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 September 30, 2015

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 October 23, 2015, there were issued and outstanding 354,786,193 shares of the Registrant’s Common Stock, $0.01 par value.

FIRST NIAGARA FINANCIAL GROUP, INC.

FORM 10-Q

For the Quarterly Period Ended September 30, 2015

TABLE OF CONTENTS

Item Number	Page Number
PART I—FINANCIAL INFORMATION
1. Financial Statements
Consolidated Statements of Condition	71
Consolidated Statements of Operations	72
Consolidated Statements of Comprehensive Income (Loss)	73
Consolidated Statements of Changes in Stockholders’ Equity	74
Consolidated Statements of Cash Flows	75
Notes to Consolidated Financial Statements (unaudited)	76
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	3
3. Quantitative and Qualitative Disclosures About Market Risk	116
4. Controls and Procedures	116
PART II—OTHER INFORMATION
1. Legal Proceedings	118
1A. Risk Factors	118
2. Unregistered Sales of Equity Securities and Use of Proceeds	118
3. Defaults Upon Senior Securities	118
4. Mine Safety Disclosures	118
5. Other Information	118
6. Exhibits	119
Signatures	120

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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, expectations of the business environment in which First Niagara Financial Group, Inc. and its subsidiaries operate, projections of future 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, 2014. 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 September 30, 2015, we had $39 billion in assets, $29 billion in deposits, and 394 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.”

Our customer-centric strategy is focused on creating a strong, competitive position by differentiating us through a fast, easy, simple and more secure customer experience. Our objective is to provide our customers with the best experience possible based on their individual needs, however they choose to do business with us, whether it's via a branch, ATM, online, mobile phone or through our call center. Our Strategic Investment Plan, which we announced in January 2014, supports our customer-centric strategy. The Strategic Investment Plan represented a pivot in our strategic imperatives by choosing to collectively accelerate certain investments focused on enhancing the customer experience. At the end of our planned three to four year investment period, our objective is to be better positioned to i) deliver greater fee generation and revenue capabilities; ii) improve operating leverage by lowering integration costs of new systems and our overall cost to serve; iii) address growing industry wide regulatory imperatives such as cybersecurity; and iv) improve our overall financial returns. The total cash spend in 2014 through 2017 for these investments was estimated at between $200 million and $250 million, and we are currently tracking to the lower end of that range. Through our Strategic Investment Plan, we believe we will drive greater customer acquisition and retention and incremental revenue growth that will improve our return profile, with the timing and absolute level of profitability also dependent upon competition and market factors including interest rates.

In 2014, our cash expenditures related to implementing our strategic investment plan approximated $58 million out of the estimated $200 million to $250 million multi-year spend. In 2013, prior to the announcement of, and not including, our strategic investment plan, we spent $40 million in total capital expenditures. In 2014, approximately $41 million of the $58 million in costs related to our strategic investment plan were capitalized, and will be amortized over the useful lives of the assets. Of the $17 million that was expensed, $2 million was classified as “Salaries and Benefits” expense, $1 million was classified as “Technology and communications”

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expense and $14 million was classified as “Professional services” expense. In addition, we recorded $9 million of amortization expense in 2014 in connection with the strategic investment plan.

In 2015, cash spend is estimated to increase to approximately $70 million, which will increase year-over-year operating expenses related to such investments. In the first nine months of 2015, approximately $50 million of the $59 million in cash expenditures related to our strategic investment plan were capitalized, and will be amortized over the useful lives of the assets. Of the $9 million that has been expensed, $1 million was classified as “Salaries and Benefits” expense and $8 million was classified as “Professional services” expense. In addition, we have recorded $19 million of amortization expense in 2015 in connection with the strategic investment plan.

Overall, we are on time and on budget. Some of the completed projects and enhancements to date include:

• Remote deposit capture

• Person-to-person payment (POP money)

• Credit card platform enhancements

• Live chat and online marketing enhancements

• Customer 360 platform

• Commercial loan servicing platform

• Indirect auto loan origination platform

Late in the first quarter of 2015, we implemented our deposit online account opening. Early results show that the customer pull-through rates, i.e. completed transactions, are materially higher than they were on our legacy platform.

In the fourth quarter of 2015, we expect to begin phasing in our Treasury Management suite. This Treasury Management enhancement is a multi-project program and once fully implemented will add the capabilities that larger commercial customers desire, such as, business online banking, foreign exchange, online remote check printing, account analysis and deposit reconciliations. In July of 2015, we launched enhanced lockbox services. With these enhancements, we now offer a more robust product set, including an enhanced Wholesale Lockbox, a market leading Retail Lockbox and lockbox services that will support our Healthcare and Commercial Real Estate segments, all products that larger customers will find appealing.

We expect that our strategic investments will drive $80 million in incremental benefits in 2017 and improve our return profile. The benefits that we expect to generate from aforementioned projects along with other system enhancements contemplated in our strategic investment plan will include incremental fee income, increased loan and deposit core customer acquisitions, enhanced pricing opportunities as well as expense efficiencies.

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.

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Absent an improvement in the competitive environment, net interest income will be challenged until we see an increase 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.

During the third quarter of 2011, the Federal Reserve announced that it intended to keep interest rates low through mid-2013, and has taken certain actions, such as “Operation Twist” and Quantitative Easing, aimed at keeping short- and long-term interest rates low, thus spurring economic growth in the labor and housing markets. The most recent round of Quantitative Easing (QE3) began in September 2012, and was an open-ended program calling for the purchase of $40 billion per month in agency mortgage-backed securities. In December 2012, the Federal Open Market Committee ("FOMC") stated it anticipates that the current exceptionally low federal funds rate will be appropriate at least as long as the unemployment rate remains above 6.5%, inflation between one and two years ahead is projected to be no more than 0.5% above the FOMC's 2% longer-run goal, and longer-term inflation expectations continue to be well anchored. In determining how long to maintain a highly accommodative stance of monetary policy, the FOMC stated it would also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. When the FOMC decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2%. At the December 2012 meeting, the FOMC also announced it would continue purchasing additional agency mortgage-backed securities at the pace of $40 billion each month and add additional purchases of longer-term Treasury securities initially at a pace of $45 billion per month.

These actions had the cumulative impact of flattening the yield curve, keeping interest rates low 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.

In June 2013, the Federal Reserve began discussing the tapering of the Quantitative Easing program. This discussion caused the yield curve to steepen appreciably, and slowed the refinancing market in our mortgage banking business. Subsequent to its December 2013 meeting, the Federal Reserve began tapering its monthly purchases of Treasury and agency mortgage-backed securities by $10 billion.

In January 2014, the Federal Reserve announced that it would continue tapering its monthly purchases of Treasury and agency mortgage-backed securities by an additional $10 billion, thereby reducing the level of purchases to $65 billion per month.

In September 2014, the Federal Reserve released its mechanisms for how they will raise interest rates when the decision is made to do so and 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 timing and use of these tools may affect the direction and impact of short-term rate increases.

In October 2014, the Federal Reserve announced it had discontinued the quantitative easing program. While the FOMC voted to discontinue monthly bond purchases, they are increasingly divided on the timing of any increase to short-term interest rates. Certain Federal Reserve policy officials have expressed growing concern that maintaining an accommodative monetary policy for longer will lead to inflation exceeding the Federal Reserve’s 2% inflation target and accordingly, the timing of the first increase to short-term interest rates should be during 2015. This view is currently offset by other FOMC members, including Federal Reserve Chair, Janet Yellen, who believe the accommodative policy needs to be maintained and that the Federal Reserve would continue to hold interest rates low until the outlook for the labor market and the general economy improve, including higher overall wages and fewer part time employees. Additionally, some market participants have expressed views that the

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Federal Funds terminal rate will be 2% lower than historic levels of 4% to 5%, which would impact the steepness of the yield curve in a normalized interest rate environment if correct. Further, depositor behavior is also subject to much debate regarding the pace and timing of deposits flowing out of the banking system.

On December 17, 2014 the FOMC released its Meeting Statement and Economic Projections that, among other things, provide each FOMC participant’s judgment of the midpoint of the appropriate target range for the federal funds rate. The FOMC members’ median projection for the federal funds rate at the end of 2015 was 1.125%. On March 18, 2015, the FOMC updated their economic projections and reduced the midpoint of the appropriate target range for the federal funds rate at the end of 2015 by 0.50% to 0.625%. The median projection for the federal funds rate at the end of 2016 declined from 2.50% to 1.875%. Minutes from the March 18, 2015 meeting demonstrated that the Federal Reserve members are split on whether to increase the federal funds rate in June 2015 stating "Several participants judged that the economic data and outlook were likely to warrant beginning normalization at the June meeting."

In its release after the March 18, 2015 meeting, the FOMC acknowledged that inflation is expected to remain near its recent low level in the near term but stated they expect inflation to gradually rise toward the target level over the medium term. The FOMC also expressed that it anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market. On April 29, 2015, the FOMC maintained the same outlook for inflation and the federal funds rate but conceded that economic growth slowed during the winter months, describing the slowdown as “in part reflecting transitory factors”. 

On June 17, 2015, the FOMC again released their Meeting Statement and Economic Projections. Most notably, the FOMC members’ median projection for the federal funds rate at the end of 2016 decreased 25 basis points to 1.625% and the FOMC members’ median projection for the federal funds rate at the end of 2017 also decreased 25 basis points to 2.875%. The median projection for 2015 remained unchanged at 0.625% suggesting potentially two rate hikes in the year. Minutes from the June Meeting suggest Federal Reserve officials believe they need more time and more evidence that economic growth was sufficiently strong to justify a change in policy accommodation. Furthermore, Federal Reserve officials have grown increasingly concerned about the potential "contagion" from international developments, specifically citing a sluggish Chinese economy and the potential departure of Greece from the Eurozone.

In its release after the July 29, 2015 meeting, the FOMC largely maintained its prior views. While it noted that the labor market and housing have improved, it equally noted that inflation is anticipated to remain near its recent low level in the near term, further removing reference from the June 17, 2015 FOMC meeting that “energy prices appear to have stabilized”. It also maintained its view that business fixed investments and net exports remained soft. Based on the language, the market believes that the timing of the first Federal Reserve liftoff still remains indeterminate.

Despite the decrease in the projections, the continued low levels of inflation and the decline in oil prices has caused the market to believe the Federal Reserve will not raise the federal funds rate as soon or as high as the Federal Reserve projections.

In the third quarter of 2015, global growth concerns and the impact on the U.S. economy led the Federal Reserve to continue to delay increasing the federal funds rate. In the September 17, 2015 release the Federal Reserve stated, ”Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term.” As a result, the market has pushed out expectations for the Federal Reserve's initial rate increase to 2016 and interest rates decreased across most Treasury rate term points. However, the Federal Reserve Economic Projections indicated that 13 of 17 FOMC members still believe the appropriate timing to raise rates is in 2015. The Federal Reserve also updated the FOMC members’ median projection for the federal funds rate which decreased 0.25% from the June projections for 2015 through the long term.

During 2015, longer term interest rates have been volatile. The 10 year Treasury has been as low as 1.64% on January 30, 2015, the lowest since the second quarter of 2013 but has risen to as high as 2.49% on June 26, 2015.

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On October 22, 2015, the 10 year Treasury was 2.04% while the 2 year Treasury was 0.62%, down from June 30, 2015 by 0.32% and 0.03%, respectively. Similarly, the mortgage refinance rates have again declined below 4.00%.

We do not expect to see significant improvement in net interest income until short-term interest rates increase, 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 are currently 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 seven implied rate increases of 0.25% by the end of 2016. The pace and magnitude of rising 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 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

Volcker Rule

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.

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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 we have Volcker Rule applicability, including in connection with capital markets (e.g., risk mitigating hedging) and certain other activities, Volcker Rule conformance is not anticipated to have a material impact.

The Volcker Rule's limitations on banking entities' investments in covered funds may apply to certain 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 grant banking entities an additional one year extension of 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.

At September 30, 2015, we have $665 million of CLO investments, with a weighted average yield of 3.1% that we believe are impacted by this rule ("legacy CLO"). These investments are further described under “Risk Management—Investment Securities Portfolio.” While we believe it is unlikely that regulatory agencies will initiate any further changes in the Volcker Rule concerning the treatment of legacy CLOs, we continue to evaluate structural solutions that we can apply to our legacy CLO securities and monitor expected prepayments, refinancing and other solutions initiated by the asset managers of the CLO structure that we believe would make any remaining legacy CLO securities compliant with the stated provisions of the final Volcker Rule. CLO securities that are not compliant with the Volcker Rule may bear greater price risk as the conformance date draws nearer.

As of September 30, 2015, we have purchased $464 million of newly issued CLO investments that we believe to be exempt from the Volcker Rule.  We believe these CLOs are structured in a manner consistent with the loan securitization exclusion set forth in the Volcker Rule.

Should we no longer be able to hold such securities, we could i) sell these securities expeditiously, and not be able to realize the value we might be able to realize with a normal market sale; ii) recognize all unrealized losses on such securities should we determine it is not more likely than not that we can hold any securities that have a fair value less than book value to a time when the fair value would be at least equal to its book value, which could be the security’s maturity; and iii) reinvest proceeds in other, likely lower yielding investments, which would reduce our revenues. Of the bonds that could be impacted by the Volcker Rule, at September 30, 2015, we had $106 million of legacy CLO securities with fair values less than their book values, aggregating to a $0.6 million unrealized loss. We continue to believe it is more likely than not that we can hold any underwater bonds to recovery, which could be maturity as the Federal Reserve intends to extend the holding period to July 21, 2017 and we believe that expected prepayments, refinancing and other structural remedies would enable us to make any remaining CLO securities compliant with the stated ownership interest provisions of the final Volcker Rule and thus allow us to continue holding the bonds after the conformance period ends.

Truth in Lending Act and the Real Estate Settlement Procedures Act

The Dodd-Frank Wall Street Reform and Consumer Protection Act directs the Consumer Financial Protection Bureau to integrate the mortgage loan disclosures under the Truth in Lending Act ("TILA") and the Real Estate Settlement Procedures Act ("RESPA"). The TILA-RESPA rule consolidates four existing disclosures required under TILA and RESPA for closed-end credit transactions secured by real property into two forms: a Loan Estimate and a Closing Disclosure, which have three business day timing requirements. The forms reconcile the differences between the existing forms and combine several other mandated disclosures. They use clear language and design

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to make it easier for consumers to locate key information such as the interest rate, monthly payments, and all costs of the transaction. The TILA-RESPA rule does not apply to HELOCs, reverse mortgages or mortgages secured by a mobile home or by a dwelling that is not attached to real property (i.e., land). The compliance date as amended was October 3, 2015. We successfully managed a project to comply with the requirements of the rule to meet the compliance date set forth. There were two very low volume products that have been suspended to allow time to implement and successfully test TRID requirements.

Regulatory Reform is discussed in our Annual Report on Form 10-K for the year ended December 31, 2014 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 2014 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 2014 Annual Report on Form 10-K. The following are critical accounting estimates that have changed since our 2014 Annual Report on Form 10-K:

Investment Securities

Our investment securities portfolio includes residential mortgage-backed securities and collateralized mortgage obligations. 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 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 these 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 September 30, 2015, the par value of our portfolio of residential mortgage-backed securities totaled $7.5 billion, which included $7.2 billion of collateralized mortgage obligations. In the determination of our constant effective yield, we estimate that we will receive $1.6 billion of principal cash flows on our collateralized mortgage obligations over the next 12 months.

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SELECTED QUARTERLY FINANCIAL DATA

	2015						2014
At or for the quarter ended	September 30		June 30		March 31		December 31			September 30
Selected financial condition data:	(in millions, except per share amounts)
Total assets	$	39,413	$	39,064	$	38,907	$	38,551		$	37,972
Loans and leases, net	23,427		23,133		22,887		22,803			22,547
Investment securities:
Available for sale	5,726		5,751		5,911		5,915			6,198
Held to maturity	6,280		6,170		6,215		5,942			5,352
Goodwill and other intangibles	1,400		1,404		1,411		1,417			1,423
Deposits	28,816		28,447		28,250		27,781			27,670
Borrowings	5,870		5,959		5,973		6,206			5,662
Stockholders’ equity	$	4,139	$	4,121	$	4,125	$	4,093		$	4,096
Common shares outstanding	355		355		354		353			355
Selected operations data:
Interest income	$	299	$	298	$	297	$	302		$	304
Interest expense	36		35		34		32			31
Net interest income	263		263		263		270			273
Provision for credit losses	20		21		13		36			17
Net interest income after provision for credit losses	244		242		250		234			257
Noninterest income	83		87		82		77			75
Restructuring charges	—		—		18		9			2
Goodwill impairment	—		—		—		—			1,100
Deposit account remediation	—		—		—		(23		)	45
Other noninterest expense	245		248		244		248			249
Income (loss) before income tax	82		81		71		77			(1,065		)
Income tax expense (benefit)	21		20		20		8			(145		)
Net income (loss)	60		61		51		69			(920		)
Preferred stock dividend	8		8		8		8			8
Net income (loss) available to common stockholders	$	53	$	53	$	44	$	62		$	(928	)
Common stock and related per share data:
Earnings (loss) per common share:
Basic	$	0.15	$	0.15	$	0.12	$	0.17		$	(2.65	)
Diluted	0.15		0.15		0.12		0.17			(2.65		)
Cash dividends	0.08		0.08		0.08		0.08			0.08
Book value(1)	10.82		10.77		10.80		10.71			10.72
Tangible book value per common share(1)(2)	6.84		6.77		6.78		6.67			6.66
Market Price (NASDAQ: FNFG):
High	10.57		9.86		9.20		8.61			9.05
Low	8.54		8.45		7.42		7.00			8.32
Close	10.21		9.44		8.84		8.43			8.33

⁽¹⁾  Excludes unallocated employee stock ownership plan shares prior to January 1, 2015 and 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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	2015									2014
At or for the quarter ended	September 30			June 30			March 31			December 31			September 30
	(dollars in millions)
Selected financial ratios and other data:
Performance ratios(1):
Return on average assets	0.61		%	0.63		%	0.54		%	0.72		%	(9.46		)%
Common equity:
Return on average common equity	5.51			5.63			4.69			6.42			(77.27		)
Return on average tangible common equity(2)	8.72			8.94			7.48			10.24			(163.71		)
Total equity:
Return on average equity	5.78			5.90			5.05			6.62			(71.57		)
Return on average tangible equity(2)	8.73			8.94			7.68			10.07			(141.16		)
Net interest rate spread	2.88			2.93			2.97			3.02			3.13
Net interest rate margin	2.98			3.02			3.07			3.11			3.21
Efficiency ratio(3)	70.7			70.9			75.6			67.5			400.6
Operating expenses as a percentage of average loans and deposits(4)	1.89			1.93			2.05			1.85			11.19
Effective tax rate (benefit)	26.0			24.7			28.0			10.2			(13.6		)
Dividend payout ratio	53.33			53.33			66.67			47.06			N/M
Capital ratios:
First Niagara Financial Group, Inc.
Tier 1 risk-based capital(5)	10.05			10.03			10.02			9.81			9.82
Total risk-based capital(5)	11.97			11.96			11.95			11.75			11.75
Common equity tier 1 capital(5)	8.52			8.50			8.48			N/A			N/A
Tier 1 risk-based common capital(2)(5)	N/A			N/A			N/A			8.20			8.19
Leverage ratio(5)	7.66			7.60			7.56			7.50			7.34
Ratio of stockholders’ equity to total assets	10.50			10.55			10.60			10.62			10.79
Ratio of tangible common stockholders’ equity to tangible assets(2)	6.32		%	6.32		%	6.34		%	6.30		%	6.39		%
Risk-weighted assets(5)	$	28,717		$	28,445		$	28,152		$	28,186		$	27,729
First Niagara Bank:(5)
Tier 1 risk-based capital	10.67			10.66			10.65			10.48			10.41
Total risk-based capital	11.56		%	11.54		%	11.53		%	11.37		%	11.27		%
Common equity tier 1 capital	10.67		%	10.66		%	10.65		%	N/A			N/A
Leverage ratio	8.12		%	8.07		%	8.03		%	8.01		%	7.78		%
Risk-weighted assets	$	28,633		$	28,359		$	28,068		$	28,146		$	27,686
Other data:
Number of full service branches	394			394			394			411			411
Full time equivalent employees	5,397			5,364			5,322			5,572			5,768

N/M    Not meaningful

⁽¹⁾  Computed using daily averages. Annualized where appropriate.

⁽²⁾  This is a non-GAAP financial 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.

⁽⁵⁾  Basel III Transitional rules became effective for us on January 1, 2015. Risk-based ratios and amounts presented prior to March 31, 2015 are calculated under Basel I rules. As of March 31, 2015, risk-based ratios and amounts presented are calculated under the Basel III Standardized Transitional Approach. Common equity tier 1 capital under Basel III replaced tier 1 common capital under Basel I. Prior to Basel III becoming effective on January 1, 2015, tier 1 common capital under Basel I was a non-GAAP financial measure.

GAAP to Non-GAAP Reconciliation
	2015									2014
At or for the quarter ended	September 30			June 30			March 31			December 31			September 30
	(in millions)
Computation of ending tangible assets:
Total assets	$	39,413		$	39,064		$	38,907		$	38,551		$	37,972
Less: goodwill and other intangibles	(1,400		)	(1,404		)	(1,411		)	(1,417		)	(1,423		)
Tangible assets	$	38,013		$	37,659		$	37,497		$	37,134		$	36,549
Computation of ending tangible common equity:
Total stockholders' equity	$	4,139		$	4,121		$	4,125		$	4,093		$	4,096
Less: goodwill and other intangibles	(1,400		)	(1,404		)	(1,411		)	(1,417		)	(1,423		)
Less: preferred stockholders' equity	(338		)	(338		)	(338		)	(338		)	(338		)
Tangible common equity	$	2,401		$	2,379		$	2,376		$	2,338		$	2,334
Computation of average tangible equity:
Total stockholders' equity	$	4,150		$	4,145		$	4,128		$	4,141		$	5,100
Less: goodwill and other intangibles	(1,402		)	(1,408		)	(1,414		)	(1,420		)	(2,515		)
Tangible equity	$	2,747		$	2,737		$	2,714		$	2,721		$	2,586
Computation of average tangible common equity:
Total stockholders' equity	$	4,150		$	4,145		$	4,128		$	4,141		$	5,100
Less: goodwill and other intangibles	(1,402		)	(1,408		)	(1,414		)	(1,420		)	(2,515		)
Less: preferred stockholders' equity	(338		)	(338		)	(338		)	(338		)	(338		)
Tangible common equity	$	2,409		$	2,399		$	2,376		$	2,383		$	2,248
Computation of Tier 1 common capital:(1)
Tier 1 capital	N/A			N/A			N/A			$	2,764		$	2,723
Less: qualifying restricted core capital elements	N/A			N/A			N/A			(114		)	(114		)
Less: perpetual non-cumulative preferred stock	N/A			N/A			N/A			(338		)	(338		)
Tier 1 common capital (Non-GAAP)	N/A			N/A			N/A			$	2,312		$	2,271

⁽¹⁾  Basel III Transitional rules became effective for us on January 1, 2015. Common equity tier 1 capital under Basel III replaced tier 1 common capital under Basel I. Prior to Basel III becoming effective on January 1, 2015, tier 1 common capital under Basel I was a non-GAAP financial measure.

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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 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. In addition, we believe the exclusion of the nonoperating items from our performance enables management and investors to perform a more effective evaluation and comparison of our results and to assess performance in relation to our ongoing operations. 

	Three months ended							Nine months ended September 30,
	September 30,		June 30,		September 30,			2015			2014
(in millions, except per share data)	2015		2015		2014
Operating results (Non-GAAP):
Net interest income	$	263	$	263	$	273		$	790		$	816
Provision for credit losses	20		21		17			53			60
Noninterest income	83		87		75			252			233
Noninterest expense	245		248		249			737			732
Income tax expense	21		20		9			68			38
Net operating income (Non-GAAP)	$	60	$	61	$	74		$	184		$	218
Operating earnings per diluted share (Non-GAAP)	$	0.15	$	0.15	$	0.19		$	0.45		$	0.55
Reconciliation of net operating income to net income (loss)	$	60	$	61	$	74		$	184		$	218
Nonoperating expenses, net of tax at effective tax rate:
Restructuring charges ($2 million and $13 million pre-tax for the three and nine months ended September 30, 2014, respectively and $18 million pre-tax for the nine months ended September 30, 2015)	—		—		(2		)	(11		)	(10		)
Goodwill impairment ($1.1 billion pre-tax)	—		—		(963		)	—			(963		)
Deposit account remediation ($45 million pre-tax)	—		—		(29		)	—			(29		)
Total nonoperating expenses, net of tax	—		—		(994		)	(11		)	(1,002		)
Net income (loss) (GAAP)	$	60	$	61	$	(920	)	$	173		$	(784	)
Earnings (loss) per diluted share (GAAP)	$	0.15	$	0.15	$	(2.65	)	$	0.42		$	(2.31	)

In the third quarter of 2015 our business fundamentals were strong, as evidenced by a 10% annualized increase in average transactional deposits and 10%increase in commercial business loans. We also continued to make progress in implementing our strategic investments, which remain on time, on budget, and are focused on delivering enhanced products and services, based on customer preferences.

