Attached files
| file | filename |
|---|---|
| EX-12 - EXHIBIT 12 - FIRST NIAGARA FINANCIAL GROUP INC | ex-1233116.htm |
| EX-32 - EXHIBIT 32 - FIRST NIAGARA FINANCIAL GROUP INC | ex-3233116.htm |
| EX-31.1 - EXHIBIT 31.1 - FIRST NIAGARA FINANCIAL GROUP INC | ex-31133116.htm |
| EX-31.2 - EXHIBIT 31.2 - FIRST NIAGARA FINANCIAL GROUP INC | ex-31233116.htm |
| EX-10.1 - EXHIBIT 10.1 - FIRST NIAGARA FINANCIAL GROUP INC | ex-10133116.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2016
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 001-35390
FIRST NIAGARA FINANCIAL GROUP, INC.
(exact name of registrant as specified in its charter)
Delaware | 42-1556195 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
726 Exchange Street, Suite 618, Buffalo, NY | 14210 | |
(Address of principal executive offices) | (Zip Code) | |
(716) 819-5500
(Registrant’s telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such requirements for the past 90 days. YES þ NO o
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES þ NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Large accelerated filer | þ | Accelerated filer | o |
Non-accelerated filer | o | Smaller reporting company | o |
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o NO þ
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. YES o NO o
As of April 28, 2016, there were issued and outstanding 354,885,931 shares of the Registrant’s Common Stock, $0.01 par value.
FIRST NIAGARA FINANCIAL GROUP, INC.
FORM 10-Q
For the Quarterly Period Ended March 31, 2016
TABLE OF CONTENTS
Item Number | Page Number |
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PART I. FINANCIAL INFORMATION
ITEM 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion and analysis is intended to provide greater details of our results of operations and financial condition and should be read in conjunction with our consolidated financial statements and the notes thereto included elsewhere in this document. Certain statements under this caption constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which involve risks and uncertainties. These forward-looking statements relate to, among other things, statements pertaining to our expectations regarding the planned merger of the Company with and into KeyCorp, with KeyCorp surviving the merger, expectations of the business environment in which First Niagara Financial Group, Inc. and its subsidiaries operate, projections of future expenses and performance and perceived opportunities in the market. Our actual results may differ significantly from the results, performance, and achievements expressed or implied in such forward-looking statements. Factors that might cause such a difference include, but are not limited to, economic conditions, competition in the geographic and business areas in which we conduct our operations, fluctuation in interest rates, changes in the credit quality of our borrowers and obligors on investment securities we own, increased regulation of financial institutions or other effects of recently enacted legislation, and other factors discussed under Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2015. First Niagara Financial Group, Inc. does not undertake, and specifically disclaims, any obligation to update any forward-looking statements to reflect the occurrence of events or circumstances after the date of such statements.
OVERVIEW
First Niagara Financial Group, Inc. (the “Company”) is a Delaware corporation and a bank holding company, subject to supervision and regulation by the Board of Governors of the Federal Reserve System (the “Federal Reserve”), serving both retail and commercial customers through our bank subsidiary, First Niagara Bank, N.A. (the “Bank”), a national bank subject to supervision and regulation by the Office of the Comptroller of the Currency (the “OCC”). At March 31, 2016, we had $40 billion in assets, $30 billion in deposits, and 392 full-service branch locations across New York, Western and Eastern Pennsylvania, Connecticut, and Western Massachusetts. The Company and the Bank are referred to collectively as “we” or “us” or “our.”
On October 30, 2015, the Company and KeyCorp (“KeyCorp”) entered into an Agreement and Plan of Merger (the “Merger Agreement”). The Merger Agreement provides that, upon the terms and subject to the conditions set forth therein, the Company will merge with and into KeyCorp (the “Merger”), with KeyCorp as the surviving corporation in the Merger. The Merger Agreement was approved by the Board of Directors and shareholders of each of the Company and KeyCorp.
Subject to the terms and conditions of the Merger Agreement, at the effective time of the Merger (the “Effective Time”), Company shareholders will have the right to receive (i) 0.680 shares (the “Exchange Ratio”) of KeyCorp common stock, par value $1.00 per share, and (ii) $2.30 in cash, for each share of Company common stock, par value $0.01 per share. Subject to the terms and conditions of the Merger Agreement, at the effective time of the Merger, each share of Company preferred stock, Series B, par value $0.01 per share, will be converted into the right to receive a share of a newly created series of preferred stock of KeyCorp having such rights, preferences, privileges and voting powers not materially less favorable to such holders than such Company preferred stock.
The Merger Agreement contains customary representations and warranties from both KeyCorp and the Company, and each party has agreed to customary covenants, including, among others, covenants relating to the conduct of its business during the interim period between the execution of the Merger Agreement and the Effective Time and, in the case of First Niagara, its non-solicitation obligations relating to alternative acquisition proposals.
The completion of the Merger is subject to customary conditions, including, among others, (1) authorization for listing on the New York Stock Exchange of the shares of KeyCorp common stock and KeyCorp preferred stock to be issued in the Merger, (2) the absence of any order, injunction or other legal restraint preventing the completion of
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the Merger or making the consummation of the Merger illegal and (3) the receipt of required regulatory approvals, including the approval of the Federal Reserve Board. Each party’s obligation to complete the Merger is also subject to certain additional customary conditions, including (i) subject to certain exceptions, the accuracy of the representations and warranties of the other party, (ii) performance in all material respects by the other party of its obligations under the Merger Agreement and (iii) receipt by such party of an opinion from its counsel to the effect that the Merger will qualify as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended.
On April 28, 2016, the Company and KeyCorp announced that they reached an agreement with Northwest Bank, a Pennsylvania savings bank ("Northwest"), for the sale of 18 branches in the Buffalo Federal Reserve banking market and certain related assets, and the assumption of certain related liabilities by Northwest Bank. The branches are being divested in connection with the Merger. The divestitures have been approved by the United States Department of Justice (DOJ) and the Federal Reserve Board following a customary antitrust review in connection with the proposed Merger. The divestiture transaction is subject to the closing of the Merger and other customary closing conditions, including approvals by Northwest's banking regulators. The divestiture transaction may be terminated upon the termination of the Merger Agreement governing the Merger.
BUSINESS AND INDUSTRY
We operate a multi-faceted regional bank that provides our customers with a full range of products and services. These include commercial real estate loans, including construction loans, commercial business loans and leases, residential real estate, home equity, indirect auto, credit cards, and other consumer loans, as well as retail and commercial deposit products and insurance services, which we offer through a wholly owned subsidiary of the Bank. We also provide wealth management products and services. Our business model has and will continue to evolve from our thrift roots to a relationship based community banking model that is supported by enhanced products and services that better serve our customers' needs.
Our profitability is primarily dependent on 1) the difference between the interest we receive on loans and investment securities, and the interest we pay on deposits and borrowings, 2) credit costs for nonperforming assets, and 3) our cost to deliver these products. The rates we earn on our assets and the rates we pay on our liabilities are a function of the general level of interest rates, the structure of the instrument, the credit worthiness of the borrower, and competition within our markets. These rates are also highly sensitive to conditions that are beyond our control, such as inflation, economic growth, and unemployment, as well as actions and policies of the federal government and its regulatory agencies, including the Federal Reserve. While the prolonged low interest rate and weak economic environment has pressured our net interest income and margin for several years, more recently, the competition from banks and non-banks has intensified both from a pricing and structural perspective. Absent an improvement in the competitive environment, net interest income will be challenged until we see additional increases in short term interest rates. We manage our interest rate risk as described in "Market Risk" in this report, Part II Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations.”
The Federal Reserve implements national monetary policies (with objectives of maximum employment and targeted levels of inflation) through its open-market operations in U.S. Government securities, by adjusting depository institutions reserve requirements, by varying the target federal funds and discount rates and by varying the supply of money. The actions of the Federal Reserve in these areas influence the growth of our loans, investments, and deposits, and also affect interest rates that we earn on interest-earning assets and that we pay on interest-bearing liabilities.
As discussed in our Annual Report on Form 10-K, the Federal Reserve has taken action over the past several years, aimed at keeping short- and long-term interest rates low, thus spurring economic growth in the labor and housing markets. These actions had the cumulative impact of flattening the yield curve, keeping interest rates low in accordance with Federal Reserve objectives, and therefore reducing the yields on our earning assets. We have been replacing higher yielding, fixed rate, longer duration loans that prepaid or refinanced away with lower yielding, shorter duration loans.
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In December 2015, the Federal Reserve announced the first Federal Funds rate increase in over nine years, increasing the federal funds target rate 25 basis points to a range of 0.25% to 0.50%. In the announcement, the Federal Reserve highlighted considerable improvement in the labor market and its expectation inflation will increase to the Federal Reserve’s target in the medium term. Since the December Federal Reserve meeting, global economic growth risks have increased causing the Federal Reserve to leave the Federal Funds rate unchanged at its January 27, 2016, March 16, 2016, and April 27, 2016 meetings.
In March 2016, the Federal Reserve released its Meeting Statement and Economic Projections. Most notably, the Federal Open Market Committee ("FOMC") members’ median projection for the Federal Funds rate at the end of 2016 was 0.875%, suggesting potentially two rate hikes in 2016. The FOMC members’ median projection for the federal funds rate at the end of 2017 was 1.875%. Both projections are a 50 basis points reduction from the previous projection.
Longer term interest rates were volatile throughout 2015 and have been thus far in 2016. The 10 year Treasury rate has been as low as 1.64% on January 30, 2015, the lowest since the second quarter of 2013 but had risen to as high as 2.49% on June 26, 2015. Renewed U.S. economic concerns have again sent rates lower, causing the 10 year Treasury yield to decrease 49 basis points from 2.27% at December 31, 2015 to 1.78% at March 31, 2016. On April 27, 2016, the 10 year Treasury yield was 1.87%.
We do not expect to see significant improvement in net interest income until short-term interest rates increase further, and the impact on net interest income will be influenced by the nature and timing of the market reaction and customer behavior, all of which are very unpredictable. There remain divergent views on the timing and pace of future increases to the Federal Funds rate, with analyst estimates tracked by Bloomberg ranging from zero to four implied additional rate increases of 0.25% by the end of 2016. The pace and magnitude of rising rates, and ultimately the shape of the yield curve (i.e. the difference between long and short-term rates), will impact future profitability.
MARKET AREAS AND COMPETITION
Our business operations are concentrated in our primary market areas of New York, Western and Eastern Pennsylvania, Connecticut, Western Massachusetts and the Tri-State area which includes Lower Hudson Valley, Fairfield County, Connecticut, and Northern New Jersey. Therefore, our financial results are affected by economic conditions in these geographic areas. If economic conditions in our markets deteriorate or if we are unable to sustain our competitive posture, our ability to expand our business and the quality of our loan portfolio could materially impact our financial results.
Our primary lending and deposit gathering areas are generally concentrated in the same areas as our branches. We face significant competition in both making loans and attracting deposits in our markets as they have a high density of financial institutions, some of which are significantly larger than we are and have greater financial resources. Competition for loans comes principally from commercial banks, savings banks, savings and loan associations, mortgage banking companies, credit unions, insurance companies, and other financial services companies. Our most direct competition for deposits has historically come from commercial banks, savings banks, and credit unions, as well as additional competition for deposits from the mutual fund industry, internet banks, securities and brokerage firms, and insurance companies, as well as nontraditional competitors such as large retailers offering bank-like products. In addition to the traditional sources of competition for loans and deposits, payment processors and other companies exploring direct peer-to-peer banking provide additional competition for our products and services. In these marketplaces, opportunities to grow and expand are primarily a function of how we are able to differentiate our product offerings and customer experience from our competitors. We offer a variety of financial services to meet the needs of the communities that we serve, functioning under a philosophy that includes a commitment to customer service and the community. We have created a customer-centric organization structure that brings our customers' needs and preferences closer to the executive team that enables us to be more responsive to our customers.
More recently, competition for loans, particularly commercial loans, has intensified given the weak economic activity within our markets and nationally. This increased competition from banks and non-banks has resulted in
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accelerated loan prepayments, particularly in our investor owned commercial real estate portfolio as borrowers gravitate towards financial institutions that are more willing to compete on price, loan structures or tenor. This competition is most notable in Eastern Pennsylvania and New England.
We offer a variety of financial services to meet the needs of the communities that we serve, functioning under a philosophy that includes a commitment to customer service and the community.
REGULATORY REFORM
Deposit Insurance
Pursuant to the requirements of the Dodd-Frank Act, in March 2016, the Federal Deposit Insurance Corporation ("FDIC") issued a final rule, effective July 1, 2016, that is expected to increase the Deposit Insurance Fund ("DIF") reserve ratio from 1.15% to the minimum statutory requirement of 1.35% of total insured deposits. The rule imposes a surcharge on the quarterly assessments (the "surcharge assessment") on insured depository institutions with total consolidated assets of $10 billion or more. The surcharge assessment will equal an annual rate of 4.5 basis points applied to the depository institution's adjusted assessment base (as described below), commencing in the quarter after the DIF reserve ratio reaches 1.15%. The FDIC expects the DIF to reach the 1.15% reserve ratio in the second quarter of 2016, with surcharge assessments expected to commence in the third quarter of 2016. Additionally, under a previous rule, the assessment rate for all depository institutions will decline by two or more basis points in the quarter after the DIF reaches a 1.15% reserve ratio.
The surcharge assessment will continue to be assessed until the sooner of (1) the DIF attaining a 1.35% reserve ratio and (2) the fourth quarter 2018. The FDIC anticipates eight quarters of surcharge assessments. If the DIF reserve ratio does not reach 1.35% before the end of 2018, the FDIC will assess a one-time shortfall assessment in the first quarter of 2019 on depository institutions with $10 billion or more in total consolidated assets.
Additionally, a depository institution's assessment base for surcharge assessments will be its regular assessment base less $10 billion. The assessment base is defined as the average consolidated total assets less the average tangible equity of the depository institution.
Based on this final rule, we estimate that our total FDIC expense would increase by less than $1 million for the second half of 2016.
Regulatory Reform is discussed in our Annual Report on Form 10-K for the year ended December 31, 2015 under Item 1, “Business—Supervision and Regulation,” and Item 1A, “Risk Factors.”
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We evaluate those accounting policies and estimates that we judge to be critical: those most important to the presentation of our financial condition and results of operations, and those which require our most subjective and complex judgments. Accordingly, our accounting estimates relating to the valuation of our investment securities, prepayment assumptions on our collateralized mortgage obligations and mortgage-backed securities, adequacy of our allowance for loan losses, the accounting treatment and valuation of our acquired loans, and the analysis of the carrying value of goodwill for impairment are deemed to be critical as our judgments could have a material effect on our results of operations and have been discussed under this same heading in Item 7 of our 2015 Annual Report on Form 10-K. Additional accounting policies are more fully described in Note 1 in the “Notes to Consolidated Financial Statements” presented in our 2015 Annual Report on Form 10-K. The following are critical accounting estimates that have changed since our 2015 Annual Report on Form 10-K:
Investment Securities
Our investment securities portfolio includes residential mortgage-backed securities ("RMBS") and collateralized mortgage obligations ("CMO"). As the underlying collateral of each of these securities is comprised of a large number of similar residential mortgage loans for which prepayments are probable and the timing and amount of such prepayments can be reasonably estimated, we estimate future principal prepayments of the underlying
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residential mortgage loans to determine a constant effective yield used to apply the interest method, with retroactive adjustments as warranted.
In order to compute the constant effective yield for the RMBS and CMO securities, we estimate pooled level cash flows for each security based on a variety of factors, including historical and projected prepayment speeds, current and future interest rates, yield curve assumptions, security issuer and the current political environment. These cash flows are then translated into security level cash flows based on the tranche we own and the unique structure and status of each security. At March 31, 2016, the par value of our portfolio of RMBS totaled $8.0 billion, which included $7.7 billion of CMO securities. In the determination of our constant effective yield, we estimate that we will receive $1.6 billion of principal cash flows on our CMO securities over the next 12 months.
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SELECTED QUARTERLY FINANCIAL DATA
2016 | 2015 | |||||||||||||||
At or for the quarter ended | March 31 | December 31 | September 30 | June 30 | March 31 | |||||||||||
Selected financial condition data: | (in millions, except per share amounts) | |||||||||||||||
Total assets | $ | 40,072 | $ | 39,918 | $ | 39,413 | $ | 39,064 | $ | 38,907 | ||||||
Loans and leases, net | 23,926 | 23,796 | 23,427 | 23,133 | 22,887 | |||||||||||
Investment securities: | ||||||||||||||||
Available for sale | 5,439 | 5,471 | 5,726 | 5,751 | 5,911 | |||||||||||
Held to maturity | 6,721 | 6,388 | 6,280 | 6,170 | 6,215 | |||||||||||
Goodwill and other intangibles | 1,392 | 1,396 | 1,400 | 1,404 | 1,411 | |||||||||||
Deposits | 29,561 | 28,701 | 28,816 | 28,447 | 28,250 | |||||||||||
Borrowings | 5,864 | 6,657 | 5,870 | 5,959 | 5,973 | |||||||||||
Stockholders’ equity | $ | 4,150 | $ | 4,126 | $ | 4,139 | $ | 4,121 | $ | 4,125 | ||||||
Common shares outstanding | 355 | 355 | 355 | 355 | 354 | |||||||||||
Selected operations data: | ||||||||||||||||
Interest income | $ | 309 | $ | 304 | $ | 299 | $ | 298 | $ | 297 | ||||||
Interest expense | 41 | 37 | 36 | 35 | 34 | |||||||||||
Net interest income | 268 | 267 | 263 | 263 | 263 | |||||||||||
Provision for credit losses | 23 | 23 | 20 | 21 | 13 | |||||||||||
Net interest income after provision for credit losses | 245 | 244 | 244 | 242 | 250 | |||||||||||
Noninterest income | 79 | 89 | 83 | 87 | 82 | |||||||||||
Merger and acquisition integration expenses | 13 | 14 | — | — | — | |||||||||||
Restructuring charges | — | 3 | — | — | 18 | |||||||||||
Other noninterest expense | 242 | 247 | 245 | 248 | 244 | |||||||||||
Income before income tax | 69 | 68 | 82 | 81 | 71 | |||||||||||
Income tax expense | 20 | 17 | 21 | 20 | 20 | |||||||||||
Net income | 48 | 51 | 60 | 61 | 51 | |||||||||||
Preferred stock dividend | 8 | 8 | 8 | 8 | 8 | |||||||||||
Net income available to common stockholders | $ | 41 | $ | 43 | $ | 53 | $ | 53 | $ | 44 | ||||||
Common stock and related per share data: | ||||||||||||||||
Earnings per common share: | ||||||||||||||||
Basic | $ | 0.11 | $ | 0.12 | $ | 0.15 | $ | 0.15 | $ | 0.12 | ||||||
Diluted | 0.11 | 0.12 | 0.15 | 0.15 | 0.12 | |||||||||||
Cash dividends | 0.08 | 0.08 | 0.08 | 0.08 | 0.08 | |||||||||||
Book value(1) | 10.84 | 10.78 | 10.82 | 10.77 | 10.80 | |||||||||||
Tangible book value per common share(1)(2) | 6.88 | 6.81 | 6.84 | 6.77 | 6.78 | |||||||||||
Market Price (NASDAQ: FNFG): | ||||||||||||||||
High | 10.81 | 11.22 | 10.57 | 9.86 | 9.20 | |||||||||||
Low | 8.64 | 10.07 | 8.54 | 8.45 | 7.42 | |||||||||||
Close | 9.68 | 10.85 | 10.21 | 9.44 | 8.84 | |||||||||||
(1) | Excludes unvested restricted stock shares. |
(2) | This is a non-GAAP measure that we believe is useful in understanding our financial performance and condition. Refer to the GAAP to Non-GAAP Reconciliation for further information. |
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2016 | 2015 | |||||||||||||||
At or for the quarter ended | March 31 | December 31 | September 30 | June 30 | March 31 | |||||||||||
(dollars in millions) | ||||||||||||||||
Selected financial ratios and other data: | ||||||||||||||||
Performance ratios(1): | ||||||||||||||||
Return on average assets | 0.49 | % | 0.51 | % | 0.61 | % | 0.63 | % | 0.54 | % | ||||||
Common equity: | ||||||||||||||||
Return on average common equity | 4.30 | 4.50 | 5.51 | 5.63 | 4.69 | |||||||||||
Return on average tangible common equity(2) | 6.77 | 7.10 | 8.72 | 8.94 | 7.48 | |||||||||||
Total equity: | ||||||||||||||||
Return on average equity | 4.68 | 4.85 | 5.78 | 5.90 | 5.05 | |||||||||||
Return on average tangible equity(2) | 7.04 | 7.32 | 8.73 | 8.94 | 7.68 | |||||||||||
Net interest rate spread | 2.89 | 2.87 | 2.88 | 2.93 | 2.97 | |||||||||||
Net interest rate margin | 3.00 | 2.98 | 2.98 | 3.02 | 3.07 | |||||||||||
Efficiency ratio(3) | 73.7 | 74.4 | 70.7 | 70.9 | 75.6 | |||||||||||
Operating expenses as a percentage of average loans and deposits(4) | 1.9 | 2.0 | 1.9 | 1.9 | 2.1 | |||||||||||
Effective tax rate | 29.8 | 25.4 | 26.0 | 24.7 | 28.0 | |||||||||||
Dividend payout ratio | 72.73 | 66.67 | 53.33 | 53.33 | 66.67 | |||||||||||
Capital ratios: | ||||||||||||||||
First Niagara Financial Group, Inc. | ||||||||||||||||
Tier 1 risk-based capital | 10.12 | 10.08 | 10.05 | 10.03 | 10.02 | |||||||||||
Total risk-based capital | 12.09 | 12.01 | 11.97 | 11.96 | 11.95 | |||||||||||
Common equity tier 1 risk-based capital | 8.58 | 8.55 | 8.52 | 8.50 | 8.48 | |||||||||||
Leverage ratio | 7.55 | 7.62 | 7.66 | 7.60 | 7.56 | |||||||||||
Ratio of stockholders’ equity to total assets | 10.36 | 10.34 | 10.50 | 10.55 | 10.60 | |||||||||||
Ratio of tangible common stockholders’ equity to tangible assets(2) | 6.25 | % | 6.21 | % | 6.32 | % | 6.32 | % | 6.34 | % | ||||||
Risk-weighted assets | $ | 28,809 | $ | 28,881 | $ | 28,716 | $ | 28,445 | $ | 28,152 | ||||||
First Niagara Bank: | ||||||||||||||||
Tier 1 risk-based capital | 10.73 | 10.65 | 10.67 | 10.66 | 10.65 | |||||||||||
Total risk-based capital | 11.67 | % | 11.55 | 11.56 | 11.54 | 11.53 | ||||||||||
Common equity risk-based tier 1 capital | 10.73 | % | 10.65 | 10.67 | 10.66 | 10.65 | ||||||||||
Leverage ratio | 8.00 | % | 8.05 | 8.12 | 8.07 | 8.03 | ||||||||||
Risk-weighted assets | $ | 28,742 | $ | 28,813 | $ | 28,632 | $ | 28,359 | $ | 28,068 | ||||||
Other data: | ||||||||||||||||
Number of full service branches | 392 | 392 | 394 | 394 | 394 | |||||||||||
Full time equivalent employees | 5,322 | 5,428 | 5,397 | 5,364 | 5,322 | |||||||||||
(1) | Computed using daily averages. Annualized where appropriate. |
(2) | This is a non-GAAP measure that we believe is useful in understanding our financial performance and condition. Refer to the GAAP to Non-GAAP Reconciliation for further information. |
(3) | Computed by dividing noninterest expense by the sum of net interest income and noninterest income. |
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(4) | Computed by dividing noninterest expense by the sum of average total loans and deposits. |
GAAP to Non-GAAP Reconciliation | ||||||||||||||||
2016 | 2015 | |||||||||||||||
At or for the quarter ended | March 31 | December 31 | September 30 | June 30 | March 31 | |||||||||||
(in millions) | ||||||||||||||||
Computation of ending tangible assets: | ||||||||||||||||
Total assets | $ | 40,072 | $ | 39,918 | $ | 39,413 | $ | 39,064 | $ | 38,907 | ||||||
Less: goodwill and other intangibles | (1,392 | ) | (1,396 | ) | (1,400 | ) | (1,404 | ) | (1,411 | ) | ||||||
Tangible assets | $ | 38,680 | $ | 38,522 | $ | 38,013 | $ | 37,659 | $ | 37,497 | ||||||
Computation of ending tangible common equity: | ||||||||||||||||
Total stockholders' equity | $ | 4,150 | $ | 4,126 | $ | 4,139 | $ | 4,121 | $ | 4,125 | ||||||
Less: goodwill and other intangibles | (1,392 | ) | (1,396 | ) | (1,400 | ) | (1,404 | ) | (1,411 | ) | ||||||
Less: preferred stockholders' equity | (338 | ) | (338 | ) | (338 | ) | (338 | ) | (338 | ) | ||||||
Tangible common equity | $ | 2,419 | $ | 2,392 | $ | 2,401 | $ | 2,379 | $ | 2,376 | ||||||
Computation of average tangible equity: | ||||||||||||||||
Total stockholders' equity | $ | 4,154 | $ | 4,153 | $ | 4,150 | $ | 4,145 | $ | 4,128 | ||||||
Less: goodwill and other intangibles | (1,394 | ) | (1,398 | ) | (1,402 | ) | (1,408 | ) | (1,414 | ) | ||||||
Tangible equity | $ | 2,760 | $ | 2,755 | $ | 2,747 | $ | 2,737 | $ | 2,714 | ||||||
Computation of average tangible common equity: | ||||||||||||||||
Total stockholders' equity | $ | 4,154 | $ | 4,153 | $ | 4,150 | $ | 4,145 | $ | 4,128 | ||||||
Less: goodwill and other intangibles | (1,394 | ) | (1,398 | ) | (1,402 | ) | (1,408 | ) | (1,414 | ) | ||||||
Less: preferred stockholders' equity | (338 | ) | (338 | ) | (338 | ) | (338 | ) | (338 | ) | ||||||
Tangible common equity | $ | 2,422 | $ | 2,417 | $ | 2,409 | $ | 2,399 | $ | 2,376 | ||||||
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RESULTS OF OPERATIONS
Overview
The following table summarizes our results of operations for the periods indicated on a GAAP basis and on an operating (non-GAAP) basis. Our operating results exclude certain nonoperating expense items as detailed below. We believe these non-GAAP measures provide a meaningful comparison of our underlying operational performance, helping to facilitate management and investor assessments of business and performance trends in comparison to others in the financial services industry and period over period analysis of our fundamental results. In addition, we believe the exclusion of the nonoperating items from our performance a more effective evaluation by which to compare our results and assess our performance in relation to our ongoing operations.
Three months ended | |||||||||
March 31, | December 31, | March 31, | |||||||
(in millions, except per share data) | 2016 | 2015 | 2015 | ||||||
Operating results (Non-GAAP): | |||||||||
Net interest income | $ | 268 | $ | 267 | $ | 263 | |||
Provision for credit losses | 23 | 23 | 13 | ||||||
Noninterest income | 79 | 89 | 82 | ||||||
Noninterest expense | 242 | 247 | 244 | ||||||
Income tax expense | 25 | 23 | 27 | ||||||
Net operating income (Non-GAAP) | $ | 57 | $ | 63 | $ | 62 | |||
Operating earnings per diluted share (Non-GAAP) | $ | 0.14 | $ | 0.15 | $ | 0.15 | |||
Reconciliation of net operating income to net income | $ | 57 | $ | 63 | $ | 62 | |||
Nonoperating expenses, net of tax at effective tax rate: | |||||||||
Merger and acquisition integration expenses ($13 million and $14 million pre-tax for the three months ended March 31, 2016 and December 31, 2015, respectively) | (9 | ) | (10 | ) | — | ||||
Restructuring charges ($3 million and $18 million pre-tax for the three months ended December 31, 2015 and March 31, 2015, respectively) | — | (2 | ) | (11 | ) | ||||
Total nonoperating expenses, net of tax | (9 | ) | (12 | ) | (11 | ) | |||
Net income (GAAP) | $ | 48 | $ | 51 | $ | 51 | |||
Earnings per diluted share (GAAP) | $ | 0.11 | $ | 0.12 | $ | 0.12 | |||
Comparison to Prior Quarter
Our first quarter of 2016 GAAP net income was $48 million, or $0.11 per diluted share, and included $13 million in pre-tax merger and acquisition integration expenses related to the pending Merger with KeyCorp. Excluding these nonoperating items, our operating (non-GAAP) net income was $57 million, or $0.14 per diluted share. By comparison, in the fourth quarter of 2015, our reported GAAP net income was $51 million, or $0.12 per diluted share, and included $14 million in pre-tax merger and acquisition integration expenses and $3 million in pre-tax restructuring charges related to third party professional fees incurred in connection with the overstatement of the allowance for loan losses. Excluding these nonoperating items, our operating (non-GAAP) net income was $63 million, or $0.15 per diluted share.
Our first quarter 2016 net interest income increased $1 million, or less than 1%, from the prior quarter to $268 million driven in part by the benefits of a 5% increase in average interest-earning assets and a modest benefit from the recent increase in short-term interest rates and offset by one less day in the quarter. Our net interest rate margin increased two basis points during the current quarter to 3.00% reflecting a seven basis points increase in yields on interest-earnings assets, driven by an eight basis points increase in loan yields, partially offset by a five
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basis points increase in rates paid on interest-bearing liabilities, which was driven by a 13 basis points increase in rates paid on borrowings. Additionally, yields on investment securities increased two basis points to 2.92% due primarily to higher yields on our commercial mortgage-backed securities and collateralized loan obligations portfolios. The average cost of interest-bearing deposits increased two basis points from the prior quarter to 0.32% as rates paid on money market deposits and certificates of deposit increased two and eight basis points, respectively.
Compared to the prior quarter, average loans increased 5% annualized during the first quarter of 2016 driven primarily by increases in our commercial real estate and business, home equity, and indirect auto portfolios. Average commercial business and real estate loans increased 7% annualized. Average commercial loan growth was driven by growth primarily in our New England, Western Pennsylvania, and Tri-State regions. Average commercial real estate loans increased 7% annualized while commercial business loans increased 6% annualized. The increase in average commercial business loans reflects strong origination activity across our footprint while the increase in average commercial real estate loan balances was driven by new commercial mortgage and construction lending volumes. Period end loan balances increased 2%, stemming primarily from higher commercial business and indirect auto loan balances.
Average consumer loans increased 2% annualized driven by a 2% and 9% annualized increase in our home equity and indirect auto portfolios, respectively, partially offset by annualized decreases in credit card and other consumer loans of 11% and 13%, respectively. Average indirect auto loan balances increased $51 million, or 9% annualized, to $2.4 billion as strong new origination activity was partially offset by increased paydowns. New originations in the quarter increased by $19 million to $314 million, and yielded 3.41%, net of dealer reserve, compared to 3.30% for the prior quarter. Average home equity balances continued to increase for the twelfth consecutive quarter to $3.1 billion, or 2% annualized, from the prior quarter as new volumes were offset by higher customer refinancing activity given low mortgage rates.
Average deposits increased 1% annualized from the prior quarter to $28.9 billion, driven by a $211 million, or 24% annualized, increase in certificates of deposit, mostly offset by a $202 million or 14% annualized, decrease in noninterest-bearing deposits. Average money market deposit balances increased $6 million, or less than 1% annualized, as higher consumer money market deposits were offset by seasonally lower municipal balances. The increase in average certificates of deposit stemmed from increases of $86 million and $144 million in consumer and brokered certificates of deposit, respectively. Average transactional deposits, which include interest-bearing and noninterest-bearing checking account balances, decreased 6% annualized, driven primarily by a 19% annualized decrease in business noninterest-checking accounts. Transactional deposits currently represent 38% of average total deposits, compared to 39% for the fourth quarter of 2015.
Our provision for credit losses totaled $23 million for the three months ended March 31, 2016 and December 31, 2015. The current quarter provision includes $11 million to cover net charge-offs on originated loans during the quarter and $11 million to support both $261 million in originated loan growth and reserve build toward our exposure to scrap metal companies and demolition companies whose profitability is partially dependent on the sale of scrap metal. Nonperforming assets increased to $238 million, or 0.59% of total assets, at March 31, 2016 from $230 million, or 0.58% of total assets at December 31, 2015. The increase was primarily driven by new inflows of a few energy related commercial credits, as well as a demolition contractor whose profitability is partially dependent on the sale of scrap metal, which were offset by pay-downs, charge-offs and resolutions.
The provision for loan losses on originated loans totaled $23 million and $22 million for the first quarter of 2016 and the fourth quarter of 2015, respectively. Originated net charge-offs decreased to 11 million, or 0.22% of average originated loans, annualized, for the first quarter of 2016 from $19 million, or 0.37% of average originated loans, annualized, for the fourth quarter of 2015. The decrease in net charge-offs was driven by the recovery of a previously charged-off energy credit as well as moderation from elevated fourth quarter levels, which included losses related to two commercial credits. Nonperforming originated loans of $197 million increased $8 million, or 4%, from December 31, 2015 and at March 31, 2016, the allowance for loan losses on originated loans totaled $248 million, or 1.16% of such loans, compared to $237 million, or 1.12% of such loans at December 31, 2015. The
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increase in the allowance coverage ratio reflects reserve build toward our exposure to scrap metal companies and demolition companies whose profitability is partially dependent on the sale of scrap metal.
We did not record a provision for loan losses related to our acquired loans in the first quarter of 2016 or the fourth quarter of 2015. Net charge-offs on the acquired portfolio totaled $0.4 million, or 0.01% annualized of average acquired loans for the first quarter of 2016 and we did not charge-off any acquired loans for the fourth quarter of 2015. At March 31, 2016 and December 31, 2015, the allowance for loan losses on acquired loans totaled $5 million. Acquired nonperforming loans decreased 2% from the prior quarter to $25 million at March 31, 2016. At March 31, 2016, remaining credit marks available to absorb losses on a pool-by-pool basis totaled $57 million. In the first quarter of 2016, we transferred approximately $5 million of credit marks from nonaccretable to accretable yields. This amount will be accreted into interest income over a period of approximately five to seven years.
Noninterest income decreased $10 million, or 12%, in the first quarter of 2016 compared to the fourth quarter of 2015, reflecting lower revenues across all line items, except bank owned life insurance, driven mostly by normal seasonality. Noninterest income for the fourth quarter of 2015 included $1 million in tax credit amortization, which was more than offset by lower tax expense. Excluding this amortization, noninterest income decreased $11 million, or 13%.
Noninterest expenses decreased $10 million, or 4%, from the fourth quarter of 2015. Excluding $13 million in pre-tax merger and acquisition integration expenses in the first quarter of 2016 and $14 million in pre-tax merger and acquisition integration expenses and $3 million in pre-tax restructuring charges related to third party professional fees incurred in connection with the overstatement of the allowance for loan losses in the fourth quarter of 2015, noninterest expenses decreased $6 million, or 2%, primarily driven by lower technology and communications, marketing and advertising, professional services, and other expenses, partially offset by higher salaries and employee benefits and occupancy and equipment.
Our effective tax rate was 29.8% and 25.4% for the three months ended March 31, 2016 and December 31, 2015, respectively. The effective tax rate for the three months ended December 31, 2015 reflects the benefit of tax credit investments that reduced our income tax expense and the partial utilization of a capital loss carryover. There were no such items for the three months ended March 31, 2016.
Comparison to Prior Year Quarter
Our first quarter of 2016 GAAP net income was $48 million, or $0.11 per diluted share, and included $13 million in pre-tax merger and acquisition integration expenses related to the pending Merger with KeyCorp. Excluding these nonoperating items, our operating (non-GAAP) net income was $57 million, or $0.14 per diluted share. By comparison, our first quarter of 2015 GAAP net income was $51 million, or $0.12 per diluted share, and included $18 million in pre-tax restructuring and severance expenses incurred primarily in connection with the consolidation of 17 branches and the completion of our organization simplification during the quarter as well as third party professional fees incurred in connection with the overstatement of the allowance for loan losses. Excluding these nonoperating items, our operating (non-GAAP) net income for the first quarter of 2015 was $62 million, or $0.15 per diluted share.
Our first quarter of 2016 net interest income increased $5 million, or 2%, from the first quarter of 2015 driven by a $311 million, or 5%, increase in net interest-earning assets, partially offset by a seven basis points decrease in our taxable equivalent net interest rate margin to 3.00% at March 31, 2016 from 3.07% in the first quarter of 2015. Compared to the first quarter of 2015, yields on average interest-earning assets were unchanged as lower yields on loans were offset by higher yields on securities and other investments. The cost of interest-bearing deposits of 0.32% for the current quarter increased four basis points from the same quarter in 2015 due to higher costs on money market and certificates of deposit accounts.
Average loans increased 4% for the quarter ended March 31, 2016 compared to the same quarter in 2015, with higher balances in all portfolios except credit cards and other consumer loans. Average commercial business and real estate loans increased 4% over the same quarter in 2015, with our commercial real estate portfolio increasing
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4% and commercial business portfolios increasing 5%. The 4% increase in consumer loans was driven by a 4% and 11% increase in home equity and indirect auto loan balances, respectively.
