10-Q 1 a10-qq263015.htm 10-Q 10-Q Q2 6.30.15
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 June 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 July 30, 2015, there were issued and outstanding 354,820,613 shares of the Registrant’s Common Stock, $0.01 par value.



FIRST NIAGARA FINANCIAL GROUP, INC.
FORM 10-Q
For the Quarterly Period Ended June 30, 2015
TABLE OF CONTENTS


2

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 June 30, 2015, we had $39 billion in assets, $28 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. 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” 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.

3

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 half of 2015, approximately $30 million of the $37 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 $7 million that has been expensed, $1 million was classified as “Salaries and Benefits” expense and $6 million was classified as “Professional services” expense. In addition, we have recorded $12 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, 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. 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.”

4

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 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.

5

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. The current futures market indicates approximately a 50% probability that the Federal Reserve will increase the Fed Funds Rate by December 2015. In the first half of 2015, longer term interest rates have been more volatile. The 10 year Treasury rate fell to as low as 1.64% on January 30, 2015, the lowest since the second quarter of 2013 but has subsequently risen to as high as 2.49% on June 26, 2015 and down to 2.28% on July 29, 2015. The increase in the 10 year Treasury rate is attributable to increases in Eurozone sovereign debt yields, such as the German Bund, that have increased as a result of quantitative easing by the European Central Bank. Similarly, the mortgage refinance rates have increased above 4.00% after declining to as low as 3.75% in April 2015. 
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 estimates ranging from two 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,

6

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.
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 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

7

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 June 30, 2015, we have $726 million of CLO investments, with a weighted average yield of 3.2% that could be impacted by this rule ("legacy CLO"). These investments are further described under “Risk Management—Investment Securities Portfolio.” While we believe that it is unlikely 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 June 30, 2015, we have purchased $347 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.
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 June 30, 2015, we had $132 million of legacy CLO securities with fair values less than their book values, aggregating to a $0.5 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.
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

8

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 June 30, 2015, the par value of our portfolio of residential mortgage-backed securities totaled $7.3 billion, which included $7.0 billion of collateralized mortgage obligations. In the determination of our constant effective yield, we estimate that we will receive $1.5 billion of principal cash flows on our collateralized mortgage obligations over the next 12 months.

9

SELECTED QUARTERLY FINANCIAL DATA
 
2015
 
2014
At or for the quarter ended
June 30
March 31
 
December 31
September 30
June 30
Selected financial condition data:
(in millions, except per share amounts)
Total assets
$
39,064

$
38,907

 
$
38,551

$
37,972

$
38,628

Loans and leases, net
23,133

22,887

 
22,803

22,547

22,126

Investment securities:
 
 
 
 
 
 
Available for sale
5,751

5,911

 
5,915

6,198

6,684

Held to maturity
6,170

6,215

 
5,942

5,352

4,834

Goodwill and other intangibles
1,404

1,411

 
1,417

1,423

2,528

Deposits
28,447

28,250

 
27,781

27,670

27,445

Borrowings
5,959

5,973

 
6,206

5,662

5,624

Stockholders’ equity
$
4,121

$
4,125

 
$
4,093

$
4,096

$
5,082

Common shares outstanding
355

354

 
353

355

355

Selected operations data:
 
 
 
 
 
 
Interest income
$
298

$
297

 
$
302

$
304

$
302

Interest expense
35

34

 
32

31

30

Net interest income
263

263

 
270

273

272

Provision for credit losses
21

13

 
36

17

20

Net interest income after provision for credit losses
242

250

 
234

257

252

Noninterest income
87

82

 
77

75

81

Restructuring charges
—

18

 
9

2

—

Goodwill impairment
—

—

 
—

1,100

—

Deposit account remediation
—

—

 
(23
)
45

—

Other noninterest expense
248

244

 
248

249

244

Income (loss) before income tax
81

71

 
77

(1,065
)
89

Income tax expense (benefit)
20

20

 
8

(145
)
13

Net income (loss)
61

51

 
69

(920
)
76

Preferred stock dividend
8

8

 
8

8

8

Net income (loss) available to common stockholders
$
53

$
44

 
$
62

$
(928
)
$
68

Common stock and related per share data:
 
 
 
 
 
 
Earnings (loss) per common share:
 
 
 
 
 
 
Basic
$
0.15

$
0.12

 
$
0.17

$
(2.65
)
$
0.19

Diluted
0.15

0.12

 
0.17

(2.65
)
0.19

Cash dividends
0.08

0.08

 
0.08

0.08

0.08

Book value(1)
10.77

10.80

 
10.71

10.72

13.54

Tangible book value per share(1)(2)
6.77

6.78

 
6.67

6.66

6.32

Market Price (NASDAQ: FNFG):



 



High
9.86

9.20

 
8.61

9.05

9.61

Low
8.45

7.42

 
7.00

8.32

8.27

Close
9.44

8.84

 
8.43

8.33

8.74

 
(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.

10

 
2015
 
2014
At or for the quarter ended
June 30
March 31
 
December 31
September 30
June 30
 
(dollars in millions)
Selected financial ratios and other data:
 
 
 
 
 
 
Performance ratios(1):
 
 
 
 
 
 
Return on average assets
0.63
%
0.54
%
 
0.72
%
(9.46
)%
0.80
%
Common equity:
 
 
 
 
 
 
Return on average common equity
5.63

4.69

 
6.42

(77.27
)
5.80

Return on average tangible common equity(2)
8.94

7.48

 
10.24

(163.71
)
12.48

Total equity:
 
 
 
 
 
 
Return on average equity
5.90

5.05

 
6.62

(71.57
)
6.01

Return on average tangible equity(2)
8.94

7.68

 
10.07

(141.16
)
12.01

Net interest rate spread
2.93

2.97

 
3.02

3.13

3.18

Net interest rate margin
3.02

3.07

 
3.11

3.21

3.26

Efficiency ratio(3)
70.9

75.6

 
67.5

400.6

69.2

Operating expenses as a percentage of average loans and deposits(4)
1.93

2.05

 
1.85

11.19

1.97

Effective tax rate (benefit)
24.7

28.0

 
10.2

(13.6
)
14.5

Dividend payout ratio
53.33

66.67

 
47.06

N/M

42.11

Capital ratios:
 
 
 
 
 
 
First Niagara Financial Group, Inc.
 
 
 
 
 
 
Tier 1 risk-based capital(5)
10.03

10.02

 
9.81

9.82

9.58

Total risk-based capital(5)
11.96

11.95

 
11.75

11.75

11.53

Common equity tier 1 capital(5)
8.50

8.48

 
N/A

N/A

N/A

Tier 1 risk-based common
capital(2)(5)
N/A

N/A

 
8.20

8.19

7.93

Leverage ratio(5)
7.60

7.56

 
7.50

7.34

7.34

Ratio of stockholders’ equity to total assets
10.55

10.60

 
10.62

10.79

13.16

Ratio of tangible common stockholders’ equity to tangible assets(2)
6.32
%
6.34
%
 
6.30
%
6.39
 %
6.14
%
Risk-weighted assets(5)
$
28,444

$
28,152

 
$
28,186

$
27,729

$
27,313

First Niagara Bank:(5)
 
 
 
 
 
 
Tier 1 risk-based capital
10.66

10.65

 
10.48

10.41

10.19

Total risk-based capital
11.54
%
11.53
%
 
11.37
%
11.27
 %
11.05
%
Common equity tier 1 capital
10.66
%
10.65
%

N/A

N/A

N/A

Leverage ratio
8.07
%
8.03
%
 
8.01
%
7.78
 %
7.80
%
Risk-weighted assets
$
28,358

$
28,068

 
$
28,146

$
27,686

$
27,272

Other data:
 
 
 
 
 
 
Number of full service branches
394

394

 
411

411

411

Full time equivalent employees
5,364

5,322

 
5,572

5,768

5,874

 
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.

11

(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
June 30
March 31
 
December 31
September 30
June 30
 
(in millions)
Computation of ending tangible assets:
 
 
 
 
Total assets
$
39,064

$
38,907

 
$
38,551

$
37,972

$
38,628

Less: goodwill and other intangibles
(1,404
)
(1,411
)
 
(1,417
)
(1,423
)
(2,528
)
Tangible assets
$
37,659

$
37,497

 
$
37,134

$
36,549

$
36,099

 
 
 
 
 
 
 
Computation of ending tangible common equity:
 
 
 
 
 
 
Total stockholders' equity
$
4,121

$
4,125

 
$
4,093

$
4,096

$
5,082

Less: goodwill and other intangibles
(1,404
)
(1,411
)
 
(1,417
)
(1,423
)
(2,528
)
Less: preferred stockholders' equity
(338
)
(338
)
 
(338
)
(338
)
(338
)
Tangible common equity
$
2,379

$
2,376

 
$
2,338

$
2,334

$
2,215

 
 
 
 
 
 
 
Computation of average tangible equity:
 
 
 
 
 
 
Total stockholders' equity
$
4,145

$
4,128

 
$
4,141

$
5,100

$
5,066

Less: goodwill and other intangibles
(1,408
)
(1,414
)
 
(1,420
)
(2,515
)
(2,532
)
Tangible equity
$
2,737

$
2,714

 
$
2,721

$
2,586

$
2,534

 
 
 
 
 
 
 
Computation of average tangible common equity:
 
 
 
 
 
 
Total stockholders' equity
$
4,145

$
4,128

 
$
4,141

$
5,100

$
5,066

Less: goodwill and other intangibles
(1,408
)
(1,414
)
 
(1,420
)
(2,515
)
(2,532
)
Less: preferred stockholders' equity
(338
)
(338
)
 
(338
)
(338
)
(338
)
Tangible common equity
$
2,399

$
2,376

 
$
2,383

$
2,248

$
2,196

 
 
 
 
 
 
 
Computation of Tier 1 common capital:(1)
 
 
 
 
 
 
Tier 1 capital
N/A

N/A

 
$
2,764

$
2,723

$
2,614

Less: qualifying restricted core capital elements
N/A

N/A

 
(114
)
(114
)
(113
)
Less: perpetual non-cumulative preferred stock
N/A

N/A

 
(338
)
(338
)
(338
)
Tier 1 common capital (Non-GAAP)
N/A

N/A

 
$
2,312

$
2,271

$
2,162

 
 
 
 
 
 
 
(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.

12

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
 
Six months ended June 30,
 
June 30,
March 31,
June 30,
 
2015
2014
(in millions, except per share data)
2015
2015
2014
 
Operating results (Non-GAAP):
 
 
 
 
 
 
Net interest income
$
263

$
263

$
272

 
$
526

$
543

Provision for credit losses
21

13

20

 
34

44

Noninterest income
87

82

81

 
169

158

Noninterest expense
248

244

244

 
491

482

Income tax expense
20

27

13

 
47

30

Net operating income (Non-GAAP)
$
61

$
62

$
76

 
$
123

$
144

Operating earnings per diluted share (Non-GAAP)
$
0.15

$
0.15

$
0.19

 
$
0.30

$
0.37

Reconciliation of net operating income to net income
$
61

$
62

$
76

 
$
123

$
144

Nonoperating expenses, net of tax at effective tax rate:
 
 
 
 
 
 
Restructuring charges ($18 million pre-tax for the three months ended March 31, 2015 and six months ended June 30, 2015, and $10 million pre-tax for the six months ended June 30, 2014)
—

(11
)
—

 
(11
)
(8
)
Total nonoperating expenses, net of tax
—

(11
)
—

 
(11
)
(8
)
Net income (GAAP)
$
61

$
51

$
76

 
$
112

$
136

Earnings per diluted share (GAAP)
$
0.15

$
0.12

$
0.19

 
$
0.27

$
0.34

Our second quarter of 2015 results reflect stable net interest income, strong noninterest income growth, and strong credit quality metrics with significant declines in nonperforming loans and criticized assets. We had solid execution in the second quarter of 2015 reflecting adherence to our prudent credit underwriting practices and progress in implementing our strategic investment plan, which remains on time and on budget. We are focused on providing a faster, easier, simpler and even more secure banking experience, and our customers are responding well.
Compared to the prior quarter, revenues increased as most noninterest income categories benefited from strong customer activity as well as seasonal strength. Our period end commercial business loan balances increased 9% annualized from the prior quarter benefiting from strong activity in June. Our loan pipeline at the end of the quarter was also robust. Sequentially, average consumer deposit balances increased 5% annualized sequentially driven by interest-bearing checking and money market deposit balances and our net interest margin of 3.02% was in line with our expectations.

13

Comparison to Prior Quarter
Our second quarter 2015 GAAP net income was $61 million, or $0.15 per diluted share. By comparison, in the first quarter of 2015, we reported GAAP net income of $51 million, or $0.12 per diluted share, which included $18 million, or $0.03 per diluted share, in pre-tax restructuring charges incurred primarily in connection with the consolidation of 17 branches and the completion of our organization simplification during the quarter as well as third party professional fees incurred in connection with the overstatement of the allowance for loan losses resulting from mid-level employee misconduct that was discovered in February 2015. Excluding these items, our operating (non-GAAP) net income for the three months ended March 31, 2015 amounted to $62 million, or $0.15 per diluted share.
Our second quarter 2015 net interest income was unchanged from the prior quarter at $263 million as the benefits of earning asset growth and one extra day in the quarter were offset by the continued impact of reinvestments and repricing of assets in the current low interest rate and competitive pricing environment. Average interest-earning assets increased $168 million, or 2% annualized, while average interest-bearing liabilities increased $179 million, or 3% annualized. Growth in average interest earning assets reflected continued loan growth, particularly in commercial business, home equity, and indirect auto loans. Average investment securities increased 5% from the prior quarter, driven by growth in our residential mortgage-backed securities portfolio partially offset by a decline in our commercial mortgage-backed securities portfolio. The five basis points decrease in net interest margin in the second quarter of 2015 reflected compression of earning asset yields in the current low interest rate and competitive pricing environment, as well as the impact of deposit pricing promotional campaigns. Average commercial loan yields increased three basis points while consumer loan yields declined 11 basis points from the prior quarter.
Compared to the prior quarter, average loans increased 1% annualized during the second quarter of 2015 driven primarily by increases in our Eastern Pennsylvania and Tri-State markets. Average commercial business and real estate loans increased less than 1% annualized. Average commercial loan growth was impacted by the timing of new business volumes, commercial real estate paydowns early in the quarter as well as our continued focus on balancing volume growth with prudent credit underwriting. Average commercial real estate loans were flat while commercial business loans increased 2% annualized. The increase in average commercial business loans was driven primarily by increases in the middle market and healthcare segments while average commercial real estate loan balances were impacted by higher principal paydowns driven by customers' sale of the properties. Period end commercial business loan balances increased 9% and our pipeline was strong at June 30, 2015, particularly in our middle market and healthcare segments.
Average consumer loans increased 2% annualized driven by a 3% and 9% increase in our home equity and indirect auto portfolios, respectively, partially offset by a 22% decrease in other consumer loans. Average indirect auto loan balances increased $51 million, or 9% annualized, to $2.2 billion as strong new origination activity was partially offset by increased paydowns. New originations in the quarter, which totaled $273 million, yielded 3.38%, net of dealer reserve, which was an increase of 13 basis points compared to the prior quarter originations as we continue to seek yield over volume. Average residential real estate loans decreased 1%, driven by the prepayment of adjustable rate mortgages and our strategy of selling most newly originated fixed rate residential real estate loans in the secondary market.
Average deposits increased 6% annualized from the prior quarter to $28.2 billion and our average core deposits increased over 5% sequentially driven by a 10% increase in interest-bearing checking balances. Total average interest-bearing deposit balances increased 8% annualized led by sequential increases across all categories. Average transactional deposit balances, which include interest-bearing and noninterest-bearing checking accounts, increased 5% annualized from the prior quarter and represent 37% of our average deposit balances at June 30, 2015, as compared to 38% at March 31, 2015. Average interest-bearing checking balances increased $130 million, or 10% from the prior quarter, driven by continued growth in net new checking units and average balance growth. Average money market deposit balances increased $119 million, or 5% annualized, reflecting promotional marketing campaigns. Time deposits increased $139 million, or 15% annualized, from the prior quarter driven primarily by a significant increase in brokered deposits partially offset by decreases in both municipal and

14

consumer certificates of deposit. The average cost of interest-bearing deposits increased one basis point from the prior quarter to 0.29%.
Average consumer deposit balances increased 5% annualized to $18.1 billion driven by higher customer balances, new account acquisitions, and successful money market deposit promotional campaigns primarily in our New York state footprint. Average consumer interest-bearing and noninterest-bearing checking balances increased 12% from the prior quarter reflecting higher balances held by customers as well as new customer acquisitions. Average savings balances increased 7% annualized driven by our new Companion Savings accounts as well as higher average customer balances.
Our provision for credit losses totaled $21 million and $13 million for the three months ended June 30, 2015 and March 31, 2015, respectively. Nonperforming assets decreased to $225 million, or 0.58% of total assets, at June 30, 2015 from $247 million, or 0.63% of total assets at March 31, 2015. Total criticized and classified loans decreased 5% and 4%, respectively, over the same time period.
The provision for loan losses on originated loans totaled $20 million and $11 million for the second quarter of 2015 and the first quarter of 2015, respectively. Annualized net charge-offs equaled 0.31% of average originated loans, unchanged from the first quarter of 2015. At June 30, 2015, originated criticized loans decreased $23 million, or 3%, to $738 million, or 3.7% of originated loans, primarily due to favorable credit migration and paydowns. Nonperforming originated loans of $181 million decreased 8% from March 31, 2015 as a result of charge-offs and paydowns.
The provision for losses on acquired loans totaled $1 million and $3 million in the second quarter and first quarter of 2015, respectively. Annualized net charge-offs equaled 0.06% of average acquired loans for the second quarter of 2015, compared to 0.25% for the first quarter of 2015. At June 30, 2015, acquired classified and criticized loans decreased 8% and 13%, respectively from March 31, 2015. Approximately $79 million of credit related discount remain on the acquired loan portfolio which equates to a 2.2% coverage ratio, slightly down from last quarter and which we believe is adequate to cover expected losses in the acquired loan portfolio. The decline in the credit related discount was primarily driven by charge-offs related to the Harleysville and NewAlliance portfolios.
Noninterest income increased $4 million, or 5%, in the second quarter of 2015 compared to the first quarter of 2015, driven by strong consumer activity, an additional day in the quarter, and typical seasonal trends. Noninterest income for the three months ended June 30, 2015 included $3 million in tax credit amortization for investments we made during the quarter. There was no such amortization in the first quarter of 2015. Excluding this amortization, noninterest income increased $7 million, or 9%. Noninterest expenses decreased $13 million from the first quarter of 2015. Excluding $18 million in pre-tax restructuring charges in the first quarter of 2015, noninterest expenses increased $4 million reflecting business and volume related expenses as well as vendor and other costs associated with our strategic initiatives and other corporate activities.
Our effective tax rate was 24.7% and 28.0% for the three months ended June 30, 2015 and March 31, 2015, respectively, primarily reflecting the benefit of a tax credit investment in the second quarter of 2015 that reduced our income tax expense.
Comparison to Prior Year Quarter
Our second quarter 2015 GAAP net income was $61 million, or $0.15 per diluted share, compared to $76 million, or $0.19 per diluted share, for the second quarter of 2014. The decrease in GAAP net income and earnings per diluted share was primarily attributable to a higher effective tax rate and net interest margin compression.
Our second quarter of 2015 net interest income decreased $9 million, or 3%, from the second quarter of 2014. Our taxable equivalent net interest margin decreased 24 basis points to 3.02% at June 30, 2015 from 3.26% in the second quarter of 2014. During the current quarter, yields on average interest-earning assets decreased 20 basis points, compared to the same quarter in 2014, driven by lower yields across all loan portfolios. The cost of interest-bearing liabilities of 0.49% for the current quarter increased five basis points from the same quarter in 2014.

