UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 8-K

 

 

Current Report

Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

March 9, 2016

Date of Report (Date of earliest event reported)

 

 

 

LOGO

HUNTINGTON BANCSHARES INCORPORATED

(Exact name of registrant as specified in its charter)

 

 

Commission file number : 1-34073

 

Maryland   31-0724920
(State of incorporation)  

(I.R.S. Employer

Identification No.)

Huntington Center  
41 South High Street  
Columbus, Ohio   43287
(Address of principal executive offices)   (Zip Code)

(614) 480-8300

(Registrant’s telephone number, including area code)

 

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

 

¨ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

 

¨ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

 

¨ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

 

¨ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 

 

 


Item 8.01. Other Events

On January 26, 2016, Huntington Bancshares Incorporated (the “Company”) announced its planned acquisition of FirstMerit Corporation (“FirstMerit”). In connection with the planned acquisition of FirstMerit, the following financial statements are provided:

 

    Audited consolidated balance sheet of FirstMerit as of December 31, 2015, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for the year ended December 31, 2015, the notes related thereto and the Report of Ernst & Young LLP, independent registered public accounting firm, dated February 22, 2016.

The following unaudited pro forma condensed combined financial statements of the Company and FirstMerit are provided:

 

    Unaudited pro forma condensed combined balance sheet as of December 31, 2015.

 

    Unaudited pro forma condensed combined statement of income for the year ended December 31, 2015.

 

    Notes to unaudited pro forma condensed combined financial statements.

The acquisition of FirstMerit has not yet been consummated and there can be no assurance that the transaction will be consummated as contemplated, or at all. For further information relating to the planned acquisition of FirstMerit, please see the Company’s current report on Form 8-K filed on January 28, 2016.

 

- 2 -


Item 9.01. Financial Statements and Exhibits.

 

(a) Financial Statements of Business to be Acquired.

Audited consolidated balance sheet of FirstMerit as of December 31, 2015, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for the year ended December 31, 2015, the notes related thereto and the Report of Ernst & Young LLP, independent registered public accounting firm, dated February 22, 2016, are filed as Exhibit 99.1 hereto.

 

(b) Pro Forma Financial Information.

The Company’s and FirstMerit’s unaudited pro forma condensed combined balance sheet as of December 31, 2015, unaudited pro forma condensed combined statement of income for the year ended December 31, 2015 and the notes related thereto are filed as Exhibit 99.2 hereto.

 

(d) Exhibits.

 

Exhibit

No.

  

Description of Exhibit

23.1    Consent of Ernst & Young LLP, independent registered public accounting firm.
99.1    Audited consolidated balance sheet of FirstMerit Corporation as of December 31, 2015, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for the year ended December 31, 2015, the notes related thereto and the Report of Ernst & Young LLP, independent registered public accounting firm, dated February 22, 2016.
99.2    Unaudited pro forma condensed combined balance sheet of Huntington Bancshares Incorporated and FirstMerit Corporation as of December 31, 2015, unaudited pro forma condensed combined statement of income of Huntington Bancshares Incorporated and FirstMerit Corporation for the year ended December 31, 2015, and the notes related thereto.

 

- 3 -


SIGNATURE

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 hereunto duly authorized.

 

HUNTINGTON BANCSHARES INCORPORATED
By:  

/s/ Richard A. Cheap

  Richard A. Cheap
  Secretary

Date: March 9, 2016

 

- 4 -


EXHIBIT INDEX

 

Exhibit

No.

  

Description of Exhibit

23.1    Consent of Ernst & Young LLP, independent registered public accounting firm.
99.1    Audited consolidated balance sheet of FirstMerit Corporation as of December 31, 2015, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for the year ended December 31, 2015, the notes related thereto and the Report of Ernst & Young LLP, independent registered public accounting firm, dated February 22, 2016.
99.2    Unaudited pro forma condensed combined balance sheet of Huntington Bancshares Incorporated and FirstMerit Corporation as of December 31, 2015, unaudited pro forma condensed combined statement of income of Huntington Bancshares Incorporated and FirstMerit Corporation for the year ended December 31, 2015, and the notes related thereto.

 

- 5 -

Exhibit 23.1

Consent of Independent Registered Public Accounting Firm

We consent to the incorporation by reference in the following Registration Statements of Huntington Bancshares Incorporated on:

 

  Form S-3 (No. 333-190078) and

 

  Forms S-8 (Nos. 33-10546, 33-41774, 33-44208, 333-136692, 333-140897, 333-144403, 333-153573, 333-158335, 333-161779, 333-161780, 333-168824, 333-173831, 333-183325, 333-187725, 333-192600, 333-202349, and 333-206720)

of our report dated February 22, 2016, with respect to the consolidated financial statements of FirstMerit Corporation and subsidiaries as of December 31, 2015 and for the year then ended, included in this Current Report on Form 8-K dated March 9, 2016, filed with the Securities and Exchange Commission.

 

/s/ Ernst & Young LLP

Akron, Ohio

March 9, 2016

EXHIBIT 99.1

CONSOLIDATED BALANCE SHEET

FIRSTMERIT CORPORATION AND SUBSIDIARIES

 

(In thousands)

   December 31, 2015  

ASSETS

  

Cash and due from banks

   $ 380,799   

Interest-bearing deposits in banks

     83,018   
  

 

 

 

Total cash and cash equivalents

     463,817   

Investment securities:

  

Held-to-maturity

     2,674,093   

Available-for-sale

     3,967,735   

Other investments

     148,172   

Loans held for sale

     5,472   

Loans

     16,076,945   

Allowance for loan losses

     (153,691
  

 

 

 

Net loans

     15,923,254   

Premises and equipment, net

     319,488   

Goodwill

     741,740   

Intangible assets

     60,628   

FDIC acquired other real estate

     2,134   

Accrued interest receivable and other assets

     1,218,071   
  

 

 

 

Total assets

   $ 25,524,604   
  

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

  

Deposits:

  

Noninterest-bearing

   $ 5,942,248   

Interest-bearing

     3,476,729   

Savings and money market accounts

     8,450,123   

Certificates and other time deposits

     2,238,903   
  

 

 

 

Total deposits

     20,108,003   
  

 

 

 

Federal funds purchased and securities sold under agreements to repurchase

     1,037,075   

Wholesale borrowings

     580,648   

Long-term debt

     505,173   

Accrued taxes, expenses and other liabilities

     353,610   
  

 

 

 

Total liabilities

     22,584,509   

Shareholders’ equity:

  

5.875% Non-Cumulative Perpetual Preferred stock, Series A, without par value: authorized 115,000 shares; 100,000 issued

     100,000   

Common stock warrant

     —     

Common Stock, without par value; authorized 300,000,000 shares; issued: December 31, 2015 - 170,183,515 shares

     127,937   

Capital surplus

     1,386,677   

Accumulated other comprehensive loss

     (79,274

Retained earnings

     1,519,438   

Treasury stock, at cost: December 31, 2015 - 4,425,927

     (114,683
  

 

 

 

Total shareholders’ equity

     2,940,095   
  

 

 

 

Total liabilities and shareholders’ equity

   $ 25,524,604   
  

 

 

 

See accompanying Notes to Consolidated Financial Statements

 

1


CONSOLIDATED STATEMENT OF INCOME

FIRSTMERIT CORPORATION AND SUBSIDIARIES

 

(In thousands, except per share amounts)

   Year Ended
December 31, 2015
 

Interest income:

  

Loans and loans held for sale

   $ 647,783   

Investment securities:

  

Taxable

     129,809   

Tax-exempt

     21,925   
  

 

 

 

Total investment securities interest

     151,734   

Total interest income

     799,517   

Interest expense:

  

Deposits:

  

Interest bearing

     3,054   

Savings and money market accounts

     22,385   

Certificates and other time deposits

     10,822   

Federal funds purchased and securities sold under agreements to repurchase

     1,126   

Wholesale borrowings

     4,662   

Long-term debt

     16,173   
  

 

 

 

Total interest expense

     58,222   
  

 

 

 

Net interest income

     741,295   

Provision for loan losses

     45,100   
  

 

 

 

Net interest income after provision for loan losses

     696,195   

Noninterest income:

  

Trust department income

     42,125   

Service charges on deposits

     66,460   

Credit card fees

     54,643   

ATM and other service fees

     25,588   

Bank owned life insurance income

     15,747   

Investment services and insurance

     15,423   

Investment securities gains/(losses), net

     957   

Loan sales and servicing income

     9,566   

Other operating income

     38,489   
  

 

 

 

Total noninterest income

     268,998   
  

 

 

 

Noninterest expense:

  

Salaries, wages, pension and employee benefits

     348,808   

Net occupancy expense

     55,937   

Equipment expense

     47,926   

Stationery, supplies and postage

     13,424   

Bankcard, loan processing and other costs

     47,081   

Professional services

     19,578   

Amortization of intangibles

     10,392   

FDIC insurance expense

     20,730   

Other operating expense

     74,814   
  

 

 

 

Total noninterest expense

     638,690   
  

 

 

 

Income before income tax expense

     326,503   

Income tax expense

     97,019   
  

 

 

 

Net income

     229,484   

Less: Net income allocated to participating shareholders

     1,836   

Preferred Stock dividends

     5,876   
  

 

 

 

Net income attributable to common shareholders

     221,772   
  

 

 

 

Net income used in diluted EPS calculation

   $ 221,772   
  

 

 

 

Basic earnings per common share

   $ 1.34   

Diluted earnings per common share

     1.33   

Cash dividend per common share

     0.66   

Weighted average number of common shares outstanding - basic

     165,669   

Weighted average number of common shares outstanding - diluted

     166,127   

See accompanying Notes to Consolidated Financial Statements

 

2


CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

FIRSTMERIT CORPORATION AND SUBSIDIARIES

 

     Year Ended December 31,
2015
 

(In thousands)

   Pre-tax     Tax     After-
tax
 

Net Income

   $ 326,503      $ 97,019      $ 229,484   

Other comprehensive income/(loss)

      

Unrealized gains and losses on securities available for sale:

      

Changes in unrealized securities’ holding gains/(losses)

     (19,842     (11,253     (8,589

Changes in unrealized securities’ holding gains/(losses) that result from securities being transferred into available-for-sale from held-to-maturity

     (3,456     (1,254     (2,202

Net losses/(gains) realized on sale of securities reclassified to noninterest income

     (957     (348     (609
  

 

 

   

 

 

   

 

 

 

Net change in unrealized gains/(losses) on securities available for sale

     (24,255     (12,855     (11,400

Pension plans and other postretirement benefits:

      

Net gains/(losses) arising during the period

     116        42        74   

Amortization of actuarial losses/(gains)

     4,552        1,652        2,900   

Amortization of prior service cost reclassified to other noninterest expense

     1,640        596        1,044   
  

 

 

   

 

 

   

 

 

 

Net change from defined benefit pension plans

     6,308        2,290        4,018   
  

 

 

   

 

 

   

 

 

 

Total other comprehensive gains/(losses)

     (17,947     (10,565     (7,382
  

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 308,556      $ 86,454      $ 222,102   
  

 

 

   

 

 

   

 

 

 

See accompanying Notes to Consolidated Financial Statements

 

3


CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

FIRSTMERIT CORPORATION AND SUBSIDIARIES

 

(In thousands)

  Preferred
Stock
    Common
Stock
    Common
Stock
Warrant
    Capital
Surplus
    Accumulated
Other
Comprehensive
Income (Loss)
    Retained
Earnings
    Treasury
Stock
    Total
Shareholders’
Equity
 

Balance at December 31, 2014

  $ 100,000      $ 127,937      $ 3,000      $ 1,393,090      $ (71,892   $ 1,404,717      $ (122,571   $ 2,834,281   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ —        $ —        $ —        $ —        $ —        $ 229,484      $ —        $ 229,484   

Other comprehensive income

    —          —          —          —          (7,382     —          —          (7,382
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

    —          —          —          —          (7,382     229,484        —          222,102   

Cash dividends - Preferred Stock

    —          —          —          —          —          (5,876     —          (5,876

Cash dividends - Common Stock ($0.66 per share)

    —          —          —          —          —          (108,887     —          (108,887

Nonvested (restricted) shares granted (680,066 shares)

    —          —          —          (14,798     —          —          14,798        —     

Restricted stock activity (312,427 shares)

    —          —          —          1,917        —          —          (6,312     (4,395

Deferred compensation trust (238,670 increase in shares)

    —          —          —          598        —          —          (598     —     

Share-based compensation

    —          —          —          15,020        —          —          —          15,020   

Repurchase of a Common Stock warrant to the U.S. Treasury for Citizens TARP warrant (2,571,998 shares)

    —          —          (3,000     (9,150     —          —          —          (12,150
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2015

  $ 100,000      $ 127,937      $ —        $ 1,386,677      $ (79,274   $ 1,519,438      $ (114,683   $ 2,940,095   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying Notes to Consolidated Financial Statements

 

4


CONSOLIDATED STATEMENT OF CASH FLOWS

FIRSTMERIT CORPORATION AND SUBSIDIARIES

 

TD>

(In thousands)

   Year Ended
December 31, 2015
 

Operating Activities

  

Net income

   $ 229,484   

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

  

Provision for loan losses

     45,100   

Provision (benefit) for deferred income taxes

     47,269   

Depreciation and amortization

     63,919   

Benefit attributable to FDIC loss share

     6,373   

Accretion of acquired loans

     (92,995

Amortization and accretion of investment securities, net

  

Available for sale

     9,393   

Held to maturity

     4,828   

Losses (gains) on sales and calls of available-for-sale investment securities, net

     (957

Originations of loans held for sale

     (68,747

Proceeds from sales of loans, primarily mortgage loans sold in the secondary markets

     77,913   

Gains on sales of loans, net

     (1,210

Amortization of intangible assets

     10,392   

Recognition of stock compensation expense

     15,020   

Net decrease (increase) in other assets

     11,751   

Net increase (decrease) in other liabilities

     (43,833
  

 

 

 

NET CASH PROVIDED BY OPERATING ACTIVITIES

     313,700   
  

 

 

 

Investing Activities

  

Proceeds from sale of securities

  

Available-for-sale

     370,946   

Held-to-maturity

     1,413   

Other

     668   

Proceeds from prepayments, calls, and maturities

  

Available-for-sale

     584,833   

Held-to-maturity

     438,882   

Other

     165   

Purchases of securities

  

Available-for-sale

     (1,371,644

Held-to-maturity

     (214,062

Other

     (402

Net decrease (increase) in loans and leases

     (719,311

Purchases of premises and equipment

     (37,358

Sales of premises and equipment

     9,472   

Cash received for acquisition, net of cash paid

     —     
  

 

 

 

NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES

     (936,398
  

 

 

 

Financing Activities

  

Net increase in demand accounts

     603,427   

Net increase (decrease) in savings and money market accounts

     50,511   

Net (decrease) in certificates and other time deposits

     (50,600

Net increase (decrease) in securities sold under agreements to repurchase

     (235,516

Increase (decrease) in long-term debt

     —     

Net increase (decrease) in wholesale borrowings

     152,577   

Repurchase of common stock warrant

     (12,150

Net proceeds from issuance of preferred stock

     —     

Cash dividends - common

     (108,887

Cash dividends - preferred

     (5,876

Restricted stock activity

     (4,395
  

 

 

 

NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES

     389,091   
  

 

 

 

Increase (decrease) in cash and cash equivalents

     (233,607

Cash and cash equivalents at beginning of year

     697,424   
  

 

 

 

Cash and cash equivalents at end of year

   $ 463,817   
  

 

 

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:

  

Non-cash transaction: Common Stock issued in merger with Citizens

   $ —     

Non-cash transaction: Consideration from the warrant issued to the Treasury for Citizens TARP

     —     

Cash paid during the year for:

  

Interest expense

     57,284   

Federal income taxes

     46,825   

See accompanying Notes to Consolidated Financial Statements

 

5


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FIRSTMERIT CORPORATION AND SUBSIDARIES

As used in the Notes to the Consolidated Financial Statements, the “Corporation” refers to FirstMerit Corporation and its subsidiaries, and the “Bank” refers to FirstMerit Bank N.A.

The Corporation is a diversified financial services company headquartered in Akron, Ohio with 366 banking offices in the Ohio, Michigan, Wisconsin, Illinois, and Pennsylvania areas. The Corporation provides a complete range of banking and other financial services to consumers and businesses through its core operations.

 

1. Summary of Significant Accounting Policies

Unless otherwise indicated, defined terms and abbreviations used herein have the meanings set forth in the accompanying Glossary of Acronyms and Abbreviations.

The accounting and reporting policies of the Corporation conform to GAAP and to general practices within the financial services industry.

In preparing these accompanying consolidated financial statements, subsequent events were evaluated through the time the consolidated financial statements were issued. Financial statements are considered issued when they are widely distributed to all shareholders and other financial statement users, or filed with the SEC.

The following is a description of the Corporation’s significant accounting policies.

(a) Principles of Consolidation

The Parent Company is a bank holding company whose principal asset is the common stock of its wholly-owned subsidiary, the Bank. The Parent Company has one other active subsidiary, FirstMerit Risk Management, Inc. All significant intercompany balances and transactions have been eliminated in consolidation.

(b) Use of Estimates

Management must make certain estimates and assumptions that affect the amounts reported in the financial statements and related notes. If these estimates prove to be inaccurate, actual results could differ from those reported.

(c) Business Combinations

Business combinations are accounted for using the acquisition method of accounting. Under this accounting method, the acquired company’s net assets are recorded at fair value on the date of acquisition, and the results of operations of the acquired company are combined with the Corporation’s results from that date

 

6


forward. Costs related to the acquisition are expensed as incurred. The difference between the purchase price and the fair value of the net assets acquired (including intangible assets with finite lives) is recorded as goodwill. The accounting policy for goodwill and intangible assets is summarized in this note under the heading “Goodwill and Other Intangible Assets”.