Average transactional deposit balances, which include interest-bearing and noninterest-bearing checking accounts, increased 6% over the prior year and represent 38% of our average deposit balances, unchanged from a year ago. Average interest-bearing checking balances increased $361 million, or 7%, for the quarter ended March 31, 2016 from the same quarter in the prior year stemming from higher consumer and municipal balances. Average noninterest-bearing checking balances increased $236 million, or 4%, due to higher consumer, business, and municipal balances. Average money market balances increased 6% compared to the prior year quarter as a result of higher consumer and business balances.
Our provision for credit losses totaled $23 million and $13 million for the three months ended March 31, 2016 and 2015, respectively. The current quarter provision includes $11 million to cover net charge-offs on originated loans during the quarter and $11 million to support both $261 million in originated loan growth and reserve build toward our exposure to scrap metal companies and demolition companies whose profitability is partially dependent on the sale of scrap metal. The provision for loan losses on originated loans was $23 million and $11 million in the first quarter of 2016 and 2015, respectively. Net charge-offs on originated loans decreased to $11 million, or 0.22% of average originated loans, annualized, for the first quarter of 2016 from $15 million, or 0.31% of average originated loans, annualized, for the first quarter of 2015. Nonperforming originated loans as a percentage of originated loans decreased to 0.92% at March 31, 2016 from 1.01% at March 31, 2015. At March 31, 2016 and 2015, the allowance for loan losses on originated loans totaled 1.16% and 1.15% of such loans, respectively.
We did not record a provision for loan losses related to our acquired loans in the first quarter of 2016. Our provision for loan losses related to our acquired loans was $3 million in the first quarter of 2015. Annualized net charge-offs equaled 0.01% and 0.25% of average acquired loans for the quarters ended March 31, 2016 and 2015, respectively. Acquired nonperforming loans totaled $25 million and $30 million at March 31, 2016 and 2015, respectively. At March 31, 2016, acquired criticized loans decreased 22% from March 31, 2015.
For the quarter ended March 31, 2016, noninterest income decreased $3 million, or 4%, from the same period in 2015. Decreases in income from insurance commissions, wealth management services, mortgage banking, and capital markets were partially offset by increases in deposit service charges and other income.
Noninterest expenses decreased $6 million, or 2%, during the same period. Excluding $13 million in pre-tax merger and acquisition integration expenses in the quarter ended March 31, 2016 and $18 million in restructuring and severance expenses in the quarter ended March 31, 2015 incurred primarily in connection with the consolidation of 17 branches and the completion of our organization simplification during the quarter as well as third party professional fees incurred in connection with the overstatement of the allowance for loan losses, noninterest expenses decreased $2 million, or 1%. Decreases in occupancy and equipment, marketing and advertising, professional services, amortization of intangibles, and FDIC expense were partially offset by increases in salaries and benefits, and other expenses.
Our effective tax rate was 29.8% and 28.0% for the first quarter of 2016 and 2015, respectively. The effective tax rate for the quarter ended March 31, 2015 reflects the benefit of the partial utilization of a capital loss carryforward. There were no such items for the first quarter of 2016.
Net Interest Income
Our first quarter of 2016 net interest income increased $1 million, or less than 1%, from the prior quarter to $268 million, driven in part by a 5% annualized increase in average interest-earning assets and two basis points expansion in net interest margin in part driven by higher short-term interest rates, and partially offset by lower net interest income from one less day in the first quarter. The two basis points increase in our net interest rate margin to 3.00% reflects higher loan and investment securities yields partially offset by higher borrowings costs. The premium amortization on our residential mortgage-backed securities portfolio decreased nearly $1 million from the prior quarter.
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Average interest-earning assets increased $409 million, or 5% annualized, while average interest-bearing liabilities increased $499 million, or 7% annualized. Growth in average interest earning assets reflected continued loan growth, particularly in commercial real estate and business, home equity, and indirect auto loans. Average investment securities were unchanged from the prior quarter, driven by a $129 million, or 46% annualized, decline in our commercial mortgage-backed securities portfolio and a $27 million, or 3% annualized, decrease in our other securities portfolio, offset by a $159 million, or 8% annualized, increase in our residential mortgage-backed securities portfolio.
In December 2015, the Federal Reserve announced the first Federal Funds rate increase in over nine years, increasing the federal funds target rate 25 basis points to a range of 0.25% to 0.50%. In the announcement, the Federal Reserve highlighted considerable improvement in the labor market and its expectation inflation will increase to the Federal Reserve’s target in the medium term. Since the December Federal Reserve meeting, global economic growth risks have increased causing the Federal Reserve to leave the Federal Funds rate unchanged at its January 27, 2016, March 16, 2016, and April 27, 2016 meetings.
In March 2016, the Federal Reserve released its Meeting Statement and Economic Projections. Most notably, the Federal Open Market Committee ("FOMC") members’ median projection for the Federal Funds rate at the end of 2016 was 0.875%, suggesting potentially two rate hikes in 2016. The FOMC members’ median projection for the federal funds rate at the end of 2017 was 1.875%. Both projections are a 50 basis points reduction from the previous projection.
Longer term interest rates were volatile throughout 2015 and have been thus far in 2016. The 10 year Treasury rate has been as low as 1.64% on January 30, 2015, the lowest since the second quarter of 2013 but had risen to as high as 2.49% on June 26, 2015. Renewed U.S. economic concerns have again sent rates lower, causing the 10 year Treasury yield to decrease 49 basis points from 2.27% at December 31, 2015 to 1.78% at March 31, 2016. On April 27, 2016, the 10 year Treasury yield was 1.87%.
We do not expect to see significant improvement in net interest income until short-term interest rates increase further, and the impact on net interest income will be influenced by the nature and timing of the market reaction and customer behavior, all of which are very unpredictable. There remain divergent views on the timing and pace of future increases to the Federal Funds rate with analyst estimates tracked by Bloomberg ranging from zero to four implied additional rate increases of 0.25% by the end of 2016. The pace and magnitude of rising rates, and ultimately the shape of the yield curve (i.e. the difference between long and short term rates), will impact future profitability.
15
Comparison to Prior Quarter
The following table presents our condensed average balance sheet and taxable equivalent yields for the periods indicated. Yields earned on interest-earning assets, rates paid on interest-bearing liabilities, and average balances are based on average daily balances.
Three months ended | Increase (decrease) | ||||||||||||||||
March 31, 2016 | December 31, 2015 | ||||||||||||||||
(dollars in millions) | Average outstanding balance | Taxable equivalent yield/rate (1) | Average outstanding balance | Taxable equivalent yield/rate (1) | Average outstanding balance | Taxable equivalent yield/rate (1) | |||||||||||
Interest-earning assets: | |||||||||||||||||
Loans and leases(2) | |||||||||||||||||
Commercial: | |||||||||||||||||
Real estate | $ | 8,625 | 3.61 | % | $ | 8,476 | 3.57 | % | $ | 149 | 0.04 | % | |||||
Business | 6,062 | 3.42 | 5,971 | 3.28 | 91 | 0.14 | |||||||||||
Total commercial lending | 14,687 | 3.53 | 14,447 | 3.45 | 240 | 0.08 | |||||||||||
Consumer: | |||||||||||||||||
Residential real estate | 3,346 | 3.65 | 3,346 | 3.65 | — | — | |||||||||||
Home equity | 3,066 | 3.93 | 3,052 | 3.80 | 14 | 0.13 | |||||||||||
Indirect auto | 2,420 | 2.91 | 2,369 | 2.90 | 51 | 0.01 | |||||||||||
Credit cards | 297 | 11.80 | 305 | 11.45 | (8 | ) | 0.35 | ||||||||||
Other consumer | 242 | 8.57 | 250 | 8.50 | (8 | ) | 0.07 | ||||||||||
Total consumer lending | 9,371 | 3.94 | 9,322 | 3.88 | 49 | 0.06 | |||||||||||
Total loans | 24,058 | 3.73 | 23,769 | 3.65 | 289 | 0.08 | |||||||||||
Residential mortgage-backed securities(3) | 7,864 | 2.43 | 7,705 | 2.44 | 159 | (0.01 | ) | ||||||||||
Commercial mortgage-backed securities(3) | 997 | 4.68 | 1,126 | 4.31 | (129 | ) | 0.37 | ||||||||||
Other investment securities(3) | 3,513 | 3.53 | 3,540 | 3.47 | (27 | ) | 0.06 | ||||||||||
Total investment securities | 12,374 | 2.92 | 12,371 | 2.90 | 3 | 0.02 | |||||||||||
Money market and other investments | 205 | 1.37 | 88 | 2.29 | 117 | (0.92 | ) | ||||||||||
Total interest-earning assets | 36,637 | 3.45 | % | 36,228 | 3.38 | % | 409 | 0.07 | % | ||||||||
Noninterest-earning assets(4)(5) | 3,323 | 3,349 | (26 | ) | |||||||||||||
Total assets | $ | 39,960 | $ | 39,577 | $ | 383 | |||||||||||
Interest-bearing liabilities: | |||||||||||||||||
Deposits | |||||||||||||||||
Savings deposits | $ | 3,371 | 0.09 | % | $ | 3,364 | 0.09 | % | $ | 7 | — | % | |||||
Checking accounts | 5,362 | 0.03 | 5,333 | 0.03 | 29 | — | |||||||||||
Money market deposits | 10,725 | 0.32 | 10,719 | 0.30 | 6 | 0.02 | |||||||||||
Certificates of deposit | 3,726 | 0.97 | 3,515 | 0.89 | 211 | 0.08 | |||||||||||
Total interest-bearing deposits | 23,184 | 0.32 | 22,931 | 0.30 | 253 | 0.02 | |||||||||||
Borrowings | |||||||||||||||||
Short-term borrowings | 3,815 | 0.72 | 4,014 | 0.56 | (199 | ) | 0.16 | ||||||||||
Long-term borrowings | 2,416 | 2.62 | 1,971 | 2.89 | 445 | (0.27 | ) | ||||||||||
Total borrowings | 6,231 | 1.46 | 5,985 | 1.33 | 246 | 0.13 | |||||||||||
Total interest-bearing liabilities | 29,415 | 0.56 | % | 28,916 | 0.51 | % | 499 | 0.05 | % | ||||||||
Noninterest-bearing deposits | 5,666 | 5,868 | (202 | ) | |||||||||||||
Other noninterest-bearing liabilities | 725 | 640 | 85 | ||||||||||||||
Total liabilities | 35,806 | 35,424 | 382 | ||||||||||||||
Stockholders’ equity(4) | 4,154 | 4,153 | 1 | ||||||||||||||
Total liabilities and stockholders’ equity | $ | 39,960 | $ | 39,577 | $ | 383 | |||||||||||
Net interest rate spread | 2.89 | % | 2.87 | % | 0.02 | % | |||||||||||
Net interest rate margin | 3.00 | % | 2.98 | % | 0.02 | % | |||||||||||
(1) | We use a taxable equivalent basis based upon a 35% tax rate in order to provide the most comparative yields among all types of interest-earning assets. |
(2) | Average outstanding balances are net of deferred costs and net premiums or discounts and include nonperforming loans. |
(3) | Average outstanding balances are at amortized cost. |
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(4) | Average outstanding balances include unrealized gains/losses on securities available for sale. |
(5) | Average outstanding balances include allowances for loan losses and bank owned life insurance, earnings from which are reflected in noninterest income. |
Our taxable equivalent net interest income of $273 million for the quarter ended March 31, 2016 increased $1 million from the quarter ended December 31, 2015. Overall the yield on interest-earning assets increased seven basis points primarily as a result of higher yields on our loan portfolio. Average interest-earning assets increased 5% annualized from the prior quarter driven by growth in our loan portfolio and other investments.
Our average balance of investment securities increased quarter over quarter by $3 million. Yields on our investment securities portfolio increased two basis points to 2.92% primarily due to higher yields on commercial mortgage-backed securities partially offset lower premium amortization on our residential mortgage-backed securities portfolio.
Loan yields in the quarter ended March 31, 2016 increased eight basis points to 3.73%, primarily reflecting the benefit from the recent increase in short-term interest rates. The yield on commercial business loans increased 14 basis points and the yield on credit card loans increased 35 basis points. The total credit mark accretion in the first quarter of 2016 was $2 million, equal to the fourth quarter of 2015. Overall, our average loan growth was 5% annualized from the fourth quarter of 2015, as our average loan balances increased by $289 million. Commercial loan growth was $240 million, or 7% annualized, and home equity and indirect auto remained a source of growth contributing $14 million, or 2% annualized, and $51 million, or 9% annualized, respectively, of the average net loan growth this quarter. Indirect auto originations increased $19 million, or 6%, to $314 million during the first quarter of 2016 with a yield, net of dealer reserve, of 3.41%.
Our average balances of interest-bearing deposits increased by $253 million, or 4% annualized. The increase in our average balances was driven by a $211 million, or 24% annualized, increase in our average certificates of deposit balances due to higher consumer and brokered certificates of deposit. The rate paid on interest-bearing deposits increased two basis points to 0.32%.
Our average borrowings increased $246 million, or 16% annualized, quarter over quarter due to a $445 million, or 91% annualized, increase in average long-term borrowings partially offset by a $199 million, or 20% annualized, decrease in average short-term borrowings. Our cost of borrowings increased thirteen basis points from the fourth quarter of 2015 to 1.46% for the first quarter of 2016 primarily due to a 16 basis points increase in the cost of short-term borrowings.
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Comparison to Prior Year Quarter
The following table presents our condensed average balance sheet and taxable equivalent yields for the periods indicated. Yields earned on interest-earning assets, rates paid on interest-bearing liabilities and average balances are based on average daily balances.
Three months ended | Increase (decrease) | ||||||||||||||||
March 31, 2016 | March 31, 2015 | ||||||||||||||||
(dollars in millions) | Average outstanding balance | Taxable equivalent yield/rate(1) | Average outstanding balance | Taxable equivalent yield/rate(1) | Average outstanding balance | Taxable equivalent yield/rate(1) | |||||||||||
Interest-earning assets: | |||||||||||||||||
Loans and leases(2) | |||||||||||||||||
Commercial: | |||||||||||||||||
Real estate | $ | 8,625 | 3.61 | % | $ | 8,263 | 3.60 | % | $ | 362 | 0.01 | % | |||||
Business | 6,062 | 3.42 | 5,797 | 3.43 | 265 | (0.01 | ) | ||||||||||
Total commercial lending | 14,687 | 3.53 | 14,060 | 3.53 | 627 | — | |||||||||||
Consumer: | |||||||||||||||||
Residential real estate | 3,346 | 3.65 | 3,338 | 3.78 | 8 | (0.13 | ) | ||||||||||
Home equity | 3,066 | 3.93 | 2,939 | 3.91 | 127 | 0.02 | |||||||||||
Indirect auto | 2,420 | 2.91 | 2,187 | 2.79 | 233 | 0.12 | |||||||||||
Credit cards | 297 | 11.80 | 311 | 11.74 | (14 | ) | 0.06 | ||||||||||
Other consumer | 242 | 8.57 | 275 | 8.49 | (33 | ) | 0.08 | ||||||||||
Total consumer lending | 9,371 | 3.94 | 9,050 | 4.02 | 321 | (0.08 | ) | ||||||||||
Total loans | 24,058 | 3.73 | 23,110 | 3.75 | 948 | (0.02 | ) | ||||||||||
Residential mortgage-backed securities(3) | 7,864 | 2.43 | 7,180 | 2.49 | 684 | (0.06 | ) | ||||||||||
Commercial mortgage-backed securities(3) | 997 | 4.68 | 1,404 | 3.26 | (407 | ) | 1.42 | ||||||||||
Other investment securities(3) | 3,513 | 3.53 | 3,554 | 3.52 | (41 | ) | 0.01 | ||||||||||
Total investment securities | 12,374 | 2.92 | 12,138 | 2.88 | 236 | 0.04 | |||||||||||
Money market and other investments | 205 | 1.37 | 158 | 1.01 | 47 | 0.36 | |||||||||||
Total interest-earning assets | 36,637 | 3.45 | % | 35,406 | 3.45 | % | 1,231 | — | % | ||||||||
Noninterest-earning assets(4)(5) | 3,323 | 3,301 | 22 | ||||||||||||||
Total assets | $ | 39,960 | $ | 38,707 | $ | 1,253 | |||||||||||
Interest-bearing liabilities: | |||||||||||||||||
Deposits | |||||||||||||||||
Savings deposits | $ | 3,371 | 0.09 | % | $ | 3,432 | 0.08 | % | $ | (61 | ) | 0.01 | % | ||||
Checking accounts | 5,362 | 0.03 | 5,001 | 0.03 | 361 | — | |||||||||||
Money market deposits | 10,725 | 0.32 | 10,132 | 0.26 | 593 | 0.06 | |||||||||||
Certificates of deposit | 3,726 | 0.97 | 3,778 | 0.84 | (52 | ) | 0.13 | ||||||||||
Total interest-bearing deposits | 23,184 | 0.32 | 22,343 | 0.28 | 841 | 0.04 | |||||||||||
Borrowings | |||||||||||||||||
Short-term borrowings | 3,815 | 0.72 | 5,125 | 0.46 | (1,310 | ) | 0.26 | ||||||||||
Long-term borrowings | 2,416 | 2.62 | 1,027 | 4.98 | 1,389 | (2.36 | ) | ||||||||||
Total borrowings | 6,231 | 1.46 | 6,152 | 1.21 | 79 | 0.25 | |||||||||||
Total interest-bearing liabilities | 29,415 | 0.56 | % | 28,495 | 0.48 | % | 920 | 0.08 | % | ||||||||
Noninterest-bearing deposits | 5,666 | 5,430 | 236 | ||||||||||||||
Other noninterest-bearing liabilities | 725 | 654 | 71 | ||||||||||||||
Total liabilities | 35,806 | 34,579 | 1,227 | ||||||||||||||
Stockholders’ equity(4) | 4,154 | 4,128 | 26 | ||||||||||||||
Total liabilities and stockholders’ equity | $ | 39,960 | $ | 38,707 | $ | 1,253 | |||||||||||
Net interest rate spread | 2.89 | % | 2.97 | % | (0.08 | )% | |||||||||||
Net interest rate margin | 3.00 | % | 3.07 | % | (0.07 | )% | |||||||||||
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(1) | We use a taxable equivalent basis based on a 35% tax rate in order to provide the most comparative yields among all types of interest-earning assets. |
(2) | Average outstanding balances are net of deferred costs and net premiums and include nonperforming loans. |
(3) | Average outstanding balances are at amortized cost. |
(4) | Average outstanding balances include unrealized gains/losses on securities available for sale. |
(5) | Average outstanding balances include allowances for loan losses and bank owned life insurance, earnings from which are reflected in noninterest income. |
Our taxable equivalent net interest income increased $5 million to $273 million for the first quarter of 2016 compared to the first quarter of 2015, reflecting an increase in net-interest earning assets of $311 million and a decrease in our net interest rate margin of seven basis points driven by increases in the cost of deposits and borrowings. The $1.2 billion increase in interest-earning assets reflects organic loan growth in our commercial, home equity, and indirect auto loan portfolios. Over the same period, our average interest-bearing liabilities increased by $920 million, as interest-bearing checking and money market deposits grew by $361 million, or 7%, and $593 million, or 6%, respectively. Total borrowings increased $79 million, or 1%, as long-term borrowings more than doubled to $2.4 billion with the increase offset by a $1.3 billion, or 26%, decrease in short-term borrowings. The yield on interest-earnings assets was unchanged from the prior year quarter while the rates paid on interest-bearing deposits and borrowings increased four and 25 basis points, respectively, resulting in the seven basis points decrease in our net interest margin. Our first quarter of 2016 net interest margin was impacted by the benefit of $1 million in unusual benefits. There were no such benefits in the first quarter of 2015.
Our noninterest-bearing deposits increased 4% from the first quarter of 2015, driven by consumer, business, and municipal checking growth while our interest-bearing checking balances increased 7% driven by continued growth in net new checking units and average balance growth. Average money market deposit accounts increased $593 million, or 6%, as a result of higher consumer and business balances.
The rate paid on long-term borrowings decreased to 2.62% from 4.98% in the first quarter of 2015, as our new long-term borrowings had a shorter weighted average life, and therefore a lower rate than our existing long-term borrowings, while the rate paid on short-term borrowings increased 26 basis points, resulting in a 25 basis point increase in the total rate paid on borrowings.
The yield on our commercial loan portfolio was unchanged from the prior year quarter. Consumer loan yields dropped eight basis points during the same period, driven primarily by a thirteen basis points decline in residential real estate yields partially offset by a 12 basis points improvement in indirect auto yields. Additionally, yields on our investment securities portfolio increased four basis points, driven by an increase in yields on commercial mortgage-backed securities from 3.26% to 4.68% partially offset by a six basis points decrease in yields on residential mortgage-backed securities.
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Provision for Credit Losses
Our provision for credit losses is comprised of three components: consideration of the adequacy of our allowance for originated loan losses; needs for allowance for acquired loan losses due to deterioration in credit quality subsequent to acquisition; and probable losses associated with our unfunded loan commitments.
The following table details the composition of our provision for credit losses for the periods indicated:
Three months ended | |||||||||
March 31, | December 31, | March 31, | |||||||
(in millions) | 2016 | 2015 | 2015 | ||||||
Provision for originated loans | $ | 23 | $ | 22 | $ | 11 | |||
Provision for acquired loans | — | — | 3 | ||||||
Provision for (release of) unfunded commitments | — | 1 | (1 | ) | |||||
Total | $ | 23 | $ | 23 | $ | 13 | |||
Our provision for loan losses related to our originated loans is based upon the inherent risk of our loans and considers interrelated factors such as the composition and other credit risk factors of our loan portfolio, trends in asset quality including loan concentrations, and the level of our delinquent loans. Consideration is also given to collateral value, government guarantees, and regional and global economic indicators. The provision for loan losses related to originated loans amounted to $23 million, or 0.42% of average originated loans annualized, for the quarter ended March 31, 2016, compared to $22 million, or 0.43% of average originated loans annualized, for the quarter ended December 31, 2015 and $11 million, or 0.23% of average originated loans annualized, for the quarter ended March 31, 2015. The current quarter provision includes $11 million to cover net charge-offs on originated loans during the quarter and $11 million to support both $261 million in originated loan growth and reserve build toward our exposure to scrap metal companies and demolition companies whose profitability is partially dependent on the sale of scrap metal. The provision for losses on originated loans for the quarter ended March 31, 2015 reflects unusually low levels.
Our provision for loan losses related to our acquired loans is based upon a deterioration in expected cash flows subsequent to the acquisition of the loans. These acquired loans were originally recorded at fair value on the date of acquisition. As the fair value at time of acquisition incorporated lifetime expected credit losses, there was no carryover of the related allowance for loan losses. Subsequent to acquisition, we periodically reforecast the expected cash flows for our acquired loans and compare this to our original estimates to evaluate the need for a loan loss provision. We recorded a provision of $3 million related to our acquired loans for the first quarter of 2015. We did not record a provision related to our acquired loans for the first quarter of 2016 or the fourth quarter of 2015.
The provision for credit losses for the fourth quarter of 2015 included $1 million related to our unfunded loan commitments. We did not record a provision for credit losses for unfunded loan commitments in the first quarter of 2016. Our total unfunded commitments were $11.2 billion and $11.7 billion at March 31, 2016 and December 31, 2015, respectively. The liability for unfunded commitments is included in other liabilities in our Consolidated Statements of Condition and amounted to $16 million at each of March 31, 2016 and December 31, 2015.
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Noninterest Income
The following table presents our noninterest income for the periods indicated:
Three months ended | |||||||||
(dollars in millions) | March 31, 2016 | December 31, 2015 | March 31, 2015 | ||||||
Deposit service charges | $ | 22 | $ | 23 | $ | 20 | |||
Insurance commissions | 15 | 15 | 16 | ||||||
Merchant and card fees | 12 | 13 | 12 | ||||||
Wealth management services | 14 | 15 | 15 | ||||||
Mortgage banking | 4 | 5 | 5 | ||||||
Capital markets income | 2 | 7 | 4 | ||||||
Lending and leasing | 4 | 4 | 4 | ||||||
Bank owned life insurance | 4 | 3 | 4 | ||||||
Other income excluding tax credit amortization | 3 | 6 | 3 | ||||||
Total noninterest income excluding tax credit amortization (non-GAAP) | 79 | 90 | 82 | ||||||
Tax credit amortization | — | (1 | ) | — | |||||
Total noninterest income (GAAP) | $ | 79 | $ | 89 | $ | 82 | |||
Noninterest income excluding tax credit amortization as a percentage of net revenue (non-GAAP) | 22.8 | % | 25.3 | % | 23.8 | % | |||
Noninterest income as a percentage of net revenue | 22.8 | % | 25.1 | % | 23.8 | % | |||
Comparison to Prior Quarter
First quarter of 2016 GAAP noninterest income of $79 million decreased $10 million, or 12%, compared to the fourth quarter of 2015, reflecting lower income from all line items except bank owned life insurance. Other income for the fourth quarter of 2015 included $1 million in amortization for tax credit investments, which was more than offset by lower tax expense. These investments are amortized in the first year of funding and we recognized the amortization as contra-fee income, included in other income, with an offsetting benefit that reduced our income tax expense. There was no such amortization for the first quarter of 2016. Excluding this amortization, noninterest income decreased $11 million, or 13%, from the prior quarter.
Deposit service charges decreased $1 million, or 6%, due to typical first quarter seasonality. Merchant and card fees decreased $1 million, or 7%, due to seasonally lower interchange revenues consistent with lower card transaction volumes. Lower producer levels and equity market volatility drove the $1 million, or 7%, decline in income from wealth management services from the prior quarter. Mortgage banking income decreased $1 million, or 19%, reflecting a $1 million repurchase reserve reversal taken in the fourth quarter of 2015. Locked volumes increased from the prior quarter while gain on sale margins remained relatively flat. The $4 million, or 65%, decrease in capital markets income, which primarily includes income from derivatives and syndications, was driven by moderation from strong fourth quarter levels which included a favorable credit valuation adjustment. Other income decreased $3 million, or 44%, due to lower equity and investment gains as well as a one-time gain from the sale of a low income housing property recognized in the fourth quarter of 2015.
GAAP noninterest income as a percentage of net revenue decreased from 25.1% for the three months ended December 31, 2015 to 22.8% for the three months ended March 31, 2016. Excluding the tax credit amortization, recorded as contra noninterest income, this ratio was 25.3% for the three months ended December 31, 2015.
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Comparison to Prior Year Quarter
First quarter of 2016 GAAP noninterest income of $79 million decreased $3 million, or 4%, compared to the first quarter of 2015, driven by decreases in insurance commissions, wealth management services, mortgage banking, and capital markets income, partially offset by higher deposit service charges.
Insurance commissions decreased $1 million, or 7%, primarily due to lower commissions from commercial lines. Wealth management services income decreased $1 million, or 7%, stemming from lower annuity and mutual funds commissions due to market volatility. Mortgage banking revenues decreased $1 million, or 19%, as a result of lower locked volumes. The $2 million, or 44%, decrease in capital markets income, which includes income from derivatives and syndications, primarily resulted from a higher unfavorable credit valuation adjustment in the first quarter of 2016. Deposit service charges increased $1 million, or 5%, due to higher service charges on business checking accounts.
GAAP noninterest income as a percentage of net revenue decreased from 23.8% for the three months ended March 31, 2015 to 22.8% for the three months ended March 31, 2016.
Noninterest Expense
The following table presents our noninterest expenses for the periods indicated:
Three months ended | |||||||||
(dollars in millions) | March 31, 2016 | December 31, 2015 | March 31, 2015 | ||||||
Salaries and employee benefits | $ | 115 | $ | 113 | $ | 112 | |||
Occupancy and equipment | 26 | 26 | 27 | ||||||
Technology and communications | 35 | 38 | 35 | ||||||
Marketing and advertising | 9 | 10 | 10 | ||||||
Professional services | 12 | 15 | 13 | ||||||
Amortization of intangibles | 4 | 4 | 6 | ||||||
FDIC premiums | 10 | 10 | 11 | ||||||
Merger and acquisition integration expenses | 13 | 14 | — | ||||||
Restructuring charges | — | 3 | 18 | ||||||
Other expense | 29 | 31 | 29 | ||||||
Total noninterest expenses | 255 | 265 | 261 | ||||||
Less nonoperating expenses: | |||||||||
Merger and acquisition integration expenses | (13 | ) | (14 | ) | — | ||||
Restructuring charges | — | (3 | ) | (18 | ) | ||||
Total operating noninterest expenses(1) | $ | 242 | $ | 247 | $ | 244 | |||
Efficiency ratio(2) | 73.7 | % | 74.4 | % | 75.6 | % | |||
Operating efficiency ratio(1) | 69.8 | % | 69.5 | % | 70.5 | % | |||
Full time equivalent employees | 5,322 | 5,428 | 5,322 | ||||||
(1) | We believe this non-GAAP measure provides a meaningful comparison of our underlying operational performance and facilitates management’s and investors’ assessments of business and performance trends in comparison to others in the financial services industry and period over period analysis of our fundamental results. The operating efficiency ratio is computed by dividing operating noninterest expense by the sum of net interest income and noninterest income. |
(2) | The efficiency ratio is computed by dividing noninterest expense by the sum of net interest income and noninterest income. |
Comparison to Prior Quarter
First quarter of 2016 GAAP noninterest expenses decreased $10 million, or 4%, to $255 million from the fourth quarter of 2015. First quarter of 2016 GAAP noninterest expenses included $13 million in pre-tax merger and acquisition integration expenses related to our pending merger with KeyCorp and GAAP noninterest expenses in
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the fourth quarter of 2015 included $14 million in pre-tax merger and acquisition integration expenses and $3 million in pre-tax restructuring charges related to third party professional fees incurred in connection with the overstatement of the allowance for loan losses. Excluding these nonoperating items, our noninterest expenses decreased $6 million, or 2%, primarily driven by lower technology and communications, marketing and advertising, professional services, and other expenses partially offset by higher salaries and benefits.
Technology and communications expense decreased $3 million, or 7%, due to decreases in infrastructure costs and depreciation expenses. Marketing and advertising expense decreased $1 million, or 9%, consistent with seasonal patterns, and professional services fees decreased $3 million, or 19%, driven by pause of certain projects and the associated decline in third party services expenses. The $1 million, or 4%, decrease in other expense resulted from lower other real estate owned valuation writedowns and other corporate expenses. Salaries and benefits increased $2 million, or 2%, as typical resetting of payroll taxes and other seasonal benefits more than offset lower salaries from lower headcount.
Pre-tax merger and acquisition integration expenses for the first quarter of 2016 and the fourth quarter of 2015 were primarily comprised of professional services fees, employee retention expenses, classification of compensation of certain personnel dedicated to merger integration efforts, as well as costs related to securing shareholder approval for the pending Merger.
In the first quarter of 2016, our GAAP efficiency ratio was 73.7% compared to 74.4% in the prior quarter. Excluding $13 million in merger and acquisition integration expenses in the first quarter of 2016, our operating (non-GAAP) efficiency ratio was 69.8%. Excluding $14 million in pre-tax merger and acquisition integration expenses and $3 million in pre-tax restructuring charges related to third party professional fees incurred in connection with the overstatement of the allowance for loan losses in the fourth quarter of 2015, our operating (non-GAAP) efficiency ratio was 69.5%.
Comparison to Prior Year Quarter
GAAP noninterest expenses decreased $6 million, or 2%, for the quarter ended March 31, 2016 from the quarter ended March 31, 2015. Noninterest expenses in the first quarter of 2016 included $13 million in pre-tax merger and acquisition integration expenses related to our pending Merger with KeyCorp. Noninterest expenses in the first quarter of 2015 included $18 million in pre-tax restructuring and severance charges incurred primarily in connection with the consolidation of 17 branches and the completion of our organization simplification during the quarter as well as third party professional fees incurred in connection with the overstatement of the allowance for loan losses resulting from mid-level employee misconduct. Excluding these charges, noninterest expenses decreased $2 million, or 1%, as lower occupancy and equipment, marketing and advertising, professional services, amortization of intangibles, and FDIC premiums were partially offset by higher salaries and benefits and other expenses.
The $1 million, or 3%, decrease in occupancy and equipment resulted from lower rental income associated with a property that was sold in the fourth quarter of 2015. Marketing and advertising expense was $1 million, or 11%, lower for the current quarter due to timing of promotional campaigns. Professional services expense decreased $1 million, or 5%, driven by pause in certain projects and the associated decline in third party services expenses. FDIC premiums decreased $1 million, or 6%, due to the expiration of the impact of our goodwill impairment charge we recorded in the third quarter of 2014. Salaries and employee benefits increased $3 million, or 3%, as a result of higher incentive-based compensation.
Merger and acquisition integration expenses for the first quarter of 2016 were primarily comprised of professional services fees, employee retention expenses, classification of compensation of certain personnel dedicated to merger integration efforts, as well as costs related to securing shareholder approval for the pending Merger. Restructuring charges of $18 million for the quarter ended March 31, 2015 were comprised of $4 million in salaries and benefits, $6 million in occupancy and equipment, $5 million in professional services, and $2 million in other expenses.
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Our GAAP efficiency ratio in the first quarter of 2016 and 2015 was 73.7% and 75.6%, respectively. Excluding the $13 million in merger and acquisition integration expenses in the first quarter of 2016, our non-GAAP efficiency ratio was 69.8%. Excluding the $18 million in restructuring and severance expenses in the first quarter of 2015, our non-GAAP efficiency ratio was 70.5%.
Taxes
The provision for income taxes for the first quarter of 2016 and fourth quarter of 2015 was $20 million and $17 million, respectively, resulting in effective tax rates of 29.8% and 25.4%, respectively. The effective tax rate for the fourth quarter of 2015 reflects the benefits of tax credit investments and the partial utilization of a capital loss carryforward that reduced our income tax expense.
The provision for income taxes in the first quarter of 2016 and 2015 was $20 million, resulting in an effective tax rate of 29.8% and 28.0%, respectively. The effective tax rate for the first quarter of 2015 reflects the benefits of the partial utilization of a capital loss carryforward that reduced our income tax expense.
RISK MANAGEMENT
The risks we are subject to in the normal course of business, include, but are not limited to, strategic, credit, market (including liquidity, interest rate, and price risks), capital, compliance and regulatory, operational, information technology/information security, and reputation (as a component of the risks noted above). We maintain capital at a level that we believe protects us against these risks. In addition, business uncertainties have been introduced due to the pending Merger with KeyCorp. The Board, Board Committees and senior management are regularly engaged in monitoring potential risks and impacts through the company’s governance structures. Metrics and monitoring reports have been created to allow for oversight and actions, as necessary. Specifically and as previously noted, the impact to employees and customers may have an adverse effect on the company. Proactive steps have been taken in an effort to retain both employees and customers during this period. To the extent there are not contractual restrictions, both First Niagara and KeyCorp, assess and manage these identified risks in the planning of the combined entity. Both First Niagara and KeyCorp are taking a focused view in understanding the level of risk and the impact those risks have on the integration process.
As with all companies, we face uncertainty and the management of these risks is an important component of driving shareholder value and financial returns. We do this through robust governance processes and appropriate risk and control framework. Our Board of Directors, through the Risk Committee of the Board, sets the tone by establishing our consolidated risk appetite statement. This risk appetite statement provides guidance to ensure risk-taking is appropriate and strategy and tactics are properly aligned in the pursuit of financial objectives. Risk appetite and risk tolerances throughout the Company are an extension of this consolidated risk appetite statement. This is managed through an Enterprise Risk Management (“ERM”) framework which includes methods and processes to identify, monitor, manage, and report on risk. The ERM division, led by our Chief Risk Officer, is responsible for this framework. Successful management of risk allows us to identify situations that may significantly or materially interfere with the achievement of desired goals, or an event or activity which may cause a significant opportunity to be missed.
We employ a three lines of defense model as our primary means to ensure roles, responsibilities and accountabilities are defined and to allow for quick identification and response to risk events. The lines of business and functional areas represent the first line of defense. These areas own, identify, and manage the risks. The second line (those independent risk areas reporting to the Chief Risk Officer), have responsibility for the facilitation and implementation of robust enterprise risk management and compliance processes to effectively monitor and oversee (governance, policy, identification, assessment, analysis, monitoring, reporting) risks being managed by the first line. The third line of defense is Internal Audit which provides independent objective assurance services which audit and report on the design and operating effectiveness of internal controls, risk management framework and governance processes. The results of internal audit reviews are reported to the Audit Committee of the Board of Directors.
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The Board of Directors has the fundamental responsibility of directing the management of the Bank's business and affairs, and establishing a corporate culture that prevents the circumvention of safe and sound policies and procedures. Our Board of Directors and Executive Management utilize various committees in the management of risk. The main risk governance committees are the Risk Committee and Audit Committee of the Board and the Enterprise Risk Management Committee ("ERMC"), Capital Management Committee ("CMC") and Disclosure Committee of Management. The purpose of the Risk Committee of the Board of Directors is to assist the Board in fulfilling its oversight responsibilities of the Company with respect to understanding inherent risks impacting the Company and related control activities; and, assessing the risks of the Company. Sub-committees of the ERMC, which support the core risk areas, are the Operational Risk Committee, Allowance for Loan and Lease Losses Committee, Commercial Credit Risk and Policy Committee, Consumer Credit Risk and Policy Committee, Asset/Liability Committee, Compliance Management Committee, and the Community Reinvestment Act Committee. These sub-committees are supported by various working groups. The purpose of the CMC is to provide oversight to the Company's capital adequacy assessment activities, Dodd-Frank Act Stress Testing ("DFAST"), and to assess/recommend capital actions.