Third quarter financial results were characterized by stable net interest income, lower operating expenses, strong balance sheet growth, and positive credit metrics. Through the first nine months of 2015, average loans increased6% annualized driven by both commercial and consumer balance growth, while average noninterest bearing deposits increased9% reflecting our increased focus on core deposit acquisitions in our consumer and commercial lines of business.

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Comparison to Prior Quarter

Our third quarter2015 GAAP net income was $60 million, or $0.15 per diluted share. By comparison, in the second quarter of 2015, we reported GAAP net income of $61 million, or $0.15 per diluted share.

Our third quarter2015 net interest income was consistent with the prior quarter at $263 million as the benefits of a 2%increase in average interest-earning assets and an extra day in the quarter were offset by a four basis points decrease in net interest rate margin. The decrease in net interest rate margin to 2.98% reflects continued compression of earning asset yields in the current low interest rate and competitive pricing environment, lower discount accretion income on prepayment of collateralized loan obligations and lower benefits from purchase accounting accretion on acquired loans. Yields on loans decreasednine basis points to 3.64%, reflecting continued pressure on loan yields due to low interest rates and competitive pressures, as well as lower benefits from purchase accounting accretion. Yields on investment securities increasedseven basis points to 2.92% due primarily to lower premium amortization on our residential mortgage-backed securities portfolio. The average cost of interest-bearing deposits remained flat compared to the prior quarter at 0.29%.

Compared to the prior quarter, average loans increased5% annualized during the third quarter of 2015 driven primarily by increases in our commercial business, home equity, and indirect auto portfolios. Average commercial business and real estate loans increased5% annualized. Average commercial loan growth was driven by growth primarily in our New York, New England, and Tri-State markets. Average commercial real estate loans increased1% while commercial business loans increased10% annualized. The 10% increase in average commercial business loans was driven primarily by increases in the middle market and asset-based lending segments while the increase in average commercial real estate loan balances was driven by construction lending offset by borrower prepayments. Period end loan balances increased5% and were driven by a 7% increase in commercial business loan balances.

Average consumer loans increased4% annualized driven by a 5% and 10% increase in our home equity and indirect auto portfolios, respectively, partially offset by an 8% decrease in other consumer loans. Average indirect auto loan balances increased$55 million, or 10% annualized, to $2.3 billion as strong new origination activity was partially offset by increased paydowns. New originations in the quarter, which totaled $300 million, yielded 3.42%, net of dealer reserve. Average residential real estate loans increased1%, driven by greater cross-sales to our Private Client Services Group clients. Average home equity balances increased for the tenth consecutive quarter to $3.0 billion, or 5% annualized, from the prior quarter reflecting higher customer draws as well as the benefits of promotional and cross-sell campaigns.

Average deposits increased6% annualized from the prior quarter to $28.6 billion, driven by growth in commercial deposits. Noninterest-bearing checking balances averaged $5.7 billion, a 17% annualized increase from the prior quarter, driven by a 26% increase in business noninterest-bearing deposit balances. Average money market deposit balances increased$152 million, or 6% annualized, reflecting the benefits of promotional marketing campaigns partially offset by seasonally lower municipal balances. Average savings balances decreased8% annualized from the prior quarter due to lower consumer balances. Average time deposits increased$45 million, or 5% annualized, from the prior quarter as increases in brokered certificates of deposit were partially offset by lower consumer and municipal certificates of deposit. Average transactional deposits, which include interest-bearing and noninterest-bearing checking account balances, increased10% annualized and currently represent 38% of average total deposits.

Our provision for credit losses totaled $20 million and $21 million for the three months ended September 30, 2015 and June 30, 2015, respectively. The decrease was driven by favorable asset quality trends and offset by provisioning to support a $662 millionincrease in originated loan balances. Nonperforming assets increased to $229 million, or 0.58% of total assets, at September 30, 2015 from $225 million, or 0.58% of total assets at June 30, 2015. Total criticized loans decreased9% over the same time period.

The provision for loan losses on originated loans increased to $21 million for the third quarter of 2015 from $20 million for the second quarter of 2015 primarily due to the $662 millionincrease in originated loan balances. Annualized net charge-offs equaled 0.31% of average originated loans, unchanged from the second quarter of

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2015. At September 30, 2015, originated criticized loans decreased$53 million, or 7%, to $685 million, or 3.3% of originated loans, primarily due to favorable credit migration and paydowns. Nonperforming originated loans of $186 millionincreased$5 million, or 3%, from June 30, 2015 and at September 30, 2015, the allowance for loan losses on originated loans totaled $233 million, or 1.13% of such loans, compared to $228 million, or 1.15% of such loans at June 30, 2015, reflecting continued improvements in underlying asset quality metrics.

We recorded a negative provision for loan losses related to our acquired loans of $1 million in the third quarter of 2015 which reflects paydowns in acquired loan balances. Our provision for loan losses related to our acquired loans was $1 millionsecond quarter of 2015. Net charge-offs on the acquired portfolio totaled $0.6 million, or 0.08% annualized of average acquired loans for the third quarter of 2015, compared to $0.5 million, or 0.06% annualized of average acquired loans, for the second quarter of 2015. At September 30, 2015, the allowance for loan losses on acquired loans totaled $5 million, compared to $7 million at June 30, 2015. Acquired nonperforming loans totaled $25 million at September 30, 2015, a 4%decrease from the prior quarter. At September 30, 2015, acquired criticized loans decreased14% from June 30, 2015 and remaining credit marks available to absorb losses on a pool-by-pool basis totaled $64 million, representing a 2% coverage ratio. In the third quarter of 2015, we transferred approximately $11 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$3 million, or 4%, in the third quarter of 2015 compared to the second quarter of 2015, reflecting lower wealth management services revenues and capital markets income due to market volatility, partially offset by higher deposit service charges and insurance commissions. Noninterest income for the three months ended September 30, 2015 and June 30, 2015 included $2 million and $3 million, respectively, in tax credit amortization. Excluding this amortization, noninterest income decreased$4 million, or 5%. Noninterest expenses decreased$2 million, or 1%, from the second quarter of 2015 primarily driven by lower marketing and advertising, amortization of intangibles, FDIC premiums, and other expenses, which were partially offset by higher technology and communications and professional services expenses.

Our effective tax rate was 26.0% and 24.7% for the three months ended September 30, 2015 and June 30, 2015, respectively, primarily reflecting the benefit of tax credit investments that reduced our income tax expense.

Comparison to Prior Year Quarter

Our third quarter2015 GAAP net income was $60 million, or $0.15 per diluted share, compared to a loss of $920 million, or $2.65 per diluted share, for the third quarter of 2014. Our third quarter of 2014 GAAP net income included a pre-tax $1.1 billion goodwill impairment charge, a $45 million pre-tax reserve to address a process issue related to certain customer deposit accounts, and $2 million in pre-tax restructuring and severance expenses incurred primarily in connection with a branch staffing realignment. Excluding these charges, our non-GAAP operating net income for the third quarter of 2014 was $74 million, or $0.19 per diluted share.

Our third quarter of 2015 net interest income decreased$10 million, or 4%, from the third quarter of 2014. Our taxable equivalent net interest rate margin decreased23 basis points to 2.98% at September 30, 2015 from 3.21% in the third quarter of 2014. During the current quarter, yields on average interest-earning assets decreased 19 basis points, compared to the same quarter in 2014, driven by lower yields in our commercial, residential real estate, and home equity loan portfolios. The cost of interest-bearing deposits of 0.29% for the current quarter increasedfive basis points from the same quarter in 2014.

Average loans increased4% for the quarter ended September 30, 2015 compared to the same quarter in 2014. Average commercial business and real estate loans increased4% over the same quarter in 2014, with our commercial real estate portfolio increasing 4% and commercial business portfolios increasing 5%. Average consumer loans increased5%, primarily driven by growth in home equity and indirect auto loan balances, partially offset by decreases in residential real estate and other consumer loan portfolios.

Average transactional deposit balances, which include interest-bearing and noninterest-bearing checking accounts, increased7% over the prior year and represent 38% of our average deposit balances, up from 37% a year ago. Average noninterest-bearing checking deposits increased8% over the prior year, which was driven primarily by

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business checking growth. Average interest-bearing checking balances increased$344 million, or 7%, for the quarter ended September 30, 2015 from the same quarter in the prior year and average noninterest-bearing checking balances increased$402 million, or 8%. The increase in noninterest-bearing checking balances was primarily driven by a 9% increase in business checking balances. Total average commercial deposits increased 11% from the year ago quarter driven by higher noninterest checking and money market balances. Average money market balances increased5% compared to the prior year quarter while time deposits were flat.

Our provision for credit losses totaled $20 million and $17 million for the three months ended September 30, 2015 and 2014, respectively. The provision for loan losses on originated loans was $21 million and $15 million in the third quarter of 2015 and 2014, respectively. Annualized net charge-offs amounted to 0.31% and 0.27% of average originated loans for the three months ended September 30, 2015 and 2014, respectively. Nonperforming originated loans as a percentage of originated loans decreased to 0.90% at September 30, 2015 from 0.91% at September 30, 2014. At September 30, 2015 and 2014, the allowance for loan losses on originated loans totaled 1.13% and 1.16%, respectively, of such loans reflecting continued improvements in underlying asset quality metrics.

We recorded a negative provision for loan losses related to our acquired loans of $1 million in the third quarter of 2015, reflecting paydowns in acquired loan balances. Our provision for loan losses related to our acquired loans was $1 million in the third quarter of 2014. Annualized net charge-offs equaled 0.08% and 0.05% of average acquired loans for the quarters ended September 30, 2015 and 2014, respectively. Acquired nonperforming loans totaled $25 million and $29 million at September 30, 2015 and 2014, respectively. At September 30, 2015, acquired criticized loans decreased35% from September 30, 2014.

For the quarter ended September 30, 2015, noninterest income increased$8 million, or 11%, from the same period in 2014, driven by increases in deposit service charges, mortgage banking, lending and leasing, and other income, partially offset by decreases in wealth management services and capital markets income. Other income for the quarters ended September 30, 2015 and 2014 included $2 million and $7 million, respectively, in amortization for tax credit investments, which was more than offset by lower tax expense in each quarter.

Noninterest expenses decreased$1.2 billion, or 82%, during the same period. Noninterest expenses in the third quarter of 2014 included a $1.1 billion goodwill impairment charge, a $45 million reserve to address a process issue related to certain customer deposit accounts, and $2 million in restructuring and severance expenses incurred primarily in connection with a branch staffing realignment. Excluding these charges, noninterest expenses decreased$4 million, or 2%. Declines in salaries and benefits, occupancy and equipment, and amortization of intangibles were partially offset by the impact of increases in technology and communications, marketing and advertising, and professional services. The decrease was also driven by $7 million of elevated charges in the third quarter of 2014, included in other expense, related to the valuation writedown of a single other real estate owned property, higher state franchise taxes, and expenses incurred to protect our customers in response to the widely publicized Home Depot data security breach that impacted debit and credit card holders and banks across North America.

The provision for taxes in the third quarter of 2015 was $21 million, resulting in an effective tax rate of 26.0%. The provision for taxes in the third quarter of 2014 was a benefit of $145 million, resulting in an effective tax rate benefit of 13.6%. The effective tax rate for the third quarter of 2015 reflects our investments in certain tax credits originated by our commercial real estate business. The effective tax rate for the three months ended September 30, 2014 reflects the impact of the goodwill impairment charge, of which only a portion was tax deductible, the benefits of a taxable reorganization of a subsidiary, and from investments in certain tax credits.

Comparison to Prior Year to Date

Our GAAP net income for the nine months ended September 30, 2015 was $173 million, or $0.42 per diluted share, compared to a net loss of $784 million, or $2.31 per diluted share, for the nine months ended September 30, 2014. Excluding $18 million in pre-tax restructuring charges, our non-GAAP operating net income for the nine months ended September 30, 2015 was $184 million, or $0.45 per diluted share. Excluding the $1.1 billion goodwill impairment charge, $45 million reserve to address a process issue, and $13 million in pre-tax

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restructuring charges, our non-GAAP operating net income was $218 million, or $0.55 per diluted share, for the nine months ended September 30, 2014.

Our GAAP net income for the nine months ended September 30, 2015 included $18 million in pre-tax restructuring charges incurred primarily in connection with the consolidation of 17 branches, the completion of our organization simplification during the first quarter, and third party professional fees incurred in connection with the overstatement of the allowance for loan losses resulting from mid-level employee misconduct that was discovered in February 2015, as well as a modest benefit from the net impact of the investments in certain tax credits recognized during the period, the amortization of the net investment in a similar amount, and the tax expense benefit of the amortization. Our GAAP net income for the nine months ended September 30, 2014 included a $1.1 billion goodwill impairment charge, a $45 million reserve to fund potential costs of a self-identified process issue related to certain customer deposit accounts, and $13 million in pre-tax restructuring charges incurred primarily in connection with the branch staffing realignment and consolidation of certain branches completed in the first quarter as well as a modest benefit from the net impact of the historic tax credits recognized during the period, the amortization of the net investment in a similar amount, and the tax expense benefit of the amortization.

Our net interest income for the nine months ended September 30, 2015decreased$26 million, or 3%, from the nine months ended September 30, 2014. Our taxable equivalent net interest rate margin decreased25 basis points to 3.02% for the nine months ended September 30, 2015 from 3.27% for the nine months ended September 30, 2014. During the nine months ended September 30, 2015, yields on average interest-earning assets decreased20 basis points, compared to the same period in 2014, driven by lower yields across all loan portfolios with the exception of our credit card portfolio. The cost of interest-bearing liabilities of 0.49% for the nine months ended September 30, 2015increasedfive basis points from the same period in 2014.

Average loans increased6% for the nine months ended September 30, 2015 compared to the same period in 2014. Average commercial business and real estate loans increased5% over the nine months ended September 30, 2014, with our commercial real estate portfolio increasing 5% and our commercial business portfolio increasing 6%. Average consumer loans increased6%, primarily driven by continued growth in home equity and indirect auto loan balances, partially offset by decreases in residential real estate and other consumer loan portfolios.

Average transactional deposit balances, which include interest-bearing and noninterest-bearing checking accounts, increased8% over the prior year. Average interest-bearing checking balances increased$308 million, or 6%, for the nine months ended September 30, 2015 from the same period in the prior year. Average noninterest-bearing checking deposits increased$439 million, or 9%, over the prior year. Average money market balances increased$350 million, or 4% annualized, compared to the prior year while time deposits increased less than 1%. The average cost of interest-bearing deposits of 0.29%increasedfive basis points from the prior year.

Our provision for credit losses totaled $53 million and $60 million for the nine months ended September 30, 2015 and 2014, respectively. The provision for loan losses on originated loans decreased to $51 million for the nine months ended September 30, 2015 from $54 million for the nine months ended September 30, 2014. Annualized net charge-offs equaled 0.31% of average originated loans for the nine months ended September 30, 2015 and 2014.

The provision for loan losses on acquired loans totaled $3 million and $5 million for the nine months ended September 30, 2015 and 2014, respectively. The decrease in the provision for loan losses on acquired loans for 2015 reflects paydowns in acquired loan balances.

For the nine months ended September 30, 2015, noninterest income increased$19 million, or 8%, from the same period in 2014. Increases in merchant and card fees, mortgage banking, capital markets income, and other income were partially offset by decreases in deposit service charges, wealth management services, and bank owned life insurance. Other income for the nine months ended September 30, 2015 and 2014 included $5 million and $23 million in amortization for tax credit investments, which was more than offset by lower tax expense.

Noninterest expenses decreased$1.1 billion during the same period. Excluding $18 million in pre-tax restructuring charges for the nine months ended September 30, 2015 and the $1.1 billion goodwill impairment charge, $45

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million reserve to address a process issue, and $13 million in pre-tax restructuring charges for the nine months ended September 30, 2014, noninterest expenses increased$5 million, or less than 1%. Increases in technology and communications, marketing and advertising, professional services, and federal deposit insurance premiums were partially offset by decreases in salaries and benefits, occupancy and equipment, amortization of intangibles, and other expense. Other expense for the nine months ended September 30, 2014 included elevated expenses of $7 million related to the valuation writedown of a single other real estate owned property, higher state franchise taxes, and expenses incurred to protect our customers in response to the widely publicized Home Depot data security breach that impacted debit and credit card holders and banks across North America.

The provision for taxes for the nine months ended September 30, 2015 was $61 million, resulting in an effective tax rate of 26.2%. The provision for income taxes for nine months ended September 30, 2014 was a benefit of $117 million, resulting in an effective tax rate benefit of 13.0%. The effective tax rate for the nine months ended September 30, 2015 reflects the benefit of investments in certain tax credits originated by our commercial real estate business during 2015. The effective tax rate for the nine months ended September 30, 2014 reflects the impact of the goodwill impairment charge, of which only a portion was tax deductible, benefits of a taxable reorganization of a subsidiary and from investments in certain historic tax credits originated by our commercial real estate business.

Net Interest Income

Our third quarter of 2015 net interest income of $263 million was unchanged from the prior quarter as the benefits of a 2% annualized increase in interest-earning assets and an extra day in the quarter were offset by a four basis points decline in our net interest rate margin. Approximately one-half of the four basis points decline was due to an additional day in the quarter. The decrease in our net interest rate margin to 2.98% reflects continued compression of earning asset yields in the current low interest rate and competitive pricing environment, lower discount accretion income on prepayments of collateralized loan obligations, and lower benefits from purchase accounting accretion on acquired loans.

The premium amortization on our residential mortgage-backed securities portfolio decreased from $9 million for the prior quarter to $6 million for the current quarter. We had a total benefit of $1 million from prepayments of some collateralized loan obligations that were carried at a discount. The yield on average interest-earning assets decreasedfour basis points from the prior quarter due to the impact of the roll off of higher earning assets and roll on of lower earning assets.

Average interest-earning assets increased$185 million, or 2% annualized, while average interest-bearing liabilities decreased$71 million, or 1% annualized. Growth in average interest earning assets reflected continued loan growth, particularly in commercial business, home equity, and indirect auto loans. Average investment securities decreased3% from the prior quarter, driven by a $99 million, or 30% annualized, decline in our commercial mortgage-backed securities portfolio and an $86 million, or 9% annualized, decrease in our other securities portfolio, partially offset by a $97 million, or 5% annualized, increase in our residential mortgage-backed securities portfolio.

During 2013, the yield curve steepened appreciably driven by increased anticipation that the Federal Reserve will begin tapering its Quantitative Easing Bond-Buying program.  The steepening of the yield curve resulted from an increase in the mid-to-long end of the curve which has the positive impact of increasing reinvestment rates on certain securities purchases and mitigating premium amortization due to lower prepayment activity driven by higher mortgage rates. However, these benefits to net interest income continue to be more than offset by continued prepayments and/or refinancing of higher-yielding loans and new loan growth at current lower market rates. An intensifying competitive landscape, particularly for commercial and commercial real estate loans may drive spread compression in the future, which will likely impact net interest income.

On December 17, 2014 the FOMC released its Meeting Statement and Economic Projections that, among other things, provide each FOMC participant’s judgment of the midpoint of the appropriate target range for the federal funds rate. The FOMC members’ median projection for the federal funds rate at the end of 2015 was 1.125%. On March 18, 2015 the FOMC updated their Economic Projections and reduced the midpoint of the appropriate target

18

range for the federal funds rate at the end of 2015 by 0.50% to 0.625%. The median projection for the federal funds rate at the end of 2016 declined from 2.50% to 1.875%. On March 18, 2015 the FOMC updated its Economic Projections and reduced the midpoint of the appropriate target range for the federal funds rate at the end of 2015 by 0.50% to 0.625%. The median projection for the federal funds rate at the end of 2016 declined from 2.50% to 1.875%. Minutes from the March 18, 2015 meeting demonstrated the Fed members are split on whether to increase the federal funds rate in June 2015 stating “Several participants judged that the economic data and outlook were likely to warrant beginning normalization at the June meeting.”

In its release after the March 18, 2015 meeting, the FOMC acknowledged that inflation is expected to remain near its recent low level in the near term but stated they expected inflation to gradually rise toward the target level over the medium term. The FOMC also expressed it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market. On April 29, 2015, the FOMC maintained the same outlook for inflation and the federal funds rate but conceded that economic growth slowed during the winter months, describing the slowdown as “in part reflecting transitory factors”.

On June 17, 2015, the FOMC again released its Meeting Statement and Economic Projections. Most notably, the FOMC members’ median projection for the federal funds rate at the end of 2016 decreased 25 basis points to 1.625% and the FOMC members’ median projection for the federal funds rate at the end of 2017 also decreased 25 basis points to 2.875%. The median projection for 2015 remained unchanged at 0.625% suggesting potentially two rate hikes in the year. Minutes from the June Meeting suggest Federal Reserve officials believe they need more time and more evidence that economic growth was sufficiently strong to justify a change in policy accommodation. Furthermore, Federal Reserve officials have grown increasingly concerned about the potential "contagion" from international developments, specifically citing a sluggish Chinese economy and the potential departure of Greece from the Eurozone.

In its release after the July 29, 2015 meeting, the FOMC largely maintained its prior views. While it noted that the labor market and housing have improved, it equally noted that inflation is anticipated to remain near its recent low level in the near term, further removing reference from the June 17, 2015 FOMC meeting that “energy prices appear to have stabilized”. It also maintained its view that business fixed investments and net exports remained soft. Based on the language, the market believes that the timing of the first Federal Reserve liftoff still remains indeterminate.

Despite the decrease in the FOMC projections, the continued low levels of inflation and the decline in oil prices has caused the market to believe the Federal Reserve will not raise the federal funds rate as soon or as high as the Federal Reserve projections.

In the third quarter of 2015, global growth concerns and the impact on the U.S. economy led the Federal Reserve to continue to delay increasing the federal funds rate. In the September 17, 2015 release the Federal Reserve stated, ”Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term.” As a result, the market has pushed out expectations for the Federal Reserve's initial rate increase to 2016 and interest rates decreased across most Treasury rate term points. However, the Federal Reserve Economic Projections indicated that 13 of 17 FOMC members still believe the appropriate timing to raise rates is in 2015. The Federal Reserve also updated the FOMC members’ median projection for the federal funds rate which decreased 0.25% from the June projections for 2015 through the longer run.

During 2015, longer term interest rates have been volatile. 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 has risen to as high as 2.49% on June 26, 2015. On October 22, 2015, the 10 year Treasury was 2.04% while the 2 year Treasury was 0.62%, down from June 30, 2015 by 0.32% and 0.03%, respectively. Similarly, the mortgage refinance rates have again declined below 4.00%.

We do not expect to see significant improvement in net interest income until short-term interest rates increase, and the impact on net interest income will be influenced by the nature, timing, market reaction and customer behavior, all of which are very unpredictable. There are currently 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 seven

19

implied rate increases of 0.25% by the end of 2016. The pace and magnitude of rising rates will impact future profitability.

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)
	September 30, 2015				June 30, 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	$	8,277	3.52	%	$	8,257	3.61	%	$	20		(0.09	)%
Business	5,972		3.26		5,830		3.48		142			(0.22	)
Total commercial lending	14,249		3.41		14,087		3.56		162			(0.15	)
Consumer:
Residential real estate	3,338		3.70		3,326		3.68		12			0.02
Home equity	3,001		3.82		2,963		3.86		38			(0.04	)
Indirect auto	2,293		2.86		2,238		2.74		55			0.12
Credit cards	306		11.44		304		11.40		2			0.04
Other consumer	255		8.57		260		8.49		(5		)	0.08
Total consumer lending	9,193		3.91		9,091		3.91		102			—
Total loans	23,442		3.64		23,178		3.73		264			(0.09	)
Residential mortgage-backed securities(3)	7,478		2.40		7,381		2.30		97			0.10
Commercial mortgage-backed securities(3)	1,212		3.88		1,311		3.42		(99		)	0.46
Other investment securities(3)	3,518		3.68		3,604		3.75		(86		)	(0.07	)
Total investment securities	12,208		2.92		12,296		2.85		(88		)	0.07
Money market and other investments	109		1.92		100		1.56		9			0.36
Total interest-earning assets	35,759		3.38	%	35,574		3.42	%	185			(0.04	)%
Noninterest-earning assets(4)(5)	3,292				3,339				(47		)
Total assets	$	39,051			$	38,913			$	138
Interest-bearing liabilities:
Deposits
Savings deposits	$	3,427	0.10	%	$	3,494	0.09	%	$	(67	)	0.01	%
Checking accounts	5,165		0.03		5,131		0.03		34			—
Money market deposits	10,403		0.29		10,251		0.29		152			—
Certificates of deposit	3,962		0.81		3,917		0.82		45			(0.01	)
Total interest-bearing deposits	22,957		0.29		22,793		0.29		164			—
Borrowings
Short-term borrowings	3,953		0.50		4,522		0.48		(569		)	0.02
Long-term borrowings	1,693		3.24		1,359		3.90		334			(0.66	)
Total borrowings	5,646		1.32		5,881		1.27		(235		)	0.05
Total interest-bearing liabilities	28,603		0.50	%	28,674		0.49	%	(71		)	0.01	%
Noninterest-bearing deposits	5,661				5,427				234
Other noninterest-bearing liabilities	637				667				(30		)
Total liabilities	34,901				34,768				133
Stockholders’ equity(4)	4,150				4,145				5
Total liabilities and stockholders’ equity	$	39,051			$	38,913			$	138
Net interest rate spread			2.88	%			2.93	%				(0.05	)%
Net interest rate margin			2.98	%			3.02	%				(0.04	)%

20

⁽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.