15

Average loans increased 5% for the quarter ended June 30, 2015 compared to the same quarter in 2014. Average commercial business and real estate loans increased 5% over the same quarter in 2014, with our commercial real estate and commercial business portfolios both increasing 5%. Average consumer loans increased 7%, 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, increased 7% over the prior year and represent 37% of our average deposit balances, up from 36% a year ago. Average noninterest-bearing checking deposits increased 7% over the prior year, which was driven primarily by business checking growth. Average interest-bearing checking balances increased $311 million, or 6%, for the quarter ended June 30, 2015 from the same quarter in the prior year and average noninterest-bearing checking balances increased $350 million, or 7%. Average money market balances increased 3% compared to the prior year quarter while time deposits decreased 1%. The average cost of interest-bearing deposits of 0.29% increased six basis points from the prior year quarter.
Our provision for credit losses totaled $21 million and $20 million for the three months ended June 30, 2015 and 2014, respectively. The provision for loan losses on originated loans was $20 million and $19 million in the second quarter of 2015 and 2014, respectively. Nonperforming originated loans as a percentage of originated loans increased to 0.91% at June 30, 2015 from 0.86% at June 30, 2014. Annualized net charge-offs amounted to 0.31% and 0.30% of average originated loans for the three months ended June 30, 2015 and 2014, respectively.
The provision for credit losses on acquired loans totaled $1 million and $0.3 million in the second quarter of 2015 and 2014, respectively. Annualized net charge-offs equaled 0.06% of average acquired loans for the quarters ended June 30, 2015 and 2014.
For the quarter ended June 30, 2015, noninterest income increased $6 million, or 7%, from the same period in 2014. Increases in mortgage banking, capital markets income, and other income were partially offset by decreases in deposit service charges and lending and leasing. Other income for the quarters ended June 30, 2015 and 2014 included $3 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 increased $4 million, or 2%, during the same period. Technology and communications, marketing and advertising, professional services, and federal deposit insurance premiums increased while declines in salaries and benefits, occupancy and equipment, and amortization of intangibles partially offset the impact of these increases.
Our effective tax rate was 24.7% and 14.5% for the second quarter of 2015 and 2014, respectively. The effective tax rate for the second 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 June 30, 2014 reflects 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 six months ended June 30, 2015 was $112 million, or $0.27 per diluted share, compared to $136 million, or $0.34 per diluted share, for the six months ended June 30, 2014. The decrease in GAAP net income and earnings per diluted share was primarily attributable to a higher effective tax rate and net interest margin compression. Excluding $18 million in pre-tax restructuring charges, our non-GAAP operating net income for the six months ended June 30, 2015 was $123 million, or $0.30 per diluted share. Excluding $10 million in pre-tax restructuring charges, our non-GAAP operating net income was $144 million, or $0.37 per diluted share for the six months ended June 30, 2014.
Our GAAP net income for the six months ended June 30, 2015 included 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 as well as $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

16

in February 2015. Our GAAP net income for the six months ended June 30, 2014 included $10 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 six months ended June 30, 2015 decreased $17 million, or 3%, from the six months ended June 30, 2014. Our taxable equivalent net interest margin decreased 26 basis points to 3.04% for the six months ended June 30, 2015 from 3.30% for the six months ended June 30, 2014. During the six months ended June 30, 2015, yields on average interest-earning assets decreased 21 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 first half of 2015 increased five basis points from the first half of 2014.
Average loans increased 6% for the six months ended June 30, 2015 compared to the same period in 2014. Average commercial business and real estate loans increased 6% over the six months ended June 30, 2014, with our commercial real estate portfolio increasing 5% and our commercial business portfolio increasing 6%. Average consumer loans increased 7%, 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, increased 8% over the prior year. Average interest-bearing checking balances increased $289 million, or 6%, for the six months ended June 30, 2015 from the same period in the prior year. Average noninterest-bearing checking deposits increased $457 million, or 9%, over the prior year. Average money market balances increased 3% annualized compared to the prior year while time deposits increased 1%. The average cost of interest-bearing deposits of 0.29% increased six basis points from the prior year.
Our provision for credit losses totaled $34 million and $44 million for the six months ended June 30, 2015 and 2014, respectively. The provision for loan losses on originated loans decreased to $31 million for the six months ended June 30, 2015 from $39 million for the six months ended June 30, 2014. Annualized net charge-offs equaled 0.31% and 0.33% of average originated loans for the six months ended June 30, 2015 and 2014.
The provision for credit losses on acquired loans totaled $4 million for the six months ended June 30, 2015 and 2014. Annualized net charge-offs equaled 0.16% for the six months ended June 30, 2015, compared to 0.14% for all of 2014.
For the six months ended June 30, 2015, noninterest income increased $11 million, or 7%, 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, lending and leasing, and bank owned life insurance. Other income for the six months ended June 30, 2015 and 2014 included $3 million and $15 million in amortization for tax credit investments, which was more than offset by lower tax expense. Noninterest expenses increased $16 million during the same period. Excluding $18 million and $10 million in pre-tax restructuring charges for the six months ended June 30, 2015 and 2014, respectively, noninterest expenses increased $9 million, or 2%. Increases in technology and communications, marketing and advertising, professional services, federal deposit insurance premiums, and other expense were partially offset by decreases in salaries and benefits, occupancy and equipment, and amortization of intangibles.
Our effective tax rate was 26.3% and 16.9% for the six months ended June 30, 2015 and 2014, respectively. The effective tax rate for the six months ended June 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 six months ended June 30, 2014 reflects the benefits of a taxable reorganization of a subsidiary and from investments in certain tax credits.

17

Net Interest Income
Second quarter 2015 net interest income of $263 million was unchanged from the prior quarter as the benefit of 2% of earning asset growth was offset by a five basis points decline in our net interest margin. The benefit of one extra day in the quarter was offset by the continued impact of reinvestments and re-pricing of assets in the current low interest rate and competitive pricing environment. Approximately one-half of the five basis points decrease in our tax equivalent net interest margin was attributable to one extra day in the quarter. Additionally, the decline in our net interest margin reflects continued compression of securities and loan yields from prepayments and reinvestments at current market rates, particularly in our residential mortgage-backed securities and consumer loan portfolios, as well as the impact of deposit pricing promotional campaigns.
Lower mortgage rates earlier in the quarter resulted in an increase in premium amortization on our residential mortgage-backed securities portfolio, from $6 million for the prior quarter to $9 million for the current quarter. Included in this amortization is about $1 million of a retroactive adjustment on collateralized mortgage obligations. We also had a total benefit of $4 million from prepayments of some collateralized loan obligations that were carried at a discount and early loan payoffs. The yield on average interest-earning assets decreased three 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 $168 million, or 2% annualized, while average interest-bearing liabilities increased $179 million, or 3% annualized. Growth in average interest earning assets reflected continued loan growth, particularly in commercial business, home equity, and indirect auto loans. Average investment securities increased 5% from the prior quarter, driven by 11% growth in our residential mortgage-backed securities portfolio partially offset by a 27% decline in our commercial 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 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

18

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 the 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. The current futures market indicates approximately a 50% probability that the Federal Reserve will increase the Fed Funds Rate by December 2015. In the first half of 2015, longer term interest rates have been more volatile. The 10 year Treasury rate fell to as low as 1.64% on January 30, 2015, the lowest since the second quarter of 2013 but has subsequently risen to as high as 2.49% on June 26, 2015 and down to 2.28% on July 29, 2015. The increase in the 10 year Treasury rate is attributable to increases in Eurozone sovereign debt yields, such as the German Bund, that have increased as a result of quantitative easing by the European Central Bank. Similarly, the mortgage refinance rates have increased back above 4.00% after declining to as low as 3.75% in April 2015.
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 estimates ranging from two to seven implied rate increases of 0.25% by the end of 2016. The pace and magnitude of rising rates will impact future profitability.

19

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)
 
June 30, 2015
 
March 31, 2015
 
(dollars in millions)
Average
outstanding
balance
Taxable
equivalent
yield/rate (1)
 
Average
outstanding
balance
Taxable
equivalent
yield/rate (1)
 
Average
outstanding
balance
Taxable
equivalent
yield/rate (1)
Interest-earning assets:
 
 
 
 
 
 
 
 
Loans and leases(2)
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
Real estate
$
8,257

3.61
%
 
$
8,263

3.60
%
 
$
(6
)
0.01
 %
Business
5,830

3.48

 
5,797

3.43

 
33

0.05

Total commercial lending
14,087

3.56

 
14,060

3.53

 
27

0.03

Consumer:
 
 
 
 
 
 
 
 
Residential real estate
3,326

3.68

 
3,338

3.78

 
(12
)
(0.10
)
Home equity
2,963

3.86

 
2,939

3.91

 
24

(0.05
)
Indirect auto
2,238

2.74

 
2,187

2.79

 
51

(0.05
)
Credit cards
304

11.40

 
311

11.74

 
(7
)
(0.34
)
Other consumer
260

8.49

 
275

8.49

 
(15
)
—

Total consumer lending
9,091

3.91

 
9,050

4.02

 
41

(0.11
)
Total loans
23,178

3.73

 
23,110

3.75

 
68

(0.02
)
Residential mortgage-backed securities(3)
7,381

2.30

 
7,180

2.49

 
201

(0.19
)
Commercial mortgage-backed securities(3)
1,311

3.42

 
1,404

3.26

 
(93
)
0.16

Other investment securities(3)
3,604

3.75

 
3,554

3.52

 
50

0.23

Total investment securities
12,296

2.85

 
12,138

2.88

 
158

(0.03
)
Money market and other investments
100

1.56

 
158

1.01

 
(58
)
0.55

Total interest-earning assets
35,574

3.42
%
 
35,406

3.45
%
 
168

(0.03
)%
Noninterest-earning assets(4)(5)
3,339

 
 
3,301

 
 
38

 
Total assets
$
38,913

 
 
$
38,707

 
 
$
206

 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
Deposits
 
 
 
 
 
 
 
 
Savings deposits
$
3,494

0.09
%
 
$
3,432

0.08
%
 
$
62

0.01
 %
Checking accounts
5,131

0.03

 
5,001

0.03

 
130

—

Money market deposits
10,251

0.29

 
10,132

0.26

 
119

0.03

Certificates of deposit
3,917

0.82

 
3,778

0.84

 
139

(0.02
)
Total interest-bearing deposits
22,793

0.29

 
22,343

0.28

 
450

0.01

Borrowings
 
 
 
 
 
 
 
 
Short-term borrowings
4,522

0.48

 
5,125

0.46

 
(603
)
0.02

Long-term borrowings
1,359

3.90

 
1,027

4.98

 
332

(1.08
)
Total borrowings
5,881

1.27

 
6,152

1.21

 
(271
)
0.06

Total interest-bearing liabilities
28,674

0.49
%
 
28,495

0.48
%
 
179

0.01
 %
Noninterest-bearing deposits
5,427

 
 
5,430

 
 
(3
)
 
Other noninterest-bearing liabilities
667

 
 
654

 
 
13

 
Total liabilities
34,768

 
 
34,579

 
 
189

 
Stockholders’ equity(4)
4,145

 
 
4,128

 
 
17

 
Total liabilities and stockholders’ equity
$
38,913

 
 
$
38,707

 
 
$
206

 
Net interest rate spread
 
2.93
%
 
 
2.97
%
 
 
(0.04
)%
Net interest rate margin
 
3.02
%
 
 
3.07
%
 
 
(0.05
)%
 
(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.

20

(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 $268 million for the quarter ended June 30, 2015 equaled our taxable equivalent net interest income from the quarter ended March 31, 2015. Overall the yield on interest-earning assets decreased three basis points as a result of the combined effects of yield compression on our loan portfolio and residential 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 increased 2% annualized from the prior quarter driven by growth in both loans and investment securities.
Our average balance of investment securities increased quarter over quarter by $158 million. Yields on our investment securities portfolio decreased three basis points primarily due to the combined impact of higher premium amortization on our collateralized mortgage obligations portfolio and purchases of new securities at yields lower than the overall portfolio. This decrease in investment securities yields reflected a $2 million benefit from income accretion from prepayments of certain collateralized loan obligations more than offset by a $1 million retroactive adjustment to reflect elevated prepayment speeds in the residential mortgage-backed securities portfolio as well as purchases of new balances at yields lower than the overall portfolio.
Loan yields declined two basis points to 3.73%, driven primarily by elevated refinance activity in our residential real estate portfolio. Overall, our loan growth was 1% annualized from the first quarter of 2015, as our average loan balances increased by $68 million. Commercial loan growth was $27 million and home equity and indirect auto remained a source of growth contributing $24 million and $51 million, respectively, of the average net loan growth this quarter. Indirect auto originations increased $39 million, or 16%, to $273 million during the second quarter of 2015. These increases were partially offset by a slight decrease in our residential real estate and other consumer portfolios.
Lower commercial loan growth this quarter was attributable to higher paydowns on investor real estate loans early in the quarter, resulting from the underlying property being sold by our borrowers, and the timing of second quarter originations were concentrated in the second half of June.
Our average balances of interest-bearing deposits increased by $450 million and our average rate paid increased one basis point from the prior quarter. The increase in our average balances was driven by an increase in our brokered time deposits of $283 million as we expanded our use of these deposits as a source of funding. Increases in our average retail checking and money market balances also contributed to the increase in interest-bearing deposits. The rate paid on interest-bearing deposits increased one basis point to 0.29% reflecting a modest shift in deposit mix and the impact of promotional pricing on money market deposit accounts.
Our average borrowings decreased quarter over quarter by $271 million as average short-term borrowings decreased $603 million, or 47%, and average long-term borrowings more than doubled to $1.4 billion. Our cost of borrowings increased six basis points from the first quarter of 2015 to 1.27% for the second 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)
 
June 30, 2015
 
June 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
$
8,257

3.61
%
 
$
7,899

3.77
%
 
$
358

(0.16
)%
Business
5,830

3.48

 
5,564

3.56

 
266

(0.08
)
Total commercial lending
14,087

3.56

 
13,463

3.68

 
624

(0.12
)
Consumer:
 
 
 
 
 
 
 
 
Residential real estate
3,326

3.68

 
3,361

3.80

 
(35
)
(0.12
)
Home equity
2,963

3.86

 
2,800

4.06

 
163

(0.20
)
Indirect auto
2,238

2.74

 
1,750

2.85

 
488

(0.11
)
Credit cards
304

11.40

 
308

11.44

 
(4
)
(0.04
)
Other consumer
260

8.49

 
291

8.53

 
(31
)
(0.04
)
Total consumer lending
9,091

3.91

 
8,510

4.13

 
581

(0.22
)
Total loans
23,178

3.73

 
21,973

3.89

 
1,205

(0.16
)
Residential mortgage-backed securities(3)
7,381

2.30

 
6,097

2.67

 
1,284

(0.37
)
Commercial mortgage-backed securities(3)
1,311

3.42

 
1,608

3.45

 
(297
)
(0.03
)
Other investment securities(3)
3,604

3.75

 
4,159

3.69

 
(555
)
0.06

Total investment securities
12,296

2.85

 
11,864

3.13

 
432

(0.28
)
Money market and other investments
100

1.56

 
165

1.27

 
(65
)
0.29

Total interest-earning assets
35,574

3.42
%
 
34,002

3.62
%
 
1,572

(0.20
)%
Noninterest-earning assets(4)(5)
3,339

 
 
4,211

 
 
(872
)
 
Total assets
$
38,913

 
 
$
38,213

 
 
$
700

 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
Deposits
 
 
 
 
 
 
 
 
Savings deposits
$
3,494

0.09
%
 
$
3,654

0.09
%
 
$
(160
)
—
 %
Checking accounts
5,131

0.03

 
4,820

0.03

 
311

—

Money market deposits
10,251

0.29

 
9,971

0.22

 
280

0.07

Certificates of deposit
3,917

0.82

 
3,971

0.66

 
(54
)
0.16

Total interest-bearing deposits
22,793

0.29

 
22,416

0.24

 
377

0.05

Borrowings
 
 
 
 
 
 
 
 
Short-term borrowings
4,522

0.48

 
4,410

0.43

 
112

0.05

Long-term borrowings
1,359

3.90

 
733

6.62

 
626

(2.72
)
Total borrowings
5,881

1.27

 
5,143

1.31

 
738

(0.04
)
Total interest-bearing liabilities
28,674

0.49
%
 
27,559

0.44
%
 
1,115

0.05
 %
Noninterest-bearing deposits
5,427

 
 
5,077

 
 
350

 
Other noninterest-bearing liabilities
667

 
 
511

 
 
156

 
Total liabilities
34,768

 
 
33,147

 
 
1,621

 
Stockholders’ equity(4)
4,145

 
 
5,066

 
 
(921
)
 
Total liabilities and stockholders’ equity
$
38,913

 
 
$
38,213

 
 
$
700

 
Net interest rate spread
 
2.93
%
 
 
3.18
%
 
 
(0.25
)%
Net interest rate margin
 
3.02
%
 
 
3.26
%
 
 
(0.24
)%
 

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 second quarter of 2015 compared to the second quarter of 2014 reflecting an increase in net-interest earning assets of $457 million and a decrease in our net interest rate margin of 24 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 we funded our balance sheet growth by strategically replacing certain money market and time deposits with lower costing brokered deposits and long-term borrowings. Our noninterest-bearing deposits increased 7% from the second quarter of 2014, driven primarily by business checking growth while our interest-bearing checking balances increased nearly 6% driven by continued growth in net new checking units and average balance growth. The 24 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.
Our second quarter of 2015 net interest margin was impacted by a $1 million retroactive adjustment on collateralized mortgage obligations and the benefit of $2 million each from prepayments of certain collateralized loan obligations that were carried at a discount and early loan payoffs. Our second quarter of 2014 net interest margin was impacted by the benefit of $3 million in prepayments of some collateralized loan obligations that were carried at a discount.
The yield on our commercial real estate and commercial business loan portfolios decreased by 16 basis points and eight basis points, respectively. Consumer loan yields dropped 22 basis points during the same period, driven primarily by an 11 basis points decline in indirect auto yields and a 20 basis points decline in home equity yields. Additionally, yields on our investment securities portfolio dropped 28 basis points, driven by a 37 basis points decrease in yields on residential mortgage-backed securities.
Our total yield on interest-earning assets in the second quarter of 2015 decreased 20 basis points compared to the second quarter of 2014, while costs on interest-bearing liabilities increased five 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.
 