The purpose of the Audit Committee is to assist the Board in fulfilling its financially related oversight responsibilities of the Company. The Disclosure Committee supports the Audit Committee and carries out Management’s responsibilities for the review and approval of reports submitted to the Securities and Exchange Commission under the authority granted to Management by the Board of Directors.
Credit Risk
As a bank, we make loans and loan commitments, and purchase securities whose realization is dependent on future principal and interest repayments. Credit risk is the risk associated with the potential inability of a borrower to repay their debt according to their contractual terms. This inability to repay could result in higher levels of nonperforming assets and credit losses, which could potentially reduce our earnings.
Loans
The following table presents the composition of our loan and lease portfolios at the dates indicated:
March 31, 2016 | December 31, 2015 | Increase (decrease) | ||||||||||||
(dollars in millions) | Amount | Percent | Amount | Percent | ||||||||||
Commercial: | ||||||||||||||
Real estate | $ | 7,257 | 30.0 | % | $ | 7,375 | 30.7 | % | $ | (117 | ) | |||
Construction | 1,369 | 5.7 | 1,278 | 5.3 | 91 | |||||||||
Business | 6,175 | 25.5 | 6,013 | 25.0 | 162 | |||||||||
Total commercial | 14,801 | 61.2 | 14,665 | 61.0 | 135 | |||||||||
Consumer: | ||||||||||||||
Residential real estate | 3,331 | 13.8 | 3,355 | 14.0 | (24 | ) | ||||||||
Home equity | 3,057 | 12.6 | 3,069 | 12.7 | (12 | ) | ||||||||
Indirect auto | 2,464 | 10.2 | 2,393 | 10.0 | 71 | |||||||||
Credit cards | 289 | 1.2 | 311 | 1.3 | (22 | ) | ||||||||
Other consumer | 237 | 1.0 | 245 | 1.0 | (8 | ) | ||||||||
Total consumer | 9,378 | 38.8 | 9,372 | 39.0 | 5 | |||||||||
Total loans and leases | 24,178 | 100.0 | % | 24,038 | 100.0 | % | 140 | |||||||
Allowance for loan losses | (253 | ) | (242 | ) | (11 | ) | ||||||||
Total loans and leases, net | $ | 23,926 | $ | 23,796 | $ | 130 | ||||||||
Our primary lending activity is the origination of commercial business and commercial real estate loans, as well as residential mortgage and home equity lines of credit to customers located within our primary market areas. Our commercial real estate and business loan portfolios provide opportunities to cross sell other fee-based banking services. Consistent with our long-term customer relationship focus, we retain the servicing rights on the majority of residential mortgage loans that we sell, resulting in monthly servicing fee income to us. We also originate and
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retain in our lending portfolio various types of consumer loan products given their customer relationship building benefits.
Total loans and leases outstanding increased $140 million, or 2% annualized, from December 31, 2015 to March 31, 2016, due to continued growth in our commercial business, and indirect auto portfolios. Our commercial loan portfolio increased $135 million, or 4% annualized, reflecting new business volumes and our continued focus on balancing volume growth with prudent credit underwriting. Our period over period results display organic growth across our footprint in our commercial lending activities, as well as an increase in utilization of commercial line commitments of 41% at March 31, 2016 from 40% at December 31, 2015. Commercial loans made up 61% of our total loans at March 31, 2016, comprising the largest part of our lending book and remaining unchanged from the loan type composition at December 31, 2015.
Commercial real estate loans represented 36% of our total loan portfolio and $8.6 billion in balances at March 31, 2016. Our commercial real estate loans consist of $7.3 billion in commercial real estate loans and $1.4 billion of construction loans. During the three months ended March 31, 2016, new construction loan originations were the largest contributor to the growth of this portfolio; balances increased by $91 million, or 29% annualized, from December 31, 2015.
Our commercial business loan portfolio increased $162 million, or 11% annualized, from December 31, 2015, resulting from increases in our middle market and asset based lending segments. Our commercial pipeline was consistent with historical norms at the end of the first quarter of 2016.
The $71 million increase, or 12% annualized, from December 31, 2015 in our indirect auto portfolio resulted from $314 million in new originations during the current quarter with an average yield of 3.41%, net of dealer reserve, an increase of 11 basis points from the prior quarter and 16 basis points from a year ago. The average FICO score for these new originations was 751, compared to 756 for the three months ended December 31, 2015.
Offsetting this growth was a decrease in our home equity portfolio of $12 million, or 2% annualized, from December 31, 2015 to March 31, 2016 primarily due to seasonality and a prime rate increase. Our residential real estate loan portfolio decreased $24 million, or 3% annualized, from December 31, 2015 to March 31, 2016. This decrease is due to prepayments of adjustable rate mortgages and our strategy of selling most newly originated fixed rate residential real estate loans in the secondary market. Additionally, our credit card and other consumer loan portfolios decreased 29% and 13% annualized, respectively.
Included in the table above are acquired loans with a carrying value of $2.8 billion and $2.9 billion at March 31, 2016 and December 31, 2015, respectively. Such acquired loans were initially recorded at fair value with no carryover of any related allowance for loan losses.
We continue to expand our commercial lending activities by taking advantage of opportunities to move up market while remaining focused on credit discipline. Our enhanced specialty offerings in equipment financing, healthcare, and loan syndications continue to provide additional opportunities to enhance our relationships with our existing commercial customer base, as well as attract new customers. We have also continued to emphasize the origination of construction loans as part of our commercial lending offerings.
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The table below presents the composition of our loan and lease portfolios, including net deferred costs and unearned discounts, based on the region in which the loan was originated, except for our residential real estate and credit cards portfolios which are assigned to a region based on the primary address of the consumer:
(in millions) | New York | Western Pennsylvania | Eastern Pennsylvania | Connecticut and Western Massachusetts | Other(1) | Total loans and leases | ||||||||||||
March 31, 2016 | ||||||||||||||||||
Commercial: | ||||||||||||||||||
Real estate | $ | 4,283 | $ | 945 | $ | 1,604 | $ | 1,795 | $ | — | $ | 8,626 | ||||||
Business | 2,916 | 1,117 | 855 | 764 | 523 | 6,175 | ||||||||||||
Total commercial | 7,198 | 2,062 | 2,459 | 2,559 | 523 | 14,801 | ||||||||||||
Consumer: | ||||||||||||||||||
Residential real estate | 1,238 | 159 | 280 | 1,653 | — | 3,331 | ||||||||||||
Home equity | 1,652 | 332 | 547 | 526 | — | 3,057 | ||||||||||||
Indirect auto | 782 | 84 | 56 | 450 | 1,092 | 2,464 | ||||||||||||
Credit cards | 227 | 31 | 15 | 15 | — | 289 | ||||||||||||
Other consumer | 156 | 42 | 27 | 12 | — | 237 | ||||||||||||
Total consumer | 4,054 | 649 | 926 | 2,657 | 1,092 | 9,378 | ||||||||||||
Total loans and leases | $ | 11,252 | $ | 2,711 | $ | 3,385 | $ | 5,215 | $ | 1,615 | $ | 24,178 | ||||||
December 31, 2015 | ||||||||||||||||||
Commercial: | ||||||||||||||||||
Real estate | $ | 4,331 | $ | 933 | $ | 1,604 | $ | 1,784 | $ | — | $ | 8,652 | ||||||
Business | 2,797 | 1,074 | 865 | 728 | 549 | 6,013 | ||||||||||||
Total commercial | 7,128 | 2,007 | 2,469 | 2,512 | 549 | 14,665 | ||||||||||||
Consumer: | ||||||||||||||||||
Residential real estate | 1,235 | 151 | 289 | 1,679 | — | 3,355 | ||||||||||||
Home equity | 1,658 | 331 | 559 | 521 | — | 3,069 | ||||||||||||
Indirect auto | 769 | 78 | 55 | 432 | 1,059 | 2,393 | ||||||||||||
Credit cards | 245 | 33 | 16 | 16 | — | 311 | ||||||||||||
Other consumer | 160 | 44 | 28 | 13 | — | 245 | ||||||||||||
Total consumer | 4,068 | 638 | 947 | 2,661 | 1,059 | 9,372 | ||||||||||||
Total loans and leases | $ | 11,196 | $ | 2,644 | $ | 3,416 | $ | 5,174 | $ | 1,608 | $ | 24,038 | ||||||
(1) | Other consists of indirect auto loans made in states that border our footprint, and our capital markets portfolio. Our capital markets portfolio includes participations in syndicated loans that have been underwritten and purchased by us where we are not the lead bank. Nearly all of these loans are to companies in our footprint states or in states that border our footprint states. |
Our Western Pennsylvania market has exhibited steady growth with an increase in their commercial loan portfolios of $55 million, or 11% annualized, from the end of 2015. Over the same period, our New York market also contributed to the growth in commercial loans, with a 4% annualized increase.
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The table below presents a breakout of the unpaid principal balance of our commercial real estate and commercial business loan portfolios by individual loan size at the dates indicated:
March 31, 2016 | December 31, 2015 | ||||||||||
(dollars in millions) | Amount | Count | Amount | Count | |||||||
Commercial real estate loans by balance size:(1) | |||||||||||
Greater than or equal to $20 million | $ | 782 | 32 | $ | 754 | 31 | |||||
$10 million to $20 million | 1,979 | 138 | 1,949 | 138 | |||||||
$5 million to $10 million | 1,650 | 236 | 1,682 | 239 | |||||||
$1 million to $5 million | 2,648 | 1,213 | 2,678 | 1,236 | |||||||
Less than $1 million(2) | 1,567 | 6,147 | 1,589 | 6,315 | |||||||
Total commercial real estate loans | $ | 8,626 | 7,766 | $ | 8,652 | 7,959 | |||||
Commercial business loans by size:(1) | |||||||||||
Greater than or equal to $20 million | $ | 304 | 11 | $ | 343 | 14 | |||||
$10 million to $20 million | 1,313 | 95 | 1,179 | 86 | |||||||
$5 million to $10 million | 1,204 | 171 | 1,172 | 169 | |||||||
$1 million to $5 million | 1,746 | 786 | 1,716 | 791 | |||||||
Less than $1 million(2) | 1,608 | 35,118 | 1,602 | 35,095 | |||||||
Total commercial business loans | $ | 6,175 | 36,181 | $ | 6,013 | 36,155 | |||||
(1) | Multiple loans to one borrower have not been aggregated for purposes of this table. |
(2) | Caption includes net deferred fees and costs and other adjustments. |
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At both March 31, 2016 and December 31, 2015, non-owner occupied commercial real estate represented 66% of the total commercial real estate balance. Loans for construction, acquisition and development increased $100 million from December 31, 2015 due to the funding of previously committed construction loans and new construction originations. The table below provides the principal balance of our non-owner occupied commercial real estate loans by location and property type at the dates indicated:
(in millions) | New York | Western Pennsylvania | Eastern Pennsylvania | Connecticut and Western Massachusetts | Other(1) | Total | ||||||||||||
March 31, 2016: | ||||||||||||||||||
Non-owner occupied commercial real estate loans: | ||||||||||||||||||
Construction, acquisition and development | $ | 503 | $ | 100 | $ | 168 | $ | 210 | $ | 243 | $ | 1,223 | ||||||
Multifamily and apartments | 1,104 | 103 | 110 | 262 | 115 | 1,694 | ||||||||||||
Office and professional space | 517 | 89 | 77 | 271 | 132 | 1,086 | ||||||||||||
Retail | 287 | 46 | 106 | 267 | 115 | 820 | ||||||||||||
Warehouse and industrial | 125 | 14 | 46 | 76 | 32 | 293 | ||||||||||||
Other | 276 | 52 | 78 | 108 | 67 | 581 | ||||||||||||
Total non-owner occupied commercial real estate loans | 2,813 | 404 | 583 | 1,194 | 703 | 5,697 | ||||||||||||
Owner occupied commercial real estate loans | 1,218 | 361 | 486 | 476 | 389 | 2,929 | ||||||||||||
Total commercial real estate loans | $ | 4,030 | $ | 765 | $ | 1,069 | $ | 1,670 | $ | 1,092 | $ | 8,626 | ||||||
December 31, 2015: | ||||||||||||||||||
Non-owner occupied commercial real estate loans: | ||||||||||||||||||
Construction, acquisition and development | $ | 469 | $ | 96 | $ | 156 | $ | 205 | $ | 198 | $ | 1,123 | ||||||
Multifamily and apartments | 1,102 | 107 | 137 | 263 | 104 | 1,713 | ||||||||||||
Office and professional space | 506 | 84 | 86 | 296 | 133 | 1,106 | ||||||||||||
Retail | 287 | 48 | 126 | 243 | 111 | 814 | ||||||||||||
Warehouse and industrial | 130 | 24 | 52 | 81 | 11 | 298 | ||||||||||||
Other | 330 | 52 | 80 | 122 | 82 | 666 | ||||||||||||
Total non-owner occupied commercial real estate loans | 2,825 | 410 | 636 | 1,210 | 638 | 5,720 | ||||||||||||
Owner occupied commercial real estate loans | 1,223 | 384 | 470 | 455 | 401 | 2,932 | ||||||||||||
Total commercial real estate loans | $ | 4,048 | $ | 795 | $ | 1,106 | $ | 1,665 | $ | 1,039 | $ | 8,652 | ||||||
(1) | Primarily consists of loans located in states bordering our footprint. |
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The table below provides detail on commercial business loans and owner occupied commercial real estate loans by industry classification (as defined by the North American Industry Classification System) at the dates indicated:
(in millions) | March 31, 2016 | December 31, 2015 | ||||
Health Care and Social Assistance | $ | 1,535 | $ | 1,450 | ||
Manufacturing | 1,372 | 1,374 | ||||
Real Estate and Rental and Leasing | 1,042 | 1,039 | ||||
Wholesale Trade | 630 | 624 | ||||
Public Administration | 541 | 511 | ||||
Retail Trade | 520 | 530 | ||||
Educational Services | 452 | 467 | ||||
Construction | 408 | 414 | ||||
Finance and Insurance | 389 | 317 | ||||
Transportation and Warehousing | 307 | 302 | ||||
Other Services (except Public Administration) | 295 | 315 | ||||
Professional, Scientific, and Technical Services | 283 | 288 | ||||
Accommodation and Food Services | 222 | 223 | ||||
Other | 1,106 | 1,090 | ||||
Total | $ | 9,104 | $ | 8,946 | ||
Energy Related Exposure
Included within our commercial portfolio are certain loans categorized as energy related, including both oil and gas related exposures as well as exposures to utilities and alternative energy. The table below provides the outstanding loan balance and unfunded commitments for energy related exposures at the dates indicated:
March 31, 2016 | December 31, 2015 | ||||||||||||||||||
Outstanding | Unused commitments | Total credit exposure | Outstanding | Unused commitments | Total credit exposure | ||||||||||||||
(in millions) | |||||||||||||||||||
Oil and gas related | $ | 282 | $ | 157 | $ | 439 | $ | 276 | $ | 176 | $ | 452 | |||||||
Utilities and alternative energy | 179 | 168 | 347 | 127 | 175 | 302 | |||||||||||||
Total | $ | 461 | $ | 325 | $ | 786 | $ | 403 | $ | 351 | $ | 754 | |||||||
Risk Management of the Energy Related Portfolio
We do not have a dedicated energy lending business. Our exposures are managed in our regional commercial banking business units. Our energy exposures consist of only senior loans, with no junior or second lien positions; additionally, we generally avoid making first lien loans to borrowers that employ significant leverage through the use of junior lien loans or large unsecured senior tranches of debt. During our energy portfolio reviews in the first quarter, we noted only a few individual credits that have been impacted enough to warrant a downgrade in their associated risk ratings. These downgrades added slightly less than $1 million to our model driven allowance. In light of the ongoing impact of low oil and natural gas prices, our allowance for loan losses included a $3 million qualitative component at both March 31, 2016 and December 31, 2015. As of March 31, 2016, four energy loan relationships were in nonaccrual status totaling $22 million in outstanding balances.
We believe that our exposure to the utilities and alternative energy sectors, while appropriate to include in the energy exposure, are likely to be unaffected in the near-term by the recent decline in oil and natural gas prices. This portfolio includes exposure to alternative power generation, transmission, control, and distribution such as hydro-electric and solar sources, and is generally not dependent on oil. However, a prolonged period of extremely low oil prices could ultimately undercut such cost-efficient alternative energy sources and result in lower demand.
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With respect to our oil and gas related exposures, our oil and gas related outstandings of $282 million included both direct and indirect exposure to energy related obligors at March 31, 2016 of $139 million and $143 million, respectively. These combined outstandings represented a modest 1.2% of total loan outstanding balances at March 31, 2016. At December 31, 2015, our oil and gas related outstandings of $276 million included both direct and indirect exposure to energy related obligors of $142 million and $134 million, respectively. These combined outstandings represented a modest 1.1% of total loan outstanding balances at December 31, 2015. The energy-related exposure can be primarily classified into three subcategories: 1) upstream, 2) midstream, and 3) downstream.
The table below provides the outstanding loan balance and unfunded commitments for oil and gas related exposures at the dates indicated. Due to the fact that many borrowers operate in multiple businesses, judgment has been applied in characterizing a borrower as energy-related, and to a particular segment of energy related activity (e.g. upstream or downstream).
Outstanding | Unused commitments | ||||||||||||||||||
(in millions) | Direct | Indirect | Total | Direct | Indirect | Total | |||||||||||||
March 31, 2016 | |||||||||||||||||||
Upstream: | |||||||||||||||||||
Drillers | $ | 15 | $ | — | $ | 15 | $ | 1 | $ | — | $ | 1 | |||||||
Midstream: | |||||||||||||||||||
Drilling field services | 83 | — | 83 | 47 | — | 47 | |||||||||||||
Other | 42 | — | 42 | 7 | — | 7 | |||||||||||||
Total midstream | 124 | — | 124 | 54 | — | 54 | |||||||||||||
Downstream: | |||||||||||||||||||
Gas stations and convenience stores | — | 58 | 58 | — | 22 | 22 | |||||||||||||
Non-drilling support | — | 43 | 43 | — | 7 | 7 | |||||||||||||
Wholesale distribution | — | 22 | 22 | — | 41 | 41 | |||||||||||||
Other | — | 20 | 20 | — | 33 | 33 | |||||||||||||
Total downstream | — | 143 | 143 | — | 103 | 103 | |||||||||||||
Total | $ | 139 | $ | 143 | $ | 282 | $ | 55 | $ | 103 | $ | 157 | |||||||
December 31, 2015 | |||||||||||||||||||
Upstream: | |||||||||||||||||||
Drillers | $ | 15 | $ | — | $ | 15 | $ | 1 | $ | — | $ | 1 | |||||||
Midstream: | |||||||||||||||||||
Drilling field services | 88 | — | 88 | 48 | — | 48 | |||||||||||||
Other | 39 | — | 39 | 10 | — | 10 | |||||||||||||
Total midstream | 127 | — | 127 | 58 | — | 58 | |||||||||||||
Downstream: | |||||||||||||||||||
Gas stations and convenience stores | — | 55 | 55 | — | 26 | 26 | |||||||||||||
Non-drilling support | — | 40 | 40 | — | 10 | 10 | |||||||||||||
Wholesale distribution | — | 19 | 19 | — | 48 | 48 | |||||||||||||
Other | — | 20 | 20 | — | 34 | 34 | |||||||||||||
Total downstream | — | 134 | 134 | — | 117 | 117 | |||||||||||||
Total | $ | 142 | $ | 134 | $ | 276 | $ | 59 | $ | 117 | $ | 176 | |||||||
The table above does not include $86 million and $83 million in outstanding loan balances and $7 million and $10 million of unused commitments at March 31, 2016 and December 31, 2015, respectively, related to commercial real estate loans in which the direct counterparty to the loan is not involved in upstream or midstream activities.
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However, such properties have a large tenant exposure to companies directly involved in such activities at March 31, 2016 and December 31, 2015.
Upstream exposure
Our exposures to the upstream sector include exposures related to the extraction and production of oil and natural gas, such as drilling and the operations of wells. We do not have any loans margined against estimated reserves or similar asset based energy loan structures. Direct exposures to the upstream category are low with $15 million in outstanding loan balances made directly to counterparties involved in the drilling and operations of wells at March 31, 2016 and December 31, 2015.
Midstream exposure
Our exposures to the midstream sector primarily consist of exposures to counterparties who provide products, services, and logistical support to exploration and production enterprises. Direct exposure of $124 million and $127 million in outstanding loan balances at March 31, 2016 and December 31, 2015, respectively, relate to loans made directly to counterparties whose operations are involved in the processing of crude oil and natural gas, including companies who provide supplies to drilling field operations. The majority of this exposure is in our Western Pennsylvania region supporting the Marcellus Shale natural gas market.
Downstream exposure
Our exposures to the downstream sector include exposures to companies involved in the refining process and distribution of refined products, such as wholesale oil and gas distributors, gas stations and convenience stores, which we consider to be indirect based upon the nature of their involvement in the oil and gas industry. Indirect exposure of $143 million and $134 million in outstanding loan balances at March 31, 2016 and December 31, 2015, respectively, relate to loans made to counterparties whose operations are primarily involved in the wholesale and retail distribution of refined products, including companies that provide support and/supplies to such entities.
Metals exposure
A softer global economic growth outlook which has resulted in weakening demand for metals coupled with excess supply has resulted in a significant decline in the price of metals. Such falling metals prices exerted stress on borrowers that directly engaged in the manufacturing or distribution of metals products, as well as those borrowers that engaged in scrap metal processing and demolition companies whose profitability is partially dependent on the sale of scrap metal.
Given prolonged weakness in metals prices, during the first quarter we performed a comprehensive review of 27 relationships with total commitments of $403 million and outstanding balances of $244 million as of March 31, 2016. At March 31, 2016, nonperforming loans related to metals totaled $20 million in outstanding balances, comprised of two relationships.
In the first quarter, we increased our general and specific reserves by $8 million given the deterioration in metals prices.
Home Equity Portfolio
Our home equity portfolio (loans and lines of credit) consists of both first-lien and junior-lien mortgage loans with underwriting criteria based on minimum credit scores, debt to income ratios, and LTV ratios. We currently offer variable-rate home equity lines of credit ("HELOCs"). The standard HELOC product has a 10 year draw period with a 20 year fully amortizing term upon utilization of the line. Interest-only draw periods are limited to 5 years, and are available at the request of the mortgagor. Applications are underwritten centrally in conjunction with an automated underwriting system.
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Of the $3.1 billion home equity portfolio at March 31, 2016 and December 31, 2015, approximately $1.2 billion were in a first lien position for each period. We hold or service the first lien loan for approximately 10% of the remainder of the home equity portfolio that was in a second lien position as of March 31, 2016 and December 31, 2015.
The table below summarizes the principal balances of our home equity lines of credit by portfolio at the dates indicated:
March 31, 2016 | December 31, 2015 | ||||||||||||||||||
(in millions) | Interest only | Principal and interest | Total | Interest only | Principal and interest | Total | |||||||||||||
Originated | $ | 410 | $ | 1,596 | $ | 2,006 | $ | 403 | $ | 1,582 | $ | 1,985 | |||||||
Acquired | 237 | 646 | 883 | 244 | 662 | 906 | |||||||||||||
Total home equity lines of credit | $ | 647 | $ | 2,242 | 2,889 | $ | 647 | $ | 2,244 | 2,891 | |||||||||
Home equity loans | 168 | 178 | |||||||||||||||||
Total home equity portfolio | $ | 3,057 | $ | 3,069 | |||||||||||||||
The principal and interest payment associated with the term structure will be higher than the interest-only payment, resulting in “maturity” risk. We have taken steps to mitigate such risk by (1) stressing each applicant based on principal and interest during underwriting and (2) placing draw restrictions on HELOCs in past due status. We monitor the risk of junior lien HELOCs by monitoring the payment status on senior lien mortgages not owned or serviced by us, and obtaining refreshed credit scores on a regular basis.
The table below summarizes our home equity line of credit portfolio still in the draw period by draw period end date at March 31, 2016:
(in millions) | 2016 | 2017 | 2018 | 2019 | Thereafter | Total | ||||||||||||
In draw - interest only | $ | 55 | $ | 125 | $ | 160 | $ | 133 | $ | 174 | $ | 647 | ||||||
In draw - principal and interest | 30 | 69 | 110 | 84 | 1,819 | 2,112 | ||||||||||||
Total | $ | 85 | $ | 194 | $ | 270 | $ | 217 | $ | 1,993 | $ | 2,759 | ||||||
Delinquency statistics for the HELOC portfolio are as follows at the dates indicated:
March 31, 2016 | December 31, 2015 | ||||||||||||||||
Delinquencies | Delinquencies | ||||||||||||||||
(dollars in millions) | Balance | Amount | Percent of balance | Balance | Amount | Percent of balance | |||||||||||
HELOC status: | |||||||||||||||||
Still in draw period | $ | 2,759 | $ | 36 | 1.3 | % | $ | 2,764 | $ | 37 | 1.3 | % | |||||
Amortizing payment | 130 | 12 | 9.6 | 127 | 12 | 9.7 | |||||||||||
Allowance for Loan Losses and Nonperforming Assets
Credit risk is the risk associated with the potential inability of some of our borrowers to repay their loans according to their contractual terms. This inability to repay could result in higher levels of nonperforming assets and credit losses, which could potentially reduce our earnings.
A detailed description of our methodology for calculating our allowance for loan losses is included under the heading “Critical Accounting Policies and Estimates” in Item 7 of our 2015 Annual Report on Form 10-K.
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Allowance for Loan Losses
The primary indicators of credit quality are delinquency status and our internal loan gradings for our commercial loan portfolio segment, and delinquency status and current FICO scores for our consumer loan portfolio segment. We place non-credit card originated loans on nonaccrual status when they become more than 90 days past due, or earlier if we do not expect the full collection of interest or principal. When a loan is placed on nonaccrual status, any interest previously accrued and not collected is reversed from interest income. Credit cards are not placed on nonaccrual status until 180 days past due, at which time they are charged-off.
Our evaluation of our allowance for loan losses is based on a continuous review of our loan portfolio. The methodology that we use for determining the quantitative and qualitative amount of the allowance for loan losses consists of several elements. We use an internal loan grading system with nine categories of loan grades in evaluating our business and commercial real estate loans. In our loan grading system, pass loans are graded 1 through 5, special mention loans are graded 6, substandard loans are graded 7, doubtful loans are graded 8 and loss loans (which are fully charged off) are graded 9. Our definition of special mention, substandard, doubtful and loss are consistent with regulatory definitions.
In the normal course of our loan monitoring process, we review all pass graded individual commercial and commercial real estate loans and/or total loan concentration to one borrower no less frequently than annually for those greater than $3 million, every 18 months for those greater than $1 million but less than $3 million and every 36 months for those greater than $500 thousand but less than $1 million.
As part of our commercial credit monitoring process, our loan officers perform formal reviews based upon the credit attributes of the respective loans. Pass graded loans are continually monitored through our review of current information related to each loan. The nature of the current information available and used by us includes, as applicable, review of payment status and delinquency reporting, receipt and analysis of interim and annual financial statements, rent roll data, delinquent property tax searches, periodic loan officer inspections of properties, and loan officer knowledge of their borrowers, as well as the business environment in their respective market areas. We perform a formal review on a more frequent basis if the above considerations indicate that such review is warranted. Further, based upon consideration of the above information, if appropriate, loan grading can be reevaluated prior to the scheduled full review.
Quarterly Criticized Asset Reports ("QCARs") are prepared every quarter for all commercial special mention Total Aggregate Exposures ("TAEs") greater than $300 thousand and substandard or doubtful TAEs greater than $200 thousand. The purpose of the QCAR is to document as applicable, current payment status, payment history, charge-off amounts, collateral valuation information (including appraisal dates), and commentary on collateral valuations, guarantor information, interim financial data, cash flow, historical data and projections, rent roll data, and account history.
QCARs for substandard TAEs greater than $200 thousand are reviewed on a quarterly basis by either management's Criticized and Classified Loan Review Committee (for such TAEs greater than $2 million) or by a Senior Credit Manager (for such TAEs between $200 thousand and $2 million). QCARs for all special mention TAEs greater than $300 thousand are reviewed on a quarterly basis by either management's Classified Loan Review Committee (for such TAEs greater than $2 million) or by a Senior Credit Manager (for such TAEs between $300 thousand and $2 million). Special mention and substandard TAEs below $300 thousand and $200 thousand, respectively, are reviewed by a loan officer on a quarterly basis ensuring that the credit risk rating and accrual status are appropriate.
Updated valuations are obtained periodically in accordance with Interagency Appraisal and Evaluation Guidelines and internal policy. Appraisals or evaluations for commercial assets securing substandard rated loans are completed within 90 days of the downgrade. On an ongoing basis, real estate collateral supporting substandard loans with an outstanding balance greater than $500 thousand is required to have an appraisal or evaluation performed at least every 18 months for general commercial properties and at least every 12 months for land and acquisition and development loans. Real estate collateral supporting substandard loans with an outstanding balance equal to or less than $500 thousand is required to have an appraisal or evaluation performed at least every
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24 months for general commercial properties and at least every 18 months for land and acquisition and development loans. However, an appraisal or evaluation may be obtained more frequently than 18 to 24 months when volatile or unusual market conditions exist that could affect the ultimate realization of the value of the real estate collateral. Non-real estate collateral is reappraised on an as-needed basis, as determined by the loan officer, our Criticized and Classified Loan Review Committee, or by credit risk management based upon the facts and circumstances of the individual relationship.
Among other factors, our quarterly reviews consist of an assessment of the fair value of collateral for all loans reviewed, including collateral dependent impaired loans. During this review process, an internal estimate of collateral value, as of each quarterly review date, is determined utilizing current information such as comparables from more current appraisals in our possession for similar collateral in our portfolio, recent sale information, current rent rolls, operating statements and cash flow information for the specific collateral. Further, we have an Appraisal Institute designated MAI appraiser on staff available for consultation during our quarterly estimation of collateral fair value. This current information is compared to the assumptions made in the most recent appraisal as well as in previous quarters. Quarterly adjustments to the estimated fair value of the collateral are made as determined necessary in the judgment of our experienced senior credit officers to reflect current market conditions and current operating results for the specific collateral.
Adjustments are made each quarter to the related allowance for loan losses for collateral dependent impaired loans to reflect the change, if any, in the estimated fair value of the collateral less estimated costs to sell as compared to the previous quarter. The determination of the appropriateness of obtaining new appraisals is also specifically addressed in each quarterly review. New appraisals will be obtained prior to the above noted required time frames if it is determined appropriate during these quarterly reviews. Further, our in-house MAI appraiser is available for consultation regarding the need for new valuations.
In addition to the credit monitoring procedures described above, our credit risk review department, which is independent of the lending function and is part of our risk management function, verifies the accuracy of loan grading, classification, and, compliance with lending policies.
The following table details our allocation of our allowance for loan losses by loan category at the dates indicated or for the related quarters:
March 31, 2016 | December 31, 2015 | ||||||||||
(dollars in millions) | Amount of allowance for loan losses | Percent of loans to total loans | Amount of allowance for loan losses | Percent of loans to total loans | |||||||
Commercial: | |||||||||||
Real estate and construction | $ | 76 | 35.7 | % | $ | 76 | 36.0 | % | |||
Business | 135 | 25.5 | 124 | 25.0 | |||||||
Total commercial | 212 | 61.2 | 200 | 61.0 | |||||||
Consumer: | |||||||||||
Residential real estate | 4 | 13.8 | 4 | 14.0 | |||||||
Home equity | 7 | 12.6 | 8 | 12.7 | |||||||
Indirect auto | 13 | 10.2 | 13 | 10.0 | |||||||
Credit cards | 12 | 1.2 | 13 | 1.3 | |||||||
Other consumer | 5 | 1.0 | 5 | 1.0 | |||||||
Total consumer | 41 | 38.8 | 42 | 39.0 | |||||||
Total | $ | 253 | 100.0 | % | $ | 242 | 100.0 | % | |||
Allowance for loan losses to total loans | 1.05 | % | 1.01 | % | |||||||
Provision to average total loans | 0.37 | % | 0.39 | % | |||||||
Allowance for loan losses to originated loans | 1.16 | % | 1.12 | % | |||||||
Provision to average originated loans | 0.42 | % | 0.39 | % | |||||||
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The following table presents the activity in our allowance for originated loan losses by portfolio segment for the periods indicated:
Commercial | Consumer | ||||||||||||||||||||||||
Originated loans (in millions) | Real estate | Business | Residential | Home equity | Indirect auto | Credit cards | Other consumer | Total | |||||||||||||||||
Three months ended March 31, 2016 | |||||||||||||||||||||||||
Allowance for loan losses: | |||||||||||||||||||||||||
Balance at beginning of period | $ | 75 | $ | 124 | $ | 2 | $ | 6 | $ | 13 | $ | 13 | $ | 5 | $ | 237 | |||||||||
Provision for loan losses | 1 | 15 | — | 1 | 2 | 2 | 2 | 23 | |||||||||||||||||
Charge-offs | (2 | ) | (8 | ) | — | (1 | ) | (3 | ) | (3 | ) | (2 | ) | (19 | ) | ||||||||||
Recoveries | 1 | 4 | — | — | 1 | 1 | — | 8 | |||||||||||||||||
Balance at end of period | $ | 75 | $ | 135 | $ | 2 | $ | 6 | $ | 13 | $ | 12 | $ | 5 | $ | 248 | |||||||||
Three months ended March 31, 2015 | |||||||||||||||||||||||||
Allowance for loan losses: | |||||||||||||||||||||||||
Balance at beginning of period | $ | 65 | $ | 122 | $ | 2 | $ | 8 | $ | 14 | $ | 12 | $ | 5 | $ | 228 | |||||||||
Provision for loan losses | 8 | — | — | (2 | ) | 2 | 2 | 1 | 11 | ||||||||||||||||
Charge-offs | (4 | ) | (7 | ) | — | (1 | ) | (2 | ) | (3 | ) | (2 | ) | (19 | ) | ||||||||||
Recoveries | — | 2 | — | — | 1 | 1 | — | 4 | |||||||||||||||||
Balance at end of period | $ | 69 | $ | 117 | $ | 2 | $ | 6 | $ | 14 | $ | 11 | $ | 4 | $ | 224 | |||||||||
The following table presents the activity in our allowance for loan losses for our acquired loan portfolio for the periods indicated:
Commercial | Consumer | |||||||||||||||||||||
Acquired loans (in millions) | Real estate | Business | Residential | Home equity | Credit cards | Other consumer | Total | |||||||||||||||
Three months ended March 31, 2016 | ||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||
Balance at beginning of period | $ | 1 | $ | — | $ | 2 | $ | 2 | $ | — | $ | — | $ | 5 | ||||||||
Provision for loan losses | — | — | — | — | — | — | — | |||||||||||||||
Charge-offs | — | — | — | — | — | — | — | |||||||||||||||
Recoveries | — | — | — | — | — | — | — | |||||||||||||||
Balance at end of period | $ | 1 | $ | — | $ | 2 | $ | 1 | $ | — | $ | — | $ | 5 | ||||||||
Three months ended March 31, 2015 | ||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||
Balance at beginning of period | $ | 1 | $ | 1 | $ | 2 | $ | 2 | $ | — | $ | — | $ | 6 | ||||||||
Provision for loan losses | 2 | — | — | 1 | — | — | 3 | |||||||||||||||
Charge-offs | (2 | ) | — | — | (1 | ) | — | — | (3 | ) | ||||||||||||
Balance at end of period | $ | 2 | $ | 1 | $ | 2 | $ | 3 | $ | — | $ | — | $ | 7 | ||||||||
Our liability for unfunded loan commitments was $16 million as of March 31, 2016 and December 31, 2015. For the three months ended March 31, 2016, we did not record a provision for credit loss related to our unfunded loan commitments. During the three months ended March 31, 2015, we recorded a release of provision related to our unfunded loan commitments of $1 million. Our total unfunded commitments amounted to $11.2 billion and $11.7 billion at March 31, 2016 and December 31, 2015, respectively.
Our total net charge-offs were $12 million, $19 million, and $17 million for the three months ended March 31, 2016, December 31, 2015, and March 31, 2015, respectively. The decrease in net charge-offs for the current quarter was driven by a recovery of a previously charged-off energy credit as well as a decrease in commercial real estate net charge-offs related to three commercial credits for the three months ended March 31, 2015. Total net charge-offs represented 0.20% of average total loans for the three months ended March 31, 2016 and 0.30% for the three months ended March 31, 2015. Excluding our acquired loans, our net charge-off ratio for originated
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loans was 0.22% for the three months ended March 31, 2016 and 0.31% for the three months ended March 31, 2015.