⁽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 $269 million for the quarter ended September 30, 2015 equaled our taxable equivalent net interest income from the quarter ended June 30, 2015. Overall the yield on interest-earning assets decreasedfour basis points as a result of the combined effects of yield compression on our loan portfolio and mortgage-backed securities portfolio due to the impact of reinvestments and repricing of assets in the current low interest rate environment. Average interest-earning assets increased2% annualized from the prior quarter primarily driven by growth in our loan portfolio partially offset by lower investment securities.

Our average balance of investment securities decreased quarter over quarter by $88 million. Yields on our investment securities portfolio increasedseven basis points to 2.92% primarily due to higher yields on commercial mortgage-backed securities as well as lower premium amortization on our residential mortgage-backed securities portfolio. During the current quarter, we recognized a $1 million benefit from income accretion from prepayments of certain collateralized loan obligations, compared to $3 million of unusual benefits in the quarter ended June 30, 2015.

Loan yields declined nine basis points to 3.64%, reflecting continued pressure on loan yields due to low interest rates and competitive pressures, as well as lower benefits from purchase accounting accretion. The decline in loan yields was driven by the roll-on/roll-off impact of commercial loan originations as well as lower credit mark accretion on acquired loans previously reclassified from nonaccretable to accretable yield. The total credit mark accretion in the third quarter was about $2 million, down from $4 million in the second quarter. Overall, our loan growth was 5% annualized from the second quarter of 2015, as our average loan balances increased by $264 million. Commercial loan growth was $162 million, or 5% annualized, and home equity and indirect auto remained a source of growth contributing $38 million, or 5% annualized, and $55 million, or 10% annualized, respectively, of the average net loan growth this quarter. Indirect auto originations increased $27 million, or 10%, to $300 million during the third quarter of 2015 with a yield, net of dealer reserve, of 3.42%, which is 58 basis points higher than yields during the third quarter of 2014.

Our average balances of interest-bearing deposits increased by $164 million, or 3% annualized. The increase in our average balances was driven by a $152 million, or 6% annualized, increase in our average money market deposits resulting from higher retail and commercial balances, partially offset by lower municipal balances. The rate paid on interest-bearing deposits was unchanged at 0.29%.

Our average borrowings decreased quarter over quarter by $235 million primarily due to a $569 million, or 50% annualized, decrease in average short-term borrowings, partially offset by a $334 million, or 98% annualized, increase in average long-term borrowings. Our cost of borrowings increasedfive basis points from the second quarter of 2015 to 1.32% for the third quarter of 2015.

21

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)
	September 30, 2015				September 30, 2014
(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	$	8,277	3.52	%	$	7,985	3.65	%	$	292		(0.13	)%
Business	5,972		3.26		5,694		3.51		278			(0.25	)
Total commercial lending	14,249		3.41		13,679		3.59		570			(0.18	)
Consumer:
Residential real estate	3,338		3.70		3,351		3.77		(13		)	(0.07	)
Home equity	3,001		3.82		2,857		4.01		144			(0.19	)
Indirect auto	2,293		2.86		1,978		2.84		315			0.02
Credit cards	306		11.44		313		11.44		(7		)	—
Other consumer	255		8.57		287		8.54		(32		)	0.03
Total consumer lending	9,193		3.91		8,786		4.06		407			(0.15	)
Total loans	23,442		3.64		22,465		3.80		977			(0.16	)
Residential mortgage-backed securities(3)	7,478		2.40		6,406		2.56		1,072			(0.16	)
Commercial mortgage-backed securities(3)	1,212		3.88		1,564		3.32		(352		)	0.56
Other investment securities(3)	3,518		3.68		3,854		4.06		(336		)	(0.38	)
Total investment securities	12,208		2.92		11,824		3.15		384			(0.23	)
Money market and other investments	109		1.92		86		2.76		23			(0.84	)
Total interest-earning assets	35,759		3.38	%	34,375		3.57	%	1,384			(0.19	)%
Noninterest-earning assets(4)(5)	3,292				4,216				(924		)
Total assets	$	39,051			$	38,591			$	460
Interest-bearing liabilities:
Deposits
Savings deposits	$	3,427	0.10	%	$	3,552	0.09	%	$	(125	)	0.01	%
Checking accounts	5,165		0.03		4,821		0.03		344			—
Money market deposits	10,403		0.29		9,882		0.23		521			0.06
Certificates of deposit	3,962		0.81		3,970		0.67		(8		)	0.14
Total interest-bearing deposits	22,957		0.29		22,225		0.24		732			0.05
Borrowings
Short-term borrowings	3,953		0.50		4,737		0.43		(784		)	0.07
Long-term borrowings	1,693		3.24		733		6.56		960			(3.32	)
Total borrowings	5,646		1.32		5,470		1.25		176			0.07
Total interest-bearing liabilities	28,603		0.50	%	27,695		0.44	%	908			0.06	%
Noninterest-bearing deposits	5,661				5,259				402
Other noninterest-bearing liabilities	637				536				101
Total liabilities	34,901				33,490				1,411
Stockholders’ equity(4)	4,150				5,100				(950		)
Total liabilities and stockholders’ equity	$	39,051			$	38,591			$	460
Net interest rate spread			2.88	%			3.13	%				(0.25	)%
Net interest rate margin			2.98	%			3.21	%				(0.23	)%

22

⁽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 decreased$9 million for the third quarter of 2015 compared to the third quarter of 2014 reflecting a decrease in our net interest rate margin of 23 basis points partially offset by an increase in net-interest earning assets of $476 million. The $1.4 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 $908 million, as interest-bearing checking and money market deposits grew by $344 million, or 7%, and $521 million, or 5%, respectively. Total borrowings increased$176 million, or 3%, as a $960 million, or 131%, increase in long-term borrowings were partially offset by a $784 million, or 17%, decrease in short-term borrowings. The rate paid on long-term borrowings decreased to 3.24% from 6.56% a year ago, while the rate paid on short-term borrowings increasedseven basis points, resulting in a seven basis point increase in the total rate paid on borrowings.

Our noninterest-bearing deposits increased8% from the third quarter of 2014, driven primarily by business checking growth while our interest-bearing checking balances increased nearly 7% driven by continued growth in net new checking units and average balance growth. The 23 basis points decrease in our net interest margin is reflective of the impact of reinvestments and repricing of assets in the current low interest rate environment, particularly in our commercial business portfolio and deposit pricing promotional campaigns.

Our third quarter of 2015 net interest margin was impacted by the benefit of $1 million from prepayments of certain collateralized loan obligations that were carried at a discount. Our third quarter of 2014 net interest margin was impacted by $0.9 million in retroactive adjustments to reflect faster expected prepayment speeds as well as $5.4 million in prepayments from certain collateralized loan obligations.

The yield on our commercial real estate and commercial business loan portfolios decreased by 13 basis points and 25 basis points, respectively. Consumer loan yields dropped 15 basis points during the same period, driven primarily by a 19 basis points decline in home equity yields partially offset by a two basis points improvement in indirect auto yields. Additionally, yields on our investment securities portfolio dropped 23 basis points, driven by a 16 basis points decrease in yields on residential mortgage-backed securities and 38 basis points decrease in yields on other investment securities, partially offset by a 56 basis points increase in yields on commercial mortgage-backed securities.

Our total yield on interest-earning assets in the third quarter of 2015decreased19 basis points compared to the third quarter of 2014, while costs of interest-bearing liabilities increasedsix basis points, resulting in a 25 basis point decrease in our interest rate spread.

23

Comparison to Prior Year to Date

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.

	Nine months ended September 30,								Increase (decrease)
	2015				2014
(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	$	8,266	3.58	%	$	7,896	3.77	%	$	370		(0.19	)%
Business	5,867		3.39		5,558		3.54		309			(0.15	)
Total commercial lending	14,133		3.50		13,454		3.68		679			(0.18	)
Consumer:
Residential real estate	3,334		3.72		3,376		3.82		(42		)	(0.10	)
Home equity	2,968		3.86		2,805		4.07		163			(0.21	)
Indirect auto	2,240		2.80		1,782		2.87		458			(0.07	)
Credit cards	307		11.53		312		11.50		(5		)	0.03
Other consumer	263		8.52		292		8.57		(29		)	(0.05	)
Total consumer lending	9,112		3.95		8,567		4.15		545			(0.20	)
Total loans	23,245		3.70		22,021		3.89		1,224			(0.19	)
Residential mortgage-backed securities(3)	7,347		2.40		6,067		2.65		1,280			(0.25	)
Commercial mortgage-backed securities(3)	1,308		3.51		1,623		3.35		(315		)	0.16
Other investment securities(3)	3,559		3.65		4,131		3.76		(572		)	(0.11	)
Total investment securities	12,214		2.88		11,821		3.14		393			(0.26	)
Money market and other investments	122		1.43		125		1.74		(3		)	(0.31	)
Total interest-earning assets	35,581		3.42	%	33,967		3.62	%	1,614			(0.20	)%
Noninterest-earning assets(4)(5)	3,311				4,220				(909		)
Total assets	$	38,892			$	38,187			$	705
Interest-bearing liabilities:
Deposits
Savings deposits	$	3,451	0.09	%	$	3,612	0.09	%	$	(161	)	—	%
Checking accounts	5,100		0.03		4,792		0.03		308			—
Money market deposits	10,263		0.28		9,913		0.22		350			0.06
Certificates of deposit	3,886		0.82		3,864		0.68		22			0.14
Total interest-bearing deposits	22,700		0.29		22,181		0.24		519			0.05
Borrowings
Short-term borrowings	4,529		0.48		4,597		0.43		(68		)	0.05
Long-term borrowings	1,362		3.89		733		6.62		629			(2.73	)
Total borrowings	5,891		1.26		5,330		1.28		561			(0.02	)
Total interest-bearing liabilities	28,591		0.49	%	27,511		0.44	%	1,080			0.05	%
Noninterest-bearing deposits	5,507				5,068				439
Other noninterest-bearing liabilities	653				541				112
Total liabilities	34,751				33,120				1,631
Stockholders’ equity(4)	4,141				5,067				(926		)
Total liabilities and stockholders’ equity	$	38,892			$	38,187			$	705
Net interest rate spread			2.93	%			3.18	%				(0.25	)%
Net interest rate margin			3.02	%			3.27	%				(0.25	)%

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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 decreased$26 million for the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014 reflecting an increase in net-interest earning assets of $534 million and a decrease in our net interest margin of 25 basis points. The $1.6 billion increase in interest-earning assets reflects organic loan growth in our commercial, home equity, and indirect auto portfolios. Over the same period, our average interest-bearing liabilities increased by $1.1 billion, as interest-bearing checking and money market deposits grew by $308 million, or 6%, and $350 million, or 4%, respectively. Total borrowings increased$561 million, or 11%, as a $629 million, or 86%, increase in long-term borrowings was partially offset by a $68 million, or 1%, decrease in short-term borrowings. The rate paid on long-term borrowings decreased from 6.62% to 3.89% while the rate paid on short-term borrowings increasedfive basis points, resulting in a two basis points decrease in the total rate paid on borrowings.

The 25 basis points decrease in our net interest margin is reflective of the impact of reinvestments and repricing of assets in the current low interest rate environment and deposit pricing promotional campaigns.

The yield on our commercial real estate and commercial business loan portfolios decreased by 19 basis points and 15 basis points, respectively. Consumer loan yields dropped 20 basis points during the same period, driven primarily by a seven basis points decline in indirect auto yields and a 21 basis points decline in home equity yields. Additionally, yields on our investment securities portfolio dropped 26 basis points, driven by a 25 basis points decrease and 11 basis points decrease in yields on residential mortgage-backed securities and other investment securities, respectively, partially offset by a 16 basis points increase in yields on commercial mortgage-backed securities.

Our yields on interest-earning assets for the nine months ended September 30, 2015decreased20 basis points compared to the nine months ended September 30, 2014, while costs on interest-bearing liabilities increasedfive basis points, resulting in a 25 basis point decrease in our interest rate spread.

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							Nine months ended September 30,
	September 30,			June 30,		September 30,		2015			2014
(in millions)	2015			2015		2014
Provision for originated loans	$	21		$	20	$	15	$	51		$	54
(Negative) provision for acquired loans	(1		)	1		1		3			5
(Negative) provision for unfunded commitments	1			—		—		(1		)	1
Total	$	20		$	21	$	17	$	53		$	60

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

25

losses related to originated loans amounted to $21 million, or 0.41% of average originated loans annualized, for the quarter ended September 30, 2015, compared to $20 million, or 0.40% of average originated loans annualized, for the quarter ended June 30, 2015 and $15 million, or 0.33% of average originated loans annualized, for the quarter ended September 30, 2014. The current quarter provision includes $5 million to support $662 million in originated loan growth and $16 million to cover net charge-offs on originated loans during the quarter.

The $1 milliondecrease in our provision for loan losses from $21 million for the quarter ended June 30, 2015 to $20 million for the quarter ended September 30, 2015 was driven by favorable asset quality trends offset by provisioning to support the $662 million increase in our originated loans.

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 release of provision of $1 million related to our acquired loans for the third quarter of 2015 reflecting paydowns in acquired loan balances. Our provision related to our acquired loans was $1 million for the second quarter of 2015 and the third quarter of 2014.

The provision for credit losses included $0.5 million for unfunded loan commitments in the third quarter of 2015. The provision for credit losses for the second quarter of 2015 included $0.3 million related to our unfunded loan commitments. Our total unfunded commitments were $11.6 billion and $11.0 billion at September 30, 2015 and December 31, 2014, 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 September 30, 2015 and December 31, 2014.

Noninterest Income

The following table presents our noninterest income for the periods indicated:

	Three months ended									Nine months ended September 30,
(dollars in millions)	September 30, 2015			June 30, 2015			September 30, 2014			2015			2014
Deposit service charges	$	23		$	22		$	20		$	66		$	67
Insurance commissions	18			17			18			51			51
Merchant and card fees	13			13			13			39			37
Wealth management services	15			16			15			45			47
Mortgage banking	5			6			4			16			13
Capital markets income	3			5			4			12			10
Lending and leasing	4			4			4			13			13
Bank owned life insurance	3			3			3			10			12
Other income excluding historic tax credit amortization	1			3			1			6			5
Total noninterest income excluding tax credit amortization (non-GAAP)	85			90			83			257			256
Tax credit amortization	(2		)	(3		)	(7		)	(5		)	(23		)
Total noninterest income (GAAP)	$	83		$	87		$	75		$	252		$	233
Noninterest income excluding tax credit amortization as a percentage of net revenue (non-GAAP)	24.5		%	25.4		%	23.3		%	24.6		%	23.9		%
Noninterest income as a percentage of net revenue	24.1		%	24.8		%	21.6		%	24.2		%	22.2		%

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Comparison to Prior Quarter

Third quarter of 2015 GAAP noninterest income of $83 milliondecreased$3 million, or 4%, compared to the second quarter of 2015, reflecting lower income from wealth management services and capital markets income due to market volatility, partially offset by higher deposit service charges and insurance commissions. Other income for the third quarter and second quarter of 2015 included $2 million and $3 million, respectively, 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. Excluding this amortization, noninterest income decreased5% from the prior quarter.

Lower annuity and mutual fund commissions drove the $1 million, or 7%, decline in income from wealth management services from the prior quarter due to market volatility during the quarter. Variable annuity sales declined from the prior quarter as customers moved away from products with equity exposure. Mortgage banking income decreased$1 million, or 12%, due to lower locked volumes. Capital markets income, which primarily includes income from derivatives and syndications, decreased$3 million, or 51%, due to market volatility. The $1 million, or 3%, increase in deposit service charges reflects typical seasonal trends. Insurance commissions increased$1 million, or 7%, during the same period, reflecting strong typical third quarter renewal activity. Excluding the tax credit amortization, other income decreased$2 million due to lower investment gains.

GAAP noninterest income as a percentage of net revenue decreased modestly from 24.8% for the three months ended June 30, 2015 to 24.1% for the three months ended September 30, 2015. Excluding the tax credit amortization, recorded as contra noninterest income, this ratio decreased from 25.4% for the three months ended June 30, 2015 to 24.5% for the three months ended September 30, 2015.

Comparison to Prior Year Quarter

Third quarter of 2015 GAAP noninterest income of $83 millionincreased$8 million, or 11%, compared to the third quarter of 2014, driven by increases in deposit service charges, mortgage banking, lending and leasing, and other income. Other income in the third quarter of 2015 and 2014 included $2 million and $7 million, respectively, of amortization of investments in tax credits, which was 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. Excluding this amortization, noninterest income increased$2 million, or 3%.

Deposit service charges increased$3 million, or 13%, due to the impact of the process issue in 2014. Mortgage banking revenues increased$1 million, or 16%, as a result of a combination of higher gain on sale margins and higher close volumes. The $1 million, or 15%, increase in lending and leasing was driven by higher loan and lease fees. Wealth management services income decreased$1 million, or 5%, stemming from lower annuity and mutual funds commissions due to market volatility. The $1 million, or 26%, decrease in capital markets income primarily resulted from lower derivatives income.

GAAP noninterest income as a percentage of net revenue increased from 21.6% for the three months ended September 30, 2014 to 24.1% for the three months ended September 30, 2015. Excluding the tax credit amortization, recorded as contra noninterest income, this ratio increased from 23.3% for the three months ended September 30, 2014 to 24.5% for the three months ended September 30, 2015.

Comparison to Prior Year to Date

GAAP noninterest income of $252 millionincreased$19 million, or 8%, for the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014, driven primarily by higher revenues from merchant and card fees, mortgage banking, capital markets income, and other income, partially offset by lower revenues from deposit service charges, wealth management services, and bank owned life insurance. Other income for the nine months ended September 30, 2015 and 2014 included $5 million and $23 million, respectively, of amortization of investments in tax credits, which was offset by lower tax expense. These investments are

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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. Excluding this amortization, noninterest income increased$1 million, or less than 1%.

The $1 million, or 4%, increase in merchant and card fees primarily stemmed from higher debit card transaction volumes. Mortgage banking revenues increased$3 million, or 21%, from the prior year as a result of higher close volumes and higher gain on sale margins and the $2 million, or 20%, increase in capital markets income was due to higher derivatives income partially offset by lower syndication revenues. Excluding the tax credit amortization, other income increased$2 million, or 42%, due to higher securities gains.

Revenues from deposit service charges decreased$2 million, or 3%, as a result of lower nonsufficient funds incident rates and other retail service charges, while revenues from wealth management services decreased$2 million, or 4%, as a result of lower annuity and mutual funds commissions caused by negative market conditions. The $2 million, or 18%, decrease in bank owned life insurance was attributable to benefits received on two insurance claims in the first quarter of 2014.

GAAP noninterest income as a percentage of net revenue increased from 22.2% for the nine months ended September 30, 2014 to 24.2% for the nine months ended September 30, 2015. Excluding the tax credit amortization, recorded as contra noninterest income, this ratio increased from 23.9% for the nine months ended September 30, 2014 to 24.6% for the nine months ended September 30, 2015.

Noninterest Expense

The following table presents our noninterest expenses for the periods indicated: 

	Three months ended									Nine months ended September 30,
(dollars in millions)	September 30, 2015			June 30, 2015			September 30, 2014			2015			2014
Salaries and employee benefits	$	114		$	114		$	116		$	339		$	352
Occupancy and equipment	26			26			27			79			84
Technology and communications	38			36			31			110			93
Marketing and advertising	8			10			8			29			24
Professional services	18			16			14			47			39
Amortization of intangibles	4			5			7			15			21
FDIC premiums	10			12			10			33			28
Restructuring charges	—			—			2			18			13
Goodwill impairment	—			—			1,100			—			1,100
Deposit account remediation	—			—			45			—			45
Other expense	27			28			36			85			92
Total noninterest expenses	245			248			1,397			754			1,890
Less nonoperating expenses:
Restructuring charges	—			—			(2		)	(18		)	(13		)
Goodwill impairment	—			—			(1,100		)	—			(1,100		)
Deposit account remediation	—			—			(45		)	—			(45		)
Total operating noninterest expenses(1)	$	245		$	248		$	249		$	737		$	732
Efficiency ratio(2)	70.7		%	70.9		%	400.6		%	72.4		%	180.2		%
Operating efficiency ratio(1)	70.7		%	70.9		%	71.5		%	70.7		%	69.8		%
Full time equivalent employees	5,397			5,364			5,768

⁽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

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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

Third quarter2015 GAAP noninterest expenses decreased$2 million, or 1%, to $245 million from the second quarter of 2015, primarily driven by lower marketing and advertising, amortization of intangibles, FDIC premiums, and other expenses, which were partially offset by higher technology and communications and professional services expenses. Salaries and benefits were consistent with the prior quarter as an increase in regular salaries was offset by a decrease in medical benefits expense.

Marketing and advertising decreased$2 million, or 18%, due to prior period deposit marketing campaigns. FDIC premiums decreased$2 million, or 15%, as a result of the expiration of the impact of our third quarter of 2014 goodwill impairment charge. The $1 million, or 4%, decrease in other expense resulted in part from lower state franchise taxes.

Technology and communications expense increased$2 million, or 5%, due to increases in software and depreciation expenses. Higher professional services fees of $2 million, or 11%, resulted in large part from vendor and other consulting costs.

In the third quarter of 2015, our GAAP efficiency ratio was 70.7% compared to 70.9% in the prior quarter.

Comparison to Prior Year Quarter

GAAP noninterest expenses decreased$1.2 billion, or 82%, for the quarter ended September 30, 2015 from the quarter ended September 30, 2014. Noninterest expenses in the third quarter of 2014 included a $1.1 billion goodwill impairment charge, a $45 million reserve to address a process issue related to certain customer deposit accounts, and $2 million in restructuring and severance expenses incurred primarily in connection with a branch staffing realignment. Excluding these charges, noninterest expenses decreased$4 million, or 2%, as lower salaries and benefits, occupancy and equipment, amortization of intangibles, and other expense were partially offset by higher technology and communications, marketing and advertising, and professional services.

Line items that decreased from the prior year quarter included $2 million, or 2%, in salaries and employee benefits, $2 million, or 7%, in occupancy and equipment, $3 million, or 39%, in amortization of intangibles and $9 million, or 25%, in other expenses. The decrease in salaries and employee benefits was primarily driven by lower regular salaries reflective of the 6% decrease in our headcount resulting from our organization simplification initiative partially offset by higher incentive-based compensation. The decrease in occupancy and equipment reflects the benefits of consolidating 17 branches during the first quarter of 2015. Other expenses for the third quarter of 2014 included $7 million of elevated charges related to the valuation writedown of a single other real estate owned property, higher state franchise taxes, and expenses incurred to protect our customers in response to the widely publicized Home Depot data security breach that impacted debit and credit card holders and banks across North America.

Technology and communications expenses for the quarter ended September 30, 2015increased$7 million, or 22%, from the same period in 2014 primarily as a result of higher hardware and software expenses as well as depreciation related to completed technology projects. Marketing and advertising was $1 million, or 9%, higher for 2015 due to our core customer acquisition strategy. Professional services increased$4 million, or 29%, due to elevated vendor and other consulting costs.

Restructuring charges of $2 million for the quarter ended September 30, 2014 were comprised of $2 million in salaries and benefits and $1 million in professional services.

In the third quarter of 2015, our GAAP efficiency ratio was 70.7%. Excluding the $1.1 billion goodwill impairment charge, a $45 million reserve to address a process issue related to certain customer deposit accounts, and $2

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million in restructuring and severance expenses incurred primarily in connection with a branch staffing realignment, our non-GAAP efficiency ratio for the third quarter of 2014 was 71.5%.

Comparison to Prior Year to Date

GAAP noninterest expenses decreased$1.1 billion, or 60%, for the nine months ended September 30, 2015 from the nine months ended September 30, 2014. Noninterest expenses for the nine months ended September 30, 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 initiative during the first quarter as well as third party professional fees incurred in connection with the overstatement of the allowance for loan losses. Noninterest expenses for the nine months ended September 30, 2014 included a $1.1 billion goodwill impairment charge, a $45 million reserve to address a process issue related to certain customer deposit accounts, and $13 million in pre-tax restructuring charges related to our branch staffing realignment, consolidation of ten branches during the first quarter, and executive departure charges. Excluding these charges, operating (non-GAAP) noninterest expenses increased$5 million, or less than 1%.