Six months ended June 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
$
8,260

3.60
%
 
$
7,850

3.83
%
 
$
410

(0.23
)%
Business
5,813

3.46

 
5,489

3.56

 
324

(0.10
)
Total commercial lending
14,073

3.54

 
13,339

3.72

 
734

(0.18
)
Consumer:
 
 
 
 
 
 
 
 
Residential real estate
3,332

3.73

 
3,389

3.84

 
(57
)
(0.11
)
Home equity
2,951

3.89

 
2,778

4.09

 
173

(0.20
)
Indirect auto
2,213

2.77

 
1,682

2.89

 
531

(0.12
)
Credit cards
307

11.57

 
311

11.54

 
(4
)
0.03

Other consumer
267

8.49

 
295

8.59

 
(28
)
(0.10
)
Total consumer lending
9,070

3.96

 
8,455

4.20

 
615

(0.24
)
Total loans
23,143

3.74

 
21,794

3.94

 
1,349

(0.20
)
Residential mortgage-backed securities(3)
7,281

2.39

 
5,895

2.71

 
1,386

(0.32
)
Commercial mortgage-backed securities(3)
1,357

3.34

 
1,652

3.36

 
(295
)
(0.02
)
Other investment securities(3)
3,580

3.63

 
4,272

3.62

 
(692
)
0.01

Total investment securities
12,218

2.86

 
11,819

3.13

 
399

(0.27
)
Money market and other investments
129

1.22

 
145

1.43

 
(16
)
(0.21
)
Total interest-earning assets
35,490

3.44
%
 
33,758

3.65
%
 
1,732

(0.21
)%
Noninterest-earning assets(4)(5)
3,320

 
 
4,224

 
 
(904
)
 
Total assets
$
38,810

 
 
$
37,982

 
 
$
828

 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
Deposits
 
 
 
 
 
 
 
 
Savings deposits
$
3,463

0.09
%
 
$
3,643

0.08
%
 
$
(180
)
0.01
 %
Checking accounts
5,067

0.03

 
4,778

0.03

 
289

—

Money market deposits
10,192

0.27

 
9,929

0.21

 
263

0.06

Certificates of deposit
3,848

0.83

 
3,810

0.68

 
38

0.15

Total interest-bearing deposits
22,570

0.29

 
22,160

0.23

 
410

0.06

Borrowings
 
 
 
 
 
 
 
 
Short-term borrowings
4,821

0.47

 
4,525

0.43

 
296

0.04

Long-term borrowings
1,194

4.36

 
733

6.65

 
461

(2.29
)
Total borrowings
6,015

1.24

 
5,258

1.30

 
757

(0.06
)
Total interest-bearing liabilities
28,585

0.49
%
 
27,418

0.44
%
 
1,167

0.05
 %
Noninterest-bearing deposits
5,428

 
 
4,971

 
 
457

 
Other noninterest-bearing liabilities
660

 
 
542

 
 
118

 
Total liabilities
34,673

 
 
32,931

 
 
1,742

 
Stockholders’ equity(4)
4,137

 
 
5,050

 
 
(913
)
 
Total liabilities and stockholders’ equity
$
38,810

 
 
$
37,982

 
 
$
828

 
Net interest rate spread
 
2.95
%
 
 
3.21
%
 
 
(0.26
)%
Net interest rate margin
 
3.04
%
 
 
3.30
%
 
 
(0.26
)%

24

(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 $16 million for the six months ended June 30, 2015 compared to the six months ended June 30, 2014 reflecting an increase in net-interest earning assets of $565 million and a decrease in our net interest margin of 26 basis points. The $1.7 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 $1.2 billion, as we funded our balance sheet growth by strategically replacing certain money market and time deposits with lower costing brokered deposits and both short and long-term borrowings. The 26 basis point 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 23 basis points and 10 basis points, respectively. Consumer loan yields dropped 24 basis points during the same period, driven primarily by a 12 basis points decline in indirect auto yields and a 20 basis points decline in home equity yields. Additionally, yields on our investment securities portfolio dropped 27 basis points, driven by a 32 basis points decrease in yields on residential mortgage-backed securities.
Our yields on interest-earning assets for the six months ended June 30, 2015 decreased 21 basis points compared to the six months ended June 30, 2014, while costs on interest-bearing liabilities increased 5 basis points, resulting in a 26 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
 
Six months ended June 30,
 
June 30,
March 31,
June 30,
 
2015
2014
(in millions)
2015
2015
2014
 
Provision for originated loans
$
20

$
11

$
19

 
$
31

$
39

Provision for acquired loans
1

3

—

 
4

4

(Release of) provision for unfunded commitments
—

(1
)
—

 
(1
)
1

Total
$
21

$
13

$
20

 
$
34

$
44

Our provision for loan losses related to our originated loans is based upon the inherent risk of our loans and considers interrelated factors such as the composition and other credit risk factors of our loan portfolio, trends in asset quality including loan concentrations, and the level of our delinquent loans. Consideration is also given to collateral value, government guarantees, and regional and global economic indicators. The provision for loan losses related to originated loans amounted to $20 million, or 0.40% of average originated loans annualized, for the quarter ended June 30, 2015, compared to $11 million, or 0.23% of average originated loans annualized, for the quarter ended March 31, 2015 and $19 million, or 0.43% of average originated loans annualized for the quarter ended June 30, 2014. The current quarter provision includes $4 million to support originated loan growth and $15 million to cover net charge-offs on originated loans during the quarter.
The $8 million increase from $11 million for the quarter ended March 31, 2015 to $20 million for the quarter ended June 30, 2015 was driven by provisioning associated with the $401 million increase in our originated loans.

25

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. Our provision related to our acquired loans was $1 million, $3.0 million, and $0.3 million for the second quarter of 2015, the first quarter of 2015, and the second quarter of 2014, respectively.
The provision for credit losses included $0.3 million for unfunded loan commitments in the second quarter of 2015. The provision for credit losses for the first quarter of 2015 included a reduction of $1 million related to our unfunded loan commitments. Our total unfunded commitments were $11.3 billion and $11.0 billion at June 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 $15 million and $16 million at June 30, 2015 and December 31, 2014, respectively.
Noninterest Income
The following table presents our noninterest income for the periods indicated:
 
Three months ended
 
Six months ended June 30,
(dollars in millions)
June 30,
2015
March 31,
2015
June 30,
2014
 
2015
2014
Deposit service charges
$
22

$
20

$
24

 
$
43

$
47

Insurance commissions
17

16

17

 
33

33

Merchant and card fees
13

12

13

 
25

24

Wealth management services
16

15

16

 
30

32

Mortgage banking
6

5

5

 
11

9

Capital markets income
5

4

3

 
9

7

Lending and leasing
4

4

5

 
8

9

Bank owned life insurance
3

4

3

 
7

9

Other income excluding historic tax credit amortization
3

3

2

 
6

3

Total noninterest income excluding tax credit amortization (non-GAAP)
90

82

88

 
172

173

Tax credit amortization
(3
)
—

(7
)
 
(3
)
(15
)
Total noninterest income (GAAP)
$
87

$
82

$
81

 
$
169

$
158

Noninterest income excluding tax credit amortization as a percentage of net revenue (non-GAAP)
25.4
%
23.8
%
24.5
%
 
24.6
%
24.1
%
Noninterest income as a percentage of net revenue
24.8
%
23.8
%
22.9
%
 
24.3
%
22.5
%
Comparison to Prior Quarter
Second quarter of 2015 GAAP noninterest income of $87 million increased $4 million, or 5%, compared to the first quarter of 2015, reflecting strong customer activity, an extra day in the quarter, and typical seasonal patterns. Other income for the second quarter of 2015 included $3 million in amortization for tax credit investments we funded during the quarter, 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 increased 9% from the prior quarter.
Consistent with typical seasonal patterns, deposit service charges increased $2 million, or 9%, during the three months ended June 30, 2015. Insurance commissions increased $1 million, or 9%, during the same period,

26

reflecting higher revenues from our health and welfare business line as well as contingent commissions. Merchant and card fees, which include both debit and credit card interchange fees, increased $1 million, or 12%, during the same period as a result of higher transaction volumes. Income from wealth management services increased $1 million, or 7%, from the prior quarter driven by strong annuity sales and a 1% increase in assets under management. Mortgage banking income increased $1 million, or 18%, reflecting an increase in gain on sale margins as well as seasonally higher origination volumes. Capital markets income, which primarily includes income from derivatives and syndications, increased $1 million, or 27%.
GAAP noninterest income as a percentage of net revenue increased from 23.8% for the three months ended March 31, 2015 to 24.8% for the three months ended June 30, 2015.
Comparison to Prior Year Quarter
Second quarter of 2015 GAAP noninterest income of $87 million increased $6 million, or 7%, compared to the second quarter of 2014, driven primarily by revenues from mortgage banking, capital markets income, and other income, partially offset by lower revenues from deposit service charges and lending and leasing. Other income in the second quarter of 2015 and 2014 included $3 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 $1 million, or 2%.
Mortgage banking revenues improved $1 million, or 10%, from the prior year quarter as a result of higher volumes and higher gain on sale margins and the $2 million, or 81%, increase in capital markets income was primarily due to higher derivatives income and to a lesser extent, increased syndication revenues.
Partially offsetting these increases were lower revenues from deposit service charges of $2 million, or 6%, which stemmed from lower insufficient funds incident rates. Lending and leasing revenues decreased $1 million, or 15%, as a result of lower letter of credit fees and loan and lease fees.
GAAP noninterest income as a percentage of net revenue increased from 22.9% for the three months ended June 30, 2014 to 24.8% for the three months ended June 30, 2015. Excluding the tax credit amortization, this ratio increased from 24.5% for the three months ended June 30, 2014 to 25.4% for the three months ended June 30, 2015.
Comparison to Prior Year to Date
GAAP noninterest income of $169 million increased $11 million, or 7%, for the six months ended June 30, 2015 compared to the six months ended June 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, lending and leasing, and bank owned life insurance. Other income for the six months ended June 30, 2015 and 2014 included $3 million and $15 million 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 decreased less than $1 million.
The $1 million, or 4%, increase in merchant and card fees primarily stemmed from higher debit card revenues. Mortgage banking revenues increased $2 million, or 24%, from the prior year as a result of higher volumes and higher gain on sale margins and the $3 million, or 44%, increase in capital markets income was due to higher derivatives income partially offset by lower syndication revenues.
Revenues from deposit service charges decreased $4 million, or 10%, as a result of lower nonsufficient funds incident rates, while revenues from wealth management services decreased $1 million, or 4%, as a result of lower annuity and mutual funds commissions. Lending and leasing income decreased $1 million, or 11%, as a result of

27

lower letter of credit fees and loan and lease fees. The $2 million, or 21%, decrease in bank owned life insurance was due to benefits received on two insurance claims in the first quarter of 2014.
GAAP noninterest income as a percentage of net revenue increased from 22.5% for the six months ended June 30, 2014 to 24.3% for the six months ended June 30, 2015. Excluding the tax credit amortization, recorded as contra noninterest income, this ratio increased modestly from 24.1% for the six months ended June 30, 2014 to 24.6% for the six months ended June 30, 2015.
Noninterest Expense
The following table presents our noninterest expenses for the periods indicated: 
 
Three months ended
 
Six months ended June 30,
(dollars in millions)
June 30,
2015
March 31,
2015
June 30,
2014
 
2015
2014
Salaries and employee benefits
$
114

$
112

$
118

 
$
226

$
236

Occupancy and equipment
26

27

29

 
53

56

Technology and communications
36

35

31

 
72

61

Marketing and advertising
10

10

8

 
20

16

Professional services
16

13

13

 
29

25

Amortization of intangibles
5

6

7

 
11

14

FDIC premiums
12

11

10

 
23

19

Restructuring charges
—

18

—

 
18

10

Other expense
28

29

29

 
57

55

Total noninterest expenses
248

261

244

 
509

493

Less nonoperating expenses:
 
 
 
 
 
 
Restructuring charges
—

(18
)
—

 
(18
)
(10
)
Total operating noninterest expenses(1)
$
248

$
244

$
244

 
$
491

$
482

Efficiency ratio(2)
70.9
%
75.6
%
69.2
%
 
73.2
%
70.4
%
Operating efficiency ratio(1)
70.9
%
70.5
%
69.2
%
 
70.7
%
68.9
%
Full time equivalent employees
5,364

5,322

5,874

 
 
 
(1) 
We believe this non-GAAP measure provides a meaningful comparison of our underlying operational performance and facilitates management’s and investors’ assessments of business and performance trends in comparison to others in the financial services industry and period over period analysis of our fundamental results. The operating efficiency ratio is computed by dividing operating noninterest expense by the sum of net interest income and noninterest income.
(2) 
The efficiency ratio is computed by dividing noninterest expense by the sum of net interest income and noninterest income.
Comparison to Prior Quarter
Second quarter 2015 GAAP noninterest expenses decreased $13 million to $248 million from the first quarter of 2015. Noninterest expenses for the first quarter of 2015 included $18 million in pre-tax restructuring and severance charges incurred primarily in connection with the consolidation of 17 branches and the completion of our organization simplification during the quarter as well as third party professional fees incurred in connection with the overstatement of the allowance for loan losses resulting from mid-level employee misconduct. Excluding these charges, operating (non-GAAP) noninterest expenses increased $4 million, or 2%, primarily driven by variable expenses tied to business volume and revenue growth as well as higher professional services fees.
Salaries and employee benefits increased $2 million, or 1%, as higher commissions and incentive compensation tied to revenue growth were partially offset by seasonally lower payroll taxes and benefit costs. The $1 million, or 4%, increase in technology and communications stemmed from higher debit transaction volumes. Higher professional services fees of $3 million, or 25%, resulted in large part from vendor and other costs associated with our strategic initiatives and other corporate activities in the second quarter of 2015. The $1 million, or 5%,

28

decrease in occupancy and equipment reflects lower building maintenance costs resulting from strong building expense management.
Restructuring charges for the first quarter of 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.
In the second quarter of 2015, our GAAP efficiency ratio was 70.9% compared to 75.6% in the prior quarter. Excluding $18 million in pre-tax restructuring and severance charges, our non-GAAP operating efficiency ratio for the first quarter of 2015 was 70.5%.
Comparison to Prior Year Quarter
GAAP noninterest expenses increased $4 million, or 2%, for the quarter ended June 30, 2015 from the quarter ended June 30, 2014 as higher technology and communications, marketing and advertising, professional services, and federal deposit insurance premiums were partially offset by lower salaries and benefits, occupancy and equipment, and amortization of intangibles.
Technology and communications expenses for the quarter ended June 30, 2015 increased $5 million, or 17%, from the same period in 2014 primarily as a result of higher depreciation related to completed technology projects and higher hardware and software expense. Marketing and advertising was $2 million, or 22%, higher for 2015 due to our core customer acquisition strategy. Professional services increased $3 million, or 25%, due to elevated vendor and other costs associated with our strategic initiatives and other corporate activities in the second quarter of 2015. Federal deposit insurance premiums increased $2 million, or 20%, 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 $4 million, or 4%, decrease in salaries and employee benefits, a $3 million, or 9%, decrease in occupancy and equipment, and a $2 million, or 25%, decrease in amortization of intangibles. The decrease in salaries and employee benefits was primarily driven by lower regular salaries reflective of the 9% 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.
In the second quarter of 2015, our GAAP efficiency ratio was 70.9% compared to 69.2% for the same period in 2014.
Comparison to Prior Year to Date
GAAP noninterest expenses increased $16 million, or 3%, for the six months ended June 30, 2015 from the six months ended June 30, 2014. Noninterest expenses for the six months ended June 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 six months ended June 30, 2014 included $10 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 $9 million, or 2%.
Technology and communications expenses for the six months ended June 30, 2015 increased $10 million, or 16%, from the same period in 2014 primarily as a result of higher depreciation related to completed technology projects. Marketing and advertising was $4 million, or 28%, higher for 2015 due to our core customer acquisition strategy. Professional services increased $4 million, or 18%, due to vendor and other costs associated with our strategic initiatives for other corporate activities in 2015. FDIC premiums increased $4 million, or 23%, due to higher construction loans and the impact of our $1.1 billion goodwill impairment charge in the third quarter of 2014. Other expense increased $2 million, or 4%, as a result of higher merchant and card expenses and expenses related to other real estate owned, partially offset by lower franchise taxes.

