UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20459
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2011, or
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File No. 0-10587
FULTON FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
PENNSYLVANIA | 23-2195389 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
One Penn Square, P.O. Box 4887, Lancaster, Pennsylvania | 17604 | |
(Address of principal executive offices) | (Zip Code) |
(717) 291-2411
(Registrants 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 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer | x | Accelerated filer | ¨ | |||
Non-accelerated filer | ¨ | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date:
Common Stock, $2.50 Par Value 199,795,000 shares outstanding as of July 29, 2011.
FORM 10-Q FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2011
INDEX
2
CONSOLIDATED BALANCE SHEETS
(in thousands, except per-share data)
June
30 2011 (unaudited) |
December 31 2010 |
|||||||
ASSETS |
||||||||
Cash and due from banks |
$ | 284,691 | $ | 198,954 | ||||
Interest-bearing deposits with other banks |
124,967 | 33,297 | ||||||
Loans held for sale |
47,133 | 83,940 | ||||||
Investment securities: |
||||||||
Held to maturity (estimated fair value of $7,038 in 2011 and $7,818 in 2010) |
6,990 | 7,751 | ||||||
Available for sale |
2,656,054 | 2,853,733 | ||||||
Loans, net of unearned income |
11,852,491 | 11,933,307 | ||||||
Less: Allowance for loan losses |
(266,683 | ) | (274,271 | ) | ||||
Net Loans |
11,585,808 | 11,659,036 | ||||||
Premises and equipment |
207,177 | 208,016 | ||||||
Accrued interest receivable |
51,387 | 53,841 | ||||||
Goodwill |
535,798 | 535,518 | ||||||
Intangible assets |
10,111 | 12,461 | ||||||
Other assets |
457,004 | 628,707 | ||||||
Total Assets |
$ | 15,967,120 | $ | 16,275,254 | ||||
LIABILITIES |
||||||||
Deposits: |
||||||||
Noninterest-bearing |
$ | 2,445,008 | $ | 2,194,988 | ||||
Interest-bearing |
9,817,887 | 10,193,593 | ||||||
Total Deposits |
12,262,895 | 12,388,581 | ||||||
Short-term borrowings: |
||||||||
Federal funds purchased |
166,179 | 267,844 | ||||||
Other short-term borrowings |
380,402 | 406,233 | ||||||
Total Short-Term Borrowings |
546,581 | 674,077 | ||||||
Accrued interest payable |
29,444 | 33,333 | ||||||
Other liabilities |
149,354 | 179,424 | ||||||
Federal Home Loan Bank advances and long-term debt |
1,025,537 | 1,119,450 | ||||||
Total Liabilities |
14,013,811 | 14,394,865 | ||||||
SHAREHOLDERS EQUITY |
||||||||
Common stock, $2.50 par value, 600 million shares authorized, 215.6 million shares issued in 2011 and 215.4 million shares issued in 2010 |
538,923 | 538,492 | ||||||
Additional paid-in capital |
1,421,626 | 1,420,127 | ||||||
Retained earnings |
210,671 | 158,453 | ||||||
Accumulated other comprehensive income: |
||||||||
Unrealized gains on investment securities not other-than-temporarily impaired |
37,227 | 22,354 | ||||||
Unrealized non-credit related losses on other-than-temporarily impaired debt securities |
(747 | ) | (2,355 | ) | ||||
Unrecognized pension and postretirement plan costs |
(4,438 | ) | (4,414 | ) | ||||
Unamortized effective portions of losses on forward-starting interest rate swaps |
(3,022 | ) | (3,090 | ) | ||||
Accumulated Other Comprehensive Income |
29,020 | 12,495 | ||||||
Treasury stock, 16.2 million shares in 2011 and 16.3 million shares in 2010, at cost |
(246,931 | ) | (249,178 | ) | ||||
Total Shareholders Equity |
1,953,309 | 1,880,389 | ||||||
Total Liabilities and Shareholders Equity |
$ | 15,967,120 | $ | 16,275,254 | ||||
See Notes to Consolidated Financial Statements
3
FULTON FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(in thousands, except per-share data)
Three Months Ended June 30 |
Six Months Ended June 30 |
|||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
INTEREST INCOME |
||||||||||||||||
Loans, including fees |
$ | 149,751 | $ | 157,628 | $ | 299,247 | $ | 315,162 | ||||||||
Investment securities: |
||||||||||||||||
Taxable |
20,749 | 25,146 | 42,556 | 53,295 | ||||||||||||
Tax-exempt |
3,146 | 3,348 | 6,321 | 6,943 | ||||||||||||
Dividends |
696 | 660 | 1,379 | 1,389 | ||||||||||||
Loans held for sale |
492 | 667 | 992 | 1,223 | ||||||||||||
Other interest income |
101 | 231 | 134 | 256 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total Interest Income |
174,935 | 187,680 | 350,629 | 378,268 | ||||||||||||
INTEREST EXPENSE |
||||||||||||||||
Deposits |
21,775 | 31,819 | 45,061 | 65,557 | ||||||||||||
Short-term borrowings |
168 | 390 | 422 | 939 | ||||||||||||
Long-term debt |
12,347 | 16,313 | 24,938 | 34,105 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total Interest Expense |
34,290 | 48,522 | 70,421 | 100,601 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net Interest Income |
140,645 | 139,158 | 280,208 | 277,667 | ||||||||||||
Provision for credit losses |
36,000 | 40,000 | 74,000 | 80,000 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net Interest Income After Provision for Credit Losses |
104,645 | 99,158 | 206,208 | 197,667 | ||||||||||||
OTHER INCOME |
||||||||||||||||
Service charges on deposit accounts |
14,332 | 15,482 | 27,637 | 29,749 | ||||||||||||
Other service charges and fees |
12,709 | 11,469 | 24,191 | 21,634 | ||||||||||||
Investment management and trust services |
9,638 | 8,655 | 18,842 | 16,743 | ||||||||||||
Mortgage banking income |
6,049 | 3,899 | 11,512 | 8,048 | ||||||||||||
Other |
4,979 | 4,503 | 9,400 | 8,317 | ||||||||||||
Total other-than-temporary impairment losses |
(71 | ) | (4,334 | ) | (1,092 | ) | (9,585 | ) | ||||||||
Less: Portion of (gain) loss recognized in other comprehensive income (before taxes) |
(322 | ) | 836 | (592 | ) | 1,110 | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net other-than-temporary impairment losses |
(393 | ) | (3,498 | ) | (1,684 | ) | (8,475 | ) | ||||||||
Net gains on sale of investment securities |
58 | 4,402 | 3,634 | 7,156 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net investment securities gains (losses) |
(335 | ) | 904 | 1,950 | (1,319 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total Other Income |
47,372 | 44,912 | 93,532 | 83,172 | ||||||||||||
OTHER EXPENSES |
||||||||||||||||
Salaries and employee benefits |
56,070 | 54,654 | 110,378 | 106,999 | ||||||||||||
Net occupancy expense |
10,874 | 10,519 | 22,240 | 22,169 | ||||||||||||
Equipment expense |
3,377 | 2,663 | 6,509 | 5,754 | ||||||||||||
FDIC insurance expense |
3,264 | 5,136 | 8,018 | 10,090 | ||||||||||||
Data processing |
3,214 | 3,311 | 6,586 | 6,728 | ||||||||||||
Professional fees |
3,102 | 3,035 | 5,951 | 5,581 | ||||||||||||
Other real estate owned and repossession expense |
2,575 | 1,876 | 4,545 | 4,556 | ||||||||||||
Software |
1,972 | 1,706 | 4,004 | 3,320 | ||||||||||||
Marketing |
1,863 | 2,271 | 4,699 | 4,101 | ||||||||||||
Intangible amortization |
1,172 | 1,341 | 2,350 | 2,655 | ||||||||||||
Other |
14,995 | 14,593 | 28,761 | 29,174 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total Other Expenses |
102,478 | 101,105 | 204,041 | 201,127 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income Before Income Taxes |
49,539 | 42,965 | 95,699 | 79,712 | ||||||||||||
Income taxes |
13,154 | 11,283 | 25,529 | 20,550 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net Income |
36,385 | 31,682 | 70,170 | 59,162 | ||||||||||||
Preferred stock dividends and discount accretion |
0 | (5,066 | ) | 0 | (10,131 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net Income Available to Common Shareholders |
$ | 36,385 | $ | 26,616 | $ | 70,170 | $ | 49,031 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
PER COMMON SHARE: |
||||||||||||||||
Net income (basic) |
$ | 0.18 | $ | 0.14 | $ | 0.35 | $ | 0.27 | ||||||||
Net income (diluted) |
0.18 | 0.14 | 0.35 | 0.27 | ||||||||||||
Cash dividends |
0.05 | 0.03 | 0.09 | 0.06 |
See Notes to Consolidated Financial Statements
4
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY AND COMPREHENSIVE INCOME (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2011 AND 2010
Common Stock | Additional | Retained Earnings |
Accumulated Other |
Treasury Stock |
Total | |||||||||||||||||||||||||||
Preferred Stock |
Shares Outstanding |
Amount | Paid-in Capital |
Comprehensive Income |
||||||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||||||
Balance at December 31, 2010 |
$ | 0 | 199,050 | $ | 538,492 | $ | 1,420,127 | $ | 158,453 | $ | 12,495 | $ | (249,178 | ) | $ | 1,880,389 | ||||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||||||
Net income |
70,170 | 70,170 | ||||||||||||||||||||||||||||||
Other comprehensive income |
16,525 | 16,525 | ||||||||||||||||||||||||||||||
Total comprehensive income |
86,695 | |||||||||||||||||||||||||||||||
Stock issued, including related tax benefits |
320 | 431 | 398 | 2,247 | 3,076 | |||||||||||||||||||||||||||
Stock-based compensation awards |
1,101 | 1,101 | ||||||||||||||||||||||||||||||
Common stock cash dividends - $0.09 per share |
(17,952 | ) | (17,952 | ) | ||||||||||||||||||||||||||||
Balance at June 30, 2011 |
$ | 0 | 199,370 | $ | 538,923 | $ | 1,421,626 | $ | 210,671 | $ | 29,020 | $ | (246,931 | ) | $ | 1,953,309 | ||||||||||||||||
Balance at December 31, 2009 |
$ | 370,290 | 176,364 | $ | 482,491 | $ | 1,257,730 | $ | 71,999 | $ | 7,458 | $ | (253,486 | ) | $ | 1,936,482 | ||||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||||||
Net income |
59,162 | 59,162 | ||||||||||||||||||||||||||||||
Other comprehensive income |
27,104 | 27,104 | ||||||||||||||||||||||||||||||
Total comprehensive income |
86,266 | |||||||||||||||||||||||||||||||
Stock issued, including related tax benefits |
22,099 | 54,879 | 171,929 | 2,199 | 229,007 | |||||||||||||||||||||||||||
Stock-based compensation awards |
611 | 611 | ||||||||||||||||||||||||||||||
Preferred stock discount accretion |
719 | (719 | ) | 0 | ||||||||||||||||||||||||||||
Preferred stock cash dividends |
(9,412 | ) | (9,412 | ) | ||||||||||||||||||||||||||||
Common stock cash dividends - $0.06 per share |
(11,743 | ) | (11,743 | ) | ||||||||||||||||||||||||||||
