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

August 1, 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:

 

    Consolidated balance sheet of FirstMerit as of March 31, 2016, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for the three months ended March 31, 2016, and the notes related thereto; and

 

    Consolidated balance sheet of FirstMerit as of June 30, 2016, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for the three months and six months ended June 30, 2016, and the notes related thereto.

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 June 30, 2016.

 

    Unaudited pro forma condensed combined statement of income for the year ended December 31, 2015 and for the six months ended June 30, 2016.

 

    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.

Item 9.01. Financial Statements and Exhibits.

 

(a) Financial Statements of Business to be Acquired.

Consolidated balance sheet of FirstMerit as of March 31, 2016, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for the three months ended March 31, 2016, and the notes related thereto are filed as Exhibit 99.1 hereto.

Consolidated balance sheet of FirstMerit as of June 30, 2016, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for the three months and six months ended June 30, 2016, and the notes related thereto are filed as Exhibit 99.2 hereto.

 

(b) Pro Forma Financial Information.

The Company’s and FirstMerit’s unaudited pro forma condensed combined balance sheet as of June 30, 2016, unaudited pro forma condensed combined statement of income for the year ended December 31, 2015 and for the six months ended June 30, 2016, and the notes related thereto are filed as Exhibit 99.3 hereto.


(d) Exhibits.

 

Exhibit No.

  

Description of Exhibit

99.1    Consolidated balance sheet of FirstMerit Corporation as of March 31, 2016, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for the three months ended March 31, 2016, and the notes related thereto.
99.2    Consolidated balance sheet of FirstMerit Corporation as of June 30, 2016, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for the three months and six months ended June 30, 2016, and the notes related thereto.
99.3    Unaudited pro forma condensed combined balance sheet of Huntington Bancshares Incorporated and FirstMerit Corporation as of June 30, 2016, unaudited pro forma condensed combined statement of income of Huntington Bancshares Incorporated and FirstMerit Corporation for the year ended December 31, 2015 and for the six months ended June 30, 2016, and the notes related thereto.

 

- 2 -


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: August 1, 2016

 

- 3 -


EXHIBIT INDEX

 

Exhibit No.

  

Description of Exhibit

99.1    Consolidated balance sheet of FirstMerit Corporation as of March 31, 2016, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for the three months ended March 31, 2016, and the notes related thereto.
99.2    Consolidated balance sheet of FirstMerit Corporation as of June 30, 2016, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for the three months and six months ended June 30, 2016, and the notes related thereto.
99.3    Unaudited pro forma condensed combined balance sheet of Huntington Bancshares Incorporated and FirstMerit Corporation as of June 30, 2016, unaudited pro forma condensed combined statement of income of Huntington Bancshares Incorporated and FirstMerit Corporation for the year ended December 31, 2015 and for the six months ended June 30, 2016, and the notes related thereto.

 

- 4 -

Exhibit 99.1

CONSOLIDATED BALANCE SHEETS

FIRSTMERIT CORPORATION AND SUBSIDARIES

 

(In thousands)

(Unaudited, except for December 31, 2015)

   March 31,
2016
    December 31,
2015
    March 31,
2015
 

ASSETS

      

Cash and due from banks

   $ 331,049      $ 380,799      $ 426,247   

Interest-bearing deposits in banks

     428,848        83,018        106,178   
  

 

 

   

 

 

   

 

 

 

Total cash and cash equivalents

     759,897        463,817        532,425   

Investment securities:

      

Held-to-maturity

     2,613,700        2,674,093        2,855,174   

Available-for-sale

     4,104,214        3,967,735        3,791,059   

Other investments

     148,159        148,172        148,475   

Loans held for sale

     5,249        5,472        3,568   

Loans

     16,225,450        16,076,945        15,490,889   

Allowance for loan losses

     (151,937     (153,691     (146,552
  

 

 

   

 

 

   

 

 

 

Net loans

     16,073,513        15,923,254        15,344,337   

Premises and equipment, net

     305,764        319,488        320,392   

Goodwill

     741,740        741,740        741,740   

Intangible assets

     58,324        60,628        68,422   

Covered other real estate

     783        2,134        40,231   

Accrued interest receivable and other assets

     1,251,306        1,218,071        1,272,297   
  

 

 

   

 

 

   

 

 

 

Total assets

   $ 26,062,649      $ 25,524,604      $ 25,118,120   
  

 

 

   

 

 

   

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

      

Deposits:

      

Noninterest-bearing

   $ 6,055,569      $ 5,942,248      $ 5,666,752   

Interest-bearing

     3,641,216        3,476,729        3,277,118   

Savings and money market accounts

     9,231,829        8,450,123        8,610,553   

Certificates and other time deposits

     2,172,752        2,238,903        2,371,172   
  

 

 

   

 

 

   

 

 

 

Total deposits

     21,101,366        20,108,003        19,925,595   
  

 

 

   

 

 

   

 

 

 

Federal funds purchased and securities sold under agreements to repurchase

     719,850        1,037,075        1,113,371   

Wholesale borrowings

     378,996        580,648        316,628   

Long-term debt

     519,249        505,173        512,625   

Accrued taxes, expenses and other liabilities

     345,231        353,610        361,115   
  

 

 

   

 

 

   

 

 

 

Total liabilities

     23,064,692        22,584,509        22,229,334   

Shareholders’ equity:

      

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

     100,000        100,000        100,000   

Common Stock warrant

     —          —          3,000   

Common Stock, without par value; authorized 300,000,000 shares; issued: March 31, 2016, December 31, 2015 and March 31, 2015 - 170,183,515 shares

     127,937        127,937        127,937   

Capital surplus

     1,390,516        1,386,677        1,394,933   

Accumulated other comprehensive loss

     (48,341     (79,274     (49,267

Retained earnings

     1,543,976        1,519,438        1,433,926   

Treasury stock, at cost: March 31, 2016 - 4,463,581; December 31, 2015 - 4,425,927; March 31, 2015 - 4,730,374 shares

     (116,131     (114,683     (121,743
  

 

 

   

 

 

   

 

 

 

Total shareholders’ equity

     2,997,957        2,940,095        2,888,786   
  

 

 

   

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 26,062,649      $ 25,524,604      $ 25,118,120   
  

 

 

   

 

 

   

 

 

 

See accompanying Notes to the Consolidated Financial Statements

 

1


CONSOLIDATED STATEMENTS OF INCOME

FIRSTMERIT CORPORATION AND SUBSIDIARIES

 

(In thousands, except per share amounts)    Three Months Ended March 31,  

(Unaudited)

   2016      2015  

Interest income:

     

Loans and loans held for sale

   $ 162,278       $ 161,539   

Investment securities:

     

Taxable

     33,149         31,950   

Tax-exempt

     5,261         6,026   
  

 

 

    

 

 

 

Total investment securities interest

     38,410         37,976   
  

 

 

    

 

 

 

Total interest income

     200,688         199,515   

Interest expense:

     

Deposits:

     