Technology and communications expenses for the nine months ended September 30, 2015increased$17 million, or 18%, from the same period in 2014 primarily as a result of higher hardware and software expenses as well as higher depreciation related to completed technology projects. Marketing and advertising was $5 million, or 21%, higher for 2015 due to our core customer acquisition strategy. Professional services increased$9 million, or 22%, due to vendor and other consulting costs. FDIC premiums increased$5 million, or 17%, due to higher construction loans and the impact of our $1.1 billion goodwill impairment charge in the third quarter of 2014.

Partially offsetting these increases were a $13 million, or 4%, decrease in salaries and employee benefits, a $5 million, or 6%, decrease in occupancy and equipment, and a $6 million, or 27%, decrease in amortization of intangibles. The decrease in salaries and employee benefits was primarily driven by lower regular salaries, reflective of the 6% decrease in our headcount resulting from our organization simplification initiative, partially offset by higher benefits costs. The decrease in occupancy and equipment reflects the benefits of consolidating 17 branches during the first quarter of 2015. Contributing to the $7 million, or 8% decrease in other expenses were $7 million of elevated charges in the third quarter of 2014 related to the valuation writedown of a single other real estate owned property, higher state franchise taxes, and expenses incurred to protect our customers in response to the widely publicized Home Depot data security breach that impacted debit and credit card holders and banks across North America.

Restructuring charges of $18 million for the nine months ended September 30, 2015 were comprised of $4 million in salaries and employee benefits, $6 million in occupancy and equipment, $5 million in professional services, and $2 million in other expenses. Restructuring charges of $13 million for the nine months ended September 30, 2014 were comprised of $8 million in salaries and employee benefits, $4 million in occupancy and equipment, and $1 million in professional services.

Taxes

The provision for income taxes for the third quarter of 2015 and second quarter of 2015 was $21 million and $20 million, respectively resulting in effective tax rates of 26.0% and 24.7%, respectively. The effective tax rate for both quarters reflects the benefit of tax credits originated by our commercial real estate business.

The provision for income taxes in the third quarter of 2015 was $21 million, resulting in an effective tax rate of 26.0%. The provision for income taxes in the third quarter of 2014 was a benefit of $145 million, resulting in an effective tax rate benefit of 13.6%. The effective tax rate for the three months ended September 30, 2015 reflects the benefit of our investments in tax credits. The effective tax rate benefit for the three months ended September 30, 2014 reflects the impact of the goodwill impairment charge, of which only a portion was tax deductible, benefits of a taxable reorganization of a subsidiary and from investments in certain historic tax credits originated by our commercial real estate business.

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The provision for income taxes for the nine months ended September 30, 2015 was $61 million, resulting in an effective tax rate of 26.2%. The provision for income taxes for the nine months ended September 30, 2014 was a benefit of $117 million, resulting in an effective tax rate benefit of 13.0%. The effective tax rate for the nine months ended September 30, 2015 reflects the benefit of our investment in tax credits. The effective tax rate benefit for the nine months ended September 30, 2014 reflects the impact of the goodwill impairment charge, of which only a portion was tax deductible, benefits of a taxable reorganization of a subsidiary and from investments in certain historic tax credits originated by our commercial real estate business.

Other

In October 2014, we reviewed an operational issue related to certain customer deposit accounts and determined that redress to certain customers was appropriate. We self-disclosed the issue to the Consumer Financial Protection Bureau, Office of the Comptroller of the Currency, and the Federal Reserve Bank of New York and established a $45 million reserve in the third quarter of 2014.

Following the initial assessment of the process issue, we engaged a third party expert to determine the precise amount of customer redress that should be provided to all impacted customers. The precise estimate of customer restitution was based on a detailed analysis performed by the third party expert for each of the impacted customer accounts and took approximately 3 months to complete.  The data set the third party ultimately had to review included over 3600 files, over 2.2 billion records, almost one terabyte of stored data and over 1.5 billion transactions. In the fourth quarter of 2014 upon completion of this detailed analysis, we lowered our estimated reserve to $25 million.

We believe that the reserve we have established for the process issue redress plan is adequate to cover our estimated total costs and that any reasonably possible losses in addition to amounts accrued will not materially impact future earnings or capital levels. Additionally, early in 2015 we corrected the process issue and we believe that the resolution of the process issue will not materially impact the amount of noninterest deposit income that we will earn in the future.

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.

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, 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

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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.

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 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:

	September 30, 2015					December 31, 2014					Increase (decrease)
(dollars in millions)	Amount			Percent		Amount			Percent
Commercial:
Real estate	$	7,174		30.3	%	$	7,231		31.4	%	$	(56	)
Construction	1,191			5.0		973			4.2		218
Business	6,031			25.5		5,775			25.1		256
Total commercial	14,397			60.8		13,979			60.7		418
Consumer:
Residential real estate	3,346			14.1		3,353			14.6		(7		)
Home equity	3,033			12.8		2,936			12.7		96
Indirect auto	2,331			9.9		2,166			9.4		165
Credit cards	306			1.3		324			1.4		(18		)
Other consumer	254			1.1		278			1.2		(24		)
Total consumer	9,269			39.2		9,058			39.3		211
Total loans and leases	23,666			100.0	%	23,037			100.0	%	629
Allowance for loan losses	(239		)			(234		)			(4		)
Total loans and leases, net	$	23,427				$	22,803				$	624

Our primary lending activity is the origination of commercial business and commercial real estate loans, as well as residential mortgage and home equity loans to customers located within our primary market areas. Our

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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. Substantially all of the residential mortgage loans that we originated in 2015 complied with the Qualified Mortgage rules of the Dodd-Frank Act. We also originate and retain in our lending portfolio various types of home equity and consumer loan products given their customer relationship building benefits.

Our total loans and leases outstanding increased$629 million, or 4% annualized, from December 31, 2014 to September 30, 2015 stemming from the continued growth in our commercial, home equity, and indirect auto portfolios. Our commercial loan portfolio increased$418 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 the organic growth across our footprint in our commercial lending activities, slightly offset by a decrease in the utilization of line commitments, to 40.4% at September 30, 2015 from 41.6% at December 31, 2014. Commercial loans as a percentage of our total loans of 61% remained in line with the loan type composition at December 31, 2014.

Our commercial business loan portfolio increased$256 million, or 6%, from December 31, 2014 which was driven primarily by increases in the middle market and asset based lending segments. Our commercial pipeline was consistent with historical norms at the end of the third quarter of 2015.

The $96 million, or 4% annualized, increase in our home equity portfolio reflects strong originations and increased utilization by current customers resulting from promotional and cross-sell campaigns. Our indirect auto portfolio increased$165 million, or 10% annualized from December 31, 2014 and increased$75 million, or 13% annualized, from June 30, 2015 reflecting $300 million in new originations during the current quarter, which yielded 3.42%, net of dealer reserve, an increase of four basis points from the prior quarter and 58 basis points from a year ago. The average FICO score for these new originations was 751, compared to 749 for the three months ended June 30, 2015.

Offsetting this growth was a decrease in our residential real estate loan portfolio of $7 million, or less than 1% annualized, from December 31, 2014 to September 30, 2015 which reflected 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 decreased8% and 12% annualized, respectively.

Included in the table above are acquired loans with a carrying value of $3.1 billion and $3.7 billion at September 30, 2015 and December 31, 2014, 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.

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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
September 30, 2015
Commercial:
Real estate	$	4,204	$	929	$	1,539	$	1,694	$	—	$	8,366
Business	2,817		1,061		888		733		533		6,031
Total commercial	7,021		1,989		2,428		2,427		533		14,397
Consumer:
Residential real estate	1,217		142		291		1,696		—		3,346
Home equity	1,632		320		559		522		—		3,033
Indirect auto	759		72		53		422		1,026		2,331
Credit cards	242		32		15		16		—		306
Other consumer	166		45		29		14		—		254
Total consumer	4,017		612		947		2,668		1,026		9,269
Total loans and leases	$	11,037	$	2,601	$	3,375	$	5,095	$	1,558	$	23,666
December 31, 2014
Commercial:
Real estate	$	4,083	$	939	$	1,535	$	1,647	$	—	$	8,204
Business	2,658		991		818		754		556		5,775
Total commercial	6,740		1,929		2,353		2,401		556		13,979
Consumer:
Residential real estate	1,221		140		290		1,702		—		3,353
Home equity	1,537		295		568		536		—		2,936
Indirect auto	733		48		41		390		954		2,166
Credit cards	261		33		15		15		—		324
Other consumer	183		48		32		15		—		278
Total consumer	3,936		564		946		2,658		954		9,058
Total loans and leases	$	10,676	$	2,494	$	3,299	$	5,059	$	1,510	$	23,037

⁽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 and Eastern Pennsylvania markets have exhibited steady growth with an increase in their commercial loan portfolios of $60 million and $74 million, or 4% and 4% annualized, respectively, from the end of 2014. Over the same period, our New York market also contributed to the growth, with a 6% 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:

	September 30, 2015			December 31, 2014
(dollars in millions)	Amount		Count	Amount		Count
Commercial real estate loans by balance size:(1)
Greater than or equal to $20 million	$	650	26	$	687	27
$10 million to $20 million	1,752		124	1,520		109
$5 million to $10 million	1,660		234	1,589		226
$1 million to $5 million	2,675		1,229	2,733		1,263
Less than $1 million(2)	1,629		6,405	1,675		6,826
Total commercial real estate loans	$	8,366	8,018	$	8,204	8,451
Commercial business loans by size:(1)
Greater than or equal to $20 million	$	322	13	$	325	13
$10 million to $20 million	1,204		86	1,114		80
$5 million to $10 million	1,154		165	1,181		167
$1 million to $5 million	1,749		791	1,626		729
Less than $1 million(2)	1,602		34,892	1,529		32,865
Total commercial business loans	$	6,031	35,947	$	5,775	33,854

⁽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 September 30, 2015 and December 31, 2014, non-owner occupied commercial real estate represented 66% of the total commercial real estate balance. Loans for construction, acquisition and development increased $200 million from December 31, 2014 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
September 30, 2015:
Non-owner occupied commercial real estate loans:
Construction, acquisition and development	$	416	$	105	$	155	$	204	$	186	$	1,067
Multifamily and apartments	1,102		97		138		247		77		1,663
Office and professional space	509		82		73		281		117		1,061
Retail	287		50		118		207		113		774
Warehouse and industrial	125		22		57		82		11		297
Other	315		44		85		118		64		625
Total non-owner occupied commercial real estate loans	2,754		400		626		1,138		568		5,487
Owner occupied commercial real estate loans	1,199		395		465		454		367		2,879
Total commercial real estate loans	$	3,953	$	796	$	1,091	$	1,592	$	935	$	8,366
December 31, 2014:
Non-owner occupied commercial real estate loans:
Construction, acquisition and development	$	322	$	108	$	117	$	182	$	137	$	867
Multifamily and apartments	1,103		98		167		245		98		1,712
Office and professional space	501		87		103		277		101		1,069
Retail	314		45		113		203		113		787
Warehouse and industrial	158		23		42		105		13		342
Other	314		47		83		158		65		666
Total non-owner occupied commercial real estate loans	2,712		409		625		1,170		528		5,444
Owner occupied commercial real estate loans	1,191		392		460		417		301		2,760
Total commercial real estate loans	$	3,903	$	800	$	1,085	$	1,587	$	828	$	8,204

⁽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)	September 30, 2015		December 31, 2014
Manufacturing	$	1,414	$	1,434
Health Care and Social Assistance	1,361		1,242
Real Estate and Rental and Leasing	1,070		1,019
Wholesale Trade	621		587
Retail Trade	547		500
Public Administration	523		456
Educational Services	455		384
Construction	414		413
Other Services (except Public Administration)	324		373
Finance and Insurance	298		337
Professional, Scientific, and Technical Services	297		304
Transportation and Warehousing	287		252
Administrative and Support and Waste Management and Remediation Services	190		201
Other	1,109		1,032
Total	$	8,910	$	8,536

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:

	September 30, 2015						December 31, 2014(1)
	Outstanding		Unused commitments		Total credit exposure		Outstanding		Unused commitments		Total credit exposure
	(in millions)
Oil and gas related	$	275	$	182	$	457	$	305	$	191	$	496
Utilities and alternative energy	78		168		246		114		109		223
Total	$	353	$	350	$	703	$	418	$	301	$	719

⁽¹⁾  Prior period amounts have been revised to reflect additional oil and gas credits that were in our portfolio at December 31, 2014.

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, second and third quarters, 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 over $2 million to our model driven allowance. In light of the downgrades, and the model driven increase in allowance, we recorded a qualitative adjustment of $3 million as of September 30, 2015, a $2 million decrease from December 31, 2014. As of September 30, 2015, only one energy loan was in nonaccrual status in the amount of $9 million.

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

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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.

With respect to our oil and gas related exposures, our oil and gas related outstandings of $275 million included both direct and indirect exposure to energy related obligors at September 30, 2015 of $145 million and $130 million, respectively. These combined outstandings represented a modest 1.2% of total loan outstanding balances at September 30, 2015. At December 31, 2014, our oil and gas related outstandings of $305 million included both direct and indirect exposure to energy related obligors of $161 million and $144 million, respectively. These combined outstandings represented a modest 1.3% of total loan outstanding balances at December 31, 2014. The energy-related exposure can be primarily classified into three subcategories: 1) upstream, 2) midstream, and 3) downstream.

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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
September 30, 2015
Upstream:
Drillers	$	14	$	—	$	14	$	1	$	—	$	1
Midstream:
Drilling field services	81		—		81		47		—		47
Other	49		—		49		14		—		14
Total midstream	131		—		132		61		—		61
Downstream:
Gas stations and convenience stores	—		58		58		—		24		24
Non-drilling support	—		35		35		—		14		14
Wholesale distribution	—		19		19		—		48		48
Other	—		18		18		—		33		33
Total downstream	—		130		130		—		120		120
Total	$	145	$	130	$	275	$	62	$	120	$	182
December 31, 2014(1)
Upstream:
Drillers	$	25	$	—	$	25	$	1	$	—	$	1
Midstream:
Drilling field services	89		—		89		49		—		49
Other	48		—		48		19		—		19
Total midstream	137		—		137		68		—		68
Downstream:
Gas stations and convenience stores	—		67		67		—		17		17
Non-drilling support	—		24		24		—		26		26
Wholesale distribution	—		30		30		—		51		51
Other	—		22		22		—		29		29
Total downstream	—		144		144		—		122		122
Total	$	161	$	144	$	305	$	69	$	122	$	191

⁽¹⁾  Prior period amounts have been revised to reflect additional oil and gas credits that were in our portfolio at December 31, 2014.

The table above does not include $76 million and $67 million, respectively, in outstanding loan balances and $18 million and $27 million, respectively, of unused commitments related to commercial real estate loans in which the direct counterparty to the loan is not involved in upstream or midstream activities. However, such properties have a large tenant exposure to companies directly involved in such activities at September 30, 2015 and December 31, 2014, respectively.

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

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$14 million and $25 million in outstanding loan balances made directly to counterparties involved in the drilling and operations of wells at September 30, 2015 and December 31, 2014, respectively.

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 $131 million and $137 million in outstanding loan balances at September 30, 2015 and December 31, 2014, 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 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 $130 million and $144 million at September 30, 2015 and December 31, 2014, respectively, in outstanding loan balances 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.

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 offer closed-end home equity loans which are generally fixed-rate with principal and interest payments, and variable-rate home equity lines of credit. Within the home equity line of credit portfolio, the standard 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.

Of the $3.0 billion and $2.9 billion home equity portfolio at September 30, 2015 and December 31, 2014, respectively, approximately $1.2 billion and $1.1 billion were in a first lien position for each period, respectively. 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 September 30, 2015 and December 31, 2014.

The table below summarizes the principal balances of our home equity lines of credit by portfolio at the dates indicated:

	September 30, 2015						December 31, 2014
(in millions)	Interest only		Principal and interest		Total		Interest only		Principal and interest		Total
Originated	$	388	$	1,531	$	1,919	$	339	$	1,387	$	1,725
Acquired	257		668		925		291		692		983
Total home equity lines of credit	$	645	$	2,199	2,844		$	630	$	2,079	2,708
Home equity loans					189						228
Total home equity portfolio					$	3,033					$	2,936

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.

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The table below summarizes our home equity line of credit portfolio still in the draw period by draw period end date at September 30, 2015:

(in millions)	2015		2016		2017		2018		Thereafter		Total
In draw - interest only	$	9	$	23	$	105	$	61	$	447	$	645
In draw - principal and interest	11		40		74		113		1,839		2,077
Total	$	20	$	63	$	179	$	174	$	2,286	$	2,722

Delinquency statistics for the HELOC portfolio are as follows at the dates indicated:

	September 30, 2015						December 31, 2014
			Delinquencies						Delinquencies
(dollars in millions)	Balance		Amount		Percent of balance		Balance		Amount		Percent of balance
HELOC status:
Still in draw period	$	2,722	$	40	1.5	%	$	2,601	$	36	1.4	%
Amortizing payment	122		12		9.8		108		8		7.6

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 2014 Annual Report on Form 10-K.

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

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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 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 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.

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The following table details our allocation of our allowance for loan losses by loan category at the dates indicated or for the related quarters:

	September 30, 2015					December 31, 2014
(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	$	75		35.4	%	$	66		35.6	%
Business	122			25.5		122			25.1
Total commercial	197			60.8		189			60.7
Consumer:
Residential real estate	4			14.1		4			14.6
Home equity	9			12.8		11			12.7
Indirect auto	12			9.9		14			9.4
Credit cards	12			1.3		12			1.4
Other consumer	4			1.1		5			1.2
Total consumer	42			39.2		45			39.3
Total	$	239		100.0	%	$	234		100.0	%
Allowance for loan losses to total loans	1.01		%			1.02		%
Provision to average total loans	0.33		%			0.60		%
Allowance for loan losses to originated loans	1.13		%			1.18		%
Provision to average originated loans	0.41		%			0.65		%

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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
Nine months ended September 30, 2015
Allowance for loan losses:
Balance at beginning of period	$	65		$	122		$	2		$	8		$	14		$	12		$	5		$	228
Provision for loan losses	21			14			—			1			3			7			5			51
Charge-offs	(14		)	(18		)	(1		)	(2		)	(6		)	(9		)	(6		)	(58		)
Recoveries	2			4			—			—			2			2			1			12
Balance at end of period	$	74		$	122		$	2		$	7		$	12		$	12		$	4		$	233
Nine months ended September 30, 2014
Allowance for loan losses:
Balance at beginning of period	$	47		$	120		$	2		$	7		$	10		$	13		$	6		$	205
Provision for loan losses	21			8			—			4			9			7			5			54
Charge-offs	(8		)	(16		)	(1		)	(3		)	(6		)	(10		)	(6		)	(51		)
Recoveries	3			2			—			1			1			1			1			10
Balance at end of period	$	62		$	115		$	2		$	9		$	13		$	12		$	6		$	218
Three months ended September 30, 2015
Allowance for loan losses:
Balance at beginning of period	$	69		$	119		$	2		$	6		$	14		$	13		$	5		$	228
Provision for loan losses	7			9			—			2			—			2			1			21
Charge-offs	(3		)	(7		)	—			(1		)	(2		)	(3		)	(2		)	(20		)
Recoveries	1			1			—			—			1			1			—			4
Balance at end of period	$	74		$	122		$	2		$	7		$	12		$	12		$	4		$	233
Three months ended September 30, 2014
Allowance for loan losses:
Balance at beginning of period	$	62		$	112		$	2		$	10		$	12		$	12		$	6		$	216
Provision for loan losses	2			5			—			—			3			3			2			15
Charge-offs	(2		)	(4		)	—			(1		)	(2		)	(3		)	(2		)	(15		)
Recoveries	—			1			—			—			—			—			—			2
Balance at end of period	$	62		$	115		$	2		$	9		$	13		$	12		$	6		$	218

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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
Nine months ended September 30, 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		)	—		—		(2		)	—		—		(4		)
Recoveries	1			—		—		—			—		—		1
Balance at end of period	$	1		$	—	$	2	$	2		$	—	$	—	$	5
Nine months ended September 30, 2014
Allowance for loan losses:
Balance at beginning of period	$	—		$	—	$	1	$	3		$	—	$	—	$	4
Provision for loan losses	1			—		1		3			—		—		5
Charge-offs	(1		)	—		—		(3		)	—		—		(4		)
Balance at end of period	$	—		$	—	$	1	$	3		$	—	$	—	$	5
Three months ended September 30, 2015
Allowance for loan losses:
Balance at beginning of period	$	2		$	1	$	2	$	3		$	—	$	—	$	7
Provision for loan losses	—			—		—		(1		)	—		—		(1		)
Charge-offs	—			—		—		(1		)	—		—		(1		)
Balance at end of period	$	1		$	—	$	2	$	2		$	—	$	—	$	5
Three months ended September 30, 2014
Allowance for loan losses:
Balance at beginning of period	$	—		$	—	$	1	$	3		$	—	$	—	$	4
Provision for loan losses	—			—		1		—			—		—		1
Charge-offs	—			—		—		—			—		—		—
Balance at end of period	$	—		$	—	$	1	$	3		$	—	$	—	$	5

Our liability for unfunded loan commitments was $16 million as of September 30, 2015 and December 31, 2014. For the nine months ended September 30, 2015 we released a provision for credit loss related to our unfunded loan commitments of $0.6 million, compared to an increase in the same provision of $1.2 million during the nine months ended September 30, 2014. Our total unfunded commitments amounted to $11.6 billion and $11.0 billion at September 30, 2015 and December 31, 2014, respectively.

Our total net charge-offs were $49 million for the nine months ended September 30, 2015 and $46 million for the nine months ended September 30, 2014. The increase was the result of higher net charge-offs in our commercial real estate portfolio in 2015, partially offset by lower net charge-offs in our other portfolios. Total net charge-offs represented 0.28% of average total loans in both the nine months ended September 30, 2015 and the nine months ended September 30, 2014. Excluding our acquired loans, our net charge-off ratio for originated loans was 0.31% for the nine months ended September 30, 2015 and the nine months ended September 30, 2014.

Our net charge-offs of $16 million for the three months ended September 30, 2015 were in line with the prior quarter.

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The following table details our total net charge-offs by loan category for the periods indicated:

	2015				2014
(dollars in millions)	Net charge-offs		Percent of average loans		Net charge-offs		Percent of average loans
Nine months ended September 30,
Commercial:
Real estate	$	14	0.23	%	$	6	0.11	%
Business	14		0.32		14		0.34
Total commercial	28		0.26		20		0.20
Consumer:
Residential real estate	1		0.03		1		0.02
Home equity	4		0.18		5		0.26
Indirect auto	4		0.26		5		0.39
Credit cards	7		3.12		9		3.72
Other consumer	5		2.68		5		2.39
Total consumer	21		0.31		25		0.39
Total	$	49	0.28	%	$	46	0.28	%
Three months ended September 30,
Commercial:
Real estate	$	3	0.13	%	$	2	0.11	%
Business	6		0.42		3		0.22
Total commercial	9		0.25		5		0.16
Consumer:
Residential real estate	—		0.03		—		0.01
Home equity	1		0.14		1		0.16
Indirect auto	2		0.30		2		0.33
Credit cards	2		2.90		3		3.49
Other consumer	2		3.06		2		2.77
Total consumer	7		0.32		8		0.35
Total	$	16	0.28	%	$	13	0.23	%

Our nonperforming loans increased to $211 million from $204 million at December 31, 2014 and $199 million at September 30, 2014. New nonperforming loans during the third quarter of 2015 were $32 million, compared to $26 million in the prior quarter. During the quarter ended September 30, 2015, $4 million of nonperforming loans returned to accruing status, and there were $11 million in paydowns and transfers to real estate owned. Nonperforming loans comprised 0.89% of total loans at September 30, 2015, consistent with 0.88% at December 31, 2014. Excluding our acquired loans, our nonperforming loans were 0.90% of originated loans at September 30, 2015 and December 31, 2014.

While nonperforming loans increased modestly from the prior year end, our total criticized loans decreased18% during the nine months ended September 30, 2015 from December 31, 2014 and decreased21% compared to a year ago. The decrease was driven by favorable credit migration and paydowns.

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Nonperforming assets to total assets were 0.58%, which is consistent with the previous quarter. The composition of our nonperforming loans and total nonperforming assets consisted of the following at the dates indicated:

	September 30,			December 31,
(dollars in millions)	2015(1)			2014(1)
Nonperforming loans:
Commercial:
Real estate	$	55		$	53
Business	47			53
Total commercial	102			106
Consumer:
Residential real estate	32			34
Home equity	58			47
Indirect auto	14			13
Other consumer	5			5
Total consumer	109			98
Total nonperforming loans	211			204
Real estate owned	18			21
Total nonperforming assets (2)	$	229		$	224
Loans 90 days past due and still accruing interest (3)	$	70		$	94
Total nonperforming assets as a percentage of total assets	0.58		%	0.58		%
Total nonaccruing loans as a percentage of total loans	0.89		%	0.88		%
Total nonaccruing originated loans as a percentage of total originated loans	0.90		%	0.90		%
Allowance for loan losses to nonaccruing loans	113.2		%	115.0		%

⁽¹⁾  Includes $25 million and $30 million of nonperforming acquired lines of credit, primarily in home equity, at September 30, 2015 and December 31, 2014, respectively.