(d) Cash and Cash Equivalents

Cash and cash equivalents consist of cash and due from banks, interest bearing deposits in other banks and checks in the process of collection.

(e) Investment Securities

Debt securities are classified as held-to-maturity when the Corporation has the positive intent and ability to hold the securities to maturity. These securities are reported at amortized cost, adjusted for amortization of premiums and accretion of discounts to maturity using the effective yield method. This method produces a constant rate of return on the adjusted carrying amount.

Securities are classified as available-for-sale when the Corporation intends to hold the securities for an indefinite period of time but may be sold in response to changes in interest rates, prepayment risk, liquidity needs or other factors. Securities available-for-sale are reported at fair value, with unrealized gains and losses, net of income tax, reported as a separate component of other comprehensive income (loss) in shareholders’ equity.

In certain situations, Management may elect to transfer certain debt securities from the available-for-sale to the held to maturity classification. In such cases, any unrealized gain or loss included in accumulated other comprehensive income (loss) at the time of transfer is amortized over the remaining life of the security as a yield adjustment such that only the remaining initial discount or premium from the purchase date is recognized in income.

Interest and dividends on securities, including the amortization of premiums and accretion of discount, are included in interest income. Realized gains or losses on the sales of available-for-sale securities are recorded on the trade date and determined using the specific identification method.

On at least a quarterly basis, Management evaluates securities that are in an unrealized loss position for OTTI. An investment security is deemed impaired if the fair value of the investment is less than its amortized cost. As part of the impairment evaluation, Management considers the extent and duration of the unrealized loss, and the financial condition and near-term prospects of the issuer. Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two

 

7


components as follows: 1) OTTI related to credit loss, which must be recognized in earnings, and 2) OTTI related to other factors, such as liquidity conditions in the market or changes in market interest rates, which is recognized in other comprehensive income. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. For equity securities, the entire amount of impairment is recognized in earnings.

Other investments include FHLB and FRB stock. As a member of the FHLB system, the Bank is required to own a certain amount of stock based on the level of borrowings and other factors. The Bank is also a member of its regional FRB. Both FHLB and FRB stock are carried at cost and evaluated for impairment based on the ultimate recovery of par value. Cash and stock dividends received on the stock are reported as interest income in the Consolidated Statement of Income.

(f) Originated Loans and Loan Income

Loans originated for investment are stated at their principal amount outstanding adjusted for partial charge-offs, and net deferred loan fees and costs. Interest income on loans is accrued over the term of the loans primarily using the simple-interest method based on the principal balance outstanding. Interest is not accrued on loans where collectability is uncertain. Accrued interest is presented separately in the balance sheet, except for accrued interest on credit card loans, which is included in the outstanding loan balance. Loan origination fees and certain direct costs incurred to extend credit are deferred and amortized over the term of the loan or loan commitment period as an adjustment to the related loan yield.

(g) Loans Held for Sale

Mortgage loans originated and intended for sale in the secondary market are carried at fair value. The election of the fair value option aligns the accounting for these loans with the related economic hedges. Loan origination fees are recorded when earned and related direct loan origination costs are recognized when incurred. Upon their sale, differences between carrying value and sales proceeds realized are recorded to loan sales and servicing income in the Consolidated Statement of Income.

A discussion of the valuation methodology applied to the Corporation’s loans held for sale is described in Note 17 (Fair Value Measurement).

(h) Nonperforming Loans

Loans and leases on which payments are past due for 90 days are placed on nonaccrual, with the exception of certain commercial, credit card and mortgage loans and loans that are fully secured and in process of collection. Credit card loans on which payments are past due for 120 days are placed on nonaccrual status. Interest on mortgage loans is accrued until Management deems it uncollectible based upon the specific identification method. Past due status is based on the contractual terms of the loan. Loans are placed on nonaccrual or charged off at an earlier date if principal or interest is considered uncollectible.

 

8


Loans are generally written off when deemed uncollectible or when they reach a predetermined number of days past due depending upon loan product, terms, and other factors. When a loan is placed on nonaccrual status, interest deemed uncollectible that had been accrued in prior years is charged against the allowance for loan losses and interest deemed uncollectible accrued in the current year is reversed against interest income. Payments subsequently received on nonaccrual loans are generally applied to principal. A loan is returned to accrual status when principal and interest are no longer past due and collectability is probable. This generally requires timely principal and interest payments for a minimum of six payment cycles.

Under the Corporation’s credit policies and practices, individually impaired loans include all nonaccrual and restructured commercial, agricultural, construction, and commercial real estate loans, but exclude certain aggregated consumer loans, mortgage loans, and leases classified as nonaccrual. Loan impairment for all loans is measured based on either the present value of expected future cash flows discounted at the loan’s effective interest rate at inception, at the observable market price of the loan, or the fair value of the collateral for certain collateral dependent loans.

Restructured loans are those on which concessions in terms have been made as a result of deterioration in a borrower’s financial condition. In general, the modification or restructuring of a debt constitutes a troubled debt restructuring if the Corporation for economic or legal reasons related to the borrower’s financial difficulties grants a concession to the borrower that the Corporation would not otherwise consider under current market conditions. Debt restructurings or loan modifications for a borrower do not necessarily constitute troubled debt restructurings. Troubled debt restructurings do not necessarily result in nonaccrual loans. Specific allowances for loan losses are established for certain consumer, commercial and commercial real estate loans whose terms have been modified in a TDR.

Acquired nonimpaired loans are placed on nonaccrual and considered and reported as nonperforming or past due using the same criteria applied to the originated portfolio. Acquired impaired loans are not classified as nonperforming assets as the loans are considered to be performing under the provisions of ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality (“ASC 310-30”). Acquired loans restructured after acquisition are not considered TDRs for purposes of the Corporation’s accounting and disclosure if the loans evidenced credit deterioration as of the acquisition date and are accounted for in pools.

(i) Allowance for Loan Losses

The allowance for loan losses is Management’s estimate of the amount of probable credit losses inherent in the loan portfolio at the balance sheet date. Increases to the allowance for loan losses are made by charges to the provisions for loan losses. Loans deemed uncollectible are charged against the allowance for loan losses. Recoveries of previously charged-off amounts are credited to the allowance for loan losses. Management estimates credit losses based on individual loans determined to be impaired and on all other loans grouped based on similar risk characteristics.

The Corporation’s historical loss component is the most significant of the allowance for loan losses components and is based on historical loss experience by credit-risk grade (for commercial loan pools) and

 

9


payment status (for mortgage and consumer loan pools). Loans are pooled based on similar risk characteristics supported by observable data. The historical loss experience component of the allowance for loan losses represents the results of migration analysis of historical net charge-offs for portfolios of loans (including groups of commercial loans within each credit-risk grade and groups of consumer loans by payment status). For measuring loss exposure in a pool of loans, the historical net charge-off or migration experience is utilized to estimate expected losses to be realized from the pool of loans.

Individual commercial loans are assigned credit-risk grades based on an internal assessment of conditions that affect a borrower’s ability to meet its contractual obligation under the loan agreement. The assessment process includes reviewing a borrower’s current financial information, historical payment experience, credit documentation, public information, and other information specific to each individual borrower. Certain commercial loans are reviewed on an annual, quarterly or rotational basis or as Management becomes aware of information affecting a borrower’s ability to fulfill its obligation.

The credit-risk grading process for commercial loans is summarized as follows:

“Pass” Loans (Grades 1, 2, 3, 4) are not considered a greater than normal credit risk. Generally, the borrowers have the apparent ability to satisfy obligations to the bank, and the Corporation anticipates insignificant uncollectible amounts based on its individual loan review.

“Special-Mention” Loans (Grade 5) are commercial loans that have identified potential weaknesses that deserve Management’s close attention. If left uncorrected, these potential weaknesses may result in noticeable deterioration of the repayment prospects for the asset or in the institution’s credit position.

“Substandard” Loans (Grade 6) are inadequately protected by the current financial condition and paying capacity of the obligor or by any collateral pledged. Loans so classified have a well-defined weakness or weaknesses that may jeopardize the liquidation of the debt pursuant to the contractual principal and interest terms. Such loans are characterized by the distinct possibility that the Corporation may sustain some loss if the deficiencies are not corrected.

“Doubtful” Loans (Grade 7) have all the weaknesses inherent in those classified as substandard, with the added characteristic that existing facts, conditions, and values make collection or liquidation in full highly improbable. Such loans are currently managed separately to determine the highest recovery alternatives.

If a nonperforming, substandard loan has an outstanding balance of $0.3 million or greater or if a doubtful loan has an outstanding balance of $0.1 million or greater, as determined by the Corporation’s credit-risk grading process, further analysis is performed to determine the probable loss, if any, and assign a specific allowance to the loan if needed. The allowance for loan losses relating to originated loans that have become impaired is based on either expected cash flows discounted at the loan’s original effective interest rate, the observable market price, or the fair value of the collateral for certain collateral dependent loans.

 

10


Management also considers internal and external factors such as economic conditions, credit quality trends, loan management practices, portfolio monitoring, and other risks, collectively known as qualitative factors, or Q-factors, to estimate credit losses in the loan portfolio. Q-factors are used to reflect changes in the portfolio’s collectability characteristics not captured by historical loss data.

The Corporation also assesses the credit risk associated with off-balance sheet loan commitments and letters of credit. The liability for off-balance sheet credit exposure related to loan commitments and other credit guarantees is included in other liabilities on the Consolidated Balance Sheet.

(j) Acquired Loans, FDIC acquired loans, covered and Related Loss Share Receivable

Acquired loans (nonimpaired and impaired) are initially measured at fair value as of the acquisition date. The fair value estimates for acquired loans are based on the estimate of expected cash flows, both principal and interest and prepayments, discounted at prevailing market interest rates. Credit discounts representing the principal losses expected over the life of the loan are also a component of the initial fair value; therefore, an allowance for loan losses is not recorded at the acquisition date.

The Corporation evaluates acquired loans for impairment in accordance with the provisions of ASC 310-30. Acquired loans are considered impaired if there is evidence of credit deterioration since origination and if it is probable at time of acquisition that all contractually required payments will not be collected. In determining the acquisition date fair value of acquired impaired loans, and in subsequent accounting, the Corporation generally aggregates impaired loans into pools of loans with common characteristics. Each pool is accounted for as a single asset with one composite interest rate and an aggregate expectation of cash flows. Expected cash flows at the acquisition date in excess of the fair value of the loans is referred to as the accretable yield and recorded as interest income over the life of the loans. Acquired impaired loans are not classified as nonaccrual or nonperforming as they are considered to be accruing loans because their interest income relates to the accretable yield recognized at the pool level and not to contractual interest payments at the loan level. Subsequent to the acquisition date, increases in expected cash flows will generally result in a recovery of any previously recorded ALL, to the extent applicable, and/or a reclassification from the nonaccretable difference to accretable yield, which will be recognized prospectively. The present value of any decreases in expected cash flows after the acquisition date will generally result in an impairment charge recorded as a provision for loan losses, resulting in an increase to the ALL, net of any expected reimbursement under FDIC Loss Share Agreements, to the extent applicable. Revolving loans, including lines of credit and credit cards loans, and leases are excluded from acquired impaired loan accounting.

For acquired nonimpaired loans, the difference between the acquisition date fair value and the contractual amounts due at the acquisition date represents the fair value adjustment. Fair value adjustments may be discounts (or premiums) to a loan’s cost basis and are accreted (or amortized) to interest income over the loan’s remaining life using the level yield method. Subsequent to the acquisition date, the method utilized to estimate the required allowance for loan losses for these loans is similar to originated loans, however, the Corporation records an allowance for loan losses only when the required allowance, net of any expected reimbursement under any FDIC Loss Share Agreements, to the extent applicable, exceeds the remaining fair

 

11


value adjustment. Acquired nonimpaired loans are reported net of the unamortized fair value adjustment. Nonimpaired acquired loans are placed on nonaccrual status and reported as nonperforming or past due using the same criteria applied to the originated portfolio.

Loans acquired in FDIC assisted transactions and covered under FDIC Loss Share Agreements are referred to as covered loans. Covered loans are recorded at fair value at the date of acquisition exclusive of the FDIC Loss Share Agreements. No allowance for loan losses related to covered loans is recorded on the acquisition date as the fair value of the loans acquired incorporates assumptions regarding credit risk. The covered loans are subsequently valued and accounted for in the same manner as the acquired loans disclosed above.

A loss share receivable is recorded at the acquisition date which represents the estimated fair value of reimbursement the Corporation expects to receive from the FDIC for incurred losses on certain covered loans. The fair value measurement reflects counterparty credit risk and other uncertainties. The loss share receivable continues to be measured on the same basis as the related indemnified loans. Deterioration in the credit quality of the loans (recorded as an adjustment to the allowance for covered loan losses) would immediately increase the basis of the loss share receivable, with the offset recorded through the consolidated statement of comprehensive income. Increases in the credit quality or cash flows of loans (reflected as an adjustment to yield and accreted into income over the remaining life of the loans) decrease the basis of the loss share receivable, with such decrease being accreted into income over 1) the same period or 2) the life of the loss share agreements, whichever is shorter. Loss assumptions used in the basis of the loss share receivable are consistent with the loss assumptions used to measure the related covered loans.

Upon the determination of an incurred loss the loss share receivable will be reduced by the amount owed by the FDIC. A corresponding claim receivable is recorded in accrued interest receivable and other assets on the Consolidated Balance Sheet until cash is received from the FDIC.

FDIC acquired loans are loans acquired in FDIC assisted transactions for which the FDIC loss share agreement has expired. FDIC acquired loans are subsequently valued and accounted for in the same manner as the acquired loans disclosed above, with the exception that there is no offsetting loss share receivable.

An acquired, FDIC acquired or covered loan may be resolved either through receipt of payment (in full or in part) from the borrower, the sale of the loan to a third party, or foreclosure of the collateral. In the period of resolution of a nonimpaired loan, any remaining unamortized fair value adjustment is recognized as interest income. In the period of resolution of an impaired loan accounted for on an individual basis, the difference between the carrying amount of the loan and the proceeds received is recognized as a gain or loss within noninterest income. The majority of impaired loans are accounted for within a pool of loans which results in any difference between the proceeds received and the loan carrying amount being deferred as part of the carrying amount of the pool. The accretable amount of the pool remains unaffected from the resolution until the subsequent quarterly cash flow re-estimation. Favorable results from removal of the resolved loan from the pool increase the future accretable yield of the pool, while unfavorable results are recorded as impairment in the

 

12


quarter of the cash flow re-estimation. Acquired, FDIC acquired or covered impaired loans subject to modification are not removed from a pool even if those loans would otherwise be deemed TDRs as the pool, and not the individual loan, represents the unit of account.

For further discussion of the Corporation’s acquisitions and loan accounting, see Note 3 (Loans), and Note 4 (Allowance for Loan Losses).

(k) Equipment Lease Financing

The Corporation leases equipment directly to customers. The net investment in financing leases includes the aggregate amount of lease payments to be received and the estimated residual values of the equipment, less unearned income. Income from lease financing is recognized over the lives of the leases on an approximate level rate of return on the unrecovered investment. The residual value represents the estimated fair value of the leased asset at the end of the lease term. Unguaranteed residual values of leased assets are reviewed at least annually for impairment. Declines in residual values determined to be other-than-temporary are recognized in earnings in the period such determinations are made.

(l) Mortgage Servicing Rights

The Corporation periodically sells residential real estate loans while retaining the rights and obligations to perform the servicing of such loans. Whenever the Corporation undertakes an obligation to service such loans, Management assesses whether a servicing asset or liability should be recognized. A servicing asset is recognized whenever the compensation for servicing is expected to exceed servicing costs. Likewise, a servicing liability would be recognized in the event that servicing fees to be received are not expected to adequately compensate the Corporation for its expected cost. Servicing assets associated with retained mortgage servicing rights are presented within other assets on the balance sheet. The Corporation does not presently have any servicing liabilities.

MSRs are initially valued at fair value. Servicing assets and liabilities are subsequently measured using the amortization method which requires servicing rights to be amortized into noninterest income in proportion to, and over the period of, the estimated future net servicing income of the underlying loans. Amortization is recorded in loan sales and servicing income in the Consolidated Statement of Income.

At each reporting period, MSRs are assessed for impairment based on fair value of those rights on a stratum-by-stratum basis. The Corporation stratifies its servicing rights portfolio into tranches based on loan type and interest rate, the predominant risk characteristics of the underlying loans. Any impairment is recognized through a valuation allowance for each impaired stratum through a charge to income. If the Corporation later determines that all or a portion of the impairment no longer exists for a particular grouping, a reduction of the allowance may be recorded as an increase to income.

The Corporation also reviews MSRs for OTTI each quarter and recognizes a direct write-down when the recoverability of a recorded allowance for impairment is determined to be remote. Unlike an allowance for impairment, a direct write-down permanently reduces the unamortized cost of the MSR and the allowance for impairment.

 

13


MSRs do not trade in an active open market with readily observable market prices. Although sales of MSRs do occur, the exact terms and conditions may not be available. As a result, the fair value of MSRs is estimated using discounted cash flow modeling techniques which require Management to make assumptions regarding future net servicing income, adjusted for such factors as net servicing income, discount rate and prepayments. The primary assumptions used in determining the current fair value of the Corporation’s MSRs as well as a sensitivity analysis are presented in Note 6 (Mortgage Servicing Rights and Mortgage Servicing Activity).

The Corporation generally records loan administration fees for servicing loans for investors on the accrual basis of accounting. Servicing fees and late fees related to delinquent loan payments are also recorded on the accrual basis of accounting.