29

Partially offsetting these increases were a $10 million, or 4%, decrease in salaries and employee benefits, a $3 million, or 5%, decrease in occupancy and equipment, and a $3 million, or 21%, decrease in amortization of intangibles. The decrease in salaries and employee benefits was primarily driven by lower regular salaries, reflective of the 9% 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.
Restructuring charges for the six months ended June 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 for the six months ended June 30, 2014 were comprised of $6 million in salaries and employee benefits and $4 million in occupancy and equipment.
Taxes
The provision for income taxes for both the second quarter of 2015 and first quarter of 2015 was $20 million resulting in effective tax rates of 24.7% and 28.0%, respectively. The effective tax rate for the three months ended June 30, 2015 reflects the benefit of tax credits originated in the quarter by our commercial real estate business.
The provision for income taxes in the second quarter of 2015 and 2014 was $20 million and $13 million, respectively, resulting in effective tax rates of 24.7% and 14.5%, respectively. The effective tax rate for the three months ended June 30, 2015 reflects the benefit of our investments in tax credits. The effective tax rate for the three months ended June 30, 2014 reflects the benefits of a taxable reorganization of a subsidiary and from investments in tax credits.
The provision for income taxes for the six months ended June 30, 2015 and 2014 was $40 million and $28 million, respectively, resulting in effective tax rates of 26.3% and 16.9%, respectively. The effective tax rate for the six months ended June 30, 2015 reflects the benefit of our investment in tax credits. The effective tax rate for the six months ended June 30, 2014 reflects the benefits of a taxable reorganization of a subsidiary and from investments in tax credits.

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,

30

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 (those independent risk areas reporting to the Chief Risk Officer), have responsibility for the facilitation and implementation of robust enterprise risk management and compliance processes to effectively monitor and oversee (governance, policy, identification, assessment, analysis, monitoring, reporting) risks being managed by the first line. The third line of defense is Internal Audit which provides independent objective assurance services which audit and report on the design and operating effectiveness of internal controls, risk management framework and governance processes. The results of internal audit reviews are reported to the Audit Committee of the Board of Directors.
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, 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.

31

Loans
The following table presents the composition of our loan and lease portfolios at the dates indicated:
 
June 30, 2015
 
December 31, 2014
Increase (decrease)
(dollars in millions)
Amount
Percent
 
Amount
Percent
Commercial:
 
 
 
 
 
 
Real estate
$
7,284

31.2
%
 
$
7,231

31.4
%
$
54

Construction
1,028

4.4

 
973

4.2

55

Business
5,924

25.3

 
5,775

25.1

148

Total commercial
14,236

60.9

 
13,979

60.7

256

Consumer:
 
 
 
 
 
 
Residential real estate
3,330

14.2

 
3,353

14.6

(23
)
Home equity
2,985

12.8

 
2,936

12.7

49

Indirect auto
2,256

9.7

 
2,166

9.4

90

Credit cards
305

1.3

 
324

1.4

(19
)
Other consumer
257

1.1

 
278

1.2

(21
)
Total consumer
9,133

39.1

 
9,058

39.3

75

Total loans and leases
23,368

100.0
%
 
23,037

100.0
%
331

Allowance for loan losses
(236
)
 
 
(234
)
 
(1
)
Total loans and leases, net
$
23,133

 
 
$
22,803

 
$
330

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 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 $331 million, or 3% annualized, from December 31, 2014 to June 30, 2015 stemming from the continued growth in our commercial, home equity, and indirect auto portfolios. Our commercial loan portfolio increased $256 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 and from a slight increase in the utilization of line commitments, to 42.3% at June 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 $133 million, or 9%, from March 31, 2015, with most of this closing in June. The increase in commercial business loans was driven primarily by increases in the middle market and healthcare segments. Our commercial pipeline was strong at the end of the second quarter of 2015, particularly in our middle market and healthcare segments.
The $49 million, or 3% annualized, increase in our home equity portfolio reflects higher customer draws and the benefits of promotional and cross-sell campaigns to increase utilization. The 10% annualized increase from March 31, 2015 in our indirect auto portfolio reflects $273 million in new originations which yielded 3.38%, net of dealer reserve, an increase of 13 basis points from the prior quarter and 50 basis points from a year ago. The average FICO score for these new originations was 749, compared to 755 for the three months ended March 31, 2015.

32

Offsetting this growth was a decrease in our residential real estate loan portfolio of $23 million, or 1% annualized, from December 31, 2014 to June 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.
Included in the table above are acquired loans with a carrying value of $3.4 billion and $3.7 billion at June 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.
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
June 30, 2015
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
Real estate
$
4,200

$
961

$
1,547

$
1,605

$
—

$
8,312

Business
2,728

984

943

736

531

5,924

Total commercial
6,928

1,945

2,490

2,342

531

14,236

Consumer:
 
 
 
 
 
 
Residential real estate
1,218

136

290

1,687

—

3,330

Home equity
1,584

312

559

529

—

2,985

Indirect auto
746

62

49

408

991

2,256

Credit cards
242

32

15

15

—

305

Other consumer
168

46

30

14

—

257

Total consumer
3,958

588

942

2,653

991

9,133

Total loans and leases
$
10,886

$
2,533

$
3,432

$
4,994

$
1,522

$
23,368

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.

33

Our Western and Eastern Pennsylvania markets have exhibited steady growth with an increase in their commercial loan portfolios of $16 million and $137 million, or 2% and 12% 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.
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:
 
June 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
$
656

26

 
$
687

27

$10 million to $20 million
1,689

121

 
1,520

109

$5 million to $10 million
1,588

226

 
1,589

226

$1 million to $5 million
2,727

1,249

 
2,733

1,263

Less than $1 million(2)
1,653

6,541

 
1,675

6,826

Total commercial real estate loans
$
8,312

8,163

 
$
8,204

8,451

Commercial business loans by size:(1)
 
 
 
 
 
Greater than or equal to $20 million
$
321

13

 
$
325

13

$10 million to $20 million
1,144

82

 
1,114

80

$5 million to $10 million
1,161

166

 
1,181

167

$1 million to $5 million
1,716

783

 
1,626

729

Less than $1 million(2)
1,580

34,348

 
1,529

32,865

Total commercial business loans
$
5,924

35,392

 
$
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.

34

At both June 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 $58 million from December 31, 2014 due to the funding of previously committed construction loans. 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
June 30, 2015:
 
 
 
 
 
 
Non-owner occupied commercial real estate loans:
 
 
 
 
 
 
Construction, acquisition and development
$
371

$
88

$
157

$
162

$
146

$
925

Multifamily and apartments
1,108

115

147

267

92

1,729

Office and professional space
501

80

72

254

115

1,023

Retail
299

42

123

208

112

784

Warehouse and industrial
154

23

58

83

14

332

Other
307

44

99

145

64

660

Total non-owner occupied commercial real estate loans
2,740

391

658

1,119

544

5,453

Owner occupied commercial real estate loans
1,204

399

481

421

354

2,860

Total commercial real estate loans
$
3,944

$
791

$
1,139

$
1,540

$
898

$
8,312

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.

35

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)
June 30, 2015
December 31, 2014
Manufacturing
$
1,403

$
1,434

Health Care and Social Assistance
1,347

1,242

Real Estate and Rental and Leasing
1,052

1,019

Wholesale Trade
605

587

Retail Trade
553

500

Public Administration
471

456

Construction
444

413

Finance and Insurance
388

337

Educational Services
372

384

Other Services (except Public Administration)
333

373

Professional, Scientific, and Technical Services
283

304

Transportation and Warehousing
267

252

Administrative and Support and Waste Management and Remediation Services
185

201

Other
1,079

1,032

Total
$
8,783

$
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:
 
June 30, 2015
 
December 31, 2014(1)
 
Outstanding
Unused commitments
Total credit exposure
 
Outstanding
Unused commitments
Total credit exposure
 
(in millions)
Oil and gas related
$
279

$
176

$
455

 
$
305

$
191

$
496

Utilities and alternative energy
80

176

256

 
114

109

223

Total
$
359

$
352

$
712

 
$
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 first and second quarter of 2015 energy portfolio review, the credit quality in the energy related portfolio, based on most recent borrower financial statements and discussions with customers concerning the impact of market conditions on their individual businesses, remained essentially stable from the fourth quarter of 2014, with a few prospective risk rating downgrades noted. We recognize that some of our energy related credits likely have incurred losses, assuming current levels of oil and gas prices persist. Therefore, we made changes to certain qualitative adjustments that had the effect of increasing the allowance for credit losses by approximately $5 million as of December 31, 2014 and June 30, 2015. As of June 30, 2015, only one energy loan was in nonaccrual status in the amount of $10 million.

36

We believe that our exposure to the utilities and alternative energy sectors, while appropriate to include in the energy exposure, are likely to be unaffected in the near-term by the recent decline in oil and natural gas prices. This portfolio includes exposure to alternative power generation, transmission, control, and distribution such as hydro-electric and solar sources, and is generally not dependent on oil. However, a prolonged period of extremely low oil prices could ultimately undercut such cost-efficient alternative energy sources and result in lower demand.
With respect to our oil and gas related exposures, our oil and gas related outstandings of $279 million included both direct and indirect exposure to energy related obligors at June 30, 2015 of $147 million and $133 million, respectively. These combined outstandings represented a modest 1.2% of total loan outstanding balances at June 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.

37

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
June 30, 2015
 
 
 
 
 
 
 
Upstream:
 
 
 
 
 
 
 
Drillers
$
15

$
—

$
15

 
$
1

$
—

$
1

Midstream:
 
 
 
 
 
 
 
Drilling field services
83

—

83

 
43

—

43

Other
49

—

49

 
21

—

21

Total midstream
132

—

132

 
64

—

64

Downstream:
 
 
 
 
 
 
 
Gas stations and convenience stores
—

63

63

 
—

19

19

Non-drilling support
—

28

28

 
—

22

22

Wholesale distribution
—

22

22

 
—

39

39

Other
—

20

20

 
—

30

30

Total downstream
—

133

133

 
—

111

111

Total
$
147

$
133

$
279

 
$
66

$
111

$
176

 
 
 
 
 
 
 
 
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 $71 million and $67 million, respectively, in outstanding loan balances and $23 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 June 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

38

$15 million and $25 million in outstanding loan balances made directly to counterparties involved in the drilling and operations of wells at June 30, 2015 and December 31, 2014, respectively.
Midstream exposure
Our exposures to the midstream sector include exposures to companies involved in the transportation and processing of oil and natural gas, which includes companies that provide services or supplies to drilling field operations. Direct exposure of $132 million and $137 million in outstanding loan balances at June 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 $133 million and $144 million at June 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 June 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 June 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:
 
June 30, 2015
 
December 31, 2014
(in millions)
Interest only
Principal and interest
Total
 
Interest only
Principal and interest
Total
Originated
$
367

$
1,477

$
1,844

 
$
339

$
1,363

$
1,725

Acquired
266

677

943

 
291

692

983

Total home equity lines of credit
$
633

$
2,154

2,787

 
$
653

$
2,055

2,708

Home equity loans
 
 
198

 
 
 
228

Total home equity portfolio
 
 
$
2,985

 
 
 
$
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.

39

The table below summarizes our home equity line of credit portfolio still in the draw period by draw period end date at June 30, 2015:
(in millions)
2015-2016
2017 - 2018
Thereafter
Total
In draw - interest only
$
105

$
311

$
217

$
633

In draw - principal and interest
67

199

1,773

2,039

Total
$
172

$
510

$
1,990

$
2,672

Delinquency statistics for the HELOC portfolio are as follows at the dates indicated:
 
June 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
$
2,672

$
38

1.4
%
 
$
2,601

$
36

1.4
%
Amortizing payment
115

10

9.1

 
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

40

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.

41

The following table details our allocation of our allowance for loan losses by loan category at the dates indicated or for the related quarters:
 
June 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
$
71

35.6
%
 
$
66

35.6
%
Business
120

25.3

 
122

25.1

Total commercial
191

60.9

 
189

60.7

Consumer:
 
 
 
 
 
Residential real estate
4

14.2

 
4

14.6

Home equity
8

12.8

 
11

12.7

Indirect auto
14

9.7

 
14

9.4

Credit cards
13

1.3

 
12

1.4

Other consumer
5

1.1

 
5

1.2

Total consumer
45

39.1

 
45

39.3

Total
$
236

100.0
%
 
$
234

100.0
%
Allowance for loan losses to total loans
1.01
%
 
 
1.02
%
 
Provision to average total loans
0.30
%
 
 
0.60
%
 
Allowance for loan losses to originated loans
1.15
%
 
 
1.18
%
 
Provision to average originated loans
0.40
%
 
 
0.65
%
 

42

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
Six months ended June 30, 2015
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
Balance at beginning of period
$
65

$
122

 
$
2

$
8

$
14

$
12

$
5

$
228

Provision for loan losses
14

5

 
—

(1
)
3

5

4

31

Charge-offs
(11
)
(11
)
 
(1
)
(2
)
(4
)
(6
)
(4
)
(38
)
Recoveries
1

3

 
—

—

1

1

1

7

Balance at end of period
$
69

$
119

 
$
2

$
6

$
14

$
13

$
5

$
228

Six months ended June 30, 2014
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
Balance at beginning of period
$
47

$
120

 
$
2

$
7

$
10

$
13

$
6

$
205

Provision for loan losses
19

3

 
—

4

6

5

3

39

Charge-offs
(6
)
(13
)
 
(1
)
(2
)
(4
)
(7
)
(4
)
(36
)
Recoveries
3

2

 
—

—

1

1

1

7

Balance at end of period
$
62

$
112

 
$
2

$
10

$
12

$
12

$
6

$
216

Three months ended June 30, 2015
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
Balance at beginning of period
$
69

$
117

 
$
2

$
6

$
14

$
11

$
4

$
224

Provision for loan losses
6

5

 
—

—

2

4

2

20

Charge-offs
(6
)
(4
)
 
—

(1
)
(2
)
(3
)
(2
)
(19
)
Recoveries
1

1

 
—

—

1

1

—

3

Balance at end of period
$
69

$
119

 
$
2

$
6

$
14

$
13

$
5

$
228

Three months ended June 30, 2014
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
Balance at beginning of period
$
61

$
112

 
$
2

$
8

$
11

$
12

$
6

$
210

Provision for loan losses
6

3

 
—

3

3

3

1

19

Charge-offs
(5
)
(3
)
 
—

(1
)
(2
)
(3
)
(2
)
(16
)
Recoveries
—

1

 
—

—

—

1

—

3

Balance at end of period
$
62

$
112

 
$
2

$
10

$
12

$
12

$
6

$
216


43

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
Six months ended June 30, 2015
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
Balance at beginning of period
$
1

$
1

 
$
2

$
2

$
—

$
—

$
6

Provision for loan losses
2

—

 
—

2

—

—

4

Charge-offs
(2
)
—

 
—

(1
)
—

—

(4
)
Recoveries
1

—

 
—

—

—

—

1

Balance at end of period
$
2

$
1

 
$
2

$
3

$
—

$
—

$
7

Six months ended June 30, 2014
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
Balance at beginning of period
$
—

$
—

 
$
1

$
3

$
—

$
—

$
4

Provision for loan losses
1

—

 
—

3

—

—

4

Charge-offs
(1
)
—

 
—

(3
)
—

—

(4
)
Balance at end of period
$
—

$
—

 
$
1

$
3

$
—

$
—

$
4

Three months ended June 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
)
Recoveries
—

—

 
—

—

—

—

—

Balance at end of period
$
2

$
1

 
$
2

$
3

$
—

$
—

$
7

Three months ended June 30, 2014
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
Balance at beginning of period
$
—

$
—

 
$
1

$
3

$
—

$
—

$
4

Provision for loan losses
—

—

 
—

—

—

—

—

Charge-offs
—

—

 
—

(1
)
—

—

(1
)
Recoveries
—

—

 
—

—

—

—

—

Balance at end of period
$
—

$
—

 
$
1

$
3

$
—

$
—

$
4

As of June 30, 2015 and December 31, 2014, we had a liability for unfunded commitments of $15 million and $16 million, respectively. For the six months ended June 30, 2015 and 2014, we released a provision for credit loss related to our unfunded loan commitments of $1.1 million and recognized a provision for credit loss of $0.8 million, respectively. Our total unfunded commitments amounted to $11.3 billion and $11.0 billion at June 30, 2015 and December 31, 2014, respectively.
Our net charge-offs of $33 million for the six months ended June 30, 2015 were consistent with our net charge-offs for the six months ended June 30, 2014. Higher net charge-offs in our commercial real estate portfolio in 2015 were offset by lower net charge-offs in our other portfolios. Total net charge-offs for the six months ended June 30, 2015 represented 0.29% of average total loans compared with 0.30% of average total loans in the six months ended June 30, 2014. Excluding our acquired loans, our net charge-off ratio for originated loans was 0.31% for the six months ended June 30, 2015 compared to 0.33% for the six months ended June 30, 2014.
Our net charge-offs of $16 million for the three months ended June 30, 2015 were $1 million lower than the prior quarter, primarily due to a decrease in net charge-offs on our acquired loans.

44

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
Six months ended June 30,
 
 
 
 
 
Commercial:
 
 
 
 
 
Real estate
$
11

0.27
%
 
$
4

0.10
%
Business
8

0.26

 
11

0.40

Total commercial
19

0.27

 
15

0.22

Consumer:
 
 
 
 
 
Residential real estate
—

0.03

 
1

0.03

Home equity
3

0.20

 
4

0.31

Indirect auto
3

0.23

 
4

0.42

Credit cards
5

3.24

 
6

3.84

Other consumer
3

2.49

 
3

2.20

Total consumer
14

0.31

 
18

0.42

Total
$
33

0.29
%
 
$
33

0.30
%
 
 
 
 
 
 
Three months ended June 30,
 
 
 
 
 
Commercial:
 
 
 
 
 
Real estate
$
6

0.27
%
 
$
5

0.25
%
Business
4

0.24

 
2

0.13

Total commercial
9

0.26

 
7

0.20

Consumer:
 
 
 
 
 
Residential real estate
—

0.02

 
—

0.04

Home equity
1

0.18

 
1

0.18

Indirect auto
1

0.24

 
1

0.33

Credit cards
3

3.32

 
3

3.80

Other consumer
2

2.35

 
1

1.65

Total consumer
7

0.31

 
7

0.34

Total
$
16

0.28
%
 
$
14

0.25
%
Our nonperforming loans increased to $208 million from $204 million at December 31, 2014 and $189 million at June 30, 2014. New nonperforming loans during the second quarter of 2015 were $26 million, compared to $47 million in the prior quarter. During the quarter ended June 30, 2015, $6 million of nonperforming loans returned to accruing status, and there were $18 million in paydowns and transfers to real estate owned. Nonperforming loans comprised 0.89% of total loans at June 30, 2015, consistent with 0.88% at December 31, 2014. Excluding our acquired loans, our nonperforming loans were 0.91% of originated loans at June 30, 2015 compared to 0.90% of originated loans at December 31, 2014.
While nonperforming loans increased modestly from the prior year end, our total criticized loans decreased 5% during the six months ended June 30, 2015 from December 31, 2014 and decreased 12% compared to a year ago. The decrease was driven by favorable credit migration and paydowns.