Interest bearing

     929         767   

Savings and money market accounts

     5,652         5,547   

Certificates and other time deposits

     3,289         2,177   

Federal funds purchased and securities sold under agreements to repurchase

     265         243   

Wholesale borrowings

     1,234         1,160   

Long-term debt

     4,163         3,998   
  

 

 

    

 

 

 

Total interest expense

     15,532         13,892   
  

 

 

    

 

 

 

Net interest income

     185,156         185,623   

Provision for loan losses

     7,809         8,248   
  

 

 

    

 

 

 

Net interest income after provision for loan losses

     177,347         177,375   

Noninterest income:

     

Trust department income

     10,284         10,149   

Service charges on deposits

     15,586         15,668   

Credit card fees

     13,578         12,649   

ATM and other service fees

     6,234         6,099   

Bank owned life insurance income

     3,696         3,592   

Investment services and insurance

     3,905         3,704   

Investment securities gains/(losses), net

     295         354   

Loan sales and servicing income

     1,852         1,600   

Other operating income

     11,964         12,032   
  

 

 

    

 

 

 

Total noninterest income

     67,394         65,847   
  

 

 

    

 

 

 

Noninterest expense:

     

Salaries, wages, pension and employee benefits

     85,880         90,526   

Net occupancy expense

     14,774         15,954   

Equipment expense

     12,408         11,025   

Stationery, supplies and postage

     3,619         3,528   

Bankcard, loan processing and other costs

     11,008         11,139   

Professional services

     8,351         4,010   

Amortization of intangibles

     2,304         2,598   

FDIC insurance expense

     5,445         5,167   

Other operating expense

     23,174         16,705   
  

 

 

    

 

 

 

Total noninterest expense

     166,963         160,652   
  

 

 

    

 

 

 

Income before income tax expense

     77,778         82,570   

Income tax expense

     23,642         25,431   
  

 

 

    

 

 

 

Net income

     54,136         57,139   

Less: Net income allocated to participating shareholders

     387         407   

Preferred Stock dividends

     1,469         1,469   
  

 

 

    

 

 

 

Net income attributable to common shareholders

   $ 52,280       $ 55,263   
  

 

 

    

 

 

 

Net income used in diluted EPS calculation

   $ 52,280       $ 55,263   
  

 

 

    

 

 

 

Weighted average number of common shares outstanding - basic

     165,745         165,411   

Weighted average number of common shares outstanding - diluted

     166,239         166,003   

Basic earnings per common share

   $ 0.32       $ 0.33   

Diluted earnings per common share

     0.31         0.33   

Cash dividend per common share

     0.17         0.16   

See accompanying Notes to the Consolidated Financial Statements

 

2


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FIRSTMERIT CORPORATION AND SUBSIDIARIES

 

(In thousands)    Three Months Ended
March 31, 2016
 

(Unaudited)

   Pretax     Tax     After tax  

Net Income

   $ 77,778      $ 23,642      $ 54,136   

Other comprehensive income/(loss)

      

Unrealized gains and losses on securities available for sale:

      

Changes in unrealized securities’ holding gains/(losses)

     48,379        17,562        30,817   

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

     (1,441     (147     (1,294

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

     295        107        188   
  

 

 

   

 

 

   

 

 

 

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

     47,233        17,522        29,711   

Pension plans and other postretirement benefits:

      

Amortization of actuarial losses/(gains)

     2,168        773        1,395   

Amortization of prior service cost reclassified to other noninterest expense

     (260     (87     (173
  

 

 

   

 

 

   

 

 

 

Net change from defined benefit pension plans

     1,908        686        1,222   
  

 

 

   

 

 

   

 

 

 

Total other comprehensive gains/(losses)

     49,141        18,208        30,933   
  

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 126,919      $ 41,850      $ 85,069   
  

 

 

   

 

 

   

 

 

 

 

(In thousands)    Three Months Ended
March 31, 2015
 

(Unaudited)

   Pretax     Tax     After tax  

Net Income

   $ 82,570      $ 25,431      $ 57,139   

Other comprehensive income/(loss)

      

Unrealized gains and losses on securities available for sale:

      

Changes in unrealized securities’ holding gains/(losses)

     34,117        11,941        22,176   

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

     (504     (176     (328

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

     (354     (124     (230
  

 

 

   

 

 

   

 

 

 

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

     33,259        11,641        21,618   

Pension plans and other postretirement benefits:

      

Amortization of actuarial losses/(gains)

     1,138        398        740   

Amortization of prior service cost reclassified to other noninterest expense

     410        143        267   
  

 

 

   

 

 

   

 

 

 

Net change from defined benefit pension plans

     1,548        541        1,007   
  

 

 

   

 

 

   

 

 

 

Total other comprehensive gains/(losses)

     34,807        12,182        22,625   
  

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 117,377      $ 37,613      $ 79,764   
  

 

 

   

 

 

   

 

 

 

See accompanying Notes to the Consolidated Financial Statements

 

3


CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

FIRSTMERIT CORPORATION AND SUBSIDIARIES

 

(In thousands)

(Unaudited)

  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

    —          —          —           —          —          57,139        —          57,139   

Other comprehensive income

    —          —          —           —          22,625        —          —          22,625   
 

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

    —          —          —           —          22,625        57,139        —          79,764   

Cash dividends - Preferred Stock

    —          —          —           —          —          (1,469     —          (1,469

Cash dividends - Common Stock ($0.16 per share)

    —          —          —           —          —          (26,461     —          (26,461

Nonvested (restricted) shares granted (129,444 shares)

    —          —          —           (2,631     —          —          2,631        —     

Restricted stock activity (66,252 shares)

    —          —          —           326        —          —          (1,296     (970

Deferred compensation trust (163,965 increase in shares)

    —          —          —           507        —          —          (507     —     

Share-based compensation

    —          —          —           3,641        —          —          —          3,641   
 

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2015

  $ 100,000      $ 127,937      $ 3,000       $ 1,394,933      $ (49,267   $ 1,433,926      $ (121,743   $ 2,888,786   
 

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2015

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

Net income

    —          —          —           —          —          54,136        —          54,136   

Other comprehensive income

    —          —          —           —          30,933        —          —          30,933   
 

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

    —          —          —           —          30,933        54,136        —          85,069   

Cash dividends - Preferred Stock

    —          —          —           —          —          (1,469     —          (1,469

Cash dividends - Common Stock ($0.17 per share)

    —          —          —           —          —          (28,129     —          (28,129

Nonvested (restricted) shares granted (17,107 shares)

    —          —          —           (364     —          —          364        —     

Restricted stock activity (54,761 shares)

    —          —          —           272        —          —          (1,160     (888

Deferred compensation trust (239,200 increase in shares)

    —          —          —           652        —          —          (652     —     

Share-based compensation

    —          —          —           3,279        —          —          —          3,279   
 

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of March 31, 2016

  $ 100,000      $ 127,937      $ —         $ 1,390,516      $ (48,341   $ 1,543,976      $ (116,131   $ 2,997,957   
 