The following table details our total net charge-offs by loan category for the periods indicated:
Three months ended March 31, | |||||||||||
2016 | 2015 | ||||||||||
(dollars in millions) | Net charge-offs | Percent of average loans | Net charge-offs | Percent of average loans | |||||||
Commercial: | |||||||||||
Real estate | $ | — | 0.01 | % | $ | 6 | 0.29 | % | |||
Business | 4 | 0.26 | 4 | 0.29 | |||||||
Total commercial | 4 | 0.11 | 10 | 0.28 | |||||||
Consumer: | |||||||||||
Residential real estate | — | 0.02 | — | 0.03 | |||||||
Home equity | 1 | 0.13 | 2 | 0.21 | |||||||
Indirect auto | 2 | 0.34 | 1 | 0.22 | |||||||
Credit cards | 3 | 3.57 | 2 | 3.16 | |||||||
Other consumer | 2 | 2.95 | 2 | 2.63 | |||||||
Total consumer | 8 | 0.33 | 7 | 0.33 | |||||||
Total | $ | 12 | 0.20 | % | $ | 17 | 0.30 | % | |||
Our nonperforming loans increased to $222 million from $214 million at December 31, 2015, however decreased from $228 million at March 31, 2015. New nonperforming loans during the first quarter of 2016 were $56 million, compared to $50 million in the prior quarter. During the quarter ended March 31, 2016, $7 million of nonperforming loans returned to accruing status, and there were $24 million in paydowns and transfers to real estate owned. Nonperforming loans comprised 0.92% of total loans at March 31, 2016, increasing from 0.89% at December 31, 2015. Excluding our acquired loans, our nonperforming loans were 0.92% of originated loans at March 31, 2016 and 0.89% at December 31, 2015. The increase was primarily driven by new inflows of a few energy commercial credits, as well as a demolition contractor whose profitability is partially dependent on the sale of scrap metal, which were offset by pay-downs, charge-offs and resolutions.
Our total criticized loans increased 1% during the three months ended March 31, 2016 from December 31, 2015 and decreased 4% compared to a year ago. The decrease as compared to the prior year period was driven by favorable credit migration and paydowns.
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Nonperforming assets to total assets were 0.59% and 0.58% at March 31, 2016 and December 31, 2015, respectively. The composition of our nonperforming loans and total nonperforming assets consisted of the following at the dates indicated:
March 31, | December 31, | |||||
(dollars in millions) | 2016(1) | 2015(1) | ||||
Nonperforming loans: | ||||||
Commercial: | ||||||
Real estate | $ | 37 | $ | 44 | ||
Business | 73 | 58 | ||||
Total commercial | 110 | 102 | ||||
Consumer: | ||||||
Residential real estate | 30 | 32 | ||||
Home equity | 59 | 59 | ||||
Indirect auto | 17 | 15 | ||||
Other consumer | 5 | 5 | ||||
Total consumer | 111 | 111 | ||||
Total nonperforming loans | 222 | 214 | ||||
Real estate owned | 16 | 16 | ||||
Total nonperforming assets (2) | $ | 238 | $ | 230 | ||
Loans 90 days past due and still accruing interest (3) | $ | 57 | $ | 68 | ||
Total nonperforming assets as a percentage of total assets | 0.59 | % | 0.58 | % | ||
Total nonaccruing loans as a percentage of total loans | 0.92 | % | 0.89 | % | ||
Total nonaccruing originated loans as a percentage of total originated loans | 0.92 | % | 0.89 | % | ||
Allowance for loan losses to nonaccruing loans | 114.1 | % | 113.3 | % | ||
(1) | Includes $25 million of nonperforming acquired lines of credit, primarily in home equity, at both March 31, 2016 and December 31, 2015. |
(2) | Nonperforming assets do not include $64 million and $63 million of performing renegotiated loans that are accruing interest at March 31, 2016 and December 31, 2015, respectively. |
(3) | Includes credit card loans, loans that have matured and are in the process of collection, and acquired loans that were originally recorded at fair value upon acquisition. |
Indicators of credit quality are delinquency status and our internal loan gradings for our commercial loan portfolio segment and delinquency status and current FICO scores for our consumer loan portfolio segment. Early stage delinquencies (loans that are 30 to 89 days past due) of $58 million at March 31, 2016 in our originated loan portfolio decreased from $78 million at December 31, 2015. Our acquired loans that were 30 to 89 days past due were $26 million at March 31, 2016 and $25 million at December 31, 2015.
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The following table contains a percentage breakout of the delinquency composition of our loan portfolio segments at the dates indicated:
Percent of loans 30-59 days past due | Percent of loans 60-89 days past due | Percent of loans 90 or more days past due | Percent of loans past due | ||||||||||||||||
March 31, 2016 | December 31, 2015 | March 31, 2016 | December 31, 2015 | March 31, 2016 | December 31, 2015 | March 31, 2016 | December 31, 2015 | ||||||||||||
Originated loans | |||||||||||||||||||
Commercial: | |||||||||||||||||||
Real estate | 0.1 | % | 0.1 | % | — | % | — | % | 0.4 | % | 0.4 | % | 0.5 | % | 0.5 | % | |||
Business | 0.2 | 0.4 | 0.1 | — | 0.3 | 0.4 | 0.5 | 0.9 | |||||||||||
Total commercial | 0.2 | 0.2 | — | — | 0.3 | 0.4 | 0.5 | 0.7 | |||||||||||
Consumer: | |||||||||||||||||||
Residential real estate | 0.1 | 0.2 | 0.1 | 0.1 | 0.8 | 0.8 | 0.9 | 1.1 | |||||||||||
Home equity | 0.1 | 0.1 | 0.1 | 0.1 | 1.0 | 1.0 | 1.2 | 1.2 | |||||||||||
Indirect auto | 0.6 | 0.8 | 0.1 | 0.2 | 0.2 | 0.2 | 1.0 | 1.2 | |||||||||||
Credit cards | 0.5 | 0.5 | 0.4 | 0.3 | 0.8 | 0.8 | 1.6 | 1.6 | |||||||||||
Other consumer | 0.9 | 0.8 | 0.3 | 0.3 | 1.5 | 1.2 | 2.7 | 2.3 | |||||||||||
Total consumer | 0.3 | 0.4 | 0.1 | 0.1 | 0.7 | 0.7 | 1.1 | 1.2 | |||||||||||
Total | 0.2 | % | 0.3 | % | 0.1 | % | 0.1 | % | 0.5 | % | 0.5 | % | 0.7 | % | 0.9 | % | |||
Acquired loans | |||||||||||||||||||
Commercial: | |||||||||||||||||||
Real estate | 0.3 | % | 0.3 | % | 0.2 | % | 0.1 | % | 1.9 | % | 2.4 | % | 2.5 | % | 2.8 | % | |||
Business | 0.1 | 0.2 | 0.1 | 0.2 | 0.7 | 0.8 | 1.0 | 1.1 | |||||||||||
Total commercial | 0.3 | 0.3 | 0.2 | 0.1 | 1.7 | 2.1 | 2.2 | 2.5 | |||||||||||
Consumer: | |||||||||||||||||||
Residential real estate | 0.9 | 1.2 | 0.7 | 0.5 | 4.0 | 4.3 | 5.6 | 6.0 | |||||||||||
Home equity | 0.4 | 0.3 | 0.2 | 0.1 | 1.9 | 1.9 | 2.5 | 2.4 | |||||||||||
Total consumer | 0.7 | 0.8 | 0.5 | 0.3 | 3.0 | 3.1 | 4.1 | 4.2 | |||||||||||
Total | 0.5 | % | 0.6 | % | 0.4 | % | 0.2 | % | 2.5 | % | 2.8 | % | 3.5 | % | 3.6 | % | |||
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Our internal loan gradings provide information about the financial health of our commercial borrowers and our risk of potential loss. The following table presents a breakout of our commercial loans by loan grade at the dates indicated:
Percent of total | ||||
March 31, 2016 | December 31, 2015 | |||
Originated loans: | ||||
Pass | 95.0 | % | 95.1 | % |
Criticized:(1) | ||||
Accrual | 4.2 | 4.2 | ||
Nonaccrual | 0.8 | 0.7 | ||
Total criticized | 5.0 | 4.9 | ||
Total | 100.0 | % | 100.0 | % |
Acquired loans: | ||||
Pass | 87.8 | % | 88.5 | % |
Criticized:(1) | ||||
Accrual | 12.0 | 11.4 | ||
Nonaccrual | 0.2 | 0.1 | ||
Total criticized | 12.2 | 11.5 | ||
Total | 100.0 | % | 100.0 | % |
(1) | Includes special mention, substandard, doubtful, and loss, which are consistent with regulatory definitions, and as described in Item 1, “Business”, under the heading “Asset Quality Review” in our Annual Report on 10-K for the year ended December 31, 2015. |
Borrower FICO scores provide information about the credit quality of our consumer loan portfolio as they provide an indication as to the likelihood that debtors will repay their debts. We obtain the scores from a nationally recognized consumer rating agency on a quarterly basis and trends are evaluated for consideration as a qualitative adjustment to the allowance. The composition of our consumer portfolio segment is presented in the table below at the dates indicated:
Percent of total | ||||
March 31, 2016 | December 31, 2015 | |||
Originated loans by refreshed FICO score: | ||||
Over 700 | 79.3 | % | 79.8 | % |
660-700 | 10.9 | 10.7 | ||
620-660 | 5.0 | 4.9 | ||
580-620 | 2.2 | 2.2 | ||
Less than 580 | 2.5 | 2.3 | ||
No score(1) | 0.1 | 0.1 | ||
Total | 100.0 | % | 100.0 | % |
Acquired loans by refreshed FICO score: | ||||
Over 700 | 73.6 | % | 73.8 | % |
660-700 | 7.9 | 7.9 | ||
620-660 | 5.0 | 5.2 | ||
580-620 | 3.7 | 3.7 | ||
Less than 580 | 3.9 | 3.5 | ||
No score(1) | 5.9 | 5.9 | ||
Total | 100.0 | % | 100.0 | % |
(1) | Primarily includes loans that are serviced by others for which refreshed FICO scores were not available as of the indicated date. |
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We maintain an allowance for loan losses for our originated portfolio segment, which is concentrated in the New York region and includes to a lesser degree, loan balances from organic growth in our acquired markets of Eastern Pennsylvania, Western Pennsylvania, Connecticut and Western Massachusetts. Despite the challenging market conditions, our asset quality continues to perform well when compared to peer averages.
As part of our determination of the fair value of our acquired loans at time of acquisition, we established a credit mark to provide for future losses in our acquired loan portfolio. Our credit mark, which represents the remaining principal balance on acquired loans that we do not expect to collect, decreased to $57 million at March 31, 2016 from $62 million at December 31, 2015 as a result of $5 million in transfers to accretable yield. In addition, we maintain an allowance for loan losses on our acquired loans, if necessary, for losses in excess of any remaining credit discount.
The following table provides information about our acquired loan portfolio by acquisition at the dates indicated or for the related quarters:
(dollars in millions) | HSBC | NewAlliance | Harleysville | National City | Total | ||||||||||
March 31, 2016 | |||||||||||||||
Provision for loan losses | $ | — | $ | — | $ | — | $ | — | $ | — | |||||
Net charge-offs | — | — | — | — | — | ||||||||||
Net charge-offs to average loans | — | % | — | % | 0.02 | % | 0.15 | % | 0.01 | % | |||||
Nonperforming loans | $ | 7 | $ | 8 | $ | 8 | $ | 1 | $ | 25 | |||||
Total loans (1) | 653 | 1,523 | 542 | 155 | 2,873 | ||||||||||
Allowance for acquired loan losses | — | — | 3 | 1 | 5 | ||||||||||
Credit related discount (2) | 12 | 37 | 7 | 1 | 57 | ||||||||||
Credit related discount as percentage of loans | 1.91 | % | 2.41 | % | 1.25 | % | 0.47 | % | 1.97 | % | |||||
Criticized loans (3) | $ | 23 | $ | 90 | $ | 37 | $ | 28 | $ | 179 | |||||
Classified loans (4) | 21 | 63 | 28 | 26 | 139 | ||||||||||
Greater than 90 days past due and accruing (5) | 10 | 30 | 12 | 2 | 55 | ||||||||||
December 31, 2015 | |||||||||||||||
Provision for loan losses | $ | — | $ | — | $ | — | $ | — | $ | — | |||||
Net charge-offs | — | — | — | — | — | ||||||||||
Net charge-offs to average loans | — | % | — | % | — | % | — | % | — | % | |||||
Nonperforming loans | $ | 7 | $ | 9 | $ | 8 | $ | 1 | $ | 25 | |||||
Total loans (1) | 667 | 1,603 | 570 | 159 | 2,999 | ||||||||||
Allowance for acquired loan losses | — | — | 3 | 1 | 5 | ||||||||||
Credit related discount (2) | 13 | 41 | 6 | 1 | 62 | ||||||||||
Credit related discount as percentage of loans | 1.94 | % | 2.58 | % | 1.14 | % | 0.55 | % | 2.06 | % | |||||
Criticized loans (3) | $ | 22 | $ | 87 | $ | 42 | $ | 32 | $ | 183 | |||||
Classified loans (4) | 20 | 70 | 34 | 29 | 152 | ||||||||||
Greater than 90 days past due and accruing(5) | 9 | 35 | 16 | 5 | 65 | ||||||||||
(1) | Carrying value of acquired loans plus the principal not expected to be collected. |
(2) | Principal on acquired loans not expected to be collected. |
(3) | Includes special mention, substandard, doubtful, and loss, which are consistent with regulatory definitions, and as described in Item 1, “Business”, under the heading “Asset Quality Review” in our Annual Report on 10-K for the year ended December 31, 2015. |
(4) | Includes consumer loans, which are considered classified when they are 90 days or more past due. Classified loans include substandard, doubtful, and loss, which are consistent with regulatory definitions, and as described in Item 1, “Business”, under the heading “Asset Quality Review” in our Annual Report on 10-K for the year ended December 31, 2015. |
(5) | Includes credit card loans, loans that have matured and are in the process of collection, and acquired loans that were originally recorded at fair value upon acquisition. Acquired loans are considered to be accruing as we can reasonably estimate future cash flows on these acquired loans and we expect to fully collect the carrying value of these loans net of the allowance for acquired loan losses. Therefore, we are accreting the difference between the carrying value of these loans and their expected cash flows into interest income. |
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The following table provides information about our originated loan portfolio at the dates indicated or for the related quarters:
(dollars in millions) | March 31, 2016 | December 31, 2015 | ||||
Provision for loan losses | $ | 23 | $ | 20 | ||
Net charge-offs | 11 | 19 | ||||
Net charge-offs to average loans | 0.22 | % | 0.37 | % | ||
Nonperforming loans | $ | 197 | $ | 188 | ||
Nonperforming loans to total loans | 0.92 | % | 0.89 | % | ||
Total loans | $ | 21,362 | $ | 21,101 | ||
Allowance for originated loan losses | 248 | 237 | ||||
Allowance for originated loan losses to total originated loans | 1.16 | % | 1.12 | % | ||
Criticized loans | $ | 776 | $ | 762 | ||
Classified loans(1) | 463 | 451 | ||||
Greater than 90 days past due and accruing (2) | 2 | 3 | ||||
(1) | Includes consumer loans, which are considered classified when they are 90 days or more past due. Classified loans include substandard, doubtful, and loss, which are consistent with regulatory definitions, and as described in Item 1, “Business”, under the heading “Asset Quality Review” in our Annual Report on 10-K for the year ended December 31, 2015. |
(2) | Includes credit card loans and loans that have matured and are in the process of collection. |
Our total allowance for loan losses related to both our originated and acquired loans increased $11 million from $242 million at December 31, 2015 to $253 million at March 31, 2016 as our total provision for loan losses of $23 million exceeded our total net charge-offs of $12 million. The ratio of our total allowance for loan losses to total loans was 1.05% at March 31, 2016 compared to 1.01% as of December 31, 2015. Excluding acquired loans, the ratio of our allowance for originated loan losses to total originated loans was 1.16% at March 31, 2016, increasing four basis points from 1.12% at December 31, 2015. The increase was primarily related to reserve build toward our exposure to scrap metal companies and demolition companies whose profitability is partially dependent on the sale of scrap metal.
As part of our credit risk management, we enter into modification agreements with troubled borrowers in order to mitigate our credit losses. Our aggregate recorded investment in impaired loans modified through troubled debt restructurings (“TDRs”) decreased to $111 million at March 31, 2016 from $115 million at December 31, 2015 and decreased from $119 million at March 31, 2015. The modifications made to these restructured loans typically consist of an extension of the payment terms, providing for a period with interest-only payments with deferred principal payments, rate reduction, or loans restructured in a Chapter 7 bankruptcy. We generally do not forgive principal when restructuring loans. These modifications were considered to be concessions provided to the respective borrower due to the borrower’s financial distress. Our aggregate recorded investment in TDRs does not include modifications to acquired loans that are accounted for as part of a pool under ASC 310-30. We accrue interest on a TDR once the borrower has demonstrated a consistent repayment record. TDRs accruing interest totaled $64 million and $63 million at March 31, 2016 and December 31, 2015, respectively.
Certain pass-graded commercial loans may have repayment dates extended at or near original maturity dates in the normal course of business. When such extensions are considered to be concessions and provided as a result of the financial distress of the borrower, these loans are classified as TDRs and considered to be impaired. However, if such extensions or other modifications at or near the original maturity date or at any time during the life of a loan are not made as a result of financial distress related to the borrower, such a loan would not be classified as a TDR or as an impaired loan. Repayment extensions typically provided in a TDR are for periods of greater than six months. When providing loan modifications because of the financial distress of the borrowers, we consider that, after the modification, the borrower would be in a better position to continue with the payment of principal and interest. While such loans may be collateralized, they are not typically considered to be collateral dependent for accounting measurement purposes.
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Residential Mortgage Banking
We often originate and sell residential mortgage loans with servicing retained. Our loan sales activity is generally conducted through loan sales in a secondary market sponsored by FNMA and FHLMC. Subsequent to the sale of mortgage loans, we do not typically retain any interest in the underlying loans except through our relationship as the servicer of the loans.
As is customary in the mortgage banking industry, we, or banks we have acquired, have made certain representations and warranties related to the sale of residential mortgage loans (including loans sold with servicing released) and to the performance of our obligations as servicer. The breach of any such representations or warranties could result in losses for us. Our maximum exposure to loss is equal to the outstanding principal balance of the sold loans; however, any loss would be reduced by any payments received on the loans or through the sale of collateral.
Our portfolio of mortgages serviced for others amounted to $4.0 billion at March 31, 2016 and December 31, 2015, respectively. Our liability for estimated repurchase obligations on loans sold, which is included in other liabilities in our Consolidated Statements of Condition, was $5 million at each of March 31, 2016 and December 31, 2015.
The delinquencies as a percentage of loans serviced were as follows at the dates indicated:
March 31, 2016 | December 31, 2015 | |||
30 to 59 days past due | 0.15 | % | 0.21 | % |
60 to 89 days past due | 0.11 | 0.11 | ||
Greater than 90 days past due | 0.64 | 0.67 | ||
Total past due loans | 0.90 | % | 0.99 | % |
Investment Securities Portfolio
The fair value of our total investment securities portfolio was comprised of the following at the dates indicated:
March 31, 2016 | December 31, 2015 | ||||||||||
(dollars in millions) | Fair value | % of total portfolio | Fair value | % of total portfolio | |||||||
Collateralized mortgage obligations | $ | 7,917 | 64.6 | % | $ | 7,356 | 62.1 | % | |||
Commercial mortgage-backed securities | 949 | 7.7 | 1,085 | 9.1 | |||||||
Collateralized loan obligations | 1,242 | 10.1 | 1,186 | 10.0 | |||||||
Corporate debt | 807 | 6.6 | 801 | 6.8 | |||||||
Asset-backed securities | 279 | 2.3 | 310 | 2.6 | |||||||
Other residential mortgage-backed securities | 326 | 2.7 | 344 | 2.9 | |||||||
States and political subdivisions | 354 | 2.9 | 379 | 3.2 | |||||||
U.S. government agencies and sponsored enterprises | 298 | 2.4 | 311 | 2.6 | |||||||
Other | 22 | 0.2 | 22 | 0.2 | |||||||
U.S. Treasury | 66 | 0.5 | 55 | 0.5 | |||||||
Total investment securities | $ | 12,260 | 100.0 | % | $ | 11,849 | 100.0 | % | |||
Our holdings in residential mortgage-backed securities were 67% and 65% of our total investment securities portfolio at March 31, 2016 and December 31, 2015, respectively. At March 31, 2016 and December 31, 2015, all of our residential mortgage-backed securities in our available for sale portfolio were issued by Government National Mortgage Association (“GNMA”), Federal National Mortgage Association (“FNMA”), or Federal Home Loan Mortgage Corporation (“FHLMC”). FNMA and FHLMC are government sponsored enterprises that are currently under the conservatorship of the U.S. government. Our GNMA mortgage-backed securities are backed by the full faith and credit of the U.S. government. At March 31, 2016 and December 31, 2015, 10% and 11%, respectively, of our investment securities were variable rate, and are predominantly CLOs.
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The net unamortized purchase premiums on our CMO portfolio amounted to $75 million, or 1.0% of the portfolio, at March 31, 2016 and $72 million, or 1.0% of the portfolio, at December 31, 2015. The net unamortized purchase premiums on our other residential mortgage-backed securities amounted to $7 million, or 2.4% of the portfolio, at March 31, 2016, and $7 million, or 2.2% of the portfolio, at December 31, 2015.
Changes in our expectations regarding the magnitude and duration of a lower interest rate environment could have a material impact on our net interest income in both the period of change, attributable to any retroactive accounting adjustment that would be required to maintain a constant effective yield, and in subsequent periods attributable to changes to the prospective yields on our investment securities.
The following table presents the latest available underlying investment ratings of the fair value of our investment securities portfolio at the dates indicated:
Average credit rating of fair value amount | |||||||||||||||||||||
(in millions) | Amortized cost | Fair value | AA or better | A | BBB | BB or less | Not rated | ||||||||||||||
March 31, 2016 | |||||||||||||||||||||
Securities backed by U.S. Treasury and U.S. government sponsored enterprises: | |||||||||||||||||||||
Collateralized mortgage obligations | $ | 7,808 | $ | 7,917 | $ | 7,917 | $ | — | $ | — | $ | — | $ | — | |||||||
Residential mortgage-backed securities | 318 | 326 | 326 | — | — | — | — | ||||||||||||||
Debt securities | 363 | 364 | 354 | 10 | — | — | — | ||||||||||||||
Total | 8,489 | 8,607 | 8,597 | 10 | — | — | — | ||||||||||||||
Commercial mortgage-backed securities | 934 | 949 | 616 | 263 | 69 | — | — | ||||||||||||||
Collateralized loan obligations | 1,262 | 1,242 | 871 | 365 | 6 | — | — | ||||||||||||||
Asset-backed securities | 278 | 279 | 245 | 34 | — | — | — | ||||||||||||||
Corporate debt | 822 | 807 | — | 101 | 182 | 523 | 1 | ||||||||||||||
States and political subdivisions | 349 | 354 | 205 | 125 | 1 | — | 24 | ||||||||||||||
Other | 22 | 22 | — | — | — | — | 22 | ||||||||||||||
Total investment securities | $ | 12,156 | $ | 12,260 | $ | 10,535 | $ | 898 | $ | 257 | $ | 523 | $ | 46 | |||||||
December 31, 2015 | |||||||||||||||||||||
Securities backed by U.S. Treasury and U.S. government sponsored enterprises: | |||||||||||||||||||||
Collateralized mortgage obligations | $ | 7,377 | $ | 7,356 | $ | 7,356 | $ | — | $ | — | $ | — | $ | — | |||||||
Residential mortgage-backed securities | 338 | 344 | 344 | — | — | — | — | ||||||||||||||
Debt securities | 365 | 365 | 355 | 10 | — | — | — | ||||||||||||||
Total | 8,080 | 8,065 | 8,055 | 10 | — | — | — | ||||||||||||||
Commercial mortgage-backed securities | 1,067 | 1,085 | 620 | 388 | 77 | — | — | ||||||||||||||
Collateralized loan obligations | 1,192 | 1,186 | 830 | 350 | 6 | — | — | ||||||||||||||
Asset-backed securities | 309 | 310 | 273 | 37 | — | — | — | ||||||||||||||
Corporate debt | 828 | 801 | — | 181 | 111 | 509 | 1 | ||||||||||||||
States and political subdivisions | 374 | 379 | 220 | 138 | 1 | — | 21 | ||||||||||||||
Other | 22 | 22 | — | — | — | — | 22 | ||||||||||||||
Total investment securities | $ | 11,873 | $ | 11,848 | $ | 9,996 | $ | 1,104 | $ | 196 | $ | 509 | $ | 44 | |||||||
The weighted average credit rating of our portfolio was AA at March 31, 2016 and December 31, 2015. As of March 31, 2016 and December 31, 2015, we have no exposures to bonds issued by Puerto Rico.
Our Credit Portfolio Oversight Committee (the "Committee") meets monthly to analyze and monitor our securities portfolio from a credit perspective. We utilize external credit ratings but have also developed our own internal ratings process based on quantitative and qualitative factors for each of the securities to evaluate credit risk within the portfolio. In addition to reviewing security ratings, which are one measure of risk, the Committee reviews various credit metrics for each of the portfolios including these metrics under stressed environments. For structured securities, the Committee generally reviews changes in the underlying collateral and changes in credit enhancement. In the discussion of our investment portfolio, we have included certain credit rating information
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because the information is one indication of the degree of credit risk to which we are exposed and significant changes in ratings classifications for our investment portfolio could result in increased risk for us.
Our Corporate Debt portfolio included $617 million and $623 million of High Yield bonds at March 31, 2016 and December 31, 2015, respectively. The High Yield bond portfolio is actively monitored and reviewed, including at the monthly Credit Portfolio Oversight Committee and additional High Yield portfolio review meetings with senior management. Each individual bond is also reviewed to determine if it is other than temporarily impaired. Our High Yield bonds are not structured and therefore, are directly susceptible to company specific liquidity and credit risks. The High Yield bond portfolio is well diversified with an average hold size of $7 million and rating of Ba2/BB at March 31, 2016. Approximately 12% and 13% of the High Yield bond portfolio's amortized cost consisted of companies rated Investment Grade at March 31, 2016 and December 31, 2015, respectively.
Currently $95 million, or less than 1% of our total investment securities portfolio, consists of companies exposed to the energy sector based on our definition at March 31, 2016. This subset of the portfolio with exposure to energy is very granular with an average security exposure of $6 million and largest exposure of $10 million. The portfolio is liquid with regular trading activity. As of March 31, 2016, the energy portfolio had a net unrealized loss of $16 million compared to a $20 million unrealized loss at December 31, 2015. As of April 27, 2016, oil prices continued to rise and the energy portfolio net unrealized loss has declined to $11 million and the remainder of the high yield portfolio’s value has increased to an unrealized gain of $5 million. As of March 31, 2016, $73 million of the portfolio with exposure to energy is rated BB or less.
Our CMBS portfolio had an amortized cost of $934 million and $1.1 billion at March 31, 2016 and December 31, 2015, respectively. The net unamortized premiums on our CMBS portfolio amounted to $2 million, or 0.2% of the portfolio at March 31, 2016, and $4 million, or 0.4% of the portfolio at December 31, 2015. Gross unrealized losses on our CMBS portfolio were less than $100 thousand at March 31, 2016 and December 31, 2015. Securities in our CMBS portfolio have significant credit enhancement that provides us protection from default, and 93% of this portfolio was rated A or higher at March 31, 2016. Our entire CMBS portfolio has either credit enhancement greater than 25% or underlying loans which collateralize our securities with loan to values of less than 100%.
The following table provides information on the credit enhancements of securities in our CMBS portfolio at the dates indicated:
March 31, 2016 | December 31, 2015 | ||||||||||
Credit enhancement(1) | Amortized cost | % of total CMBS portfolio | Amortized cost | % of total CMBS portfolio | |||||||
(dollars in millions) | |||||||||||
30+% | $ | 821 | 88 | % | $ | 875 | 82 | % | |||
25 - 30% | 63 | 7 | 142 | 13 | |||||||
20 - 25% | 50 | 5 | 50 | 5 | |||||||
18 - 20% | — | — | — | — | |||||||
Total | $ | 934 | 100 | % | $ | 1,067 | 100 | % | |||
(1) | Credit enhancement is calculated by dividing the remaining unpaid principal balance of bonds subordinated to the bonds we own plus any overcollateralization remaining in the securitization structure by the remaining unpaid principal balance of all bonds in the securitization structure. |
Our collateralized loan obligation ("CLO") portfolio had an amortized cost of $1.3 billion and $1.2 billion at March 31, 2016 and December 31, 2015, respectively. Gross unrealized losses on our CLO portfolio amounted to $22 million and $11 million at March 31, 2016 and December 31, 2015, respectively. Our CLO portfolio is predominantly variable rate and returns an approximate 2.97% yield at a credit quality level we believe superior to middle market lending. The collateral underlying our CLOs consists of over 95% senior secured loans, and over 90% of the obligors are domiciled in the United States. Approximately three quarters of the portfolio is comprised of CLOs originated in 2011 or later, and no CLO investments were made by us until the fourth quarter of 2011. As of March 31, 2016, we have purchased $670 million of newly issued CLO investments that we believe to be exempt
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from the Volcker Rule. These CLOs are structured in a manner consistent with the loan securitization exclusion set forth in the Volcker Rule.
As shown in the table above, of the underlying investment ratings of our portfolio, almost all of our CLO portfolio was rated A or higher at March 31, 2016 and significant credit enhancements for our securities provide us protection from default.
The following table provides information on the credit enhancements for our securities in our CLO portfolio at the dates indicated:
March 31, 2016 | December 31, 2015 | ||||||||||
Credit Enhancement(1) | Amortized cost | % of total CLO portfolio | Amortized cost | % of total CLO portfolio | |||||||
(dollars in millions) | |||||||||||
40+% | $ | 102 | 8 | % | $ | 91 | 8 | % | |||
35 - 40% | 163 | 13 | 172 | 14 | |||||||
30 - 35% | 55 | 4 | 61 | 5 | |||||||
25 - 30% | 272 | 22 | 300 | 25 | |||||||
20 - 25% | 296 | 23 | 252 | 21 | |||||||
15 - 20% | 364 | 30 | 310 | 26 | |||||||
10 - 15% | 11 | 1 | 6 | 1 | |||||||
0 - 10% | — | — | — | — | |||||||
Total | $ | 1,262 | 101 | % | $ | 1,192 | 100 | % | |||
(1) | Credit enhancement is calculated by dividing the remaining unpaid principal balance of bonds subordinated to the bonds we own plus any overcollateralization remaining in the securitization structure by the remaining unpaid principal balance of all bonds in the securitization structure. |
Liquidity Risk
Liquidity risk is the risk to earnings or capital arising from our inability to meet our obligations as they come due. Liquidity risk arises from our failure to recognize or address changes in market conditions that affect the ability to liquidate assets quickly or to obtain adequate funding to continue to operate profitably.
Liquidity refers to our ability to obtain cash, or to convert assets into cash timely, efficiently, and economically. Our Asset and Liability Committee ("ALCO") establishes procedures, guidelines and limits for managing and monitoring our liquidity to ensure we maintain adequate liquidity under both normal and stressed operating conditions at all times. We manage our liquidity to ensure that we have sufficient cash to:
• | Support our operating activities, |
• | Meet increases in demand for loans and other assets, |
• | Provide for repayments of deposits and borrowings, and |
• | To fulfill contract obligations. |
Factors or conditions that could affect our liquidity management objectives include profitability, changes in the mix of assets and liabilities on our balance sheet; our actual investment, loan, and deposit balances; our available collateralized wholesale borrowings; our reputation; and our credit rating. A significant change in our financial performance, our ability to maintain our deposit levels, the amount of our available collateralized wholesale borrowings, or credit rating could reduce the availability, or increase the cost, of our funding sources.
As part of our liquidity risk management framework, we have a contingency funding plan (“CFP”) that is designed to address temporary and long-term liquidity disruptions. The CFP assesses liquidity needs under normal and various stress scenarios, encompassing both idiosyncratic and systemic conditions. The plan provides for on-going monitoring of the liquidity environment by using numerous indicators and metrics that are regularly reviewed by ALCO. Furthermore, the CFP provides for the ongoing monitoring of the unused borrowing capacity and available sources of contingent liquidity to address unexpected liquidity needs under adverse conditions.
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Consolidated liquidity
Sources of liquidity
We obtain our liquidity from multiple sources, including gathering deposit balances, cash generated by principal and interest repayments on our investment and loan portfolios, short and long-term borrowings, as well as short-term federal funds, internally generated capital, and other credit facilities. The primary source of our non-deposit borrowings are FHLB advances, of which we had $4.8 billion outstanding at March 31, 2016.
While core deposits and loan and investment securities repayments are principal sources of liquidity, funding diversification is another key element of liquidity management. We are rated by Moody’s, Standard and Poor’s (“S&P”), and Fitch Ratings (“Fitch”). Credit ratings relate to our ability to issue debt securities and the cost to borrow money, and should not be viewed as an indication of future stock performance or a recommendation to buy, sell, or hold securities. Among other factors, the credit ratings are based on financial strength, credit quality and concentrations in the loan portfolio, the level and volatility of earnings, capital adequacy, the quality of management, the liquidity of the balance sheet, the availability of a significant base of core deposits, and our ability to access a broad array of wholesale funding sources. Adverse changes in these factors could result in a negative change in credit ratings and impact not only the ability to raise funds in the capital markets but also the cost of these funds. Ratings are subject to revision or withdrawal at any time and each rating should be evaluated independently.
We have included the Company's credit rating information in the table below because significant changes in ratings classifications for debt we issue could result in increased liquidity risk for us. The following table presents our credit ratings by agency as of March 31, 2016:
Moody's | S&P | Fitch | |
Senior unsecured | Ba1 | BBB- | BBB- |
Subordinated debt | Ba1 | BB+ | BB+ |
Following the announcement of the Merger, each of the rating agencies have published updated reports regarding their view of the impact of the Merger on the Company’s credit ratings. During the fourth quarter of 2015, Standard and Poor ("S&P") affirmed the Company's long-term issuer rating of BBB- (which is at the investment grade minimum), and moved their outlook from stable to positive. Similarly, in the fourth quarter of 2015, Moody's placed the Company's ratings on review for upgrade and Fitch placed the Company's ratings on Rating Watch Positive. Although the rating agencies currently hold positive outlooks for our ratings, there can be no assurances that we will maintain our current ratings and future downgrades could have adverse consequences for us.
Our total collateralized wholesale borrowings amounted to $4.8 billion and $5.5 million at March 31, 2016 and December 31, 2015, respectively. In addition to this amount, we had additional collateralized wholesale borrowing capacity of $6.6 billion and $4.9 billion at March 31, 2016 and December 31, 2015, respectively, from various funding sources which include the FHLB, Federal Reserve Bank, and commercial banks that we can use to fund lending activities, liquidity needs, and/or to adjust and manage our asset and liability position, of which $1.0 billion and $0.9 billion was available at the Federal Reserve's discount window at March 31, 2016 and December 31, 2015, respectively.
Uses of liquidity
The primary uses of our liquidity are to support our operating activities, fund loans or obtain other assets, and provide for repayments of deposits and borrowings.
In addition to cash flow from operations, deposits and borrowings, our funding is provided from the principal and interest payments that we receive from our loans and investment securities. While maturities and scheduled amortization of loans and securities are predictable sources of funds, our deposit balances and loan prepayments are greatly influenced by the level of interest rates, the economic environment and local competitive conditions.
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In the ordinary course of business, we extend commitments to originate commercial and consumer loans. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Our commitments generally have fixed expiration dates or other termination clauses and may require our customer to pay us a fee. Since we do not expect all of our commitments to be funded, the total commitment amounts do not necessarily represent our future cash requirements. We evaluate each customer’s creditworthiness on a case-by-case basis. We may obtain collateral based upon our assessment of the customer’s creditworthiness. We may write a commitment to extend credit on a fixed rate basis exposing us to interest rate risk given the possibility that market rates may change between the commitment date and the actual extension of credit. We had outstanding commitments to originate residential real estate, commercial real estate and business, and consumer loans of approximately $11.2 billion and $11.7 billion at March 31, 2016 and December 31, 2015, respectively.
Included in these commitments are lines of credit to both consumer and commercial customers. The borrowers are able to draw on these lines as needed, making our funding requirements generally difficult to predict. Indicative of our strategic focus on commercial lending and relationship based home equity lending, our unused commercial lines of credit amounted to $4.0 billion and $4.1 billion at March 31, 2016 and December 31, 2015, and our unused home equity and other consumer lines of credit amounted to $5.3 billion and $5.8 billion at March 31, 2016 and December 31, 2015, respectively. Our commercial business lines of credit generally possess an expiration period of less than one year and our home equity and other consumer lines of credit have an expiration period of up to ten years.
In addition to the commitments discussed above, we issue standby letters of credit to third parties that guarantee payments on behalf of our commercial customers in the event the customer fails to perform under the terms of the contract between our customer and the third party. Our standby letters of credit, which generally have an expiration period of less than two years, amounted to $255 million and $252 million at March 31, 2016 and December 31, 2015, respectively. Since the majority of our unused lines of credit and outstanding standby letters of credit expire without being fully funded, our actual funding requirements may be substantially less than the amounts above. We anticipate that we will have sufficient funds available to meet our current loan commitments and other obligations through our normal business operations. The credit risk involved in our issuance of these commitments is essentially the same as that involved in extending loans to customers and is limited to the contractual notional amount of those instruments.
Given the current interest rate environment and current customer preference for long-term fixed rate mortgages, coupled with our desire to not hold these assets in our portfolio, we generally sell most newly originated fixed rate conventional, 20 to 30 year and most FHA and VA loans in the secondary market to government sponsored enterprises such as FNMA and FHLMC or to wholesale lenders. We generally retain the servicing rights on residential mortgage loans sold which results in monthly service fee income. We will, however, sell select loans with servicing released on a nonrecourse basis. In connection with our residential lending business, our commitments to sell residential mortgages increased to $153 million at March 31, 2016 from $130 million at December 31, 2015.