Balance at June 30, 2010 |
$ | 371,009 | 198,463 | $ | 537,370 | $ | 1,430,270 | $ | 109,287 | $ | 34,562 | $ | (251,287 | ) | $ | 2,231,211 | ||||||||||||||||
See Notes to Consolidated Financial Statements
5
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
Six Months Ended June 30 |
||||||||
2011 | 2010 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
Net Income |
$ | 70,170 | $ | 59,162 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Provision for credit losses |
74,000 | 80,000 | ||||||
Depreciation and amortization of premises and equipment |
10,462 | 10,261 | ||||||
Net amortization of investment securities premiums |
1,999 | 1,187 | ||||||
Investment securities (gains) losses |
(1,950 | ) | 1,319 | |||||
Net decrease (increase) in loans held for sale |
36,807 | (8,120 | ) | |||||
Amortization of intangible assets |
2,350 | 2,655 | ||||||
Stock-based compensation |
1,101 | 611 | ||||||
Decrease in accrued interest receivable |
2,454 | 3,752 | ||||||
Decrease (increase) in other assets |
22,955 | (256 | ) | |||||
Decrease in accrued interest payable |
(3,889 | ) | (3,304 | ) | ||||
(Decrease) increase in other liabilities |
(11,566 | ) | 3,236 | |||||
Total adjustments |
134,723 | 91,341 | ||||||
Net cash provided by operating activities |
204,893 | 150,503 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||
Proceeds from sales of securities available for sale |
416,480 | 276,691 | ||||||
Proceeds from maturities of securities held to maturity |
160 | 227 | ||||||
Proceeds from maturities of securities available for sale |
279,841 | 388,152 | ||||||
Purchase of securities held to maturity |
(14 | ) | (122 | ) | ||||
Purchase of securities available for sale |
(356,323 | ) | (245,875 | ) | ||||
Increase in short-term investments |
(91,670 | ) | (417,096 | ) | ||||
Net increase in loans |
(49 | ) | (28,136 | ) | ||||
Net purchases of premises and equipment |
(9,623 | ) | (11,357 | ) | ||||
Net cash provided by (used in) investing activities |
238,802 | (37,516 | ) | |||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||
Net increase in demand and savings deposits |
229,071 | 523,628 | ||||||
Net decrease in time deposits |
(354,757 | ) | (276,070 | ) | ||||
Decrease in short-term borrowings |
(127,496 | ) | (410,606 | ) | ||||
Additions to long-term debt |
0 | 45,000 | ||||||
Repayments of long-term debt |
(93,913 | ) | (220,085 | ) | ||||
Net proceeds from issuance of stock |
3,076 | 229,007 | ||||||
Dividends paid |
(13,939 | ) | (19,998 | ) | ||||
Net cash used in financing activities |
(357,958 | ) | (129,124 | ) | ||||
Net Increase (Decrease) in Cash and Due From Banks |
85,737 | (16,137 | ) | |||||
Cash and Due From Banks at Beginning of Period |
198,954 | 284,508 | ||||||
Cash and Due From Banks at End of Period |
$ | 284,691 | $ | 268,371 | ||||
Supplemental Disclosures of Cash Flow Information |
||||||||
Cash paid during the period for: |
||||||||
Interest |
$ | 74,310 | $ | 103,905 | ||||
Income taxes |
7,469 | 24,039 |
See Notes to Consolidated Financial Statements
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE A Basis of Presentation
The accompanying unaudited consolidated financial statements of Fulton Financial Corporation (the Corporation) have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the amounts of assets and liabilities as of the date of the financial statements as well as revenues and expenses during the period. Actual results could differ from those estimates. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six-month periods ended June 30, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011. The Corporation evaluates subsequent events through the date of filing with the Securities and Exchange Commission (SEC).
NOTE B Net Income Per Common Share and Other Comprehensive Income
The Corporations basic net income per common share is calculated as net income available to common shareholders divided by the weighted average number of common shares outstanding. Net income available to common shareholders is calculated as net income less accrued dividends and discount accretion related to preferred stock.
For diluted net income per common share, net income available to common shareholders is divided by the weighted average number of common shares outstanding plus the incremental number of shares added as a result of converting common stock equivalents, calculated using the treasury stock method. The Corporations common stock equivalents consist of outstanding stock options, restricted stock and common stock warrants. As of June 30, 2011, there were no outstanding common stock warrants.
A reconciliation of weighted average common shares outstanding used to calculate basic net income per common share and diluted net income per common share follows.
Three months
ended June 30 |
Six months
ended June 30 |
|||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(in thousands) | ||||||||||||||||
Weighted average shares outstanding (basic) |
198,772 | 190,221 | 198,686 | 183,236 | ||||||||||||
Effect of dilutive securities |
755 | 606 | 721 | 557 | ||||||||||||
Weighted average shares outstanding (diluted) |
199,527 | 190,827 | 199,407 | 183,793 | ||||||||||||
For the three and six months ended June 30, 2011, 4.6 million stock options were excluded from the diluted net income per share computation as their effect would have been anti-dilutive. For the three and six months ended June 30, 2010, 4.9 million and 5.2 million stock options, respectively, were excluded from the diluted net income per share computation as their effects would have been anti-dilutive.
7
The following table presents the components of other comprehensive income:
Six months ended June 30 |
||||||||
2011 | 2010 | |||||||
(in thousands) | ||||||||
Unrealized gain on securities (net of a $9.2 million and $15.2 million tax effect in 2011 and 2010, respectively) |
$ | 17,019 | $ | 28,277 | ||||
Non-credit related unrealized gain (loss) on other-than-temporarily impaired debt securities (net of a $392,000 and $1.2 million tax effect in 2011 and 2010, respectively) |
729 | (2,137 | ) | |||||
Unrealized gain on derivative financial instruments (net of a $36,000 tax effect in 2011 and 2010) (1) |
68 | 68 | ||||||
(Accretion)/amortization of net unrecognized pension and postretirement items (net of a $12,000 and $20,000 tax effect in 2011 and 2010, respectively) |
(24 | ) | 38 | |||||
Reclassification adjustment for securities (gains) losses included in net income (net of $682,000 tax expense in 2011 and $461,000 tax benefit in 2010) |
(1,267 | ) | 858 | |||||
Other comprehensive income |
$ | 16,525 | $ | 27,104 | ||||
(1) | Amounts represent the amortization of the effective portions of losses on forward-starting interest rate swaps, designated as cash flow hedges and entered into in prior years in connection with the issuance of fixed-rate debt. The total amount recorded as a reduction to accumulated other comprehensive income upon settlement of these derivatives is being amortized to interest expense over the life of the related securities using the effective interest method. The amount of net losses in accumulated other comprehensive income that will be reclassified into earnings during the next twelve months is expected to be approximately $135,000. |
NOTE C Investment Securities
The following tables present the amortized cost and estimated fair values of investment securities:
Held to Maturity at June 30, 2011 |
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Estimated Fair Value |
||||||||||||
(in thousands) | ||||||||||||||||
U.S. Government sponsored agency securities |
$ | 6,014 | $ | 0 | $ | (7 | ) | $ | 6,007 | |||||||
State and municipal securities |
346 | 0 | 0 | 346 | ||||||||||||
Mortgage-backed securities |
630 | 55 | 0 | 685 | ||||||||||||
$ | 6,990 | $ | 55 | $ | (7 | ) | $ | 7,038 | ||||||||
Available for Sale at June 30, 2011 |
||||||||||||||||
Equity securities |
$ | 126,841 | $ | 3,761 | $ | (1,641 | ) | $ | 128,961 | |||||||
U.S. Government securities |
1,324 | 0 | 0 | 1,324 | ||||||||||||
U.S. Government sponsored agency securities |
4,858 | 135 | (1 | ) | 4,992 | |||||||||||
State and municipal securities |
345,942 | 9,939 | (255 | ) | 355,626 | |||||||||||
Corporate debt securities |
131,535 | 5,689 | (8,969 | ) | 128,255 | |||||||||||
Collateralized mortgage obligations |
968,785 | 25,370 | (173 | ) | 993,982 | |||||||||||
Mortgage-backed securities |
753,353 | 35,163 | (744 | ) | 787,772 | |||||||||||
Auction rate securities |
267,339 | 708 | (12,905 | ) | 255,142 | |||||||||||
$ | 2,599,977 | $ | 80,765 | $ | (24,688 | ) | $ | 2,656,054 | ||||||||
8
Held to Maturity at December 31, 2010 |
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Estimated Fair Value |
||||||||||||
(in thousands) | ||||||||||||||||
U.S. Government sponsored agency securities |
$ | 6,339 | $ | 0 | $ | (1 | ) | $ | 6,338 | |||||||
State and municipal securities |
346 | 0 | 0 | 346 | ||||||||||||
Mortgage-backed securities |
1,066 | 68 | 0 | 1,134 | ||||||||||||
$ | 7,751 | $ | 68 | $ | (1 | ) | $ | 7,818 | ||||||||
Available for Sale at December 31, 2010 |
||||||||||||||||
Equity securities |
$ | 133,570 | $ | 3,872 | $ | (974 | ) | $ | 136,468 | |||||||
U.S. Government securities |
1,649 | 0 | 0 | 1,649 | ||||||||||||
U.S. Government sponsored agency securities |
4,888 | 172 | (2 | ) | 5,058 | |||||||||||
State and municipal securities |
345,053 | 6,003 | (1,493 | ) | 349,563 | |||||||||||
Corporate debt securities |
137,101 | 3,808 | (16,123 | ) | 124,786 | |||||||||||
Collateralized mortgage obligations |
1,085,613 | 23,457 | (5,012 | ) | 1,104,058 | |||||||||||
Mortgage-backed securities |
843,446 | 31,080 | (3,054 | ) | 871,472 | |||||||||||
Auction rate securities |
271,645 | 892 | (11,858 | ) | 260,679 | |||||||||||
$ | 2,822,965 | $ | 69,284 | $ | (38,516 | ) | $ | 2,853,733 | ||||||||
Available for sale equity securities include restricted investment securities issued by the Federal Home Loan Bank (FHLB) and the Federal Reserve Bank totaling $88.6 million and $96.4 million as of June 30, 2011 and December 31, 2010, respectively.