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying Notes to the Consolidated Financial Statements

 

4


CONSOLIDATED STATEMENTS OF CASH FLOWS

FIRSTMERIT CORPORATION AND SUBSIDIARIES

 

(In thousands)    Three Months Ended March 31,  

(Unaudited)

   2016     2015  

Operating Activities

    

Net income

   $ 54,136      $ 57,139   

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

    

Provision for loan losses

     7,809        8,248   

Provision/(benefit) for deferred income taxes

     (292     (1,663

Depreciation and amortization

     16,339        14,739   

Benefit attributable to FDIC loss share

     269        4,227   

Accretion of acquired loans

     (17,890     (26,339

Amortization and accretion of investment securities, net

    

Available-for-sale

     2,355        2,680   

Held-to-maturity

     744        814   

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

     —          (354

Originations of loans held for sale

     (7,493     (40,442

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

     7,920        50,868   

Gains on sales of loans, net

     (204     (566

Amortization of intangible assets

     2,304        2,598   

Change in unrealized securities’ holdings/(losses)

     —          —     

Recognition of stock compensation expense

     3,279        3,641   

Net decrease/(increase) in other assets

     (39,766     (48,684

Net increase/(decrease) in other liabilities

     6,238        25,224   
  

 

 

   

 

 

 

NET CASH PROVIDED BY OPERATING ACTIVITIES

     35,748        52,130   
  

 

 

   

 

 

 

Investing Activities

    

Proceeds from sale of investment securities

    

Available-for-sale

     —          39,302   

Held-to-maturity

     —          1,015   

Proceeds from prepayments, calls, and maturities of investment securities

    

Available-for-sale

     150,299        129,296   

Held-to-maturity

     91,890        92,241   

Other

     —          166   

Purchases of investment securities

    

Available-for-sale

     (249,424     (404,163

Held-to-maturity

     (33,669     (46,164

Other

     —          —     

Net decrease/(increase) in loans and leases

     (146,288     (152,359

Purchases of premises and equipment

     (58     (5,795

Sales of premises and equipment

     3,582        7,965   
  

 

 

   

 

 

 

NET CASH PROVIDED/(USED) BY INVESTING ACTIVITIES

     (183,668     (338,496
  

 

 

   

 

 

 

Financing Activities

    

Net increase in demand accounts

     277,808        128,320   

Net increase/(decrease) in savings and money market accounts

     781,706        210,941   

Net decrease in certificates and other time deposits

     (66,151     81,669   

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

     (317,225     (159,220

Net increase/(decrease) in wholesale borrowings

     (201,652     (111,443

Cash dividends - common

     (28,129     (26,461

Cash dividends - preferred

     (1,469     (1,469

Restricted stock activity

     (888     (970
  

 

 

   

 

 

 

NET CASH PROVIDED/(USED) BY FINANCING ACTIVITIES

     444,000        121,367   
  

 

 

   

 

 

 

Increase/(Decrease) in cash and cash equivalents

     296,080        (164,999

Cash and cash equivalents at beginning of year

     463,817        697,424   
  

 

 

   

 

 

 

Cash and cash equivalents at end of year

   $ 759,897      $ 532,425   
  

 

 

   

 

 

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:

    

Cash paid during the year for:

    

Interest

   $ 16,197      $ 14,036   

Federal income taxes

     —          2,000   

See accompanying Notes to the Consolidated Financial Statements

 

5


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FIRSTMERIT CORPORATION AND SUBSIDIARIES

FirstMerit Corporation and subsidiaries (the “Corporation” or “we”) is a diversified financial services company headquartered in Akron, Ohio with 368 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.

On January 26, 2016, the Corporation and Huntington Bancshares Incorporated (“Huntington”) announced the signing of a definitive merger agreement under which the Corporation will merge into a subsidiary of Huntington in a stock and cash transaction. Based on the closing price of Huntington’s common shares on January 25, 2016 of $8.80, the total transaction value is approximately $3.40 billion, including outstanding options and other equity-linked securities.

Under the terms of the definitive agreement, the Corporation will merge with a subsidiary of Huntington Bancshares, and FirstMerit Bank will merge with and into The Huntington National Bank. In conjunction with the closing of the transaction, four independent members of the Corporation’s Board of Directors will join the Huntington Board, which will be expanded accordingly.

Shareholders of the Corporation will receive 1.72 shares of Huntington common stock, and $5.00 in cash, for each share of the Corporation common stock. The per share consideration is valued at $20.14 per share based on the closing price of Huntington Common Stock on January 25, 2016. The transaction is expected to be completed in the third quarter of 2016, subject to the satisfaction of customary closing conditions, including regulatory approvals and the approval of the shareholders of Huntington and the Corporation.

 

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.

Basis of Presentation - FirstMerit Corporation is a BHC whose principal asset is the Common Stock of its wholly-owned subsidiary, FirstMerit Bank, N. A. The Parent Company’s other subsidiaries include Citizens Savings Corporation of Stark County, FirstMerit Capital Trust I, and FirstMerit Risk Management, Inc. All significant intercompany balances and transactions have been eliminated in consolidation.

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

The Consolidated Balance Sheet at December 31, 2015 has been derived from the audited consolidated financial statements at that date. The accompanying unaudited interim financial statements reflect all

 

6


adjustments (consisting only of normally recurring adjustments) that are, in the opinion of Management, necessary for a fair statement of the results for the interim periods presented. Certain reclassifications of prior year’s amounts have been made to conform to the current year presentation. Such reclassifications had no effect on net earnings or equity. Certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been omitted in accordance with the rules of the SEC. The unaudited consolidated financial statements of the Corporation as of March 31, 2016 and 2015 are not necessarily indicative of the results that may be achieved for the full fiscal year or for any future period. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2015 (the “2015 Form 10-K”). There have been no significant changes in the current quarter to the Corporation’s accounting policies as disclosed in the 2015 Form 10-K.

In preparing these accompanying unaudited interim consolidated financial statements, subsequent events were evaluated through the time the consolidated financial statements were issued.

Recently Adopted Accounting Standards

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 will 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 did not 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

 

7


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 did not have a material effect on the Corporation’s financial position or results of operations.

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 did not 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 did not have a material effect on the Corporation’s financial position or results of operations.

Recently Issued Accounting Standards

ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing . This update amends the new revenue recognition guidance on accounting for licenses of intellectual property and identifying performance obligations. The amendments clarify how an entity should evaluate the nature of its promise in granting a license of intellectual property, which will

 

8


determine whether it recognizes revenue over time or a point in time. The amendments also clarify when a promised good or service is separately identifiable, that is distinct within the context of the contract, and allow entities to disregard items that are immaterial in the context of a contract. The effective date and transition requirements for this update are the same as those of the new standard. For public business entities, the amendments in this update are effective for 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. 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.