⁽²⁾  Nonperforming assets do not include $61 million and $67 million of performing renegotiated loans that are accruing interest at September 30, 2015 and December 31, 2014, 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 $89 million at September 30, 2015 in our originated loan portfolio increased from $60 million at December 31, 2014. Our acquired loans that were 30 to 89 days past due were $30 million at December 31, 2014 and September 30, 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
	September 30, 2015		December 31, 2014		September 30, 2015		December 31, 2014		September 30, 2015		December 31, 2014		September 30, 2015		December 31, 2014
Originated loans
Commercial:
Real estate	0.3	%	0.1	%	—	%	—	%	0.5	%	0.4	%	0.8	%	0.6	%
Business	0.4		0.1		0.1		0.1		0.6		0.3		1.1		0.5
Total commercial	0.3		0.1		—		0.1		0.5		0.4		0.9		0.5
Consumer:
Residential real estate	0.1		0.2		0.1		0.1		0.9		1.0		1.2		1.3
Home equity	0.2		0.2		0.1		0.1		1.0		0.8		1.3		1.0
Indirect auto	0.8		0.8		0.2		0.2		0.2		0.2		1.1		1.3
Credit cards	0.5		0.6		0.4		0.5		0.7		0.7		1.6		1.8
Other consumer	0.8		1.2		0.4		0.4		1.1		1.0		2.3		2.5
Total consumer	0.4		0.4		0.1		0.1		0.7		0.7		1.3		1.3
Total	0.4	%	0.2	%	0.1	%	0.1	%	0.6	%	0.5	%	1.0	%	0.8	%
Acquired loans
Commercial:
Real estate	0.6	%	0.3	%	0.2	%	0.2	%	2.2	%	2.5	%	3.0	%	3.0	%
Business	0.2		0.1		—		—		0.7		1.9		0.9		2.1
Total commercial	0.5		0.2		0.2		0.2		2.0		2.3		2.6		2.8
Consumer:
Residential real estate	1.2		0.9		0.4		0.4		4.3		4.4		5.9		5.7
Home equity	0.5		0.6		0.2		0.2		1.7		1.9		2.4		2.7
Total consumer	0.9		0.7		0.3		0.3		3.1		3.3		4.2		4.3
Total	0.7	%	0.6	%	0.2	%	0.3	%	2.7	%	2.9	%	3.7	%	3.7	%

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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
	September 30, 2015		December 31, 2014
Originated loans:
Pass	95.5	%	94.2	%
Criticized:(1)
Accrual	3.7		5.0
Nonaccrual	0.8		0.8
Total criticized	4.5		5.8
Total	100.0	%	100.0	%
Acquired loans:
Pass	90.3	%	89.1	%
Criticized:(1)
Accrual	9.6		10.4
Nonaccrual	0.1		0.5
Total criticized	9.7		10.9
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, 2014.

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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 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
	September 30, 2015		December 31, 2014
Originated loans by refreshed FICO score:
Over 700	79.5	%	78.9	%
660-700	10.8		11.2
620-660	5.0		5.0
580-620	2.3		2.2
Less than 580	2.3		2.2
No score(1)	0.1		0.5
Total	100.0	%	100.0	%
Acquired loans by refreshed FICO score:
Over 700	72.9	%	73.4	%
660-700	8.4		7.7
620-660	4.8		4.8
580-620	3.7		3.8
Less than 580	4.0		3.9
No score(1)	6.2		6.4
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.

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 $64 million at September 30, 2015 from $93 million at December 31, 2014 as a result of $18 million in net charge-offs and $11 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.

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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
September 30, 2015
Provision for loan losses	$	—		$	—		$	(1	)	$	—		$	(1	)
Net charge-offs	—			—			1			—			1
Net charge-offs to average loans	0.01		%	—		%	0.35		%	—		%	0.08		%
Nonperforming loans	$	8		$	9		$	8		$	1		$	25
Total loans (1)	685			1,680			595			178			3,139
Allowance for acquired loan losses	—			—			3			1			5
Credit related discount (2)	13			43			6			1			64
Credit related discount as percentage of loans	1.95		%	2.57		%	1.07		%	0.57		%	2.04		%
Criticized loans (3)	$	22		$	77		$	40		$	34		$	173
Classified loans (4)	20			55			35			32			142
Greater than 90 days past due and accruing (5)	9			37			15			5			66
December 31, 2014
Provision for loan losses	$	—		$	—		$	2		$	1		$	3
Net charge-offs	—			—			2			—			2
Net charge-offs to average loans	—		%	—		%	0.79		%	0.09		%	0.17		%
Nonperforming loans	$	8		$	11		$	10		$	2		$	30
Total loans (1)	800			2,043			782			210			3,835
Allowance for acquired loan losses	1			—			4			1			6
Credit related discount (2)	18			55			18			2			93
Credit related discount as percentage of loans	2.29		%	2.71		%	2.27		%	0.84		%	2.43		%
Criticized loans (3)	$	30		$	129		$	55		$	22		$	237
Classified loans (4)	24			69			50			15			158
Greater than 90 days past due and accruing(5)	10			46			27			8			91

⁽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, 2014.

⁽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, 2014.

⁽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)	September 30, 2015			December 31, 2014
Provision for loan losses	$	21		$	31
Net charge-offs	16			21
Net charge-offs to average loans	0.31		%	0.44		%
Nonperforming loans	$	186		$	174
Nonperforming loans to total loans	0.90		%	0.90		%
Total loans	$	20,592		$	19,296
Allowance for originated loan losses	233			228
Allowance for originated loan losses to total originated loans	1.13		%	1.18		%
Criticized loans	$	685		$	804
Classified loans(1)	450			451
Greater than 90 days past due and accruing (2)	4			2

⁽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, 2014.

⁽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$4 million from $234 million at December 31, 2014 to $239 million at September 30, 2015 as our total provision for loan losses of $54 million exceeded our total net charge-offs of $49 million. The ratio of our total allowance for loan losses to total loans was 1.01% at September 30, 2015 compared to 1.02% as of December 31, 2014. Excluding acquired loans, the ratio of our allowance for originated loan losses to total originated loans was 1.13% at September 30, 2015, declining five basis points from 1.18% at December 31, 2014. This decline is primarily related to the first quarter charge-off of the commercial credit that the company exited in March, but recorded the provision in the fourth quarter of 2014.

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”) increased to $123 million at September 30, 2015 from $120 million at December 31, 2014 and decreased from $127 million at September 30, 2014. 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 the ability to perform for six consecutive payments. TDRs accruing interest totaled $61 million and $67 million at September 30, 2015 and December 31, 2014, 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 and $3.8 billion at September 30, 2015 and December 31, 2014, respectively. Our liability for estimated repurchase obligations on loans sold, which is included in other liabilities in our Consolidated Statements of Condition, was $6 million at September 30, 2015 and December 31, 2014.

The delinquencies as a percentage of loans serviced were as follows at the dates indicated: 

	September 30, 2015		December 31, 2014
30 to 59 days past due	0.22	%	0.20	%
60 to 89 days past due	0.08		0.11
Greater than 90 days past due	0.63		0.69
Total past due loans	0.93	%	1.01	%

Investment Securities Portfolio

The fair value of our total investment securities portfolio was comprised of the following at the dates indicated: 

	September 30, 2015				December 31, 2014
(dollars in millions)	Fair value		% of total portfolio		Fair value		% of total portfolio
Collateralized mortgage obligations	$	7,344	60.7	%	$	6,741	56.7	%
Commercial mortgage-backed securities	1,212		10.0		1,500		12.6
Collateralized loan obligations	1,118		9.3		1,016		8.6
Corporate debt	827		6.8		823		6.9
Asset-backed securities	405		3.3		599		5.1
Other residential mortgage-backed securities	375		3.1		448		3.8
States and political subdivisions	405		3.4		453		3.8
U.S. government agencies and sponsored enterprises	329		2.7		251		2.1
Other	22		0.2		22		0.2
U.S. Treasury	55		0.5		25		0.2
Total investment securities	$	12,093	100.0	%	$	11,879	100.0	%

Our holdings in residential mortgage-backed securities were 64% and 61% of our total investment securities portfolio at September 30, 2015 and December 31, 2014, respectively. At September 30, 2015 and December 31, 2014, 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 September 30, 2015 and December 31, 2014, 11% and 14%, respectively, of our investment securities were variable rate.

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The net unamortized purchase premiums on our CMO portfolio amounted to $72 million, or 1.0% of the portfolio, at September 30, 2015 and $78 million, or 1.2% of the portfolio, at December 31, 2014. The net unamortized purchase premiums on our other residential mortgage-backed securities decreased to $8 million, or 2.2% of the portfolio, at September 30, 2015, from $9 million, or 2.1% of the portfolio, at December 31, 2014.

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
September 30, 2015
Securities backed by U.S. Treasury and U.S. government sponsored enterprises:
Collateralized mortgage obligations	$	7,249	$	7,344	$	7,344	$	—	$	—	$	—	$	—
Residential mortgage-backed securities	366		375		376		—		—		—		—
Debt securities	382		385		375		10		—		—		—
Total	7,997		8,104		8,095		10		—		—		—
Commercial mortgage-backed securities	1,181		1,212		678		392		141		—		—
Collateralized loan obligations	1,113		1,118		786		320		12		—		—
Asset-backed securities	398		405		336		69		—		—		—
Corporate debt	846		827		—		181		121		524		1
States and political subdivisions	399		405		215		166		1		—		24
Other	22		22		—		—		—		—		22
Total investment securities	$	11,956	$	12,093	$	10,108	$	1,138	$	276	$	524	$	47
December 31, 2014
Securities backed by U.S. Treasury and U.S. government sponsored enterprises:
Collateralized mortgage obligations	$	6,734	$	6,741	$	6,741	$	—	$	—	$	—	$	—
Residential mortgage-backed securities	438		448		448		—		—		—		—
Debt securities	272		277		266		11		—		—		—
Total	7,445		7,466		7,455		11		—		—		—
Commercial mortgage-backed securities	1,450		1,500		928		406		166		—		—
Collateralized loan obligations	1,001		1,016		721		273		21		—		—
Asset-backed securities	591		599		497		101		—		—		—
Corporate debt	820		823		—		102		193		526		1
States and political subdivisions	444		453		260		170		2		—		22
Other	22		22		—		—		—		—		22
Total investment securities	$	11,772	$	11,879	$	9,862	$	1,064	$	382	$	526	$	45

The weighted average credit rating of our portfolio was AA at September 30, 2015 and December 31, 2014. As of September 30, 2015 and December 31, 2014, 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 $636 million of High Yield bonds at September 30, 2015. The High Yield bond portfolio is well diversified with an average hold size of $7 million and rating of Ba2/BB. Approximately 13% of the High Yield bond portfolio's amortized cost consisted of companies rated Investment Grade. Currently $95 million, or less than 1% of our total investment securities portfolio, consists of companies exposed to the energy sector. 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 very liquid with regular trading activity.  As of September 30, 2015, the energy portfolio had a net unrealized loss of $10 million compared to a $4 million unrealized loss at December 31, 2014. The remainder of the High Yield portfolio, which amounted to $539 million, had an unrealized loss of $12 million. During the third quarter, continued low commodity prices, potential Federal Reserve tightening and global economic concerns led to decreased demand for credit sensitive instruments that hurt the stock markets and widened credit spreads. As a result, valuations in the High Yield portfolio declined. More recently, in October some of the volatility has receded.  The energy portfolio net unrealized loss has declined to $7 million and the remainder of the high yield portfolio has recovered to the carrying value.  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.

Our CMBS portfolio had an amortized cost of $1.2 billion at September 30, 2015. The net unamortized premiums on our CMBS portfolio amounted to $8 million, or 0.7% of the portfolio at September 30, 2015, and $28 million, or 2.0% of the portfolio at December 31, 2014. Gross unrealized losses on our CMBS portfolio were less than $100 thousand at September 30, 2015 and amounted to $0.2 million at December 31, 2014. Securities in our CMBS portfolio have significant credit enhancement that provides us protection from default, and 88% of this portfolio was rated A or higher at September 30, 2015. 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:

	September 30, 2015				December 31, 2014
Credit enhancement(1)	Amortized cost		% of total CMBS portfolio		Amortized cost		% of total CMBS portfolio
	(dollars in millions)
30+%	$	937	79	%	$	1,075	74	%
25 - 30%	137		12		223		16
20 - 25%	98		8		118		8
18 - 20%	10		1		33		2
Total	$	1,181	100	%	$	1,450	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 $1.1 billion at September 30, 2015. Gross unrealized losses on our CLO portfolio amounted to $5 million and $3 million at September 30, 2015 and December 31, 2014, respectively. Our CLO portfolio is predominantly variable rate and returns an approximate 3.0% 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 September 30, 2015, we have purchased $464 million of newly issued CLO investments that we believe to be exempt from the Volcker Rule. These CLOs are structured in a manner consistent with the loan securitization exclusion set forth in the Volcker Rule.

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As shown in the table above, of the underlying investment ratings of our portfolio, 99% of our CLO portfolio was rated A or higher at September 30, 2015 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:

	September 30, 2015				December 31, 2014
Credit Enhancement(1)	Amortized cost		% of total CLO portfolio		Amortized cost		% of total CLO portfolio
	(dollars in millions)
40+%	$	85	8	%	$	73	7	%
35 - 40%	194		17		224		23
30 - 35%	53		5		83		8
25 - 30%	292		26		223		22
20 - 25%	215		19		133		13
15 - 20%	262		24		240		24
10 - 15%	12		1		25		3
0 - 10%	—		—		—		—
Total	$	1,113	100	%	$	1,001	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 $4.7 billion outstanding at September 30, 2015.

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 September 30, 2015:

	Moody's	S&P	Fitch
Senior unsecured	Ba1	BBB-	BBB-
Subordinated debt	Ba1	BB+	BB+

In March 2014, Moody's downgraded the Company's long-term issuer rating to Ba1 (one notch below investment grade). Moody's affirmed the rating in November 2014, but moved their outlook from stable to negative. In May 2015, Moody’s upgraded the Company’s subordinated debt to Ba1 from Ba2 upon industry wide methodology change with no other changes to the Company’s long-term issuer rating or outlook. In December 2014, S&P downgraded the Company's long-term issuer rating by one notch to BBB- (which is at the investment grade minimum rating). In January 2015, Fitch affirmed their rating of BBB- (which is at the investment grade minimum rating), but moved their outlook from stable to negative. Following the downgrade in December 2014, S&P’s outlook is stable while the negative outlook by Moody’s and Fitch initiated during the fourth quarter of 2014 will entail their monitoring of our credit rating over the next three to nine months.

Our total collateralized wholesale borrowings amounted to $4.7 billion and $5.0 million at September 30, 2015 and December 31, 2014, respectively. In addition to this amount, we had additional collateralized wholesale borrowing capacity of $5.9 billion and $5.7 billion at September 30, 2015 and December 31, 2014, 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 $0.9 billion, was available at the Federal Reserve's discount window at both September 30, 2015 and December 31, 2014.

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 $11.6 billion and $11.0 billion at September 30, 2015 and December 31, 2014, 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 $4.1 billion and $3.8 billion at September 30, 2015 and December 31, 2014, respectively, and our unused home equity and other consumer lines of credit increased to $5.7 billion at September 30, 2015 from $5.3 billion at December 31, 2014. 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 $241 million and $266 million at September 30, 2015 and December 31, 2014, 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 $154 million at September 30, 2015 from $137 million at December 31, 2014, as a result of the increased customer activity given the lower rate environment in 2015, along with seasonality in home sales.

Parent Company liquidity

The Company obtains its liquidity from multiple sources, including dividends and capital distributions 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. The primary uses of the Company's liquidity are dividends to common and preferred stockholders, capital contributions to the Bank, debt service, operating expenses, repurchases of our common stock, and acquisitions. 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 $385 million at September 30, 2015. As of September 30, 2015, 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. We had received non-objection from the Federal Reserve and approval from our Board of Directors to pay common and preferred dividends for the second quarter of 2015, which were paid to shareholders on August 17, 2015 to shareholders of record on August 5, 2015. Beginning with the payment of our quarterly common and preferred dividends for the third quarter of 2015, consultation with the Federal Reserve is no longer necessary based on their calculation formula. We have received approval from our Board of Directors to pay common and preferred dividends for the third quarter of 2015, which will be paid to shareholders on November 16, 2015 to shareholders of record on November 6, 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 Bank made $90 million in capital distributions to the Company during the nine months ended September 30, 2015. Additionally, the Bank paid dividends of $45 million and $80 million to the Company during the nine months ended September 30, 2015 and 2014, respectively.

Deposits

The following table illustrates the composition of our deposits at the dates indicated:

	September 30, 2015				December 31, 2014				Increase (decrease)
(dollars in millions)	Amount		Percent		Amount		Percent
Core deposits:
Savings	$	3,359	11.7	%	$	3,452	12.4	%	$	(92	)
Interest-bearing checking	5,286		18.3		5,084		18.3		202
Money market deposits	10,484		36.4		9,962		35.8		522
Noninterest-bearing	5,814		20.2		5,407		19.5		406
Total core deposits	24,943		86.6		23,906		86.0		1,037
Certificates	3,874		13.4		3,876		14.0		(2		)
Total deposits	$	28,816	100.0	%	$	27,781	100.0	%	$	1,035

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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
September 30, 2015
Core deposits:
Savings	$	2,162	$	178	$	218	$	802	$	3,359
Interest-bearing checking	3,416		642		572		656		5,286
Money market deposits	6,735		1,323		922		1,503		10,484
Noninterest-bearing	3,609		797		630		778		5,814
Total core deposits	15,922		2,941		2,342		3,739		24,943
Certificates	2,593		430		280		571		3,874
Total deposits	$	18,514	$	3,370	$	2,622	$	4,310	$	28,816
December 31, 2014
Core deposits:
Savings	$	2,223	$	170	$	218	$	842	$	3,452
Interest-bearing checking	3,083		674		672		656		5,084
Money market deposits	6,455		1,205		895		1,407		9,962
Noninterest-bearing	3,219		830		636		722		5,407
Total core deposits	14,980		2,878		2,421		3,627		23,906
Certificates	2,421		450		300		705		3,876
Total deposits	$	17,401	$	3,329	$	2,720	$	4,331	$	27,781

⁽¹⁾  Includes brokered money market deposits of $419 million and $412 million at September 30, 2015 and December 31, 2014, respectively, andbrokered certificates of deposit of $1.5 billion and $1.2 billion at September 30, 2015 and December 31, 2014, respectively.

Our total deposits increased$1.0 billion, or 5% annualized, from December 31, 2014 to $28.8 billion at September 30, 2015. Our strategic focus remains on efforts to grow our customer base, re-position our account mix and introduce new products and services that further enhance our value proposition to customers. Recent investments in online account opening, mobile banking, and remote deposit capture have further enhanced customers’ ability to transact in the delivery channel of their choice while at the same time lowering our cost to acquire and serve such customers. Current and anticipated investments as part of our Strategic Investment Plan in new digital features and functionalities will further enhance customers’ ability to do business with us across all delivery channels.

Transactional deposits, which include interest-bearing and noninterest bearing checking balances, increased $608 million, or 8% annualized, from December 31, 2014. Transactional deposits currently represent 39% of our deposit base, up from 37% a year ago. Money market balances increased7% annualized from December 31, 2014 driven by seasonal strength in commercial deposits and, to a lesser extent, promotional deposit campaigns, primarily in our New York and Western Pennsylvania footprint. Noninterest-bearing checking balances increased 10% from December 31, 2014, driven by higher municipal and business deposit balances. Total commercial deposit balances increased 13% annualized from December 31, 2014 to September 30, 2015.

The $2 million decrease in certificates of deposit from December 31, 2014 to September 30, 2015, reflects lower consumer and municipal balances partially offset by a $291 million increase in brokered certificates of deposit to $1.5 billion. The terms on these brokered certificates of deposit are between six months and 24 months with interest rates ranging between 0.30% and 1.15%.

The average cost of interest-bearing deposits for the three months ended September 30, 2015 of 0.29% was unchanged from the three months ended June 30, 2015 and increasedfive basis points from the quarter ended

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September 30, 2014, reflecting the impact of promotional pricing campaigns to gather money market deposit balances as well as purchase accounting mark to market adjustments on maturing acquired certificates of deposit.

Loan Maturity and Repricing Schedule

The following table sets forth certain information at September 30, 2015 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 September 30, 2015 and December 31, 2014, 53% and 51%, respectively, 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	$	5,319	$	1,728	$	128	$	7,174
Construction	1,170		12		9		1,191
Business	4,830		980		221		6,031
Total commercial	11,319		2,720		358		14,397
Consumer:
Residential real estate	1,070		1,651		625		3,346
Home equity	2,508		367		157		3,033
Indirect auto	913		1,394		24		2,331
Credit cards	306		—		—		306
Other consumer	155		68		32		254
Total consumer	4,951		3,479		838		9,269
Total loans and leases	$	16,270	$	6,199	$	1,197	$	23,666

For the loans reported in the preceding table, the following sets forth at September 30, 2015, the dollar amount of all of our fixed-rate and adjustable-rate loans due after September 30,2016: 

(in millions)	Fixed		Adjustable		Total
Commercial:
Real estate	$	698	$	1,158	$	1,856
Construction	21		—		22
Business	1,107		94		1,201
Total commercial	1,826		1,252		3,078
Consumer:
Residential real estate	1,339		937		2,276
Home equity	514		10		524
Indirect auto	1,418		—		1,418
Other consumer	99		—		100
Total consumer	3,371		947		4,318
Total loans and leases	$	5,197	$	2,199	$	7,396

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The following table sets forth at September 30, 2015, the dollar amount of all of our fixed-rate loans due after September 30,2016 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	$	607	$	292	$	117	$	636	$	23	$	1,675
2 to 3 years	469		235		98		427		19		1,248
3 to 5 years	455		326		142		331		25		1,280
Total 1 to 5 years	1,532		853		357		1,394		68		4,203
5 to 10 years	260		323		138		24		21		766
More than 10 years	34		163		19		—		11		227
Total	$	1,826	$	1,339	$	514	$	1,418	$	99	$	5,197

The following table sets forth at September 30, 2015, the dollar amount of all of our adjustable-rate loans due after September 30,2016 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	$	429	$	367	$	10	$	806
2 to 3 years	371		177		—		548
3 to 5 years	389		254		—		642
Total 1 to 5 years	1,189		797		10		1,996
5 to 10 years	64		138		—		202
More than 10 years	—		1		—		2
Total	$	1,252	$	937	$	10	$	2,199

Our primary investing activities are the origination of loans, the purchase of investment securities, and the acquisition of banking and financial services companies.

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

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loans into the secondary market without recourse; (iv) investing in securities with predictable 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)
	September 30, 2015					December 31, 2014
Changes in interest rates(1)	Net interest income			% change		Net interest income			% change
	(dollars in millions)
+ 200 basis points (gradual)	$	53		5.0	%	$	53		4.9	%
+ 100 basis points (gradual)	27			2.5		28			2.6
- 50 basis points (gradual)	(19		)	(1.8	)	(15		)	(1.4	)

⁽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 10.3% and 9.7% at September 30, 2015 and December 31, 2014, 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 3.0% at January 2, 2014 and yielded 1.75% as of January 29, 2015 while the 2-year US Treasury yielded 0.39% to 0.52% over that same period, resulting in the spread difference between the yields decreasing from 261 bps at January 2, 2014 to 123 bps at January 29, 2015. 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 interest rate spreads between deposit categories will likely cause product shifts and changes in CD

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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 duration of the prolonged low rate environment, with actions taken by the Federal Reserve to keep interest rates low through its Quantitative Easing program and 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.

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

• 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

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• 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	September 30, 2015		December 31, 2014
- 100 basis points	(5.9	)%	(3.6	)%
+ 100 basis points	(2.8	)	(2.2	)
+ 200 basis points (1)	(7.6	)	(7.1	)
+ 300 basis points (2)	(13.5	)	(13.0	)

⁽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 have remained consistent as continued growth in variable rate commercial loans was offset by an increase in 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, 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.

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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 September 30, 2015, 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.).

In July 2013, the Federal Reserve and OCC published final rules establishing a new comprehensive framework for U.S. banking organizations (the "New Capital Rules"). Effective January 1, 2015, we became subject to the Standardized approach under the New Capital Rules which implemented the Basel Committee's December 2010 capital framework known as "Basel III" for strengthening international capital standards as well as certain provisions of the Dodd-Frank Act. Prior to January 1, 2015, the Company and the Bank were subject to consolidated regulatory capital requirements administered by the Federal Reserve and OCC, which were referred to as their “general risk-based capital rules”, which were based upon the 1988 capital accord of the Basel Committee , referred to as “Basel I." Compared to Basel I, Basel III narrows the definition of regulatory capital and increases the capital requirements and revisions to Tier 1 common (referred to as Common Equity Tier 1 under Basel III), Tier 1 capital and Tier 2 capital are subject to phase-in from 2015 to 2019 and during that period, such capital amounts represent Basel III Transitional capital. In addition, Basel III establishes the Standardized approach for calculating risk weighted assets, replacing the risk weighting asset calculation framework under Basel I.