The amortized cost and estimated fair values of debt securities as of June 30, 2011, by contractual maturity, are shown in the following table. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Held to Maturity | Available for Sale | |||||||||||||||
Amortized Cost |
Estimated Fair Value |
Amortized Cost |
Estimated Fair Value |
|||||||||||||
(in thousands) | ||||||||||||||||
Due in one year or less |
$ | 6,181 | $ | 6,174 | $ | 80,963 | $ | 81,194 | ||||||||
Due from one year to five years |
179 | 179 | 49,609 | 51,521 | ||||||||||||
Due from five years to ten years |
0 | 0 | 136,802 | 143,210 | ||||||||||||
Due after ten years |
0 | 0 | 483,624 | 469,414 | ||||||||||||
6,360 | 6,353 | 750,998 | 745,339 | |||||||||||||
Collateralized mortgage obligations |
0 | 0 | 968,785 | 993,982 | ||||||||||||
Mortgage-backed securities |
630 | 685 | 753,353 | 787,772 | ||||||||||||
$ | 6,990 | $ | 7,038 | $ | 2,473,136 | $ | 2,527,093 | |||||||||
9
The following table presents information related to the Corporations gains and losses on the sales of equity and debt securities, and losses recognized for the other-than-temporary impairment of investments:
Gross Realized Gains |
Gross Realized Losses |
Other-than- temporary Impairment Losses |
Net Gains (Losses) |
|||||||||||||
(in thousands) | ||||||||||||||||
Three months ended June 30, 2011: |
||||||||||||||||
Equity securities |
$ | 43 | $ | 0 | $ | (34 | ) | $ | 9 | |||||||
Debt securities |
16 | (1 | ) | (359 | ) | (344 | ) | |||||||||
Total |
$ | 59 | $ | (1 | ) | $ | (393 | ) | $ | (335 | ) | |||||
Three months ended June 30, 2010: |
||||||||||||||||
Equity securities |
$ | 14 | $ | 0 | $ | (509 | ) | $ | (495 | ) | ||||||
Debt securities |
4,401 | (13 | ) | (2,989 | ) | 1,399 | ||||||||||
Total |
$ | 4,415 | $ | (13 | ) | $ | (3,498 | ) | $ | 904 | ||||||
Six months ended June 30, 2011: |
||||||||||||||||
Equity securities |
$ | 48 | $ | 0 | $ | (331 | ) | $ | (283 | ) | ||||||
Debt securities |
3,605 | (19 | ) | (1,353 | ) | 2,233 | ||||||||||
Total |
$ | 3,653 | $ | (19 | ) | $ | (1,684 | ) | $ | 1,950 | ||||||
Six months ended June 30, 2010: |
||||||||||||||||
Equity securities |
$ | 850 | $ | 0 | $ | (1,333 | ) | $ | (483 | ) | ||||||
Debt securities |
6,324 | (18 | ) | (7,142 | ) | (836 | ) | |||||||||
Total |
$ | 7,174 | $ | (18 | ) | $ | (8,475 | ) | $ | (1,319 | ) | |||||
The other-than-temporary impairment charges for equity securities during the three and six months ended June 30, 2011 and 2010, respectively, were for investments in stocks of financial institutions. Other-than-temporary impairment charges related to financial institution stocks were due to the severity and duration of the declines in fair values of certain bank stock holdings, in conjunction with managements assessment of the near-term prospects of each specific issuer. As of June 30, 2011, after other-than-temporary impairment charges, the financial institutions stock portfolio had a cost basis of $31.2 million and a fair value of $33.3 million.
The credit related other-than-temporary impairment charges for debt securities during the three and six months ended June 30, 2011 and 2010, were for investments in pooled trust preferred securities issued by financial institutions. Other-than-temporary impairment charges related to pooled trust preferred securities were determined based on an expected cash flows model.
10
The following table presents a summary of the cumulative credit related other-than-temporary impairment charges, recognized as components of earnings, for pooled trust preferred securities still held by the Corporation:
Three months ended June 30 | Six months ended June 30 | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(in thousands) | ||||||||||||||||
Balance of cumulative credit losses on pooled trust preferred securities, beginning of period |
$ | (28,517 | ) | $ | (19,765 | ) | $ | (27,560 | ) | $ | (15,612 | ) | ||||
Additions for credit losses recorded which were not previously recognized as components of earnings |
(359 | ) | (2,989 | ) | (1,353 | ) | (7,142 | ) | ||||||||
Reductions for increases in cash flows expected to be collected that are recognized over the remaining life of the security |
0 | 0 | 37 | 0 | ||||||||||||
Balance of cumulative credit losses on pooled trust preferred securities, end of period |
$ | (28,876 | ) | $ | (22,754 | ) | $ | (28,876 | ) | $ | (22,754 | ) | ||||
The following table presents the gross unrealized losses and estimated fair values of investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2011:
Less than 12 months | 12 months or longer | Total | ||||||||||||||||||||||
Estimated Fair Value |
Unrealized Losses |
Estimated Fair Value |
Unrealized Losses |
Estimated Fair Value |
Unrealized Losses |
|||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
U.S. Government sponsored agency securities |
$ | 5,377 | $ | (7 | ) | $ | 187 | $ | (1 | ) | $ | 5,564 | $ | (8 | ) | |||||||||
State and municipal securities |
31,090 | (254 | ) | 401 | (1 | ) | 31,491 | (255 | ) | |||||||||||||||
Corporate debt securities |
4,900 | (105 | ) | 46,505 | (8,864 | ) | 51,405 | (8,969 | ) | |||||||||||||||
Collateralized mortgage obligations |
102,430 | (173 | ) | 0 | 0 | 102,430 | (173 | ) | ||||||||||||||||
Mortgage-backed securities |
66,829 | (744 | ) | 0 | 0 | 66,829 | (744 | ) | ||||||||||||||||
Auction rate securities |
56,746 | (1,550 | ) | 175,166 | (11,355 | ) | 231,912 | (12,905 | ) | |||||||||||||||
Total debt securities |
267,372 | (2,833 | ) | 222,259 | (20,221 | ) | 489,631 | (23,054 | ) | |||||||||||||||
Equity securities |
11,584 | (1,138 | ) | 1,690 | (503 | ) | 13,274 | (1,641 | ) | |||||||||||||||
$ | 278,956 | $ | (3,971 | ) | $ | 223,949 | $ | (20,724 | ) | $ | 502,905 | $ | (24,695 | ) | ||||||||||
For its investments in equity securities, most notably its investments in stocks of financial institutions, management evaluates the near-term prospects of the issuers in relation to the severity and duration of the impairment. Based on that evaluation and the Corporations ability and intent to hold those investments for a reasonable period of time sufficient for a recovery of fair value, the Corporation does not consider those investments with unrealized holding losses as of June 30, 2011 to be other-than-temporarily impaired.
The unrealized holding losses on investments in student loan auction rate securities, also known as auction rate certificates (ARCs), are attributable to liquidity issues resulting from the failure of periodic auctions. Fulton Financial Advisors (FFA), the investment management and trust division of the Corporations Fulton Bank, N.A. subsidiary, held ARCs for some of its customers accounts. FFA had previously sold ARCs to customers as short-term investments with fair values that could be derived based on periodic auctions under normal market conditions. During 2008 and 2009, the Corporation purchased ARCs from customers due to the failure of these periodic auctions, which made these previously short-term investments illiquid.