FASB ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting . The amendments in ASU 2016-09 simplify several aspects of accounting for employee share-based payments including income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Some areas of the simplification apply only to nonpublic entities. The new guidance will require all income tax effects of awards to be recognized as income tax expense or benefit in the income statement when the awards vest or are settled and additional paid in capital pools will be eliminated. The guidance requires companies to present excess tax benefits as an operating activity on the statement of cash flows rather than as a financing activity. Companies will be required to account for forfeitures of share-based payments by recognizing forfeitures of awards as they occur or estimating the number of awards expected to be forfeited and adjusting the estimate when it is likely to change, as currently required, through an accounting policy election. The guidance will increase the amount an employer can withhold to cover income taxes on awards and still qualify for the exception to liability classification for shares used to satisfy the employer’s income tax withholding obligation. The guidance requires an employer to classify the cash paid to a tax authority when shares are withheld to satisfy its statutory income tax withholding obligation as a financing activity on the statement of cash flows. For public business entities, the amendments in this update are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption will be permitted in any interim or annual period for which financial statements have not yet been issued or have not been made available for issuance, however all of the guidance must be adopted in the same period. If early adoption is elected in an interim period, any adjustments should be reflected as of the beginning of the annual period that includes that interim 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 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net). The amendments in ASU 2016-08 are intended to improve the operability and understandability of the implementation guidance by clarifying the following: how an entity should identify the unit of accounting for the principal versus agent evaluation; how the control principle applies to transactions, such as service arrangements; reframes the indicators to focus on a principal rather than an agent, removes the credit risk and commission indicators and clarifies the relationship between the control principle and the indicators; and revises the existing illustrative examples and adds new illustrative examples. For public business entities, the amendments in this update are effective for annual reporting periods

 

9


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. 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.

FASB ASU 2016-07, Investments—Equity Method and Joint Ventures (Topic 323) , The amendments in this update eliminate the requirement that when an investment qualifies for use of the equity method due to an increase in level of ownership or influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by step basis as if the equity method had been in effect during all previous periods that the investment had been held. For public business entities, the amendments in this update are effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted. The amendments should be applied prospectively upon their effective date to increases in the level of ownership interest or degree of influence that result in the adoption of the equity method. 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.

FASB ASU 2016-06, Derivatives and Hedging (Topic 815), Contingent Put and Call Options in Debt Instruments . The amendments in this update clarify the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. An entity performing the assessment under the amendments in this update is required to assess the embedded call (put) options solely in accordance with the four-step decision sequence. For public business entities, the amendments in this update are effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. An entity should apply the amendments in this update on a modified retrospective basis to existing debt instruments as of the beginning of the fiscal year for which the amendments are effective. 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. 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.

FASB ASU 2016-05, Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships. The amendments in ASU 2016-05 clarify that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument under Topic 815 does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria (including those in paragraphs 815-20-35-14 through 35-18) continue to be met. For public business entities, the amendments in this update are effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. 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.

 

10


FASB ASU 2016-02, Leases (Topic 842). The amendments in ASU 2016-02 increase transparency and comparability by requiring a lessee to recognize assets and liabilities for operating and capital leases with lease terms of more than 12 months. Additional qualitative and quantitative requirements disclosures are required to provide additional information to better understand the amount, timing, and uncertainty of cash flows arising from leases. Lessor accounting will remain largely unchanged from current GAAP. For public business entities, the amendments in this update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. 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.

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.

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, and the FASB has recently issued updates to certain aspects of the guidance as noted above. 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.

 

11


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.

 

     March 31, 2016  

(In thousands)

   Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair
Value
 

Securities available-for-sale

          

Debt securities

          

U.S. government agency debentures

   $ 2,500       $ 20       $ —        $ 2,520   

U.S. states and political subdivisions

     169,281         3,894         (34     173,141   

Residential mortgage-backed securities:

          

U.S. government agencies

     889,511         18,398         (253     907,656   

Commercial mortgage-backed securities:

          

U.S. government agencies

     181,846         2,654         (252     184,248   

Residential collateralized mortgage-backed securities:

          

U.S. government agencies

     2,214,035         20,761         (8,059     2,226,737   

Non-agency

     4         —           —          4   

Commercial collateralized mortgage-backed securities:

          

U.S. government agencies

     269,197         3,976         (291     272,882   

Asset-backed securities:

          

Collateralized loan obligations

     297,885         36         (12,524     285,397   

Corporate debt securities

     61,724         —           (12,968     48,756   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total debt securities

     4,085,983         49,739         (34,381     4,101,341   

Equity securities

          

Marketable equity securities

     2,873         —           —          2,873   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total equity securities

     2,873         —           —          2,873   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total securities available-for-sale

   $ 4,088,856       $ 49,739       $ (34,381   $ 4,104,214   
  

 

 

    

 

 

    

 

 

   

 

 

 

Securities held-to-maturity

          

Debt securities

          

U.S. government agency debentures

   $ 25,000       $ 26       $ —        $ 25,026   

U.S. states and political subdivisions

     558,795         17,285         (262     575,818   

Residential mortgage-backed securities:

          

U.S. government agencies

     88,314         1,280         (266     89,328   

Commercial mortgage-backed securities:

          

U.S. government agencies

     489,216         10,159         (212     499,163   

Residential collateralized mortgage-backed securities:

          

U.S. government agencies

     1,113,901         2,414         (14,257     1,102,058   

Commercial collateralized mortgage-backed securities:

          

U.S. government agencies

     251,421         2,436         (934     252,923   

Corporate debt securities

     87,053         905         —          87,958   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total securities held-to-maturity

   $ 2,613,700       $ 34,505       $ (15,931   $ 2,632,274   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

12


     December 31, 2015  

(In thousands)

   Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
 

Securities available-for-sale

           

Debt securities

           

U.S. treasury notes & bonds

   $ 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   

Non-agency

     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   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

13


     March 31, 2015  

(In thousands)

   Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair
Value
 

Securities available-for-sale

          

Debt securities

          

U.S. government agency debentures

   $ 2,500       $ 13       $ —        $ 2,513   

U.S. states and political subdivisions

     208,800         6,750         (386     215,164   

Residential mortgage-backed securities:

          

U.S. government agencies

     924,453         24,799         (1,949     947,303   

Commercial mortgage-backed securities:

          

U.S. government agencies

     139,789         1,231         (661     140,359   

Residential collateralized mortgage-backed securities:

          

U.S. government agencies

     1,895,112         11,305         (13,857     1,892,560   

Non-agency

     6         —           —          6   

Commercial collateralized mortgage-backed securities:

          

U.S. government agencies

     241,839         2,602         (382     244,059   

Asset-backed securities:

          

Collateralized loan obligations

     297,506         587         (4,131     293,962   

Corporate debt securities

     61,668         —           (9,404     52,264   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total debt securities

     3,771,673         47,287         (30,770     3,788,190   

Equity Securities

          

Marketable equity securities

     2,869         —           —          2,869   

Non-marketable equity securities

     —           —           —          —     
  

 

 

    

 

 

    

 

 

   

 

 

 

Total equity securities

     2,869         —           —          2,869   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total securities available-for-sale