Parent Company liquidity
The Company obtains its liquidity from multiple sources, including dividends from the Bank, principal repayments on investment securities, interest received from the Bank, a $100 million line of credit facility with a bank, and the issuance of debt and equity securities. Our line of credit facility with a bank has never been drawn and is not a significant component of our CFP. This line of credit facility matures in the second quarter of 2016 and we currently do not intend to renew it. The primary uses of the Company's liquidity are dividends to common and preferred stockholders, capital contributions to the Bank, debt service, and operating expenses. The Company's most liquid assets are cash it holds at the Bank and interest-bearing demand accounts at correspondent banks, all of which totaled $386 million at March 31, 2016. As of March 31, 2016, the Company has in excess of eight quarters of cash liquidity to maintain the current dividends to common and preferred stockholders without reliance on dividends from the Bank.
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The Company’s ability to pay dividends to our stockholders is substantially dependent upon the Bank’s ability to pay dividends to the Company. Subject to the Bank meeting or exceeding regulatory capital requirements, the prior approval of the OCC is required if the total of all dividends declared by the Bank in any calendar year would exceed the sum of the Bank’s net profits for that year and its retained net profits for the preceding two calendar years, less any required transfers to surplus. In addition, Federal Reserve guidance sets forth the supervisory expectation that bank holding companies will inform and consult with Federal Reserve staff in advance of issuing a dividend that exceeds earnings for the quarter and should not pay dividends in a rolling four quarter period in an amount that exceeds net income for that period. Federal law also prohibits the Bank from paying dividends that would be greater than its undivided profits after deducting statutory bad debt in excess of its allowance for loan losses.
While the size of our 2014 $1.1 billion goodwill impairment charge did not adversely impact our capital ratios, it did impact our regulatory dividend capacity formula. Simply stated, even though the non-cash goodwill charge did not impact cash flow for dividends, the size of the charge does require that we get regulatory approval from the OCC to make distributions or other returns of capital from the Bank to the Company in the future. Following the goodwill impairment charge, we were also required to consult with the Federal Reserve before paying the Company dividend to our common and preferred stockholders through the payment of dividends for the second quarter of 2015.
Based on current estimates, we expect to need quarterly approval from the OCC until the first quarter of 2017 based on their calculation formula. While we cannot be assured that the OCC will approve our quarterly dividend requests going forward, based on conversations with the regulators and barring any unforeseen future developments that would materially impact our profitability, we believe that we can maintain our holding company common and preferred dividend payments at their current levels.
The Merger Agreement provides that the Company and KeyCorp must coordinate with one another with respect to the declaration of dividends in respect of KeyCorp common shares and Company common stock, and the record dates and payment dates with respect thereto, with the intention that the holders of Company common stock should not receive two dividends, or fail to receive a dividend, in any quarter with respect to their shares of First Niagara common stock and any KeyCorp common shares they receive in exchange therefor in the Merger.
The Bank paid dividends of $40 million to the Company during the three months ended March 31, 2016 and the Bank made a capital distribution to the Company of $45 million during the three months ended March 31, 2015.
Deposits
The following table illustrates the composition of our deposits at the dates indicated:
March 31, 2016 | December 31, 2015 | Increase (decrease) | ||||||||||||
(dollars in millions) | Amount | Percent | Amount | Percent | ||||||||||
Core deposits: | ||||||||||||||
Savings | $ | 3,429 | 11.6 | % | $ | 3,390 | 11.8 | % | $ | 39 | ||||
Interest-bearing checking | 5,554 | 18.8 | 5,479 | 19.1 | 75 | |||||||||
Money market deposits | 10,884 | 36.8 | 10,654 | 37.1 | 231 | |||||||||
Noninterest-bearing | 5,740 | 19.4 | 5,835 | 20.3 | (95 | ) | ||||||||
Total core deposits | 25,607 | 86.6 | 25,357 | 88.3 | 250 | |||||||||
Certificates | 3,954 | 13.4 | 3,344 | 11.7 | 610 | |||||||||
Total deposits | $ | 29,561 | 100.0 | % | $ | 28,701 | 100.0 | % | $ | 860 | ||||
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The table below contains selected information on the composition of our deposits by geographic region at the dates indicated:
(In millions) | New York(1) | Western Pennsylvania | Eastern Pennsylvania | Connecticut and Western Massachusetts | Total deposits | ||||||||||
March 31, 2016 | |||||||||||||||
Core deposits: | |||||||||||||||
Savings | $ | 2,194 | $ | 192 | $ | 238 | $ | 805 | $ | 3,429 | |||||
Interest-bearing checking | 3,584 | 698 | 569 | 702 | 5,554 | ||||||||||
Money market deposits | 6,990 | 1,456 | 936 | 1,502 | 10,884 | ||||||||||
Noninterest-bearing | 3,524 | 730 | 671 | 814 | 5,740 | ||||||||||
Total core deposits | 16,293 | 3,076 | 2,414 | 3,823 | 25,607 | ||||||||||
Certificates | 2,533 | 478 | 327 | 616 | 3,954 | ||||||||||
Total deposits | $ | 18,826 | $ | 3,553 | $ | 2,742 | $ | 4,440 | $ | 29,561 | |||||
December 31, 2015 | |||||||||||||||
Core deposits: | |||||||||||||||
Savings | $ | 2,182 | $ | 183 | $ | 225 | $ | 800 | $ | 3,390 | |||||
Interest-bearing checking | 3,507 | 686 | 583 | 703 | 5,479 | ||||||||||
Money market deposits | 6,851 | 1,365 | 934 | 1,503 | 10,654 | ||||||||||
Noninterest-bearing | 3,571 | 804 | 648 | 812 | 5,835 | ||||||||||
Total core deposits | 16,111 | 3,038 | 2,390 | 3,817 | 25,357 | ||||||||||
Certificates | 2,068 | 431 | 280 | 564 | 3,344 | ||||||||||
Total deposits | $ | 18,180 | $ | 3,469 | $ | 2,670 | $ | 4,382 | $ | 28,701 | |||||
(1) | Includes brokered money market deposits of $392 million and $420 million at March 31, 2016 and December 31, 2015, respectively, and brokered certificates of deposit of $1.3 billion and $941 million at March 31, 2016 and December 31, 2015, respectively. |
Our total deposits increased $860 million, or 12% annualized, from December 31, 2015 to $29.6 billion at March 31, 2016. Interest-bearing checking and money market balances increased 6% and 9% annualized, respectively, from December 31, 2015 driven by seasonal strength in municipal deposits. Total municipal deposits increased 32% annualized from December 31, 2015. Noninterest-bearing checking balances decreased 7% annualized at March 31, 2016, driven by lower consumer and business balances.
The $610 million increase in certificates of deposit from December 31, 2015 to March 31, 2016, reflects higher consumer balances and a $401 million increase in brokered certificates of deposit to $1.3 billion. The terms on these brokered certificates of deposit are between six months and 24 months with interest rates ranging between 0.15% and 1.35%.
The average cost of interest-bearing deposits for the three months ended March 31, 2016 of 0.32% increased two basis points from the three months ended December 31, 2015 and increased four basis points from the three months ended March 31, 2015, reflecting higher rates paid on money market deposit balances and certificates of deposit.
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Loan Maturity and Repricing Schedule
The following table sets forth certain information at March 31, 2016 regarding the amount of loans maturing or repricing in our portfolio. Demand loans having no stated schedule of repayment and no stated maturity are reported as due in one year or less. At March 31, 2016 and December 31, 2015, 55% of loans were variable rate and unencumbered by floors. The impact of loan floors on our net interest income sensitivity is not significant. Adjustable-rate loans are included in the period in which interest rates are next scheduled to adjust rather than the period in which they contractually mature, and fixed-rate loans (including bi-weekly loans) are included in the period in which contractual payments are due. No adjustments have been made for prepayment of principal.
(in millions) | Within one year | One through five years | After five years | Total | ||||||||
Commercial: | ||||||||||||
Real estate | $ | 5,456 | $ | 1,678 | $ | 123 | $ | 7,257 | ||||
Construction | 1,344 | 16 | 8 | 1,369 | ||||||||
Business | 4,938 | 1,003 | 234 | 6,175 | ||||||||
Total commercial | 11,738 | 2,697 | 366 | 14,801 | ||||||||
Consumer: | ||||||||||||
Residential real estate | 923 | 1,485 | 922 | 3,331 | ||||||||
Home equity | 2,566 | 350 | 142 | 3,057 | ||||||||
Indirect auto | 977 | 1,463 | 25 | 2,464 | ||||||||
Credit cards | 289 | — | — | 289 | ||||||||
Other consumer | 147 | 61 | 28 | 237 | ||||||||
Total consumer | 4,902 | 3,359 | 1,117 | 9,378 | ||||||||
Total loans and leases | $ | 16,639 | $ | 6,056 | $ | 1,483 | $ | 24,178 | ||||
For the loans reported in the preceding table, the following sets forth at March 31, 2016, the dollar amount of all of our fixed-rate and adjustable-rate loans due after March 31, 2017:
(in millions) | Fixed | Adjustable | Total | ||||||
Commercial: | |||||||||
Real estate | $ | 648 | $ | 1,153 | $ | 1,802 | |||
Construction | 22 | 3 | 25 | ||||||
Business | 1,143 | 93 | 1,237 | ||||||
Total commercial | 1,814 | 1,249 | 3,063 | ||||||
Consumer: | |||||||||
Residential real estate | 1,450 | 957 | 2,407 | ||||||
Home equity | 481 | 11 | 491 | ||||||
Indirect auto | 1,488 | — | 1,488 | ||||||
Other consumer | 90 | — | 90 | ||||||
Total consumer | 3,508 | 968 | 4,476 | ||||||
Total loans and leases | $ | 5,322 | $ | 2,217 | $ | 7,539 | |||
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The following table sets forth at March 31, 2016, the dollar amount of all of our fixed-rate loans due after March 31, 2017 by the period in which the loans mature:
Maturity | Commercial | Residential real estate | Home equity | Indirect auto | Other consumer | Total | ||||||||||||
(in millions) | ||||||||||||||||||
1 to 2 years | $ | 593 | $ | 223 | $ | 116 | $ | 673 | $ | 21 | $ | 1,627 | ||||||
2 to 3 years | 452 | 195 | 94 | 444 | 18 | 1,204 | ||||||||||||
3 to 5 years | 446 | 309 | 129 | 346 | 23 | 1,253 | ||||||||||||
Total 1 to 5 years | 1,491 | 728 | 339 | 1,463 | 61 | 4,083 | ||||||||||||
5 to 10 years | 282 | 418 | 123 | 25 | 19 | 867 | ||||||||||||
More than 10 years | 40 | 304 | 18 | — | 9 | 372 | ||||||||||||
Total | $ | 1,814 | $ | 1,450 | $ | 481 | $ | 1,488 | $ | 90 | $ | 5,322 | ||||||
The following table sets forth at March 31, 2016, the dollar amount of all of our adjustable-rate loans due after March 31, 2017 by the period in which the loans reprice:
Maturity | Commercial | Residential real estate | Home equity and other consumer | Total | ||||||||
(in millions) | ||||||||||||
1 to 2 years | $ | 434 | $ | 319 | $ | 11 | $ | 764 | ||||
2 to 3 years | 354 | 158 | — | 511 | ||||||||
3 to 5 years | 418 | 280 | — | 698 | ||||||||
Total 1 to 5 years | 1,206 | 757 | 11 | 1,973 | ||||||||
5 to 10 years | 43 | 198 | — | 241 | ||||||||
More than 10 years | — | 3 | — | 3 | ||||||||
Total | $ | 1,249 | $ | 957 | $ | 11 | $ | 2,217 | ||||
Our primary investing activities are the origination of loans and the purchase of investment securities.
Market Risk
Our primary market risk is interest rate risk, which is defined as the potential variability of our earnings that arises from changes in market interest rates and the magnitude of the change at varying points along the yield curve. Changes in market interest rates, whether they are increases or decreases, can trigger repricings and changes in the pace of payments for both assets and liabilities (prepayment risk), which individually or in combination may affect our net income, net interest income and net interest margin, either positively or negatively.
Most of the yields on our earning assets, including adjustable-rate loans and investments, and the rates we pay on interest-bearing deposits and liabilities are related to market interest rates. Interest rate risk occurs when the interest income (yields) we earn on our assets changes at a pace that differs from the interest expense (rates) we pay on liabilities.
The primary tool we use to assess our exposure to interest rate risk is a quantitative modeling technique that simulates the effects of variations in interest rates on net interest income. These monthly simulations compare multiple hypothetical interest rate scenarios to a stable or current interest rate environment. As a result of these simulations, we take actions to limit the variability of our net interest income due to changes in interest rates. Such actions include: (i) employing interest rate swaps; (ii) emphasizing the origination and retention of residential and commercial adjustable-rate loans, home equity loans, and residential fixed-rate mortgage loans having contractual maturities of no more than 20 years; (iii) selling the majority of 30 year fixed-rate, conforming residential mortgage loans into the secondary market without recourse; (iv) investing in securities with predictable
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cash flows; (v) growing core deposits; and (vi) utilizing wholesale borrowings to support cash flow needs and help match asset repricing.
Our Asset and Liability Committee ("ALCO") monitors our sensitivity to interest rates and approves strategies to manage our exposure to interest rate risk. Our goal is to prudently manage the bank’s exposure to changes in the interest rate environment and resultant impacts on earnings and capital.
Net Interest Income Sensitivity
The following table shows the estimated impact on net interest income for the next 12 months resulting from parallel interest rate shifts of varying magnitude and different timing assumptions (gradual ramps up in rates over twelve months versus an immediate rate shock). These measurements assume the balance sheet remains static, meaning there is no net growth or change in balance sheet composition. Accordingly, the impact of the rate scenario run in calculating these measurements is reflected via the repricing of existing positions and reinvestment of runoff balances into similar positions at the periodic rate dictated by the scenario.
Calculated increase (decrease) | ||||||||||||
March 31, 2016 | December 31, 2015 | |||||||||||
Changes in interest rates(1) | Net interest income | % change | Net interest income | % change | ||||||||
(dollars in millions) | ||||||||||||
+ 200 basis points (gradual)(2) | $ | 58 | 5.5 | % | $ | 58 | 5.4 | % | ||||
+ 100 basis points (gradual) | 28 | 2.7 | 27 | 2.5 | ||||||||
- 50 basis points (gradual) | (25 | ) | (2.3 | ) | (23 | ) | (2.1 | ) | ||||
(1) | Our ERMC has established a policy limiting the adverse change to net interest income to less than -5% under this scenario. |
(2) | Under a shock scenario where interest rates increase 200 basis points immediately, net interest income was estimated to increase by approximately 11.7% and 11.6% at March 31, 2016 and December 31, 2015, respectively. |
Assumptions / Limitations: The assumption of maintaining a static balance sheet and parallel rate shocks are key elements of this assessment of interest rate risk exposure. Certain variable impacts on these assumptions, such as the direction of future interest rates not moving in a parallel manner across the yield curve and how the balance sheet will dynamically respond and shift based on a change in future interest rates and how the Company will actually respond, are not contemplated in these measures and limit the predictive value of these scenarios. The Company is cognizant of the methodology and assumptions used in these standard interest rate risk measures, along with their resultant benefits and limitations. Key variables not included in these interest rate risk measures include, but are not limited to:
▪ | Rates are unlikely to change in a parallel manner: There will likely be changes in yield curve slope and the spread between key market indices. For example, the 10-year U.S. Treasury Bond yielded 2.17% at December 31, 2014 and yielded 2.27% as of December 31, 2015 while the 2-year U.S. Treasury yielded 0.67% to 1.06% over that same period, resulting in the spread difference between the yields decreasing from 150 bps at December 31, 2014 to 121 bps at December 31, 2015. The dynamic of the short end of the yield curve increasing more than the long end of the yield curve is referred to as a “bear flattener.” With different points of the interest rate curve moving in varying degrees, the balance sheet may dynamically adjust and not remain static as assumed in the standard interest rate risk measures. Examples of mix shifts in the balance sheet include, but are not limited to, shifts between variable and fixed rate assets originated and the composition and absolute levels of deposit categories. |
▪ | Changes in customer behaviors: Changing market rates re-define customer incentives and alternatives. For example, on the asset side the direction of mortgage rates will influence customer behavior and therefore housing turnover and refinance activity, resulting in greater mortgage prepayments when long-term rates are declining, but create extension risk when those rates are increasing. In a rising rate environment mortgage activity may decline as lower prepayments on existing positions would likely be balanced by reduced originations. On the liability side, changing |
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interest rate spreads between deposit categories will likely cause product shifts and changes in CD maturity terms. For example, as rates rise we would likely see customers migrate from non-reactive deposit categories (Savings and Checking) to more reactive categories (CDs and Money Market), which would carry higher rates than non-reactive deposits. These types of mix shifts are not contemplated in the assumptions for the standard interest rate risk measures.
▪ | Responses to the competitive environment: Deposit reactivity, a key determinant to quantify interest rate risk and estimates of profitability, is also driven by the competitive environment for deposits. Our deposit reactivity modeling, like most others, is derived from experience in prior rate cycles. The prolongation of the low rate environment, including the actions taken by the Federal Reserve to keep interest rates low through its Quantitative Easing program and the resulting excess liquidity in the financial system, renders historical modeling and experience of how non-contractual deposits may actually react in an increasing interest rate environment potentially less effective as the historical data set is not representative of current dynamics and may not be a good indicator of future performance. Equally, the release by the Federal Reserve during September 2014 of its mechanisms for how they will raise interest rates when the decision is made to do so include, in addition to conventional measures such as increases to the Federal Funds Rate, new tools such as paying interest on excess reserves and the use of reverse repurchase agreements. The impact of these new tools as excess liquidity is reversed from the financial system is unprecedented. Additionally, the potential increases to the competitive pressures amongst financial institutions to retain deposits is not contemplated in the historical data set and thus modeling output. |
▪ | Static balance sheet: These measurements assume the balance sheet remains static as of the last day in the year with no net growth or change in balance sheet composition. The balance sheet on that particular day may not appropriately represent the typical balance sheet. In particular, on December 31, 2015, a larger than typical overnight cash position at the Federal Reserve had a positive impact on net interest income sensitivity given the daily re-pricing nature of that asset. As a result, the net interest income sensitivity reflected may be temporary based on the specific dynamics balance sheet on the measurement date. |
Scenario Analysis: Assumptions on future rate paths and their impacts are inherently uncertain and, as a result, the impact of changes in interest rates on our net interest income cannot be precisely predicted. In conjunction with standard interest rate risk metrics, ALCO formulates and analyzes a range of alternative scenarios in which rate moves are not parallel and the balance sheet is not static. Certain assumptions are stressed to provide a broader range of potential outcomes. Thus, both static interest rate risk measures and dynamic scenario analysis are factored into risk assessment and strategic decisions of the Company.
To measure the potential impacts of rate driven dynamics on net interest income, we utilize multivariate quantitative modeling that simulates the effects of changing market rates on the amount and timing of cash flows. A range of rate scenarios are analyzed, including parallel rate shocks, partial shocks and non-parallel rate moves. In addition, there are deterministic scenarios, such as flat rates (including bull flatteners where long-term rates move lower relative to short-term rates and bear flatteners where short-term increase more relative to long-term rates), implied forward curves and stressed environments. Scenario specific assumptions are formulated to project customer behaviors, the competitive environment and pricing implications on new and existing positions. Sensitivity analysis is applied to assumptions which are key to the outcome but inherently uncertain, such as prepayments, deposit reactivity and disintermediation.
The goal of these simulations is to quantify the full range of interest rate risk, and identify the key drivers of rate driven exposure. Results of these standard analyses are presented to ALCO. Strategies which foster prudent management of the bank’s exposure to interest rates and the resultant impacts on earnings and capital are reviewed, approved and monitored.
Mitigants of interest rate risk exposure include the following business practices and possible initiatives to manage balance sheet structure:
• | targeting of security portfolio size and duration |
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• | diversification of security portfolio collateral and credit profiles |
• | management of balance sheet growth: |
• | limited growth in longer duration assets, such as the sale of conforming fixed mortgage originations and capping the production of non-conforming mortgages |
• | fostered growth of shorter duration assets (e.g. variable rate loans) or longer duration liabilities (e.g. core deposits) |
• | disposition of current positions (sale / securitization) |
• | hedging of current positions, or anticipatory hedging of projected positions |
• | monitoring leverage to remain within prudent bounds |
Economic Value of Equity (EVE) Sensitivity
In addition to the Net Interest Income Sensitivity approach, our interest rate risk position is also evaluated using an Economic Value of Equity ("EVE") approach. The assessment of both short-term earnings (Net Interest Income Sensitivity) and long-term valuation (EVE) approaches provides a more comprehensive analysis of interest rate risk exposure than Net Interest Income Sensitivity alone.
The EVE calculation represents a hypothetical valuation of equity, and is defined as the present value of projected asset cash flows less the present value of projected liability cash flows plus the current market value of any off balance sheet positions. EVE values only the current balance sheet positions and therefore does not incorporate the growth assumptions inherent in the Net Interest Income Sensitivity approach. All positions are evaluated in a current rate and parallel shock scenarios, which range from (100) bps to +300 bps.
The key indicator of interest rate risk is the EVE profile, which measures the percentage change in the hypothetical equity value versus the base rate scenario. The profile reflects the duration gap between assets, liabilities and off balance sheet positions. The impacts of embedded options are incorporated, including applicable caps / floors, behavioral assumptions on mortgage positions and reactivity assumptions on deposits. Governance limits define the tolerable degree of duration mismatch in rising rate environments.
• | A negative EVE percentage in a rising rate scenario indicates that asset duration exceeds liability duration. Future liability repricing and refunding may have a detrimental impact on net interest income. |
• | A positive EVE percentage in a rising rate scenario indicates that liability duration exceeds asset duration. Future asset repricing and reinvestment may have a beneficial impact on net interest income. |
• | The converse of the above would apply to falling rate environments. |
The following table shows our EVE sensitivity profile the dates indicated:
Change in EVE | ||||
Calculated increase (decrease) | ||||
Changes in interest rates | March 31, 2016 | December 31, 2015 | ||
- 100 basis points | (7.8 | )% | (4.0 | )% |
+ 100 basis points | (3.0 | ) | (3.0 | ) |
+ 200 basis points (1) | (8.3 | ) | (7.6 | ) |
+ 300 basis points (2) | (14.4 | ) | (12.9 | ) |
(1) | Our ERMC has established a policy limiting the adverse change to -20% under this scenario. |
(2) | Our ERMC has established a policy limiting the adverse change to -30% under this scenario. |
Our EVE measures became moderately more liability sensitive as growth in variable rate commercial loans was offset by the continued investment migration to fixed rate collateralized mortgage obligations.
The EVE profile is useful as an indicator of longer term interest rate risk exposure. However, the measure is subject to limitations, as it does not factor in variables such as balance sheet growth, changes in balance sheet composition, adjustments to pricing spreads or strategic responses to changing interest rate environments. Also,
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the shocked rates represent stress scenarios, generating exposures which may overstate actual experience. Actual rate changes would be expected to be more gradual, with changes in yield curve relationships, and would thereby produce lesser impacts to future net interest income.
Operational Risk
Like all companies, we are subject to Operational Risk. We define Operational Risk as the risk to current or anticipated earnings or capital arising from inadequate or failed internal processes or systems, the misconduct or errors of people, and adverse external events. Operational losses may result from internal fraud; external fraud; employment practices and workplace safety; clients, products, and business practices; damage to physical assets; business disruption and systems failures; and execution, delivery, and process management. These events may include, but are not limited to, third party attempts to disrupt or penetrate our critical systems (for example, hacking, cyber attacks or denial-of-service attacks), inadequate vendor management or oversight, clerical errors, theft and other criminal conduct.
We manage Operational Risk through our ERM framework and internal control processes. Within this framework, our business lines have direct and primary responsibility and accountability for accessing, identifying, controlling, and monitoring operational risks embedded in their business activities. Risk assessment and the regular monitoring of significant operating risks is performed by business units with oversight from Risk Management. Risk Management provides oversight and establishes internal policies and reviews procedures to assist business unit’s assessment, monitoring and mitigation of operational risks. In addition, we are continuing to invest in risk management systems and technology to support our businesses. The Operational Risk Committee, a senior management committee, provides oversight to the operational risk management process. The most significant operational risks we face are reported and reviewed by the ERMC and the Board Risk Committee. In addition, Risk Management is responsible for establishing compliance and operational risk program standards and policies, and provides effective challenge to management's self-assessments in their execution against program standards and policies.
The ERMC provides oversight of the Operational Risk Committee, our risk management functions and reviews our system of internal controls. ERMC reports to the Risk Committee of our Board of Directors on its activities.
Capital
We manage our capital position to ensure that our capital base is sufficient to support our current and future business needs, satisfy existing regulatory requirements, and meet appropriate standards of safety and soundness.
As of March 31, 2016, we met all capital adequacy requirements to which we were subject and both First Niagara Financial Group, Inc. and First Niagara Bank, N.A. were considered well-capitalized under the Federal Reserve’s Regulation Y (in the case of First Niagara Financial Group, Inc.) and the OCC’s prompt corrective action regulations (in the case of First Niagara Bank, N.A.).
Beginning on January 1, 2015, we became subject to the federal banking agencies' capital rules which were issued in July 2013 to implement the Basel Committee's 2010 capital framework known as "Basel III" and certain provisions of the Dodd-Frank Act (the "New Capital Rules"). The New Capital Rules are subject to phase-in periods for certain of their components, with full phase-in to be completed by January 1, 2019.
Our tier 1 risk-based capital ratio on a consolidated basis was 10.12% and 10.08% at March 31, 2016 and December 31, 2015, respectively. Our common equity tier 1 capital ratio under Basel III was 8.58% at March 31, 2016 and 8.55% at December 31, 2015.
Due to the $1.1 billion goodwill impairment charge we recorded in the third quarter of 2014, we are required to obtain regulatory approval from the OCC to make distributions or other returns of capital from the Bank to the Company until the first quarter of 2017 based on their calculation formula. We were also required to consult with the Federal Reserve before paying the Company dividend to our common and preferred stockholders through the payment of dividends for the second quarter of 2015.
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While we cannot be assured that the OCC will approve our quarterly dividend requests going forward, based on conversations with the regulators and barring any unforeseen future developments that would materially impact our profitability, we believe that we can maintain our holding company common and preferred dividend payments at their current levels.
During the first three months of 2016, our stockholders’ equity increased $23 million, driven by increases due primarily to our net income of $48 million, $10 million in unrealized gains, net of tax, on investment securities available for sale, and $3 million related to stock-based compensation partially offset by $2 million in unrealized losses on interest rate swaps designated as cash flow hedges, $28 million, or $0.08 per share, in common stock dividends, and $8 million in preferred stock dividends.
First Niagara Financial Group, Inc. and our bank subsidiary, First Niagara Bank, N.A. are subject to regulatory capital requirements administered by the Federal Reserve and the OCC, respectively. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on our financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. Such quantitative measures are also subject to qualitative judgment of the regulators regarding components, risk weightings, and other factors.
In accordance with regulatory capital rules, the amount of our subordinated debt issued by the Company will begin to lose eligibility for inclusion in Tier 2 capital at the beginning of each of the last five years of the life of the instrument. Our subordinated debt will mature in December 2021 and accordingly, the amount of subordinated debt eligible for inclusion in Tier 2 capital will be reduced by 20 percent beginning in December 2016 and will continue to be reduced by 20 percent in each subsequent year.
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The capital amounts, ratios, and requirements under the Basel III Transitional rules for First Niagara Financial Group, Inc. and First Niagara Bank, N.A. are as follows at the dates indicated. Minimum ratios and amounts for First Niagara Financial Group, Inc., as presented, are based upon the standards for well-capitalized status applicable to banks under the banking agencies' prompt corrective action rules. The Federal Reserve's actual standards in its Regulation Y for well-capitalized status for a bank holding company, including First Niagara Financial Group, Inc., are Tier 1 risk-based capital of 6.0% and Total risk-based capital of 10.0%, and do not include a minimum Leverage or Common equity tier 1 ratio. We anticipate that the Federal Reserve will in due course conform its Regulation Y standards for bank holding companies to the prompt corrective action standards that apply to banks.
Minimum amount to be | |||||||||||
Actual | well-capitalized | ||||||||||
(dollars in millions) | Amount | Ratio | Amount | Ratio | |||||||
First Niagara Financial Group, Inc.: | |||||||||||
March 31, 2016: | |||||||||||
Leverage ratio | $ | 2,914 | 7.55 | % | $ | 1,930 | 5.00 | % | |||
Tier 1 risk-based capital | 2,914 | 10.12 | 2,304 | 8.00 | |||||||
Total risk-based capital | 3,482 | 12.09 | 2,880 | 10.00 | |||||||
Common equity tier 1 capital | 2,471 | 8.58 | 1,872 | 6.50 | |||||||
December 31, 2015 | |||||||||||
Leverage ratio | $ | 2,911 | 7.62 | % | $ | 1,910 | 5.00 | % | |||
Tier 1 risk-based capital | 2,911 | 10.08 | 2,311 | 8.00 | |||||||
Total risk-based capital | 3,468 | 12.01 | 2,888 | 10.00 | |||||||
Tier 1 common capital | 2,470 | 8.55 | 1,878 | 6.50 | |||||||
First Niagara Bank, N.A.: | |||||||||||
March 31, 2016: | |||||||||||
Leverage ratio | $ | 3,085 | 8.00 | % | $ | 1,928 | 5.00 | % | |||
Tier 1 risk-based capital | 3,085 | 10.73 | 2,300 | 8.00 | |||||||
Total risk-based capital | 3,354 | 11.67 | 2,874 | 10.00 | |||||||
Common equity tier 1 capital | 3,085 | 10.73 | 1,869 | 6.50 | |||||||
December 31, 2015 | |||||||||||
Leverage ratio | $ | 3,070 | 8.05 | % | $ | 1,907 | 5.00 | % | |||
Tier 1 risk-based capital | 3,070 | 10.65 | 2,306 | 8.00 | |||||||
Total risk-based capital | 3,328 | 11.55 | 2,881 | 10.00 | |||||||
Common equity tier 1 capital | 3,070 | 10.65 | 1,874 | 6.50 | |||||||
Accounting Standards Adopted in 2016
In June 2014, the FASB issued guidance that clarifies the accounting for share-based payments granted to employees in which the terms of the award provide that a performance target, that affects vesting, could be achieved after the requisite service period. The amendments require that those performance targets should be treated as performance conditions. The guidance became effective for us on January 1, 2016, with early adoption permitted. We did not early adopt this guidance and it did not an impact on our financial statements.
In November 2014, the FASB issued guidance for determining whether the nature of the host contract within a hybrid instrument is more akin to debt or equity. The guidance requires evaluating the nature of the host contract by considering the economic characteristics and risks of the entire hybrid, including the embedded feature that is being evaluated for separation. The guidance became effective for us on January 1, 2016 and it did not have an impact on our financial statements.
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In January 2015, the FASB issued guidance that eliminates the concept of extraordinary items from GAAP. The guidance became effective for us on January 1, 2016 and we applied it on a prospective basis. It did not have an impact on our financial statements.
In February 2015, the FASB issued guidance that amends existing standards regarding the evaluation of certain legal entities and their consolidation in the financial statements. The amendments modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities or voting interest entities and eliminate the presumption that a general partner should consolidate a limited partnership. The amendments also affect the consolidation analysis of reporting entities that are involved with variable interest entities and provide a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds. The guidance became effective for us on January 1, 2016 and it did not have an impact on our financial statements.
In April 2015, the FASB issued guidance that requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct reduction from the carrying amount of that debt liability, consistent with debt discounts. In August 2015, amendments were made to SEC paragraphs related to the presentation and subsequent measurement of debt issuance costs associated with line of credit arrangements. Given the absence of authoritative guidance within this accounting standard update for debt issuance costs related to line of credit arrangements, the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and amortized ratably over the term of the line of credit arrangement, regardless of whether there are any outstanding borrowings on the line of credit arrangement. The guidance became effective for us on January 1, 2016 and it did not have an impact on our financial statements.
In September 2015, the FASB issued guidance that requires an acquirer in a business combination to recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The guidance became effective for us on January 1, 2016 and it did not have an impact on our financial statements.
Impact of New Accounting Standards
In May 2014, the FASB issued guidance that improves the revenue recognition requirements for contracts with customers. The core principle is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015, the FASB delayed the effective date for this guidance for one year to fiscal years beginning after December 15, 2017, and we do not expect this to have a significant impact on our financial statements.
In August 2014, the FASB issued guidance on determining when and how to disclose going-concern uncertainties in the financial statements. The new standard requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued. An entity must provide certain disclosures if “conditions or events raise substantial doubt about the entity’s ability to continue as a going concern.” The guidance applies to all entities and is effective for us for annual periods ending after December 15, 2016, and interim periods thereafter, with early adoption permitted, and we do not expect this to have a significant impact on our financial statements.
In November 2015, the FASB issued guidance that requires deferred tax liabilities and assets to be classified as noncurrent in a classified statement of financial position. The guidance becomes effective for us on January 1, 2017, and we do not expect this to have a significant impact on our financial statements.
In January 2016, the FASB issued guidance to address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Specifically the guidance (1) requires equity investments to be measured at fair value with changes in fair value recognized in earnings, (2) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, (3) eliminates the requirement to disclose the methods and significant assumptions used to estimate the fair value
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that is required to be disclosed for financial instruments measured at amortized cost, (4) requires the use of the exit price notion when measuring the fair value of financial instruments for disclosure purposes, (5) requires an entity to present separately in other comprehensive income the portion of the total change in fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option, (6) requires separate presentation of financial assets and liabilities by measurement category and form on the balance sheet or the notes to the financial statements, and (7) clarifies that the need for a valuation allowance on a deferred tax asset related to an available for sale security should be evaluated with other deferred tax assets. The guidance becomes effective for us on January 1, 2018 and we are currently evaluating the impact on our financial statements.
In February 2016, the FASB issued guidance requiring the recognition in the statement of financial position of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP. The core principle of the guidance is that a lessee should recognize the assets and liabilities that arise from leases. All leases create an asset and a liability and recognition of those lease assets and lease liabilities is required under this new guidance as compared to previous GAAP that did not require lease assets and lease liabilities to be recognized for most leases. The guidance becomes effective for us on January 1, 2019 and we are currently evaluating the impact on our financial statements.
In March 2016, the FASB issued two Accounting Standards Updates ("ASU’s") related to derivatives and hedging. The first ASU provides guidance clarifying that a change in the counterparty to a derivative instrument that has been designated as a hedging instrument does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. The second ASU provides guidance clarifying the requirements for assessing whether the economic characteristics and risks of call (put) options are clearly and closely related to the economic characteristics and risk of their debt hosts. When a call (put) option is contingently exercisable, an entity does not have to assess whether the event that triggers the ability to exercise the call (put) option is related to interest rates or credit risks. An entity performing the assessment is required to assess the embedded call (put) options solely in accordance with the four-step decision sequence that exists within the guidance. The guidance within both ASU’s becomes effective for us on January 1, 2017 and we are currently evaluating the impact on our financial statements.
In March 2016, the FASB issued guidance that specifies how prepaid stored-value product liabilities within the guidance's scope should be derecognized. With the exception of prepaid stored-value products (1) for which any breakage must be remitted in accordance with unclaimed property laws, or (2) that are attached to a separate bank account like a customer depository account, if an entity expects to be entitled to a breakage amount for a liability resulting from the sale of a prepaid stored-value product the entity shall derecognize the amount related to the expected breakage in proportion to the pattern of rights expected to be exercised by the product holder. If an entity does not expect to be entitled to a breakage amount, the entity shall derecognize the amount related to the breakage when the likelihood of the product holder exercising its remaining rights becomes remote. The guidance becomes effective for us on January 1, 2018 and we are currently evaluating the impact on our financial statements.
In March 2016, the FASB issued guidance eliminating the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method as of the date the investment becomes qualified for equity method accounting. Therefore, upon qualifying for the equity method, no retroactive adjustment of the investment is required. The guidance becomes effective for us on January 1, 2017 and we do not expect this to have a significant impact on our financial statements.
In March 2016, the FASB issued guidance clarifying the implementation guidance on principal versus agent considerations within the Revenue from Contracts with Customers Topic 606. The guidance amends the indicators for when an entity controls the specified good or service before it is transferred to the customer for purposes of
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determining whether the entity is a principal or agent in the transaction. The effective date for this guidance for us is January 1, 2018, which is the same as the effective date for the guidance in ASU 2014-09, Revenue from Contracts with Customers. We do not expect this to have a significant impact on our financial statements.
In March 2016, the FASB issued guidance that amends several aspects of the accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The guidance becomes effective for us on January 1, 2017 and we are currently evaluating the impact on our financial statements.
Pending FASB Rule Proposal
The FASB currently has a project underway that could have a meaningful impact on bank financial statements, capital levels and regulatory capital ratios. The project, which addresses the amount and timing of loss recognition for loans and investment securities, would generally result in an increase in overall allowance levels and lower capital levels. This project has been exposed for public comment three times since 2010. A final standard is expected to be issued in the second quarter of 2016 with an effective date of January 1, 2020 for calendar year entities.