11
As of June 30, 2011, approximately $205 million, or 80%, of the ARCs were rated above investment grade, with approximately $156 million, or 61%, AAA rated. Approximately $50 million, or 20%, of ARCs were rated below investment grade by at least one ratings agency or not rated. Of this amount, approximately $29 million, or 59%, of the student loans underlying the ARCs have principal payments which are guaranteed by the Federal government. In total, approximately $225 million, or 89%, of the student loans underlying the ARCs have principal payments which are guaranteed by the Federal government. As of June 30, 2011, all ARCs were current and making scheduled interest payments. Because the Corporation does not have the intent to sell and does not believe it will more likely than not be required to sell any of these securities prior to a recovery of their fair value to amortized cost, the Corporation does not consider these investments to be other-than-temporarily impaired as of June 30, 2011.
The Corporations collateralized mortgage obligations and mortgage-backed securities have contractual terms that generally do not permit the issuer to settle the securities at a price less than the amortized cost of the investment. Because the decline in market value of these securities is attributable to changes in interest rates and not credit quality, and because the Corporation does not have the intent to sell and does not believe it will more likely than not be required to sell any of these securities prior to a recovery of their fair value to amortized cost, the Corporation does not consider these investments to be other-than-temporarily impaired as of June 30, 2011.
The following table presents the amortized cost and estimated fair values of corporate debt securities:
June 30, 2011 | December 31, 2010 | |||||||||||||||
Amortized cost |
Estimated fair value |
Amortized cost |
Estimated fair value |
|||||||||||||
(in thousands) | ||||||||||||||||
Single-issuer trust preferred securities |
$ | 87,338 | $ | 82,785 | $ | 91,257 | $ | 81,789 | ||||||||
Subordinated debt |
35,051 | 37,527 | 34,995 | 35,915 | ||||||||||||
Pooled trust preferred securities |
6,636 | 5,433 | 8,295 | 4,528 | ||||||||||||
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Corporate debt securities issued by financial institutions |
129,025 | 125,745 | 134,547 | 122,232 | ||||||||||||
Other corporate debt securities |
2,510 | 2,510 | 2,554 | 2,554 | ||||||||||||
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Available for sale corporate debt securities |
$ | 131,535 | $ | 128,255 | $ | 137,101 | $ | 124,786 | ||||||||
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The Corporations investments in single-issuer trust preferred securities had an unrealized loss of $4.6 million at June 30, 2011. The Corporation did not record any other-than-temporary impairment charges for single-issuer trust preferred securities during the three or six months ended June 30, 2011 or 2010, respectively. The Corporation held 13 single-issuer trust preferred securities that were rated below investment grade by at least one ratings agency, with an amortized cost of $40.1 million and an estimated fair value of $39.8 million at June 30, 2011. The majority of the single-issuer trust preferred securities rated below investment grade were rated BB or Baa. Single-issuer trust preferred securities with an amortized cost of $11.8 million and an estimated fair value of $10.3 million at June 30, 2011 were not rated by any ratings agency.
The Corporation holds ten pooled trust preferred securities. As of June 30, 2011, nine of these securities, with an amortized cost of $6.0 million and an estimated fair value of $4.9 million, were rated below investment grade by at least one ratings agency, with ratings ranging from C to Ca. For each of the nine pooled trust preferred securities rated below investment grade, the class of securities held by the Corporation is below the most senior tranche, with the Corporations interests being subordinate to other investors in the pool. The Corporation determines the fair value of pooled trust preferred securities based on quotes provided by third-party brokers.
The amortized cost of pooled trust preferred securities is the purchase price of the securities, net of cumulative credit related other-than-temporary impairment charges, determined using an expected cash flows model. The most significant input to the expected cash flows model was the expected payment deferral rate for each pooled trust preferred security. The Corporation evaluates the financial metrics, such as capital ratios
12
and non-performing asset ratios, of the individual financial institution issuers that comprise each pooled trust preferred security to estimate its expected deferral rate. The actual weighted average cumulative defaults and deferrals as a percentage of original collateral were approximately 38% as of June 30, 2011. The discounted cash flow modeling for pooled trust preferred securities held by the Corporation as of June 30, 2011 assumed, on average, an additional 19% expected deferral rate.
Based on managements evaluations, corporate debt securities with a fair value of $128.3 million were not subject to any additional other-than-temporary impairment charges as of June 30, 2011. The Corporation does not have the intent to sell and does not believe it will more likely than not be required to sell any of these securities prior to a recovery of their fair value to amortized cost, which may be maturity.
NOTE D Loans and Allowance for Credit Losses
Loans, Net of Unearned Income
Loans, net of unearned income are summarized as follows:
June 30, 2011 |
December 31, 2010 |
|||||||
(in thousands) | ||||||||
Real-estate commercial mortgage |
$ | 4,443,025 | $ | 4,375,980 | ||||
Commercial industrial, financial and agricultural |
3,678,858 | 3,704,384 | ||||||
Real-estate home equity |
1,626,545 | 1,641,777 | ||||||
Real-estate residential mortgage |
1,023,646 | 995,990 | ||||||
Real-estate construction |
681,588 | 801,185 | ||||||
Consumer |
330,965 | 350,161 | ||||||
Leasing and other |
58,591 | 61,017 | ||||||
Overdrafts |
15,657 | 10,011 | ||||||
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11,858,875 | 11,940,505 | |||||||
Unearned income |
(6,384 | ) | (7,198 | ) | ||||
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$ | 11,852,491 | $ | 11,933,307 | |||||
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Allowance for Credit Losses
The allowance for credit losses consists of the allowance for loan losses and the reserve for unfunded lending commitments. The allowance for loan losses represents managements estimate of losses inherent in the loan portfolio as of the balance sheet date and is recorded as a reduction to loans. The reserve for unfunded lending commitments represents managements estimate of losses inherent in its unfunded loan commitments and is recorded in other liabilities on the consolidated balance sheet. The allowance for credit losses is increased by charges to expense, through the provision for credit losses, and decreased by charge-offs, net of recoveries.
The Corporations established methodology for evaluating the adequacy of the allowance for loan losses considers both components of the allowance: (1) specific allowances allocated to loans evaluated individually for impairment under the Financial Accounting Standards Boards (FASB) Accounting Standards Codification (ASC) Section 310-10-35, and (2) allowances calculated for pools of loans evaluated collectively for impairment under FASB ASC Subtopic 450-20.
Effective April 1, 2011, the Corporation revised and enhanced its allowance for credit loss methodology. The significant revisions to the methodology were as follows:
| Change in the identification of loans evaluated individually for impairment. The population of loans evaluated individually for impairment was revised to include only loans on non-accrual status and impaired troubled debt restructurings (Impaired TDRs). Impaired TDRs represent TDRs that: (1) were modified via a change in the interest rate that, at the time of restructuring, was favorable in comparison to rates offered for loans with similar risk characteristics; or (2) were 90 days or more past due according to their modified terms; or (3) were modified in the current year. |
13
Under the Corporations prior methodology, loans evaluated individually for impairment included accruing and non-accrual commercial loans, commercial mortgages and construction loans with risk ratings of substandard or worse and Impaired TDRs.
As of April 1, 2011, the balance of loans evaluated individually for impairment decreased from $525.6 million under the Corporations prior methodology to $335.6 million under the new methodology. The allowance allocations for loans evaluated individually for impairment decreased from $106.0 million under the Corporations prior methodology to $88.0 million under the new methodology.
| Quarterly evaluations of impaired loans Due to the reduction in loans evaluated individually for impairment noted above, all loans evaluated individually for impairment are now measured for losses on a quarterly basis. Measurement may be more frequent basis if there is a significant change in the amount or timing of an impaired loans expected future cash flows, if actual cash flows are significantly different from the cash flows previously projected, or if the fair value of an impaired loans collateral significantly changes. In addition, the Corporation implemented a new appraisal policy which requires that impaired loans secured predominately by real estate have updated certified third-party appraisals, generally every 12 months. |
Under the Corporations prior methodology, impaired loans were individually evaluated for impairment every 12 months or, if necessary, on a more frequent basis based on significant changes in expected future cash flows or significant changes collateral values. For impaired loans secured predominately by real estate, decisions regarding whether an updated certified appraisal was necessary were made on a loan-by-loan basis.
As of June 30, 2011, approximately 85% of impaired loans with principal balances greater than $1.0 million, whose primary collateral is real estate, were measured at estimated fair value using certified third-party appraisals that had been updated within the preceding 12 months. In comparison, as of March 31, 2011 and December 31, 2010, approximately 57% and 52%, respectively, of impaired loans with principal balances greater than $1 million, whose primary collateral is real estate, were measured at estimated fair value using certified third-party appraisals that had been updated within the preceding 12 months.
| Change in the determination of allocation needs on loans evaluated collectively for impairment. Under its new methodology, the Corporation revised and further disaggregated its pools of loans evaluated collectively for impairment. Similar to the prior methodology, pools are segmented by general loan types, and further segmented by collateral types, where appropriate. However, under the new methodology, pools are further disaggregated by internal credit risk ratings for commercial loans, commercial mortgages and construction loans and by delinquency status for residential mortgages, consumer loans and all other loan types. |
Allowance allocations for each pool are determined through a regression analysis based on historical losses for the most recent four years. The analysis computes loss rates based on a probability of default (PD) and loss given default (LGD). While the previous methodology utilized the same historical loss period, allowance allocations were computed based on weighted average charge-off rates as opposed to the use of a regression analysis, which computes PDs and LGDs based on historical losses as loans migrate through the various risk rating or delinquency categories.