45

Nonperforming assets to total assets were 0.58%, down five basis points from the prior quarter, reflecting the decrease in nonperforming loans. The composition of our nonperforming loans and total nonperforming assets consisted of the following at the dates indicated:
 
June 30,
December 31,
(dollars in millions)
2015(1)
2014(1)
Nonperforming loans:
 
 
Commercial:
 
 
Real estate
$
60

$
53

Business
47

53

Total commercial
107

106

Consumer:
 
 
Residential real estate
33

34

Home equity
50

47

Indirect auto
13

13

Other consumer
5

5

Total consumer
101

98

Total nonperforming loans
208

204

Real estate owned
17

21

Total nonperforming assets (2)
$
225

$
224

Loans 90 days past due and still accruing interest (3)
$
78

$
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
0.91
%
0.90
%
Allowance for loan losses to nonaccruing loans
113.5
%
115.0
%
 
(1) 
Includes $27 million and $30 million of nonperforming acquired lines of credit, primarily in home equity, at June 30, 2015 and December 31, 2014, respectively.
(2) 
Nonperforming assets do not include $65 million and $67 million of performing renegotiated loans that are accruing interest at June 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 $49 million at June 30, 2015 in our originated loan portfolio decreased 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 June 30, 2015.

46

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
 
June 30, 2015
December 31, 2014
 
June 30, 2015
December 31, 2014
 
June 30, 2015
December 31, 2014
 
June 30, 2015
December 31, 2014
Originated loans
 
 
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
Real estate
0.1
%
0.1
%
 
0.1
%
—
%
 
0.5
%
0.4
%
 
0.7
%
0.6
%
Business
0.1

0.1

 
—

0.1

 
0.5

0.3

 
0.6

0.5

Total commercial
0.1

0.1

 
0.1

0.1

 
0.5

0.4

 
0.6

0.5

Consumer:
 
 
 
 
 
 
 
 
 
 
 
Residential real estate
0.2

0.2

 
—

0.1

 
0.9

1.0

 
1.1

1.3

Home equity
0.2

0.2

 
0.1

0.1

 
0.9

0.8

 
1.1

1.0

Indirect auto
0.7

0.8

 
0.1

0.2

 
0.2

0.2

 
1.0

1.3

Credit cards
0.5

0.6

 
0.3

0.5

 
0.6

0.7

 
1.4

1.8

Other consumer
0.9

1.2

 
0.4

0.4

 
1.1

1.0

 
2.4

2.5

Total consumer
0.4

0.4

 
0.1

0.1

 
0.7

0.7

 
1.1

1.3

Total
0.2
%
0.2
%
 
0.1
%
0.1
%
 
0.6
%
0.5
%
 
0.8
%
0.8
%
Acquired loans
 
 
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
Real estate
0.3
%
0.3
%
 
0.3
%
0.2
%
 
2.1
%
2.5
%
 
2.7
%
3.0
%
Business
0.2

0.1

 
0.1

—

 
1.4

1.9

 
1.7

2.1

Total commercial
0.2

0.2

 
0.2

0.2

 
1.9

2.3

 
2.4

2.8

Consumer:
 
 
 
 
 
 
 
 
 
 
 
Residential real estate
0.9

0.9

 
0.5

0.4

 
4.3

4.4

 
5.8

5.7

Home equity
0.5

0.6

 
0.2

0.2

 
1.9

1.9

 
2.6

2.7

Total consumer
0.7

0.7

 
0.4

0.3

 
3.2

3.3

 
4.3

4.3

Total
0.5
%
0.6
%
 
0.3
%
0.3
%
 
2.7
%
2.9
%
 
3.6
%
3.7
%

47

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
 
June 30,
2015
December 31,
2014
Originated loans:
 
 
Pass
94.9
%
94.2
%
Criticized:(1)
 
 
Accrual
4.3

5.0

Nonaccrual
0.8

0.8

Total criticized
5.1

5.8

Total
100.0
%
100.0
%
Acquired loans:
 
 
Pass
90.3
%
89.1
%
Criticized:(1)
 
 
Accrual
9.4

10.4

Nonaccrual
0.3

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.

48

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
 
June 30,
2015
December 31,
2014
Originated loans by refreshed FICO score:
 
 
Over 700
79.7
%
78.9
%
660-700
10.7

11.2

620-660
5.0

5.0

580-620
2.2

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
72.4
%
73.4
%
660-700
8.3

7.7

620-660
5.3

4.8

580-620
3.6

3.8

Less than 580
4.3

3.9

No score(1)
6.1

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, was $79 million and $93 million as of June 30, 2015 and December 31, 2014, respectively. In addition, we maintain an allowance for loan losses on our acquired loans, if necessary, for losses in excess of any remaining credit discount.

49

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
June 30, 2015
 
 
 
 
 
Provision for loan losses
$
—

$
—

$
1

$
—

$
1

Net charge-offs
—

—

—

—

1

Net charge-offs to average loans
—
%
—
%
0.27
%
0.14
%
0.06
%
Nonperforming loans
$
9

$
8

$
9

$
2

$
27

Total loans (1)
753

1,856

713

196

3,518

Allowance for acquired loan losses
1

—

5

1

7

Credit related discount (2)
17

50

11

1

79

Credit related discount as percentage of loans
2.28
%
2.67
%
1.48
%
0.76
%
2.24
%
Criticized loans (3)
$
30

$
109

$
47

$
15

$
201

Classified loans (4)
25

57

42

12

136

Greater than 90 days past due and accruing (5)
10

38

22

7

76

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.

50

The following table provides information about our originated loan portfolio at the dates indicated or for the related quarters:
(dollars in millions)
June 30,
2015
December 31,
2014
Provision for loan losses
$
20

$
31

Net charge-offs
15

21

Net charge-offs to average loans
0.31
%
0.44
%
Nonperforming loans
$
181

$
174

Nonperforming loans to total loans
0.91
%
0.90
%
Total loans
$
19,930

$
19,296

Allowance for originated loan losses
228

228

Allowance for originated loan losses to total originated loans
1.15
%
1.18
%
Criticized loans
$
738

$
804

Classified loans(1)
456

451

Greater than 90 days past due and accruing (2)
2

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 $1 million from $234 million at December 31, 2014 to $236 million at June 30, 2015 as our total provision for loan losses of $35 million exceeded our total net charge-offs of $33 million. The ratio of our total allowance for loan losses to total loans was 1.01% at June 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 1.15% at June 30, 2015, declining three 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 $121 million at June 30, 2015 from $120 million at December 31, 2014 and $136 million at June 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 $65 million and $67 million at June 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.

51

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 $3.9 billion and $3.8 billion at June 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 June 30, 2015 and December 31, 2014.
The delinquencies as a percentage of loans serviced were as follows at the dates indicated: 
 
June 30,
2015
December 31,
2014
30 to 59 days past due
0.17
%
0.20
%
60 to 89 days past due
0.08

0.11

Greater than 90 days past due
0.71

0.69

Total past due loans
0.96
%
1.01
%
Investment Securities Portfolio
The fair value of our total investment securities portfolio was comprised of the following at the dates indicated: 
 
June 30, 2015
 
December 31, 2014
(dollars in millions)
Fair
value
% of total
portfolio
 
Fair
value
% of total
portfolio
Collateralized mortgage obligations
$
7,060

58.9
%
 
$
6,741

56.7
%
Commercial mortgage-backed securities
1,290

10.8

 
1,500

12.6

Collateralized loan obligations
1,085

9.1

 
1,016

8.6

Corporate debt
872

7.3

 
823

6.9

Asset-backed securities
437

3.7

 
599

5.1

Other residential mortgage-backed securities
391

3.3

 
448

3.8

States and political subdivisions
410

3.4

 
453

3.8

U.S. government agencies and sponsored enterprises
339

2.8

 
251

2.1

Other
22

0.2

 
22

0.2

U.S. Treasury
55

0.5

 
25

0.2

Total investment securities
$
11,962

100.0
%
 
$
11,879

100.0
%
Our holdings in residential mortgage-backed securities were 62% and 61% of our total investment securities portfolio at June 30, 2015 and December 31, 2014, respectively. At June 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 June 30, 2015 and December 31, 2014, 11% and 14%, respectively, of our investment securities were variable rate.

52

The net unamortized purchase premiums on our CMO portfolio amounted to $74 million, or 1.1% of the portfolio, at June 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 June 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
June 30, 2015
 
 
 
 
 
 
 
Securities backed by U.S. Treasury and U.S. government sponsored enterprises:
 
 
 
 
 
 
 
Collateralized mortgage obligations
$
7,032

$
7,060

$
7,060

$
—

$
—

$
—

$
—

Residential mortgage-backed securities
384

391

391

—

—

—

—

Debt securities
392

394

384

10

—

—

—

Total
7,808

7,845

7,835

10

—

—

—

Commercial mortgage-backed securities
1,252

1,290

758

379

153

—

—

Collateralized loan obligations
1,073

1,085

803

264

18

—

—

Asset-backed securities
430

437

366

72

—

—

—

Corporate debt
870

872

—

182

137

552

—

States and political subdivisions
404

410

227

157

2

4

20

Other
22

22

—

—

—

—

22

Total investment securities
$
11,859

$
11,962

$
9,989

$
1,064

$
310

$
556

$
42

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 June 30, 2015 and December 31, 2014. As of June 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

53

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 includes $645 million of High Yield bonds at June 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 June 30, 2015, the energy portfolio had a net unrealized loss of $1.1 million compared to a $4.0 million unrealized loss at December 31, 2014. 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 $1.3 billion at June 30, 2015. The net unamortized premiums on our CMBS portfolio amounted to $14 million, or 1.1% of the portfolio at June 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 June 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 June 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:
 
June 30, 2015
 
December 31, 2014
Credit enhancement(1)
Amortized cost
% of total CMBS portfolio
 
Amortized cost
% of total CMBS portfolio
 
(dollars in millions)
30+%
$
989

79
%
 
$
1,075

74
%
25 - 30%
150

12

 
223

16

20 - 25%
103

8

 
118

8

18 - 20%
10

1

 
33

2

Total
$
1,252

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 June 30, 2015. Gross unrealized losses on our CLO portfolio amounted to $2 million and $3 million at June 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 June 30, 2015, we have purchased $347 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.
As shown in the table above, of the underlying investment ratings of our portfolio, 98% of our CLO portfolio was rated A or higher at June 30, 2015 and significant credit enhancements for our securities provide us protection from default.

54

The following table provides information on the credit enhancements for our securities in our CLO portfolio at the dates indicated:
 
June 30, 2015
 
December 31, 2014
Credit Enhancement(1)
Amortized cost
% of total CLO portfolio
 
Amortized cost
% of total CLO portfolio
 
(dollars in millions)
40+%
$
49

4
%
 
$
73

7
%
35 - 40%
234

22

 
224

23

30 - 35%
54

5

 
83

8

25 - 30%
249

23

 
223

22

20 - 25%
227

21

 
133

13

15 - 20%
243

23

 
240

24

10 - 15%
17

2

 
25

3

0 - 10%
—

—

 
—

—

Total
$
1,073

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.
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-

55

term federal funds, internally generated capital, and other credit facilities. The primary source of our non-deposit borrowings are FHLB advances, of which we had $4.8 billion outstanding at June 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 June 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 six to 12 months.
Our total collateralized wholesale borrowings amounted to $4.8 billion and $5.0 million at June 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 June 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 June 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.
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

56

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 $11.3 billion and $11.0 billion at June 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 $4.0 billion and $3.8 billion at June 30, 2015 and December 31, 2014, respectively, and our unused home equity and other consumer lines of credit increased to $5.7 billion at June 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 $242 million and $266 million at June 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 $198 million at June 30, 2015 from $137 million at December 31, 2014, as a result of the increased customer activity given the lower rate environment in the first half of 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 $382 million at June 30, 2015. As of June 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.
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

57

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 have 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 will be paid to shareholders on August 17, 2015 to shareholders of record on August 5, 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. Beginning with the payment of our quarterly common and preferred dividends for the third quarter of 2015, such consultation with the Federal Reserve will no longer be necessary 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 six months ended June 30, 2015. Additionally, the Bank paid dividends of $80 million to the Company during the six months ended June 30, 2014.
Deposits
The following table illustrates the composition of our deposits at the dates indicated:
 
June 30, 2015
 
December 31, 2014
Increase (decrease)
(dollars in millions)
Amount
Percent
 
Amount
Percent
Core deposits:
 
 
 
 
 
 
Savings
$
3,484

12.3
%
 
$
3,452

12.4
%
$
32

Interest-bearing checking
5,089

17.9

 
5,084

18.3

4

Money market deposits
10,304

36.2

 
9,962

35.8

342

Noninterest-bearing
5,550

19.5

 
5,407

19.5

143

Total core deposits
24,426

85.9

 
23,906

86.0

521

Certificates
4,020

14.1

 
3,876

14.0

145

Total deposits
$
28,447

100.0
%
 
$
27,781

100.0
%
$
666


58

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
June 30, 2015
 
 
 
 
 
Core deposits:
 
 
 
 
 
Savings
$
2,247

$
181

$
227

$
829

$
3,484

Interest-bearing checking
3,217

652

549

670

5,089

Money market deposits
6,652

1,268

889

1,494

10,304

Noninterest-bearing
3,379

749

660

762

5,550

Total core deposits
15,496

2,850

2,326

3,755

24,426

Certificates
2,698

435

283

604

4,020

Total deposits
$
18,193

$
3,286

$
2,609

$
4,359

$
28,447

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 $357 million and $412 million at June 30, 2015 and December 31, 2014, respectively, and brokered certificates of deposit of $1.5 billion and $1.2 billion at June 30, 2015 and December 31, 2014, respectively.
Our total deposits increased $666 million, or 5% annualized, from December 31, 2014 to $28.4 billion at June 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 $147 million, or 3% annualized, from December 31, 2014. Transactional deposits currently represent 37% of our deposit base, consistent with a year ago. Money market balances increased from December 31, 2014 driven by promotional deposit campaigns, primarily in our New York state footprint, and by seasonal strength in commercial deposits. Noninterest-bearing checking balances increased $143 million from December 31, 2014, driven by higher consumer and business deposit balances.
Consumer interest-bearing checking and noninterest bearing checking account balances increased an annualized 3% from December 31, 2014, driven by higher balances held by customers. Factors contributing to this growth included higher spend on marketing, changes to our incentive compensation structure to emphasize deposits, better new client acquisitions, and the recent enhancements to our online account opening platform.
The $145 million increase in certificates of deposit from December 31, 2014 to June 30, 2015, reflects a $385 million increase in brokered certificates of deposit to $1.5 billion partially offset by lower consumer and municipal balances. The terms on these brokered certificates of deposit are between six months and 24 months with interest rates ranging between 0.30% and 0.90%.

59

The average cost of interest-bearing deposits for the three months ended June 30, 2015 of 0.29% increased one basis point from the three months ended March 31, 2015 and increased five basis points from the quarter ended June 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 June 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 June 30, 2015 and December 31, 2014, 52% 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
$
5,359

$
1,785

$
140

$
7,284

Construction
1,006

12

9

1,028

Business
4,743

964

217

5,924

Total commercial
11,108

2,761

367

14,236

Consumer:
 
 
 
 
Residential real estate
1,003

1,609

718

3,330

Home equity
2,446

373

166

2,985

Indirect auto
872

1,361

23

2,256

Credit cards
305

—

—

305

Other consumer
154

71

33

257

Total consumer
4,779

3,413

940

9,133

Total loans and leases
$
15,887

$
6,175

$
1,307

$
23,368

For the loans reported in the preceding table, the following sets forth at June 30, 2015, the dollar amount of all of our fixed-rate and adjustable-rate loans due after June 30, 2016: 
(in millions)
Fixed
Adjustable
Total
Commercial:
 
 
 
Real estate
$
732

$
1,194

$
1,926

Construction
22

—

22

Business
1,082

99

1,181

Total commercial
1,835

1,293

3,128

Consumer:
 
 
 
Residential real estate
1,356

971

2,327

Home equity
529

9

539

Indirect auto
1,384

—

1,384

Other consumer
104

—

104

Total consumer
3,373

981

4,353

Total loans and leases
$
5,208

$
2,274

$
7,482


60

The following table sets forth at June 30, 2015, the dollar amount of all of our fixed-rate loans due after June 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
$
600

$
262

$
119

$
613

$
24

$
1,617

2 to 3 years
452

220

100

419

20

1,211

3 to 5 years
486

319

145

329

26

1,305

Total 1 to 5 years
1,538

800

364

1,361

70

4,133

5 to 10 years
266

359

145

23

21

814

More than 10 years
32

197

20

—

12

261

Total
$
1,835

$
1,356

$
529

$
1,384

$
104

$
5,208

The following table sets forth at June 30, 2015, the dollar amount of all of our adjustable-rate loans due after June 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
$
418

$
353

$
9

$
780

2 to 3 years
376

197

—

573

3 to 5 years
430

258

—

688

Total 1 to 5 years
1,224

808

9

2,042

5 to 10 years
66

162

—

228

More than 10 years
3

1

—

4

Total
$
1,293

$
971

$
9

$
2,274

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

61

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)
 
 
June 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

4.9
 %
 
$
53

4.9
 %
+ 100 basis points (gradual)
27

2.5

 
28

2.6

- 50 basis points (gradual)
(17
)
(1.6
)
 
(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 June 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

62

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

63

•
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
June 30, 2015
December 31, 2014
- 100 basis points
(2.6
)%
(3.6
)%
+ 100 basis points
(2.6
)
(2.2
)
+ 200 basis points (1)
(7.3
)
(7.1
)
+ 300 basis points (2)
(12.7
)
(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 we maintained variable rate commercial loan production and deposit balances in more reactive categories such as money market deposits.
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.