(m) Depreciation and Amortization

Premises and equipment are reported at cost less accumulated depreciation and amortization and principally depreciated using the straight-line method over their estimated useful lives. Estimated useful lives for furniture and equipment range from three to 15 years, and depreciable buildings ranges from 10 to 35 years. Amortization of leasehold improvements is computed on the straight-line method based on related lease terms or the estimated useful lives of the assets of up to 15 years, whichever is shorter.

The Corporation purchases, as well as internally develops and customizes, certain software to enhance or perform internal business functions. Software development costs incurred in the planning and post-development project stages are charged to noninterest expense. Costs associated with designing software configuration and interfaces, installation, coding programs and testing systems are capitalized and amortized using the straight-line method over periods ranging from three to seven years.

(n) Goodwill and Other Intangible Assets

Goodwill represents the amount by which the cost of net assets acquired in a business combination exceeds their fair value. Goodwill is evaluated for impairment on an annual basis or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The goodwill impairment test is a two-step process. The first step compares the reporting unit’s estimated fair values, including goodwill, to its carrying amount. If the carrying amount exceeds its fair value, then goodwill impairment may be indicated. The second step allocates the reporting units fair value to its assets and liabilities. If the unallocated fair value does not exceed the carrying amount of goodwill then an impairment loss would be recognized as a charge to earnings.

Other intangible assets represent the present value of the future stream of income to be derived from the purchase of core deposits and trust relationships. Other intangible assets are amortized on an accelerated basis over their estimated useful lives. Goodwill and other intangible assets deemed to have indefinite lives are not amortized.

 

14


(o) Other Real Estate Owned

Other real estate owned is included in other assets in the consolidated balance sheet and is primarily comprised of property acquired through loan foreclosure proceedings or acceptance of a deed-in-lieu of foreclosures, and loans classified as in-substance foreclosure. Other real estate owned is recorded at the lower of the recorded investment in the loan at the time of transfer or the fair value of the underlying property collateral, less estimated selling costs. Any write-down in the carrying value of a property at the time of acquisition is charged to the allowance for loan losses. Any subsequent write-downs to reflect current fair market value, as well as gains and losses on disposition and revenues and expenses incurred in maintaining such properties, are treated as period costs. Other real estate owned also includes bank premises formerly but no longer used for banking. Banking premises are transferred at the lower of carrying value or estimated fair value, less estimated selling costs.

(p) Derivative Instruments and Hedging Activities

The Corporation uses interest rate swaps, interest rate lock commitments and forward contracts sold to hedge interest rate risk for asset and liability management purposes. Foreign exchange derivatives are entered into to accommodate the needs of customers. All derivatives are recorded as either other assets or other liabilities at fair value. Credit risk associated with derivatives is reflected in the fair values recorded for those positions. Accounting for changes in fair value (i.e., gains or losses) of derivatives differs depending on whether the derivative has been designated and qualifies as part of a hedging relationship, and further, on the type of hedging relationship. For derivatives that are not designated as hedging instruments, the gain or loss is recognized immediately in other operating income. A derivative that is designated and qualifies as a hedging instrument must be designated a fair value hedge, a cash flow hedge or a hedge of a net investment in a foreign operation. The Corporation does not have any cash flow hedges or derivatives that hedge net investments in foreign operations.

Effectiveness measures the extent to which changes in the fair value of a derivative instrument offset changes in the fair value of the hedged item. If the relationship between the change in the fair value of the derivative instrument and the fair value of the hedged item falls within a range considered to be the industry norm, the hedge is considered highly-effective and qualifies for hedge accounting. A hedge is ineffective if the offsetting difference between the fair values falls outside the acceptable range.

A fair value hedge is used to limit exposure to changes in the fair value of existing assets, liabilities and firm commitments caused by changes in interest rates or other economic factors. The Corporation recognizes the gain or loss on these derivatives, as well as the related gain or loss on the underlying hedged item, in earnings during the period in which the fair value changes. If a hedge is perfectly effective, the change in the fair value of the hedged item will be offset, resulting in no net effect on earnings.

 

15


A cash flow hedge is used to minimize the variability of future cash flows that is caused by changes in interest rates or other economic factors. The effective portion of a gain or loss on any cash flow hedge is reported as a component of accumulated other comprehensive income (loss) and reclassified into other operating income in the same period or periods that the hedged transaction affects earnings. Any ineffective portion of the derivative gain or loss is recognized in other operating income during the current period.

The Corporation enters into commitments to originate mortgage loans whereby the interest rate on the prospective loan is determined prior to funding (rate lock commitments). Rate lock commitments on mortgage loans that are intended to be sold are considered to be derivatives. Accordingly, such commitments, along with any related fees received from potential borrowers, are recorded at fair value as derivative assets or liabilities, with changes in fair value recorded in net gain or loss on sale of mortgage loans.

(q) Income Taxes

Management evaluates two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period as adjusted by prior year provision to return adjustments. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between the carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.

A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded.

The Corporation follows the asset and liability method of accounting for income taxes. Deferred income taxes are recognized for the tax consequences of “temporary differences” by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The effect of a change in tax rates is recognized in income in the period of enactment date.

In assessing the realizability of deferred tax assets, Management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Assessing the need for, or the sufficiency of, a valuation allowance requires Management to evaluate all available evidence, both negative and positive, including the recent trend of quarterly earnings. Positive evidence necessary to overcome the negative evidence includes whether future taxable income in sufficient amounts and character within the carryback and carryforward periods is available under the tax law, including the use of tax planning strategies. When negative evidence (e.g., cumulative losses in recent years, history of operating loss or tax credit carryforwards expiring unused) exists, more positive evidence than negative evidence will be necessary.

Additional information regarding income taxes is included in Note 12 (Income Taxes).

 

16


(r) Treasury Stock

Treasury stock is accounted for using the cost method in which reacquired shares reduce outstanding Common Stock and capital surplus. At the date of subsequent reissue, the treasury stock account is reduced by the cost of such stock on the last-in, first-out basis.

(s) Per Share Data

Basic net income per common share is calculated using the two-class method to determine income attributable to common shareholders. The two-class method is an earnings allocation formula that determines earnings per share for each share of common stock and participating securities according to dividends declared (distributed earnings) and participation rights in undistributed earnings. Distributed and undistributed earnings are allocated between common and participating security shareholders based on their respective rights to receive dividends. Unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents are considered participating securities (i.e., nonvested restricted stock). Undistributed net losses are not allocated to nonvested restricted shareholders, as these shareholders do not have a contractual obligation to fund the losses incurred by the Corporation. Net income attributable to Common Stock is then divided by the weighted-average number of Common Stock outstanding during the period.

Diluted net income per common share is calculated under the more dilutive of either the treasury method or two-class method. For the diluted calculation, the weighted-average number of shares of Common Stock outstanding by the assumed conversion of outstanding convertible preferred stock from the beginning of the year or date of issuance, if later, and the number of shares of Common Stock that would be issued assuming the exercise of stock options and warrants using the treasury stock method. The treasury stock method assumes that the Corporation uses the proceeds from a hypothetical exercise of any options and warrants to repurchase Common Stock at the average market price during the period. These adjustments to the weighted-average number of shares of Common Stock outstanding are made only when such adjustments will dilute earnings per common share.

All earnings per share disclosures appearing in these financial statements, related notes and management’s discussion and analysis, are computed assuming dilution unless otherwise indicated. The Corporation’s earnings per share calculations are illustrated in Note 20 (Shareholders’ Equity) under the heading “Earnings per Share.”

(t) Trust Department Assets and Income

Property held by the Corporation in a fiduciary or other capacity for trust customers is not included in the accompanying consolidated financial statements, since such items are not assets of the Corporation. Trust department income is reported on the accrual basis of accounting.

 

17


(u) Share-Based Compensation

The Corporation’s share-based compensation plans are described in detail in Note 14 (Share-Based Compensation). The Corporation recognizes share-based compensation expense using the straight-line method over the requisite service period for all stock awards, including those with graded vesting, and reduced by assumed forfeitures. The requisite service period is the period an employee is required to provide service in order to vest in the award, which cannot extend beyond the date at which the employee is no longer required to perform any service to receive the share-based compensation (the retirement-eligible date). Certain awards are contingent upon performance conditions, which affect the number of awards ultimately granted. The Corporation periodically evaluates the probable outcome of the performance conditions and makes cumulative adjustments to compensation expense as appropriate.

(v) Pension and Other Postretirement Plans

Pension and other postretirement costs are based on assumptions concerning future events that will affect the amount and timing of required benefit payments under the Corporation’s plans. These assumptions include demographic assumptions such as retirement age and mortality, a compensation rate increase, a discount rate used to determine the current benefit obligation and a long-term expected rate of return on plan assets. Net periodic benefit cost includes service and interest cost based on the assumed discount rate, an expected return on plan assets based on an actuarially derived market-related value and amortization of prior service cost and net actuarial gains or losses. The amortization of any prior service costs is determined using a straight line amortization of the cost over the average remaining lifetime of participants expected to receive benefits under the plans. Actuarial gains and losses include the impact of plan amendments and various unrecognized gains and losses, which are deferred and amortized over the future service periods of active employees. The overfunded or underfunded status of the plans is recorded as an asset or liability, respectively, in the Consolidated Balance Sheet, with changes in that status recognized through other comprehensive income. Additional information about pension and other postretirement plans is included in Note 13 (Benefit Plans).

(w) Revenue Recognition

The Corporation recognizes revenues as they are earned based on contractual terms, as transactions occur, or as services are provided and collectability is reasonably assured. The Corporation’s principal source of revenue is interest income, which is recognized on an accrual basis primarily according to nondiscretionary formulas in written contracts, such as loan agreements or securities contracts.

(x) Fair Value Measurement

Fair value is defined as the price to sell an asset or transfer a liability in an orderly transaction between market participants. It represents an exit price at the measurement date. Market participants are buyers and sellers, who are independent, knowledgeable, and willing and able to transact in the principal (or most advantageous) market for the asset or liability being measured. Current market conditions, including imbalances between supply and demand, are considered in determining fair value. The Corporation values its assets and

 

18


liabilities in the principal market where it sells the particular asset or transfers the liability with the greatest volume and level of activity. In the absence of a principal market, the valuation is based on the most advantageous market for the asset or liability (i.e., the market where the asset could be sold or the liability transferred at a price that maximizes the amount to be received for the asset or minimizes the amount to be paid to transfer the liability).

In measuring the fair value of an asset, the Corporation assumes the highest and best use of the asset by a market participant to maximize the value of the asset, and does not consider the intended use of the asset.

When measuring the fair value of a liability, the Corporation assumes that the nonperformance risk associated with the liability is the same before and after the transfer. Nonperformance risk is the risk that an obligation will not be satisfied and encompasses not only the Corporation’s own credit risk (i.e., the risk that the Corporation will fail to meet its obligation), but also other risks such as settlement risk. The Corporation considers the effect of its own credit risk on the fair value for any period in which fair value is measured.

There are three acceptable valuation techniques that can be used to measure fair value: the market approach, the income approach and the cost approach. Selection of the appropriate technique for valuing a particular asset or liability takes into consideration the exit market, the nature of the asset or liability being valued, and how a market participant would value the same asset or liability. Ultimately, determination of the appropriate valuation method requires significant judgment, and sufficient knowledge and expertise are required to apply the valuation techniques.

Valuation inputs refer to the assumptions market participants would use in pricing a given asset or liability using one of the three valuation techniques. Inputs can be observable or unobservable. Observable inputs are those assumptions which market participants would use in pricing the particular asset or liability. These inputs are based on market data and are obtained from a source independent of the Corporation. Unobservable inputs are assumptions based on the Corporation’s own information or estimate of assumptions used by market participants in pricing the asset or liability. Unobservable inputs are based on the best and most current information available on the measurement date. All inputs, whether observable or unobservable, are ranked in accordance with a prescribed fair value hierarchy which gives the highest ranking to quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1) and the lowest ranking to unobservable inputs (Level 3). Fair values for assets or liabilities classified as Level 2 are based on one or a combination of the following factors: (i) quoted prices for similar assets; (ii) observable inputs for the asset or liability, such as interest rates or yield curves; or (iii) inputs derived principally from or corroborated by observable market data. The level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Corporation considers an input to be significant if it drives 10% or more of the total fair value of a particular asset or liability.

Assets and liabilities are considered to be fair valued on a recurring basis if fair value is measured regularly (i.e., daily, weekly, monthly or quarterly). Recurring valuation occurs at a minimum on the measurement date. Assets and liabilities are considered to be fair valued on a nonrecurring basis if the fair value

 

19


measurement of the instrument does not necessarily result in a change in the amount recorded on the balance sheet. Generally, nonrecurring valuation is the result of the application of other accounting pronouncements which require assets or liabilities to be assessed for impairment or recorded at the lower of cost or fair value. The fair value of assets or liabilities transferred in or out of Level 3 is measured on the transfer date, with any additional changes in fair value subsequent to the transfer considered to be realized or unrealized gains or losses. Additional information regarding fair value measurements is provided in Note 17 (Fair Value Measurement).

(y) Reclassifications

Certain reclassifications of prior years’ amounts have been made to conform to current year presentation. Such reclassifications had no effect on prior year net income or shareholders’ equity.

 

20


(z) Recently Adopted Accounting Standards

FASB ASU 2015-10, Technical Corrections and Improvemen ts. The amendments in this update cover a wide range of Topics in the Codification. The amendments in this update represent changes to clarify the Codification, correct unintended application of guidance, or make minor improvements to the accounting guidance and are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities. Additionally, some of these amendments will make the accounting guidance easier to understand and eliminate inconsistencies. The ASU is effective immediately. The adoption of this accounting guidance did not have a material effect on the Corporation’s financial position or results of operations.

FASB ASU 2015-8, Business Combinations (Topic 805): Pushdown Accounting—Amendments to SEC Paragraphs Pursuant to Staff Accounting Bulletin No. 115 (SEC Update). The amendments in the SEC Update conform the accounting guidance with the various SEC paragraphs pursuance to the SEC Staff Accounting Bulletin No. 115. The SEC Update is effective immediately. The adoption of this accounting guidance did not have a material effect on the Corporation’s financial position or results of operations.

FASB ASU 2015-3, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. The amendments in ASU 2015-03, require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from that debt liability, consistent with the presentation of a debt discount. An entity should apply the new guidance on a retrospective basis, wherein the balance sheet of each individual period presented should be adjusted to reflect the period-specific effects of applying the new guidance. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU. For public business entities, these amendments are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years, and early adoption is permitted. An entity should apply the new guidance on a retrospective basis, wherein the balance sheet of each individual period presented should be adjusted to reflect the period-specific effects of applying the new guidance. Upon transition, an entity is required to comply with the applicable disclosures for a change in an accounting principle. As of June 30, 2015, the Corporation adopted this accounting standard by classifying $3.7 million of deferred debt issuance costs as a deduction to long term debt. Management concluded that the classification of debt issuance costs capitalized in prior periods was immaterial as a component of other assets, total assets, total long term debt, and total liabilities.

 

21


FASB ASU 2014-14, Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure —a consensus of the FASB Emerging Issues Task Force. The objective of this update is to reduce diversity in practice by addressing the classification of certain foreclosed mortgage loans held by creditors that are either fully or partially guaranteed under government programs. The amendments in this update require that 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 and interest) expected to be recovered from the guarantor. The ASU is effective for interim and annual periods beginning after December 15, 2014. The amendments can be adopted using either a prospective transition method or a modified retrospective transition method. The adoption of this accounting guidance did not have a material effect on the Corporation’s financial position or results of operations.

FASB ASU 2014-11, Transfers and Servicing: Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures . The amendments in this update require entities to account for repurchase-to-maturity transactions as secured borrowings (rather than as sales with forward repurchase agreements), eliminate accounting guidance on linking repurchase financing transactions, and expand disclosure requirements related to certain transfers of financial assets that are accounted for as sales and certain transfers, such as repos, securities lending transactions, and repurchase-to-maturity transactions, accounted for as secured borrowings. The amendments in ASU 2014-11 are effective for the first interim or annual period beginning after December 15, 2014. The amendments must present changes in accounting for transactions outstanding on the effective date as a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. Early application is prohibited. The adoption of this accounting guidance did not have a material effect on the Corporation’s financial position or results of operations.

FASB ASU 2014-08, Presentation of Financial Statements and Property, Plant, and Equipment:   Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.   The amendments in this update change the definition of a discontinued operation in ASC 205-20 and require additional disclosures for transactions that meet the definition of a discontinued operation and certain other significant transactions that do not meet the discontinued operations criteria. The amendments in ASU 2014-08 are effective prospectively for all disposals, except disposals classified as held for sale before the adoption date or components initially classified as held for sale in periods beginning on or after December 15, 2014, with early adoption permitted. The adoption of this accounting guidance did not have a material effect on the Corporation’s financial position or results of operations.

FASB ASU 2014-04, Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure.   ASU 2014-04 amends the guidance in ASC 310-40 by clarifying when an in-substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan. Additionally, the amendments

 

22


require interim and annual disclosure of both 1) the amount of foreclosed residential real estate property held by the creditor and 2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. The amendments in ASU 2014-04 are effective for annual periods, and interim period within those annual periods, beginning after December 15, 2014. The amendments can either be adopted using a modified retrospective or a prospective transition method. The adoption of this accounting guidance did not have a material effect on the Corporation’s financial position or results of operations.

FASB ASU 2014-01, Accounting for Investments in Qualified Affordable Housing Projects.  The amendments in ASU 2014-01 do not change the existing accounting methods, but permit reporting entities to make an accounting policy election to account for their investments in qualified affordable projects using the proportional amortization method, if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense (benefit). The amendments in ASU 2014-01 are effective for annual periods and interim reporting periods within those annual periods, beginning after December 15, 2014, and should be applied retrospectively to all periods presented. The Corporation early adopted ASU 2014-01 in the first quarter of 2014. Amortization of the initial investment cost of qualifying projects is now recorded in the provision for income taxes together with the tax credits and benefits received. Previously, the amortization was recorded as other noninterest expense. All prior period amounts have been restated to reflect the adoption of the amendment, which resulted in an offsetting decrease to other noninterest expense and increase to the provision for income taxes of approximately $3.1 million for the year ended December 31, 2013.