Under both the current and previous methodologies, loss rates are adjusted to consider qualitative factors such as economic conditions and trends, among others. However, under its new methodology, the Corporation applies a more detailed analysis of qualitative factors that are formally assessed on a quarterly basis by a committee comprised of lending and credit administration personnel.
14
As of April 1, 2011, total allocations on $11.5 billion of loans evaluated collectively for impairment under the new methodology were $182.2 million. In comparison, under the Corporations previous methodology, total allocations on $11.3 billion of loans evaluated collectively for impairment were $164.2 million.
The Corporations conclusion as of March 31, 2011 that its total allowance for credit losses of $271.2 million was sufficient to cover losses inherent in the loan portfolio did not change as a result of its new allowance for credit loss methodology. As noted above, the change in methodology expanded the number of loans evaluated collectively for impairment and reduced the number of loans evaluated individually for impairment. In addition, the change in methodology resulted in shifts in allocations by loan type, as detailed within the tabular information below.
Effective December 31, 2010, the Corporation adopted the provisions of the Financial Accounting Standards FASB ASC Update 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses (ASC Update 2010-20), for period end disclosures related to the credit quality of loans. In 2011, the Corporation adopted certain additional disclosure requirements of ASC Update 2010-20 related to credit quality activity during a reporting period, or for the three and six months ended June 30, 2011.
The development of the Corporations allowance for loan losses is based first on a segmentation of its loan portfolio by general loan type, or portfolio segments, as presented in the table under the heading, Loans, Net of Unearned Income, above. Certain portfolio segments are further disaggregated and evaluated collectively for impairment based on class segments, which are largely based on the type of collateral underlying each loan. For commercial loans, class segments include loans secured by collateral and unsecured loans. Construction loan class segments include loans secured by commercial real estate and loans secured by residential real estate. Consumer loan class segments are based on collateral types and include direct consumer installment loans and indirect automobile loans.
The following table presents the components of the allowance for credit losses:
June 30, 2011 |
December 31, 2010 |
|||||||
(in thousands) | ||||||||
Allowance for loan losses |
$ | 266,683 | $ | 274,271 | ||||
Reserve for unfunded lending commitments |
1,950 | 1,227 | ||||||
Allowance for credit losses |
$ | 268,633 | $ | 275,498 | ||||
The following table presents the activity in the allowance for credit losses for the three and six months ended June 30:
Three months ended June 30, |
Six months ended June 30, |
|||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(in thousands) | ||||||||||||||||
Balance at beginning of period |
$ | 271,156 | $ | 269,254 | $ | 275,498 | $ | 257,553 | ||||||||
Loans charged off |
(40,675 | ) | (31,532 | ) | (86,204 | ) | (61,524 | ) | ||||||||
Recoveries of loans previously charged off |
2,152 | 2,655 | 5,339 | 4,348 | ||||||||||||
Net loans charged off |
(38,523 | ) | (28,877 | ) | (80,865 | ) | (57,176 | ) | ||||||||
Provision for credit losses |
36,000 | 40,000 | 74,000 | 80,000 | ||||||||||||
Balance at end of period |
$ | 268,633 | $ | 280,377 | $ | 268,633 | $ | 280,377 | ||||||||
15
The following tables present the activity in the allowance for loan losses by portfolio segment for the three and six months ended June 30, 2011:
Real Estate - Commercial Mortgage |
Commercial - Industrial, Financial and Agricultural |
Real Estate - Home Equity |
Real Estate - Residential Mortgage |
Real Estate - Construction |
Consumer | Leasing and other and Overdrafts |
Unallocated | Total | ||||||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||||||||||
Three months ended June 30, 2011 |
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Balance at April 1, 2011 |
$ | 48,558 | $ | 100,180 | $ | 5,656 | $ | 19,575 | $ | 55,491 | $ | 4,736 | $ | 2,576 | $ | 33,500 | $ | 270,272 | ||||||||||||||||||
Loans charged off |
(7,074 | ) | (15,406 | ) | (1,650 | ) | (7,707 | ) | (7,468 | ) | (681 | ) | (689 | ) | 0 | (40,675 | ) | |||||||||||||||||||
Recoveries of loans previously charged off |
191 | 1,003 | 2 | 190 | 79 | 433 | 254 | 0 | 2,152 | |||||||||||||||||||||||||||
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Net loans charged off |
(6,883 | ) | (14,403 | ) | (1,648 | ) | (7,517 | ) | (7,389 | ) | (248 | ) | (435 | ) | 0 | (38,523 | ) | |||||||||||||||||||
Provision for loan losses |
9,040 | 10,224 | 1,862 | 11,958 | 7,239 | 343 | 590 | (6,322 | ) | 34,934 | ||||||||||||||||||||||||||
Impact of change in allowance methodology |
22,883 | (13,388 | ) | 3,690 | 7,896 | (24,771 | ) | (3,076 | ) | (944 | ) | 7,710 | 0 | |||||||||||||||||||||||
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Provision for loan losses, including impact of change in allowance methodology (1) |
31,923 | (3,164 | ) | 5,552 | 19,854 | (17,532 | ) | (2,733 | ) | (354 | ) | 1,388 | 34,934 | |||||||||||||||||||||||
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Balance at June 30, 2011 |
$ | 73,598 | $ | 82,613 | $ | 9,560 | $ | 31,912 | $ | 30,570 | $ | 1,755 | $ | 1,787 | $ | 34,888 | $ | 266,683 | ||||||||||||||||||
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Six months ended June 30, 2011 |
||||||||||||||||||||||||||||||||||||
Balance at January 1, 2011 |
$ | 40,831 | $ | 101,436 | $ | 6,454 | $ | 17,425 | $ | 58,117 | $ | 4,669 | $ | 3,840 | $ | 41,499 | $ | 274,271 | ||||||||||||||||||
Loans charged off |
(17,121 | ) | (28,742 | ) | (3,118 | ) | (12,703 | ) | (21,362 | ) | (1,972 | ) | (1,186 | ) | 0 | (86,204 | ) | |||||||||||||||||||
Recoveries of loans previously charged off |
1,726 | 1,394 | 3 | 234 | 642 | 742 | 598 | 0 | 5,339 | |||||||||||||||||||||||||||
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Net loans charged off |
(15,395 | ) | (27,348 | ) | (3,115 | ) | (12,469 | ) | (20,720 | ) | (1,230 | ) | (588 | ) | 0 | (80,865 | ) | |||||||||||||||||||
Provision for loan losses |
25,279 | 21,913 | 2,531 | 19,060 | 17,944 | 1,392 | (521 | ) | (14,321 | ) | 73,277 | |||||||||||||||||||||||||
Impact of change in allowance methodology |
22,883 | (13,388 | ) | 3,690 | 7,896 | (24,771 | ) | (3,076 | ) | (944 | ) | 7,710 | 0 | |||||||||||||||||||||||
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Provision for loan losses, including impact of change in allowance methodology (1) |
48,162 | 8,525 | 6,221 | 26,956 | (6,827 | ) | (1,684 | ) | (1,465 | ) | (6,611 | ) | 73,277 | |||||||||||||||||||||||
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Balance at June 30, 2011 |
$ | 73,598 | $ | 82,613 | $ | 9,560 | $ | 31,912 | $ | 30,570 | $ | 1,755 | $ | 1,787 | $ | 34,888 | $ | 266,683 | ||||||||||||||||||
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(1) | Provision for loan losses is net of a $1.1 million and $723,000 increase in provision applied to unfunded commitments for the three and six months ended June 30, 2011, respectively. The total provision for credit losses, comprised of allocations for both funded and unfunded loans, was $36.0 million and $74.0 million for the three and six months ended June 30, 2011, respectively. |
The following tables present loans, net of unearned income and their related allowance for loan losses, by portfolio segment, as of June 30, 2011 and December 31, 2010:
Real Estate - Commercial Mortgage |
Commercial - Industrial, Financial and Agricultural |
Real Estate - Home Equity |
Real Estate - Residential Mortgage |
Real Estate - Construction |
Consumer | Leasing and other and Overdrafts |
Unallocated (1) |
Total | ||||||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||||||||||
Allowance for loan losses at June 30, 2011: |
||||||||||||||||||||||||||||||||||||
Evaluated collectively for impairment under FASB ASC Subtopic 450-20 |
$ | 44,600 | $ | 53,373 | $ | 9,560 | $ | 5,953 | $ | 18,794 | $ | 1,597 | $ | 1,727 | $ | 34,888 | $ | 170,492 | ||||||||||||||||||
Evaluated individually for impairment under FASB ASC Section 310-10-35 |
28,998 | 29,240 | 0 | 25,959 | 11,776 | 158 | 60 | N/A | 96,191 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
$ | 73,598 | $ | 82,613 | $ | 9,560 | $ | 31,912 | $ | 30,570 | $ | 1,755 | $ | 1,787 | $ | 34,888 | $ | 266,683 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Loans, net of unearned income at June 30, 2011: |
||||||||||||||||||||||||||||||||||||
Evaluated collectively for impairment under FASB ASC Subtopic 450-20 |
$ | 4,329,750 | $ | 3,587,702 | $ | 1,626,545 | $ | 955,863 | $ | 623,734 | $ | 330,754 | $ | 67,773 | N/A | $ | 11,522,121 | |||||||||||||||||||
Evaluated individually for impairment under FASB ASC Section 310-10-35 |
113,275 | 91,156 | 0 | 67,783 | 57,854 | 211 | 91 | N/A | 330,370 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Total |
$ | 4,443,025 | $ | 3,678,858 | $ | 1,626,545 | $ | 1,023,646 | $ | 681,588 | $ | 330,965 | $ | 67,864 | N/A | $ | 11,852,491 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Allowance for loan losses at December 31, 2010: |
||||||||||||||||||||||||||||||||||||
Evaluated collectively for impairment under FASB ASC Subtopic 450-20 |
$ | 22,836 | $ | 32,323 | $ | 6,454 | $ | 11,475 | $ | 35,247 | $ | 4,669 | $ | 3,840 | $ | 41,499 | $ | 158,343 | ||||||||||||||||||
Evaluated individually for impairment under FASB ASC Section 310-10-35 |
17,995 | 69,113 | 0 | 5,950 | 22,870 | 0 | 0 | N/A | 115,928 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|||||||||||||||||||
$ | 40,831 | $ | 101,436 | $ | 6,454 | $ | 17,425 | $ | 58,117 | $ | 4,669 | $ | 3,840 | $ | 41,499 | $ | 274,271 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Loans, net of unearned income at December 31, 2010: |
||||||||||||||||||||||||||||||||||||
Evaluated collectively for impairment under FASB ASC Subtopic 450-20 |
$ | 4,217,660 | $ | 3,469,775 | $ | 1,641,777 | $ | 956,260 | $ | 660,238 | $ | 350,161 | $ | 63,830 | N/A | $ | 11,359,701 | |||||||||||||||||||
Evaluated individually for impairment under FASB ASC Section 310-10-35 |
158,320 | 234,609 | 0 | 39,730 | 140,947 | 0 | 0 | N/A | 573,606 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Total |
$ | 4,375,980 | $ | 3,704,384 | $ | 1,641,777 | $ | 995,990 | $ | 801,185 | $ | 350,161 | $ | 63,830 | N/A | $ | 11,933,307 | |||||||||||||||||||
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|
|
(1) | The Corporations unallocated allowance, which was approximately 13% and 15% as of June 30, 2011 and December 31, 2010, respectively, was reasonable and appropriate as the estimates used in the allocation process are inherently imprecise. |
N/A Not applicable
16
Impaired Loans
A loan is considered to be impaired if the Corporation believes it is probable that all amounts will not be collected according to the contractual terms of the loan agreement.