We are evaluating the project as proposed and the possible range of impacts and will determine any impact of this project to capital or future earnings once the final rule is issued.
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ITEM 1. | Financial Statements |
FIRST NIAGARA FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Condition (unaudited)
(in millions, except share and per share amounts)
March 31, 2016 | December 31, 2015 | |||||
ASSETS | ||||||
Cash and cash equivalents | $ | 383 | $ | 672 | ||
Investment securities: | ||||||
Available for sale, at fair value (amortized cost of $5,436 and $5,485 in 2016 and 2015; includes pledged securities that can be sold or repledged of $117 and $91 in 2016 and 2015) | 5,439 | 5,471 | ||||
Held to maturity, at amortized cost (fair value of $6,821 and $6,378 in 2016 and 2015; includes pledged securities that can be sold or repledged of $22 and $9 in 2016 and 2015) | 6,721 | 6,388 | ||||
Federal Home Loan Bank and Federal Reserve Bank common stock, at amortized cost | 376 | 410 | ||||
Loans held for sale | 27 | 46 | ||||
Loans and leases (net of allowance for loan losses of $253 and $242 in 2016 and 2015) | 23,926 | 23,796 | ||||
Bank owned life insurance | 439 | 437 | ||||
Premises and equipment, net | 401 | 410 | ||||
Goodwill | 1,348 | 1,348 | ||||
Core deposit and other intangibles, net | 44 | 48 | ||||
Other assets | 969 | 892 | ||||
Total assets | $ | 40,072 | $ | 39,918 | ||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||
Liabilities: | ||||||
Deposits | $ | 29,561 | $ | 28,701 | ||
Short-term borrowings | 3,256 | 4,349 | ||||
Long-term borrowings | 2,608 | 2,308 | ||||
Other | 498 | 434 | ||||
Total liabilities | 35,923 | 35,792 | ||||
Stockholders’ equity: | ||||||
Preferred stock, $0.01 par value, 50,000,000 shares authorized; Series B, noncumulative perpetual preferred stock, $25 liquidation preference; 14,000,000 shares issued in 2016 and 2015 | 338 | 338 | ||||
Common stock, $0.01 par value, 500,000,000 shares authorized; 366,002,045 shares issued in 2016 and 2015 | 4 | 4 | ||||
Additional paid-in capital | 4,231 | 4,231 | ||||
Accumulated deficit | (244 | ) | (255 | ) | ||
Accumulated other comprehensive loss | (39 | ) | (48 | ) | ||
Treasury stock, at cost, 11,025,189 and 11,239,793 shares in 2016 and 2015 | (140 | ) | (143 | ) | ||
Total stockholders’ equity | 4,150 | 4,126 | ||||
Total liabilities and stockholders’ equity | $ | 40,072 | $ | 39,918 | ||
See accompanying notes to consolidated financial statements.
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FIRST NIAGARA FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Income (unaudited)
(in millions, except per share amounts)
Three months ended March 31, | ||||||
2016 | 2015 | |||||
Interest income: | ||||||
Loans and leases | $ | 219 | $ | 210 | ||
Investment securities and other | 90 | 86 | ||||
Total interest income | 309 | 297 | ||||
Interest expense: | ||||||
Deposits | 19 | 15 | ||||
Borrowings | 23 | 18 | ||||
Total interest expense | 41 | 34 | ||||
Net interest income | 268 | 263 | ||||
Provision for credit losses | 23 | 13 | ||||
Net interest income after provision for credit losses | 245 | 250 | ||||
Noninterest income: | ||||||
Deposit service charges | 22 | 20 | ||||
Insurance commissions | 15 | 16 | ||||
Merchant and card fees | 12 | 12 | ||||
Wealth management services | 14 | 15 | ||||
Mortgage banking | 4 | 5 | ||||
Capital markets income | 2 | 4 | ||||
Lending and leasing | 4 | 4 | ||||
Bank owned life insurance | 4 | 4 | ||||
Other income | 3 | 3 | ||||
Total noninterest income | 79 | 82 | ||||
Noninterest expense: | ||||||
Salaries and employee benefits | 115 | 112 | ||||
Occupancy and equipment | 26 | 27 | ||||
Technology and communications | 35 | 35 | ||||
Marketing and advertising | 9 | 10 | ||||
Professional services | 12 | 13 | ||||
Amortization of intangibles | 4 | 6 | ||||
Federal deposit insurance premiums | 10 | 11 | ||||
Merger and acquisition integration expenses | 13 | — | ||||
Restructuring charges | — | 18 | ||||
Other expense | 29 | 29 | ||||
Total noninterest expense | 255 | 261 | ||||
Income before income taxes | 69 | 71 | ||||
Income tax | 20 | 20 | ||||
Net income | 48 | 51 | ||||
Preferred stock dividend | 8 | 8 | ||||
Net income available to common stockholders | $ | 41 | $ | 44 | ||
Earnings per share: | ||||||
Basic | $ | 0.11 | $ | 0.12 | ||
Diluted | $ | 0.11 | $ | 0.12 | ||
Weighted average common shares outstanding: | ||||||
Basic | 351 | 351 | ||||
Diluted | 354 | 353 | ||||
Dividends per common share | $ | 0.08 | $ | 0.08 | ||
See accompanying notes to consolidated financial statements.
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FIRST NIAGARA FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (unaudited)
(in millions)
Three months ended March 31, | ||||||
2016 | 2015 | |||||
Net income | $ | 48 | $ | 51 | ||
Other comprehensive income, net of income taxes: | ||||||
Securities available for sale: | ||||||
Net unrealized gains arising during the period | 11 | 16 | ||||
Net unrealized holding gains on securities transferred between available for sale and held to maturity: | ||||||
Less: amortization of net unrealized holding gains to income during the period | (1 | ) | (2 | ) | ||
Net unrealized losses on interest rate swaps designated as cash flow hedges arising during the period | (2 | ) | (1 | ) | ||
Amortization of net loss related to pension and post-retirement plans | — | 1 | ||||
Total other comprehensive income | 8 | 15 | ||||
Total comprehensive income | $ | 57 | $ | 66 | ||
See accompanying notes to consolidated financial statements.
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FIRST NIAGARA FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders’ Equity (unaudited)
(in millions, except share and per share amounts)
Preferred stock | Common stock | Additional paid-in capital | Accumulated deficit | Accumulated other comprehensive (loss) income | Treasury stock | Total | |||||||||||||||
Balances at January 1, 2016 | $ | 338 | $ | 4 | $ | 4,231 | $ | (255 | ) | $ | (48 | ) | $ | (143 | ) | $ | 4,126 | ||||
Net income | — | — | — | 48 | — | — | 48 | ||||||||||||||
Total other comprehensive income, net | — | — | — | — | 8 | — | 8 | ||||||||||||||
Stock-based compensation expense | — | — | 4 | — | — | — | 4 | ||||||||||||||
Restricted stock activity (214,604 shares) | — | — | (3 | ) | (1 | ) | — | 3 | (1 | ) | |||||||||||
Preferred stock dividends | — | — | — | (8 | ) | — | — | (8 | ) | ||||||||||||
Common stock dividends of $0.08 per share | — | — | — | (28 | ) | — | — | (28 | ) | ||||||||||||
Balances at March 31, 2016 | $ | 338 | $ | 4 | $ | 4,231 | $ | (244 | ) | $ | (39 | ) | $ | (140 | ) | $ | 4,150 | ||||
Balances at January 1, 2015 | $ | 338 | $ | 4 | $ | 4,235 | $ | (330 | ) | $ | 9 | $ | (162 | ) | $ | 4,093 | |||||
Net income | — | — | — | 51 | — | — | 51 | ||||||||||||||
Total other comprehensive income, net | — | — | — | — | 15 | — | 15 | ||||||||||||||
Stock-based compensation expense | — | — | 2 | — | — | — | 2 | ||||||||||||||
Restricted stock activity (328,644 shares) | — | — | (4 | ) | — | — | 4 | — | |||||||||||||
Preferred stock dividends | — | — | — | (8 | ) | — | — | (8 | ) | ||||||||||||
Common stock dividends of $0.08 per share | — | — | — | (28 | ) | — | — | (28 | ) | ||||||||||||
Balances at March 31, 2015 | $ | 338 | $ | 4 | $ | 4,233 | $ | (314 | ) | $ | 23 | $ | (158 | ) | $ | 4,125 | |||||
See accompanying notes to consolidated financial statements.
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FIRST NIAGARA FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (unaudited)
(in millions)
Three months ended March 31, | ||||||
2016 | 2015 | |||||
Cash flows from operating activities: | ||||||
Net income | $ | 48 | $ | 51 | ||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||
Amortization of fees and discounts, net | — | 7 | ||||
Provision for credit losses | 23 | 13 | ||||
Depreciation of premises and equipment | 19 | 17 | ||||
Amortization of intangibles | 4 | 6 | ||||
Origination of loans held for sale | (127 | ) | (157 | ) | ||
Proceeds from sales of loans held for sale | 149 | 153 | ||||
Stock based-compensation expense | 4 | 2 | ||||
Deferred income tax expense | 7 | 10 | ||||
Other, net | (43 | ) | (57 | ) | ||
Net cash provided by operating activities | 84 | 45 | ||||
Cash flows from investing activities: | ||||||
Proceeds from sales of securities available for sale | 148 | 25 | ||||
Proceeds from maturities of securities available for sale | 120 | 67 | ||||
Principal payments received on securities available for sale | 213 | 267 | ||||
Purchases of securities available for sale | (412 | ) | (315 | ) | ||
Principal payments received on securities held to maturity | 308 | 299 | ||||
Purchases of securities held to maturity | (654 | ) | (569 | ) | ||
Proceeds from maturities of securities held to maturity | 8 | 15 | ||||
Proceeds from sales of Federal Home Loan Bank and Federal Reserve Bank common stock | 34 | 37 | ||||
Net increase in loans and leases | (174 | ) | (101 | ) | ||
Purchases of premises and equipment | (7 | ) | (21 | ) | ||
Other, net | 10 | 20 | ||||
Net cash used in investing activities | (405 | ) | (277 | ) | ||
Cash flows from financing activities: | ||||||
Net increase in deposits | 860 | 469 | ||||
Repayments of short-term borrowings, net | (1,093 | ) | (733 | ) | ||
Proceeds from long-term borrowings | 300 | 500 | ||||
Dividends paid on noncumulative preferred stock | (8 | ) | (8 | ) | ||
Dividends paid on common stock | (28 | ) | (28 | ) | ||
Net cash provided by financing activities | 31 | 200 | ||||
Net decrease in cash and cash equivalents | (290 | ) | (32 | ) | ||
Cash and cash equivalents at beginning of period | 672 | 420 | ||||
Cash and cash equivalents at end of period | $ | 383 | $ | 388 | ||
Supplemental disclosures | ||||||
Cash (received) paid during the period for: | ||||||
Income taxes | $ | (7 | ) | $ | 34 | |
Interest expense | 36 | 33 | ||||
Other noncash activity: | ||||||
Securities available for sale purchased not settled | 20 | 37 | ||||
Securities held to maturity purchased not settled | — | 25 | ||||
See accompanying notes to consolidated financial statements.
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Notes to Consolidated Financial Statements (unaudited)
(in millions, except as noted and per share amounts)
The accompanying consolidated financial statements of First Niagara Financial Group, Inc. (the “Company”), including its wholly owned subsidiary First Niagara Bank, N.A. (the “Bank”), have been prepared using U.S. generally accepted accounting principles (“GAAP”) for interim financial information.
These consolidated financial statements do not include all of the information and footnotes required by GAAP for a full year presentation and certain disclosures have been condensed or omitted in accordance with rules and regulations of the Securities and Exchange Commission. In our opinion, all adjustments necessary for a fair presentation have been included. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our 2015 Annual Report on Form 10-K. Results for the three months ended March 31, 2016 do not necessarily reflect the results that may be expected for the year ending December 31, 2016. We reviewed subsequent events and determined that no further disclosures or adjustments were required. Amounts in prior period financial statements are reclassified whenever necessary to conform to the current period presentation. The Company and the Bank are referred to collectively as “we” or “us” or “our.”
Note 1. Business Combination
On October 30, 2015, the Company and KeyCorp (“KeyCorp”) entered into an Agreement and Plan of Merger (the “Merger Agreement”). The Merger Agreement provides that, upon the terms and subject to the conditions set forth therein, the Company will merge with and into KeyCorp (the “Merger”), with KeyCorp as the surviving corporation in the Merger. The Merger Agreement was approved by the Board of Directors and shareholders of each of the Company and KeyCorp.
Subject to the terms and conditions of the Merger Agreement, at the effective time of the Merger (the “Effective Time”), Company shareholders will have the right to receive (i) 0.680 shares (the “Exchange Ratio”) of KeyCorp common stock, par value $1.00 per share, and (ii) $2.30 in cash, for each share of Company common stock, par value $0.01 per share. Subject to the terms and conditions of the Merger Agreement, at the effective time of the Merger, each share of Company preferred stock, Series B, par value $0.01 per share, will be converted into the right to receive a share of a newly created series of preferred stock of KeyCorp having such rights, preferences, privileges and voting powers not materially less favorable to such holders than such Company preferred stock.
The Merger Agreement contains customary representations and warranties from both KeyCorp and the Company, and each party has agreed to customary covenants, including, among others, covenants relating to the conduct of its business during the interim period between the execution of the Merger Agreement and the Effective Time, its obligation to recommend that its shareholders adopt the Merger Agreement and, in the case of First Niagara, its non-solicitation obligations relating to alternative acquisition proposals.
The completion of the Merger is subject to customary conditions, including, among others, (1) authorization for listing on the New York Stock Exchange of the shares of KeyCorp common stock and KeyCorp preferred stock to be issued in the Merger, (2) the absence of any order, injunction or other legal restraint preventing the completion of the Merger or making the consummation of the Merger illegal and (3) the receipt of required regulatory approvals, including the approval of the Federal Reserve Board. Each party’s obligation to complete the Merger is also subject to certain additional customary conditions, including (i) subject to certain exceptions, the accuracy of the representations and warranties of the other party, (ii) performance in all material respects by the other party of its obligations under the Merger Agreement and (iii) receipt by such party of an opinion from its counsel to the effect that the Merger will qualify as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended.
Direct costs related to the Merger were expensed as incurred and amounted to $13 million for the three months ended March 31, 2016. These costs were primarily comprised of professional services fees, employee retention expenses, classification of compensation of certain personnel dedicated to merger integration efforts, as well as costs related to securing shareholder approval for the pending Merger.
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On April 28, 2016, the Company and KeyCorp announced that they reached an agreement with Northwest Bank, a Pennsylvania savings bank ("Northwest"), for the sale of 18 branches in the Buffalo Federal Reserve banking market and certain related assets, and the assumption of certain related liabilities by Northwest Bank. The branches are being divested in connection with the Merger. The divestitures have been approved by the United States Department of Justice (DOJ) and the Federal Reserve Board following a customary antitrust review in connection with the proposed Merger. The divestiture transaction is subject to the closing of the Merger and other customary closing conditions, including approvals by Northwest's banking regulators. The divestiture transaction may be terminated upon the termination of the Merger Agreement governing the Merger.
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Note 2. Investment Securities
The amortized cost, gross unrealized gains and losses, and fair value of our investment securities at the dates indicated are summarized as follows:
Amortized | Unrealized | Unrealized | Fair | |||||||||
March 31, 2016 | cost | gains | losses | value | ||||||||
Investment securities available for sale: | ||||||||||||
Debt securities: | ||||||||||||
States and political subdivisions | $ | 349 | $ | 5 | $ | — | $ | 354 | ||||
U.S. Treasury | 65 | 1 | — | 66 | ||||||||
U.S. government sponsored enterprises | 166 | 1 | — | 167 | ||||||||
Corporate | 822 | 11 | (26 | ) | 807 | |||||||
Total debt securities | 1,402 | 18 | (26 | ) | 1,394 | |||||||
Mortgage-backed securities: | ||||||||||||
Residential mortgage-backed securities: | ||||||||||||
Government National Mortgage Association | 26 | — | (1 | ) | 26 | |||||||
Federal National Mortgage Association | 63 | 3 | — | 66 | ||||||||
Federal Home Loan Mortgage Corporation | 78 | 3 | — | 82 | ||||||||
Collateralized mortgage obligations: | ||||||||||||
Government National Mortgage Association | 118 | 1 | — | 120 | ||||||||
Federal National Mortgage Association | 820 | 6 | (2 | ) | 825 | |||||||
Federal Home Loan Mortgage Corporation | 432 | 5 | — | 436 | ||||||||
Total collateralized mortgage obligations | 1,370 | 12 | (2 | ) | 1,380 | |||||||
Total residential mortgage-backed securities | 1,537 | 19 | (3 | ) | 1,554 | |||||||
Commercial mortgage-backed securities, non-agency issued | 934 | 14 | — | 949 | ||||||||
Total mortgage-backed securities | 2,472 | 34 | (3 | ) | 2,502 | |||||||
Collateralized loan obligations, non-agency issued | 1,262 | 1 | (22 | ) | 1,242 | |||||||
Asset-backed securities collateralized by: | ||||||||||||
Student loans | 161 | 2 | — | 163 | ||||||||
Credit cards | 20 | — | — | 20 | ||||||||
Auto loans | 44 | — | — | 44 | ||||||||
Other | 53 | — | (1 | ) | 52 | |||||||
Total asset-backed securities | 278 | 3 | (1 | ) | 279 | |||||||
Other | 22 | — | — | 22 | ||||||||
Total securities available for sale | $ | 5,436 | $ | 56 | $ | (53 | ) | $ | 5,439 | |||
Investment securities held to maturity: | ||||||||||||
Debt securities, U.S. government agencies | $ | 132 | $ | — | $ | (1 | ) | $ | 131 | |||
Residential mortgage-backed securities: | ||||||||||||
Government National Mortgage Association | 16 | — | — | 17 | ||||||||
Federal National Mortgage Association | 88 | 1 | — | 89 | ||||||||
Federal Home Loan Mortgage Corporation | 46 | — | — | 47 | ||||||||
Collateralized mortgage obligations: | ||||||||||||
Government National Mortgage Association | 1,605 | 30 | (2 | ) | 1,633 | |||||||
Federal National Mortgage Association | 2,485 | 33 | (9 | ) | 2,509 | |||||||
Federal Home Loan Mortgage Corporation | 2,347 | 52 | (4 | ) | 2,395 | |||||||
Total collateralized mortgage obligations | 6,438 | 115 | (15 | ) | 6,538 | |||||||
Total residential mortgage-backed securities | 6,589 | 116 | (16 | ) | 6,689 | |||||||
Total securities held to maturity | $ | 6,721 | $ | 116 | $ | (16 | ) | $ | 6,821 | |||
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Amortized | Unrealized | Unrealized | Fair | |||||||||
December 31, 2015 | cost | gains | losses | value | ||||||||
Investment securities available for sale: | ||||||||||||
Debt securities: | ||||||||||||
States and political subdivisions | $ | 374 | $ | 5 | $ | — | $ | 379 | ||||
U.S. Treasury | 55 | — | — | 55 | ||||||||
U.S. government sponsored enterprises | 268 | 2 | (2 | ) | 269 | |||||||
Corporate | 828 | 7 | (34 | ) | 801 | |||||||
Total debt securities | 1,525 | 15 | (36 | ) | 1,504 | |||||||
Mortgage-backed securities: | ||||||||||||
Residential mortgage-backed securities: | ||||||||||||
Government National Mortgage Association | 27 | — | (1 | ) | 26 | |||||||
Federal National Mortgage Association | 68 | 3 | — | 71 | ||||||||
Federal Home Loan Mortgage Corporation | 84 | 4 | — | 87 | ||||||||
Collateralized mortgage obligations: | ||||||||||||
Government National Mortgage Association | 94 | — | (1 | ) | 94 | |||||||
Federal National Mortgage Association | 738 | 1 | (9 | ) | 730 | |||||||
Federal Home Loan Mortgage Corporation | 359 | 1 | (4 | ) | 355 | |||||||
Total collateralized mortgage obligations | 1,191 | 2 | (14 | ) | 1,179 | |||||||
Total residential mortgage-backed securities | 1,369 | 10 | (15 | ) | 1,364 | |||||||
Commercial mortgage-backed securities, non-agency issued | 1,067 | 17 | — | 1,085 | ||||||||
Total mortgage-backed securities | 2,437 | 27 | (15 | ) | 2,449 | |||||||
Collateralized loan obligations, non-agency issued | 1,192 | 5 | (11 | ) | 1,186 | |||||||
Asset-backed securities collateralized by: | ||||||||||||
Student loans | 170 | 2 | — | 171 | ||||||||
Credit cards | 20 | — | — | 20 | ||||||||
Auto loans | 66 | — | — | 66 | ||||||||
Other | 53 | — | — | 53 | ||||||||
Total asset-backed securities | 309 | 3 | (1 | ) | 310 | |||||||
Other | 22 | — | — | 22 | ||||||||
Total securities available for sale | $ | 5,485 | $ | 49 | $ | (63 | ) | $ | 5,471 | |||
Investment securities held to maturity: | ||||||||||||
Debt securities, U.S. government agencies | $ | 42 | $ | — | $ | — | $ | 42 | ||||
Residential mortgage-backed securities: | ||||||||||||
Government National Mortgage Association | 17 | — | — | 17 | ||||||||
Federal National Mortgage Association | 93 | — | (1 | ) | 92 | |||||||
Federal Home Loan Mortgage Corporation | 50 | — | — | 50 | ||||||||
Collateralized mortgage obligations: | ||||||||||||
Government National Mortgage Association | 1,571 | 14 | (6 | ) | 1,579 | |||||||
Federal National Mortgage Association | 2,297 | 8 | (26 | ) | 2,279 | |||||||
Federal Home Loan Mortgage Corporation | 2,318 | 20 | (19 | ) | 2,319 | |||||||
Total collateralized mortgage obligations | 6,186 | 42 | (51 | ) | 6,177 | |||||||
Total residential mortgage-backed securities | 6,345 | 43 | (53 | ) | 6,336 | |||||||
Total securities held to maturity | $ | 6,388 | $ | 43 | $ | (53 | ) | $ | 6,378 | |||
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The table below details certain information regarding our investment securities that were in an unrealized loss position at the dates indicated by the length of time those securities were in a continuous loss position:
Less than 12 months | 12 months or longer | Total | ||||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||||
March 31, 2016 | value | losses | Count | value | losses | Count | value | losses | Count | |||||||||||||||||
Investment securities available for sale: | ||||||||||||||||||||||||||
Debt securities: | ||||||||||||||||||||||||||
States and political subdivisions | $ | 14 | $ | — | 16 | $ | 3 | $ | — | 4 | $ | 17 | $ | — | 20 | |||||||||||
U.S. government sponsored enterprises | 34 | — | 5 | — | — | — | 34 | — | 5 | |||||||||||||||||
Corporate | 158 | (6 | ) | 92 | 129 | (20 | ) | 73 | 287 | (26 | ) | 165 | ||||||||||||||
Total debt securities | 206 | (6 | ) | 113 | 132 | (20 | ) | 77 | 338 | (26 | ) | 190 | ||||||||||||||
Mortgage-backed securities: | ||||||||||||||||||||||||||
Residential mortgage-backed securities: | ||||||||||||||||||||||||||
Government National Mortgage Association | — | — | — | 17 | (1 | ) | 5 | 17 | (1 | ) | 5 | |||||||||||||||
Federal National Mortgage Association | — | — | 1 | — | — | — | — | — | 1 | |||||||||||||||||
Federal Home Loan Mortgage Corporation | — | — | 2 | — | — | — | — | — | 2 | |||||||||||||||||
Collateralized mortgage obligations: | ||||||||||||||||||||||||||
Federal National Mortgage Association | 89 | — | 5 | 146 | (2 | ) | 9 | 236 | (2 | ) | 14 | |||||||||||||||
Federal Home Loan Mortgage Corporation | 59 | — | 4 | 39 | — | 2 | 98 | — | 6 | |||||||||||||||||
Total collateralized mortgage obligations | 148 | — | 9 | 185 | (2 | ) | 11 | 333 | (2 | ) | 20 | |||||||||||||||
Total residential mortgage-backed securities | 148 | — | 12 | 202 | (2 | ) | 16 | 350 | (3 | ) | 28 | |||||||||||||||
Commercial mortgage-backed securities, non-agency issued | 16 | — | 4 | — | — | — | 16 | — | 4 | |||||||||||||||||
Total mortgage-backed securities | 164 | — | 16 | 202 | (2 | ) | 16 | 366 | (3 | ) | 32 | |||||||||||||||
Collateralized loan obligations, non-agency issued | 798 | (20 | ) | 88 | 195 | (3 | ) | 21 | 992 | (22 | ) | 109 | ||||||||||||||
Asset-backed securities collateralized by: | ||||||||||||||||||||||||||
Student loans | 23 | — | 5 | 8 | — | 2 | 31 | — | 7 | |||||||||||||||||
Auto loans | 2 | — | 2 | — | — | — | 2 | — | 2 | |||||||||||||||||
Other | 28 | (1 | ) | 3 | 2 | — | 1 | 31 | (1 | ) | 4 | |||||||||||||||
Total asset-backed securities | 54 | (1 | ) | 10 | 10 | — | 3 | 63 | (1 | ) | 13 | |||||||||||||||
Other | — | — | 1 | 9 | — | 3 | 9 | — | 4 | |||||||||||||||||
Total securities available for sale in an unrealized loss position | $ | 1,222 | $ | (27 | ) | 228 | $ | 547 | $ | (25 | ) | 120 | $ | 1,769 | $ | (53 | ) | 348 | ||||||||
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Less than 12 months | 12 months or longer | Total | ||||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||||
March 31, 2016 | value | losses | Count | value | losses | Count | value | losses | Count | |||||||||||||||||
Investment securities held to maturity: | ||||||||||||||||||||||||||
Debt securities, U.S. government agencies | $ | 116 | $ | (1 | ) | 6 | $ | — | $ | — | — | $ | 116 | $ | (1 | ) | 6 | |||||||||
Residential mortgage-backed securities: | ||||||||||||||||||||||||||
Government National Mortgage Association | 1 | — | 1 | — | — | 1 | 1 | — | 2 | |||||||||||||||||
Federal National Mortgage Association | 7 | — | 6 | 26 | — | 9 | 33 | — | 15 | |||||||||||||||||
Federal Home Loan Mortgage Corporation | 10 | — | 7 | 4 | — | 3 | 14 | — | 10 | |||||||||||||||||
Collateralized mortgage obligations: | ||||||||||||||||||||||||||
Government National Mortgage Association | 207 | (1 | ) | 49 | 50 | (1 | ) | 21 | 257 | (2 | ) | 70 | ||||||||||||||
Federal National Mortgage Association | 261 | (3 | ) | 14 | 356 | (5 | ) | 25 | 618 | (9 | ) | 39 | ||||||||||||||
Federal Home Loan Mortgage Corporation | 28 | — | 4 | 301 | (4 | ) | 23 | 329 | (4 | ) | 27 | |||||||||||||||
Total collateralized mortgage obligations | 497 | (5 | ) | 67 | 707 | (10 | ) | 69 | 1,204 | (15 | ) | 136 | ||||||||||||||
Total residential mortgage-backed securities | 515 | (5 | ) | 81 | 738 | (11 | ) | 82 | 1,253 | (16 | ) | 163 | ||||||||||||||
Total securities held to maturity in an unrealized loss position | $ | 631 | $ | (6 | ) | 87 | $ | 738 | $ | (11 | ) | 82 | $ | 1,369 | $ | (16 | ) | 169 | ||||||||
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Less than 12 months | 12 months or longer | Total | ||||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||||
December 31, 2015 | value | losses | Count | value | losses | Count | value | losses | Count | |||||||||||||||||
Investment securities available for sale: | ||||||||||||||||||||||||||
Debt securities: | ||||||||||||||||||||||||||
States and political subdivisions | $ | 22 | $ | — | 32 | $ | 2 | $ | — | 3 | $ | 24 | $ | — | 35 | |||||||||||
U.S. Treasury | 30 | — | 2 | — | — | — | 30 | — | 2 | |||||||||||||||||
U.S. government sponsored enterprises | 132 | (2 | ) | 15 | — | — | 1 | 132 | (2 | ) | 16 | |||||||||||||||
Corporate | 311 | (16 | ) | 195 | 102 | (18 | ) | 71 | 413 | (34 | ) | 266 | ||||||||||||||
Total debt securities | 495 | (18 | ) | 244 | 104 | (18 | ) | 75 | 599 | (36 | ) | 319 | ||||||||||||||
Mortgage-backed securities: | ||||||||||||||||||||||||||
Residential mortgage-backed securities: | ||||||||||||||||||||||||||
Government National Mortgage Association | 1 | — | 6 | 17 | (1 | ) | 5 | 18 | (1 | ) | 11 | |||||||||||||||
Federal National Mortgage Association | — | — | — | — | — | 1 | — | — | 1 | |||||||||||||||||
Federal Home Loan Mortgage Corporation | — | — | 1 | — | — | — | — | — | 1 | |||||||||||||||||
Collateralized mortgage obligations: | ||||||||||||||||||||||||||
Government National Mortgage Association | 94 | (1 | ) | 4 | — | — | — | 94 | (1 | ) | 4 | |||||||||||||||
Federal National Mortgage Association | 326 | (3 | ) | 26 | 166 | (6 | ) | 10 | 492 | (9 | ) | 36 | ||||||||||||||
Federal Home Loan Mortgage Corporation | 212 | (3 | ) | 14 | 39 | (2 | ) | 2 | 251 | (4 | ) | 16 | ||||||||||||||
Total collateralized mortgage obligations | 631 | (6 | ) | 44 | 205 | (8 | ) | 12 | 836 | (14 | ) | 56 | ||||||||||||||
Total residential mortgage-backed securities | 632 | (6 | ) | 51 | 222 | (8 | ) | 18 | 854 | (15 | ) | 69 | ||||||||||||||
Commercial mortgage-backed securities, non-agency issued | 35 | — | 6 | — | — | — | 35 | — | 6 | |||||||||||||||||
Total mortgage-backed securities | 667 | (6 | ) | 57 | 222 | (8 | ) | 18 | 889 | (15 | ) | 75 | ||||||||||||||
Collateralized loan obligations, non-agency issued | 698 | (10 | ) | 68 | 154 | (1 | ) | 18 | 852 | (11 | ) | 86 | ||||||||||||||
Asset-backed securities collateralized by: | ||||||||||||||||||||||||||
Student loans | 27 | — | 6 | 9 | — | 2 | 36 | — | 8 | |||||||||||||||||
Credit card | 8 | — | 1 | — | — | — | 8 | — | 1 | |||||||||||||||||
Auto loans | 2 | — | 2 | — | — | — | 2 | — | 2 | |||||||||||||||||
Other | 33 | — | 5 | — | — | — | 33 | — | 5 | |||||||||||||||||
Total asset-backed securities | 71 | (1 | ) | 14 | 9 | — | 2 | 79 | (1 | ) | 16 | |||||||||||||||
Other | 12 | — | 2 | 9 | — | 3 | 21 | — | 5 | |||||||||||||||||
Total securities available for sale in an unrealized loss position | $ | 1,942 | $ | (35 | ) | 385 | $ | 498 | $ | (28 | ) | 116 | $ | 2,441 | $ | (63 | ) | 501 | ||||||||
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Less than 12 months | 12 months or longer | Total | ||||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||||
December 31, 2015 | value | losses | Count | value | losses | Count | value | losses | Count | |||||||||||||||||
Investment securities held to maturity: | ||||||||||||||||||||||||||
Debt securities, U.S. government agencies | $ | 20 | $ | — | 1 | $ | — | $ | — | — | $ | 20 | $ | — | 1 | |||||||||||
Residential mortgage-backed securities: | ||||||||||||||||||||||||||
Government National Mortgage Association | 6 | — | 4 | — | — | 1 | 7 | — | 5 | |||||||||||||||||
Federal National Mortgage Association | 35 | — | 14 | 27 | (1 | ) | 9 | 62 | (1 | ) | 23 | |||||||||||||||
Federal Home Loan Mortgage Corporation | 31 | — | 13 | 4 | — | 2 | 35 | — | 15 | |||||||||||||||||
Collateralized mortgage obligations: | ||||||||||||||||||||||||||
Government National Mortgage Association | 675 | (5 | ) | 85 | 63 | (1 | ) | 22 | 738 | (6 | ) | 107 | ||||||||||||||
Federal National Mortgage Association | 946 | (13 | ) | 57 | 398 | (13 | ) | 27 | 1,345 | (26 | ) | 84 | ||||||||||||||
Federal Home Loan Mortgage Corporation | 1,019 | (10 | ) | 66 | 310 | (9 | ) | 24 | 1,329 | (19 | ) | 90 | ||||||||||||||
Total collateralized mortgage obligations | 2,641 | (28 | ) | 208 | 771 | (23 | ) | 73 | 3,412 | (51 | ) | 281 | ||||||||||||||
Total residential mortgage-backed securities | 2,713 | (29 | ) | 239 | 803 | (24 | ) | 85 | 3,516 | (53 | ) | 324 | ||||||||||||||
Total securities held to maturity in an unrealized loss position | $ | 2,733 | $ | (29 | ) | 240 | $ | 803 | $ | (24 | ) | 85 | $ | 3,535 | $ | (53 | ) | 325 | ||||||||
We have assessed the securities in an unrealized loss position at March 31, 2016 and at December 31, 2015 and determined that the declines in fair value below amortized cost were temporary.
The Volcker Rule provisions of the Dodd-Frank Act restrict the ability of affiliates of insured depository institutions to sponsor or invest in private funds or to engage in certain types of proprietary trading. Although the Volcker Rule became effective on July 21, 2012 and the final rules became effective April 1, 2014, in connection with the adoption of the final rules on December 10, 2013 by the responsible agencies, the Federal Reserve issued an order extending the period during which institutions have to conform their activities and investments to the requirements of the Volcker Rule to July 21, 2015.
In connection with conforming our activities to the Volcker Rule, including the establishment of a compliance program by July 21, 2015, we engaged in an enterprise wide review and established a cross functional working group. Our Volcker Rule conformance efforts included the establishment of a corporate-wide compliance program, required for banks with assets over $10 billion, which reviews and monitors Volcker Rule compliance on an on-going basis.
A significant portion of our Volcker Rule conformance efforts included confirming that our activities are either excluded or exempted from the Volcker Rule. In areas where the Volcker Rule applies to our activities, including in connection with capital markets (e.g., risk mitigating hedging), residential lending (e.g., secondary mortgage originations) and certain other activities, Volcker Rule conformance is not anticipated to have a material impact.
The Volcker Rule's potential impact on us is most significant in connection with Collateralized Loan Obligations ("CLOs") held in our investment securities portfolio. The issuance of the final Volcker Rule restricts our ability to hold debt securities issued by CLOs where our investment in these debt securities is deemed to be an ownership interest in a CLO and the CLO itself does not qualify for an exclusion in the final rule for loan securitizations. On December 18, 2014, the Federal Reserve Board announced it would give banking entities until July 21, 2016 to conform investments in covered funds that were in place prior to December 31, 2013 ("legacy covered funds"). The Board also announced its intention to act in 2016 to grant banking entities an additional one-year extension of
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the conformance period for legacy covered funds which together would extend until July 21, 2017 the time period for institutions to conform their ownership interests to the stated provisions of the final Volcker Rule.
For our CLOs subject to the Volcker Rule in an unrealized loss position, we believe it is more likely than not that we will be able to hold these securities to recovery, which could be maturity as the Federal Reserve announcement extends the conformance period to July 2017 and we believe that other structural remedies are available to us to allow us to continue holding the bonds after the conformance period.
In making the determination that the declines in fair value below amortized cost for the remainder of the portfolio were temporary, we considered some or all of the following factors: the period of time the securities were in an unrealized loss position, the percentage decline in comparison to the securities’ amortized cost, credit rating, the financial condition of the issuer and guarantor, where applicable, the delinquency or default rates of underlying collateral, projected collateral losses, projected cash flows and credit enhancement. If the level of credit enhancement is sufficient based on our expectations of future collateral losses, we conclude that we will receive all of the originally scheduled cash flows. If the present value of the cash flows indicates that we should not expect to recover the amortized cost basis of the security, we would consider the security to be other than temporarily impaired and write down the credit component of the unrealized loss through a charge to current period earnings. We do not intend to sell these securities in an unrealized loss position and it is not more likely than not that we will be required to sell these securities before the recovery of their amortized cost bases, which may be at maturity.
Scheduled contractual maturities of our investment securities at March 31, 2016 were as follows:
Amortized cost | Fair value | |||||
Debt securities: | ||||||
Within one year | $ | 337 | $ | 340 | ||
After one year through five years | 502 | 501 | ||||
After five years through ten years | 686 | 676 | ||||
After ten years | 9 | 9 | ||||
Total debt securities | 1,534 | 1,525 | ||||
Mortgage-backed securities | 9,060 | 9,192 | ||||
Collateralized loan obligations | 1,262 | 1,242 | ||||
Asset-backed securities | 278 | 279 | ||||
Other | 22 | 22 | ||||
$ | 12,156 | $ | 12,260 | |||
While the contractual maturities of our mortgage-backed securities, collateralized loan obligations, asset-backed securities, and other securities generally exceed ten years, we expect the effective lives to be significantly shorter due to prepayments of the underlying loans and the nature of these securities. The duration of our investment securities portfolio increased to 3.7 years at March 31, 2016 from 3.3 years at December 31, 2015.