Our tier 1 risk-based capital ratio on a consolidated basis was 10.05% and 9.81% at September 30, 2015 and December 31, 2014, respectively. Our common equity tier 1 capital ratio under Basel III was 8.52% at September 30, 2015 and our tier 1 common ratio under Basel I was 8.20% at December 31, 2014. The change in regulatory capital ratios from the fourth quarter of 2014 to the first quarter of 2015 reflected a positive impact related to the implementation of Basel III for both the Company and the Bank. The positive impact resulted from the benefits of

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a reduction in disallowed intangibles and deferred tax assets as well as overall risk-weighted assets slightly decreasing.

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. We had received non-objection from the Federal Reserve and approval from our Board of Directors to pay common and preferred dividends for the second quarter of 2015, which were paid on August 17, 2015 to shareholders of record on August 5, 2015. Beginning with the payment of our quarterly common and preferred dividends for the third quarter of 2015, such consultation with the Federal Reserve is no longer necessary based on their calculation formula. We have received approval from our Board of Directors to pay common and preferred dividends for the third quarter of 2015, which will be paid to shareholders on November 16, 2015 to shareholders of record on November 6, 2015.

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 nine months of 2015, our stockholders’ equity increased$47 million, driven by increases due primarily to our net income of $173 million and $7 million related to stock-based compensation partially offset by $27 million in unrealized losses, net of tax, on investment securities available for sale, $85 million, or $0.24 per share, in common stock dividends and $23 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 for First Niagara Financial Group, Inc. and First Niagara Bank, N.A. are as follows at the dates indicated. Basel III Transitional rules became effective for us on January 1, 2015. Ratios and amounts presented as of December 31, 2014 are calculated under Basel I rules. As of September 30, 2015, the ratios presented are calculated under the Basel III Standardized Transitional Approach. Common equity tier 1 capital under Basel III replaced Tier 1 common capital under Basel I.

	Actual				Minimum amount to be
(dollars in millions)	Amount		Ratio		well-capitalized
First Niagara Financial Group, Inc.:
September 30, 2015:
Leverage ratio	$	2,885	7.66	%	$	1,883	5.00	%
Tier 1 risk-based capital	2,885		10.05		2,297		8.00
Total risk-based capital	3,438		11.97		2,872		10.00
Common equity tier 1 capital	2,448		8.52		1,867		6.50
December 31, 2014
Leverage ratio	$	2,764	7.50	%	$	1,843	5.00	%
Tier 1 risk-based capital	2,764		9.81		1,691		6.00
Total risk-based capital	3,313		11.75		2,819		10.00
Tier 1 common capital	2,312		8.20		N/A		N/A
First Niagara Bank, N.A.:
September 30, 2015:
Leverage ratio	$	3,054	8.12	%	$	1,881	5.00	%
Tier 1 risk-based capital	3,054		10.67		2,290		8.00
Total risk-based capital	3,309		11.56		2,862		10.00
Common equity tier 1 capital	3,054		10.67		1,861		6.50
December 31, 2014
Leverage ratio	$	2,949	8.01	%	$	1,841	5.00	%
Tier 1 risk-based capital	2,949		10.48		1,688		6.00
Total risk-based capital	3,199		11.37		2,814		10.00

Accounting Standards Adopted in 2015

In January 2014, the Financial Accounting Standards Board ("FASB") issued guidance on accounting for investments by a reporting entity in flow-through limited liability entities that manage or invest in affordable housing projects that qualify for the low-income housing tax credit.  The low-income housing tax credit program is designed to encourage private capital investment in the construction and rehabilitation of low-income housing.  The guidance became effective for us on January 1, 2015 with early adoption permitted.  We did not early adopt this guidance and it did not have a significant impact on our current or prior year financial statements.

In January 2014, the FASB issued guidance on when a creditor should reclassify a collateralized mortgage loan such that the loan should be derecognized and the collateral asset recognized.  The objective of the guidance is to reduce diversity by clarifying when an in substance repossession or foreclosure occurs, that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real estate property recognized.  The guidance became effective for us on January 1, 2015 with early adoption permitted.  We did not early adopt this guidance and it did not have a significant impact on our financial statements.

In April 2014, the FASB issued guidance that changed the requirements for reporting discontinued operations.  The new guidance requires that a disposal of an entity or a group of components of an entity be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results.  The guidance became effective for us on January 1, 2015 and it did not have a significant impact on our financial statements.

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In August 2014, the FASB issued guidance that requires a mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure if the following conditions are met: (1) the loan has a government guarantee that is not separable from the loan before foreclosure; (2) at the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that claim; and (3) at the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed. Upon foreclosure, the separate other receivable should be measured based on the amount of the loan balance (principal plus interest) expected to be recovered from the guarantor. The guidance became effective for us on January 1, 2015, and did not have a significant 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. We are currently evaluating the impact on our financial statements.

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 becomes effective for us on January 1, 2016, with early adoption permitted, and we are currently evaluating the 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 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 becomes effective for us on January 1, 2016, and we do not expect this to have a significant impact on our financial statements.

In January 2015, the FASB issued guidance that eliminates the concept of extraordinary items from GAAP. The guidance becomes effective for us on January 1, 2016 and may be applied on either a prospective or retrospective basis and we do not expect this to have a significant 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 becomes effective for us on January 1, 2016 and we are evaluating the impact of this guidance 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

69

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 becomes effective for us on January 1, 2016, and we do not expect this to have a significant 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 becomes effective for us on January 1, 2016, and we do not expect this to have a significant impact on our financial statements.

Pending FASB Rule Proposals

The FASB currently has two projects underway that could have a meaningful impact on bank financial statements, capital levels and regulatory capital ratios. The first 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. The most recent exposure draft did not contain an effective date, and the FASB has not indicated when they expect to issue a final standard or the final effective date.

The second project relates to leases and requires an operating lease to be recognized on the balance sheet as a "right to use" asset and as a corresponding liability representing the obligation to pay rent. This project would result in an increase to assets and liabilities recognized and therefore increase risk-weighted assets for regulatory capital purposes. This project has been exposed for public comment twice since 2010. The most recent exposure draft did not contain an effective date, and the FASB has not indicated when they expect to issue a final standard or the final effective date.

We are evaluating the projects as proposed and the possible range of impacts and will determine any impact of these projects to capital or future earnings once the final rules are 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)

	September 30, 2015			December 31, 2014
ASSETS
Cash and cash equivalents	$	420		$	420
Investment securities:
Available for sale, at fair value (amortized cost of $5,676 and $5,830 in 2015 and 2014; includes pledged securities that can be sold or repledged of $39 in 2014)	5,726			5,915
Held to maturity, at amortized cost (fair value of $6,367 and $5,964 in 2015 and 2014; includes pledged securities that can be sold or repledged of $11 and $128 in 2015 and 2014)	6,280			5,942
Federal Home Loan Bank and Federal Reserve Bank common stock, at amortized cost	373			412
Loans held for sale	51			40
Loans and leases (net of allowance for loan losses of $239 and $234 in 2015 and 2014)	23,427			22,803
Bank owned life insurance	434			426
Premises and equipment, net	420			407
Goodwill	1,348			1,350
Core deposit and other intangibles, net	52			67
Other assets	881			769
Total assets	$	39,413		$	38,551
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits	$	28,816		$	27,781
Short-term borrowings	4,086			5,472
Long-term borrowings	1,783			734
Other	588			471
Total liabilities	35,274			34,458
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 2015 and 2014	338			338
Common stock, $0.01 par value, 500,000,000 shares authorized; 366,002,045 shares issued in 2015 and 2014	4			4
Additional paid-in capital	4,228			4,235
Accumulated deficit	(270		)	(330		)
Accumulated other comprehensive (loss) income	(17		)	9
Treasury stock, at cost, 11,214,237 and 12,613,836 shares in 2015 and 2014	(143		)	(162		)
Total stockholders’ equity	4,139			4,093
Total liabilities and stockholders’ equity	$	39,413		$	38,551

See accompanying notes to consolidated financial statements.

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FIRST NIAGARA FINANCIAL GROUP, INC. AND SUBSIDIARIES    

Consolidated Statements of Operations(unaudited)

(in millions, except per share amounts)

	Three months ended September 30,						Nine months ended September 30,
	2015			2014			2015		2014
Interest income:
Loans and leases	$	211		$	212		$	634	$	632
Investment securities and other	88			92			261		274
Total interest income	299			304			894		906
Interest expense:
Deposits	17			14			49		39
Borrowings	19			17			56		51
Total interest expense	36			31			105		90
Net interest income	263			273			790		816
Provision for credit losses	20			17			53		60
Net interest income after provision for credit losses	244			257			736		756
Noninterest income:
Deposit service charges	23			20			66		67
Insurance commissions	18			18			51		51
Merchant and card fees	13			13			39		37
Wealth management services	15			15			45		47
Mortgage banking	5			4			16		13
Capital markets income	3			4			12		10
Lending and leasing	4			4			13		13
Bank owned life insurance	3			3			10		12
Other income	(1		)	(7		)	2		(18		)
Total noninterest income	83			75			252		233
Noninterest expense:
Salaries and employee benefits	114			116			339		352
Occupancy and equipment	26			27			79		84
Technology and communications	38			31			110		93
Marketing and advertising	8			8			29		24
Professional services	18			14			47		39
Amortization of intangibles	4			7			15		21
Federal deposit insurance premiums	10			10			33		28
Restructuring charges	—			2			18		13
Goodwill impairment	—			1,100			—		1,100
Deposit account remediation	—			45			—		45
Other expense	27			36			85		92
Total noninterest expense	245			1,397			754		1,890
Income (loss) before income taxes	82			(1,065		)	234		(901		)
Income tax (benefit)	21			(145		)	61		(117		)
Net income (loss)	60			(920		)	173		(784		)
Preferred stock dividend	8			8			23		23
Net income (loss) available to common stockholders	$	53		$	(928	)	$	150	$	(807	)
Earnings (loss) per share:
Basic	$	0.15		$	(2.65	)	$	0.42	$	(2.31	)
Diluted	$	0.15		$	(2.65	)	$	0.42	$	(2.31	)
Weighted average common shares outstanding:
Basic	351			350			351		350
Diluted	353			350			353		350
Dividends per common share	$	0.08		$	0.08		$	0.24	$	0.24

See accompanying notes to consolidated financial statements.

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FIRST NIAGARA FINANCIAL GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Loss)(unaudited)

(in millions) 

	Three months ended September 30,						Nine months ended September 30,
	2015			2014			2015			2014
Net income (loss)	$	60		$	(920	)	$	173		$	(784	)
Other comprehensive loss, net of income taxes:
Securities available for sale:
Net unrealized losses arising during the period	(8		)	(31		)	(22		)	(9		)
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	(2		)	(2		)	(5		)	(6		)
Net unrealized losses on interest rate swaps designated as cash flow hedges arising during the period	(2		)	—			(2		)	—
Amortization of net loss related to pension and post-retirement plans	1			—			3			1
Total other comprehensive loss	(10		)	(33		)	(26		)	(14		)
Total comprehensive income (loss)	$	51		$	(953	)	$	147		$	(798	)

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) retained earnings			Accumulated other comprehensive income			Common stock held by ESOP			Treasury stock			Total
Balances at January 1, 2015	$	338	$	4	$	4,235		$	(330	)	$	9		$	—		$	(162	)	$	4,093
Net income	—		—		—			173			—			—			—			173
Total other comprehensive loss, net	—		—		—			—			(26		)	—			—			(26		)
Stock-based compensation expense	—		—		10			—			—			—			—			10
Restricted stock activity (1,399,599 shares)	—		—		(17		)	(5		)	—			—			19			(3		)
Preferred stock dividends	—		—		—			(23		)	—			—			—			(23		)
Common stock dividends of $0.24 per share	—		—		—			(85		)	—			—			—			(85		)
Balances at September 30, 2015	$	338	$	4	$	4,228		$	(270	)	$	(17	)	$	—		$	(143	)	$	4,139
Balances at January 1, 2014	$	338	$	4	$	4,235		$	536		$	62		$	(17	)	$	(165	)	$	4,993
Net loss	—		—		—			(784		)	—			—			—			(784		)
Total other comprehensive loss, net	—		—		—			—			(14		)	—			—			(14		)
ESOP shares committed to be released (133,455 shares)	—		—		—			—			—			1			—			1
Stock-based compensation expense	—		—		9			—			—			—			—			9
Restricted stock activity (1,481,639 shares)	—		—		(16		)	(8		)	—			—			21			(2		)
Preferred stock dividends	—		—		—			(23		)	—			—			—			(23		)
Common stock dividends of $0.24 per share	—		—		—			(85		)	—			—			—			(85		)
Balances at September 30, 2014	$	338	$	4	$	4,229		$	(363	)	$	48		$	(16	)	$	(144	)	$	4,096

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)

	Nine months ended September 30,
	2015			2014
Cash flows from operating activities:
Net income	$	173		$	(784	)
Adjustments to reconcile net income to net cash provided by operating activities:
Goodwill impairment	—			1,100
Amortization of fees and discounts, net	20			34
Provision for credit losses	53			60
Depreciation of premises and equipment	58			43
Amortization of intangibles	15			21
Origination of loans held for sale	(580		)	(468		)
Proceeds from sales of loans held for sale	574			493
ESOP and stock based-compensation expense	10			10
Deferred income tax expense (benefit)	6			(154		)
Other, net	(16		)	103
Net cash provided by operating activities	313			458
Cash flows from investing activities:
Proceeds from sales of securities available for sale	169			165
Proceeds from maturities of securities available for sale	202			326
Principal payments received on securities available for sale	874			789
Purchases of securities available for sale	(1,081		)	(77		)
Principal payments received on securities held to maturity	1,049			552
Purchases of securities held to maturity	(1,441		)	(1,878		)
Proceeds from maturities of securities held to maturity	30			5
Proceeds from sales of Federal Home Loan Bank and Federal Reserve Bank common stock	39			79
Net increase in loans and leases	(670		)	(1,344		)
Purchases of premises and equipment	(71		)	(32		)
Other, net	(5		)	(59		)
Net cash used in investing activities	(905		)	(1,474		)
Cash flows from financing activities:
Net increase in deposits	1,035			1,007
(Repayments of) proceeds from short-term borrowings, net	(1,386		)	107
Proceeds from long-term borrowings	1,050			—
Repayments of long-term borrowings	—			(1		)
Dividends paid on noncumulative preferred stock	(23		)	(23		)
Dividends paid on common stock	(85		)	(85		)
Net cash provided by financing activities	592			1,005
Net decrease in cash and cash equivalents	—			(12		)
Cash and cash equivalents at beginning of period	420			463
Cash and cash equivalents at end of period	$	420		$	451
Supplemental disclosures
Cash paid during the period for:
Income taxes	$	42		$	36
Interest expense	101			90
Other noncash activity:
Securities available for sale purchased not settled	42			9
Securities held to maturity purchased not settled	1			1

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 2014 Annual Report on Form 10-K. Results for the nine months ended September 30, 2015 do not necessarily reflect the results that may be expected for the year ending December 31, 2015. 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. Summary of Significant Accounting Policies

Capitalized software

Certain costs associated with software that is acquired, developed, or modified solely to meet internal needs are capitalized and amortized on a straight line basis over a period of 3 to 10 years. Direct costs of materials and services consumed in developing the software and internal payroll and payroll-related costs related to activities such as coding and testing the software are the types of costs capitalized. Capitalized costs for internal-use software are included in “Premises and equipment, net” in our balance sheet. Amortization of these costs is classified as “Technology and communications” expenses in our income statement.

Additional accounting policies are more fully described in Note 1 in the “Notes to Consolidated Financial Statements” presented in our 2014 Annual Report on Form 10-K.

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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
September 30, 2015	cost		gains		losses			value
Investment securities available for sale:
Debt securities:
States and political subdivisions	$	399	$	6	$	—		$	405
U.S. Treasury	55		—		—			55
U.S. government sponsored enterprises	281		3		(1		)	284
Corporate	846		9		(28		)	827
Total debt securities	1,582		19		(29		)	1,572
Mortgage-backed securities:
Residential mortgage-backed securities:
Government National Mortgage Association	31		1		(1		)	31
Federal National Mortgage Association	77		4		—			81
Federal Home Loan Mortgage Corporation	92		4		—			97
Collateralized mortgage obligations:
Government National Mortgage Association	70		1		—			71
Federal National Mortgage Association	739		8		(3		)	744
Federal Home Loan Mortgage Corporation	371		4		(1		)	374
Total collateralized mortgage obligations	1,180		12		(4		)	1,188
Total residential mortgage-backed securities	1,380		21		(5		)	1,396
Commercial mortgage-backed securities, non-agency issued	1,181		31		—			1,212
Total mortgage-backed securities	2,562		52		(5		)	2,609
Collateralized loan obligations, non-agency issued	1,113		10		(5		)	1,118
Asset-backed securities collateralized by:
Student loans	212		6		—			218
Credit cards	20		—		—			20
Auto loans	90		—		—			90
Other	76		1		—			76
Total asset-backed securities	398		8		—			405
Other	22		—		—			22
Total securities available for sale	$	5,676	$	88	$	(38	)	$	5,726
Investment securities held to maturity:
Debt securities, U.S. government agencies	$	45	$	—	$	—		$	45
Residential mortgage-backed securities:
Government National Mortgage Association	15		—		—			15
Federal National Mortgage Association	98		1		—			98
Federal Home Loan Mortgage Corporation	53		—		—			53
Collateralized mortgage obligations:
Government National Mortgage Association	1,574		29		(2		)	1,601
Federal National Mortgage Association	2,151		28		(7		)	2,172
Federal Home Loan Mortgage Corporation	2,344		45		(7		)	2,383
Total collateralized mortgage obligations	6,069		102		(16		)	6,155
Total residential mortgage-backed securities	6,235		103		(16		)	6,322
Total securities held to maturity	$	6,280	$	103	$	(16	)	$	6,367

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	Amortized		Unrealized		Unrealized			Fair
December 31, 2014	cost		gains		losses			value
Investment securities available for sale:
Debt securities:
States and political subdivisions	$	444	$	10	$	—		$	453
U.S. Treasury	25		—		—			25
U.S. government sponsored enterprises	187		5		—			191
Corporate	820		15		(12		)	823
Total debt securities	1,476		29		(12		)	1,492
Mortgage-backed securities:
Residential mortgage-backed securities:
Government National Mortgage Association	34		1		(1		)	34
Federal National Mortgage Association	96		5		—			100
Federal Home Loan Mortgage Corporation	115		5		—			120
Collateralized mortgage obligations:
Federal National Mortgage Association	694		2		(13		)	682
Federal Home Loan Mortgage Corporation	353		1		(4		)	350
Total collateralized mortgage obligations	1,047		3		(18		)	1,032
Total residential mortgage-backed securities	1,291		13		(19		)	1,286
Commercial mortgage-backed securities, non-agency issued	1,450		51		—			1,500
Total mortgage-backed securities	2,741		64		(19		)	2,786
Collateralized loan obligations, non-agency issued	1,001		18		(3		)	1,016
Asset-backed securities collateralized by:
Student loans	228		7		—			235
Credit cards	42		—		—			42
Auto loans	193		1		—			194
Other	127		1		(1		)	127
Total asset-backed securities	591		9		(1		)	599
Other	22		—		—			22
Total securities available for sale	$	5,830	$	121	$	(35	)	$	5,915
Investment securities held to maturity:
Debt securities, U.S. government agencies	$	60	$	—	$	—		$	60
Residential mortgage-backed securities:
Government National Mortgage Association	12		—		—			12
Federal National Mortgage Association	118		1		(1		)	118
Federal Home Loan Mortgage Corporation	65		1		—			65
Collateralized mortgage obligations:
Government National Mortgage Association	1,755		27		(3		)	1,779
Federal National Mortgage Association	1,965		11		(22		)	1,954
Federal Home Loan Mortgage Corporation	1,967		25		(17		)	1,976
Total collateralized mortgage obligations	5,687		63		(41		)	5,709
Total residential mortgage-backed securities	5,882		64		(42		)	5,904
Total securities held to maturity	$	5,942	$	64	$	(42	)	$	5,964

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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
September 30, 2015	value		losses			Count	value		losses			Count	value		losses			Count
Investment securities available for sale:
Debt securities:
States and political subdivisions	$	16	$	—		25	$	2	$	—		4	$	17	$	—		29
U.S. Treasury	10		—			1	—		—			—	10		—			1
U.S. government sponsored enterprises	136		(1		)	16	—		—			1	137		(1		)	17
Corporate	346		(16		)	225	104		(12		)	67	451		(28		)	292
Total debt securities	508		(17		)	267	107		(12		)	72	615		(29		)	339
Mortgage-backed securities:
Residential mortgage-backed securities:
Government National Mortgage Association	—		—			—	17		(1		)	5	17		(1		)	5
Federal National Mortgage Association	—		—			1	—		—			—	—		—			1
Collateralized mortgage obligations:
Federal National Mortgage Association	—		—			—	174		(3		)	10	174		(3		)	10
Federal Home Loan Mortgage Corporation	57		(1		)	3	42		—			2	99		(1		)	5
Total collateralized mortgage obligations	57		(1		)	3	216		(3		)	12	273		(4		)	15
Total residential mortgage-backed securities	57		(1		)	4	233		(4		)	17	291		(5		)	21
Commercial mortgage-backed securities, non-agency issued	15		—			5	—		—			—	15		—			5
Total mortgage-backed securities	73		(1		)	9	233		(4		)	17	306		(5		)	26
Collateralized loan obligations, non-agency issued	460		(4		)	45	151		(1		)	16	611		(5		)	61
Asset-backed securities collateralized by:
Student loans	18		—			2	10		—			2	28		—			4
Auto loans	1		—			1	—		—			—	1		—			1
Other	28		—			4	10		—			1	38		—			5
Total asset-backed securities	47		—			7	20		—			3	67		—			10
Other	—		—			—	9		—			3	9		—			3
Total securities available for sale in an unrealized loss position	$	1,088	$	(21	)	328	$	520	$	(17	)	111	$	1,608	$	(38	)	439

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	Less than 12 months						12 months or longer						Total
	Fair		Unrealized				Fair		Unrealized				Fair		Unrealized
September 30, 2015	value		losses			Count	value		losses			Count	value		losses			Count
Investment securities held to maturity:
Residential mortgage-backed securities:
Government National Mortgage Association	4		—			2	—		—			1	5		—			3
Federal National Mortgage Association	14		—			6	29		—			9	43		—			15
Federal Home Loan Mortgage Corporation	31		—			10	4		—			2	35		—			12
Collateralized mortgage obligations:
Government National Mortgage Association	174		(1		)	39	70		(1		)	25	244		(2		)	64
Federal National Mortgage Association	8		—			3	421		(7		)	27	430		(7		)	30
Federal Home Loan Mortgage Corporation	100		(1		)	8	332		(6		)	24	432		(7		)	32
Total collateralized mortgage obligations	283		(1		)	50	823		(14		)	76	1,105		(16		)	126
Total residential mortgage-backed securities	332		(2		)	68	856		(15		)	88	1,188		(16		)	156
Total securities held to maturity in an unrealized loss position	$	332	$	(2	)	68	$	856	$	(15	)	88	$	1,188	$	(16	)	156

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	Less than 12 months						12 months or longer						Total
	Fair		Unrealized				Fair		Unrealized				Fair		Unrealized
December 31, 2014	value		losses			Count	value		losses			Count	value		losses			Count
Investment securities available for sale:
Debt securities:
States and political subdivisions	$	16	$	—		22	$	1	$	—		5	$	17	$	—		27
US Treasury	5		—			1	—		—			—	5		—			1
U.S. government sponsored enterprises	18		—			7	42		—			4	60		—			11
Corporate	176		(7		)	127	102		(5		)	61	278		(12		)	188
Total debt securities	215		(7		)	157	145		(5		)	70	360		(12		)	227
Mortgage-backed securities:
Residential mortgage-backed securities:
Government National Mortgage Association	—		—			—	19		(1		)	5	19		(1		)	5
Collateralized mortgage obligations:
Federal National Mortgage Association	26		—			3	517		(13		)	30	542		(13		)	33
Federal Home Loan Mortgage Corporation	47		—			3	216		(4		)	12	263		(4		)	15
Total collateralized mortgage obligations	73		—			6	733		(18		)	42	806		(18		)	48
Total residential mortgage-backed securities	73		—			6	752		(19		)	47	825		(19		)	53
Commercial mortgage-backed securities, non-agency issued	13		—			3	24		—			3	36		—			6
Total mortgage-backed securities	85		—			9	776		(19		)	50	861		(19		)	59
Collateralized loan obligations, non-agency issued	276		(2		)	32	146		(1		)	15	422		(3		)	47
Asset-backed securities collateralized by:
Student loans	26		—			4	2		—			2	28		—			6
Credit card	8		—			1	—		—			—	8		—			1
Auto loans	3		—			2	—		—			—	3		—			2
Other	—		—			1	52		(1		)	5	52		(1		)	6
Total asset-backed securities	37		—			8	55		(1		)	7	92		(1		)	15
Other	—		—			—	9		—			3	9		—			3
Total securities available for sale in an unrealized loss position	$	614	$	(10	)	206	$	1,130	$	(26	)	145	$	1,744	$	(35	)	351

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	Less than 12 months						12 months or longer						Total
	Fair		Unrealized				Fair		Unrealized				Fair		Unrealized
December 31, 2014	value		losses			Count	value		losses			Count	value		losses			Count
Investment securities held to maturity:
Debt securities, U.S. government agencies	$	38	$	—		5	$	—	$	—		—	$	38	$	—		5
Residential mortgage-backed securities:
Government National Mortgage Association	—		—			—	2		—			2	2		—			2
Federal National Mortgage Association	4		—			1	51		(1		)	12	55		(1		)	13
Federal Home Loan Mortgage Corporation	33		—			9	9		—			2	42		—			11
Collateralized mortgage obligations:
Government National Mortgage Association	360		(2		)	48	46		(1		)	12	407		(3		)	60
Federal National Mortgage Association	240		(1		)	18	648		(21		)	36	888		(22		)	54
Federal Home Loan Mortgage Corporation	422		(5		)	27	463		(12		)	28	885		(17		)	55
Total collateralized mortgage obligations	1,022		(8		)	93	1,157		(34		)	76	2,179		(41		)	169
Total residential mortgage-backed securities	1,059		(8		)	103	1,219		(35		)	92	2,278		(42		)	195
Total securities held to maturity in an unrealized loss position	$	1,097	$	(8	)	108	$	1,219	$	(35	)	92	$	2,316	$	(42	)	200

We have assessed the securities in an unrealized loss position at September 30, 2015 and at December 31, 2014 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 we have Volcker Rule applicability, 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.