   $ 3,774,542       $ 47,287       $ (30,770   $ 3,791,059   
  

 

 

    

 

 

    

 

 

   

 

 

 

Securities held-to-maturity

          

Debt securities

          

U.S. treasury notes & bonds

   $ 5,000       $ —         $ —        $ 5,000   

U.S. government agency debentures

     25,000         —           (178     24,822   

U.S states and political subdivisions

     523,501         8,864         (1,147     531,218   

Residential mortgage-backed securities:

          

U.S. government agencies

     577,278         10,745         (1,677     586,346   

Commercial mortgage-backed securities:

          

U.S. government agencies

     57,818         765         (108     58,475   

Residential collateralized mortgage-backed securities:

          

U.S. government agencies

     1,320,215         1,959         (24,846     1,297,328   

Commercial collateralized mortgage-backed securities:

          

U.S. government agencies

     256,352         1,659         (3,377     254,634   

Corporate debt securities

     90,010         1,079         —          91,089   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total securities held-to-maturity

   $ 2,855,174       $ 25,071       $ (31,333   $ 2,848,912   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

14


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 $10.0 million in 11 of the 37 U.S. states in which it holds investments.

 

(Dollars in thousands)

   March 31, 2016  

U.S. State

   # of Issuers      Average Issue
Size, Fair Value
     Amortized Cost      Fair Value  

Michigan

     137       $ 1,364       $ 180,322       $ 186,935   

Ohio

     110         1,098         117,643         120,829   

Wisconsin

     61         615         36,369         37,528   

Illinois

     53         1,840         95,228         97,511   

Texas

     53         802         41,356         42,496   

Pennsylvania

     41         1,035         41,680         42,448   

New Jersey

     33         736         23,746         24,285   

Washington

     29         948         26,977         27,497   

Minnesota

     23         699         15,713         16,069   

New York

     18         617         10,819         11,104   

Missouri

     11         1,086         11,637         11,948   

Other

     107         756         79,847         80,899   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total general obligation bonds

     676       $ 1,035       $ 681,337       $ 699,549   
  

 

 

    

 

 

    

 

 

    

 

 

 

(Dollars in thousands)

   December 31, 2015  

U.S. State

   # 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   
  

 

 

    

 

 

    

 

 

    

 

 

 

(Dollars in thousands)

   March 31, 2015  

U.S. State

   # of Issuers      Average Issue
Size, Fair Value
     Amortized Cost      Fair Value  

Michigan

     164       $ 857       $ 138,091       $ 140,620   

Ohio

     136         925         124,908         125,864   

Illinois

     62         1,841         111,649         114,150   

Wisconsin

     73         760         53,877         55,497   

Texas

     63         784         48,388         49,396   

Pennsylvania

     46         1,018         46,085         46,816   

Washington

     31         930         28,194         28,836   

New Jersey

     37         747         26,724         27,623   

Minnesota

     35         697         23,821         24,405   

Missouri

     15         1,098         16,032         16,472   

New York

     19         629         11,646         11,948   

Other

     121         639         76,127         77,365   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total general obligation bonds

     802       $ 896       $ 705,542       $ 718,992   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

15


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 of revenue, financial 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 March 31, 2016 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 constitutes the majority of other investments on the Consolidated Balance Sheets.

 

(In thousands)

   March 31, 2016      December 31, 2015      March 31, 2015  

FRB stock

   $ 56,083       $ 56,083       $ 55,681   

FHLB stock

     91,714         91,714         92,381   

Other

     362         375         413   
  

 

 

    

 

 

    

 

 

 

Total other investments

   $ 148,159       $ 148,172       $ 148,475   
  

 

 

    

 

 

    

 

 

 

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 $3.4 billion, $2.9 billion, and $3.5 billion at March 31, 2016, December 31, 2015, and March 31, 2015, respectively, were pledged to secure trust and public deposits and securities sold under agreements to repurchase and for other purposes required or permitted by law.

 

16


Realized Gains and Losses

The following table presents 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.

 

     Three Months Ended March 31,  

(In thousands)

   2016      2015  

Realized gains

   $ 295       $ 392   

Realized losses

     —           (38
  

 

 

    

 

 

 

Net securities (losses)/gains

   $ 295       $ 354   
  

 

 

    

 

 

 

 

17


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.

 

     March 31, 2016  
     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. states and political subdivisions

   $ 2,880       $ (14     6       $ 1,899       $ (20     4       $ 4,779       $ (34

Residential mortgage-backed securities:

                     

U.S. government agencies

     171         —          2         32,960         (253     3         33,131         (253

Commercial mortgage-backed securities:

                     

U.S. government agencies

     —           —          0         12,595         (252     1         12,595         (252

Residential collateralized mortgage-backed securities:

                     

U.S. government agencies

     96,691         (568     6         552,785         (7,491     46         649,476         (8,059

Commercial collateralized mortgage-backed securities:

                     

U.S. government agencies

     32,200         (107     5         22,464         (184     2         54,664         (291

Asset-backed securities:

                     

Collateralized loan obligations

     149,999         (6,176     27         121,596         (6,348     15         271,595         (12,524

Corporate debt securities

     —           —          0         48,755         (12,968     8         48,755         (12,968
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total securities available-for-sale

   $ 281,941       $ (6,865     46       $ 793,054       $ (27,516     79       $ 1,074,995       $ (34,381
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Securities held-to-maturity

                     

Debt securities

                     

U.S. government agency debentures

   $ —         $ —          0       $ —         $ —          0       $ —         $ —     

U.S. states and political subdivisions

     4,491         (21     9         7,793         (241     10         12,284         (262

Residential mortgage-backed securities:

                     

U.S. government agencies

     —           —          0         62,997         (212     4         62,997         (212

Commercial mortgage-backed securities:

                     

U.S. government agencies

     13,268         (263     1         9,438         (3     1         22,706         (266

Residential collateralized mortgage-backed securities:

                     

U.S. government agencies

     —           —          0         873,299         (14,257     52         873,299         (14,257

Commercial collateralized mortgage-backed securities:

                     

U.S. government agencies

     —           —          0         80,216         (934     7         80,216         (934
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total securities held-to-maturity

   $ 17,759       $ (284     10       $ 1,033,743       $ (15,647     74       $ 1,051,502       $ (15,931
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

 

18


     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       $ —         $ —          0       $ 2,498       $ (2

U.S. treasury notes and bonds

     5,000         (1     1         —           —          0         5,000         (1

U.S. states and political subdivisions

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

Residential mortgage-backed securities:

                    &nbsnbsp;

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

     —           —          0         52,229         (9,481     8         52,229         (9,481
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total securities available-for-sale

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

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Securities held-to-maturity

                     

Debt securities

                     

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         —           —          0         19,243         (22
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total securities held-to-maturity

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

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

 

19


     March 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. states and political subdivisions

   $ 14,380       $ (117     23       $ 6,004       $ (269     10       $ 20,384       $ (386

Residential mortgage-backed securities:

                     

U.S. government agencies

     74,517         (360     5         108,052         (1,589     8         182,569         (1,949

Commercial mortgage-backed securities:

                     

U.S. government agencies

     49,129         (175     7         17,690         (486     2         66,819         (661

Residential collateralized mortgage-backed securities:

                     

U.S. government agencies

     70,574         (762     6         745,621         (13,095     53         816,195         (13,857

Commercial collateralized mortgage-backed securities:

                     

U.S. government agencies

     13,206         (24     2         61,132         (358     6         74,338         (382

Asset-backed securities:

                     

Collateralized loan obligations

     24,087         (209     3         181,498         (3,922     27         205,585         (4,131

Corporate debt securities

     —           —          0         52,263         (9,404     8         52,263         (9,404
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total securities available-for-sale

   $ 245,893       $ (1,647     46       $ 1,172,260       $ (29,123     114       $ 1,418,153       $ (30,770
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Securities held-to-maturity

                     

Debt securities

                     

U.S. treasury notes & bonds

   $ 5,000       $ —          1       $ —         $ —          0       $ 5,000       $ —     

U.S. government agency debentures

     —           —          0         24,822         (178     1         24,822         (178

U.S. states and political subdivisions

     38,202         (1,093     26         4,448         (54     6         42,650         (1,147

Residential mortgage-backed securities:

                     

U.S. government agencies

     28,386         (123     2         110,329         (1,554     6         138,715         (1,677

Commercial mortgage-backed securities:

                     

U.S. government agencies

     —           —          0         9,554         (108     1         9,554         (108

Residential collateralized mortgage-backed securities:

                     

U.S. government agencies

     19,016         (71     1         1,095,375         (24,775     56         1,114,391         (24,846

Commercial collateralized mortgage-backed securities:

                     

U.S. government agencies

     —           —          0         144,970         (3,377     13         144,970         (3,377

Corporate debt securities

     —           —          0         —           —          0         —           —     
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total securities held-to-maturity

   $ 90,604       $ (1,287     30       $ 1,389,498       $ (30,046     83       $ 1,480,102       $ (31,333
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

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 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

 

20


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 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 gain position of $33.9 million at March 31, 2016, compared to a net unrealized loss position of $53.0 million at December 31, 2015 and a net unrealized gain position of $10.3 million at March 31, 2015. Gross unrealized losses were $50.3 million as of March 31, 2016, compared to $100.4 million at December 31, 2015, and $62.1 million at March 31, 2015. As of March 31, 2016, gross unrealized losses are concentrated within agency MBS, CLOs, and corporate debt securities. Securities classified as corporate debt would 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 March 31, 2016 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 hold CLOs. As of March 31, 2016, the Corporation holds $285.4 million of CLOs with a gross unrealized loss position of $12.5 million. Management believes that its holdings of CLOs are not ownership interests 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.

 

21


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 March 31, 2016. 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.

 

(Dollars in thousands)

   U.S.
Government
agency
debentures
    U.S. States
and political
subdivisions
    Residential
mortgage-
backed
securities -
U.S. govt.
agencies
    Commercial
mortgage-
backed
securities -
U.S. govt.
agencies
    Residential
collateralized
mortgage
obligations -
U.S. govt.
agencies
    Residential
collateralized
mortgage
obligations -
non-agency
    Commercial
collateralized
mortgage
obligations -
U.S. govt.
agencies
    Asset backed
securities -
collateralized
loan
obligations
    Corporate
debt
securities
    Total     Weighted
Average
Yield
 

Securities Available-for-Sale

                                                                  

Remaining maturity:

                      

One year or less

   $ —        $ 7,120      $ 119      $ —        $ —        $ —        $ —        $ —        $ —        $ 7,239        3.29

Over one year through five years

     2,520        79,686        61,444        32,937        16,015        3        15,653        —          —          208,258        3.80

Over five years through ten years

     —          66,049        52,312        122,070        11,655        —          110,696        204,643        —          567,425        3.06

Over ten years

     —          20,286        793,781        29,241        2,199,067        1        146,533        80,754        48,756        3,318,419        2.11
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair Value

   $ 2,520      $ 173,141      $ 907,656      $ 184,248      $ 2,226,737      $ 4      $ 272,882      $ 285,397      $ 48,756      $ 4,101,341        2.33
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Amortized Cost

   $ 2,500      $ 169,281      $ 889,511      $ 181,846      $ 2,214,035      $ 4      $ 269,197      $ 297,885      $ 61,724      $ 4,085,983     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Weighted-Average Yield

     1.25     5.17     2.40     2.15     2.04     2.60     2.21     3.07     1.34     2.33  

Weighted-Average Maturity (in years)

     2.17        1.96        3.38        4.24        3.44        0.60        4.09        6.51        11.56        3.79     

Securities  Held-to-Maturity

                                                                  

Remaining maturity:

                      

One year or less

   $ —        $ 65,484      $ —        $ —        $ —        $ —        $ —        $ —        $ 22,609      $ 88,093        2.21

Over one year through five years

     25,026        157,086        36,437        —          —          —          81,282        —          65,349        365,180        2.45

Over five years through ten years

     —          202,251        52,891        22,567        —          —          40,984        —          —          318,693        3.83

Over ten years

     —          150,997        —          476,596        1,102,058        —          130,657        —          —          1,860,308        2.07
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair Value

   $ 25,026      $ 575,818      $ 89,328      $ 499,163      $ 1,102,058      $ —        $ 252,923      $ —        $ 87,958      $ 2,632,274        2.34
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Amortized Cost

   $ 25,000      $ 558,795      $ 88,314      $ 489,216      $ 1,113,901      $ —        $ 251,421      $ —        $ 87,053      $ 2,613,700     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Weighted-Average Yield

     1.43     4.22     2.02     2.15     1.60     —       2.00     —       2.26     2.34  

Weighted-Average Maturity (in years)

     0.08        4.61        3.36        3.57        3.45        —          3.85        —          1.77        3.67     

 

22


3. Loans

Loans outstanding as of March 31, 2016, December 31, 2015, and March 31, 2015, net of unearned income, consisted of the following:

 

(In thousands)

   March 31, 2016     December 31, 2015     March 31, 2015  

Originated loans:

      

Commercial

   $ 9,100,731      $ 9,007,830      $ 8,420,765   

Residential mortgage

     700,138        689,045        639,980   

Installment

     3,154,912        2,990,349        2,500,288   

Home equity

     1,254,709        1,248,438        1,134,238   

Credit cards

     179,023        182,843        160,766   
  

 

 

   

 

 

   

 

 

 

Total originated loans

     14,389,513        14,118,505        12,856,037   

Allowance for originated loan losses

     (102,915     (105,135     (97,545
  

 

 

   

 

 

   

 

 

 

Net originated loans

   $ 14,286,598      $ 14,013,370      $ 12,758,492   
  

 

 

   

 

 

   

 

 

 

Acquired loans:

      