An allowance for loan losses is established for an impaired loan if its carrying value exceeds its estimated fair value. Impaired loans with balances greater than $1.0 million are evaluated individually for impairment. As of June 30, 2011 and December 31, 2010, substantially all of the Corporations individually evaluated impaired loans were measured based on the estimated fair value of each loans collateral. Collateral could be in the form of real estate in the case of impaired commercial mortgages, construction loans and residential mortgages, or business assets, such as accounts receivable or inventory, in the case of commercial loans. Commercial loans may also be secured by real property.
Impaired loans with balances less than $1.0 million are measured collectively based on a statistical model which applies PDs and LGDs based on historical losses as loans migrate through the various risk rating or delinquency categories.
The following table presents total impaired loans by class segment:
June 30, 2011 | Three months ended June 30, 2011 |
Six months ended June 30, 2011 |
December 31, 2010 | |||||||||||||||||||||||||||||||||||||
Unpaid Principal Balance |
Recorded Investment |
Related Allowance |
Average Recorded Investment |
Interest Income Recognized (1) |
Average Recorded Investment |
Interest Income Recognized |
Unpaid Principal Balance |
Recorded Investment |
Related Allowance |
|||||||||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||||||||||||||
With no related allowance recorded: |
||||||||||||||||||||||||||||||||||||||||
Real estate - commercial mortgage |
$ | 49,335 | $ | 41,764 | N/A | $ | 41,139 | $ | 87 | $ | 45,510 | $ | 490 | $ | 68,583 | $ | 54,251 | N/A | ||||||||||||||||||||||
Commercial - secured |
37,660 | 35,613 | N/A | 32,313 | 15 | 30,790 | 161 | 38,366 | 27,745 | N/A | ||||||||||||||||||||||||||||||
Commercial - unsecured |
0 | 0 | N/A | 0 | 0 | 196 | 3 | 710 | 587 | N/A | ||||||||||||||||||||||||||||||
Real estate - residential mortgage (2) |
0 | 0 | N/A | 0 | 0 | 7,071 | 43 | 21,598 | 21,212 | N/A | ||||||||||||||||||||||||||||||
Construction - commercial residential |
33,882 | 17,439 | N/A | 20,322 | 6 | 24,333 | 184 | 69,624 | 32,354 | N/A | ||||||||||||||||||||||||||||||
Construction - commercial |
5,605 | 3,486 | N/A | 3,601 | 1 | 3,109 | 21 | 5,637 | 2,125 | N/A | ||||||||||||||||||||||||||||||
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|
|
|||||||||||||||||||||||||
126,482 | 98,302 | 97,375 | 109 | 111,009 | 902 | 204,518 | 138,274 | |||||||||||||||||||||||||||||||||
With a related allowance recorded: |
||||||||||||||||||||||||||||||||||||||||
Real estate - commercial mortgage |
92,006 | 71,511 | $ | 28,998 | 70,441 | 150 | 81,650 | 989 | 111,190 | 104,069 | $ | 17,995 | ||||||||||||||||||||||||||||
Commercial - secured |
63,700 | 52,623 | 26,752 | 47,747 | 22 | 97,723 | 1,199 | 202,824 | 197,674 | 64,922 | ||||||||||||||||||||||||||||||
Commercial - unsecured |
3,102 | 2,920 | 2,488 | 3,193 | 2 | 4,996 | 33 | 8,681 | 8,603 | 4,191 | ||||||||||||||||||||||||||||||
Real estate - residential mortgage (2) |
67,783 | 67,783 | 25,959 | 71,807 | 487 | 54,044 | 577 | 18,518 | 18,518 | 5,950 | ||||||||||||||||||||||||||||||
Construction - commercial residential |
61,888 | 34,513 | 10,530 | 40,219 | 13 | 61,421 | 448 | 110,465 | 103,826 | 22,155 | ||||||||||||||||||||||||||||||
Construction - commercial |
303 | 303 | 158 | 313 | 0 | 1,089 | 17 | 2,642 | 2,642 | 715 | ||||||||||||||||||||||||||||||
Construction - other |
2,113 | 2,113 | 1,088 | 1,687 | 0 | 1,124 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||||||||
Consumer - direct |
211 | 211 | 158 | 150 | 2 | 100 | 2 | 0 | 0 | 0 | ||||||||||||||||||||||||||||||
Leasing and other and overdrafts |
91 | 91 | 60 | 77 | 0 | 51 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
291,197 | 232,068 | 96,191 | 235,634 | 676 | 302,198 | 3,265 | 454,320 | 435,332 | 115,928 | |||||||||||||||||||||||||||||||
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
Total |
$ | 417,679 | $ | 330,370 | $ | 96,191 | $ | 333,009 | $ | 785 | $ | 413,207 | $ | 4,167 | $ | 658,838 | $ | 573,606 | $ | 115,928 | ||||||||||||||||||||
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|
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|
|
(1) | Effective April 1, 2011, all impaired loans, excluding certain accruing Impaired TDRs, were non-accrual loans. Interest income recognized for the three months ended June 30, 2011 represents amounts earned on accruing TDRs. |
(2) | Impaired residential mortgages include accruing TDRs that were modified in the current calendar year and/or not performing according to their modified terms. |
N/A Not applicable.
As of June 30, 2011 and December 31, 2010, there were $98.3 million and $138.3 million, respectively, of impaired loans that did not have a related allowance for loan loss. The estimated fair values of the collateral for these loans exceeded the carrying amount of the loans and, accordingly, no specific valuation allowance was considered to be necessary.
For 2010, the total average recorded investment in impaired loans was approximately $772.3 million. The Corporation generally applies all payments received on non-accruing impaired loans to principal until such time as the principal is paid off, after which time any additional payments received are recognized as interest income. For 2010, the Corporation recognized interest income of approximately $27.4 million on impaired loans.