We have significant Volcker Rule applicability 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 next year to grant banking entities an additional one-year extension of the

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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 September 30, 2015 were as follows:

	Amortized cost		Fair value
Debt securities:
Within one year	$	248	$	250
After one year through five years	628		635
After five years through ten years	737		717
After ten years	14		14
Total debt securities	1,627		1,617
Mortgage-backed securities	8,796		8,930
Collateralized loan obligations	1,113		1,118
Asset-backed securities	398		405
Other	22		22
	$	11,956	$	12,093

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 decreased to 3.3 years at September 30, 2015 from 3.7 years at December 31, 2014.

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: 

	September 30, 2015									December 31, 2014
	Originated			Acquired			Total			Originated			Acquired			Total
Commercial:
Real estate	$	6,284		$	890		$	7,174		$	6,181		$	1,050		$	7,231
Construction	1,191			—			1,191			973			1			973
Business	5,862			169			6,031			5,430			345			5,775
Total commercial	13,338			1,060			14,397			12,584			1,395			13,979
Consumer:
Residential real estate	2,289			1,057			3,346			2,096			1,257			3,353
Home equity	2,074			959			3,033			1,847			1,089			2,936
Indirect auto	2,331			—			2,331			2,166			—			2,166
Credit cards	306			—			306			324			—			324
Other consumer	254			—			254			278			—			278
Total consumer	7,254			2,015			9,269			6,711			2,347			9,058
Total loans and leases	20,592			3,075			23,666			19,296			3,742			23,037
Allowance for loan losses	(233		)	(5		)	(239		)	(228		)	(6		)	(234		)
Total loans and leases, net	$	20,358		$	3,069		$	23,427		$	19,067		$	3,736		$	22,803

As of September 30, 2015 and December 31, 2014, we had a liability for unfunded loan commitments of $16 million. For the nine months ended September 30, 2015, we recognized a negative provision for credit losses related to our unfunded loan commitments of $1 million. For the nine months ended September 30, 2014 we recognized a provision for credit losses related to our unfunded commitments of $1 million.

Of the $3.0 billion home equity portfolio at September 30, 2015 and $2.9 billion at December 31, 2014, $1.2 billion and $1.1 billion were in a first lien position at each period end, respectively. 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 September 30, 2015 and December 31, 2014.

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: 

	September 30, 2015		December 31, 2014
Credit impaired acquired loans evaluated individually for future credit losses
Outstanding principal balance	$	5	$	10
Carrying amount	5		6
Acquired loans evaluated collectively for future credit losses
Outstanding principal balance	2,031		2,549
Carrying amount	1,994		2,496
Other acquired loans
Outstanding principal balance	1,096		1,274
Carrying amount	1,076		1,240
Total acquired loans
Outstanding principal balance	3,132		3,832
Carrying amount	3,075		3,742

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, 2014	$	(851	)
Net reclassifications from nonaccretable yield	(5		)
Accretion	138
Other (1)	55
Balance at December 31, 2014	(663		)
Net reclassifications from nonaccretable yield	(9		)
Accretion	80
Balance at September 30, 2015	$	(593	)

⁽¹⁾  Includes changes in expected cash flows from changes in interest rate and prepayment assumptions.

During 2014, we reduced our estimate of future cash flows on acquired loans to reflect our current outlook for prepayment speeds on these balances.  The increase in prepayment speed assumptions reduced our accretable discount by $55 million in 2014.  These changes did not materially impact our interest income or net interest margin. 

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 determined our allowance for loan losses by portfolio segment as defined above. For our originated loans, our allowance for loan losses consists of the following elements: (i) specific valuation allowances based on probable losses on specifically identified impaired loans; and (ii) valuation allowances based on net historical loan loss experience for similar loans with similar inherent risk characteristics and performance trends, adjusted, as appropriate for qualitative risk factors specific to respective loan types.

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.

Beginning in the second quarter of 2014, we raised our threshold for evaluating commercial loans individually for impairment from $200 thousand to $1 million. Impaired loans to commercial borrowers with outstandings less than $1 million are pooled and measured for impairment collectively. Additionally, all loans modified in a troubled

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debt restructuring ("TDR"), regardless of dollar size, are considered impaired. The impact of this change to our allowance for loan losses was not significant. This change is being implemented on a prospective basis, accordingly, prior period financial disclosures have not been revised.

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
Nine months ended September 30, 2015
Allowance for loan losses:
Balance at beginning of period	$	65		$	122		$	2		$	8		$	14		$	12		$	5		$	228
Provision for loan losses	21			14			—			1			3			7			5			51
Charge-offs	(14		)	(18		)	(1		)	(2		)	(6		)	(9		)	(6		)	(58		)
Recoveries	2			4			—			—			2			2			1			12
Balance at end of period	$	74		$	122		$	2		$	7		$	12		$	12		$	4		$	233
Allowance for loan losses:
Individually evaluated for impairment	$	3		$	5		$	—		$	—		$	—		$	—		$	—		$	9
Collectively evaluated for impairment	71			117			1			7			12			12			4			224
Total	$	74		$	122		$	2		$	7		$	12		$	12		$	4		$	233
Loans receivable:
Balance at end of period
Individually evaluated for impairment	$	58		$	58		$	23		$	17		$	4		$	—		$	3		$	162
Collectively evaluated for impairment	7,418			5,805			2,267			2,057			2,327			306			252			20,430
Total	$	7,476		$	5,862		$	2,289		$	2,074		$	2,331		$	306		$	254		$	20,592
Nine months ended September 30, 2014
Allowance for loan losses:
Balance at beginning of period	$	47		$	120		$	2		$	7		$	10		$	13		$	6		$	205
Provision for loan losses	21			8			—			4			9			7			5			54
Charge-offs	(8		)	(16		)	(1		)	(3		)	(6		)	(10		)	(6		)	(51		)
Recoveries	3			2			—			1			1			1			1			10
Balance at end of period	$	62		$	115		$	2		$	9		$	13		$	12		$	6		$	218
Allowance for loan losses:
Individually evaluated for impairment	$	2		$	2		$	1		$	1		$	—		$	—		$	—		$	6
Collectively evaluated for impairment	60			113			1			7			13			12			5			212
Total	$	62		$	115		$	2		$	9		$	13		$	12		$	6		$	218
Loans receivable:
Balance at end of period
Individually evaluated for impairment	$	69		$	59		$	21		$	7		$	3		$	—		$	2		$	161
Collectively evaluated for impairment	6,821			5,409			2,009			1,775			2,071			313			284			18,681
Total	$	6,890		$	5,468		$	2,030		$	1,781		$	2,074		$	313		$	286		$	18,842

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	Commercial						Consumer
Originated loans	Real estate			Business			Residential		Home equity			Indirect auto			Credit cards			Other consumer			Total
Three months ended September 30, 2015
Allowance for loan losses:
Balance at beginning of period	$	69		$	119		$	2	$	6		$	14		$	13		$	5		$	228
Provision for loan losses	7			9			—		2			—			2			1			21
Charge-offs	(3		)	(7		)	—		(1		)	(2		)	(3		)	(2		)	(20		)
Recoveries	1			1			—		—			1			1			—			4
Balance at end of period	$	74		$	122		$	2	$	7		$	12		$	12		$	4		$	233
Three months ended September 30, 2014
Allowance for loan losses:
Balance at beginning of period	$	62		$	112		$	2	$	10		$	12		$	12		$	6		$	216
Provision for loan losses	2			5			—		—			3			3			2			15
Charge-offs	(2		)	(4		)	—		(1		)	(2		)	(3		)	(2		)	(15		)
Recoveries	—			1			—		—			—			—			—			2
Balance at end of period	$	62		$	115		$	2	$	9		$	13		$	12		$	6		$	218

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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
Nine months ended September 30, 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		)	—		—		(2		)	—		—		(4		)
Recoveries	1			—		—		—			—		—		1
Balance at end of period	$	1		$	—	$	2	$	2		$	—	$	—	$	5
Allowance for loan losses:
Individually evaluated for impairment	$	—		$	—	$	—	$	—		$	—	$	—	$	—
Collectively evaluated for impairment	1			—		2		2			—		—		5
Total	$	1		$	—	$	2	$	2		$	—	$	—	$	5
Loans receivable:
Balance at end of period
Individually evaluated for impairment	$	—		$	—	$	—	$	5		$	—	$	—	$	5
Collectively evaluated for impairment	—			169		—		902			—		—		1,071
Loans acquired with deteriorated credit quality	890			—		1,057		52			—		—		1,999
Total	$	890		$	169	$	1,057	$	959		$	—	$	—	$	3,075
Nine months ended September 30, 2014
Allowance for loan losses:
Balance at beginning of period	$	—		$	—	$	1	$	3		$	—	$	—	$	4
Provision for loan losses	1			—		1		3			—		—		5
Charge-offs	(1		)	—		—		(3		)	—		—		(4		)
Balance at end of period	$	—		$	—	$	1	$	3		$	—	$	—	$	5
Allowance for loan losses:
Individually evaluated for impairment	$	—		$	—	$	—	$	—		$	—	$	—	$	—
Collectively evaluated for impairment	—			—		1		3			—		—		5
Total	$	—		$	—	$	1	$	3		$	—	$	—	$	5
Loans receivable:
Balance at end of period
Individually evaluated for impairment	$	—		$	2	$	—	$	4		$	—	$	—	$	6
Collectively evaluated for impairment	—			285		—		968			—		—		1,253
Loans acquired with deteriorated credit quality	1,124			81		1,330		133			—		—		2,668
Total	$	1,124		$	368	$	1,330	$	1,105		$	—	$	—	$	3,928

88

	Commercial				Consumer
Acquired loans	Real estate		Business		Residential		Home equity			Credit cards		Other consumer		Total
Three months ended September 30, 2015
Allowance for loan losses:
Balance at beginning of period	$	2	$	1	$	2	$	3		$	—	$	—	$	7
Provision for loan losses	—		—		—		(1		)	—		—		(1		)
Charge-offs	—		—		—		(1		)	—		—		(1		)
Balance at end of period	$	1	$	—	$	2	$	2		$	—	$	—	$	5
Three months ended September 30, 2014
Allowance for loan losses:
Balance at beginning of period	$	—	$	—	$	1	$	3		$	—	$	—	$	4
Provision for loan losses	—		—		1		—			—		—		1
Charge-offs	—		—		—		—			—		—		—
Balance at end of period	$	—	$	—	$	1	$	3		$	—	$	—	$	5

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:

	September 30, 2015						December 31, 2014
	Originated		Acquired		Total		Originated		Acquired		Total
Commercial:
Real estate	$	55	$	—	$	55	$	53	$	—	$	53
Business	45		1		47		45		7		53
Total commercial	100		1		102		98		7		106
Consumer:
Residential real estate	32		—		32		34		—		34
Home equity	34		24		58		24		23		47
Indirect auto	14		—		14		13		—		13
Other consumer	5		—		5		5		—		5
Total consumer	85		24		109		75		23		98
Total	$	186	$	25	$	211	$	174	$	30	$	204

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				Nine months ended
	September 30,				September 30,
	2015		2014		2015		2014
Additional interest income that would have been recorded if nonperforming loans had performed in accordance with original terms	$	3	$	2	$	8	$	6

89

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 64% and 70% of the loans’ unpaid principal balance at September 30, 2015 and December 31, 2014, respectively. 

	September 30, 2015						December 31, 2014
Originated loans	Recorded investment		Unpaid principal balance		Related allowance		Recorded investment		Unpaid principal balance		Related allowance
With no related allowance recorded:
Commercial:
Real estate	$	24	$	49	$	—	$	40	$	59	$	—
Business	33		68		—		29		51		—
Total commercial	57		118		—		69		110		—
Consumer:
Residential real estate	16		19		—		8		9		—
Home equity	12		15		—		3		4		—
Indirect auto	3		4		—		2		3		—
Other consumer	1		2		—		2		2		—
Total consumer	32		40		—		16		18		—
Total	$	89	$	158	$	—	$	85	$	128	$	—
With a related allowance recorded:
Commercial:
Real estate	$	34	$	39	$	3	$	24	$	27	$	2
Business	25		28		5		32		43		2
Total commercial	58		67		8		56		70		4
Consumer:
Residential real estate	7		7		—		11		13		1
Home equity	5		5		—		4		4		1
Indirect auto	1		1		—		—		—		—
Other consumer	1		1		—		—		—		—
Total consumer	14		14		1		16		17		2
Total	$	73	$	81	$	9	$	71	$	87	$	6
Total
Commercial:
Real estate	$	58	$	89	$	3	$	64	$	86	$	2
Business	58		96		5		61		93		2
Total commercial	116		185		8		125		179		4
Consumer:
Residential real estate	23		25		—		20		22		1
Home equity	17		20		—		7		8		1
Indirect auto	4		5		—		2		3		—
Other consumer	3		3		—		2		2		—
Total consumer	46		54		1		31		36		2
Total	$	162	$	239	$	9	$	156	$	215	$	6

90

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.

	September 30, 2015						December 31, 2014
Acquired loans	Recorded investment		Unpaid principal balance		Related allowance		Recorded investment		Unpaid principal balance		Related allowance
Commercial:
Real estate	$	—	$	—	$	—	$	—	$	—	$	—
Business	—		3		—		3		3		—
Total commercial	—		3		—		3		3		—
Consumer:
Residential real estate	—		—		—		—		—		—
Home equity	5		7		—		4		6		—
Other consumer	—		—		—		—		—		—
Total consumer	5		7		—		4		6		—
Total(1)	$	5	$	10	$	—	$	7	$	9	$	—

⁽¹⁾ Includes nonperforming purchased credit impaired loans.

91

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: 

	September 30,
	2015				2014
Originated loans	Average recorded investment		Interest income recognized		Average recorded investment		Interest income recognized
Nine months ended September 30,
Commercial:
Real estate	$	71	$	1	$	68	$	1
Business	62		1		56		1
Total commercial	132		2		124		2
Consumer:
Residential real estate	23		—		21		—
Home equity	17		—		7		—
Indirect auto	4		—		3		—
Other consumer	3		—		3		—
Total consumer	47		1		34		—
Total	$	179	$	2	$	157	$	2
Three months ended September 30,
Commercial:
Real estate	$	65	$	—	$	64	$	—
Business	59		—		59		—
Total commercial	124		—		124		1
Consumer:
Residential real estate	23		—		21		—
Home equity	12		—		7		—
Indirect auto	4		—		2		—
Other consumer	3		—		2		—
Total consumer	41		—		33		—
Total	$	165	$	1	$	156	$	1

92

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:

	September 30,
	2015				2014
Acquired loans	Average recorded investment		Interest income recognized		Average recorded investment		Interest income recognized
Nine months ended September 30,
Commercial:
Real estate	$	—	$	—	$	—	$	—
Business	—		—		2		—
Total commercial	—		—		2		—
Consumer:
Residential real estate	—		—		—		—
Home equity	5		—		4		—
Other consumer	—		—		—		—
Total consumer	5		—		4		—
Total(1)	$	5	$	—	$	6	$	—
Three months ended September 30,
Commercial:
Real estate	$	—	$	—	$	—	$	—
Business	—		—		4		—
Total commercial	—		—		4		—
Consumer:
Residential real estate	—		—		—		—
Home equity	4		—		4		—
Other consumer	—		—		—		—
Total consumer	4		—		4		—
Total(1)	$	4	$	—	$	8	$	—

⁽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 its ability to satisfy the terms of the restructured loan for at least six consecutive payments. 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.

93

The following table is a reconciliation between nonperforming loans and impaired loans at the dates indicated:

	Commercial			Consumer			Total
September 30, 2015
Nonperforming loans	$	102		$	109		$	211
Plus: Accruing TDRs	48			13			61
Less: Smaller balance nonperforming loans evaluated collectively when determining the allowance for loan losses	(34		)	(72		)	(106		)
Total impaired loans(1)	$	116		$	51		$	166
December 31, 2014:
Nonperforming loans	$	106		$	98		$	204
Plus: Accruing TDRs	59			8			67
Less: Smaller balance nonperforming loans evaluated collectively when determining the allowance for loan losses	(36		)	(71		)	(108		)
Total impaired loans(1)	$	128		$	35		$	163

⁽¹⁾  Includes nonperforming purchased credit impaired loans.

94

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)
September 30, 2015
Originated loans
Commercial:
Real estate	$	20	$	1	$	37	$	59	$	7,417	$	7,476	$	1
Business	26		4		32		62		5,800		5,862		—
Total commercial	46		5		70		120		13,217		13,338		1
Consumer:
Residential real estate	3		3		20		26		2,263		2,289		—
Home equity	4		2		21		27		2,047		2,074		—
Indirect auto	18		4		5		27		2,304		2,331		—
Credit cards	2		1		2		5		301		306		2
Other consumer	2		1		3		6		248		254		—
Total consumer	29		10		52		91		7,163		7,254		2
Total	$	74	$	15	$	122	$	211	$	20,380	$	20,592	$	4
Acquired loans
Commercial:
Real estate	$	5	$	2	$	20	$	26	$	864	$	890	$	20
Business	—		—		1		2		168		169		—
Total commercial	5		2		21		28		1,032		1,060		20
Consumer:
Residential real estate	13		4		45		62		995		1,057		45
Home equity	5		2		16		23		936		959		1
Total consumer	18		5		62		85		1,931		2,015		47
Total	$	23	$	7	$	82	$	113	$	2,962	$	3,075	$	66

95

	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, 2014
Originated loans
Commercial:
Real estate	$	7	$	2	$	31	$	40	$	7,113	$	7,154	$	—
Business	5		7		17		28		5,402		5,430		—
Total commercial	11		9		49		69		12,515		12,584		—
Consumer:
Residential real estate	4		2		21		27		2,069		2,096		—
Home equity	3		1		15		19		1,828		1,847		—
Indirect auto	17		4		5		27		2,139		2,166		—
Credit cards	2		2		2		6		318		324		2
Other consumer	3		1		3		7		271		278		—
Total consumer	29		10		46		85		6,626		6,711		2
Total	$	41	$	19	$	95	$	154	$	19,141	$	19,296	$	2
Acquired loans
Commercial:
Real estate	$	3	$	3	$	26	$	31	$	1,019	$	1,050	$	26
Business	—		—		7		7		338		345		4
Total commercial	3		3		33		38		1,357		1,395		30
Consumer:
Residential real estate	11		5		56		72		1,186		1,257		56
Home equity	6		2		21		29		1,060		1,089		6
Total consumer	17		7		77		101		2,246		2,347		62
Total	$	21	$	9	$	109	$	139	$	3,603	$	3,742	$	91

⁽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.

96

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
September 30, 2015
Originated loans:
Pass	$	7,188	$	5,553	$	12,740	95.5	%
Criticized:(1)
Accrual	233		264		497		3.7
Nonaccrual	55		45		100		0.8
Total criticized	288		309		597		4.5
Total	$	7,476	$	5,862	$	13,338	100.0	%
Acquired loans:
Pass	$	814	$	142	$	957	90.3	%
Criticized:(1)
Accrual	76		25		101		9.6
Nonaccrual	—		1		1		0.1
Total criticized	76		27		103		9.7
Total	$	890	$	169	$	1,060	100.0	%
December 31, 2014
Originated loans:
Pass	$	6,791	$	5,067	$	11,858	94.2	%
Criticized:(1)
Accrual	310		318		628		5.0
Nonaccrual	53		45		98		0.8
Total criticized	363		363		726		5.8
Total	$	7,154	$	5,430	$	12,584	100.0	%
Acquired loans:
Pass	$	948	$	294	$	1,243	89.1	%
Criticized:(1)
Accrual	102		43		145		10.4
Nonaccrual	—		7		7		0.5
Total criticized	102		51		153		10.9
Total	$	1,050	$	345	$	1,395	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, 2014.

97

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
September 30, 2015
Originated loans by refreshed FICO score:
Over 700	$	2,027	$	1,708	$	1,652	$	214	$	166	$	5,768	79.5	%
660-700	133		199		359		50		44		784		10.8
620-660	61		82		173		23		21		361		5.0
580-620	32		39		71		10		12		164		2.3
Less than 580	32		43		76		7		11		169		2.3
No score(1)	4		2		—		2		1		8		0.1
Total	$	2,289	$	2,074	$	2,331	$	306	$	254	$	7,254	100.0	%
Acquired loans by refreshed FICO score:
Over 700	$	709	$	760	$	—	$	—	$	—	$	1,469	72.9	%
660-700	86		84		—		—		—		170		8.4
620-660	55		42		—		—		—		98		4.8
580-620	45		29		—		—		—		74		3.7
Less than 580	53		27		—		—		—		80		4.0
No score(1)	109		16		—		—		—		125		6.2
Total	$	1,057	$	959	$	—	$	—	$	—	$	2,015	100.0	%
December 31, 2014
Originated loans by refreshed FICO score:
Over 700	$	1,841	$	1,529	$	1,533	$	226	$	167	$	5,296	78.9	%
660-700	124		182		347		53		46		752		11.2
620-660	62		71		159		24		24		339		5.0
580-620	28		31		64		11		13		148		2.2
Less than 580	32		32		63		8		12		146		2.2
No score(1)	9		1		—		3		17		31		0.5
Total	$	2,096	$	1,847	$	2,166	$	324	$	278	$	6,711	100.0	%
Acquired loans by refreshed FICO score:
Over 700	$	872	$	851	$	—	$	—	$	—	$	1,723	73.4	%
660-700	87		93		—		—		—		180		7.7
620-660	61		52		—		—		—		113		4.8
580-620	49		40		—		—		—		88		3.8
Less than 580	57		34		—		—		—		91		3.9
No score(1)	131		20		—		—		—		151		6.4
Total	$	1,257	$	1,089	$	—	$	—	$	—	$	2,347	100.0	%

⁽¹⁾  Primarily includes loans that are serviced by others for which refreshed FICO scores were not available as of the date indicated.

98

Troubled Debt Restructures

The following table details additional information about our TDRs at the dates indicated:

	September 30, 2015		December 31, 2014
Aggregate recorded investment of impaired loans with terms modified through a troubled debt restructuring:
Accruing interest	$	61	$	67
Nonaccrual	62		53
Total troubled debt restructurings (1)	$	123	$	120

⁽¹⁾  Includes 102 and 87 acquired loans that were restructured with a recorded investment of $5 million and $4 million at September 30, 2015 and December 31, 2014, 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.