Note 3. Loans and Leases
Overall Portfolio
Our loan portfolio is made up of two segments, commercial loans and consumer loans. Those segments are further segregated between our loans initially accounted for under the amortized cost method (referred to as “originated” loans) and loans acquired (referred to as “acquired” loans). Our commercial loan portfolio segment includes both business and commercial real estate loans. Our consumer portfolio segment includes residential real estate, home equity, indirect auto, credit cards, and other consumer loans.
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Our loans and leases receivable consisted of the following at the dates indicated:
March 31, 2016 | December 31, 2015 | ||||||||||||||||||
Originated | Acquired | Total | Originated | Acquired | Total | ||||||||||||||
Commercial: | |||||||||||||||||||
Real estate | $ | 6,474 | $ | 783 | $ | 7,257 | $ | 6,539 | $ | 835 | $ | 7,375 | |||||||
Construction | 1,369 | — | 1,369 | 1,278 | — | 1,278 | |||||||||||||
Business | 6,009 | 165 | 6,175 | 5,853 | 160 | 6,013 | |||||||||||||
Total commercial | 13,852 | 948 | 14,801 | 13,670 | 996 | 14,665 | |||||||||||||
Consumer: | |||||||||||||||||||
Residential real estate | 2,376 | 955 | 3,331 | 2,349 | 1,005 | 3,355 | |||||||||||||
Home equity | 2,143 | 914 | 3,057 | 2,133 | 936 | 3,069 | |||||||||||||
Indirect auto | 2,464 | — | 2,464 | 2,393 | — | 2,393 | |||||||||||||
Credit cards | 289 | — | 289 | 311 | — | 311 | |||||||||||||
Other consumer | 237 | — | 237 | 245 | — | 245 | |||||||||||||
Total consumer | 7,509 | 1,868 | 9,378 | 7,431 | 1,941 | 9,372 | |||||||||||||
Total loans and leases | 21,362 | 2,817 | 24,178 | 21,101 | 2,937 | 24,038 | |||||||||||||
Allowance for loan losses | (248 | ) | (5 | ) | (253 | ) | (237 | ) | (5 | ) | (242 | ) | |||||||
Total loans and leases, net | $ | 21,114 | $ | 2,812 | $ | 23,926 | $ | 20,864 | $ | 2,932 | $ | 23,796 | |||||||
As of March 31, 2016 and December 31, 2015, we had a liability for unfunded loan commitments of $16 million. For the three months ended March 31, 2016, we did not recognize a provision for credit losses related to our unfunded loan commitments. For the three months ended March 31, 2015, we recognized a provision for credit losses related to our unfunded commitments of $1 million.
At March 31, 2016 and December 31, 2015, our home equity portfolio totaled $3.1 billion, of which $1.2 billion was in the first lien position. We hold or service the first lien loan for approximately 10% of the remainder of the home equity portfolio that was in a second lien position as of March 31, 2016 and December 31, 2015.
As of March 31, 2016, commitments to extend credit to related parties amounted to $41 million, of which $36 million was outstanding and due as of March 31, 2016.
Acquired loan portfolios
We have acquired loans in four acquisitions since January 1, 2009. All acquired loans were initially measured at fair value and subsequently accounted for under either Accounting Standards Codification Topic (“ASC”) 310-30 (Loans and Debt Securities Acquired with Deteriorated Credit Quality) or ASC 310-20 (Nonrefundable Fees and Other Costs.)
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The outstanding principal balance and the related carrying amount of our acquired loans included in our Consolidated Statements of Condition were as follows at the dates indicated:
March 31, 2016 | December 31, 2015 | |||||
Credit impaired acquired loans evaluated individually for future credit losses | ||||||
Outstanding principal balance | $ | 5 | $ | 5 | ||
Carrying amount | 5 | 5 | ||||
Acquired loans evaluated collectively for future credit losses | ||||||
Outstanding principal balance | 1,811 | 1,918 | ||||
Carrying amount | 1,775 | 1,883 | ||||
Other acquired loans | ||||||
Outstanding principal balance | 1,055 | 1,069 | ||||
Carrying amount | 1,036 | 1,049 | ||||
Total acquired loans | ||||||
Outstanding principal balance | 2,871 | 2,992 | ||||
Carrying amount | 2,817 | 2,937 | ||||
The following table presents changes in the accretable yield, which includes income recognized from contractual interest cash flows, for the dates indicated. Acquired lines of credit accounted for under ASC 310-20 are not included in this table.
Balance at January 1, 2015 | $ | (663 | ) |
Net reclassifications from nonaccretable yield | (9 | ) | |
Accretion | 104 | ||
Balance at December 31, 2015 | (569 | ) | |
Net reclassifications from nonaccretable yield | (5 | ) | |
Accretion | 23 | ||
Balance at March 31, 2016 | $ | (551 | ) |
Allowance for loan losses
We establish our allowance for loan losses through a provision for credit losses based on our evaluation of the credit quality of our loan portfolio. We segregate our loans between loans we originated which are accounted for under the amortized cost method (referred to as “originated” loans) and loans acquired (referred to as “acquired” loans), as acquired loans were originally recorded at fair value, which included an estimate of lifetime credit losses, resulting in no carryover of the related allowance for loan losses. We continue to monitor and modify the level of our allowance for loan losses to ensure it is adequate to cover losses inherent in our loan portfolio.
We determined our allowance for loan losses by portfolio segment as defined above. For our originated loans, the allowance for loan losses is comprised of two components. The first component covers pools of loans for which there are incurred losses that are not yet individually identifiable. The allowance for pools of loans is based on net historical loan loss experience for similar loans with similar inherent risk characteristics and performance trends adjusted, as appropriate, for quantitative and qualitative risk factors specific to respective loan types. The second component covers loans that have been identified as impaired or are nonperforming as well as troubled debt restructurings (“TDRs”.)
We also maintain an allowance for loan losses on acquired loans when: (i) for loans accounted for under ASC 310-30, there is deterioration in credit quality subsequent to acquisition, and (ii) for loans accounted for under ASC 310-20, the inherent losses in the loans exceed the remaining credit discount recorded at the time of acquisition.
Our threshold for evaluating commercial loans individually for impairment is $1 million. Impaired loans to commercial borrowers with outstandings less than $1 million are pooled and measured for impairment
77
collectively. Additionally, all loans modified in a troubled debt restructuring ("TDR"), regardless of dollar size, are considered impaired.
The following table presents the activity in our allowance for loan losses on originated loans and related recorded investment of the associated loans in our originated loan portfolio segment for the periods indicated:
Commercial | Consumer | ||||||||||||||||||||||||
Originated loans | Real estate | Business | Residential | Home equity | Indirect auto | Credit cards | Other consumer | Total | |||||||||||||||||
Three months ended March 31, 2016 | |||||||||||||||||||||||||
Allowance for loan losses: | |||||||||||||||||||||||||
Balance at beginning of period | $ | 75 | $ | 124 | $ | 2 | $ | 6 | $ | 13 | $ | 13 | $ | 5 | $ | 237 | |||||||||
Provision for loan losses | 1 | 15 | — | 1 | 2 | 2 | 2 | 23 | |||||||||||||||||
Charge-offs | (2 | ) | (8 | ) | — | (1 | ) | (3 | ) | (3 | ) | (2 | ) | (19 | ) | ||||||||||
Recoveries | 1 | 4 | — | — | 1 | 1 | — | 8 | |||||||||||||||||
Balance at end of period | $ | 75 | $ | 135 | $ | 2 | $ | 6 | $ | 13 | $ | 12 | $ | 5 | $ | 248 | |||||||||
Allowance for loan losses: | |||||||||||||||||||||||||
Individually evaluated for impairment | $ | 3 | $ | 9 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 13 | |||||||||
Collectively evaluated for impairment | 72 | 126 | 1 | 6 | 13 | 12 | 5 | 235 | |||||||||||||||||
Total | $ | 75 | $ | 135 | $ | 2 | $ | 6 | $ | 13 | $ | 12 | $ | 5 | $ | 248 | |||||||||
Loans receivable: | |||||||||||||||||||||||||
Balance at end of period | |||||||||||||||||||||||||
Individually evaluated for impairment | $ | 40 | $ | 85 | $ | 22 | $ | 17 | $ | 4 | $ | — | $ | 2 | $ | 171 | |||||||||
Collectively evaluated for impairment | 7,803 | 5,924 | 2,354 | 2,127 | 2,460 | 289 | 234 | 21,191 | |||||||||||||||||
Total | $ | 7,843 | $ | 6,009 | $ | 2,376 | $ | 2,143 | $ | 2,464 | $ | 289 | $ | 237 | $ | 21,362 | |||||||||
Three months ended March 31, 2015 | |||||||||||||||||||||||||
Allowance for loan losses: | |||||||||||||||||||||||||
Balance at beginning of period | $ | 65 | $ | 122 | $ | 2 | $ | 8 | $ | 14 | $ | 12 | $ | 5 | $ | 228 | |||||||||
Provision for loan losses | 8 | — | — | (2 | ) | 2 | 2 | 1 | 11 | ||||||||||||||||
Charge-offs | (4 | ) | (7 | ) | — | (1 | ) | (2 | ) | (3 | ) | (2 | ) | (19 | ) | ||||||||||
Recoveries | — | 2 | — | — | 1 | 1 | — | 4 | |||||||||||||||||
Balance at end of period | $ | 69 | $ | 117 | $ | 2 | $ | 6 | $ | 14 | $ | 11 | $ | 4 | $ | 224 | |||||||||
Allowance for loan losses: | |||||||||||||||||||||||||
Individually evaluated for impairment | $ | 5 | $ | 3 | $ | 1 | $ | — | $ | — | $ | — | $ | — | $ | 9 | |||||||||
Collectively evaluated for impairment | 64 | 115 | 1 | 6 | 14 | 11 | 4 | 215 | |||||||||||||||||
Total | $ | 69 | $ | 117 | $ | 2 | $ | 6 | $ | 14 | $ | 11 | $ | 4 | $ | 224 | |||||||||
Loans receivable: | |||||||||||||||||||||||||
Balance at end of period | |||||||||||||||||||||||||
Individually evaluated for impairment | $ | 76 | $ | 76 | $ | 22 | $ | 6 | $ | 3 | $ | — | $ | 2 | $ | 186 | |||||||||
Collectively evaluated for impairment | 7,214 | 5,372 | 2,114 | 1,882 | 2,198 | 301 | 261 | 19,343 | |||||||||||||||||
Total | $ | 7,291 | $ | 5,448 | $ | 2,136 | $ | 1,888 | $ | 2,201 | $ | 301 | $ | 264 | $ | 19,529 | |||||||||
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The following table presents the activity in our allowance for loan losses and related recorded investment of the associated loans in our acquired loan portfolio for the periods indicated:
Commercial | Consumer | |||||||||||||||||||||
Acquired loans | Real estate | Business | Residential | Home equity | Credit cards | Other consumer | Total | |||||||||||||||
Three months ended March 31, 2016 | ||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||
Balance at beginning of period | $ | 1 | $ | — | $ | 2 | $ | 2 | $ | — | $ | — | $ | 5 | ||||||||
Provision for loan losses | — | — | — | — | — | — | — | |||||||||||||||
Charge-offs | — | — | — | — | — | — | — | |||||||||||||||
Recoveries | — | — | — | — | — | — | — | |||||||||||||||
Balance at end of period | $ | 1 | $ | — | $ | 2 | $ | 1 | $ | — | $ | — | $ | 5 | ||||||||
Allowance for loan losses: | ||||||||||||||||||||||
Individually evaluated for impairment | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||
Collectively evaluated for impairment | 1 | — | 2 | 1 | — | — | 5 | |||||||||||||||
Total | $ | 1 | $ | — | $ | 2 | $ | 1 | $ | — | $ | — | $ | 5 | ||||||||
Loans receivable: | ||||||||||||||||||||||
Balance at end of period | ||||||||||||||||||||||
Individually evaluated for impairment | $ | — | $ | — | $ | — | $ | 4 | $ | — | $ | — | $ | 4 | ||||||||
Collectively evaluated for impairment | — | 165 | — | 867 | — | — | 1,032 | |||||||||||||||
Loans acquired with deteriorated credit quality | 783 | — | 955 | 43 | — | — | 1,780 | |||||||||||||||
Total | $ | 783 | $ | 165 | $ | 955 | $ | 914 | $ | — | $ | — | $ | 2,817 | ||||||||
Three months ended March 31, 2015 | ||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||
Balance at beginning of period | $ | 1 | $ | 1 | $ | 2 | $ | 2 | $ | — | $ | — | $ | 6 | ||||||||
Provision for loan losses | 2 | — | — | 1 | — | — | 3 | |||||||||||||||
Charge-offs | (2 | ) | — | — | (1 | ) | — | — | (3 | ) | ||||||||||||
Recoveries | — | — | — | — | — | — | — | |||||||||||||||
Balance at end of period | $ | 2 | $ | 1 | $ | 2 | $ | 3 | $ | — | $ | — | $ | 7 | ||||||||
Allowance for loan losses: | ||||||||||||||||||||||
Individually evaluated for impairment | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||
Collectively evaluated for impairment | 2 | 1 | 2 | 3 | — | — | 7 | |||||||||||||||
Total | $ | 2 | $ | 1 | $ | 2 | $ | 3 | $ | — | $ | — | $ | 7 | ||||||||
Loans receivable: | ||||||||||||||||||||||
Balance at end of period | ||||||||||||||||||||||
Individually evaluated for impairment | $ | — | $ | 3 | $ | — | $ | 4 | $ | — | $ | — | $ | 7 | ||||||||
Collectively evaluated for impairment | — | 271 | — | 939 | — | — | 1,211 | |||||||||||||||
Loans acquired with deteriorated credit quality | 996 | 69 | 1,194 | 113 | — | — | 2,372 | |||||||||||||||
Total | $ | 996 | $ | 343 | $ | 1,194 | $ | 1,056 | $ | — | $ | — | $ | 3,590 | ||||||||
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Credit Quality
We monitor credit quality as indicated by various factors and utilize such information in our evaluation of the adequacy of the allowance for loan losses. The following sections discuss the various credit quality indicators that we consider.
Nonperforming loans
Our nonperforming loans consisted of the following at the dates indicated:
March 31, 2016 | December 31, 2015 | ||||||||||||||||||
Originated | Acquired | Total | Originated | Acquired | Total | ||||||||||||||
Commercial: | |||||||||||||||||||
Real estate | $ | 37 | $ | — | $ | 37 | $ | 44 | $ | — | $ | 44 | |||||||
Business | 72 | 1 | 73 | 56 | 1 | 58 | |||||||||||||
Total commercial | 109 | 1 | 110 | 101 | 1 | 102 | |||||||||||||
Consumer: | |||||||||||||||||||
Residential real estate | 30 | — | 30 | 32 | — | 32 | |||||||||||||
Home equity | 36 | 23 | 59 | 36 | 24 | 59 | |||||||||||||
Indirect auto | 17 | — | 17 | 15 | — | 15 | |||||||||||||
Other consumer | 5 | — | 5 | 5 | — | 5 | |||||||||||||
Total consumer | 88 | 23 | 111 | 87 | 24 | 111 | |||||||||||||
Total | $ | 197 | $ | 25 | $ | 222 | $ | 188 | $ | 25 | $ | 214 | |||||||
The table below provides information about the interest income that would have been recognized if our nonperforming loans had performed in accordance with terms for the periods indicated:
Three months ended | ||||||
March 31, | ||||||
2016 | 2015 | |||||
Additional interest income that would have been recorded if nonperforming loans had performed in accordance with original terms | $ | 3 | $ | 3 | ||
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Impaired loans
The following table provides information about our impaired originated loans including ending recorded investment, principal balance, and related allowance amount at the dates indicated. Loans with no related allowance for loan losses have adequate collateral securing their carrying value and in some circumstances have been charged down to their current carrying value based on the fair value of the collateral. The recorded investment of our impaired loans, less any related allowance for loan losses, was 68% and 64% of the loans’ unpaid principal balance at March 31, 2016 and December 31, 2015, respectively.
March 31, 2016 | December 31, 2015 | ||||||||||||||||||
Originated loans | Recorded investment | Unpaid principal balance | Related allowance | Recorded investment | Unpaid principal balance | Related allowance | |||||||||||||
With no related allowance recorded: | |||||||||||||||||||
Commercial: | |||||||||||||||||||
Real estate | $ | 13 | $ | 31 | $ | — | $ | 17 | $ | 35 | $ | — | |||||||
Business | 43 | 73 | — | 37 | 80 | — | |||||||||||||
Total commercial | 56 | 104 | — | 54 | 115 | — | |||||||||||||
Consumer: | |||||||||||||||||||
Residential real estate | 16 | 19 | — | 16 | 19 | — | |||||||||||||
Home equity | 12 | 16 | — | 12 | 15 | — | |||||||||||||
Indirect auto | 3 | 5 | — | 3 | 4 | — | |||||||||||||
Other consumer | 1 | 2 | — | 2 | 2 | — | |||||||||||||
Total consumer | 32 | 41 | — | 32 | 40 | — | |||||||||||||
Total | $ | 88 | $ | 145 | $ | — | $ | 86 | $ | 155 | $ | — | |||||||
With a related allowance recorded: | |||||||||||||||||||
Commercial: | |||||||||||||||||||
Real estate | $ | 28 | $ | 32 | $ | 3 | $ | 31 | $ | 38 | $ | 2 | |||||||
Business | 42 | 43 | 9 | 32 | 33 | 7 | |||||||||||||
Total commercial | 70 | 75 | 13 | 63 | 71 | 9 | |||||||||||||
Consumer: | |||||||||||||||||||
Residential real estate | 6 | 6 | — | 6 | 6 | — | |||||||||||||
Home equity | 5 | 5 | — | 5 | 5 | — | |||||||||||||
Indirect auto | 1 | 1 | — | 1 | 1 | — | |||||||||||||
Other consumer | 1 | 1 | — | 1 | 1 | — | |||||||||||||
Total consumer | 14 | 13 | — | 13 | 13 | — | |||||||||||||
Total | $ | 83 | $ | 88 | $ | 13 | $ | 76 | $ | 84 | $ | 10 | |||||||
Total | |||||||||||||||||||
Commercial: | |||||||||||||||||||
Real estate | $ | 40 | $ | 63 | $ | 3 | $ | 47 | $ | 72 | $ | 2 | |||||||
Business | 85 | 116 | 9 | 69 | 113 | 7 | |||||||||||||
Total commercial | 125 | 179 | 13 | 116 | 186 | 9 | |||||||||||||
Consumer: | |||||||||||||||||||
Residential real estate | 22 | 25 | — | 22 | 25 | — | |||||||||||||
Home equity | 17 | 21 | — | 17 | 20 | — | |||||||||||||
Indirect auto | 4 | 6 | — | 4 | 6 | — | |||||||||||||
Other consumer | 2 | 3 | — | 2 | 3 | — | |||||||||||||
Total consumer | 46 | 54 | — | 45 | 53 | — | |||||||||||||
Total | $ | 171 | $ | 233 | $ | 13 | $ | 162 | $ | 239 | $ | 10 | |||||||
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The following table provides information about our impaired acquired loans with no related allowance at the dates indicated. There were no impaired acquired loans with a related allowance at the dates indicated. The remaining credit mark is considered adequate to cover any loss on these balances.
March 31, 2016 | December 31, 2015 | ||||||||||||||||||
Acquired loans | Recorded investment | Unpaid principal balance | Related allowance | Recorded investment | Unpaid principal balance | Related allowance | |||||||||||||
Commercial: | |||||||||||||||||||
Real estate | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||
Business | — | — | — | — | — | — | |||||||||||||
Total commercial | — | — | — | — | — | — | |||||||||||||
Consumer: | |||||||||||||||||||
Residential real estate | — | — | — | — | — | — | |||||||||||||
Home equity | 4 | 6 | — | 4 | 6 | — | |||||||||||||
Other consumer | — | — | — | — | — | — | |||||||||||||
Total consumer | 4 | 6 | — | 4 | 6 | — | |||||||||||||
Total(1) | $ | 4 | $ | 6 | $ | — | $ | 4 | $ | 6 | $ | — | |||||||
(1) | Includes nonperforming purchased credit impaired loans. |
The following table provides information about our impaired originated loans including the average recorded investment and interest income recognized on impaired loans for the periods indicated:
Three months ended March 31, | |||||||||||||
2016 | 2015 | ||||||||||||
Originated loans | Average recorded investment | Interest income recognized | Average recorded investment | Interest income recognized | |||||||||
Commercial: | |||||||||||||
Real estate | $ | 43 | $ | — | $ | 77 | $ | — | |||||
Business | 104 | — | 78 | — | |||||||||
Total commercial | 147 | 1 | 155 | 1 | |||||||||
Consumer: | |||||||||||||
Residential real estate | 22 | — | 22 | — | |||||||||
Home equity | 17 | — | 6 | — | |||||||||
Indirect auto | 5 | — | 3 | — | |||||||||
Other consumer | 3 | — | 3 | — | |||||||||
Total consumer | 46 | — | 33 | — | |||||||||
Total | $ | 193 | $ | 1 | $ | 189 | $ | 1 | |||||
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The following table provides information about our impaired acquired loans including the average recorded investment and interest income recognized on impaired loans for the periods indicated:
Three months ended March 31, | |||||||||||||
2016 | 2015 | ||||||||||||
Acquired loans | Average recorded investment | Interest income recognized | Average recorded investment | Interest income recognized | |||||||||
Commercial: | |||||||||||||
Real estate | $ | — | $ | — | $ | — | $ | — | |||||
Business | — | — | 3 | — | |||||||||
Total commercial | — | — | 3 | — | |||||||||
Consumer: | |||||||||||||
Residential real estate | — | — | — | — | |||||||||
Home equity | 4 | — | 4 | — | |||||||||
Other consumer | — | — | — | — | |||||||||
Total consumer | 4 | — | 4 | — | |||||||||
Total(1) | $ | 4 | $ | — | $ | 7 | $ | — | |||||
(1) | Includes nonperforming purchased credit impaired loans. |
Period end nonperforming loans differed from the amount of total impaired loans as certain TDRs, which are considered impaired loans, were accruing interest because the borrower demonstrated a consistent repayment record. Also contributing to the difference are nonperforming commercial loans less than $1 million and nonperforming consumer loans, which are not considered impaired unless they have been modified in a TDR as they are evaluated collectively when determining the allowance for loan losses.
The following table is a reconciliation between nonperforming loans and impaired loans at the dates indicated:
Commercial | Consumer | Total | |||||||
March 31, 2016 | |||||||||
Nonperforming loans | $ | 110 | $ | 111 | $ | 222 | |||
Plus: Accruing TDRs | 49 | 14 | 64 | ||||||
Less: Smaller balance nonperforming loans evaluated collectively when determining the allowance for loan losses | (35 | ) | (75 | ) | (110 | ) | |||
Total impaired loans(1) | $ | 125 | $ | 50 | $ | 175 | |||
December 31, 2015: | |||||||||
Nonperforming loans | $ | 102 | $ | 111 | $ | 214 | |||
Plus: Accruing TDRs | 49 | 13 | 63 | ||||||
Less: Smaller balance nonperforming loans evaluated collectively when determining the allowance for loan losses | (35 | ) | (75 | ) | (110 | ) | |||
Total impaired loans(1) | $ | 116 | $ | 50 | $ | 166 | |||
(1) | Includes nonperforming purchased credit impaired loans. |
83
Credit Quality Indicators
The primary indicators of credit quality are delinquency status and our internal loan gradings for our commercial loan portfolio segment and delinquency status and current FICO scores for our consumer loan portfolio segment.
The following tables contain an aging analysis of our loans by class at the dates indicated:
30-59 days past due | 60-89 days past due | Greater than 90 days past due | Total past due | Current | Total loans receivable | Greater than 90 days and accruing (1) | |||||||||||||||
March 31, 2016 | |||||||||||||||||||||
Originated loans | |||||||||||||||||||||
Commercial: | |||||||||||||||||||||
Real estate | $ | 12 | $ | 2 | $ | 29 | $ | 43 | $ | 7,800 | $ | 7,843 | $ | — | |||||||
Business | 9 | 4 | 19 | 32 | 5,978 | 6,009 | — | ||||||||||||||
Total commercial | 21 | 6 | 48 | 75 | 13,778 | 13,852 | — | ||||||||||||||
Consumer: | |||||||||||||||||||||
Residential real estate | 3 | 1 | 19 | 22 | 2,354 | 2,376 | — | ||||||||||||||
Home equity | 2 | 1 | 22 | 26 | 2,118 | 2,143 | — | ||||||||||||||
Indirect auto | 15 | 3 | 5 | 24 | 2,441 | 2,464 | — | ||||||||||||||
Credit cards | 1 | 1 | 2 | 5 | 284 | 289 | 2 | ||||||||||||||
Other consumer | 2 | 1 | 4 | 6 | 230 | 237 | — | ||||||||||||||
Total consumer | 23 | 8 | 52 | 83 | 7,426 | 7,509 | 2 | ||||||||||||||
Total | $ | 44 | $ | 14 | $ | 100 | $ | 158 | $ | 21,204 | $ | 21,362 | $ | 2 | |||||||
Acquired loans | |||||||||||||||||||||
Commercial: | |||||||||||||||||||||
Real estate | $ | 3 | $ | 2 | $ | 15 | $ | 19 | $ | 763 | $ | 783 | $ | 15 | |||||||
Business | — | — | 1 | 2 | 164 | 165 | — | ||||||||||||||
Total commercial | 3 | 2 | 16 | 21 | 927 | 948 | 15 | ||||||||||||||
Consumer: | |||||||||||||||||||||
Residential real estate | 9 | 6 | 38 | 54 | 901 | 955 | 38 | ||||||||||||||
Home equity | 4 | 2 | 17 | 23 | 891 | 914 | 1 | ||||||||||||||
Total consumer | 13 | 8 | 55 | 76 | 1,792 | 1,868 | 40 | ||||||||||||||
Total | $ | 15 | $ | 10 | $ | 72 | $ | 97 | $ | 2,719 | $ | 2,817 | $ | 55 | |||||||
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30-59 days past due | 60-89 days past due | Greater than 90 days past due | Total past due | Current | Total loans receivable | Greater than 90 days and accruing (1) | |||||||||||||||
December 31, 2015 | |||||||||||||||||||||
Originated loans | |||||||||||||||||||||
Commercial: | |||||||||||||||||||||
Real estate | $ | 8 | $ | 2 | $ | 29 | $ | 39 | $ | 7,778 | $ | 7,817 | $ | — | |||||||
Business | 26 | 3 | 23 | 51 | 5,802 | 5,853 | — | ||||||||||||||
Total commercial | 34 | 5 | 52 | 90 | 13,580 | 13,670 | — | ||||||||||||||
Consumer: | |||||||||||||||||||||
Residential real estate | 5 | 1 | 20 | 26 | 2,323 | 2,349 | — | ||||||||||||||
Home equity | 3 | 2 | 22 | 26 | 2,107 | 2,133 | — | ||||||||||||||
Indirect auto | 20 | 4 | 6 | 30 | 2,364 | 2,393 | — | ||||||||||||||
Credit cards | 2 | 1 | 2 | 5 | 306 | 311 | 2 | ||||||||||||||
Other consumer | 2 | 1 | 3 | 6 | 239 | 245 | — | ||||||||||||||
Total consumer | 31 | 9 | 53 | 92 | 7,339 | 7,431 | 2 | ||||||||||||||
Total | $ | 64 | $ | 13 | $ | 104 | $ | 182 | $ | 20,919 | $ | 21,101 | $ | 3 | |||||||
Acquired loans | |||||||||||||||||||||
Commercial: | |||||||||||||||||||||
Real estate | $ | 2 | $ | 1 | $ | 20 | $ | 23 | $ | 812 | $ | 835 | $ | 20 | |||||||
Business | — | — | 1 | 2 | 159 | 160 | — | ||||||||||||||
Total commercial | 3 | 1 | 21 | 25 | 971 | 996 | 20 | ||||||||||||||
Consumer: | |||||||||||||||||||||
Residential real estate | 12 | 5 | 43 | 60 | 945 | 1,005 | 43 | ||||||||||||||
Home equity | 3 | 1 | 18 | 22 | 914 | 936 | 1 | ||||||||||||||
Total consumer | 15 | 6 | 61 | 82 | 1,859 | 1,941 | 45 | ||||||||||||||
Total | $ | 18 | $ | 7 | $ | 82 | $ | 107 | $ | 2,830 | $ | 2,937 | $ | 65 | |||||||
(1) | Includes credit card loans, loans that have matured and are in the process of collection, and acquired loans that were originally recorded at fair value upon acquisition. Acquired loans are considered to be accruing as we can reasonably estimate future cash flows on these acquired loans and we expect to fully collect the carrying value of these loans net of the allowance for acquired loan losses. Therefore, we are accreting the difference between the carrying value of these loans and their expected cash flows into interest income. |
85
Our internal loan risk assessment provides information about the financial health of our commercial borrowers and our risk of potential loss. The following tables present information about the credit quality of our commercial loan portfolio at the dates indicated:
Real estate | Business | Total | Percent of total | ||||||||
March 31, 2016 | |||||||||||
Originated loans: | |||||||||||
Pass | $ | 7,550 | $ | 5,617 | $ | 13,166 | 95.0 | % | |||
Criticized:(1) | |||||||||||
Accrual | 256 | 321 | 577 | 4.2 | |||||||
Nonaccrual | 37 | 72 | 109 | 0.8 | |||||||
Total criticized | 293 | 393 | 686 | 5.0 | |||||||
Total | $ | 7,843 | $ | 6,009 | $ | 13,852 | 100.0 | % | |||
Acquired loans: | |||||||||||
Pass | $ | 702 | $ | 131 | $ | 833 | 87.8 | % | |||
Criticized:(1) | |||||||||||
Accrual | 81 | 33 | 114 | 12.0 | |||||||
Nonaccrual | — | 1 | 1 | 0.2 | |||||||
Total criticized | 81 | 34 | 115 | 12.2 | |||||||
Total | $ | 783 | $ | 165 | $ | 948 | 100.0 | % | |||
December 31, 2015 | |||||||||||
Originated loans: | |||||||||||
Pass | $ | 7,510 | $ | 5,488 | $ | 12,998 | 95.1 | % | |||
Criticized:(1) | |||||||||||
Accrual | 262 | 308 | 571 | 4.2 | |||||||
Nonaccrual | 44 | 56 | 101 | 0.7 | |||||||
Total criticized | 307 | 365 | 672 | 4.9 | |||||||
Total | $ | 7,817 | $ | 5,853 | $ | 13,670 | 100.0 | % | |||
Acquired loans: | |||||||||||
Pass | $ | 748 | $ | 133 | $ | 881 | 88.5 | % | |||
Criticized:(1) | |||||||||||
Accrual | 87 | 26 | 113 | 11.4 | |||||||
Nonaccrual | — | 1 | 1 | 0.1 | |||||||
Total criticized | 87 | 27 | 114 | 11.5 | |||||||
Total | $ | 835 | $ | 160 | $ | 996 | 100.0 | % | |||
(1) | Includes special mention, substandard, doubtful, and loss, which are consistent with regulatory definitions, and as described in Item 1, “Business,” under “Asset Quality Review” in our Annual Report on 10-K for the year ended December 31, 2015. |
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Borrower FICO scores provide information about the credit quality of our consumer loan portfolio as they provide an indication as to the likelihood that a debtor will repay their debts. The scores are obtained from a nationally recognized consumer rating agency and are presented in the table below at the dates indicated:
Residential real estate | Home equity | Indirect auto | Credit cards | Other consumer | Total | Percent of total | ||||||||||||||
March 31, 2016 | ||||||||||||||||||||
Originated loans by refreshed FICO score: | ||||||||||||||||||||
Over 700 | $ | 2,090 | $ | 1,770 | $ | 1,737 | $ | 201 | $ | 154 | $ | 5,953 | 79.3 | % | ||||||
660-700 | 159 | 202 | 374 | 47 | 40 | 822 | 10.9 | |||||||||||||
620-660 | 61 | 84 | 186 | 22 | 20 | 374 | 5.0 | |||||||||||||
580-620 | 31 | 39 | 77 | 10 | 11 | 167 | 2.2 | |||||||||||||
Less than 580 | 32 | 46 | 91 | 7 | 11 | 187 | 2.5 | |||||||||||||
No score(1) | 3 | 2 | — | 1 | — | 7 | 0.1 | |||||||||||||
Total | $ | 2,376 | $ | 2,143 | $ | 2,464 | $ | 289 | $ | 237 | $ | 7,509 | 100.0 | % | ||||||
Acquired loans by refreshed FICO score: | ||||||||||||||||||||
Over 700 | $ | 642 | $ | 732 | $ | — | $ | — | $ | — | $ | 1,374 | 73.6 | % | ||||||
660-700 | 75 | 73 | — | — | — | 148 | 7.9 | |||||||||||||
620-660 | 52 | 42 | — | — | — | 94 | 5.0 | |||||||||||||
580-620 | 43 | 27 | — | — | — | 70 | 3.7 | |||||||||||||
Less than 580 | 48 | 25 | — | — | — | 73 | 3.9 | |||||||||||||
No score(1) | 95 | 15 | — | — | — | 110 | 5.9 | |||||||||||||
Total | $ | 955 | $ | 914 | $ | — | $ | — | $ | — | $ | 1,868 | 100.0 | % | ||||||
December 31, 2015 | ||||||||||||||||||||
Originated loans by refreshed FICO score: | ||||||||||||||||||||
Over 700 | $ | 2,084 | $ | 1,767 | $ | 1,700 | $ | 220 | $ | 161 | $ | 5,932 | 79.8 | % | ||||||
660-700 | 139 | 197 | 364 | 50 | 41 | 791 | 10.7 | |||||||||||||
620-660 | 60 | 85 | 177 | 23 | 21 | 365 | 4.9 | |||||||||||||
580-620 | 30 | 39 | 74 | 10 | 12 | 166 | 2.2 | |||||||||||||
Less than 580 | 31 | 44 | 78 | 7 | 10 | 169 | 2.3 | |||||||||||||
No score(1) | 4 | 2 | — | 2 | — | 8 | 0.1 | |||||||||||||
Total | $ | 2,349 | $ | 2,133 | $ | 2,393 | $ | 311 | $ | 245 | $ | 7,431 | 100.0 | % | ||||||
Acquired loans by refreshed FICO score: | ||||||||||||||||||||
Over 700 | $ | 682 | $ | 750 | $ | — | $ | — | $ | — | $ | 1,432 | 73.8 | % | ||||||
660-700 | 77 | 76 | — | — | — | 154 | 7.9 | |||||||||||||
620-660 | 59 | 42 | — | — | — | 100 | 5.2 | |||||||||||||
580-620 | 43 | 29 | — | — | — | 72 | 3.7 | |||||||||||||
Less than 580 | 44 | 24 | — | — | — | 68 | 3.5 | |||||||||||||
No score(1) | 100 | 16 | — | — | — | 115 | 5.9 | |||||||||||||
Total | $ | 1,005 | $ | 936 | $ | — | $ | — | $ | — | $ | 1,941 | 100.0 | % | ||||||
(1) | Primarily includes loans that are serviced by others for which refreshed FICO scores were not available as of the date indicated. |
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Troubled Debt Restructures
The following table details additional information about our TDRs at the dates indicated:
March 31, 2016 | December 31, 2015 | |||||
Aggregate recorded investment of impaired loans with terms modified through a troubled debt restructuring: | ||||||
Accruing interest | $ | 64 | $ | 63 | ||
Nonaccrual | 47 | 52 | ||||
Total troubled debt restructurings (1) | $ | 111 | $ | 115 | ||
(1) | Includes 101 and 102 acquired loans that were restructured with a recorded investment of $4 million and $4 million at March 31, 2016 and December 31, 2015, respectively. |
The modifications made to loans classified as TDRs typically consist of an extension of the payment terms, providing for a period with interest-only payments with deferred principal payments, rate reduction, or loans restructured in a Chapter 7 bankruptcy. We generally do not forgive principal when restructuring loans.
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The financial effects of our modifications are as follows for the periods indicated. There were no new commercial TDRs during the three months ended March 31, 2016.
Type of Concession | Count | Postmodification recorded investment(1) | Premodification allowance for loan losses | Postmodification allowance for loan losses | |||||||
Three months ended March 31, 2016 | |||||||||||
Consumer: | |||||||||||
Residential real estate | |||||||||||
Rate reduction | 2 | — | — | — | |||||||
Deferral of principal | 1 | — | — | — | |||||||
Extension of term and rate reduction | 2 | — | — | — | |||||||
Other | 3 | — | — | — | |||||||
Home equity | |||||||||||
Extension of term and rate reduction | 2 | — | — | — | |||||||
Chapter 7 Bankruptcy | 18 | 1 | — | — | |||||||
Indirect auto | |||||||||||
Chapter 7 Bankruptcy | 90 | 1 | — | — | |||||||
Other consumer | |||||||||||
Chapter 7 Bankruptcy | 3 | — | — | — | |||||||
Other | 1 | — | — | — | |||||||
Total consumer | 122 | 4 | — | — | |||||||
Three months ended March 31, 2015 | |||||||||||
Commercial: | |||||||||||
Commercial business | |||||||||||
Rate reduction | 2 | — | — | — | |||||||
Total commercial | 2 | — | — | — | |||||||
Consumer: | |||||||||||
Residential real estate | |||||||||||
Extension of term | 7 | 1 | — | — | |||||||
Extension of term and rate reduction | 4 | 1 | — | — | |||||||
Chapter 7 Bankruptcy | 5 | 1 | — | — | |||||||
Home equity | |||||||||||
Extension of term | 1 | — | — | — | |||||||
Extension of term and rate reduction | 1 | — | — | — | |||||||
Chapter 7 Bankruptcy | 23 | 1 | — | — | |||||||
Indirect auto | |||||||||||
Chapter 7 Bankruptcy | 53 | 1 | — | — | |||||||
Other consumer | |||||||||||
Chapter 7 Bankruptcy | 2 | — | — | — | |||||||
Total consumer | 96 | 5 | — | — | |||||||
Total | 98 | $ | 5 | $ | — | $ | — | ||||
1) Postmodification balances approximate premodification balances. The aggregate amount of charge-offs as a result of the restructurings was not significant for the three months ended March 31, 2016 or the three months ended March 31, 2015.