(aa) Recently Issued Accounting Standards

FASB ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in this Update supersede the guidance to classify equity securities with readily determinable fair values into different categories (that is, trading or available-for-sale) and require equity securities (including other ownership interests, such as partnerships, unincorporated joint ventures, and limited liability companies) to be measured at fair value with changes in the fair value recognized through net income. The amendments allow equity investments that do not have readily determinable fair values to be remeasured at fair value either upon the occurrence of an observable price change or upon identification of an impairment. The amendments also require enhanced disclosures about those investments. The amendments improve financial reporting by providing relevant information about an entity’s equity investments and reducing the number of items that are recognized in other comprehensive income. For public business entities, the amendments in this update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The amendments should be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The adoption of this guidance is not expected to have a material effect on the Corporation’s financial position or results of operations.

 

23


FASB ASU 2015-16, Business Combinations (Topic 805), Simplifying the Accounting for Measurement-Period Adjustments. The amendments in ASU 2015-16 require an entity to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. For public business entities, the amendments in this update are effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The amendments in this update should be applied prospectively to adjustments to provisional amounts that occur after the effective date of this update with earlier application permitted for financial statements that have not been issued. The adoption of this guidance is not expected to have a material effect on the Corporation’s financial position or results of operations.

FASB ASU 2015-5 , Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement. The amendments in ASU 2015-05 provide guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The guidance will not change GAAP for a customer’s accounting for service contracts. In addition, the guidance in this update supersedes 350-40-25-16. Consequently, all software licenses within the scope of Subtopic 350-40 will be accounted for consistent with other licenses of intangible assets. The amendments are effective for public business entities for annual and interim periods within those annual periods, beginning after December 15, 2015. An entity can elect to adopt the amendments either (1) prospectively to all arrangements entered into or materially modified after the effective date or (2) retrospectively. For prospective transition, the only disclosure requirements at transition are the nature of and reason for the change in accounting principle, the transition method, and a qualitative description of the financial statement line items affected by the change. For retrospective transition, the disclosure requirements at transition include the requirements for prospective transition and quantitative information about the effects of the accounting change. The adoption of this guidance is not expected to have a material effect on the Corporation’s financial position or results of operations.

 

24


FASB ASU 2015-2, Amendments to the Consolidation Analysis . The amendments in ASU 2015-02 affect reporting entities that are required to evaluate whether they should consolidate certain legal entities. All legal entities are subject to reevaluation under the revised consolidation model. These amendments modify the current accounting guidance to address limited partnerships and similar entities; certain investments funds, fees paid to a decision maker or service provider, and the impact of fee arrangements and related parties on the primary beneficiary determination. The amendments are effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. A reporting entity may apply the amendments using a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption. A reporting entity also may apply the amendments retrospectively. The adoption of this guidance is not expected to have a material effect on the Corporation’s financial position or results of operations.

FASB ASU 2014–12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved After the Requisite Service Period — a consensus of the FASB Emerging Issues Task Force. The amendments in this update clarify that entities should treat performance targets that can be met after the requisite service period of a share-based payment award as performance conditions that affect vesting. Therefore, an entity would not record compensation expense (measured as of the grant date without taking into account the effect of the performance target) related to an award for which transfer to the employee is contingent on the entity’s satisfaction of a performance target until it becomes probable that the performance target will be met. The ASU does not contain any new disclosure requirements. The ASU is effective for interim and annual reporting periods beginning after December 15, 2015. Early adoption is permitted. In addition, entities will have the option of applying the guidance either prospectively (i.e., only to awards granted or modified on or after the effective date) or retrospectively. Retrospective application would only apply to awards with performance targets outstanding at or after the beginning of the first annual period presented (i.e., the earliest presented comparative period). The adoption of this guidance is not expected to have a material effect on the Corporation’s financial position or results of operations.

FASB ASU 2014-09, Revenue from Contracts with Customers . In May 2014, the FASB issued new accounting guidance that revises the criteria for determining when to recognize revenue from contracts with customers and expands disclosure requirements. The amendments in this update supersede virtually all existing GAAP revenue recognition guidance, including most industry-specific revenue recognition guidance. The core principle requires an entity to recognize revenue in a manner that depicts the transfer of goods or services to customers at an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 applies to contracts with customers to provide goods and services, with certain exclusions such as lease contracts, financing arrangements, and financial instruments. On July 9, 2015, the FASB decided to delay, by one year, the effective dates, permitting public entities to apply this guidance to annual reporting periods beginning after December 15, 2017, with early adoption permitted, but not before December 15, 2016. The amendments can be adopted using either the full retrospective approach or a modified retrospective approach. There are many aspects of this new accounting guidance that are still being interpreted,

 

25


and the FASB has recently proposed updates to certain aspects of the guidance. The Corporation is in process of assessing the potential impact the adoption of this guidance will have on its consolidated financial statements and related disclosures.

 

2. Investment Securities

The following tables provide the amortized cost and fair value for the major categories of held-to-maturity and available-for-sale securities. Held-to-maturity securities are carried at amortized cost, which reflects historical cost, adjusted for amortization of premiums and accretion of discounts. Available-for-sale securities are carried at fair value with net unrealized gains or losses reported on an after tax basis as a component of OCI in shareholders’ equity.

 

26


     December 31, 2015  

(In thousands)

   Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
 

Securities available-for-sale

           

Debt securities:

           

U.S. treasury bonds & notes

   $ 5,001       $ —         $ (1    $ 5,000   

U.S. government agency debentures

     2,500         —           (2      2,498   

U.S. states and political subdivisions

     188,829         4,170         (204      192,795   

Residential mortgage-backed securities:

           

U.S. government agencies

     900,358         11,325         (5,454      906,229   

Commercial mortgage-backed securities:

           

U.S. government agencies

     173,912         220         (2,023      172,109   

Residential collateralized mortgage-backed securities:

           

U.S. government agencies

     2,155,808         2,659         (30,147      2,128,320   

Nonagency

     4         —           —           4   

Commercial collateralized mortgage-backed securities:

           

U.S. government agencies

     217,008         580         (1,269      216,319   

Asset-backed securities:

           

Collateralized loan obligations

     297,831         26         (8,446      289,411   

Corporate debt securities

     61,710         —           (9,481      52,229   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total debt securities

     4,002,961         18,980         (57,027      3,964,914   

Equity securities:

           

Marketable equity securities

     2,821         —           —           2,821   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total equity securities

     2,821         —           —           2,821   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities available for sale

   $ 4,005,782       $ 18,980       $ (57,027    $ 3,967,735   
  

 

 

    

 

 

    

 

 

    

 

 

 

Securities held-to-maturity

           

Debt securities:

           

U.S. government agency debentures

   $ 25,000       $ 19       $ —         $ 25,019   

U.S. states and political subdivisions

     571,738         22,180         (262      593,656   

Residential mortgage-backed securities:

           

U.S. government agencies

     507,908         4,767         (2,999      509,676   

Commercial mortgage-backed securities:

           

U.S. government agencies

     64,951         294         (574      64,671   

Residential collateralized mortgage-backed securities:

           

U.S. government agencies

     1,161,340         75         (35,881      1,125,534   

Commercial collateralized mortgage-backed securities:

           

U.S. government agencies

     255,359         676         (3,611      252,424   

Corporate debt securities

     87,797         364         (22      88,139   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities held to maturity

   $ 2,674,093       $ 28,375       $ (43,349    $ 2,659,119   
  

 

 

    

 

 

    

 

 

    

 

 

 

The Corporation’s U.S. states and political subdivisions portfolio is composed of general obligation bonds issued by a highly diversified number of states, cities, counties, and school districts. The amortized cost and fair value of the Corporation’s portfolio of general obligation bonds are summarized by U.S. state in the tables below. As illustrated in the tables below, the aggregate fair value of the Corporation’s general obligation bonds was greater than $10 million in 11 of the 37 U.S. states in which it holds investments.

 

27


(Dollars in thousands)

U.S. State

   December 31, 2015  
   # of Issuers      Average Issue
Size, Fair Value
     Amortized Cost      Fair Value  

Michigan

     137       $ 1,381       $ 180,508       $ 189,259   

Ohio

     111         1,091         116,783         121,117   

Illinois

     55         1,870         99,524         102,867   

Texas

     58         807         45,818         46,805   

Wisconsin

     69         673         44,794         46,454   

Pennsylvania

     42         1,020         42,185         42,835   

Washington

     29         950         27,080         27,548   

New Jersey

     35         725         24,810         25,372   

Minnesota

     33         667         21,679         22,020   

Missouri

     15         1,078         15,878         16,174   

New York

     18         635         11,161         11,422   

Other

     110         759         81,815         83,477   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total general obligation bonds

     712       $ 1,033       $ 712,035       $ 735,350   
  

 

 

    

 

 

    

 

 

    

 

 

 

The Corporation’s investment policy states that municipal securities purchased are to be investment grade and allows for a 20% maximum portfolio concentration in municipal securities with a combined individual state to total municipal outstanding equal to or less than 25%. A municipal security is investment grade if (1) the security has a low risk of default by the obligor and (2) the full and timely payment of principal and interest is expected over the anticipated life of the instrument. The fact that a municipal security is rated by one nationally recognized credit rating agency is indicative, but not sufficient evidence, that a municipal security is investment grade. In all cases, the Corporation considers and documents within a security pre-purchase analysis factors such as capacity to pay, market and economic data, and such other factors as are available and relevant to the security or issuer. Factors to be considered in the ongoing monitoring of municipal securities and in the pre-purchase analysis include soundness of budgetary position, and sources, strength, and stability of tax or enterprise revenues. The Corporation also considers spreads to U.S. Treasuries on comparable bonds of similar credit quality, in addition to the above analysis, to assess whether municipal securities are investment grade. The Corporation performs a risk analysis for any security that is downgraded below investment grade to determine if the security should be retained or sold. This risk analysis includes, but is not limited to, discussions with the Corporation’s credit department as well as third party municipal credit analysts and review of the nationally recognized credit rating agency’s analysis describing the downgrade.

The Corporation’s evaluation of its municipal bond portfolio at December 31, 2015 did not uncover any facts or circumstances resulting in significantly different credit ratings than those assigned by a nationally recognized credit rating agency.

FRB and FHLB stock constitute the majority of other investments on the Consolidated Balance Sheet.

 

28


(In thousands)

   December 31,
2015
 

FRB stock

   $ 56,083   

FHLB stock

     91,714   

Other

     375   
  

 

 

 

Total other investments

   $ 148,172   
  

 

 

 

FRB and FHLB stock is classified as a restricted investment, carried at cost and valued based on the ultimate recoverability of par value. Cash and stock dividends received on the stock are reported as interest income. There are no identified events or changes in circumstances that may have a significant adverse effect on these investments carried at cost.

Securities with a carrying value of $2.9 billion at December 31, 2015 were pledged to secure trust and public deposits and securities sold under agreements to repurchase and for other purposes required or permitted by law.

Realized Gains and Losses

The following table presents the proceeds from sales of available-for-sale securities and the gross realized gains and losses on the sales of those securities that have been included in earnings as a result of those sales. Gains or losses on the sales of available-for-sale securities are recognized upon sale and are determined using the specific identification method.

 

(In thousands)

   Year Ended
December 31,
2015
 

Realized gains

   $ 2,608   

Realized losses

     (1,651
  

 

 

 

Net securities (losses)/gains

   $ 957   
  

 

 

 

 

29


Gross Unrealized Losses and Fair Value

The following table presents the gross unrealized losses and fair value of securities by length of time that individual securities had been in a continuous loss position by major categories of available-for-sale and held-to-maturity securities.

 

    December 31, 2015  
    Less than 12 months     12 months or longer     Total  
(Dollars in thousands)   Fair Value     Unrealized
Losses
    Number
Impaired
Securities
    Fair Value     Unrealized
Losses
    Number
Impaired
Securities
    Fair Value     Unrealized
Losses
 

Securities available-for-sale

               

Debt Securities

               

U.S. government agency debentures

  $ 2,498      $ (2     1      $ —        $ —          —        $ 2,498      $ (2

U.S. treasury notes & bonds

    5,000        (1     1        —          —          —          5,000        (1

U.S. states and political subdivisions

    10,178        (37     20        5,899        (167     9        16,077        (204

Residential mortgage-backed securities:

               

U.S. government agencies

    328,156        (3,026     27        95,895        (2,428     7        424,051        (5,454

Commercial mortgage-backed securities:

               

U.S. government agencies

    107,074        (1,447     15        12,401        (576     1        119,475        (2,023

Residential collateralized mortgage-backed securities:

               

U.S. government agencies

    1,130,779        (10,587     78        597,403        (19,560     49        1,728,182        (30,147

Commercial collateralized mortgage-backed securities:

               

U.S. government agencies

    113,825        (893     12        23,400        (376     2        137,225        (1,269

Asset-backed securities:

               

Collateralized loan obligations

    151,810        (3,576     26        126,422        (4,870     15        278,232        (8,446

Corporate debt securities

    —          —          —          52,229        (9,481     8        52,229        (9,481
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total available-for-sale securities

  $ 1,849,320      $ (19,569     180      $ 913,649      $ (37,458     91      $ 2,762,969      $ (57,027
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Securities held-to-maturity

               

Debt Securities

               

U.S. government agency debentures

  $ —        $ —          —        $ —        $ —          —        $ —        $ —     

U.S. states and political subdivisions

    18,465        (224     21        4,174        (38     6        22,639        (262

Residential mortgage-backed securities:

               

U.S. government agencies

    85,738        (715     6        97,880        (2,284     6        183,618        (2,999

Commercial mortgage-backed securities:

               

U.S. government agencies

    34,833        (346     6        9,269        (228     1        44,102        (574

Residential collateralized mortgage-backed securities:

               

U.S. government agencies

    140,514        (1,225     12        941,982        (34,656     55        1,082,496        (35,881

Commercial collateralized mortgage-backed securities:

               

U.S. government agencies

    71,812        (384     7        117,992        (3,227     11        189,804        (3,611

Corporate debt securities

    19,243        (22     6        —          —          —          19,243        (22
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total held-to-maturity securities

  $ 370,605      $ (2,916     58      $ 1,171,297      $ (40,433     79      $ 1,541,902      $ (43,349
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

At least quarterly, the Corporation conducts a comprehensive security-level impairment assessment on all securities in an unrealized loss position to determine if OTTI exists. An unrealized loss exists when the current fair value of an individual security is less than its amortized cost basis. An OTTI loss must be recognized for a debt security in an unrealized loss position if the Corporation intends to sell the security or it is more likely than not that the Corporation will be required to sell the security before recovery of its amortized cost basis. In this situation, the amount of loss recognized in income is equal to the difference between the fair

 

30


value and the amortized cost basis of the security. Even if the Corporation does not expect to sell the security, the Corporation must evaluate the expected cash flows to be received to determine if a credit loss has occurred. In the event of a credit loss, only the amount of impairment associated with the credit loss is recognized in income. The portion of the unrealized loss relating to other factors, such as liquidity conditions in the market or changes in market interest rates, is recorded in OCI. Equity securities are also evaluated to determine whether the unrealized loss is expected to be recoverable based on whether evidence exists to support a realizable value equal to or greater than the amortized cost basis. If it is probable that the Corporation will not recover the amortized cost basis, taking into consideration the estimated recovery period and its ability to hold the equity security until recovery, OTTI is recognized.

The security-level assessment is performed on each security, regardless of the classification of the security as available for sale or held to maturity. The assessments are based on the nature of the securities, the financial condition of the issuer, the extent and duration of the securities, the extent and duration of the loss and whether Management intends to sell or it is more likely than not that it will be required to sell a security before recovery of its amortized cost basis, which may be maturity. For those securities for which the assessment shows the Corporation will recover the entire cost basis, Management does not intend to sell these securities and it is not more likely than not that the Corporation will be required to sell them before the anticipated recovery of the amortized cost basis, the gross unrealized losses are recognized in OCI, net of tax.

The investment securities portfolio was in a net unrealized loss position of $53.0 million at December 31, 2015. Gross unrealized losses were $100.4 million as of December 31, 2015. As of December 31, 2015, gross unrealized losses are concentrated within agency MBS, CLOs, and corporate debt securities. Securities classified as corporate debt securities include eight, single issuer, trust preferred securities with stated maturities. Such investments are only 1% of the fair value of the available-for-sale investment portfolio. None of the corporate issuers have deferred paying dividends on their issued trust preferred shares in which the Corporation is invested. The fair values of these investments have been impacted by the market conditions which have caused risk premiums to increase, resulting in the decline in the fair value of the trust preferred securities.

Management believes the Corporation will fully recover the cost of these agency MBSs, CLOs, and corporate debt securities, and it does not intend to sell these securities and it is not more likely than not that it will be required to sell them before the anticipated recovery of the remaining amortized cost basis, which may be maturity. As a result, Management concluded that these securities were not other-than-temporarily impaired at December 31, 2015 and has recognized the total amount of the impairment in OCI, net of tax.

The new Volcker Rule, as originally adopted, may affect the Corporation’s ability to CLOs. As of December 31, 2015, the Corporation holds $289.4 million of CLOs with a gross unrealized loss position of $8.4 million. Management believes that its holdings of CLOs are not ownership interested in covered funds prohibited by the Volcker Rule regulations and, therefore, expects to be able to hold these investments until their stated maturities. Management seeks to maintain a CLO portfolio consistent with the requirements of the Volcker Rule, and new CLO investments are being made in accordance with the strategy.