64

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 June 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 the capital requirements of 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 10.03% and 9.81% at June 30, 2015 and December 31, 2014, respectively. Our common equity tier 1 capital ratio under Basel III was 8.50% at June 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 a reduction in disallowed intangibles and deferred tax assets as well as overall risk-weighted assets slightly decreasing.

65

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 have 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 will be 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 will no longer be necessary 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.
During the first six months of 2015, our stockholders’ equity increased $28 million, driven by increases due primarily to our net income of $112 million and $4 million related to stock-based compensation partially offset by $18 million in unrealized losses, net of tax, on investment securities available for sale, $57 million, or $0.16 per share, in common stock dividends and $15 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.

66

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 June 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.:
 
 
 
 
 
June 30, 2015:
 
 
 
 
 
Leverage ratio
$
2,852

7.60
%
 
$
1,876

5.00
%
Tier 1 risk-based capital
2,852

10.03

 
2,274

8.00

Total risk-based capital
3,401

11.96

 
2,843

10.00

Common equity tier 1 capital
2,417

8.50

 
1,848

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.:
 
 
 
 
 
June 30, 2015:
 
 
 
 
 
Leverage ratio
$
3,023

8.07
%
 
$
1,873

5.00
%
Tier 1 risk-based capital
3,023

10.66

 
2,269

8.00

Total risk-based capital
3,274

11.54

 
2,837

10.00

Common equity tier 1 capital
3,023

10.66

 
1,843

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.

67

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 July 2015, the FASB stated that they would delay the effective date for this guidance for one year to fiscal years beginning after December 15, 2017 although they have not officially amended the guidance. 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

68

with debt discounts.  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.


69

ITEM 1.
Financial Statements
FIRST NIAGARA FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Condition (unaudited)
(in millions, except share and per share amounts)
 
 
June 30,
2015
December 31,
2014
ASSETS
Cash and cash equivalents
$
527

$
420

Investment securities:
 
 
Available for sale, at fair value (amortized cost of $5,689 and $5,830 in 2015 and 2014; includes pledged securities that can be sold or repledged of $102 and $39 in 2015 and 2014)
5,751

5,915

Held to maturity, at amortized cost (fair value of $6,211 and $5,964 in 2015 and 2014; includes pledged securities that can be sold or repledged of $2,659 and $128 in 2015 and 2014)
6,170

5,942

Federal Home Loan Bank and Federal Reserve Bank common stock, at amortized cost
379

412

Loans held for sale
60

40

Loans and leases (net of allowance for loan losses of $236 and $234 in 2015 and 2014)
23,133

22,803

Bank owned life insurance
431

426

Premises and equipment, net
413

407

Goodwill
1,348

1,350

Core deposit and other intangibles, net
56

67

Other assets
796

769

Total assets
$
39,064

$
38,551

LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
 
 
Deposits
$
28,447

$
27,781

Short-term borrowings
4,276

5,472

Long-term borrowings
1,683

734

Other
536

471

Total liabilities
34,942

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
4,223

4,235

Accumulated deficit
(294
)
(330
)
Accumulated other comprehensive income
(7
)
9

Treasury stock, at cost, 11,112,038 and 12,613,836 shares in 2015 and 2014
(142
)
(162
)
Total stockholders’ equity
4,121

4,093

Total liabilities and stockholders’ equity
$
39,064

$
38,551

See accompanying notes to consolidated financial statements.

70

FIRST NIAGARA FINANCIAL GROUP, INC. AND SUBSIDIARIES    
Consolidated Statements of Income (unaudited)
(in millions, except per share amounts)
 
Three months ended June 30,
 
Six months ended June 30,
 
2015
2014
 
2015
2014
Interest income:
 
 
 
 
 
Loans and leases
$
212

$
210

 
$
422

$
420

Investment securities and other
86

92

 
173

182

Total interest income
298

302

 
595

602

Interest expense:
 
 
 
 
 
Deposits
17

13

 
32

25

Borrowings
19

17

 
37

34

Total interest expense
35

30

 
69

59

Net interest income
263

272

 
526

543

Provision for credit losses
21

20

 
34

44

Net interest income after provision for credit losses
242

252

 
493

499

Noninterest income:
 
 
 
 
 
Deposit service charges
22

24

 
43

47

Insurance commissions
17

17

 
33

33

Merchant and card fees
13

13

 
25

24

Wealth management services
16

16

 
30

32

Mortgage banking
6

5

 
11

9

Capital markets income
5

3

 
9

7

Lending and leasing
4

5

 
8

9

Bank owned life insurance
3

3

 
7

9

Other income
—

(5
)
 
3

(12
)
Total noninterest income
87

81

 
169

158

Noninterest expense:
 
 
 
 
 
Salaries and employee benefits
114

118

 
226

236

Occupancy and equipment
26

29

 
53

56

Technology and communications
36

31

 
72

61

Marketing and advertising
10

8

 
20

16

Professional services
16

13

 
29

25

Amortization of intangibles
5

7

 
11

14

Federal deposit insurance premiums
12

10

 
23

19

Restructuring charges
—

—

 
18

10

Other expense
28

29

 
57

55

Total noninterest expense
248

244

 
509

493

Income before income taxes
81

89

 
152

164

Income tax
20

13

 
40

28

Net income
61

76

 
112

136

Preferred stock dividend
8

8

 
15

15

Net income available to common stockholders
$
53

$
68

 
$
97

$
121

Earnings per share:
 
 
 
 
 
Basic
$
0.15

$
0.19

 
$
0.27

$
0.34

Diluted
$
0.15

$
0.19

 
$
0.27

$
0.34

Weighted average common shares outstanding:
 
 
 
 
 
Basic
351

350

 
351

350

Diluted
353

352

 
353

351

Dividends per common share
$
0.08

$
0.08

 
$
0.16

$
0.16

See accompanying notes to consolidated financial statements.

71

FIRST NIAGARA FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (unaudited)
(in millions) 
 
Three months ended June 30,
 
Six months ended June 30,
 
2015
2014
 
2015
2014
Net income
$
61

$
76

 
$
112

$
136

Other comprehensive income, net of income taxes:
 
 
 
 
 
Securities available for sale:
 
 
 
 
 
Net unrealized (losses) gains arising during the period
(31
)
14

 
(15
)
22

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
)
 
(3
)
(4
)
Net unrealized gains on interest rate swaps designated as cash flow hedges arising during the period
1

—

 
—

—

Amortization of net loss related to pension and post-retirement plans
1

—

 
2

—

Total other comprehensive (loss) income
(31
)
12

 
(16
)
19

Total comprehensive income
$
30

$
88

 
$
96

$
155

See accompanying notes to consolidated financial statements.


72

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
—

—

—

112

—

—

—

112

Total other comprehensive loss, net
—

—

—

—

(16
)
—

—

(16
)
Stock-based compensation expense
—

—

6

—

—

—

—

6

Restricted stock activity (1,501,798 shares)
—

—

(18
)
(5
)
—

—

20

(3
)
Preferred stock dividends
—

—

—

(15
)
—

—

—

(15
)
Common stock dividends of $0.16 per share
—

—

—

(57
)
—

—

—

(57
)
Balances at June 30, 2015
$
338

$
4

$
4,223

$
(294
)
$
(7
)
$
—

$
(142
)
$
4,121

Balances at January 1, 2014
$
338

$
4

$
4,235

$
536

$
62

$
(17
)
$
(165
)
$
4,993

Net Income
—

—

—

136

—

—

—

136

Total other comprehensive income, net
—

—

—

—

19

—

—

19

ESOP shares committed to be released (88,970 shares)
—

—

—

—

—

1

—

1

Stock-based compensation expense
—

—

6

—

—

—

—

6

Restricted stock activity (1,541,890 shares)
—

—

(16
)
(8
)
—

—

22

(2
)
Preferred stock dividends
—

—

—

(15
)
—

—

—

(15
)
Common stock dividends of $0.16 per share
—

—

—

(56
)
—

—

—

(56
)
Balances at June 30, 2014
$
338

$
4

$
4,225

$
593

$
81

$
(16
)
$
(143
)
$
5,082

See accompanying notes to consolidated financial statements.


73

FIRST NIAGARA FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (unaudited)
(in millions)
 
Six months ended June 30,
 
2015
2014
Cash flows from operating activities:
 
 
Net income
$
112

$
136

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
Amortization of fees and discounts, net
16

22

Provision for credit losses
34

44

Depreciation of premises and equipment
38

28

Amortization of intangibles
11

14

Origination of loans held for sale
(372
)
(278
)
Proceeds from sales of loans held for sale
353

291

ESOP and stock based-compensation expense
6

7

Deferred income tax expense
8

4

Other, net
10

18

Net cash provided by operating activities
218

285

Cash flows from investing activities:
 
 
Proceeds from sales of securities available for sale
129

128

Proceeds from maturities of securities available for sale
153

210

Principal payments received on securities available for sale
653

481

Purchases of securities available for sale
(780
)
(54
)
Principal payments received on securities held to maturity
705

334

Purchases of securities held to maturity
(975
)
(1,133
)
Proceeds from maturities of securities held to maturity
25

5

Proceeds from sales of Federal Home Loan Bank and Federal Reserve Bank common stock
33

35

Net increase in loans and leases
(358
)
(925
)
Purchases of premises and equipment
(45
)
(21
)
Other, net
2

(26
)
Net cash used in investing activities
(458
)
(967
)
Cash flows from financing activities:
 
 
Net increase in deposits
666

781

(Repayments of) proceeds from short-term borrowings, net
(1,196
)
68

Proceeds from long-term borrowings
950

—

Repayments of long-term borrowings
—

(1
)
Dividends paid on noncumulative preferred stock
(15
)
(15
)
Dividends paid on common stock
(57
)
(56
)
Net cash provided by financing activities
348

776

Net increase in cash and cash equivalents
107

94

Cash and cash equivalents at beginning of period
420

463

Cash and cash equivalents at end of period
$
527

$
557

Supplemental disclosures
 
 
Cash paid during the period for:
 
 
Income taxes
$
33

$
36

Interest expense
67

60

Other noncash activity:
 
 
Securities available for sale purchased not settled
42

10

Securities held to maturity purchased not settled
—

4

See accompanying notes to consolidated financial statements.

74

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 six months ended June 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.

75

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
June 30, 2015
cost
gains
losses
value
Investment securities available for sale:
 
 
 
 
Debt securities:
 
 
 
 
States and political subdivisions
$
404

$
6

$
—

$
410

U.S. Treasury
55

—

—

55

U.S. government sponsored enterprises
287

3

(1
)
289

Corporate
870

13

(11
)
872

Total debt securities
1,616

23

(13
)
1,626

Mortgage-backed securities:
 
 
 
 
Residential mortgage-backed securities:
 
 
 
 
Government National Mortgage Association
31

—

(1
)
31

Federal National Mortgage Association
83

4

—

86

Federal Home Loan Mortgage Corporation
100

4

—

104

Collateralized mortgage obligations:
 
 
 
 
Government National Mortgage Association
51

—

—

51

Federal National Mortgage Association
625

2

(9
)
618

Federal Home Loan Mortgage Corporation
406

1

(6
)
401

Total collateralized mortgage obligations
1,082

3

(15
)
1,070

Total residential mortgage-backed securities
1,296

11

(16
)
1,291

Commercial mortgage-backed securities, non-agency issued
1,252

38

—

1,290

Total mortgage-backed securities
2,548

49

(16
)
2,581

Collateralized loan obligations, non-agency issued
1,073

14

(2
)
1,085

Asset-backed securities collateralized by:
 
 
 
 
Student loans
217

6

—

223

Credit cards
20

—

—

20

Auto loans
117

1

—

117

Other
76

—

—

76

Total asset-backed securities
430

8

—

437

Other
22

—

—

22

Total securities available for sale
$
5,689

$
94

$
(32
)
$
5,751

Investment securities held to maturity:
 
 
 
 
Debt securities, U.S. government agencies
$
50

$
—

$
—

$
50

Residential mortgage-backed securities:
 
 
 
 
Government National Mortgage Association
10

—

—

10

Federal National Mortgage Association
103

—

(1
)
103

Federal Home Loan Mortgage Corporation
57

—

—

57

Collateralized mortgage obligations:
 
 
 
 
Government National Mortgage Association
1,482

28

(2
)
1,508

Federal National Mortgage Association
2,061

17

(15
)
2,062

Federal Home Loan Mortgage Corporation
2,407

31

(17
)
2,420

Total collateralized mortgage obligations
5,949

75

(34
)
5,990

Total residential mortgage-backed securities
6,120

76

(36
)
6,160

Total securities held to maturity
$
6,170

$
77

$
(36
)
$
6,211


76

 
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


77

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
 
June 30, 2015
value
losses
Count
 
value
losses
Count
 
value
losses
Count
Investment securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
Debt securities:
 
 
 
 
 
 
 
 
 
 
 
States and political subdivisions
$
39

$
—

58

 
$
1

$
—

4

 
$
39

$
—

62

U.S. Treasury
30

—

2

 
—

—

—

 
30

—

2

U.S. government sponsored enterprises
157

(1
)
15

 
—

—

—

 
157

(1
)
15

Corporate
265

(6
)
160

 
87

(5
)
52

 
352

(11
)
212

Total debt securities
491

(8
)
235

 
88

(5
)
56

 
579

(13
)
291

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Government National Mortgage Association
—

—

—

 
18

(1
)
5

 
18

(1
)
5

Federal National Mortgage Association
—

—

1

 
—

—

—

 
—

—

1

Collateralized mortgage obligations:
 
 
 
 
 
 
 
 
 
 
 
Government National Mortgage Association
25

—

1

 
—

—

—

 
25

—

1

Federal National Mortgage Association
189

(1
)
13

 
175

(9
)
10

 
364

(9
)
23

Federal Home Loan Mortgage Corporation
228

(4
)
13

 
43

(2
)
2

 
271

(6
)
15

Total collateralized mortgage obligations
442

(5
)
27

 
218

(10
)
12

 
660

(15
)
39

Total residential mortgage-backed securities
442

(5
)
28

 
236

(11
)
17

 
678

(16
)
45

Commercial mortgage-backed securities, non-agency issued
11

—

7

 
1

—

2

 
12

—

9

Total mortgage-backed securities
453

(5
)
35

 
237

(11
)
19

 
690

(16
)
54

Collateralized loan obligations, non-agency issued
261

(2
)
28

 
134

(1
)
13

 
395

(2
)
41

Asset-backed securities collateralized by:
 
 
 
 
 
 
 
 
 
 
 
Student loans
13

—

3

 
12

—

2

 
25

—

5

Auto loans
1

—

1

 
—

—

—

 
1

—

1

Other
28

—

3

 
26

—

3

 
54

—

6

Total asset-backed securities
42

—

7

 
38

—

5

 
79

—

12

Other
—

—

—

 
9

—

3

 
9

—

3

Total securities available for sale in an unrealized loss position
$
1,247

$
(15
)
305

 
$
505

$
(17
)
96

 
$
1,751

$
(32
)
401

 
 
 
 
 
 
 
 
 
 
 
 

78

 
Less than 12 months
 
12 months or longer
 
Total
 
Fair
Unrealized
 
 
Fair
Unrealized
 
 
Fair
Unrealized
 
June 30, 2015
value
losses
Count
 
value
losses
Count
 
value
losses
Count
Investment securities held to maturity:
 
 
 
 
 
 
 
 
 
 
 
Debt securities, U.S. government agencies
$
18

$
—

3

 
$
—

$
—

—

 
$
18

$
—

3

Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Government National Mortgage Association
—

—

—

 
2

—

2

 
2

—

2

Federal National Mortgage Association
43

—

17

 
30

(1
)
9

 
73

(1
)
26

Federal Home Loan Mortgage Corporation
33

—

10

 
4

—

2

 
37

—

12

Collateralized mortgage obligations:
 
 
 
 
 
 
 
 
 
 
 
Government National Mortgage Association
191

(2
)
26

 
72

(1
)
19

 
263

(2
)
45

Federal National Mortgage Association
404

(3
)
23

 
436

(12
)
28

 
841

(15
)
51

Federal Home Loan Mortgage Corporation
665

(8
)
37

 
349

(10
)
25

 
1,013

(17
)
62

Total collateralized mortgage obligations
1,260

(12
)
86

 
857

(22
)
72

 
2,117

(34
)
158

Total residential mortgage-backed securities
1,336

(13
)
113

 
893

(23
)
85

 
2,229

(36
)
198

Total securities held to maturity in an unrealized loss position
$
1,354

$
(13
)
116

 
$
893

$
(23
)
85

 
$
2,247

$
(36
)
201


79


 
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

 
 
 
 
 
 
 
 
 
 
 
 

80

 
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 June 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. Included in 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

81

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 June 30, 2015 were as follows:
 
Amortized cost
Fair value
Debt securities:
 
 
Within one year
$
176

$
177

After one year through five years
733

746

After five years through ten years
743

739

After ten years
14

14

Total debt securities
1,666

1,676

Mortgage-backed securities
8,668

8,741

Collateralized loan obligations
1,073

1,085

Asset-backed securities
430

437

Other
22

22

 
$
11,859

$
11,962

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 3.4 years at June 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.

82

Our loans and leases receivable consisted of the following at the dates indicated: 
 
June 30, 2015
 
December 31, 2014
 
Originated
Acquired
Total
 
Originated
Acquired
Total
Commercial:
 
 
 
 
 
 
 
Real estate
$
6,341

$
943

$
7,284

 
$
6,181

$
1,050

$
7,231

Construction
1,028

—

1,028

 
973

1

973

Business
5,583

341

5,924

 
5,430

345

5,775

Total commercial
12,952

1,284

14,236

 
12,584

1,395

13,979

Consumer:
 
 
 
 
 
 
 
Residential real estate
2,204

1,126

3,330

 
2,096

1,257

3,353

Home equity
1,956

1,029

2,985

 
1,847

1,089

2,936

Indirect auto
2,256

—

2,256

 
2,166

—

2,166

Credit cards
305

—

305

 
324

—

324

Other consumer
257

—

257

 
278

—

278

Total consumer
6,978

2,155

9,133

 
6,711

2,347

9,058

Total loans and leases
19,930

3,439

23,368

 
19,296

3,742

23,037

Allowance for loan losses
(228
)
(7
)
(236
)
 
(228
)
(6
)
(234
)
Total loans and leases, net
$
19,701

$
3,431

$
23,133

 
$
19,067

$
3,736

$
22,803

As of June 30, 2015 and December 31, 2014, we had a liability for unfunded loan commitments of $15 million and $16 million, respectively. For the six months ended June 30, 2015, we recognized a release of provision for credit losses related to our unfunded loan commitments of $1 million. For the six months ended June 30, 2014 we recognized a provision for credit losses related to our unfunded commitments of $0.8 million.
Of the $3.0 billion home equity portfolio at June 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 June 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.)