The financial effects of our modifications are as follows for the periods indicated: 

Type of Concession	Count	Postmodification recorded investment(1)		Premodification allowance for loan losses		Postmodification allowance for loan losses
Nine months ended September 30, 2015
Commercial:
Commercial real estate
Extension of term	4	$	4	$	—	$	—
Deferral of principal	7	11		—		—
Deferral of principal and extension of term	1	—		—		—
Extension of term and rate reduction	1	—		—		—
Commercial business
Deferral of principal	1	1		—		—
Rate reduction	2	—		—		—
Deferral of principal and extension of term	2	—		—		—
Other	1	—		—		—
Total commercial	19	15		—		—
Consumer:
Residential real estate
Extension of term	13	1		—		—
Rate reduction	6	1		—		—
Extension of term and rate reduction	8	1		—		—
Chapter 7 bankruptcy	13	1		—		—
Home equity
Extension of term	3	—		—		—
Extension of term and rate reduction	4	—		—		—
Chapter 7 Bankruptcy	71	5		—		—
Other	2	—		—		—
Indirect auto
Chapter 7 Bankruptcy	194	3		—		—
Other consumer
Extension of term and rate reduction	1	—		—		—
Chapter 7 Bankruptcy	9	—		—		—
Total consumer	324	13		—		—

99

Type of Concession	Count	Postmodification recorded investment(1)		Premodification allowance for loan losses		Postmodification allowance for loan losses
Total	343	$	28	$	—	$	—
Nine months ended September 30, 2014
Commercial:
Commercial real estate
Extension of term	5	$	14	$	1	$	—
Rate reduction	1	3		—		—
Extension of term and rate reduction	3	1		—		—
Commercial business
Extension of term	13	28		6		1
Extension of term and rate reduction	2	—		—		—
Total commercial	24	47		7		2
Consumer:
Residential real estate
Extension of term	4	—		—		—
Rate reduction	2	—		—		—
Deferral of principal and extension of term	7	1		—		—
Extension of term and rate reduction	7	—		—		—
Chapter 7 Bankruptcy	14	1		—		—
Home equity
Extension of term	3	—		—		—
Deferral of principal and extension of term	2	—		—		—
Extension of term and rate reduction	7	—		—		—
Chapter 7 Bankruptcy	79	3		—		—
Indirect auto
Chapter 7 Bankruptcy	192	3		—		—
Other consumer
Chapter 7 Bankruptcy	33	—		—		—
Total consumer	350	10		—		—
Total	374	$	57	$	7	$	2

100

Type of Concession	Count	Postmodification recorded investment(1)		Premodification allowance for loan losses		Postmodification allowance for loan losses
Three months ended September 30, 2015
Commercial:
Commercial real estate
Extension of term	1	$	—	$	—	$	—
Deferral of principal	1	1		—		—
Extension of term and rate reduction	1	—		—		—
Commercial business
Deferral of principal and extension of term	2	—		—		—
Total commercial	5	1		—		—
Consumer:
Residential real estate
Extension of term	2	—		—		—
Extension of term and rate reduction	1	—		—		—
Chapter 7 Bankruptcy	5	—		—		—
Home equity
Extension of term	1	—		—		—
Extension of term and rate reduction	1	—		—		—
Chapter 7 Bankruptcy	22	2		—		—
Other	2	—		—		—
Indirect Auto
Chapter 7 Bankruptcy	75	1		—		—
Other consumer
Chapter 7 Bankruptcy	2	—		—		—
Total consumer	111	4		—		—
Total	116	$	5	$	—	$	—
Three months ended September 30, 2014
Commercial:
Commercial real estate
Rate reduction	1	3		—		—
Commercial business
Extension of term	7	1		—		—
Total commercial	8	5		—		—
Consumer:
Residential real estate
Extension of term	1	$	—	$	—	$	—
Extension of term and rate reduction	3	—		—		—
Chapter 7 Bankruptcy	2	—		—		—
Home equity
Extension of term	2	—		—		—
Extension of term and rate reduction	2	—		—		—
Chapter 7 Bankruptcy	20	1		—		—
Indirect auto
Chapter 7 Bankruptcy	35	1		—		—
Other consumer
Chapter 7 Bankruptcy	7	—		—		—
Total consumer	72	2		—		—
Total	80	$	7	$	—	$	—

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⁽¹⁾   Postmodification balances approximate premodification balances. The aggregate amount of charge-offs as a result of the restructurings was $3 million for the nine months ended September 30, 2015 and was not significant for the nine months ended September 30, 2014, three months ended September 30, 2015, and three months ended September 30, 2014.

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 $4 million for the nine months ended September 30, 2015 and $2 million for the nine months ended September 30, 2014.

Residential Mortgage Banking

The following table provides information about our residential mortgage banking activities at the dates indicated: 

	September 30,
	2015		2014
Mortgages serviced for others	$	3,981	$	3,796
Mortgage servicing asset recorded for loans serviced for others, net	38		36

Note 4. Goodwill

The following table shows information regarding our goodwill for the nine months ended September 30, 2015 and the year ended December 31, 2014.

	Banking			Financial services			Consolidated total
Balances at January 1, 2014	$	2,381		$	68		$	2,449
Acquisitions	—			1			1
Impairment	(1,100		)	—			(1,100		)
Balances at December 31, 2014	1,281			69			1,350
Disposal	—			(2		)	(2		)
Balances at September 30, 2015	$	1,281		$	67		$	1,348

We perform our annual impairment test of goodwill on November 1st of each year or more often if events or circumstances have changed significantly from the annual test date.

For the period ending September 30, 2014, we concluded it was more likely than not that the fair value of our Banking reporting unit was less than its carrying value including goodwill, given our current expectations regarding the macroeconomic and industry environment, including our view of future interest rates and our current stock price range. Accordingly, we performed a Step 1 review for possible goodwill impairment in advance of our annual impairment testing date.

Under Step 1 of the goodwill impairment review, we calculated the fair value of the Banking reporting unit using a market approach, and compared the fair value to carrying value to identify potential impairment. Under Step 1, we determined that the carrying value of our Banking reporting unit exceeded its fair value. For Step 2, we compared the implied fair value of the Banking reporting unit's goodwill with the carrying amount of the goodwill for the Banking reporting unit.

Based on our assessments under both Steps 1 and 2, we have recorded an impairment of our Banking reporting unit goodwill of $1.1 billion during the quarter ended September 30, 2014. When we performed our annual goodwill impairment assessment as of November 1, 2014, we concluded that our goodwill balance was not impaired.

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Note 5. 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)
September 30, 2015
Derivatives designated as hedging instruments:
Interest rate swap agreements	$	—	$	—	$	266	$	7
Derivatives not designated as hedging instruments:
Interest rate swap agreements	4,060		162		4,111		163
Total derivatives	$	4,060	$	162	$	4,377	$	170
December 31, 2014
Derivatives designated as hedging instruments:
Interest rate swap agreements	$	4	$	—	$	30	$	2
Derivatives not designated as hedging instruments:
Interest rate swap agreements	3,629		96		3,649		96
Total derivatives	$	3,633	$	96	$	3,679	$	97

⁽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.

At September 30, 2015, all of our interest rate swaps for which we had master netting positions with the counterparty were in a liability position. Accordingly, there was no offsetting in our Consolidated Statements of Condition at September 30, 2015. Interest rate swaps for which we had master netting arrangements with the counterparty at December 31, 2014 were in a net liability position of $93 million. We offset $96 million of liabilities with $3 million of assets in our Consolidated Statement of Condition at December 31, 2014 related to these interest rate swaps and we did not include any cash collateral in the netting. We posted collateral for liability positions with a fair value of $239 million and $130 million at September 30, 2015 and December 31, 2014, 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 nine months ended September 30, 2015 and 2014.

We have entered into forward starting 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

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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 September 30, 2015, there was a $3 millionloss recognized in accumulated other comprehensive income related to these swaps.

At September 30, 2015, there was a $4 millionloss 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 September 30,					Nine months ended September 30,
Cash Flow Hedges	2015			2014		2015			2014
Interest rate swap agreements:
Amount of (loss) on derivatives recognized in other comprehensive income, net of tax	$	(2	)	$	—	$	(2	)	$	—
Amount of (loss) on derivatives reclassified from other comprehensive income to income(1)	—			—		(1		)	(1		)

⁽¹⁾  Recognized in interest expense on borrowings in our Consolidated Statements of Operations.

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 $9 million and $7 million for the nine months ended September 30, 2015 and 2014, respectively, included in Capital Markets income in our Consolidated Statements of Operations.

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Note 6. 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 September 30,						Nine months ended September 30,
	2015			2014			2015			2014
Net income (loss) available to common stockholders	$	53		$	(928	)	$	150		$	(807	)
Less income allocable to unvested restricted stock awards	1			—			1			1
Net income (loss) allocable to common stockholders	$	52		$	(928	)	$	149		$	(807	)
Weighted average common shares outstanding:
Total shares issued	366			366			366			366
Unallocated employee stock ownership plan shares	—			(2		)	—			(2		)
Unvested restricted stock awards	(4		)	(3		)	(3		)	(3		)
Treasury shares	(11		)	(11		)	(12		)	(11		)
Total basic weighted average common shares outstanding	351			350			351			350
Effect of dilutive stock-based awards	2			—			2			—
Total diluted weighted average common shares outstanding	353			350			353			350
Basic earnings (loss) per common share	$	0.15		$	(2.65	)	$	0.42		$	(2.31	)
Diluted earnings (loss) per common share	$	0.15		$	(2.65	)	$	0.42		$	(2.31	)
Anti-dilutive stock-based awards excluded from the diluted weighted average common share calculations	3			11			8			11

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Note 7. Other Comprehensive Loss

The following table presents the activity in our Other Comprehensive Income for the periods indicated:

	Three months ended September 30,									Nine months ended September 30,
	Pretax			Income  taxes			Net			Pretax			Income  taxes			Net
2015
Securities available for sale:
Net unrealized holding losses arising during the period	$	(12	)	$	(5	)	$	(8	)	$	(36	)	$	(13	)	$	(22	)
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)	(3		)	(1		)	(2		)	(8		)	(3		)	(5		)
Interest rate swaps designated as cash flow hedges:
Net unrealized losses arising during the period	(3		)	(1		)	(2		)	(4		)	(2		)	(3		)
Reclassification adjustment for realized losses included in net income(2)	—			—			—			1			—			1
Net unrealized losses on interest rate swaps designated as cash flow hedges	(3		)	(1		)	(2		)	(3		)	(1		)	(2		)
Amortization of net loss related to pension and post-retirement plans	1			—			1			3			—			3
Total other comprehensive loss	$	(16	)	$	(7	)	$	(10	)	$	(43	)	$	(18	)	$	(26	)
2014
Securities available for sale:
Net unrealized holding losses arising during the year	$	(51	)	$	(19	)	$	(31	)	$	(14	)	$	(5	)	$	(9	)
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)	(3		)	(1		)	(2		)	(10		)	(4		)	(6		)
Interest rate swaps designated as cash flow hedges:
Reclassification adjustment for realized losses included in net income(2)	—			—			—			1			—			—
Amortization of net loss related to pension and post-retirement plans	—			—			—			1			—			1
Total other comprehensive loss	$	(54	)	$	(20	)	$	(33	)	$	(23	)	$	(9	)	$	(14	)

⁽¹⁾  Included in Interest income on investment securities and other in our Consolidated Statements of Operations.

⁽²⁾  Included in Interest expense on borrowings in our Consolidated Statements of Operations.

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The following table presents the activity in our accumulated other comprehensive income for the periods indicated:

	Net unrealized gains on securities available for sale			Net unrealized gains (losses) on securities transferred from available for sale to held to maturity			Unrealized loss on  interest rate swaps designated as cash flow hedges			Pension and postretirement plans			Total
Balance, January 1, 2015	$	52		$	12		$	(5	)	$	(51	)	$	9
Period change, net of tax	(22		)	(5		)	(2		)	3			(26		)
Balance, September 30, 2015	$	30		$	7		$	(7	)	$	(48	)	$	(17	)
Balance, January 1, 2014	$	64		$	20		$	(6	)	$	(16	)	$	62
Period change, net of tax	(9		)	(6		)	—			1			(14		)
Balance, September 30, 2014	$	55		$	14		$	(5	)	$	(16	)	$	48

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.

Note 8. 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

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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 September 30, 2015, 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 Operations.

The table below presents information about our loans held for sale for which we elected the fair value option at the dates indicated: 

	September 30, 2015		December 31, 2014
Fair value carrying amount	$	48	$	35
Aggregate unpaid principal balance	46		34
Fair value carrying amount less aggregate unpaid principal balance	$	2	$	1

Additionally, included in loans held for sale on our Consolidated Statements of Condition are $3 million and $5 million of commercial loans held for sale that are carried at the lower of cost or market at September 30, 2015 and December 31, 2014, 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
September 30, 2015
Assets:
Investment securities available for sale:
Debt securities:
States and political subdivisions	$	405	$	—	$	405	$	—
U.S. Treasury	55		55		—		—
U.S. government sponsored enterprises	284		—		284		—
Corporate	827		—		823		4
Total debt securities	1,572		55		1,512		4
Mortgage-backed securities:
Residential mortgage-backed securities:
Government National Mortgage Association	31		—		31		—
Federal National Mortgage Association	81		—		81		—
Federal Home Loan Mortgage Corporation	97		—		97		—
Collateralized mortgage obligations:
Government National Mortgage Association	71		—		71		—
Federal National Mortgage Association	744		—		744		—
Federal Home Loan Mortgage Corporation	374		—		374		—
Total collateralized mortgage obligations	1,188		—		1,188		—
Total residential mortgage-backed securities	1,396		—		1,396		—
Commercial mortgage-backed securities, non-agency issued	1,212		—		1,212		—
Total mortgage-backed securities	2,609		—		2,609		—
Collateralized loan obligations, non-agency issued	1,118		—		1,118		—
Asset-backed securities collateralized by:
Student loans	218		—		218		—
Credit cards	20		—		20		—
Auto loans	90		—		90		—
Other	76		—		76		—
Total asset-backed securities	405		—		405		—
Other	22		21		1		—
Total securities available for sale	5,726		77		5,645		4
Loans held for sale (1)	48		—		48		—
Derivatives	162		—		162		—
Total assets	$	5,935	$	77	$	5,854	$	4
Liabilities:
Derivatives	$	170	$	—	$	170	$	—

⁽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, 2014
Assets:
Investment securities available for sale:
Debt securities:
States and political subdivisions	$	453	$	—	$	453	$	—
U.S. Treasury	25		25		—		—
U.S. government sponsored enterprises	191		—		191		—
Corporate	823		—		818		4
Total debt securities	1,492		25		1,463		4
Mortgage-backed securities:
Residential mortgage-backed securities:
Government National Mortgage Association	34		—		34		—
Federal National Mortgage Association	100		—		100		—
Federal Home Loan Mortgage Corporation	120		—		120		—
Collateralized mortgage obligations:
Federal National Mortgage Association	682		—		682		—
Federal Home Loan Mortgage Corporation	350		—		350		—
Total collateralized mortgage obligations	1,032		—		1,032		—
Total residential mortgage-backed securities	1,286		—		1,286		—
Commercial mortgage-backed securities, non-agency issued	1,500		—		1,500		—
Total mortgage-backed securities	2,786		—		2,786		—
Collateralized loan obligations, non-agency issued	1,016		—		1,016		—
Asset-backed securities collateralized by:
Student loans	235		—		235		—
Credit cards	42		—		42		—
Auto loans	194		—		194		—
Other	127		—		127		—
Total asset-backed securities	599		—		599		—
Other	22		21		1		—
Total securities available for sale	5,915		47		5,865		4
Loans held for sale (1)	35		—		35		—
Derivatives	93		—		93		—
Total assets	$	6,043	$	47	$	5,993	$	4
Liabilities:
Derivatives	$	94	$	—	$	94	$	—

⁽¹⁾  Represents loans for which we have elected the fair value option.

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)
Nine months ended September 30, 2015
Collateral dependent impaired loans	$	9	$	—	$	9	$	—	$	—
Nine months ended September 30, 2014
Collateral dependent impaired loans	$	11	$	—	$	10	$	1	$	—

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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 nine months ended September 30, 2015, we recorded an increase of $0.4 million to our specific allowance as a result of adjusting the fair value of the collateral for certain collateral dependent impaired loans to $9 million at September 30, 2015, which is included in our provision for credit losses. During the nine months ended September 30, 2014 we recorded an increase of $0.3 million to our specific allowance as a result of adjusting the fair value of the collateral for certain collateral dependent impaired loans to $11 million at September 30, 2014, 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 September 30, 2015 and December 31, 2014, in Level 3 of the fair value hierarchy. There were no changes in our trust preferred securities during the nine months ended September 30, 2015 and 2014. As of September 30, 2015 and December 31, 2014, 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: 

	September 30, 2015						December 31, 2014
	Carrying value		Estimated fair value		Fair value level		Carrying value		Estimated fair value		Fair value level
Financial assets:
Cash and cash equivalents	$	420	$	420	1		$	420	$	420	1
Investment securities available for sale	5,726		5,726		1,2,3	(1)	5,915		5,915		1,2,3	(1)
Investment securities held to maturity	6,280		6,367		2		5,942		5,964		2
Federal Home Loan Bank and Federal Reserve Bank common stock	373		373		2		412		412		2
Loans held for sale	51		51		2		40		40		2
Loans and leases, net	23,427		23,502		2,3	(2)	22,803		23,037		2,3	(2)
Derivatives	162		162		2		93		93		2
Accrued interest receivable	107		107		2		101		101		2
Financial liabilities:
Deposits	$	28,816	$	28,834	2		$	27,781	$	27,793	2
Borrowings	5,870		5,878		2		6,206		6,215		2
Derivatives	170		170		2		94		94		2
Accrued interest payable	14		14		2		11		11		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 $9 million and $10 million of collateral dependent impaired loans without significant adjustments made to appraised values at September 30, 2015 and December 31, 2014, respectively. 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.

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Investment Securities

The fair value estimates of securities are based on quoted market prices of identical securities, where available. 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 9. 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 September 30, 2015
Net interest income	$	263		$	—	$	263
Provision for credit losses	20			—		20
Net interest income after provision for credit losses	244			—		244
Noninterest income	65			18		83
Amortization of intangibles	3			1		4
Other noninterest expense	228			13		241
Income before income taxes	77			5		82
Income tax expense	19			2		21
Net income	$	58		$	3	$	60
Three months ended September 30, 2014
Net interest income	$	273		$	—	$	273
Provision for credit losses	17			—		17
Net interest income after provision for credit losses	257			—		257
Noninterest income	57			18		75
Amortization of intangibles	6			1		7
Goodwill impairment	1,100			—		1,100
Other noninterest expense	276			14		290
Income before income taxes	(1,068		)	3		(1,065		)
Income tax expense	(146		)	1		(145		)
Net (loss) income	$	(922	)	$	2	$	(920	)
Nine months ended September 30, 2015
Net interest income	$	790		$	—	$	790
Provision for credit losses	53			—		53
Net interest income after provision for credit losses	736			—		736
Noninterest income	201			51		252
Amortization of intangibles	14			2		15
Other noninterest expense	699			40		739
Income before income taxes	225			9		234
Income tax expense	58			3		61
Net income	$	167		$	6	$	173
Nine months ended September 30, 2014
Net interest income	$	816		$	—	$	816
Provision for credit losses	60			—		60
Net interest income after provision for credit losses	756			—		756
Noninterest income	182			51		233
Amortization of intangibles	19			2		21
Goodwill impairment	1,100			—		1,100
Other noninterest expense	726			43		769
Income before income taxes	(908		)	6		(901		)
Income tax expense	(120		)	2		(117		)
Net (loss) income	$	(788	)	$	4	$	(784	)

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Note 10. Condensed Parent Company Only Financial Statements

The following condensed statements of condition, the related condensed statements of operations, and cash flows should be read in conjunction with our Consolidated Financial Statements and related notes:

Condensed Statements of Condition	September 30, 2015		December 31, 2014
Assets:
Cash and cash equivalents	$	385	$	383
Investment in subsidiary	4,435		4,388
Deferred taxes	30		32
Other assets	12		13
Total assets	$	4,862	$	4,815
Liabilities and Stockholders’ Equity:
Accounts payable and other liabilities	$	11	$	12
Borrowings	711		710
Stockholders’ equity	4,139		4,093
Total liabilities and stockholders’ equity	$	4,862	$	4,815

	Three months ended September 30,						Nine months ended September 30,
Condensed Statements of Operations	2015			2014			2015			2014
Interest income	$	—		$	—		$	—		$	1
Dividends received from subsidiary	45			—			45			80
Total interest and dividend income	45			—			45			81
Interest expense	12			12			36			36
Net interest income	33			(12		)	9			45
Noninterest income	1			—			1			3
Noninterest expense	7			7			21			22
Income (loss) before income taxes and undisbursed income of subsidiary	26			(19		)	(11		)	25
Income tax benefit	(7		)	(8		)	(21		)	(21		)
Income (loss) before undisbursed income of subsidiary	33			(10		)	10			47
Undisbursed income (loss) of subsidiary	27			(910		)	163			(830		)
Net income (loss)	60			(920		)	173			(784		)
Preferred stock dividend	8			8			23			23
Net income (loss) available to common stockholders	$	53		$	(928	)	$	150		$	(807	)
Net income (loss)	$	60		$	(920	)	$	173		$	(784	)
Other comprehensive loss(1)	(10		)	(33		)	(26		)	(14		)
Total comprehensive income (loss)	$	51		$	(953	)	$	147		$	(798	)

⁽¹⁾  See Consolidated Statements of Comprehensive Income (Loss) for other comprehensive loss detail.

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	Nine months ended September 30,
Condensed Statements of Cash Flows	2015			2014
Cash flows from operating activities:
Net income (loss)	$	173		$	(784	)
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Undisbursed (income) loss of subsidiaries	(163		)	830
Stock-based compensation expense	10			9
Deferred income tax (benefit) expense	(2		)	2
Decrease (increase) in other assets	3			(5		)
Decrease in other liabilities	(1		)	(1		)
Net cash provided by operating activities	20			52
Cash flows from investing activities:
Proceeds from sales of securities available for sale	—			2
Other, net	1			1
Net cash provided by investing activities	1			3
Cash flows from financing activities:
Return of capital from subsidiary	90			45
Dividends paid on preferred stock	(23		)	(23		)
Dividends paid on common stock	(85		)	(85		)
Net cash used in financing activities	(18		)	(62		)
Net increase (decrease) in cash and cash equivalents	3			(8		)
Cash and cash equivalents at beginning of period	383			390
Cash and cash equivalents at end of period	$	385		$	382

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

Evaluation of Disclosure Controls and Procedures

Previously Identified Material Weakness

As of December 31, 2014, Management concluded that our internal control over financial reporting was not effective due to the material weakness related to the process for determining the allowance for loan losses (the "allowance"). We determined that our allowance was overstated for the second, third and fourth quarters of 2013 and the first three quarters of 2014. The errors were due to the misconduct of a mid-level employee and, to a lesser extent, by errors related to certain data, model adjustments and calculations detected in 2015. The employee was responsible for preparing the information used by our Chief Credit Officer in determining the allowance each quarter that is then subject to review and approval by our Allowance Committee. The allowance information the employee prepared and presented to our Chief Credit Officer and the Allowance Committee for the relevant periods was not based on the models and judgmental processes as required under the Company’s internal procedures, which are designed to comply with GAAP and regulatory requirements. The employee has been terminated. Although we have determined that the resulting errors in the allowance for the specified periods were not material with regard to the consolidated financial statements taken as a whole for those periods, we concluded that our internal control over financial reporting was not effective as of December 31, 2014 due to the material weakness described below.

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A material weakness is defined as a deficiency, or combination of deficiencies in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected in a timely manner.

Based on its evaluation of internal control over financial reporting considering the foregoing, Management has concluded that it did not design and maintain effective control with respect to: (1) segregation of duties among and between the individuals responsible for the determination of the allowance, the control operators responsible for validating that the allowance was determined and documented in accordance with the required policies and procedures, and the monitoring control that consists of management self testing over the key Sarbanes-Oxley allowance process controls, and (2) general computing controls were not designed and operating effectively to ensure that access to applications and data, and the ability to make program changes to the models used in the determination of the allowance were adequately restricted to the appropriate personnel and that the activities of the individuals with access to modify output and make program changes were appropriately monitored.

During 2015, Management has made changes to its internal controls that include: (1) better segregating the roles and responsibilities of its reconciliation, review and monitoring control consisting of management self testing of the key Sarbanes-Oxley controls over the determination and documentation of the allowance, and (2) the establishment of improved general computing controls that detect unauthorized access to applications and data, and detect unauthorized program changes to the models used in the determination of the allowance. These control improvements have been implemented; however, in accordance with the Company’s internal control compliance program, the control deficiency designation cannot be closed until the control improvements have been operational for a period of time and successfully tested. The Company currently expects that testing will be completed during the fourth quarter of 2015. We will continue to monitor the efficacy of these and other control improvements. Management believes that these changes, when fully implemented, will be effective in remediating the material weakness.

Except for those referenced in the prior paragraph, 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 during the quarter ended September 30, 2015.

In accordance with Rule 13a-15(b) of the Exchange Act, we carried out an evaluation as of September 30, 2015 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 not effective as of September 30, 2015 as a result of the material weakness that exists in our internal control over financial reporting as previously described in our Annual Report on Form 10-K for the year ended December 31, 2014.

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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.

Based on information currently available to us, and on advice of counsel, management does not believe that judgments or settlements arising from pending or threatened legal proceedings will have a material adverse effect on our consolidated financial position. We note, however, that the outcomes of these 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 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 2014 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 third quarter of 2015.

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.

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ITEM 6. Exhibits

The following exhibits are filed herewith: 

Exhibits
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 Operations, (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

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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: October 26, 2015	By:	/s/ Gary M. Crosby
		Gary M. Crosby
		President and Chief Executive Officer
		(Principal Executive Officer)
Date: October 26, 2015	By:	/s/ Gregory W. Norwood
		Gregory W. Norwood
		Senior Executive Vice President and Chief Financial Officer
		(Principal Financial Officer)

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