17
Credit Quality Indicators and Non-performing Assets
The following table presents a summary of delinquency and non-performing status by portfolio segment and class segment:
June 30, 2011 | ||||||||||||||||
Performing | Delinquent (1) | Non- performing (2) |
Total | |||||||||||||
(in thousands) | ||||||||||||||||
Real estate - commercial mortgage |
$ | 4,314,764 | $ | 25,537 | $ | 102,724 | $ | 4,443,025 | ||||||||
Commercial - secured |
3,333,421 | 18,699 | 91,640 | 3,443,760 | ||||||||||||
Commercial -unsecured |
230,570 | 1,313 | 3,215 | 235,098 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total Commercial - industrial, financial and agricultural |
3,563,991 | 20,012 | 94,855 | 3,678,858 | ||||||||||||
Real estate - home equity |
1,605,004 | 12,101 | 9,440 | 1,626,545 | ||||||||||||
Real estate - residential mortgage |
945,952 | 34,494 | 43,200 | 1,023,646 | ||||||||||||
Construction - commercial residential |
348,197 | 2,022 | 52,413 | 402,632 | ||||||||||||
Construction - commercial |
223,510 | 8 | 3,789 | 227,307 | ||||||||||||
Construction - other |
47,305 | 2,165 | 2,179 | 51,649 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total Real estate - construction |
619,012 | 4,195 | 58,381 | 681,588 | ||||||||||||
Consumer - direct |
37,161 | 496 | 77 | 37,734 | ||||||||||||
Consumer - indirect |
158,988 | 1,798 | 89 | 160,875 | ||||||||||||
Consumer - other |
128,220 | 2,212 | 1,924 | 132,356 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total Consumer |
324,369 | 4,506 | 2,090 | 330,965 | ||||||||||||
Leasing and other and overdrafts |
67,344 | 368 | 152 | 67,864 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 11,440,436 | $ | 101,213 | $ | 310,842 | $ | 11,852,491 | |||||||||
|
|
|
|
|
|
|
|
|||||||||
December 31, 2010 | ||||||||||||||||
Real estate - commercial mortgage |
$ | 4,257,871 | $ | 24,389 | $ | 93,720 | $ | 4,375,980 | ||||||||
Commercial - secured |
3,373,651 | 12,111 | 85,536 | 3,471,298 | ||||||||||||
Commercial -unsecured |
229,985 | 1,182 | 1,919 | 233,086 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total Commercial - industrial, financial and agricultural |
3,603,636 | 13,293 | 87,455 | 3,704,384 | ||||||||||||
Real estate - home equity |
1,619,684 | 11,905 | 10,188 | 1,641,777 | ||||||||||||
Real estate - residential mortgage |
909,247 | 36,331 | 50,412 | 995,990 | ||||||||||||
Construction - commercial residential |
409,190 | 7,273 | 76,436 | 492,899 | ||||||||||||
Construction - commercial |
239,150 | 0 | 5,287 | 244,437 | ||||||||||||
Construction - other |
60,956 | 0 | 2,893 | 63,849 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total Real estate - construction |
709,296 | 7,273 | 84,616 | 801,185 | ||||||||||||
Consumer - direct |
45,942 | 935 | 212 | 47,089 | ||||||||||||
Consumer - indirect |
166,531 | 2,275 | 290 | 169,096 | ||||||||||||
Consumer - other |
129,911 | 2,413 | 1,652 | 133,976 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total Consumer |
342,384 | 5,623 | 2,154 | 350,161 | ||||||||||||
Leasing and other and overdrafts |
63,087 | 516 | 227 | 63,830 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 11,505,205 | $ | 99,330 | $ | 328,772 | $ | 11,933,307 | |||||||||
|
|
|
|
|
|
|
|
(1) | Includes all accruing loans 30 days to 89 days past due. |
(2) | Includes all accruing loans 90 days or more past due and all non-accrual loans. |
18
The following table presents non-performing assets:
June 30, 2011 |
December 31, 2010 |
|||||||
(in thousands) | ||||||||
Non-accrual loans |
$ | 274,973 | $ | 280,688 | ||||
Accruing loans greater than 90 days past due |
35,869 | 48,084 | ||||||
Total non-performing loans |
310,842 | 328,772 | ||||||
Other real estate owned (OREO) |
37,493 | 32,959 | ||||||
Total non-performing assets |
$ | 348,335 | $ | 361,731 | ||||
The following table presents TDRs, by loan type:
June 30, 2011 |
December 31, 2010 |
|||||||
(in thousands) | ||||||||
Real-estate residential mortgage |
$ | 37,006 | $ | 37,826 | ||||
Real-estate commercial mortgage |
30,735 | 18,778 | ||||||
Real-estate construction |
5,589 | 5,440 | ||||||
Commercial industrial, financial and agricultural |
3,055 | 5,502 | ||||||
Consumer and home equity |
258 | 263 | ||||||
Total accruing TDRs |
76,643 | 67,809 | ||||||
Non-accrual TDRs (1) |
44,659 | 51,175 | ||||||
Total TDRs |
$ | 121,302 | $ | 118,984 | ||||
(1) | Included within non-accrual loans in table detailing non-performing assets above. |
As of June 30, 2011 and December 31, 2010, there were $1.8 million and $1.6 million, respectively, of commitments to lend additional funds to borrowers whose loans were modified under TDRs.
19
The following table presents past due status and non-accrual loans by portfolio segment and class segment:
June 30, 2011 | ||||||||||||||||||||||||||||||||
31-59 Days Past Due |
60-89 Days Past Due |
³ 90 Days Past Due and Accruing |
Non- accrual |
Total ³ 90 Days |
Total Past Due |
Current | Total | |||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||||||
Real estate - commercial mortgage |
$ | 20,376 | $ | 5,161 | $ | 5,578 | $ | 97,146 | $ | 102,724 | $ | 128,261 | $ | 4,314,764 | $ | 4,443,025 | ||||||||||||||||
Commercial - secured |
13,077 | 5,622 | 5,892 | 85,748 | 91,640 | 110,339 | 3,333,421 | 3,443,760 | ||||||||||||||||||||||||
Commercial - unsecured |
823 | 490 | 295 | 2,920 | 3,215 | 4,528 | 230,570 | 235,098 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total Commercial - industrial, financial and agricultural |
13,900 | 6,112 | 6,187 | 88,668 | 94,855 | 114,867 | 3,563,991 | 3,678,858 | ||||||||||||||||||||||||
Real estate - home equity |
10,112 | 1,989 | 9,241 | 199 | 9,440 | 21,541 | 1,605,004 | 1,626,545 | ||||||||||||||||||||||||
Real estate - residential mortgage |
24,031 | 10,463 | 12,197 | 31,003 | 43,200 | 77,694 | 945,952 | 1,023,646 | ||||||||||||||||||||||||
Construction - commercial residential |
1,569 | 453 | 461 | 51,952 | 52,413 | 54,435 | 348,197 | 402,632 | ||||||||||||||||||||||||
Construction - commercial |
8 | 0 | 0 | 3,789 | 3,789 | 3,797 | 223,510 | 227,307 | ||||||||||||||||||||||||
Construction - other |
2,165 | 0 | 66 | 2,113 | 2,179 | 4,344 | 47,305 | 51,649 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total Real estate - construction |
3,742 | 453 | 527 | 57,854 | 58,381 | 62,576 | 619,012 | 681,588 | ||||||||||||||||||||||||
Consumer - direct |
343 | 153 | 65 | 12 | 77 | 573 | 37,161 | 37,734 | ||||||||||||||||||||||||
Consumer - indirect |
1,489 | 309 | 89 | 0 | 89 | 1,887 | 158,988 | 160,875 | ||||||||||||||||||||||||
Consumer - other |
1,226 | 986 | 1,924 | 0 | 1,924 | 4,136 | 128,220 | 132,356 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total Consumer |
3,058 | 1,448 | 2,078 | 12 | 2,090 | 6,596 | 324,369 | 330,965 | ||||||||||||||||||||||||
Leasing and other and overdrafts |
339 | 29 | 61 | 91 | 152 | 520 | 67,344 | 67,864 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
$ | 75,558 | $ | 25,655 | $ | 35,869 | $ | 274,973 | $ | 310,842 | $ | 412,055 | $ | 11,440,436 | $ | 11,852,491 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
December 31, 2010 | ||||||||||||||||||||||||||||||||
Real estate - commercial mortgage |
$ | 15,898 | $ | 8,491 | $ | 6,744 | $ | 86,976 | $ | 93,720 | $ | 118,109 | $ | 4,257,871 | $ | 4,375,980 | ||||||||||||||||
Commercial - secured |
5,274 | 6,837 | 13,374 | 72,162 | 85,536 | 97,647 | 3,373,651 | 3,471,298 | ||||||||||||||||||||||||
Commercial - unsecured |
629 | 553 | 731 | 1,188 | 1,919 | 3,101 | 229,985 | 233,086 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total Commercial - industrial, financial and agricultural |
5,903 | 7,390 | 14,105 | 73,350 | 87,455 | 100,748 | 3,603,636 | 3,704,384 | ||||||||||||||||||||||||
Real estate - home equity |
8,138 | 3,767 | 10,024 | 164 | 10,188 | 22,093 | 1,619,684 | 1,641,777 | ||||||||||||||||||||||||
Real estate - residential mortgage |
24,237 | 12,094 | 13,346 | 37,066 | 50,412 | 86,743 | 909,247 | 995,990 | ||||||||||||||||||||||||
Construction - commercial residential |
3,872 | 3,401 | 884 | 75,552 | 76,436 | 83,709 | 409,190 | 492,899 | ||||||||||||||||||||||||
Construction - commercial |
0 | 0 | 195 | 5,092 | 5,287 | 5,287 | 239,150 | 244,437 | ||||||||||||||||||||||||
Construction - other |
0 | 0 | 491 | 2,402 | 2,893 | 2,893 | 60,956 | 63,849 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total Real estate - construction |
3,872 | 3,401 | 1,570 | 83,046 | 84,616 | 91,889 | 709,296 | 801,185 | ||||||||||||||||||||||||
Consumer - direct |
707 | 228 | 212 | 0 | 212 | 1,147 | 45,942 | 47,089 | ||||||||||||||||||||||||
Consumer - indirect |
1,916 | 359 | 290 | 0 | 290 | 2,565 | 166,531 | 169,096 | ||||||||||||||||||||||||
Consumer - other |
1,751 | 662 | 1,638 | 14 | 1,652 | 4,065 | 129,911 | 133,976 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total Consumer |
4,374 | 1,249 | 2,140 | 14 | 2,154 | 7,777 | 342,384 | 350,161 | ||||||||||||||||||||||||
Leasing and other and overdrafts |
473 | 43 | 155 | 72 | 227 | 743 | 63,087 | 63,830 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
$ | 62,895 | $ | 36,435 | $ | 48,084 | $ | 280,688 | $ | 328,772 | $ | 428,102 | $ | 11,505,205 | $ | 11,933,307 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
NOTE E Mortgage Servicing Rights
The following table summarizes the changes in mortgage servicing rights (MSRs), which are included in other assets on the consolidated balance sheets:
Three months ended June 30 |
Six months ended June 30 |
|||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(in thousands) | ||||||||||||||||
Amortized cost: |
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Balance at beginning of period |
$ | 32,060 | $ | 24,517 | $ | 30,700 | $ | 23,499 | ||||||||
Originations of mortgage servicing rights |
2,010 | 1,756 | 4,668 | 3,672 | ||||||||||||
Amortization expense |
(1,261 | ) | (946 | ) | (2,559 | ) | (1,844 | ) | ||||||||
Balance at end of period |
$ | 32,809 | $ | 25,327 | $ | 32,809 | $ | 25,327 | ||||||||
Valuation allowance: |
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Balance at beginning of period |
$ | (1,550 | ) | $ | (1,000 | ) | $ | (1,550 | ) | $ | (1,000 | ) | ||||
Additions |
0 | 0 | 0 | 0 | ||||||||||||
Balance at end of period |
$ | (1,550 | ) | $ | (1,000 | ) | $ | (1,550 | ) | $ | (1,000 | ) | ||||
Net MSRs at end of period |
$ | 31,259 | $ | 24,327 | $ | 31,259 | $ | 24,327 | ||||||||
MSRs represent the economic value of existing contractual rights to service mortgage loans that have been sold. Accordingly, actual and expected prepayments of the underlying mortgage loans can impact the value of MSRs.