83

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: 
 
June 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
2,277

2,549

Carrying amount
2,229

2,496

Other acquired loans
 
 
Outstanding principal balance
1,228

1,274

Carrying amount
1,205

1,240

Total acquired loans
 
 
Outstanding principal balance
3,511

3,832

Carrying amount
3,439

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
)
Accretion
55

Balance at June 30, 2015
$
(608
)
(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 debt restructuring ("TDR"), regardless of dollar size, are considered impaired. The impact of this change to our

84

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
Six months ended June 30, 2015
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
Balance at beginning of period
$
65

$
122

 
$
2

$
8

$
14

$
12

$
5

$
228

Provision for loan losses
14

5

 
—

(1
)
3

5

4

31

Charge-offs
(11
)
(11
)
 
(1
)
(2
)
(4
)
(6
)
(4
)
(38
)
Recoveries
1

3

 
—

—

1

1

1

7

Balance at end of period
$
69

$
119

 
$
2

$
6

$
14

$
13

$
5

$
228

Allowance for loan losses:
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
4

$
3

 
$
1

$
—

$
—

$
—

$
—

$
8

Collectively evaluated for impairment
65

116

 
1

5

14

13

5

220

Total
$
69

$
119

 
$
2

$
6

$
14

$
13

$
5

$
228

Loans receivable:
 
 
 
 
 
 
 
 
 
Balance at end of period
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
73

$
60

 
$
23

$
6

$
3

$
—

$
3

$
168

Collectively evaluated for impairment
7,296

5,523

 
2,181

1,950

2,253

305

255

19,762

Total
$
7,369

$
5,583

 
$
2,204

$
1,956

$
2,256

$
305

$
257

$
19,930

Six months ended June 30, 2014
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
Balance at beginning of period
$
47

$
120

 
$
2

$
7

$
10

$
13

$
6

$
205

Provision for loan losses
19

3

 
—

4

6

5

3

39

Charge-offs
(6
)
(13
)
 
(1
)
(2
)
(4
)
(7
)
(4
)
(36
)
Recoveries
3

2

 
—

—

1

1

1

7

Balance at end of period
$
62

$
112

 
$
2

$
10

$
12

$
12

$
6

$
216

Allowance for loan losses:
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
2

$
2

 
$
1

$
3

$
—

$
—

$
—

$
8

Collectively evaluated for impairment
60

110

 
1

7

12

12

5

208

Total
$
62

$
112

 
$
2

$
10

$
12

$
12

$
6

$
216

Loans receivable:
 
 
 
 
 
 
 
 
 
Balance at end of period
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
63

$
59

 
$
21

$
7

$
2

$
—

$
2

$
155

Collectively evaluated for impairment
6,668

5,288

 
1,926

1,694

1,869

312

284

18,041

Total
$
6,732

$
5,348

 
$
1,947

$
1,701

$
1,872

$
312

$
286

$
18,196


85

 
 
 
 
 
 
 
 
 
 
 
Commercial
 
Consumer
 
Originated loans
Real estate
Business
 
Residential
Home equity
Indirect auto
Credit cards
Other
consumer
Total
Three months ended June 30, 2015
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
Balance at beginning of period
$
69

$
117

 
$
2

$
6

$
14

$
11

$
4

$
224

Provision for loan losses
6

5

 
—

—

2

4

2

20

Charge-offs
(6
)
(4
)
 
—

(1
)
(2
)
(3
)
(2
)
(19
)
Recoveries
1

1

 
—

—

1

1

—

3

Balance at end of period
$
69

$
119

 
$
2

$
6

$
14

$
13

$
5

$
228

Three months ended June 30, 2014
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
Balance at beginning of period
$
61

$
112

 
$
2

$
8

$
11

$
12

$
6

$
210

Provision for loan losses
6

3

 
—

3

3

3

1

19

Charge-offs
(5
)
(3
)
 
—

(1
)
(2
)
(3
)
(2
)
(16
)
Recoveries
—

1

 
—

—

—

1

—

3

Balance at end of period
$
62

$
112

 
$
2

$
10

$
12

$
12

$
6

$
216



86


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
Six months ended June 30, 2015
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
Balance at beginning of period
$
1

$
1

 
$
2

$
2

$
—

$
—

$
6

Provision for loan losses
2

—

 
—

2

—

—

4

Charge-offs
(2
)
—

 
—

(1
)
—

—

(4
)
Recoveries
1

—

 
—

—

—

—

1

Balance at end of period
$
2

$
1

 
$
2

$
3

$
—

$
—

$
7

Allowance for loan losses:
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
—

$
—

 
$
—

$
—

$
—

$
—

$
—

Collectively evaluated for impairment
2

1

 
2

3

—

—

7

Total
$
2

$
1

 
$
2

$
3

$
—

$
—

$
7

Loans receivable:
 
 
 
 
 
 
 
 
Balance at end of period
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
—

$
—

 
$
—

$
4

$
—

$
—

$
4

Collectively evaluated for impairment
—

280

 
—

921

—

—

1,201

Loans acquired with deteriorated credit quality
943

61

 
1,126

104

—

—

2,234

Total
$
943

$
341

 
$
1,126

$
1,029

$
—

$
—

$
3,439

Six months ended June 30, 2014
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
Balance at beginning of period
$
—

$
—

 
$
1

$
3

$
—

$
—

$
4

Provision for loan losses
1

—

 
—

3

—

—

4

Charge-offs
(1
)
—

 
—

(3
)
—

—

(4
)
Recoveries
—

—

 
—

—

—

—

—

Balance at end of period
$
—

$
—

 
$
1

$
3

$
—

$
—

$
4

Allowance for loan losses:
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
—

$
—

 
$
—

$
—

$
—

$
—

$
—

Collectively evaluated for impairment
—

—

 
1

3

—

—

4

Total
$
—

$
—

 
$
1

$
3

$
—

$
—

$
4

Loans receivable:
 
 
 
 
 
 
 
 
Balance at end of period
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
—

$
6

 
$
—

$
4

$
—

$
—

$
9

Collectively evaluated for impairment
—

302

 
—

985

—

—

1,287

Loans acquired with deteriorated credit quality
1,209

86

 
1,412

146

—

—

2,853

Total
$
1,209

$
394

 
$
1,412

$
1,135

$
—

$
—

$
4,150


87

 
 
 
 
 
 
 
 
 
 
Commercial
 
Consumer
 
Acquired loans
Real estate
Business
 
Residential
Home equity
Credit cards
Other
consumer
Total
Three months ended June 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
)
Recoveries
—

—

 
—

—

—

—

—

Balance at end of period
$
2

$
1

 
$
2

$
3

$
—

$
—

$
7

Three months ended June 30, 2014
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
Balance at beginning of period
$
—

$
—

 
$
1

$
3

$
—

$
—

$
4

Provision for loan losses
—

—

 
—

—

—

—

—

Charge-offs
—

—

 
—

(1
)
—

—

(1
)
Recoveries
—

—

 
—

—

—

—

—

Balance at end of period
$
—

$
—

 
$
1

$
3

$
—

$
—

$
4

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:
 
June 30, 2015
 
December 31, 2014
 
Originated
Acquired
Total
 
Originated
Acquired
Total
Commercial:
 
 
 
 
 
 
 
Real estate
$
60

$
—

$
60

 
$
53

$
—

$
53

Business
43

4

47

 
45

7

53

Total commercial
103

4

107

 
98

7

106

Consumer:
 
 
 
 
 
 
 
Residential real estate
33

—

33

 
34

—

34

Home equity
27

23

50

 
24

23

47

Indirect auto
13

—

13

 
13

—

13

Other consumer
5

—

5

 
5

—

5

Total consumer
78

23

101

 
75

23

98

Total
$
181

$
27

$
208

 
$
174

$
30

$
204



88

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
 
Six months ended
 
June 30,
 
June 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

 
$
5

$
4


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 67% and 70% of the loans’ unpaid principal balance at June 30, 2015 and December 31, 2014, respectively. 
 
June 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
$
31

$
58

$
—

 
$
40

$
59

$
—

Business
38

61

—

 
29

51

—

Total commercial
69

119

—

 
69

110

—

Consumer:
 
 
 
 
 
 
 
Residential real estate
16

18

—

 
8

9

—

Home equity
4

6

—

 
3

4

—

Indirect auto
2

4

—

 
2

3

—

Other consumer
1

2

—

 
2

2

—

Total consumer
24

30

—

 
16

18

—

Total
$
93

$
149

$
—

 
$
85

$
128

$
—

With a related allowance recorded:
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
Real estate
$
42

$
46

$
4

 
$
24

$
27

$
2

Business
22

33

3

 
32

43

2

Total commercial
63

79

7

 
56

70

4

Consumer:
 
 
 
 
 
 
 
Residential real estate
7

7

1

 
11

13

1

Home equity
2

2

—

 
4

4

1

Indirect auto
1

1

—

 
—

—

—

Other consumer
1

1

—

 
—

—

—

Total consumer
11

11

1

 
16

17

2

Total
$
75

$
90

$
8

 
$
71

$
87

$
6

Total
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
Real estate
$
73

$
104

$
4

 
$
64

$
86

$
2

Business
60

94

3

 
61

93

2

Total commercial
133

198

7

 
125

179

4

Consumer:
 
 
 
 
 
 
 
Residential real estate
23

26

1

 
20

22

1

Home equity
6

8

—

 
7

8

1

Indirect auto
3

5

—

 
2

3

—

Other consumer
3

3

—

 
2

2

—

Total consumer
35

41

1

 
31

36

2

Total
$
168

$
239

$
8

 
$
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.
 
June 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
4

6

—

 
4

6

—

Other consumer
—

—

—

 
—

—

—

Total consumer
4

6

—

 
4

6

—

Total(1)
$
4

$
9

$
—

 
$
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: 
 
June 30,
 
2015
 
2014
Originated loans
Average
recorded
investment
Interest
income
recognized
 
Average
recorded
investment
Interest
income
recognized
Six months ended June 30,
 
 
 
 
 
Commercial:
 
 
 
 
 
Real estate
$
67

$
1

 
$
62

$
1

Business
76

1

 
47

1

Total commercial
143

1

 
109

1

Consumer:
 
 
 
 
 
Residential real estate
23

—

 
21

—

Home equity
7

—

 
7

—

Indirect auto
4

—

 
2

—

Other consumer
3

—

 
3

—

Total consumer
36

—

 
33

—

Total
$
179

$
2

 
$
141

$
1

Three months ended June 30,
 
 
 
 
 
Commercial:
 
 
 
 
 
Real estate
$
75

$
—

 
$
62

$
—

Business
68

—

 
57

—

Total commercial
142

1

 
119

1

Consumer:
 
 
 
 
 
Residential real estate
22

—

 
21

—

Home equity
6

—

 
6

—

Indirect auto
3

—

 
2

—

Other consumer
3

—

 
2

—

Total consumer
34

—

 
31

—

Total
$
177

$
1

 
$
150

$
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:
 
June 30,
 
2015
 
2014
Acquired loans
Average
recorded
investment
Interest
income
recognized
 
Average
recorded
investment
Interest
income
recognized
Six months ended June 30,
 
 
 
 
 
Commercial:
 
 
 
 
 
Real estate
$
—

$
—

 
$
—

$
—

Business
—

—

 
5

—

Total commercial
—

—

 
5

—

Consumer:
 
 
 
 
 
Residential real estate
—

—

 
—

—

Home equity
4

—

 
4

—

Other consumer
—

—

 
—

—

Total consumer
4

—

 
4

—

Total(1)
$
4

$
—

 
$
9

$
—

Three months ended June 30,
 
 
 
 
 
Commercial:
 
 
 
 
 
Real estate
$
—

$
—

 
$
—

$
—

Business
1

—

 
7

—

Total commercial
1

—

 
7

—

Consumer:
 
 
 
 
 
Residential real estate
—

—

 
—

—

Home equity
4

—

 
4

—

Other consumer
—

—

 
—

—

Total consumer
4

—

 
4

—

Total(1)
$
5

$
—

 
$
10

$
—

(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
June 30, 2015
 
 
 
Nonperforming loans
$
107

$
101

$
208

Plus: Accruing TDRs
56

8

65

Less: Smaller balance nonperforming loans evaluated collectively when determining the allowance for loan losses
(30
)
(70
)
(100
)
Total impaired loans(1)
$
133

$
40

$
172

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)
June 30, 2015
 
 
 
 
 
 
 
Originated loans
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
Real estate
$
6

$
5

$
39

$
50

$
7,319

$
7,369

$
—

Business
3

2

28

33

5,550

5,583

—

Total commercial
9

7

67

83

12,869

12,952

—

Consumer:
 
 
 
 
 
 
 
Residential real estate
4

1

19

24

2,180

2,204

—

Home equity
3

1

17

21

1,935

1,956

—

Indirect auto
16

3

5

24

2,232

2,256

—

Credit cards
2

1

2

4

300

305

2

Other consumer
2

1

3

6

251

257

—

Total consumer
27

7

46

79

6,899

6,978

2

Total
$
36

$
13

$
113

$
162

$
19,768

$
19,930

$
2

Acquired loans
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
Real estate
$
3

$
3

$
20

$
25

$
918

$
943

$
20

Business
1

—

5

6

335

341

2

Total commercial
3

3

25

31

1,253

1,284

22

Consumer:
 
 
 
 
 
 
 
Residential real estate
11

6

49

66

1,061

1,126

49

Home equity
5

2

19

26

1,002

1,029

5

Total consumer
15

8

68

92

2,063

2,155

54

Total
$
19

$
11

$
93

$
123

$
3,316

$
3,439

$
76

 
 
 
 
 
 
 
 

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
June 30, 2015
 
 
 
 
Originated loans:
 
 
 
 
Pass
$
7,049

$
5,245

$
12,294

94.9
%
Criticized:(1)
 
 
 
 
Accrual
260

295

555

4.3

Nonaccrual
60

43

103

0.8

Total criticized
320

338

658

5.1

Total
$
7,369

$
5,583

$
12,952

100.0
%
Acquired loans:
 
 
 
 
Pass
$
861

$
298

$
1,159

90.3
%
Criticized:(1)
 
 
 
 
Accrual
82

39

121

9.4

Nonaccrual
—

4

4

0.3

Total criticized
82

42

124

9.7

Total
$
943

$
341

$
1,284

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
June 30, 2015
 
 
 
 
 
 
 
Originated loans by refreshed FICO score:
 
 
 
 
 
 
 
Over 700
$
1,955

$
1,623

$
1,606

$
213

$
167

$
5,564

79.7
%
660-700
121

184

347

49

44

745

10.7

620-660
61

77

164

23

22

347

5.0

580-620
32

34

66

10

12

154

2.2

Less than 580
30

36

72

7

12

158

2.3

No score(1)
4

2

—

2

1

9

0.1

Total
$
2,204

$
1,956

$
2,256

$
305

$
257

$
6,978

100.0
%
Acquired loans by refreshed FICO score:
 
 
 
 
 
 
 
Over 700
$
757

$
802

$
—

$
—

$
—

$
1,559

72.4
%
660-700
89

89

—

—

—

178

8.3

620-660
64

51

—

—

—

115

5.3

580-620
46

32

—

—

—

78

3.6

Less than 580
57

37

—

—

—

94

4.3

No score(1)
114

17

—

—

—

131

6.1

Total
$
1,126

$
1,029

$
—

$
—

$
—

$
2,155

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:
 
June 30,
2015
December 31,
2014
Aggregate recorded investment of impaired loans with terms modified through a troubled debt restructuring:
 
 
Accruing interest
$
65

$
67

Nonaccrual
57

53

Total troubled debt restructurings (1)
$
121

$
120

(1) 
Includes 98 and 87 acquired loans that were restructured with a recorded investment of $4 million at June 30, 2015 and December 31, 2014.
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
Six months ended June 30, 2015
 
 
 
 
Commercial:
 
 
 
 
Commercial real estate
 
 
 
 
Extension of term
3

$
4

$
—

$
—

Deferral of principal
6

10

—

—

Deferral of principal and extension of term
1

—

—

—

Commercial business
 
 
 
 
Deferral of principal
1

1

—

—

Rate reduction
2

—

—

—

Other
1

—

—

—

Total commercial
14

14

—

—

Consumer:
 
 
 
 
Residential real estate
 
 
 
 
Extension of term
11

1

—

—

Rate reduction
6

1

—

—

Extension of term and rate reduction
7

1

—

—

Chapter 7 bankruptcy
8

1

—

—

Home equity
 
 
 
 
Extension of term
2

—

—

—

Extension of term and rate reduction
3

—

—

—

Chapter 7 Bankruptcy
49

3

—

—

Indirect auto
 
 
 
 
Chapter 7 Bankruptcy
119

2

—

—

Other consumer
 
 
 
 
Extension of term and rate reduction
1

—

—

—

Chapter 7 Bankruptcy
7

—

—

—

Total consumer
213

9

—

—

Total
227

$
23

$
—

$
—

 
 
 
 
 

99

Type of Concession
Count
Postmodification
recorded
investment(1)
Premodification
allowance for
loan losses
Postmodification
allowance for
loan losses
Six months ended June 30, 2014
 
 
 
 
Commercial:
 
 
 
 
Commercial real estate
 
 
 
 
Extension of term
5

$
14

$
1

$
—

Extension of term and rate reduction
3

1

—

—

Commercial business
 
 
 
 
Extension of term
6

27

6

1

Extension of term and rate reduction
2

—

—

—

Total commercial
16

42

7

1

Consumer:
 
 
 
 
Residential real estate
 
 
 
 
Extension of term
3

—

—

—

Rate reduction
2

—

—

—

Deferral of principal and extension of term
7

1

—

—

Extension of term and rate reduction
4

—

—

—

Chapter 7 Bankruptcy
12

1

—

—

Home equity
 
 
 