 

31


Contractual Maturity of Debt Securities

The following table shows the remaining contractual maturities and contractual yields of debt securities held-to-maturity and available-for-sale as of December 31, 2015. Estimated lives on MBSs may differ from contractual maturities as issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

32


December 31, 2015

 

(Dollars in thousands)

  U.S.
Government
agency
debentures
    U.S.
Treasuries
    U.S. States and
political
subdivisions
obligations
    Residential
mortgage-
backed
securities -
U.S. govt.
agency
obligations
    Commercial
mortgage-
backed
securities -
U.S. govt.
agency
obligations
    Residential
collateralized
mortgage
obligations -
U.S. govt.
agency
obligations
 

Securities Available for Sale

           

Remaining maturity:

           

One year or less

  $ —        $ 5,000      $ 8,640      $ —        $ —        $ —     

Over one year through five years

    2,498        —          78,968        37,010        14,825        10,922   

Over five years through ten years

    —          —          83,928        71,478        136,728        23,697   

Over ten years

    —          —          21,259        797,741        20,556        2,093,701   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair Value

  $ 2,498      $ 5,000      $ 192,795      $ 906,229      $ 172,109      $ 2,128,320   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Amortized Cost

  $ 2,500      $ 5,001      $ 188,829      $ 900,358      $ 173,912      $ 2,155,808   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-Average Yield

    1.25     0.28     5.19     2.39     2.03     2.04

Weighted-Average Maturity (in years)

    2.42        —          2.17        3.78        4.52        3.89   

Securities Held to Maturity

           

Remaining maturity:

           

One year or less

  $ —        $ —        $ 63,383      $ —        $ —        $ —     

Over one year through five years

    25,019        —          144,134        —          35,953        —     

Over five years through ten years

    —          —          216,331        23,421        28,718        —     

Over ten years

    —          —          169,808        486,255        —          1,125,534   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair Value

  $ 25,019      $ —        $ 593,656      $ 509,676      $ 64,671      $ 1,125,534   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Amortized Cost

  $ 25,000      $ —        $ 571,738      $ 507,908      $ 64,951      $ 1,161,340   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-Average Yield

    1.43     —       4.01     2.15     2.55     1.60

Weighted-Average Maturity (in years)

    0.08        —          4.83        4.04        2.91        3.76   

 

33


TD VALIGN="BOTTOM">  

December 31, 2015

 

(Dollars in thousands)

  Residential
collateralized
mortgage
obligations -
non-
U.S. govt.

agency
issued
    Commercial
collateralized
mortgage
obligations -
U.S. govt.
agency
obligations
    Collateralized
loan
obligations
    Corporate
debt securities
    Total     Weighted
Average Yield
 

Securities Available for Sale

         

Remaining maturity:

           

One year or less

  $ —        $ —        $ —        $ —        $ 13,640        1.99

Over one year through five years

    4        46,105        —          —          190,332        3.84

Over five years through ten years

    —          67,299        207,480        —          590,610        3.02

Over ten years

    —          102,915        81,931        52,229        3,170,332        2.09
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Fair Value

  $ 4      $ 216,319      $ 289,411      $ 52,229      $ 3,964,914        2.31
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Amortized Cost

  $ 4      $ 217,008      $ 297,831      $ 61,710      $ 4,002,961     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Weighted-Average Yield

    3.07     2.11     2.77     1.24     2.31  

Weighted-Average Maturity (in years)

    0.90        4.00        6.51        11.81        4.13     

Securities Held to Maturity

           

Remaining maturity:

           

One year or less

  $ —        $ —        $ —        $ —        $ 63,383        1.99

Over one year through five years

    —          79,833        —          88,139        373,078        2.34

Over five years through ten years

    —          41,190        —          —          309,660        3.79

Over ten years

    —          131,401        —          —          1,912,998        2.12
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Fair Value

  $ —        $ 252,424      $ —        $ 88,139      $ 2,659,119        2.33
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Amortized Cost

  $ —        $ 255,359      $ —        $ 87,797      $ 2,674,093     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Weighted-Average Yield

    —       2.34     —       2.28     2.33  

Weighted-Average Maturity (in years)

    —          4.04        —          2.02        3.96     

 

34


3. Loans

Loans outstanding as of December 31, 2015, net of unearned income, consisted of the following:

 

(In thousands)

   December 31, 2015  

Originated loans:

  

Commercial

   $ 9,007,830   

Residential mortgage

     689,045   

Installment

     2,990,349   

Home equity

     1,248,438   

Credit cards

     182,843   
  

 

 

 

Total originated loans

     14,118,505   

Allowance for originated loan losses

     (105,135
  

 

 

 

Net originated loans

   $ 14,013,370   
  

 

 

 

Acquired loans:

  

Commercial

   $ 677,149   

Residential mortgage

     324,008   

Installment

     573,372   

Home equity

     168,542   
  

 

 

 

Total acquired loans

     1,743,071   

Allowance for acquired loan losses

     (3,877
  

 

 

 

Net acquired loans

   $ 1,739,194   
  

 

 

 

FDIC acquired loans:

  

Commercial

     129,109   

Residential mortgage

     35,568   

Installment

     2,077   

Home equity

     38,668   

Loss share receivable

     9,947   
  

 

 

 

Total FDIC acquired loans

     215,369   

Allowance for FDIC acquired loan losses

     (44,679
  

 

 

 

Net FDIC acquired loans

   $ 170,690   
  

 

 

 

Total loans:

  

Commercial

   $ 9,814,088   

Residential mortgage

     1,048,621   

Installment

     3,565,798   

Home equity

     1,455,648   

Credit cards

     182,843   

Loss share receivable

     9,947   
  

 

 

 

Total loans

     16,076,945   

Total allowance for loan losses

     (153,691
  

 

 

 

Total Net loans

   $ 15,923,254   
  

 

 

 

 

35


Loan activity with related parties for the year ended December 31, 2015 is summarized as follows:

 

(In thousands)

   Year Ended
December 31,
2015
 

Aggregate amount at beginning of year

   $ 20,682   

New loans

     5,365   

Repayments

     (5,619

Changes in directors and their affiliations

     —     
  

 

 

 

Aggregate amount at end of year

   $ 20,428   
  

 

 

 

The following describes the distinction between originated, acquired and FDIC acquired loan portfolios and certain significant accounting policies relevant to each of these portfolios.

Originated Loans

Loans originated for investment are stated at their principal amount outstanding adjusted for partial charge-offs, and net deferred loan fees and costs. Interest income on loans is accrued over the term of the loans primarily using the “simple-interest” method based on the principal balance outstanding. Interest is not accrued on loans where collectability is uncertain. Accrued interest is presented separately in the consolidated balance sheet, except for accrued interest on credit card loans, which is included in the outstanding loan balance. Loan origination fees and certain direct costs incurred to extend credit are deferred and amortized over the term of the loan or loan commitment period as an adjustment to the related loan yield. Net deferred loan origination fees and costs amounted to $4.1 million at December 31, 2015.

Acquired Loans

Acquired loans are those purchased in the Citizens acquisition. These loans were recorded at estimated fair value at the Acquisition Date with no carryover of the related ALL. The acquired loans were segregated as of the Acquisition Date between those considered to be performing (acquired nonimpaired loans) and those with evidence of credit deterioration (acquired impaired loans). Acquired loans are considered impaired if there is evidence of credit deterioration and if it is probable, at acquisition, all contractually required payments will not be collected. Revolving loans, including lines of credit, are excluded from acquired impaired loan accounting.

 

36


Total outstanding acquired impaired loans were $406.0 million as of December 31, 2015. The outstanding balance of these loans is the undiscounted sum of all amounts, including amounts deemed principal, interest, fees, penalties, and other under the loan terms, owed at the reporting date, whether or not currently due and whether or not any such amounts have been charged off. Changes in the carrying amount and accretable yield for acquired impaired loans were as follows for the year ended December 31, 2015:

 

Acquired Impaired Loans

(In thousands)

   Year Ended December 31,
2015
 
   Accretable
Yield
     Carrying
Amount of
Loans
 

Balance at beginning of period

   $ 119,450       $ 423,209   

Accretion

     (40,756      40,756   

Net reclassifications from nonaccretable to accretable

     37,245         —     

Payments received, net

     —           (179,256

Disposals

     (26,116      —     
  

 

 

    

 

 

 

Balance at end of period

   $ 89,823       $ 284,709   
  

 

 

    

 

 

 

Cash flows expected to be collected on acquired impaired loans are estimated quarterly by incorporating several key assumptions similar to the initial estimate of fair value. These key assumptions include probability of default and the amount of actual prepayments after the acquisition date. Prepayments affect the estimated life of the loans and could change the amount of interest income, and possibly principal expected to be collected. In reforecasting future estimated cash flows, credit loss expectations are adjusted as necessary.

Improved cash flow expectations for loans or pools that were impaired in prior periods are recorded first as a reversal of previously recorded impairment and then as an increase in prospective yield when all previously recorded impairment has been recaptured. Decreases in expected cash flows are recognized as an impairment through a provision for loan loss and an increase to the allowance for acquired impaired loans.

During the year ended December 31, 2015, there was an overall improvement in cash flow expectations which resulted in a net reclassification of $37.2 million from the nonaccretable difference to accretable yield. The reclassification from the nonaccretable difference to the accretable yield results in prospective yield adjustments on the loan pools.

FDIC Acquired Loans and Related Loss Share Receivable

FDIC acquired loans include loans purchased in the 2010 FDIC-assisted acquisitions of George Washington and Midwest. George Washington and Midwest non-single family loss share agreements with the FDIC expired at March 31, 2015 and June 30, 2015, respectively, resulting in $129.1 million of loans no longer being covered as of December 31, 2015. As of December 31, 2015, $76.3 million of loans remained covered by single family loss share agreements.

 

37


Changes in the loss share receivable for the year ended December 31, 2015 were as follows:

 

Loss Share Receivable

   Year Ended December  

(In thousands)

   31, 2015  

Balance at beginning of period

   $ 22,033   

Amortization

     (4,141

Increase due to impairment on FDIC acquired loans

     6,373   

FDIC reimbursement

     (13,795

FDIC acquired loans paid in full

     (523
  

 

 

 

Balance at end of period (1)

   $ 9,947   
  

 

 

 

 

(1) As of December 31, 2015, the loss share receivable of $9.9 million was related to single family covered loans.

Total outstanding FDIC acquired impaired loans were $323.7 million as of December 31, 2015. The outstanding balance of these loans is the undiscounted sum of all amounts, including amounts deemed principal, interest, fees, penalties, and other under the loan terms, owed at the reporting date, whether or not currently due and whether or not any such amounts have been charged off. Changes in the carrying amount and accretable yield for FDIC acquired impaired loans were as follows for the year ended December 31, 2015:

 

     Year Ended December 31,
2015
 

FDIC Acquired Impaired Loans

   Accretable     

Carrying

Amount of

 

(In thousands)

   Yield      Loans  

Balance at beginning of period

   $ 37,511       $ 232,452   

Accretion

     (14,947      14,947   

Net reclassifications from nonaccretable to accretable

     4,818         —     

Payments received, net

     —           (116,751

(Disposals)/Additions

     (4,474      —     
  

 

 

    

 

 

 

Balance at end of period

   $ 22,908       $ 130,648   
  

 

 

    

 

 

 

The cash flows expected to be collected on FDIC acquired impaired loans are estimated quarterly in a similar manner as described above for acquired impaired loans. During the year ended December 31, 2015, the re-estimation process resulted in a net reclassification of $4.8 million from the nonaccretable difference to accretable yield. The reclassification from the nonaccretable difference to the accretable yield results in prospective yield adjustments on the loan pools.

Credit Quality Disclosures

The credit quality of the Corporation’s loan portfolios is assessed as a function of net credit losses, levels of nonperforming assets and delinquencies, and credit quality ratings as defined by the Corporation. These credit quality ratings are an important part of the Corporation’s overall credit risk management process and evaluation of the allowance for credit losses.

 

38


Generally loans, except for certain commercial, credit card and mortgage loans, and leases on which payments are past due for 90 days are placed on nonaccrual status, unless those loans are in the process of collection and, in Management’s opinion, are fully secured. Credit card loans on which payments are past due for 120 days are placed on nonaccrual status. Acquired and covered impaired loans are considered to be accruing and performing even though collection of contractual payments may be in doubt because income continues to be accreted on the loan pool as long as expected cash flows are reasonably estimable.

When a loan is placed on nonaccrual status, interest deemed uncollectible which had been accrued in prior years is charged against the ALL and interest deemed uncollectible accrued in the current year is reversed against interest income. Interest on mortgage loans is accrued until Management deems it uncollectible based upon the specific identification method. Payments subsequently received on nonaccrual loans are generally applied to principal. A loan is returned to accrual status when principal and interest are no longer past due and collectability is probable. This generally requires timely principal and interest payments for a minimum of six consecutive payment cycles. Loans are generally written off when deemed uncollectible or when they reach a predetermined number of days past due depending upon loan product, terms and other factors.

 

39


The following tables provide a summary of loans by portfolio type, including the delinquency status of those loans that continue to accrue interest and those loans that are nonaccrual:

 

As of December 31, 2015

 
                                               ³  90 Days         
(In thousands)    Days Past Due      Total             Total      Past Due and      Nonaccrual  

Originated Loans

   30-59      60-89      ³ 90      Past Due      Current      Loans      Accruing (1)      Loans  

Commercial

                       

C&I

   $ 4,684       $ 115       $ 8,824       $ 13,623       $ 5,779,785       $ 5,793,408       $ 236       $ 23,123   

CRE

     12,880         —           2,260         15,140         2,062,204         2,077,344         153         4,503   

Construction

     1,360         —           486         1,846         643,491         645,337         —           482   

Leases

     —           —           —           —           491,741         491,741         —           —     

Consumer

                       

Installment

     17,934         4,828         3,920         26,682         2,963,667         2,990,349         3,519         2,178   

Home equity lines

     1,952         913         1,478         4,343         1,244,095         1,248,438         513         1,674   

Credit cards

     1,449         494         632         2,575         180,268         182,843         725         545   

Residential mortgages

     11,099         1,519         6,693         19,311         669,734         689,045         2,876         11,600   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total originated loans

   $ 51,358       $ 7,869       $ 24,293       $ 83,520       $ 14,034,985       $ 14,118,505       $ 8,022       $ 44,105   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
                                               ³ 90 Days         
                          Total             Total      Past Due and      Nonaccrual  

Acquired Loans

   30-59      60-89      ³ 90      Past Due      Current      Loans      Accruing (3)      Loans  

Commercial

                       

C&I

   $ 311       $ 31       $ 3,336       $ 3,678       $ 236,467       $ 240,145       $ 13       $ 782   

CRE

     3,192         1,681         9,657         14,530         416,361         430,891         522         4,948   

Construction

     —           —           733         733         5,380         6,113         —           —     

Consumer

                       

Installment

     5,059         1,329         974         7,362         566,010         573,372         236         835   

Home equity lines

     1,365         660         1,260         3,285         165,257         168,542         644         514   

Residential mortgages

     8,760         567         6,792         16,119         307,889         324,008         1,681         1,166   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total acquired loans

   $ 18,687       $ 4,268       $ 22,752       $ 45,707       $ 1,697,364       $ 1,743,071       $ 3,096       $ 8,245   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
                                               ³ 90 Days         
     Days Past Due      Total             Total      Past Due and      Nonaccrual  

FDIC Acquired Loans (2)

   30-59      60-89      ³ 90      Past Due      Current      Loans      Accruing (3)      Loans (3)  

Commercial

                       

C&I

   $ —         $ —         $ 1,054       $ 1,054       $ 34,412       $ 35,466         n/a         n/a   

CRE

     296         354         28,501         29,151         58,623         87,774         n/a         n/a   

Construction

     —           —           3,761         3,761         2,108         5,869         n/a         n/a   

Consumer

                       

Installment

     —           —           —           —           2,077         2,077         n/a         n/a   

Home equity lines

     2,230         52         1,917         4,199         34,469         38,668         n/a         n/a   

Residential mortgages

     4,616         172         2,655         7,443         28,125         35,568         n/a         n/a   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

       

Total FDIC acquired loans

   $ 7,142       $ 578       $ 37,888       $ 45,608       $ 159,814       $ 205,422         n/a         n/a   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

       

 

(1) Installment loans 90 days or more past due and accruing include $2.3 million of loans guaranteed by the U.S. government as of December 31, 2015.
(2) Excludes loss share receivable of $9.9 million as of December 31, 2015.
(3) Acquired and FDIC acquired impaired loans were not classified as nonperforming assets at December 31, 2015 as the loans are considered to be performing under ASC 310-30. As a result interest income, through the accretion of the difference between the carrying amount of the loans and the expected cash flows, is being recognized on all acquired and FDIC Acquired impaired loans. These asset quality disclosures are, therefore, not applicable to acquired and FDIC acquired impaired loans.

Individual commercial loans are assigned credit risk grades based on an internal assessment of conditions that affect a borrower’s ability to meet its contractual obligation under the loan agreement. The assessment process includes reviewing a borrower’s current financial information, historical payment experience, credit documentation, public information, and other information specific to each borrower. Commercial loans are reviewed on an annual, quarterly or rotational basis or as Management becomes aware

 

40


of information regarding a borrower’s ability to fulfill its obligation. For consumer loans, Management evaluates credit quality based on the aging status of the loan as well as by payment activity, which is presented in the above tables.

The credit-risk grading process for commercial loans is summarized as follows:

“Pass” Loans (Grades 1, 2, 3, 4) are not considered a greater than normal credit risk. Generally, the borrowers have the apparent ability to satisfy obligations to the Corporation, and the Corporation anticipates insignificant uncollectible amounts based on its individual loan review.