The Corporation estimates the fair value of its MSRs by discounting the estimated cash flows from servicing income, net of expense, over the expected life of the underlying loans at a discount rate commensurate with the risk associated with these assets. Expected life is based on the contractual terms of the loans, as adjusted for prepayment projections for mortgage-backed securities with rates and terms comparable to the loans underlying the MSRs.
The Corporation determined that the estimated fair value of MSRs was equal to their book value, net of the valuation allowance, at June 30, 2011. Therefore, no adjustment to the valuation allowance was necessary as of June 30, 2011.
NOTE F Stock-Based Compensation
The fair value of equity awards granted to employees is recognized as compensation expense over the period during which employees are required to provide service in exchange for such awards. The Corporation grants equity awards to employees, consisting of stock options and restricted stock, under its 2004 Stock Option and Compensation Plan (Employee Option Plan). In addition, employees may purchase stock under the Corporations Employee Stock Purchase Plan.
The following table presents compensation expense and the related tax benefits for equity awards recognized in the consolidated statements of income:
Three months ended June 30 | Six months ended June 30 | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(in thousands) | ||||||||||||||||
Stock-based compensation expense |
$ | 554 | $ | 318 | $ | 1,101 | $ | 611 | ||||||||
Tax benefit |
(119 | ) | (66 | ) | (255 | ) | (128 | ) | ||||||||
Stock-based compensation expense, net of tax |
$ | 435 | $ | 252 | $ | 846 | $ | 483 | ||||||||
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Stock option exercise prices are equal to the fair value of the Corporations stock on the date of grant, and carry terms of up to ten years. Restricted stock fair values are equal to the average trading price of the Corporations stock on the date of grant. Restricted stock awards earn dividends during the vesting period, which are forfeitable if the awards do not vest. Stock options and restricted stock are typically granted annually on July 1st and become fully vested over or after a three-year vesting period. Certain events, as defined in the Employee Option Plan, result in the acceleration of the vesting of both stock options and restricted stock. As of June 30, 2011, the Employee Option Plan had 13.0 million shares reserved for future grants through 2013. On July 1, 2011, the Corporation granted approximately 616,000 stock options and 267,000 shares of restricted stock under its Employee Option Plan.
On July 1, 2011, the Corporation also granted approximately 11,000 shares of restricted stock to non-employee directors of the holding company under its 2011 Directors Equity Participation Plan (Directors Plan) that become fully vested after one year. Under the Directors Plan, the Corporation can grant equity awards to non-employee holding company and affiliate directors in the form of stock options, restricted stock or common stock. As of June 30, 2011, the Directors Plan had 500,000 shares reserved for future grants through 2021.
NOTE G Employee Benefit Plans
The Corporation maintains a defined benefit pension plan (Pension Plan) for certain employees. Contributions to the Pension Plan are actuarially determined and funded annually, if required. Pension Plan assets are invested in: money markets; fixed income securities, including corporate bonds, U.S. Treasury securities and common trust funds; and equity securities, including common stocks and common stock mutual funds. Effective January 1, 2008, the Pension Plan was curtailed.
The Corporation currently provides medical and life insurance benefits under a postretirement benefits plan (Postretirement Plan) to certain retired full-time employees who were employees of the Corporation prior to January 1, 1998. Certain full-time employees may become eligible for these discretionary benefits if they reach retirement age while working for the Corporation.
The Corporation recognizes the funded status of its Pension Plan and Postretirement Plan on the consolidated balance sheets and recognizes the changes in that funded status through other comprehensive income.
The net periodic benefit cost for the Corporations Pension Plan and Postretirement Plan, as determined by consulting actuaries, consisted of the following components for the three and six months ended June 30:
Pension Plan | ||||||||||||||||
Three months ended June 30 |
Six months
ended June 30 |
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2011 | 2010 | 2011 | 2010 | |||||||||||||
(in thousands) | ||||||||||||||||
Service cost (1) |
$ | 15 | $ | 26 | $ | 30 | $ | 52 | ||||||||
Interest cost |
853 | 842 | 1,706 | 1,684 | ||||||||||||
Expected return on plan assets |
(837 | ) | (802 | ) | (1,674 | ) | (1,604 | ) | ||||||||
Net amortization and deferral |
72 | 119 | 144 | 238 | ||||||||||||
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Net periodic benefit cost |
$ | 103 | $ | 185 | $ | 206 | $ | 370 | ||||||||
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(1) | The Pension Plan service cost recorded for the three and six months ended June 30, 2011 and 2010, respectively, was related to administrative costs associated with the plan and not due to the accrual of additional participant benefits. |
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Postretirement Plan | ||||||||||||||||
Three months ended June 30 |
Six months ended June 30 |
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2011 | 2010 | 2011 | 2010 | |||||||||||||
(in thousands) | ||||||||||||||||
Service cost |
$ | 50 | $ | 48 | $ | 101 | $ | 98 | ||||||||
Interest cost |
107 | 110 | 214 | 220 | ||||||||||||
Expected return on plan assets |
(1 | ) | (1 | ) | (2 | ) | (2 | ) | ||||||||
Net accretion and deferral |
(91 | ) | (91 | ) | (182 | ) | (182 | ) | ||||||||
Net periodic benefit cost |
$ | 65 | $ | 66 | $ | 131 | $ | 134 | ||||||||
NOTE H Derivative Financial Instruments
In connection with its mortgage banking activities, the Corporation enters into commitments to originate fixed-rate residential mortgage loans for customers, also referred to as interest rate locks. In addition, the Corporation enters into forward commitments for the future sale or purchase of mortgage-backed securities to or from third-party investors to hedge the effect of changes in interest rates on the values of both the interest rate locks and mortgage loans held for sale. Forward sales commitments may also be in the form of commitments to sell individual mortgage loans at a fixed price on a future date. Both the interest rate locks and the forward commitments are accounted for as derivative financial instruments and are carried at fair value, determined as the amount that would be necessary to settle each derivative financial instrument at the balance sheet date. The amount necessary to settle each interest rate lock is based on the price that secondary market investors would pay for loans with similar characteristics, including interest rate and term, as of the date fair value is measured. Gross derivative assets and liabilities are recorded within other assets and other liabilities, respectively, on the consolidated balance sheets.
The following table presents a summary of the notional amounts and fair values of derivative financial instruments recorded on the consolidated balance sheets, none of which have been designated as hedging instruments:
June 30, 2011 | December 31, 2010 | |||||||||||||||
Notional Amount |
Asset (Liability) Fair Value |
Notional Amount |
Asset (Liability) Fair Value |
|||||||||||||
(in thousands) | ||||||||||||||||
Interest Rate Locks with Customers: |
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Positive fair values |
$ | 163,795 | $ | 2,041 | $ | 140,682 | $ | 777 | ||||||||
Negative fair values |
3,736 | (22 | ) | 50,527 | (760 | ) | ||||||||||
Net Interest Rate Locks with Customers |
2,019 | 17 | ||||||||||||||
Forward Commitments: |
||||||||||||||||
Positive fair values |
49,369 | 131 | 558,861 | 8,479 | ||||||||||||
Negative fair values |
118,459 | (975 | ) | 0 | 0 | |||||||||||
Net Forward Commitments |
(844 | ) | 8,479 | |||||||||||||
$ | 1,175 | $ | 8,496 | |||||||||||||
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The following table presents a summary of the fair value gains and losses on derivative financial instruments for the three and six months ended June 30:
Three months ended June 30 | Six months ended June 30 | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(in thousands) | ||||||||||||||||
Interest rate locks with customers (1) |
$ | 82 | $ | 1,499 | $ | 2,002 | $ | 2,521 | ||||||||
Forward commitments (1) |
(38 | ) | (4,878 | ) | (9,323 | ) | (6,176 | ) | ||||||||
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$ | 44 | $ | (3,379 | ) | $ | (7,321 | ) | $ | (3,655 | ) | ||||||
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(1) | Fair value gains and losses recorded as components of mortgage banking income on the consolidated statements of income. |