Commercial

   $ 628,030      $ 677,149      $ 1,011,170   

Residential mortgage

     308,618        324,008        378,192   

Installment

     539,313        573,372        717,693   

Home equity

     157,745        168,542        217,824   
  

 

 

   

 

 

   

 

 

 

Total acquired loans

     1,633,706        1,743,071        2,324,879   

Allowance for acquired loan losses

     (4,423     (3,877     (7,493
  

 

 

   

 

 

   

 

 

 

Net acquired loans

   $ 1,629,283      $ 1,739,194      $ 2,317,386   
  

 

 

   

 

 

   

 

 

 

FDIC acquired loans:

      

Commercial

   $ 122,123      $ 129,109      $ 179,547   

Residential mortgage

     34,594        35,568        40,470   

Installment

     1,942        2,077        4,781   

Home equity

     34,136        38,668        65,170   

Loss share receivable

     9,436        9,947        20,005   
  

 

 

   

 

 

   

 

 

 

Total FDIC acquired loans

     202,231        215,369        309,973   

Allowance for FDIC acquired loan losses

     (44,599     (44,679     (41,514
  

 

 

   

 

 

   

 

 

 

Net FDIC acquired loans

   $ 157,632      $ 170,690      $ 268,459   
  

 

 

   

 

 

   

 

 

 

Total loans:

      

Commercial

   $ 9,850,884      $ 9,814,088      $ 9,611,482   

Residential mortgage

     1,043,350        1,048,621        1,058,642   

Installment

     3,696,167        3,565,798        3,222,762   

Home equity

     1,446,590        1,455,648        1,417,232   

Credit cards

     179,023        182,843        160,766   

Loss share receivable

     9,436        9,947        20,005   
  

 

 

   

 

 

   

 

 

 

Total loans

     16,225,450        16,076,945        15,490,889   

Total allowance for loan losses

     (151,937     (153,691     (146,552
  

 

 

   

 

 

   

 

 

 

Total Net loans

   $ 16,073,513      $ 15,923,254      $ 15,344,337   
  

 

 

   

 

 

   

 

 

 

 

23


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 $4.9 million, $4.1 million, and $4.6 million at March 31, 2016, December 31, 2015, and March 31, 2015, respectively.

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.

Total outstanding acquired impaired loans as of March 31, 2016 and 2015 were $370.6 million and $548.2 million, respectively. The outstanding balance of these loans is the undiscounted sum of all amounts, including amounts deemed principal, interest, fees, penalties, and other under the loans, 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 three months ended March 31, 2016 and 2015:

 

     Three Months Ended March 31,  
Acquired Impaired Loans    2016      2015  

(In thousands)

   Accretable
Yield
     Carrying
Amount of
Loans
     Accretable
Yield
     Carrying
Amount of
Loans
 

Balance at beginning of period

   $ 89,823       $ 284,709       $ 119,450       $ 423,209   

Accretion

     (8,902      8,902         (11,218      11,218   

Net reclassifications from nonaccretable to accretable

     7,753         —           12,995         —     

Payments received, net

     —           (36,459      —           (46,114

Disposals

     (3,230      —           (2,471      —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance at end of period

   $ 85,444       $ 257,152       $ 118,756       $ 388,313   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

24


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 quarter ended March 31, 2016, there was an overall improvement in cash flow expectations, which resulted in the net reclassification of $7.8 million from the nonaccretable difference to accretable yield. This reclassification was $13.0 million for the three months ended March 31, 2015. 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 $122.1 million of loans no longer being covered as of March 31, 2016. As of March 31, 2016, $70.7 million remained covered by single family loss share agreements.

Changes in the loss share receivable for the three months ended March 31, 2016 and 2015 were as follows:

 

Loss Share Receivable    Three Months Ended March 31,  

(In thousands)

   2016      2015  

Balance at beginning of period

   $ 9,947       $ 22,033   

Amortization

     (348      (2,187

Increase/(decrease) due to impairment (recapture) on FDIC acquired loans

     269         4,227   

FDIC reimbursement

     (192      (4,013

FDIC acquired loans paid in full

     (240      (55
  

 

 

    

 

 

 

Balance at end of the period (1)

   $ 9,436       $ 20,005   
  

 

 

    

 

 

 

 

(1) As of March 31, 2016, the loss share receivable of $9.4 million was related to single family covered loans.

 

25


Total outstanding FDIC acquired impaired loans were $306.6 million and $404.4 million as of March 31, 2016 and 2015, respectively. The outstanding balance of these loans is the undiscounted sum of all amounts, including amounts deemed principal, interest, fees, penalties, and other under the loans, 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 three months ended March 31, 2016 and 2015:

 

     Three Months Ended March 31,  
FDIC Acquired Impaired Loans    2016      2015  

(In thousands)

   Accretable
Yield
     Carrying
Amount of

Loans
     Accretable
Yield
     Carrying
Amount of

Loans
 

Balance at beginning of period

   $ 22,908       $ 130,648       $ 37,511       $ 232,452   

Accretion

     (2,297      2,297         (5,567      5,567   

Net reclassifications between non-accretable and accretable

     1,673         —           (56      —     

Payments received, net

     —           (10,811      —           (38,794

(Disposals)/Additions

     (158      —           (2,021      —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance at end of period

   $ 22,126       $ 122,134       $ 29,867       $ 199,225   
  

 

 

    

 

 

    

 

 

    

 

 

 

The cash flows expected to be collected on covered impaired loans are estimated quarterly in a similar manner as described above for acquired impaired loans. During the quarter ended March 31, 2016, the re-estimation process resulted in a net reclassification of $1.7 million from the nonaccretable difference to accretable yield. This reclassification was $0.1 million for the three months ended March 31, 2015. 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.

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 FDIC acquired 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

 

26


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.

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 March 31, 2016

 
(In thousands)                                              ³  90 Days         

Originated Loans

   Days Past Due      Total
Past Due
     Current      Total
Loans
     Past Due and
Accruing (1)
     Nonaccrual
Loans
 
   30-59      60-89      ³ 90                 

Commercial

                       

C&I

   $ 2,485       $ 3,464       $ 8,627       $ 14,576       $ 5,822,739       $ 5,837,315       $ 274       $ 35,500   

CRE

     3,211         1,137         17,024         21,372         2,058,290         2,079,662         2,420         18,216   

Construction

     6,891         —           485         7,376         663,449         670,825         —           3,010   

Leases

     —           —           —           —           512,929         512,929         —           —     

Consumer

                       

Installment

     13,150         2,591         3,567         19,308         3,135,604         3,154,912         3,178         2,554   

Home Equity Lines

     1,100         897         1,757         3,754         1,250,955         1,254,709         274         2,267   

Credit Cards

     857         483         843         2,183         176,840         179,023         339         554   

Residential Mortgages

     11,278         1,544         6,801         19,623         680,515         700,138         2,876         11,600   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 38,972       $ 10,116       $ 39,104       $ 88,192       $ 14,301,321       $ 14,389,513       $ 9,361       $ 73,701   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Acquired Loans