“Special-Mention” Loans (Grade 5) are commercial loans that have identified potential weaknesses that deserve Management’s close attention. If left uncorrected, these potential weaknesses may result in noticeable deterioration of the repayment prospects for the asset or in the Corporation’s credit position.

“Substandard” Loans (Grade 6) are inadequately protected by the current financial condition and paying capacity of the obligor or by any collateral pledged. Loans so classified have a well-defined weakness or weaknesses that may jeopardize the liquidation of the debt pursuant to the contractual principal and interest terms. Such loans are characterized by the distinct possibility that the Corporation may sustain some loss if the deficiencies are not corrected.

“Doubtful” Loans (Grade 7) have all the weaknesses inherent in those classified as substandard, with the added characteristic that existing facts, conditions, and values make collection or liquidation in full highly improbable. Such loans are currently managed separately to determine the highest recovery alternatives.

 

41


The following tables provide a summary of commercial loans by portfolio type and the Corporation’s internal credit quality rating:

 

As of December 31, 2015

 
(In thousands)    Commercial  

Originated Loans

   C&I      CRE     Construction      Leases      Total  

Grade 1

   $ 60,440       $ 773      $ —         $ 12,732       $ 73,945   

Grade 2

     353,581         831        —           69,258         423,670   

Grade 3

     1,371,850         319,987        59,182         49,956         1,800,975   

Grade 4

     3,756,333         1,697,261        569,098         344,763         6,367,455   

Grade 5

     124,140         18,388        7,193         7,858         157,579   

Grade 6

     124,483         40,105        9,864         7,174         181,626   

Grade 7

     2,581         (1     —           —           2,580   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total

   $ 5,793,408       $ 2,077,344      $ 645,337       $ 491,741       $ 9,007,830   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 
     Commercial  

Acquired Loans

   C&I      CRE     Construction      Leases      Total  

Grade 1

   $ 346       $ —        $ —         $ —         $ 346   

Grade 2

     —           —          —           —           —     

Grade 3

     15,548         27,387        —           —           42,935   

Grade 4

     200,736         361,518        5,380         —           567,634   

Grade 5

     11,735         12,546        —           —           24,281   

Grade 6

     11,780         29,440        733         —           41,953   

Grade 7

     —           —          —           —           —     
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total

   $ 240,145       $ 430,891      $ 6,113       $ —         $ 677,149   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 
     Commercial  

FDIC Acquired Loans

   C&I      CRE     Construction      Leases      Total  

Grade 1

   $ —         $ —        $ —         $ —         $ —     

Grade 2

     1,072         —          —           —           1,072   

Grade 3

     —           7,004        —           —           7,004   

Grade 4

     31,637         49,917        819         —           82,373   

Grade 5

     295         —          —           —           295   

Grade 6

     2,462         30,853        5,050         —           38,365   

Grade 7

     —           —          —           —           —     
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total

   $ 35,466       $ 87,774      $ 5,869       $ —         $ 129,109   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

 

42


4. Allowance for Loan Losses

The Corporation’s Credit Policy Division manages credit risk by establishing common credit policies for its subsidiary bank, participating in approval of its loans, conducting reviews of loan portfolios, providing centralized consumer underwriting, collections and loan operation services, and overseeing loan workouts. The Corporation’s objective is to minimize losses from its commercial lending activities and to maintain consumer losses at acceptable levels that are stable and consistent with growth and profitability objectives.

The ALL is Management’s estimate of the amount of probable credit losses inherent in a loan portfolio at the balance sheet date. The following describes the distinctions in methodology used to estimate the ALL of originated, acquired and FDIC acquired loan portfolios as well as certain significant accounting policies relevant to each category.

Allowance for Originated Loan Losses

Management estimates credit losses based on originated individual loans determined to be impaired and on all other loans grouped based on similar risk characteristics. Management also considers internal and external factors such as economic conditions, loan management practices, portfolio monitoring, and other risks, collectively known as qualitative factors, or Q-factors, to estimate credit losses in the loan portfolio. Q-factors are used to reflect changes in the portfolio’s collectability characteristics not captured by historical loss data.

The Corporation’s historical loss component is the most significant of the ALL components and is based on historical loss experience by credit-risk grade (for commercial loan pools) and payment status (for mortgage and consumer loan pools). The historical loss experience component of the ALL represents the results of migration analysis of historical net charge-offs for portfolios of loans (including groups of commercial loans within each credit-risk grade and groups of consumer loans by payment status). For measuring loss exposure in a pool of loans, the historical net charge-off or migration experience is utilized to estimate expected losses to be realized from the pool of loans.

If a nonperforming, substandard loan has an outstanding balance of $0.3 million or greater or if a doubtful loan has an outstanding balance of $0.1 million or greater, as determined by the Corporation’s credit-risk grading process, further analysis is performed to determine the probable loss content and assign a specific allowance to the loan, if deemed appropriate. The ALL relating to originated loans that have become impaired is based on either expected cash flows discounted using the original effective interest rate, the observable market price, or the fair value of the collateral for certain collateral dependent loans.

 

43


The following tables show activity in the originated ALL, by portfolio segment for the year ended December 31, 2015, as well as the corresponding recorded investment in originated loans at the end of the period:

 

As of December 31, 2015

 

(In thousands)

Originated Loans

  C&I     CRE     Construction     Leases     Installment     Home
Equity
Lines
    Credit
Cards
    Residential
Mortgages
    Total  

Year ended

                 

Allowance for originated loan losses, beginning balance

  $ 37,375      $ 10,492      $ 2,202      $ 674      $ 12,918      $ 19,324      $ 7,966      $ 4,745      $ 95,696   

Charge-offs

    (14,913     (625     —          (1,268     (21,630     (4,032     (4,867     (1,443     (48,778

Recoveries

    1,196        517        178        787        11,547        2,606        1,395        257        18,483   

Provision for loan losses

    21,102        (753     (786     1,120        11,348        2,196        4,337        1,170        39,734   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for originated loan losses, ending balance

  $ 44,760      $ 9,631      $ 1,594      $ 1,313      $ 14,183      $ 20,094      $ 8,831      $ 4,729      $ 105,135   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Ending allowance for originated loan losses balance attributable to loans:   

Individually evaluated for impairment

  $ 11,837      $ 128      $ —        $ —        $ 1,009      $ 188      $ 243      $ 944      $ 14,349   

Collectively evaluated for impairment

    32,923        9,503        1,594        1,313        13,174        19,906        8,588        3,785        90,786   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total ending allowance for originated loan losses balance

  $ 44,760      $ 9,631      $ 1,594      $ 1,313      $ 14,183      $ 20,094      $ 8,831      $ 4,729      $ 105,135   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Originated loans:

                 

Originated loans individually evaluated for impairment

  $ 43,818      $ 16,614      $ —        $ —        $ 36,904      $ 7,080      $ 717      $ 23,905      $ 129,038   

Originated loans collectively evaluated for impairment

    5,749,590        2,060,730        645,337        491,741        2,953,445        1,241,358        182,126        665,140        13,989,467   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total originated loans

  $ 5,793,408      $ 2,077,344      $ 645,337      $ 491,741      $ 2,990,349      $ 1,248,438      $ 182,843      $ 689,045      $ 14,118,505   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for Acquired Loan Losses

The Citizens’ loans were recorded at their fair value as of the Acquisition Date and the prior ALL was eliminated. An ALL for acquired nonimpaired loans is estimated using a methodology similar to that used for originated loans. The allowance determined for each acquired nonimpaired loan is compared to the remaining fair value adjustment for that loan. If the computed allowance is greater, the excess is added to the allowance through a provision for loan losses. If the computed allowance is less, no additional allowance is recognized. As of December 31, 2015, the computed ALL was less than the remaining fair value discount; therefore, no allowance for acquired nonimpaired loan losses was recorded.

 

44


Charge-offs and actual losses on an acquired nonimpaired loan first reduce any remaining fair value discount for that loan. Once a loan’s discount is depleted, charge-offs and actual losses are applied against the acquired ALL. During the year ended December 31, 2015, provision for loan losses, equal to net charge-offs, of $6.5 million was recorded. Charge-offs on acquired nonimpaired loans were mainly related to consumer loans that were written off in accordance with the Corporation’s credit policies based on a predetermined number of days past due.

The ALL for acquired impaired loans is determined by comparing the present value of the cash flows expected to be collected to the carrying amount for a given pool of loans. Management reforecasts the estimated cash flows expected to be collected on acquired impaired loans on a quarterly basis. If the present value of expected cash flows for a pool is less than its carrying value, impairment is recognized by an increase in the ALL and a charge to the provision for loan losses. If the present value of expected cash flows for a pool is greater than its carrying value, any previously established ALL is reversed and any remaining difference increases the accretable yield which will be taken into interest income over the remaining life of the loan pool. See Note 3 (Loans) for further information on changes in accretable yield.

The following table presents activity in the allowance for acquired impaired loan losses for the year ended December 31, 2015:

 

Allowance for Acquired Impaired Loan Losses

   Year Ended
December
 

(In thousands)

   31, 2015  

Balance at beginning of the period

   $ 7,457   

Charge-offs

     —     

Recoveries

     —     

Provision/(recapture) for loan losses

     (3,580
  

 

 

 

Balance at end of the period

   $ 3,877   
  

 

 

 

Allowance for FDIC Acquired Loan Losses

The ALL for FDIC acquired nonimpaired loans is estimated similar to acquired loans as described above except any increase to the allowance and provision for loan losses is partially offset by an increase in the loss share receivable for the portion of the losses recoverable under the loss sharing agreements with the FDIC. As of December 31, 2015, the computed ALL was less than the remaining fair value discount, therefore, no ALL for FDIC acquired nonimpaired loans was recorded.

 

45


The following table presents activity in the allowance for FDIC acquired impaired loan losses for the year ended December 31, 2015:

 

Allowance for FDIC Acquired Impaired Loan Losses

   Year Ended
December
 

(In thousands)

   31, 2015  

Balance at beginning of the period

   $ 40,496   

Net provision/(recapture) for loan losses before benefit attributable to FDIC loss share agreements

     8,830   

Net (benefit)/recapture attributable to FDIC loss share agreements

     (6,373
  

 

 

 

Net provision/(recapture) for loan losses

     2,457   

Increase/(decrease) in loss share receivable

     6,373   

Loans charged-off

     (4,647
  

 

 

 

Balance at end of the period

   $ 44,679   
  

 

 

 

An acquired or FDIC acquired loan may be resolved either through receipt of payment (in full or in part) from the borrower, the sale of the loan to a third party, or foreclosure of the collateral. In the period of resolution of a nonimpaired loan, any remaining unamortized fair value adjustment is recognized as interest income. In the period of resolution of an impaired loan accounted for on an individual basis, the difference between the carrying amount of the loan and the proceeds received is recognized as a gain or loss within noninterest income. The majority of impaired loans are accounted for within a pool of loans which results in any difference between the proceeds received and the loan carrying amount being deferred as part of the carrying amount of the pool. The accretable amount of the pool remains unaffected from the resolution until the subsequent quarterly cash flow re-estimation. Favorable results from removal of the resolved loan from the pool increase the future accretable yield of the pool, while unfavorable results are recorded as impairment in the quarter of the cash flow re-estimation. Acquired or FDIC acquired impaired loans subject to modification are not removed from a pool even if those loans would otherwise be deemed TDRs as the pool, and not the individual loan, represents the unit of account.

Credit Quality

A loan is considered to be impaired when, based on current events or information, it is probable the Corporation will be unable to collect all amounts due (principal and interest) per the contractual terms of the loan agreement.

Interest income recognized on impaired loans was $0.6 million during the year ended 2015. Interest income which would have been earned in accordance with the original terms was $3.2 million during the year ended December 31, 2015.

Loan impairment is measured based on either the present value of expected future cash flows discounted at the loan’s effective interest rate, at the observable market price of the loan, or the fair value of the collateral

 

46


for certain collateral dependent loans. Impaired loans include all nonaccrual commercial, agricultural, construction, and commercial real estate loans, and loans modified as a TDR, regardless of nonperforming status. Acquired and FDIC acquired impaired loans are not considered or reported as impaired loans. Nonimpaired acquired loans that are subsequently placed on nonaccrual status and individually evaluated are reported as impaired loans and included in the Troubled Debt Restructurings section below. Acquired loans restructured after acquisition are not considered or reported as TDRs if the loans evidenced credit deterioration as of the date of acquisition and are accounted for in pools.

The following tables provide further detail on impaired loans individually evaluated for impairment and the associated ALL. Certain impaired loans do not have a related ALL as the valuation of these impaired loans exceeded the recorded investment.

 

As of December 31, 2015

 
            Unpaid             Average  
Originated Loans    Recorded      Principal      Related      Recorded  

(In thousands)

   Investment      Balance      Allowance      Investment  

Impaired loans with no related allowance

           

Commercial

           

C&I

   $ 21,066       $ 23,854       $ —         $ 27,215   

CRE

     15,465         17,456         —           13,031   

Construction

     —           —           —           —     

Consumer

           

Installment

     1,369         1,658         —           1,807   

Home equity line

     670         919         —           999   

Credit card

     21         21         —           20   

Residential mortgages

     11,550         13,901         —           11,979   
  

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

     50,141         57,809         —           55,051   

Impaired loans with a related allowance

           

Commercial

           

C&I

     22,752         28,881         11,837         11,284   

CRE

     1,149         1,173         128         3,037   

Construction

     —           —           —           —     

Consumer

           

Installment

     35,535         35,592         1,009         28,808   

Home equity line

     6,410         6,411         188         6,382   

Credit card

     696         696         243         757   

Residential mortgages

     12,355         12,458         944         12,619   
  

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

     78,897         85,211         14,349         62,887   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 129,038       $ 143,020       $ 14,349       $ 117,938   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

Note 1: These tables exclude loans fully charged off.
Note 2: The differences between the recorded investment and unpaid principal balance amounts represent partial charge offs.

 

47


Troubled Debt Restructurings

In certain circumstances, the Corporation may modify the terms of a loan to maximize the collection of amounts due when a borrower is experiencing financial difficulties or is expected to experience difficulties in the near term. In most cases the modification is either a concessionary reduction in interest rate, extension of the maturity date or modification of the adjustable rate provisions of the loan that would otherwise not be considered; however, forgiveness of principal is rarely granted. Concessionary modifications are classified as TDRs unless the modification is short-term, typically less than 90 days. TDRs accrue interest if the borrower complies with the revised terms and conditions and has demonstrated repayment performance at a level commensurate with the modified terms for a minimum of six consecutive payment cycles after the restructuring date. Acquired loans restructured after acquisition are not considered or reported as TDRs if the loans evidenced credit deterioration as of the Acquisition Date and are accounted for in pools.

The substantial majority of the Corporation’s residential mortgage TDRs involve reducing the client’s loan payment through an interest rate reduction for a set period of time based on the borrower’s ability to service the modified loan payment. Modifications of mortgages retained in portfolio are handled using proprietary modification guidelines, or the FDIC’s Modification Program for residential first mortgages covered by loss share agreements (agreements between the Bank and the FDIC that afford the Bank significant protection against future losses). The Corporation participates in the U.S. Treasury’s Home Affordable Modification Program for originated mortgages sold to and serviced for FNMA and FHLMC.

Commercial and industrial loans modified in a TDR often involve temporary interest-only payments, term extensions and converting revolving credit lines to term loans. Additional collateral, a co-borrower, or a guarantor is often requested. Commercial real estate and construction loans modified in a TDR often involve reducing the interest rate for the remaining term of the loan, extending the maturity date at an interest rate lower than the current market rate for new debt with similar risk, or substituting or adding a new borrower or guarantor. Construction loans modified in a TDR may also involve extending the interest-only payment period. The Corporation has modified certain loans according to provisions in loss share agreements. Losses associated with modifications on these loans, including the economic impact of interest rate reductions, are generally eligible for reimbursement under the loss share agreements.

 

48


The following tables provide the number of loans modified in a TDR and the recorded investment and unpaid principal balance by loan portfolio as of December 31, 2015.

 

     As of December 31, 2015  

(Dollars in thousands)

   Number of Loans      Recorded Investment      Unpaid Principal
Balance
 

Originated loans

        

Commercial

        

C&I

     26       $ 33,087       $ 33,740   

CRE

     24         14,671         16,648   

Construction

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total originated commercial

     50         47,758         50,388   

Consumer

        

Installment

     1,223         36,904         37,250   

Home equity lines

     257         7,080         7,330   

Credit card

     212         717         717   

Residential mortgages

     312         23,905         26,359   
  

 

 

    

 

 

    

 

 

 

Total originated consumer

     2,004         68,606         71,656   
  

 

 

    

 

 

    

 

 

 

Total originated loans

     2,054       $ 116,364       $ 122,044   
  

 

 

    

 

 

    

 

 

 

Acquired Loans

        

Commercial

        

C&I

     1       $ 7,611       $ 7,611   

CRE

     3         918         1,044   

Construction

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total acquired commercial

     4         8,529         8,655   

Consumer

        

Installment

     51         1,117         1,211   

Home equity lines

     176         7,718         7,778   

Residential mortgages

     31         2,154         2,382   
  

 

 

    

 

 

    

 

 

 

Total acquired consumer

     258         10,989         11,371   
  

 

 

    

 

 

    

 

 

 

Total acquired loans

     262       $ 19,518       $ 20,026   
  

 

 

    

 

 

    

 

 

 

FDIC Acquired loans

        

Commercial

        

C&I

     —         $ —         $ —     

CRE

     3         14,056         12,479   

Construction

     1         593         682   
  

 

 

    

 

 

    

 

 

 

Total FDIC acquired commercial

     4         14,649         13,161   

Consumer

        

Home equity lines

     81         10,215         10,281   

Residential mortgages

     1         182         182   
  

 

 

    

 

 

    

 

 

 

Total FDIC acquired consumer

     82         10,397         10,463   
  

 

 

    

 

 

    

 

 

 

Total FDIC acquired loans

     86       $ 25,046       $ 23,624   
  

 

 

    

 

 

    

 

 

 

Total loans

        

Commercial

        

C&I

     27       $ 40,698       $ 41,351   

CRE

     30         29,645         30,171   

Construction

     1         593         682   
  

 

 

    

 

 

    

 

 

 

Total commercial

     58         70,936         72,204   

Consumer

        

Installment

     1,274         38,021         38,461   

Home equity lines

     514         25,013         25,389   

Credit card

     212         717         717   

Residential mortgages

     344         26,241         28,923   
  

 

 

    

 

 

    

 

 

 

Total consumer

     2,344         89,992         93,490   
  

 

 

    

 

 

    

 

 

 

Total loans

     2,402       $ 160,928       $ 165,694   
  

 

 

    

 

 

    

 

 

 

 

Note 1: For originated loans, the differences between the recorded investment and unpaid principal balance amounts represent partial charge offs.
Note 2: For acquired and FDIC acquired loans, the differences between the recorded investment and unpaid principal balance amounts represent partial charge offs and remaining purchase discount.