The recorded investment in loans modified as TDRs within 12 months of the balance sheet date and for which there was a payment default was not significant for the three months ended March 31, 2016 or the three months ended March 31, 2015.
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Residential Mortgage Banking
The following table provides information about our residential mortgage banking activities at the dates indicated:
March 31, | ||||||
2016 | 2015 | |||||
Mortgages serviced for others | $ | 4,041 | $ | 3,869 | ||
Mortgage servicing asset recorded for loans serviced for others, net | 38 | 37 | ||||
Note 4. Derivative Financial Instruments
We are a party to derivative financial instruments in the normal course of business to manage our own exposure to fluctuations in interest rates and to meet the needs of our customers. These financial instruments have been limited to interest rate swap agreements, which are entered into with counterparties that meet established credit standards and, where appropriate, contain master netting and collateral provisions protecting the party at risk. We believe that the credit risk inherent in all of our derivative contracts is minimal based on our credit standards and the netting and collateral provisions of the interest rate swap agreements.
Our derivative positions include both instruments that are designated as hedging instruments and instruments that are customer related and not designated in hedging relationships. The following table presents information regarding our derivative financial instruments at the dates indicated:
Asset derivatives | Liability derivatives | ||||||||||||
Notional amount | Fair value (1) | Notional amount | Fair value (2) | ||||||||||
March 31, 2016 | |||||||||||||
Derivatives designated as hedging instruments: | |||||||||||||
Interest rate swap agreements | $ | — | $ | — | $ | 263 | $ | 10 | |||||
Derivatives not designated as hedging instruments: | |||||||||||||
Interest rate swap agreements | 4,358 | 218 | 4,342 | 221 | |||||||||
Total derivatives | $ | 4,358 | $ | 218 | $ | 4,604 | $ | 230 | |||||
December 31, 2015 | |||||||||||||
Derivatives designated as hedging instruments: | |||||||||||||
Interest rate swap agreements | $ | 2 | $ | — | $ | 263 | $ | 4 | |||||
Derivatives not designated as hedging instruments: | |||||||||||||
Interest rate swap agreements | 4,221 | 123 | 4,224 | 124 | |||||||||
Total derivatives | $ | 4,224 | $ | 123 | $ | 4,487 | $ | 128 | |||||
(1) | Represents gross amounts, included in Other Assets in our Consolidated Statements of Condition. |
(2) | Represents gross amounts, included in Other Liabilities in our Consolidated Statements of Condition. |
All of our interest rate swaps for which we had master netting positions with the counterparty were in a liability position at March 31, 2016 and December 31, 2015. Accordingly, there was no offsetting in our Consolidated Statements of Condition at March 31, 2016 and December 31, 2015. We posted collateral for liability positions with a fair value of $316 million and $195 million at March 31, 2016 and December 31, 2015, respectively.
Derivatives designated in hedging relationships
We designate interest rate swap agreements used to manage changes in the fair value of loans due to interest rate changes as fair value hedges. We have designated the risk of changes in the fair value of loans attributable to changes in the benchmark rate as the hedged risk. Accordingly, changes to the fair value of the hedged items attributable to a change in credit risk are excluded from our assessment of hedge effectiveness. The change in fair value of the derivatives, including both the effective and ineffective portions, is recognized in earnings and, so long as our fair value hedging relationships remain highly effective, such change is offset by the gain or loss due to the change in fair value of the loans attributable to the hedged risk. The net impact of the fair value hedging relationships on net income was not significant for the three months ended March 31, 2016 and 2015.
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We have entered into interest rate swaps to reduce our exposure to variability in interest-related cash outflows attributable to changes in forecasted LIBOR based borrowings. These derivative instruments are designated as cash flow hedges. We have designated the risk of changes in the amount of interest payment cash flows to be made during the term of the borrowings attributable to changes in the benchmark rate as the hedged risk. Accordingly, changes to the amount of interest payment cash flows for the hedged transactions attributable to a change in credit risk are excluded from our assessment of hedge effectiveness. Our interest rate swaps designated as cash flow hedges have maturities that correspond to the maturity of the forecasted hedged borrowing. Any gain or loss associated with the effective portion of our cash flow hedges is recognized in other comprehensive income and is subsequently reclassified into earnings in the period during which the hedged forecasted transactions affects earnings. Any gain or loss associated with the ineffective portion of our cash flow hedges, including ineffectiveness, is recognized immediately in earnings. At March 31, 2016, there was a $3 million loss recognized in accumulated other comprehensive income related to these swaps.
At March 31, 2016, there was a $4 million loss recognized in accumulated other comprehensive income related to borrowings that were previously hedged using interest rate swaps that were classified as cash flow hedges. This amount will be reclassified out of accumulated other comprehensive income and into earnings over the remaining life of the hedged borrowings as an adjustment of yield.
The following table presents certain information about amounts recognized for our derivative financial instruments designated in cash flow hedging relationships for the periods indicated.
Three months ended March 31, | ||||||
Cash Flow Hedges | 2016 | 2015 | ||||
Interest rate swap agreements: | ||||||
Amount of (loss) on derivatives recognized in other comprehensive income, net of tax | $ | (2 | ) | $ | (1 | ) |
Derivatives not designated in hedging relationships
In addition to our derivatives designated in hedging relationships, we act as an interest rate swap counterparty for certain commercial borrowers in the normal course of servicing our customers, which are accounted for at fair value. We manage our exposure to such interest rate swaps by entering into corresponding and offsetting interest rate swaps with third parties that mirror the terms of the interest rate swaps we have with the commercial borrowers. These positions (referred to as “customer swaps”) directly offset each other and our exposure is the positive fair value of the derivatives due to changes in credit risk of our commercial borrowers and third parties. We recognized revenue for this service that we provide our customers of $2 million and $3 million for the three months ended March 31, 2016 and 2015, respectively, included in Capital Markets income in our Consolidated Statements of Income.
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Note 5. Earnings Per Share
The following table is a computation of our basic and diluted earnings per share using the two-class method for the periods indicated:
Three months ended March 31, | ||||||
2016 | 2015 | |||||
Net income available to common stockholders | $ | 41 | $ | 44 | ||
Less income allocable to unvested restricted stock awards | — | — | ||||
Net income allocable to common stockholders | $ | 40 | $ | 44 | ||
Weighted average common shares outstanding: | ||||||
Total shares issued | 366 | 366 | ||||
Unvested restricted stock awards | (3 | ) | (3 | ) | ||
Treasury shares | (11 | ) | (13 | ) | ||
Total basic weighted average common shares outstanding | 351 | 351 | ||||
Effect of dilutive stock-based awards | 3 | 2 | ||||
Total diluted weighted average common shares outstanding | 354 | 353 | ||||
Basic earnings per common share | $ | 0.11 | $ | 0.12 | ||
Diluted earnings per common share | $ | 0.11 | $ | 0.12 | ||
Anti-dilutive stock-based awards excluded from the diluted weighted average common share calculations | 3 | 11 | ||||
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Note 6. Other Comprehensive Income
The following table presents the activity in our Other Comprehensive Income for the periods indicated:
Three months ended March 31, | |||||||||
Pretax | Income taxes | Net | |||||||
2016 | |||||||||
Securities available for sale: | |||||||||
Net unrealized holding gains arising during the period | $ | 17 | $ | 6 | $ | 11 | |||
Net unrealized holding gains on securities transferred between available for sale and held to maturity: | |||||||||
Amortization of net unrealized holding gains to income during the period(1) | (2 | ) | (1 | ) | (1 | ) | |||
Interest rate swaps designated as cash flow hedges: | |||||||||
Net unrealized losses arising during the period | (3 | ) | (1 | ) | (2 | ) | |||
Amortization of net loss related to pension and post-retirement plans | 1 | — | — | ||||||
Total other comprehensive income | $ | 14 | $ | 5 | $ | 8 | |||
2015 | |||||||||
Securities available for sale: | |||||||||
Net unrealized holding gains arising during the period | $ | 26 | $ | 10 | $ | 16 | |||
Net unrealized holding gains on securities transferred between available for sale and held to maturity: | |||||||||
Amortization of net unrealized holding gains to income during the period(1) | (2 | ) | (1 | ) | (2 | ) | |||
Interest rate swaps designated as cash flow hedges: | |||||||||
Net unrealized losses arising during the period | (2 | ) | (1 | ) | (1 | ) | |||
Net unrealized losses on interest rate swaps designated as cash flow hedges | (1 | ) | (1 | ) | (1 | ) | |||
Amortization of net loss related to pension and post-retirement plans | 1 | — | 1 | ||||||
Total other comprehensive income | $ | 23 | $ | 8 | $ | 15 | |||
(1) | Included in Interest income on investment securities and other in our Consolidated Statements of Income. |
The following table presents the activity in our accumulated other comprehensive income (loss) for the periods indicated:
Net unrealized (losses) gains on securities available for sale | Net unrealized gains (losses) on securities transferred from available for sale to held to maturity | Unrealized losses on interest rate swaps designated as cash flow hedges | Pension and postretirement plans | Total | |||||||||||
Balance, January 1, 2016 | $ | (10 | ) | $ | 6 | $ | (6 | ) | $ | (39 | ) | $ | (48 | ) | |
Period change, net of tax | 11 | (1 | ) | (2 | ) | — | 8 | ||||||||
Balance, March 31, 2016 | $ | 1 | $ | 5 | $ | (8 | ) | $ | (38 | ) | $ | (39 | ) | ||
Balance, January 1, 2015 | $ | 52 | $ | 12 | $ | (5 | ) | $ | (51 | ) | $ | 9 | |||
Period change, net of tax | 16 | (2 | ) | (1 | ) | 1 | 15 | ||||||||
Balance, March 31, 2015 | $ | 68 | $ | 11 | $ | (6 | ) | $ | (50 | ) | $ | 23 | |||
During the next twelve months, we expect to reclassify $1 million of pre-tax net loss on previous cash flow hedges from accumulated other comprehensive income to earnings.
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Note 7. Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Current accounting guidance establishes a fair value hierarchy based on the transparency of inputs participants use to price an asset or liability. The fair value hierarchy prioritizes these inputs into the following three levels:
Level 1 Inputs—Unadjusted quoted prices in active markets for identical assets or liabilities that are available at the measurement date.
Level 2 Inputs—Inputs, other than quoted prices included within Level 1, that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.), or inputs that are derived principally from or corroborated by market data through correlation or other means.
Level 3 Inputs—Unobservable inputs for determining the fair value of the asset or liability and are based on the entity’s own estimates about the assumptions that market participants would use to price the asset or liability.
A financial instrument’s categorization within the valuation hierarchy is based on the lowest level of input that is significant to the fair value measurement. A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.
Our valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While we believe our valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Securities Available for Sale
The fair value estimates of available for sale securities are based on quoted market prices of identical securities, where available (Level 1). However, as quoted prices of identical securities are not often available, the fair value estimate for almost our entire investment portfolio is based on quoted market prices of similar securities, adjusted for differences between the securities (Level 2). Adjustments may include amounts to reflect differences in underlying collateral, interest rates, estimated prepayment speeds, and counterparty credit quality. Where sufficient information is not available from the pricing services to produce a reliable valuation, we estimate fair value based on either broker quotes or internally developed models. We determine the fair value using third party pricing services, including brokers. As of March 31, 2016, none of our investment securities were priced utilizing broker quotes. For details regarding our pricing process and sources, refer to Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Income-Critical Accounting Policies and Estimates.”
Loans held for sale
We have elected the fair value option for certain residential real estate loans held for sale as we believe the fair value measurement of such loans reduces certain timing differences in our Statement of Income and better aligns with our management of the portfolio from a business perspective. This election is made at the time of origination, on a loan by loan basis, and is irrevocable. The secondary market for securities backed by similar loan types is actively traded, which provides readily observable market pricing to be used as input for the estimate for the fair value of our loans. Accordingly, we have classified this fair value measurement as Level 2. Interest income on these loans is recognized in Interest Income—Loans and Leases in our Consolidated Statements of Income.
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The table below presents information about our loans held for sale for which we elected the fair value option at the dates indicated:
March 31, 2016 | December 31, 2015 | |||||
Fair value carrying amount | $ | 23 | $ | 43 | ||
Aggregate unpaid principal balance | 22 | 42 | ||||
Fair value carrying amount less aggregate unpaid principal balance | $ | 1 | $ | 1 | ||
Additionally, included in loans held for sale on our Consolidated Statements of Condition are $4 million and $3 million of commercial loans held for sale that are carried at the lower of cost or market at March 31, 2016 and December 31, 2015, respectively.
Derivatives
We obtain fair value measurements of our interest rate swaps from a third party. The fair value measurements are determined using a market standard methodology of netting discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). Variable cash payments (or receipts) are based on an expectation of future interest rates derived from observable market interest rate curves. Credit valuation adjustments are incorporated to appropriately reflect our nonperformance risk as well as the counterparty’s nonperformance risk. The impact of netting and any applicable credit enhancements, such as bilateral collateral postings, thresholds, mutual puts, and guarantees are also considered in the fair value measurement.
The fair value of our interest rate swaps was estimated using primarily Level 2 inputs. However, Level 3 inputs were used to determine credit valuation adjustments, such as estimates of current credit spreads to evaluate the likelihood of default. We have determined that the impact of these credit valuation adjustments was not significant to the overall valuation of our interest rate swaps. Therefore, we have classified the entire fair value of our interest rate swaps in Level 2 of the fair value hierarchy.
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Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following tables summarize our assets and liabilities measured at fair value on a recurring basis at the dates indicated:
Fair Value Measurements | ||||||||||||
Total | Level 1 | Level 2 | Level 3 | |||||||||
March 31, 2016 | ||||||||||||
Assets: | ||||||||||||
Investment securities available for sale: | ||||||||||||
Debt securities: | ||||||||||||
States and political subdivisions | $ | 354 | $ | — | $ | 354 | $ | — | ||||
U.S. Treasury | 66 | 66 | — | — | ||||||||
U.S. government sponsored enterprises | 167 | — | 167 | — | ||||||||
Corporate | 807 | — | 803 | 4 | ||||||||
Total debt securities | 1,394 | 66 | 1,324 | 4 | ||||||||
Mortgage-backed securities: | ||||||||||||
Residential mortgage-backed securities: | ||||||||||||
Government National Mortgage Association | 26 | — | 26 | — | ||||||||
Federal National Mortgage Association | 66 | — | 66 | — | ||||||||
Federal Home Loan Mortgage Corporation | 82 | — | 82 | — | ||||||||
Collateralized mortgage obligations: | ||||||||||||
Government National Mortgage Association | 120 | — | 120 | — | ||||||||
Federal National Mortgage Association | 825 | — | 825 | — | ||||||||
Federal Home Loan Mortgage Corporation | 436 | — | 436 | — | ||||||||
Total collateralized mortgage obligations | 1,380 | — | 1,380 | — | ||||||||
Total residential mortgage-backed securities | 1,554 | — | 1,554 | — | ||||||||
Commercial mortgage-backed securities, non-agency issued | 949 | — | 949 | — | ||||||||
Total mortgage-backed securities | 2,502 | — | 2,502 | — | ||||||||
Collateralized loan obligations, non-agency issued | 1,242 | — | 1,242 | — | ||||||||
Asset-backed securities collateralized by: | ||||||||||||
Student loans | 163 | — | 163 | — | ||||||||
Credit cards | 20 | — | 20 | — | ||||||||
Auto loans | 44 | — | 44 | — | ||||||||
Other | 52 | — | 52 | — | ||||||||
Total asset-backed securities | 279 | — | 279 | — | ||||||||
Other | 22 | 21 | 1 | — | ||||||||
Total securities available for sale | 5,439 | 87 | 5,348 | 4 | ||||||||
Loans held for sale (1) | 23 | — | 23 | — | ||||||||
Derivatives | 218 | — | 218 | — | ||||||||
Total assets | $ | 5,680 | $ | 87 | $ | 5,589 | $ | 4 | ||||
Liabilities: | ||||||||||||
Derivatives | $ | 230 | $ | — | $ | 230 | $ | — | ||||
(1) | Represents loans for which we have elected the fair value option. |
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Fair Value Measurements | ||||||||||||
Total | Level 1 | Level 2 | Level 3 | |||||||||
December 31, 2015 | ||||||||||||
Assets: | ||||||||||||
Investment securities available for sale: | ||||||||||||
Debt securities: | ||||||||||||
States and political subdivisions | $ | 379 | $ | — | $ | 379 | $ | — | ||||
U.S. Treasury | 55 | 55 | — | — | ||||||||
U.S. government sponsored enterprises | 269 | — | 269 | — | ||||||||
Corporate | 801 | — | 797 | 4 | ||||||||
Total debt securities | 1,504 | 55 | 1,445 | 4 | ||||||||
Mortgage-backed securities: | ||||||||||||
Residential mortgage-backed securities: | ||||||||||||
Government National Mortgage Association | 26 | — | 26 | — | ||||||||
Federal National Mortgage Association | 71 | — | 71 | — | ||||||||
Federal Home Loan Mortgage Corporation | 87 | — | 87 | — | ||||||||
Collateralized mortgage obligations: | ||||||||||||
Government National Mortgage Association | 94 | — | 94 | — | ||||||||
Federal National Mortgage Association | 730 | — | 730 | — | ||||||||
Federal Home Loan Mortgage Corporation | 355 | — | 355 | — | ||||||||
Total collateralized mortgage obligations | 1,179 | — | 1,179 | — | ||||||||
Total residential mortgage-backed securities | 1,364 | — | 1,364 | — | ||||||||
Commercial mortgage-backed securities, non-agency issued | 1,085 | — | 1,085 | — | ||||||||
Total mortgage-backed securities | 2,449 | — | 2,449 | — | ||||||||
Collateralized loan obligations, non-agency issued | 1,186 | — | 1,186 | — | ||||||||
Asset-backed securities collateralized by: | ||||||||||||
Student loans | 171 | — | 171 | — | ||||||||
Credit cards | 20 | — | 20 | — | ||||||||
Auto loans | 66 | — | 66 | — | ||||||||
Other | 53 | — | 53 | — | ||||||||
Total asset-backed securities | 310 | — | 310 | — | ||||||||
Other | 22 | 21 | 1 | — | ||||||||
Total securities available for sale | 5,471 | 76 | 5,391 | 4 | ||||||||
Loans held for sale (1) | 43 | — | 43 | — | ||||||||
Derivatives | 123 | — | 123 | — | ||||||||
Total assets | $ | 5,637 | $ | 76 | $ | 5,557 | $ | 4 | ||||
Liabilities: | ||||||||||||
Derivatives | $ | 128 | $ | — | $ | 128 | $ | — | ||||
(1) | Represents loans for which we have elected the fair value option. |
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Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
The following table summarizes our assets and liabilities measured at fair value on a nonrecurring basis for the periods indicated:
Fair Value Measurements | Total gains | ||||||||||||||
Total | Level 1 | Level 2 | Level 3 | (losses) | |||||||||||
Three months ended March 31, 2016 | |||||||||||||||
Collateral dependent impaired loans | $ | 8 | $ | — | $ | 8 | $ | — | $ | — | |||||
Three months ended March 31, 2015 | |||||||||||||||
Collateral dependent impaired loans | $ | 18 | $ | — | $ | 9 | $ | 9 | $ | (2 | ) | ||||
Collateral Dependent Impaired Loans
We record nonrecurring fair value adjustments to the carrying value of collateral dependent impaired loans when establishing the allowance for loan losses. Such amounts are generally based on the fair value of the underlying collateral supporting the loan less estimated costs to sell the collateral. When the fair value of such collateral, less costs to sell, is less than the carrying value of the loan, a specific allowance or charge off is recorded through a provision for credit losses. Real estate collateral is typically valued using independent appraisals that we review for acceptability, or other indications of value based on recent comparable sales of similar properties or assumptions generally observable in the marketplace and the related nonrecurring fair value measurements have been classified as Level 2. Under certain circumstances significant adjustments may be made to the appraised value due to the lack of direct marketplace information. Such adjustments are made as determined necessary in the judgment of our experienced senior credit officers to reflect current market conditions and current operating results for the specific collateral. When the fair value of collateral dependent impaired loans is based on appraisals containing significant adjustments, such collateral dependent impaired loans are classified as Level 3. We obtain new appraisals from an approved appraiser, in accordance with Interagency Appraisal and Evaluation Guidelines and internal policy. Appraisals or evaluations for assets securing substandard rated loans are usually completed within 90 days of the downgrade. An appraisal may be obtained more frequently when volatile or unusual market conditions exist that could affect the ultimate realization of the value of the real estate collateral.
During the three months ended March 31, 2016, we recorded a decrease of $0.1 million to our specific allowance as a result of adjusting the fair value of the collateral for certain collateral dependent impaired loans to $8 million at March 31, 2016, which is included in our provision for credit losses. During the three months ended March 31, 2015 we recorded an increase of $2 million to our specific allowance as a result of adjusting the fair value of the collateral for certain collateral dependent impaired loans to $18 million at March 31, 2015, which is included in our provision for credit losses.
Level 3 Assets
Due to the lack of observable market data, we have classified our trust preferred securities, which are included in corporate debt securities and amounted to $4 million at March 31, 2016 and December 31, 2015, in Level 3 of the fair value hierarchy. There were no changes in our trust preferred securities during the three months ended March 31, 2016 and 2015. As of March 31, 2016 and December 31, 2015, the fair values of our trust preferred securities are based upon third party pricing without adjustment.
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Fair Value of Financial Instruments
The carrying value and estimated fair value of our financial instruments, including those that are not measured and reported at fair value on a recurring basis or nonrecurring basis, at the dates indicated are as follows:
March 31, 2016 | December 31, 2015 | ||||||||||||||||||
Carrying value | Estimated fair value | Fair value level | Carrying value | Estimated fair value | Fair value level | ||||||||||||||
Financial assets: | |||||||||||||||||||
Cash and cash equivalents | $ | 383 | $ | 383 | 1 | $ | 672 | $ | 672 | 1 | |||||||||
Investment securities available for sale | 5,439 | 5,439 | 1,2,3 | (1) | 5,471 | 5,471 | 1,2,3 | (1) | |||||||||||
Investment securities held to maturity | 6,721 | 6,821 | 2 | 6,388 | 6,378 | 2 | |||||||||||||
Federal Home Loan Bank and Federal Reserve Bank common stock | 376 | 376 | 2 | 410 | 410 | 2 | |||||||||||||
Loans held for sale | 27 | 27 | 2 | 46 | 46 | 2 | |||||||||||||
Loans and leases, net | 23,926 | 24,170 | 2,3 | (2) | 23,796 | 23,749 | 2,3 | (2) | |||||||||||
Derivatives | 123 | 123 | 2 | 123 | 123 | 2 | |||||||||||||
Accrued interest receivable | 117 | 117 | 2 | 104 | 104 | 2 | |||||||||||||
Financial liabilities: | |||||||||||||||||||
Deposits | $ | 29,561 | $ | 29,574 | 2 | $ | 28,701 | $ | 28,705 | 2 | |||||||||
Borrowings | 5,864 | 5,884 | 2 | 6,657 | 6,666 | 2 | |||||||||||||
Derivatives | 128 | 128 | 2 | 128 | 128 | 2 | |||||||||||||
Accrued interest payable | 19 | 19 | 2 | 14 | 14 | 2 | |||||||||||||
(1) | For a detailed breakout of our investment securities available for sale, refer to our table of recurring fair value measurements. |
(2) | Loans and leases classified as level 2 are made up of $8 million of collateral dependent impaired loans without significant adjustments made to appraised values at March 31, 2016 and December 31, 2015. All other loans and leases are classified as level 3. |
Our fair value estimates are based on our existing on and off balance sheet financial instruments without attempting to estimate the value of any anticipated future business and the value of assets and liabilities that are not considered financial instruments. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on our fair value estimates and have not been considered in these estimates.
Our fair value estimates are made as of the dates indicated, based on relevant market information and information about the financial instruments, including our judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in our assumptions could significantly affect the estimates. Our fair value estimates, methods, and assumptions are set forth below for each type of financial instrument. The method of estimating the fair value of the financial instruments disclosed in the table above does not necessarily incorporate the exit price concept used to record financial instruments at fair value in our Consolidated Statements of Condition or when measuring goodwill for impairment.
Cash and Cash Equivalents
The carrying value of our cash and cash equivalents approximates fair value because these instruments have original maturities of three months or less.
Investment Securities
The fair value estimates of securities are based on quoted market prices of identical securities, where available.
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However, as quoted prices of identical securities are not often available, the fair value estimate for almost our entire investment portfolio is based on quoted market prices of similar securities, adjusted for differences between the securities. Adjustments may include amounts to reflect differences in underlying collateral, interest rates, estimated prepayment speeds, and counterparty credit quality.
Federal Home Loan Bank and Federal Reserve Bank Common Stock
The carrying value of our Federal Home Loan Bank and Federal Reserve Bank common stock, which are non-marketable equity investments, approximates fair value.
Loans and Leases
Our variable rate loans reprice as the associated rate index changes. The calculation of fair value for our variable rate loans is driven by the comparison between the loan’s margin and the prevailing margin observed in the market at the time of the valuation. Any caps and floors embedded in the loan’s pricing structure are also incorporated into the fair value. We calculated the fair value of our fixed-rate loans and leases by discounting scheduled cash flows through the estimated maturity using credit adjusted period end origination rates. Our estimate of maturity is based on the contractual cash flows adjusted for prepayment estimates based on current economic and lending conditions.
Accrued Interest Receivable and Accrued Interest Payable
The carrying value of accrued interest receivable and accrued interest payable approximates fair value.
Deposits
The fair value of our deposits with no stated maturity, such as savings and checking, as well as mortgagors’ payments held in escrow, is equal to the amount payable on demand. The fair value of our certificates of deposit is based on the discounted value of contractual cash flows, using the period end rates offered for deposits of similar remaining maturities.
Borrowings
The fair value of our borrowings is calculated by discounting scheduled cash flows through the estimated maturity using period end market rates for borrowings of similar remaining maturities.
Commitments
The fair value of our commitments to extend credit, standby letters of credit, and financial guarantees are not included in the above table as the carrying value generally approximates fair value. These instruments generate fees that approximate those currently charged to originate similar commitments.
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Note 8. Segment Information
We have two business segments: banking and financial services. The banking segment includes all of our retail and commercial banking operations. The financial services segment includes our insurance operations. Substantially all of our assets relate to the banking segment. Transactions between our banking and financial services segments are eliminated in consolidation.
Selected financial information for our segments follows for the periods indicated:
Banking | Financial services | Consolidated total | |||||||
Three months ended March 31, 2016 | |||||||||
Net interest income | $ | 268 | $ | — | $ | 268 | |||
Provision for credit losses | 23 | — | 23 | ||||||
Net interest income after provision for credit losses | 245 | — | 245 | ||||||
Noninterest income | 65 | 15 | 79 | ||||||
Amortization of intangibles | 3 | — | 4 | ||||||
Other noninterest expense | 239 | 13 | 251 | ||||||
Income before income taxes | 67 | 2 | 69 | ||||||
Income tax expense | 20 | 1 | 20 | ||||||
Net income | $ | 47 | $ | 1 | $ | 48 | |||
Three months ended March 31, 2015 | |||||||||
Net interest income | $ | 263 | $ | — | $ | 263 | |||
Provision for credit losses | 13 | — | 13 | ||||||
Net interest income after provision for credit losses | 250 | — | 250 | ||||||
Noninterest income | 67 | 16 | 82 | ||||||
Amortization of intangibles | 6 | 1 | 6 | ||||||
Other noninterest expense | 241 | 13 | 255 | ||||||
Income before income taxes | 70 | 2 | 71 | ||||||
Income tax expense | 19 | 1 | 20 | ||||||
Net income | $ | 50 | $ | 1 | $ | 51 | |||
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Note 9. Condensed Parent Company Only Financial Statements
The following condensed statements of condition, the related condensed statements of income, and cash flows should be read in conjunction with our Consolidated Financial Statements and related notes:
Condensed Statements of Condition | March 31, 2016 | December 31, 2015 | ||||
Assets: | ||||||
Cash and cash equivalents | $ | 386 | $ | 394 | ||
Investment in subsidiary | 4,448 | 4,418 | ||||
Deferred taxes | 31 | 33 | ||||
Other assets | 16 | 12 | ||||
Total assets | $ | 4,880 | $ | 4,857 | ||
Liabilities and Stockholders’ Equity: | ||||||
Accounts payable and other liabilities | $ | 19 | $ | 19 | ||
Borrowings | 712 | 712 | ||||
Stockholders’ equity | 4,150 | 4,126 | ||||
Total liabilities and stockholders’ equity | $ | 4,880 | $ | 4,857 | ||
Three months ended March 31, | ||||||
Condensed Statements of Income | 2016 | 2015 | ||||
Dividends received from subsidiary | $ | 40 | $ | — | ||
Interest expense | 12 | 12 | ||||
Net interest income | 28 | (12 | ) | |||
Noninterest expense | 9 | 5 | ||||
Income (loss) before income taxes and undisbursed income of subsidiary | 19 | (17 | ) | |||
Income tax benefit | (8 | ) | (7 | ) | ||
Income (loss) before undisbursed income of subsidiary | 27 | (11 | ) | |||
Undisbursed income of subsidiary | 21 | 62 | ||||
Net income | 48 | 51 | ||||
Preferred stock dividend | 8 | 8 | ||||
Net income available to common stockholders | $ | 41 | $ | 44 | ||
Net income | $ | 48 | $ | 51 | ||
Other comprehensive income(1) | 8 | 15 | ||||
Total comprehensive income | $ | 57 | $ | 66 | ||
(1) | See Consolidated Statements of Comprehensive Income for other comprehensive loss detail. |
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Three months ended March 31, | ||||||
Condensed Statements of Cash Flows | 2016 | 2015 | ||||
Cash flows from operating activities: | ||||||
Net income | $ | 48 | $ | 51 | ||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||
Undisbursed income of subsidiaries | (21 | ) | (62 | ) | ||
Stock-based compensation expense | 4 | 2 | ||||
Deferred income tax benefit | (2 | ) | (2 | ) | ||
Decrease in other assets | — | 2 | ||||
Decrease in other liabilities | — | (1 | ) | |||
Net cash provided by (used in) operating activities | 29 | (9 | ) | |||
Cash flows from financing activities: | ||||||
Return of capital from subsidiary | — | 45 | ||||
Dividends paid on preferred stock | (8 | ) | (8 | ) | ||
Dividends paid on common stock | (28 | ) | (28 | ) | ||
Net cash (used in) provided by financing activities | (36 | ) | 9 | |||
Net decrease in cash and cash equivalents | (7 | ) | — | |||
Cash and cash equivalents at beginning of period | 394 | 383 | ||||
Cash and cash equivalents at end of period | $ | 386 | $ | 383 | ||
ITEM 3. | Quantitative and Qualitative Disclosures About Market Risk |
A discussion regarding our management of market risk is included in the section entitled “Interest Rate and Market Risk” included within Part I, Item 2 of this Form 10-Q.
ITEM 4. | Controls and Procedures |
In accordance with Rule 13a-15(b) of the Exchange Act, we carried out an evaluation as of March 31, 2016 under the supervision and with the participation of our management, including our Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act. Based on that evaluation, our Principal Executive Officer and Principal Financial Officer have concluded that our disclosure controls and procedures were effective as of March 31, 2016.
During the quarter ended March 31, 2016, there have been no changes in our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
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PART II—OTHER INFORMATION
ITEM 1. | Legal Proceedings |
The nature of our business ordinarily results in a variety of pending as well as threatened legal proceedings, in the form of regulatory/governmental investigations as well as private, civil litigation and arbitration proceedings. The private, civil litigations range from individual actions involving a single plaintiff to putative class action lawsuits with potentially thousands of class members. Investigations involve both formal and informal proceedings, by both government agencies and self-regulatory bodies. The legal proceedings are at varying stages of adjudication, arbitration or investigation and involve a variety of claims.
On at least a quarterly basis, we assess our liabilities and contingencies in connection with outstanding legal proceedings utilizing the latest information available. Where it is probable that we will incur a loss and the amount of the loss can be reasonably estimated, we record a liability in our consolidated financial statements. These reserves may be increased or decreased to reflect any relevant developments on a quarterly basis. Where a loss is not probable or the amount of the loss is not estimable, we have not accrued reserves, consistent with applicable accounting guidance.
Since the announcement of the Merger, eight shareholders of the Company have filed separate putative class action complaints challenging the Merger. Six complaints were filed in New York State Supreme Court, Erie County (the "Court"); these complaints were subsequently consolidated into a single action entitled In re First Niagara Financial Group, Inc. Shareholders Litigation, Case No. 812908/2015 (the “New York Action”). One complaint was filed in the Court of Chancery, Delaware, and one was filed in United States District Court, District of Delaware. The complaints were brought against the Company, each of its directors individually, and KeyCorp. All of the lawsuits seek, among other things, to enjoin or rescind the Merger, and to obtain an award of costs and attorneys’ fees and damages for the alleged fiduciary breaches.
On March 8, 2016, First Niagara, each of its directors and KeyCorp entered into a memorandum of understanding with plaintiffs regarding the settlement of the New York Action. The memorandum of understanding reflects the plaintiffs’ and the defendants’ agreement in principle to settle the New York Action and release the defendants from all claims relating to the Merger, subject to the approval of the Court. Under the terms of the agreement in principle, plaintiffs’ counsel also has reserved the right to seek an award of attorneys’ fees and expenses. If the Court approves the settlement contemplated by the agreement in principle, the New York action will be dismissed with prejudice.
Also on or about March 8, 2016, defendants and the plaintiff in the matter pending before the Delaware Court of Chancery agreed to stay the proceedings in light of the settlement of the New York Action. On or about March 14, 2016, the plaintiff and defendants in the Delaware federal court action reached an agreement to settle that action, and on March 31, 2016, the Court entered an order of dismissal.
None of the settlements will affect the merger consideration to be paid to First Niagara’s stockholders in connection with the Merger.
First Niagara, KeyCorp and the other defendants deny all of the allegations made by plaintiffs in each of the actions and believe the disclosures in the Joint Proxy Statement are adequate under the law. Nevertheless, First Niagara, KeyCorp and the other defendants have agreed to settle the New York Action and the action brought in the District of Delaware in order to avoid the costs, disruption, and distraction of further litigation.
Based on information currently available to us, and on advice of counsel, management does not believe that judgments or settlements arising from all current pending or threatened legal proceedings will have a material adverse effect on our consolidated financial position. We note, however, that the outcomes of these legal proceedings are often unpredictable and the actual results of these proceedings, including their impact on the Company, cannot be determined with precision or at all. As a result, the outcome of a particular proceeding or a combination of proceedings, whether pending or threatened, may be material to our results of operations or cash
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flow for a particular period, depending upon our results for the period when the matter is resolved or its impact otherwise occurs.
ITEM 1A. | Risk Factors |
There are no material changes to the risk factors as previously discussed in Item 1A to Part I of our 2015 Annual Report on Form 10-K.
ITEM 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
a) | Not applicable. |
b) | Not applicable. |
c) | We did not repurchase any shares of our common stock during the first quarter of 2016. |
ITEM 3. | Defaults Upon Senior Securities |
Not applicable.
ITEM 4. | Mine Safety Disclosures |
Not applicable.
ITEM 5. | Other Information |
(a) Not applicable.
(b) Not applicable.
ITEM 6. | Exhibits |
The following exhibits are filed herewith:
Exhibits | |
10.1 | Second Amendment to the First Niagara Financial Group Separation Pay Plan (As Amended and Restated Effective July 1, 2013)* |
12 | Ratio of Earnings to Fixed Charges |
31.1 | Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
31.2 | Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
32 | Certification of Principal Executive Officer and Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
101 | Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Statements of Condition, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income (Loss), (iv) the Consolidated Statements of Changes in Stockholders’ Equity, (v) the Consolidated Statements of Cash Flows, and (vi) the Notes to Consolidated Financial Statements tagged as blocks of text and in detail |
*Management contract or compensatory plan or arrangement.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
FIRST NIAGARA FINANCIAL GROUP, INC. | ||
Date: April 29, 2016 | By: | /s/ Gary M. Crosby |
Gary M. Crosby | ||
President and Chief Executive Officer | ||
(Principal Executive Officer) | ||
Date: April 29, 2016 | By: | /s/ Gregory W. Norwood |
Gregory W. Norwood | ||
Senior Executive Vice President and Chief Financial Officer | ||
(Principal Financial Officer) | ||
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