 
Extension of term
1

—

—

—

Deferral of principal and extension of term
2

—

—

—

Extension of term and rate reduction
5

—

—

—

Chapter 7 Bankruptcy
59

2

—

—

Indirect auto
 
 
 
 
Chapter 7 Bankruptcy
157

2

—

—

Other consumer
 
 
 
 
Chapter 7 Bankruptcy
26

—

—

—

Total consumer
278

8

—

—

Total
294

$
50

$
7

$
2

 
 
 
 
 
Type of Concession
Count
Postmodification
recorded
investment(1)
Premodification
allowance for
loan losses
Postmodification
allowance for
loan losses
Three months ended June 30, 2015
 
 
 
 
Commercial:
 
 
 
 
Commercial real estate
 
 
 
 
Extension of term
3

$
4

$
—

$
—

Deferral of principal
6

10

—

—

Deferral of principal and extension of term
1

—

—

—

Commercial business
 
 
 
 
Deferral of principal
1

1

—

—

Other
1

—

—

—

Total commercial
12

14

—

—

Consumer:
 
 
 
 
Residential real estate
 
 
 
 
Extension of term
4

—

—

—

Rate reduction
6

1

—

—

Extension of term and rate reduction
3

—

—

—

Chapter 7 Bankruptcy
3

—

—

—

Home equity
 
 
 
 

100

 
 
 
 
 
Type of Concession
Count
Postmodification
recorded
investment(1)
Premodification
allowance for
loan losses
Postmodification
allowance for
loan losses
Extension of term
1

—

—

—

Extension of term and rate reduction
2

—

—

—

Chapter 7 Bankruptcy
26

1

—

—

Indirect Auto
 
 
 
 
Chapter 7 Bankruptcy
66

1

—

—

Other consumer
 
 
 
 
Extension of term and rate reduction
1

—

—

—

Chapter 7 Bankruptcy
5

—

—

—

Total consumer
117

4

—

—

Total
129

$
19

$
—

$
—

Three months ended June 30, 2014
 
 
 
 
Commercial:
 
 
 
 
Commercial real estate
 
 
 
 
Extension of term
5

$
14

$
1

$
—

Extension of term and rate reduction
2

1

—

—

Commercial business
 
 
 
 
Extension of term
4

24

5

1

Extension of term and rate reduction
2

—

—

—

Total commercial
13

39

6

1

Consumer:
 
 
 
 
Residential real estate
 
 
 
 
Extension of term
1

$
—

$
—

$
—

Rate reduction
2

—

—

—

Deferral of principal and extension of term
6

1

—

—

Chapter 7 Bankruptcy
4

—

—

—

Home equity
 
 
 
 
Extension of term
1

—

—

—

Extension of term and rate reduction
5

—

—

—

Chapter 7 Bankruptcy
26

1

—

—

Indirect auto
 
 
 
 
Chapter 7 Bankruptcy
71

1

—

—

Other consumer
 
 
 
 
Chapter 7 Bankruptcy
26

—

—

—

Total consumer
142

4

—

—

Total
155

$
43

$
6

$
1

(1)  
Postmodification balances approximate premodification balances. The aggregate amount of charge-offs as a result of the restructurings was $2 million for the six months ended June 30, 2015 and was not significant for the six months ended June 30, 2014, three months ended June 30, 2015, and three months ended June 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 not significant for the six months ended June 30, 2015 and 2014, respectively.
Residential Mortgage Banking
The following table provides information about our residential mortgage banking activities at the dates indicated: 
 
June 30,
 
2015
2014
Mortgages serviced for others
$
3,924

$
3,735

Mortgage servicing asset recorded for loans serviced for others, net
37

36


101

Note 4. Goodwill
The following table shows information regarding our goodwill for the six months ended June 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 June 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.
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.

102

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)
June 30, 2015
 
 
 
 
 
Derivatives designated as hedging instruments:
 
 
 
 
 
Interest rate swap agreements
$
5

$
—

 
$
227

$
2

Derivatives not designated as hedging instruments:
 
 
 
 
 
Interest rate swap agreements
3,894

94

 
3,921

94

Total derivatives
$
3,899

$
94

 
$
4,149

$
96

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.
Some of our interest rate swaps for which we had master netting arrangements with the counterparty were in a net liability position of $91 million and $93 million at June 30, 2015 and December 31, 2014, respectively. We offset $94 million and $96 million of liabilities at June 30, 2015 and December 31, 2014, respectively, with $3 million of assets in our Consolidated Statement of Financial Condition 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 $176 million and $130 million at June 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 six months ended June 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 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 June 30, 2015, there was a $1 million loss recognized in accumulated other comprehensive income related to these swaps.

103

At June 30, 2015, there was a $5 million loss recognized in accumulated other comprehensive income related to borrowings that were previously hedged using interest rate swaps that were classified as cash flow hedges. This amount will be reclassified out of accumulated other comprehensive income and into earnings over the remaining life of the hedged borrowings as an adjustment of yield.
The following table presents certain information about amounts recognized for our derivative financial instruments designated in cash flow hedging relationships for the periods indicated.
 
Three months ended June 30,
 
Six months ended June 30,
Cash Flow Hedges
2015
2014
 
2015
2014
Interest rate swap agreements:
 
 
 
 
 
Amount of gain on derivatives recognized in other comprehensive income, net of tax
$
1

$
—

 
$
—

$
—

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 Income.
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 $7 million and $4 million for the six months ended June 30, 2015 and 2014, respectively, included in Capital Markets income in our Consolidated Statements of Income.

104

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 June 30,
 
Six months ended June 30,
 
2015
2014
 
2015
2014
Net income available to common stockholders
$
53

$
68

 
$
97

$
121

Less income allocable to unvested restricted stock awards
1

1

 
1

1

Net income allocable to common stockholders
$
53

$
68

 
$
96

$
120

Weighted average common shares outstanding:
 
 
 
 
 
Total shares issued
366

366

 
366

366

Unallocated employee stock ownership plan shares
—

(2
)
 
—

(2
)
Unvested restricted stock awards
(3
)
(3
)
 
(3
)
(2
)
Treasury shares
(11
)
(11
)
 
(12
)
(12
)
Total basic weighted average common shares outstanding
351

350

 
351

350

Effect of dilutive stock-based awards
2

1

 
2

1

Total diluted weighted average common shares outstanding
353

352

 
353

351

Basic earnings per common share
$
0.15

$
0.19

 
$
0.27

$
0.34

Diluted earnings per common share
$
0.15

$
0.19

 
$
0.27

$
0.34

Anti-dilutive stock-based awards excluded from the diluted weighted average common share calculations
10

12

 
11

11


105

Note 7. Other Comprehensive income
The following table presents the activity in our Other Comprehensive Income for the periods indicated:
 
Three months ended June 30,
 
Six months ended June 30,
 
Pretax
Income 
taxes
Net
 
Pretax
Income 
taxes
Net
2015
 
 
 
 
 
 
 
Securities available for sale:
 
 
 
 
 
 
 
Net unrealized holding losses arising during the period
$
(49
)
$
(19
)
$
(31
)
 
$
(24
)
$
(9
)
$
(15
)
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
)
 
(5
)
(2
)
(3
)
Interest rate swaps designated as cash flow hedges:
 
 
 
 
 
 
 
Net unrealized gains (losses) arising during the period
1

—

—

 
(1
)
—

(1
)
Reclassification adjustment for realized losses included in net income(2)
—

—

—

 
1

—

—

Net unrealized gains (losses) on interest rate swaps designated as cash flow hedges
1

—

1

 
(1
)
—

—

Amortization of net loss related to pension and post-retirement plans
1

—

1

 
2

—

2

Total other comprehensive loss
$
(50
)
$
(19
)
$
(31
)
 
$
(27
)
$
(11
)
$
(16
)
 
 
 
 
 
 
 
 
2014
 
 
 
 
 
 
 
Securities available for sale:
 
 
 
 
 
 
 
Net unrealized holding gains arising during the year
$
22

$
9

$
14

 
$
36

$
14

$
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
)
 
(7
)
(3
)
(4
)
Total other comprehensive income
$
19

$
7

$
12

 
$
31

$
12

$
19

 
 
 
 
 
 
 
 
(1) 
Included in Interest income on investment securities and other in our Consolidated Statements of Income.
(2) 
Included in Interest expense on borrowings in our Consolidated Statements of Income.


106

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
(15
)
(3
)
—

2

(16
)
Balance, June 30, 2015
$
37

$
9

$
(5
)
$
(49
)
$
(7
)
Balance, January 1, 2014
$
64

$
20

$
(6
)
$
(16
)
$
62

Period change, net of tax
22

(4
)
—

—

19

Balance, June 30, 2014
$
86

$
16

$
(5
)
$
(16
)
$
81

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

107

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 June 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 Income.
The table below presents information about our loans held for sale for which we elected the fair value option at the dates indicated: 
 
June 30,
2015
December 31,
2014
Fair value carrying amount
$
57

$
35

Aggregate unpaid principal balance
56

34

Fair value carrying amount less aggregate unpaid principal balance
$
1

$
1

Additionally, included in loans held for sale on our Consolidated Statements of Condition are $3 million and $5 million of commercial loans held for sale that are carried at the lower of cost or market at June 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.

108

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
June 30, 2015
 
 
 
 
Assets:
 
 
 
 
Investment securities available for sale:
 
 
 
 
Debt securities:
 
 
 
 
States and political subdivisions
$
410

$
—

$
410

$
—

U.S. Treasury
55

55

—

—

U.S. government sponsored enterprises
289

—

289

—

Corporate
872

—

867

4

Total debt securities
1,626

55

1,567

4

Mortgage-backed securities:
 
 
 
 
Residential mortgage-backed securities:
 
 
 
 
Government National Mortgage Association
31

—

31

—

Federal National Mortgage Association
86

—

86

—

Federal Home Loan Mortgage Corporation
104

—

104

—

Collateralized mortgage obligations:

 
 
 
Government National Mortgage Association
51

—

51

—

Federal National Mortgage Association
618

—

618

—

Federal Home Loan Mortgage Corporation
401

—

401

—

Total collateralized mortgage obligations
1,070

—

1,070

—

Total residential mortgage-backed securities
1,291

—

1,291

—

Commercial mortgage-backed securities, non-agency issued
1,290

—

1,290

—

Total mortgage-backed securities
2,581

—

2,581

—

Collateralized loan obligations, non-agency issued
1,085

—

1,085

—

Asset-backed securities collateralized by:
 
 
 
 
Student loans
223

—

223

—

Credit cards
20

—

20

—

Auto loans
117

—

117

—

Other
76

—

76

—

Total asset-backed securities
437

—

437

—

Other
22

21

1

—

Total securities available for sale
5,751

76

5,670

4

Loans held for sale (1)
57

—

57

—

Derivatives
91

—

91

—

Total assets
$
5,899

$
76

$
5,818

$
4

Liabilities:
 
 
 
 
Derivatives
$
93

$
—

$
93

$
—

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

109

 
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)
Six months ended June 30, 2015
 
 
 
 
 
Collateral dependent impaired loans
$
11

$
—

$
11

$
—

$
(1
)
Six months ended June 30, 2014
 
 
 
 
 
Collateral dependent impaired loans
$
9

$
—

$
8

$
1

$
(1
)

110

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 six months ended June 30, 2015, we recorded an increase of $1 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 June 30, 2015, which is included in our provision for credit losses. During the six months ended June 30, 2014 we recorded an increase of $1 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 June 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 June 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 six months ended June 30, 2015 and 2014. As of June 30, 2015 and December 31, 2014, the fair values of our trust preferred securities are based upon third party pricing without adjustment.
 
 
 

111

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: 
 
June 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
$
527

$
527

1

 
 
$
420

$
420

1

 
Investment securities available for sale
5,751

5,751

1,2,3

(1) 
 
5,915

5,915

1,2,3

(1) 
Investment securities held to maturity
6,170

6,211

2

 
 
5,942

5,964

2

 
Federal Home Loan Bank and Federal Reserve Bank common stock
379

379

2

 
 
412

412

2

 
Loans held for sale
60

60

2

 
 
40

40

2

 
Loans and leases, net
23,133

23,239

2,3

(2) 
 
22,803

23,037

2,3

(2) 
Derivatives
91

91

2

 
 
93

93

2

 
Accrued interest receivable
101

101

2

 
 
101

101

2

 
Financial liabilities:
 
 
 
 
 
 
 
 
 
Deposits
$
28,447

$
28,461

2

 
 
$
27,781

$
27,793

2

 
Borrowings
5,959

5,966

2

 
 
6,206

6,215

2

 
Derivatives
93

93

2

 
 
94

94

2

 
Accrued interest payable
13

13

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 $11 million and $10 million of collateral dependent impaired loans without significant adjustments made to appraised values at June 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.

112

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.

113

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 June 30, 2015
 
 
 
Net interest income
$
263

$
—

$
263

Provision for credit losses
21

—

21

Net interest income after provision for credit losses
242

—

242

Noninterest income
70

17

87

Amortization of intangibles
5

1

5

Other noninterest expense
229

14

243

Income before income taxes
78

3

81

Income tax expense
19

1

20

Net income
$
59

$
2

$
61

Three months ended June 30, 2014
 
 
 
Net interest income
$
272

$
—

$
272

Provision for credit losses
20

—

20

Net interest income after provision for credit losses
252

—

252

Noninterest income
64

17

81

Amortization of intangibles
6

1

7

Other noninterest expense
223

14

237

Income before income taxes
86

2

89

Income tax expense
12

1

13

Net income
$
74

$
1

$
76

Six months ended June 30, 2015
 
 
 
Net interest income
$
526

$
—

$
526

Provision for credit losses
34

—

34

Net interest income after provision for credit losses
493

—

493

Noninterest income
136

33

169

Amortization of intangibles
10

1

11

Other noninterest expense
471

27

498

Income before income taxes
148

5

152

Income tax expense
38

2

40

Net income
$
110

$
3

$
112

Six months ended June 30, 2014
 
 
 
Net interest income
$
543

$
—

$
543

Provision for credit losses
44

—

44

Net interest income after provision for credit losses
499

—

499

Noninterest income
125

33

158

Amortization of intangibles
13

1

14

Other noninterest expense
450

28

479

Income before income taxes
161

3

164

Income tax expense
26

1

28

Net income
$
134

$
2

$
136


114

Note 10. Condensed Parent Company Only Financial Statements
The following condensed statements of condition, the related condensed statements of income, and cash flows should be read in conjunction with our Consolidated Financial Statements and related notes:
Condensed Statements of Condition
June 30,
2015
December 31,
2014
Assets:
 
 
Cash and cash equivalents
$
382

$
383

Investment in subsidiary
4,417

4,388

Deferred taxes
28

32

Other assets
15

13

Total assets
$
4,843

$
4,815

Liabilities and Stockholders’ Equity:
 

 

Accounts payable and other liabilities
$
11

$
12

Borrowings
711

710

Stockholders’ equity
4,121

4,093

Total liabilities and stockholders’ equity
$
4,843

$
4,815


 
Three months ended June 30,
 
Six months ended June 30,
Condensed Statements of Income
2015
2014
 
2015
2014
Interest income
$
—

$
—

 
$
—

$
1

Dividends received from subsidiary
—

40

 
—

80

Total interest and dividend income
—

40

 
—

81

Interest expense
12

12

 
24

24

Net interest income
(12
)
28

 
(24
)
57

Noninterest income
1

2

 
1

3

Noninterest expense
8

9

 
14

15

(Loss) income before income taxes and undisbursed income of subsidiary
(20
)
21

 
(37
)
44

Income tax benefit
(7
)
(7
)
 
(14
)
(13
)
(Loss) income before undisbursed income of subsidiary
(12
)
28

 
(23
)
57

Undisbursed income of subsidiary
73

48

 
136

79

Net income
61

76

 
112

136

Preferred stock dividend
8

8

 
15

15

Net income available to common stockholders
$
53

$
68

 
$
97

$
121

 
 
 
 
 
 
Net income
$
61

$
76

 
$
112

$
136

Other comprehensive (loss) income(1)
(31
)
12

 
(16
)
19

Total comprehensive income
$
30

$
88

 
$
96

$
155

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

115

 
Six months ended June 30,
Condensed Statements of Cash Flows
2015
2014
Cash flows from operating activities:
 
 
Net income
$
112

$
136

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
Undisbursed income of subsidiaries
(136
)
(79
)
Stock-based compensation expense
6

6

Deferred income tax (benefit) expense
(2
)
3

Decrease (increase) in other assets
1

(5
)
Decrease in other liabilities
(1
)
(1
)
Net cash (used in) provided by operating activities
(19
)
60

Cash flows from investing activities:
 
 
Proceeds from sales of securities available for sale
—

2

Other, net
—

1

Net cash provided by investing activities
—

4

Cash flows from financing activities:
 
 
Return of capital from subsidiary
90

—

Dividends paid on preferred stock
(15
)
(15
)
Dividends paid on common stock
(57
)
(56
)
Net cash provided by (used in) financing activities
18

(72
)
Net decrease in cash and cash equivalents
—

(8
)
Cash and cash equivalents at beginning of period
383

390

Cash and cash equivalents at end of period
$
382

$
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
In accordance with Rule 13a-15(b) of the Exchange Act, we carried out an evaluation as of June 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 June 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.
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

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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.
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.
In response, we have added compensating controls over our processes to calculate the amounts used to determine the appropriate allowance for loan losses for the period ended June 30, 2015.
Further, in 2015, Management is making 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) establishing improved general computing controls that restrict access to applications and data, and the ability to make program changes to the models used in the determination of the allowance to the appropriate personnel and to ensure that the activities of individuals with access to modify output and make program changes are appropriately monitored. 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 June 30, 2015.

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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 second 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 Income, (iii) the Consolidated Statements of Comprehensive Income, (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: July 31, 2015
By:
/s/ Gary M. Crosby
 
 
Gary M. Crosby
 
 
President and Chief Executive Officer
 
 
(Principal Executive Officer)
 
 
 
Date: July 31, 2015
By:
/s/ Gregory W. Norwood
 
 
Gregory W. Norwood
 
 
Senior Executive Vice President and Chief Financial Officer
 
 
(Principal Financial Officer)

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