 

49


The pre-modification and post-modification outstanding recorded investments of loans modified as TDRs during the year ended December 31, 2015 were not materially different. Post-modification balances may include capitalization of unpaid accrued interest and fees associated with the modification as well as forgiveness of principal. Loans modified as TDRs during the year ended December 31, 2015 did not involve the forgiveness of principal, accordingly, the Corporation did not record a charge-off at the modification date. Additionally, capitalization of any unpaid accrued interest and fees assessed to loans modified in the year ended December 31, 2015 were not material to the accompanying consolidated financial statements. Specific allowances for loan losses are established for loans whose terms have been modified in a TDR. Specific reserve allocations are generally assessed prior to loans being modified in a TDR, as most of these loans migrate from the Corporation’s internal watch list and have been specifically allocated for as part of the Corporation’s normal loan loss provisioning methodology. At December 31, 2015, the Corporation had $7.0 million in commitments to lend additional funds to debtors owing receivables whose terms have been modified in a TDR.

 

50


The following tables provide a summary of the delinquency status of TDRs along with the specific allowance for loan loss, by loan type, as of December 31, 2015, including TDRs that continue to accrue interest and TDRs included in nonperforming assets.

 

/TD>

As of December 31, 2015

 
    Accruing TDRs     Nonaccruing TDRs     Total     Total  

(In thousands)

  Current     Delinquent     Total     Current     Delinquent     Total     TDRs     Allowance  

Originated loans

               

Commercial

               

C&I

  $ 22,566      $ 107      $ 22,673      $ 4,229      $ 6,185      $ 10,414      $ 33,087      $ 6,052   

CRE

    10,271        2,247        12,518        746        1,407        2,153        14,671        20   

Construction

    —          —          —          —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total originated commercial

    32,837        2,354        35,191        4,975        7,592        12,567        47,758        6,072   

Consumer

               

Installment

    34,902        794        35,696        1,125        83        1,208        36,904        1,009   

Home equity lines

    6,511        114        6,625        399        56        455        7,080        188   

Credit card

    575        140        715        —          2        2        717        243   

Residential mortgages

    12,869        2,896        15,765        4,611        3,529        8,140        23,905        944   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total originated consumer

    54,857        3,944        58,801        6,135        3,670        9,805        68,606        2,384   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total originated TDRs

  $ 87,694      $ 6,298      $ 93,992      $ 11,110      $ 11,262      $ 22,372      $ 116,364      $ 8,456   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Acquired loans

               

Commercial

               

C&I

  $ 7,611      $ —        $ 7,611      $ —        $ —        $ —        $ 7,611      $ —     

CRE

    —          —          —          659        259        918        918        201   

Construction

    —          —          —          —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total acquired commercial

    7,611        —          7,611        659        259        918        8,529        201   

Consumer

               

Installment

    967        126        1,093        14        10        24        1,117        45   

Home equity lines

    6,941        655        7,596        122        —          122        7,718        70   

Residential mortgages

    1,096        256        1,352        802        —          802        2,154        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total acquired consumer

    9,004        1,037        10,041        938        10        948        10,989        115   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total acquired TDRs

  $ 16,615      $ 1,037      $ 17,652      $ 1,597      $ 269      $ 1,866      $ 19,518      $ 316   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

FDIC acquired loans

               

Commercial

               

C&I

  $ —        $ —        $ —        $ —        $ —        $ —        $ —        $ —     

CRE

    —          14,056        14,056        —          —          —          14,056        2,333   

Construction

    593        —          593        —          —          —          593        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total FDIC acquired commercial

    593        14,056        14,649        —          —          —          14,649        2,333   

Consumer

               

Home equity lines

    10,065        70        10,135        6        74        80        10,215        23   

Residential mortgages

    182        —          182        —          —          —          182        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total FDIC acquired consumer

    10,247        70        10,317        6        74        80        10,397        23   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total FDIC acquired TDRs

  $ 10,840      $ 14,126      $ 24,966      $ 6      $ 74      $ 80      $ 25,046      $ 2,356   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans

               

Commercial

               

C&I

  $ 30,177      $ 107      $ 30,284      $ 4,229      $ 6,185      $ 10,414      $ 40,698      $ 6,052   

CRE

    10,271        16,303        26,574        1,405        1,666        3,071        29,645        2,554   

Construction

    593        —          593        —          —          —          593        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

    41,041        16,410        57,451        5,634        7,851        13,485        70,936        8,606   

Consumer

               

Installment

    35,869        920        36,789        1,139        93        1,232        38,021 TD>        1,054   

Home equity lines

    23,517        839        24,356        527        130        657        25,013        281   

Credit card

    575        140        715        —          2        2        717        243   

Residential mortgages

    14,147        3,152        17,299        5,413        3,529        8,942        26,241        944   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer

    74,108        5,051        79,159        7,079        3,754        10,833        89,992        2,522   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total TDRs

  $ 115,149      $ 21,461      $ 136,610      $ 12,713      $ 11,605      $ 24,318      $ 160,928      $ 11,128   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

51


Loans modified in a TDR are closely monitored for delinquency as an early indicator of possible future default. If loans modified in a TDR subsequently default, the Corporation evaluates the loan for possible further impairment. The ALL may be increased, adjustments may be made in the allocation of the ALL, or partial charge-offs may be taken to further write-down the carrying value of the loan.

On an ongoing basis, the Corporation monitors the performance of modified loans to their restructured terms. In the event of a subsequent default, the ALL continues to be reassessed on the basis of an individual evaluation of the loan.

 

52


The following table provides the number of loans modified in a TDR during the previous 12 months that subsequently defaulted during the year ended December 31, 2015, as well as the amount defaulted in these restructured loans as of December 31, 2015.

 

     As of December 31, 2015  

(Dollars in thousands)

   Number of Loans      Amount Defaulted  

Originated loans

     

Commercial

     

C&I

     —         $ —     

CRE

     —           —     

Construction

     —           —     
  

 

 

    

 

 

 

Total originated commercial

     —           —     

Consumer

     

Installment

     8         113   

Home equity lines

     —           —     

Credit card

     10         51   

Residential mortgages

     —           —     
  

 

 

    

 

 

 

Total originated consumer

     18       $ 164   
  

 

 

    

 

 

 

FDIC acquired loans

     

Commercial

     

C&I

     —         $ —     

CRE

     —           —     

Construction

     —           —     
  

 

 

    

 

 

 

Total FDIC acquired commercial

     —         $ —     
  

 

 

    

 

 

 

Acquired loans

     

Consumer

     

Installment

     2       $ 61   

Home equity lines

     1         105   

Residential mortgages

     —           —     
  

 

 

    

 

 

 

Total acquired consumer

     3       $ 166   
  

 

 

    

 

 

 

Total loans

     

Commercial

     

C&I

     —         $ —     

CRE

     —           —     

Construction

     —           —     
  

 

 

    

 

 

 

Total commercial

     —           —     

Consumer

     

Installment

     10         174   

Home equity lines

     2         348   

Credit card

     10         51   

Residential mortgages

     —           —     
  

 

 

    

 

 

 

Total consumer

     22         573   
  

 

 

    

 

 

 

Total

     22       $ 573   
  

 

 

    

 

 

 
     

 

53


5. Goodwill and Other Intangible Assets

Goodwill

Goodwill totaled $741.7 million as of December 31, 2015. The following table shows goodwill allocated by business segment.

 

(In thousands)

   Commercial      Retail      Wealth      Total  

Balance at December 31, 2015

   $ 527,406       $ 193,961       $ 20,373       $ 741,740   
  

 

 

    

 

 

    

 

 

    

 

 

 

The Corporation performed its annual impairment test of goodwill as of November 30, 2015 and determined that no impairment of goodwill had been incurred. Key changes in the market and our operations were monitored from our impairment test date of November 30 to year end in order to identify circumstances necessitating further testing of impairment. No such changes were noted for 2015. It is possible that a future conclusion could be reached that all or a portion of the Corporation’s goodwill may be impaired, in which case a noncash charge for the amount of such impairment would be recorded in earnings.

Other Intangible Assets

The Corporation has other intangible assets that are amortized, consisting of core deposit intangibles, lease intangibles and trust relationship intangibles. The following tables show the gross carrying amount, accumulated amortization, and net carrying amount of these intangible assets.

 

     December 31, 2015  
     Gross Carrying      Accumulated      Net Carrying  

(In thousands)

   Amount      Amortization      Amount  

Core deposit intangibles (1)

   $ 82,323       $ (28,304    $ 54,019   

Lease intangible

     238         (212      26   

Trust relationships (2)

     14,000         (7,417      6,583   
  

 

 

    

 

 

    

 

 

 

Total intangibles

   $ 96,561       $ (35,933    $ 60,628   
  

 

 

    

 

 

    

 

 

 

 

(1) Core deposit intangibles are amortized on an accelerated basis over their estimated useful lives, which range from 10-15 years.
(2) Trust relationship intangibles are amortized on an accelerated basis on their estimated useful lives of 12 years.

Amortization expense for intangible assets was $10.4 million in 2015.

 

54


The following table shows the estimated future amortization expense for intangible assets subject to amortization as of December 31, 2015.

 

(In thousands)       

For the years ended:

      

December 31, 2016

   $ 9,209   

December 31, 2017

     8,161   

December 31, 2018

     7,273   

December 31, 2019

     6,500   

December 31, 2020

     5,214   
  

 

 

 

Total estimated future amortization

   $ 36,357   
  

 

 

 

 

6. Mortgage Servicing Rights and Mortgage Servicing Activity

In the year ended December 31, 2015, the Corporation sold residential mortgage loans from the held for sale portfolio with unpaid principal balances of $76.7 million and recognized pretax gains of $1.2 million, which are included as a component of loan sales and servicing income. As of December 31, 2015, the Corporation retained the related MSRs, for which it receives servicing fees, on $60.3 million of the loans sold.

The Corporation serviced for third parties approximately $2.4 billion of residential mortgage loans at December 31, 2015. Loan servicing fees, not including valuation changes on MSRs included in loan sales and servicing income, were $6.3 million for the year ended December 31, 2015.

Servicing rights are presented within other assets on the accompanying Consolidated Balance Sheet. The retained servicing rights are initially valued at fair value. Since MSRs do not trade in an active market with readily observable prices, the Corporation relies primarily on a discounted cash flow analysis model to estimate the fair value of its mortgage servicing rights. Additional information can be found in Note 17 (Fair Value Measurement). MSRs are subsequently measured using the amortization method. Accordingly, the MSRs are amortized over the period of, and in proportion to, the estimated net servicing income and the related amortization is recorded in loan sales and servicing income.

 

55


Changes in the carrying amount of MSRs and the MSR valuation allowance are as follows:

 

(In thousands)    Year Ended
December 31,
2015
 

Balance at beginning of period

   $ 22,011   

Addition of Citizens’ MSRs on Acquisition Date

     —     

Additions

     619   

Amortization

     (3,693
  

 

 

 

Balance at end of period

     18,937   

Valuation allowance at beginning of period

     (955

Recoveries (Additions)

     556   
  

 

 

 

Valuation Allowance at end of period

     (399
  

 

 

 

MSRs, net carrying balance

   $ 18,538   
  

 

 

 

Fair value at end of period

   $ 19,149   
  

 

 

 

On a quarterly basis, the Corporation assesses its capitalized servicing rights for impairment based on their current fair value. For purposes of the impairment, the servicing rights are disaggregated based on loan type and interest rate which are the predominant risk characteristics of the underlying loans. A valuation allowance is established through a charge to earnings to the extent the amortized cost of the MSRs exceeds the estimated fair value by stratification. If it is later determined that all or a portion of the temporary impairment no longer exists for the stratification, the valuation is reduced through a recovery to earnings. No permanent impairment losses were written off against the allowance during the year ended December 31, 2015.

Key economic assumptions and the sensitivity of the current fair value of the MSRS related to immediate 10% and 25% adverse changes in those assumptions at December 31, 2015, are presented in the following table below. These sensitivities are hypothetical and should be used with caution. As the figures indicate, changes in the fair value based on 10% variation in the prepayment speed assumption generally cannot be extrapolated because the relationship of the change in the prepayment speed assumption to the change in fair value may not be linear. Also, in the below table, the effect of a variation in the discount rate assumption on the fair value of the MSRs is calculated independently without changing any other assumption. In reality, changes in one factor may result in changes in another (for example, changes in prepayment speed estimates could result in changes in the discount rates), which might magnify or counteract the sensitivities.

 

(Dollars in thousands)

 

Prepayment speed assumption (annual CPR)

     10.93

Decrease in fair value from 10% adverse change

   $ 1,032   

Decrease in fair value from 25% adverse change

   $ 1,292   

Discount rate assumption

     9.39

Decrease in fair value from 100 basis point adverse change

   $ 599   

Decrease in fair value from 200 basis point adverse change

   $ 1,155   

Expected weighted-average life (in months)

     97.6   

 

56


The following table shows the estimated future amortization for net MSRs as of December 31, 2015:

 

(In thousands)

 

Year Ended December 31,

 

2016

   $ 3,075   

2017

     2,723   

2018

     2,281   

2019

     1,917   

2020

     1,608   

more than 5 years

     6,934   
  

 

 

 

Total estimated future amortization

   $ 18,538   
  

 

 

 

 

7. Restrictions on Cash and Dividends

The average balance on deposit with the FRB or other governing bodies to satisfy reserve requirements amounted to $15.3 million during 2015. The level of this balance is based upon amounts and types of customers’ deposits held by the banking subsidiary of the Corporation. In addition, deposits are maintained with other banks at levels determined by Management based upon the volumes of activity and prevailing interest rates to compensate for check-clearing, safekeeping, collection and other bank services performed by these banks. At December 31, 2015, cash and due from banks included $0.3 million deposited with other banks for these reasons.

Dividends paid by the subsidiaries are the principal source of funds to enable the payment of dividends by the Corporation to its shareholders. These payments by the subsidiaries in 2015 were restricted, by the regulatory agencies, principally to the total of 2015 net income plus undistributed net income of the previous two calendar years. Regulatory approval must be obtained for the payment of dividends of any greater amount.

 

8. Premises and Equipment

The components of premises and equipment are as follows:

 

(In thousands)

   As of
December 31,
2015
     Estimated
useful lives

Land

   $ 57,040       —  

Buildings

     309,754       10-35 yrs

Equipment

     182,385       3-15 yrs

Leasehold improvements

     24,765       1-20 yrs

Software

     116,280       3-7 yrs
  

 

 

    
     690,224      

Less accumulated depreciation and amortization

     370,736      
  

 

 

    

Total premises and equipment

   $ 319,488      
  

 

 

    

 

57


Amounts included in noninterest expense in the accompanying Consolidated Statement of Income for depreciation and amortization aggregated $40.7 million for the year ended 2015.

 

58


9. Certificates and Other Time Deposits

The aggregate amounts of certificates and other time deposits of $100 thousand and over at December 31, 2015 were $794.8 million. Interest expense on these certificates and time deposits amounted to $3.1 million in 2015.

Maturities of certificates and other time deposits as of December 31, 2015 are as follows:

 

(In thousands)       

For the year ended December 31,

 

2016

   $ 1,525,838   

2017

     407,919   

2018

     124,610   

2019

     103,921   

2020

     73,131   

2021 and after

     3,484   
  

 

 

 

Total certificates and other time deposits

   $ 2,238,903   
  

 

 

 

 

10. Federal Funds Purchased and Securities Sold under Agreements to Repurchase

The following table presents federal funds purchased and securities sold under agreements to repurchase as of December 31, 2015.

 

(In thousands)

   As of
December 31,
2015
 

Federal funds purchased and securities sold under agreements to repurchase

   $ 1,037,075   
  

 

 

 

Securities sold under agreements to repurchase are secured by securities with a carrying value of $813.3 million at December 31, 2015. Securities sold under agreements to repurchase have an overnight maturity at December 31, 2015.

Selected financial statement information pertaining to the securities sold under agreements to repurchase is as follows:

 

(Dollars in thousands)

   As of December
31, 2015
 

Average balance during the year

   $ 1,138,307   

Weighted-average annual interest rate during the year

     0.10

Maximum month-end balance

   $ 1,519,250   

 

59


11. Borrowed Funds

The following table presents wholesale borrowings and long-term debt as of December 31, 2015.

 

(In thousands)

   As of
December 31,
2015
 

FHLB advances

   $ 580,501   

Subordinated debentures

     505,173   

Other

     147   
  

 

 

 

Total borrowed funds

   $ 1,085,821   
  

 

 

 

FHLB advances were secured by a lien on residential and other real estate-related loans totaling $5.1 billion at December 31, 2015. The FHLB advances have interest rates that range from 0.34% to 4.12% as of December 31, 2015.

On November 25, 2014, the Bank issued $250 million in aggregate principal of subordinated notes, due November 25, 2026, and bearing interest at an annual rate of 4.27% payable semi-annually in arrears on May 25 and November 25 of each year. The net proceeds were used to initially pay down existing federal funds purchased and securities sold under repurchase agreements, general corporate purposes, and as capital to support the Bank’s growth. The subordinated notes are not redeemable by the Bank or callable by the holders prior to maturity.

Selected financial statement information pertaining to the Corporation’s borrowed funds is as follows:

 

(Dollars in thousands)

   As of December
31, 2015
 

Average balance during the year

   $ 885,478   

Weighted-average annual interest rate during the year

     2.35

Maximum month-end balance

   $ 1,189,093   

The following table illustrates the contractual maturities of the Corporation’s borrowed funds at December 31, 2015:

 

     One Year      One to      Three to      Over Five         

(In thousands)

   or Less      Three Years      Five Years      Years      Total  

FHLB advances

   $ 310,716       $ 230,193       $ —         $ 39,592       $ 580,501   

Subordinated debentures

     —           —           —           505,173         505,173   

Other

     71         76         —           —           147   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total borrowed funds

   $ 310,787       $ 230,269       $ —         $ 544,765       $ 1,085,821   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

60


12. Income Taxes

Income tax expense is comprised of the following:

 

(In thousands)

   Year Ended
December 31,
2015
 

Taxes currently payable

  

Federal

   $ 52,869   

State

     (3,119

Deferred expense

     47,269   
  

 

 

 

Total income tax expense

   $ 97,019   
  

 

 

 

The actual income tax rate differs from the statutory tax rate as shown in the following table:

 

     Year Ended
December 31,
2015
 

Statutory rate

     35.00

Increase (decrease) in rate due to:

  

Interest on tax-exempt securities and tax-free loans, net

     (2.75

Merger expenses at acquisition

     —     

Reduction in excess tax reserves

     —     
P STYLE="MARGIN-LEFT:3.00EM; TEXT-INDENT:-1.00EM; FONT-SIZE:10PT; FONT-FAMILY:TIMES NEW ROMAN"> Bank owned life insurance

     (1.76

State income tax (net)

     0.59   

Tax credits

     (0.82

ESOP Dividends

     (0.14

Nondeductible meals and entertainment

     0.25   

Other

     (0.66
  

 

 

 

Effective tax rates

     29.71
  

 

 

 

Income tax expense as reflected in the previous table excludes net worth-based taxes, which are assessed on financial institutions in lieu of income tax in Ohio, Pennsylvania and Michigan. These taxes are $8.1 million in 2015 and are recorded in other operating expense in the accompanying Consolidated Statement of Income.

 

61


Principal components of the Corporation’s net deferred tax asset are summarized as follows:

 

(In thousands)

   Year Ended
December 31,
2015
 

Deferred tax assets:

  

Allowance for credit losses

   $ 40,069   

Employee benefits

     50,868   

Real Estate Mortgage Investment Credit

     3,791   

Acquired liabilities

     5,931   

Acquired loans

     25,388   

Available for sale securities

     11,475   

Loan fees and expenses

     —     

Federal NOL carryforwards

     102,194   

Alternative minimum tax credit carryforward

     112,861   

General business tax credit carryforward

     2,924   

State income tax (net of federal benefit)

     2,441   

Other

     1,789   
  

 

 

 

Total deferred tax assets

     359,731   
  

 

 

 

Deferred tax liabilities:

  

Leased assets and depreciation

     (41,649

FHLB stock

     (18,641

Loan fees and expenses

     (1,480

Goodwill

     (26,885

Core deposit intangibles

     (18,697

Other

     —     
  

 

 

 

Total deferred tax liabilities

     (107,352
  

 

 

 

Total net deferred tax asset

   $ 252,379   
  

 

 

 

At December 31, 2015, there was no valuation allowance for deferred tax assets.

At December 31, 2015, the Corporation had gross federal loss carryforwards of $292.0 million that expire in 2028 through 2032, general business credits of $2.9 million that expire in 2028, and $112.9 million of federal alternative minimum tax credits with an indefinite life. In addition, future state income taxes are expected to be reduced by $450.0 thousand resulting from state non-operating losses at various levels in various states. This benefit is expected to be fully used during the expiration period of 2015 through 2027.

 

62


The period change in deferred taxes recorded both directly to shareholders’ equity and as a part of the income tax expense is summarized as follows:

 

(In thousands)

   Year Ended
December 31,
2015
 

Deferred tax changes reflected in other comprehensive income

   $ (10,565

Deferred tax changes reflected in Federal income tax expense

     47,269   
  

 

 

 

Net decrease/(increase) in DTA

   $ 36,704   
  

 

 

 

Income tax benefits are recognized in the financial statements for a tax position only if it is considered “more likely than not” of being sustained on audit based solely on the technical merits of the income tax position. If the recognition criteria are met, the amount of income tax benefits to be recognized is measured based on the largest income tax benefit that is more than 50 percent likely to be realized on ultimate resolution of the tax position.

A reconciliation of the change in the reserve for uncertain tax positions for 2015 is as follows:

 

(In thousands)

   Federal and
State Tax
     Accrued
Interest and
Penalties
     Gross
Unrecognized
Income Tax
Benefits
 

Balance as of January 1, 2015

   $ 305       $ 19       $ 324   

Additions for tax provisions related to prior year

     299         17         316   

Reduction for tax positions related to prior year due closed tax years

     —           —           —     

Reduction for tax positions related to prior tax years

     (134      —           (134
  

 

 

    

 

 

    

 

 

 

Balance at December 31, 2015

   $ 470       $ 36       $ 506   
  

 

 

    

 

 

    

 

 

 

Components of Reserve:

        

State income tax exposure

   $ 470       $ 36       $ 506   
  

 

 

    

 

 

    

 

 

 

Balance at December 31, 2015

   $ 470       $ 36       $ 506   
  

 

 

    

 

 

    

 

 

 

The Corporation recognized accrued interest and penalties, as appropriate, related to UTBs, in the effective tax rate. The balance of accrued interest and penalties at the reporting periods is presented in the table above. The reserve of uncertain tax positions is recorded in accrued taxes, expenses and other liabilities on the Consolidated Balance Sheet.

The Corporation is routinely examined by various taxing authorities. With few exceptions, the Corporation is no longer subject to federal, state and local tax examinations by tax authorities for years before 2012. The expiration of statutes of limitation for various jurisdictions is expected to reduce the UTB balance by approximately $50 thousand within the next twelve months. Management anticipates that the UTB balance will increase by $0.2 million as a result of the 2015 tax filings in the next twelve months. If the total amount of UTBs were recognized the effective tax rate would decrease by 0.15 to 29.71% at December 31, 2015.

 

63


Management monitors changes in tax statutes and regulations and the issuance of judicial decisions to determine the potential impact to uncertain income tax positions. As of December 31, 2015, Management had identified no other potential U.S. Treasury regulations or legislative initiatives that could have a significant impact on the UTB balance within the next twelve months.

 

13. Benefit Plans

Pension plans . The Corporation had a noncontributory qualified defined benefit pension plan that covered all eligible legacy FirstMerit employees vested in the pension plan as of December 31, 2006 (“FirstMerit Pension Plan”). The FirstMerit Pension Plan was frozen for nonvested employees and closed to new entrants after December 31, 2006. Effective December 31, 2012, the FirstMerit Pension Plan was frozen for vested employees resulting in no benefits accruing after December 31, 2012. Employees will have an accrued benefit which will be paid upon retirement.

Certain former Citizens’ employees were covered by a cash balance defined benefit pension plan after the Acquisition Date through December 31, 2013 (“Citizens Pension Plan”). Effective December 31, 2006, the Citizens Pension Plan was frozen, preserving prior earned benefits but discontinuing the accrual of future benefits.

As of December 31, 2013, the Corporation adopted one noncontributory qualified defined pension plan covering all eligible FirstMerit and former Citizens employees, with the FirstMerit Pension Plan being the surviving plan. The Citizens Pension Plan ceased to exist after December 31, 2013. The plan assets of the FirstMerit Pension Plan and the Citizens Pension Plan were combined and invested in a single trust as of December 31, 2013. Benefits remain frozen in the combined plan with the unique benefit structure under each of the FirstMerit and Citizens Pension Plans retained in the combined plan.

A supplemental nonqualified, nonfunded pension plan for certain officers is also maintained and is being provided for by charges to earnings sufficient to meet the projected benefit obligation. The pension cost for this plan is based on substantially the same actuarial methods and economic assumptions as those used for the FirstMerit Pension Plan. On December 18, 2013, the FirstMerit Corporation Amended and Restated Supplemental Executive Retirement Plan was amended to freeze the benefit payable to the Corporation’s Chairman, President and Chief Executive Officer (“CEO”) at the level of the benefit accrued by the CEO under the plan as of November 30, 2013. Subsequent increases or decreases in the CEO’s compensation nor any changes in circumstances will cause any increase or decrease in the amount payable to the CEO under this plan.

Postretirement medical and life insurance plan. The Corporation also sponsors a benefit plan that provided postretirement medical and life insurance for retired employees (“FirstMerit Postretirement Plan”). The Corporation’s medical contribution was limited to 200% of the 1993 level for employees who retire after January 1, 1993.

 

64


Effective March 1, 2009, the Corporation discontinued the subsidy for retiree medical for current eligible active employees. Eligible employees who retired on or prior to March 1, 2009, were offered subsidized retiree medical coverage until age 65. Employees who retired after March 1, 2009, do not receive a Corporation subsidy toward retiree medical coverage.

Effective January 1, 2012, the FirstMerit Postretirement Plan was amended to cap the Corporation’s subsidy on retiree medical costs. Any cost incurred over the cap will be the responsibility of the retiree.

Effective January 1, 2016, the FirstMerit Postretirement Plan was amended to cap the life insurance benefits for all retirees at $10,000.

Employer-provided subsidies under the postretirement medical plan will be discontinued after 2018. As a result, a three-year sunset of this subsidized coverage is reflected in the December 31, 2015 disclosures.

Postretirement medical and life insurance plans were also maintained for certain former Citizens employees after the Acquisition Date through December 31, 2013, (“Citizens Postretirement Plan”). Citizens’ Postretirement Plan provided postretirement health and dental care to full-time employees who retired with eligibility for coverage based on historical plan terms.

As of December 31, 2013, the Corporation adopted one postretirement plan covering all eligible FirstMerit and former Citizens employees, with the FirstMerit Postretirement Plan being the surviving plan. The Citizens Postretirement Plan ceased to exist after December 31, 2013, and future benefits to the existing participants of the Citizens Postretirement Plan will be provided under the FirstMerit Postretirement Plan. The Corporation reserves the right to terminate or amend the FirstMerit Postretirement Plan at any time.

Other employee benefits. FirstMerit’s Amended and Restated Executive Deferred Compensation Plan (“FirstMerit Deferred Compensation Plan”) allows participating executives to elect to receive incentive compensation payable with respect to any year in whole Common Stock or cash, or to elect to defer receipt of any incentive compensation otherwise payable with respect to any year in increments of 1%. An account is maintained in the name of each participant and is credited with cash or Common Stock equal to the number of shares that could have been purchased with the amount of any compensation so deferred, at the closing price of the Common Stock on the day as of which the share account is so credited. The deferred compensation liability at December 31, 2015 was $18.6 million and is included in accrued taxes, expenses and other liabilities on the accompanying Consolidated Balance Sheet.

Savings plans . The Corporation maintains a retirement savings plan under Section 401(k) of the Internal Revenue Code of 1986, as amended, covering substantially all full-time and part-time employees beginning in the quarter following three months of continuous employment (“FirstMerit 401(k) Plan”). For the year ended December 31, 2015, the employer’s matching contribution to the FirstMerit 401(k) Plan was 100% on the first 3% and then 50% on the next 2% of the employee’s qualifying salary. Contributions made by the Corporation to the FirstMerit 401(k) Plan were $7.6 million for 2015. Matching contributions vest in accordance with plan specifications.

 

65


From the Acquisition Date through the close of business December 31, 2013, eligible Citizens employees who were employed by the Corporation continued to be covered by an employee savings plan under Section 401(k) (“Citizens 401(k) Plan”). Contributions to the Citizens 401(k) Plan were matched 50% on the first 2% of salary deferred and 25% on the next 6% deferred. The Corporation contributed $1.1 million to the Citizens 401(k) Plan from Acquisition Date through December 31, 2013. The Citizens 401(k) Plan was merged with the FirstMerit 401(k) Plan as of close of business December 31, 2013. The plan terms of the merged plans are substantially the same as the FirstMerit 401(k) Plan.

The Corporation maintained a qualified defined contribution plan known as Retirement Investment Plan through December 31, 2012. Effective with the termination of this plan as of January 1, 2013, the Corporation will provide, for a five-year period, a transition contribution equal to 3% of an employee’s qualifying salary to all eligible plan participants that have earned 60 age-plus-service points, as of December 31, 2012. This transition contribution totaled $0.9 million for the year ended December 31, 2015.

The combined components of net periodic pension and postretirement benefits and other amounts recognized in AOCI for the Corporation’s pension and postretirement benefit plans as of December 31, 2015 are as follows:

 

(In thousands)

   Pension
Benefits
     Postretirement
Benefits
 

Net periodic cost consists of:

     

Service cost

   $ 830       $ 165   

Interest cost

     14,069         575   

Expected return on plan assets

     (15,607      —     

Amortization of prior service cost/(credit)

     2,279         (639

Amortization of actuarial (gains)/losses

     4,227         325   

Settlement / curtailment income

     —           —     
  

 

 

    

 

 

 

Net periodic cost (benefit)

     5,798         426   

Other changes in plan assets and benefit obligations recognized in Other comprehensive income:

     

Current year actuarial losses/(gains)

     7,987         (8,103

Amortization of actuarial gains/(losses)

     (4,227      (325

Amortization of prior service (cost)/credit

     (2,279      639   
  

 

 

    

 

 

 

Total recognized in AOCI, before income taxes

     1,481         (7,789

Total recognized in net periodic cost and AOCI

   $ 7,279       $ (7,363
  

 

 

    

 

 

 

 

66


A measurement date of December 31 is used for plan assets and benefit obligations. The following table sets forth a reconciliation of the changes in the projected benefit obligation for the Corporation’s pension and postretirement benefit plans as of December 31, 2015, as well as the change in plan assets for the Corporation’s qualified pension plans:

 

(In thousands)

   Pension
Benefits
     Postretirement
Benefits
 

Accumulated benefit obligation, end of year

   $ 339,661      
  

 

 

    

Change in projected benefit obligation:

     

Projected benefit obligation, beginning of year

     355,642       $ 15,164   

Service cost

     830         165   

Interest cost

     14,069         575   

Plan amendments

     —           (7,657

Participant contributions

     —           1,805   

Actuarial (gains)/losses and change in assumptions

     (10,469      (446

Benefits paid

     (19,252      (2,765
  

 

 

    

 

 

 

Projected benefit obligation, end of year

   $ 340,820       $ 6,841   
  

 

 

    

 

 

 

Change in plan assets, at fair value:

     

Fair value of plan assets, beginning of year

   $ 257,355       $ —     

Actual return on plan assets

     (2,849      —     

Participant contributions

     —           1,805   

Employer contributions

     1,527         960   

Benefits paid

     (19,252      (2,765
  

 

 

    

 

 

 

Fair value of plan assets, end of year

   $ 236,781       $ —     
  

 

 

    

 

 

 

Funded status (1)

     (104,039      (6,841

Amounts recognized in AOCI before income taxes:

     

Prior service cost (credit)

   $ 308       $ (12,389

Net actuarial loss

     103,477         4,364   
  

 

 

    

 

 

 

Amount recognized in AOCI

   $ 103,785       $ (8,025
  

 

 

    

 

 

 

 

(1) The Corporation recognizes the underfunded status of the plans in accrued taxes, expenses and other liabilities on the Consolidated Balance Sheet.

As indicated in the table above, the benefit obligation and accumulated benefit obligation for all of the Corporation’s pension plans were in excess of the fair value of plan assets.

 

67


Actuarial assumptions. The actuarial assumptions used to determine year end obligations for the Corporation’s pension and postretirement plans were as follows:

 

Weighted-average assumptions for year end obligations

   2015  

Discount rate

  

Qualified pensions

     4.57

Nonqualified pensions

     3.99

Postretirement medical benefits, FirstMerit’s plan

     1.76

Postretirement medical benefits, Citizens’ plan

     1.77

Postretirement life insurance benefits

     4.79

Expected long-term rate of return

     6.00

Rate of compensation increase

  

Qualified pensions

     na   

Nonqualified pensions

     3.75

Assumed health care cost trend rate, pre-65 (1) (2)

  

Initial trend

     na   

Ultimate trend

     na   

Year ultimate trend reached

     na   

Assumed health care cost trend rate, post-65 (1) (2)

  

Initial trend

     na   

Ultimate trend

     na   

Year ultimate trend reached

     na   

Prescription Drugs (2)

  

Initial trend

     na   

Ultimate trend

     na   

Year ultimate trend reached

     na   

 

(1) The health care cost trend assumptions relate only to the postretirement benefit plans. Increasing or decreasing the assumed health care cost trend rates by one percentage point each future year would not have a material impact on total service and interest cost or the year end benefit obligation.
(2) Employer-provided subsidies under the postretirement medical plan will be discontinued after 2018. As a result, a three-year sunset of this subsidized coverage is reflected in the December 31, 2015 disclosures. Since employer subsidies are not expected to change from current levels, health care trend rates no longer have any impact on the accounting liabilities.

 

68