                                             ³ 90 Days         
   Days Past Due      Total             Total      Past Due and      Nonaccrual  
   30-59      60-89      ³ 90      Past Due      Current      Loans      Accruing (3)      Loans (3)  

Commercial

                       

C&I

   $ 1,092       $ 75       $ 1,729       $ 2,896       $ 227,804       $ 230,700       $ 145       $ 766   

CRE

     2,580         918         10,561         14,059         377,804         391,863         —           4,332   

Construction

     —           —           718         718         4,749         5,467         —           —     

Consumer

                       

Installment

     3,869         793         633         5,295         534,018         539,313         289         600   

Home Equity Lines

     1,002         120         470         1,592         156,153         157,745         260         320   

Residential Mortgages

     9,244         49         4,515         13,808         294,810         308,618         1,018         980   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 17,787       $ 1,955       $ 18,626       $ 38,368       $ 1,595,338       $ 1,633,706       $ 1,712       $ 6,998   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

FDIC Acquired Loans (2)

                                             ³ 90 Days         
   Days Past Due      Total             Total      Past Due and      Nonaccrual  
   30-59      60-89      ³ 90      Past Due      Current      Loans      Accruing (3)      Loans (3)  

Commercial

                       

C&I

   $ —         $ —         $ 949       $ 949       $ 30,981       $ 31,930         n/a         n/a   

CRE

     288         344         27,699         28,331         56,973         85,304         n/a         n/a   

Construction

     —           —           3,133         3,133         1,756         4,889         n/a         n/a   

Consumer

                       

Installment

     —           —           —           —           1,942         1,942         n/a         n/a   

Home Equity Lines

     1,969         46         1,693         3,708         30,428         34,136         n/a         n/a   

Residential Mortgages

     4,490         167         2,582         7,239         27,355         34,594         n/a         n/a   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

       

Total

   $ 6,747       $ 557       $ 36,056       $ 43,360       $ 149,435       $ 192,795         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 March 31, 2016.
(2) Excludes loss share receivable of $9.4 million as of March 31, 2016.
(3) Acquired and FDIC acquired impaired loans were not classified as nonperforming assets at March 31, 2016 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.

 

27


As of December 31, 2015

 
(In thousands)                                              ³  90 Days         

Originated Loans

   Days Past Due      Total             Total      Past Due and      Nonaccrual  
   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

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Acquired Loans

                                             ³ 90 Days         
   Days Past Due      Total             Total      Past Due and      Nonaccrual  
   30-59      60-89      ³ 90      Past Due      Current      Loans      Accruing (3)      Loans (3)  

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     nbsp;    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

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

FDIC Acquired Loans (2)

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

   $ 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.

 

28


As of March 31, 2015

 
(In thousands)                                              ³  90 Days         

Originated Loans

   Days Past Due      Total             Total      Past Due and      Nonaccrual  
   30-59      60-89      ³ 90      Past Due      Current      Loans      Accruing (1)      Loans  

Commercial

                       

C&I

   $ 525       $ 515       $ 5,846       $ 6,886       $ 5,311,011       $ 5,317,897       $ 498       $ 18,838   

CRE

     4,401         1,177         3,481         9,059         2,123,958         2,133,017         150         9,640   

Construction

     —           —           —           —           580,978         580,978         —           —     

Leases

     255         —           —           255         388,618         388,873         —           —     

Consumer

                       

Installment

     11,294         3,215         4,157         18,666         2,481,622         2,500,288         3,332         3,016   

Home Equity Lines

     1,480         323         1,395         3,198         1,131,040         1,134,238         622         1,780   

Credit Cards

     654         301         637         1,592         159,174         160,766         312         523   

Residential Mortgages

     9,236         2,515         7,402         19,153         620,827         639,980         3,000         12,288   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 27,845       $ 8,046       $ 22,918       $ 58,809       $ 12,797,228       $ 12,856,037       $ 7,914       $ 46,085   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Acquired Loans

                                             ³ 90 Days         
   Days Past Due      Total             Total      Past Due and      Nonaccrual  
   30-59      60-89      ³ 90      Past Due      Current      Loans      Accruing (3)      Loans (3)  

Commercial

                       

C&I

   $ 66       $ 131       $ 5,366       $ 5,563       $ 415,247       $ 420,810       $ 44       $ 700   

CRE

     4,507         1,380         23,420         29,307         554,765         584,072         252         4,172   

Construction

     —           —           676         676         5,612         6,288         —           —     

Consumer

                       

Installment

     4,859         1,322         1,121         7,302         710,391         717,693         521         746   

Home Equity Lines

     2,850         1,544         1,172         5,566         212,258         217,824         462         639   

Residential Mortgages

     9,894         590         5,250         15,734         362,458         378,192         425         997   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 22,176       $ 4,967       $ 37,005       $ 64,148       $ 2,260,731       $ 2,324,879       $ 1,704       $ 7,254   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

FDIC Acquired Loans (2)

                                             ³ 90 Days         
   Days Past Due      Total             Total      Past Due and      Nonaccrual  
   30-59      60-89      ³ 90      Past Due      Current      Loans      Accruing (3)      Loans (3)  

Commercial

                       

C&I

   $ 815       $ 144       $ 4,566       $ 5,525       $ 37,289       $ 42,814         n/a         n/a   

CRE

     413         5,218         44,023         49,654         78,254         127,908         n/a         n/a   

Construction

     —           —           6,906         6,906         1,919         8,825         n/a         n/a   

Consumer

                       

Installment

     —           110         —           110         4,671         4,781         n/a         n/a   

Home Equity Lines

     2,291         564         3,651         6,506         58,664         65,170         n/a         n/a   

Residential Mortgages

     5,714         163         3,684         9,561         30,909         40,470         n/a         n/a   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

       

Total

   $ 9,233       $ 6,199       $ 62,830       $ 78,262       $ 211,706       $ 289,968         n/a         n/a   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

       

 

(1) Installment loans 90 days or more past due and accruing include $2.4 million of loans guaranteed by the U.S. government as of March 31, 2015.
(2) Excludes loss share receivable of $20.0 million as of March 31, 2015.
(3) Acquired and FDIC acquired impaired loans were not classified as nonperforming assets at March 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 of information about 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.

 

29


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.

 

30


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

 

As of March 31, 2016

 
(In thousands)                                   

Originated Loans

   Commercial  
   C&I      CRE      Construction      Leases      Total  

Grade 1

   $ 68,185       $ 757       $ —         $ 12,613       $ 81,555   

Grade 2

     397,855         818         —           43,507         442,180   

Grade 3

     1,317,058         310,816         52,039         80,042         1,759,955   

Grade 4

     3,762,793         1,719,833         597,571         336,402         6,416,599   

Grade 5

     141,456         9,924         2,401         32,416         186,197   

Grade 6

     146,380         37,514         18,814         7,949         210,657   

Grade 7

     3,588         —           —           —           3,588   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 5,837,315       $ 2,079,662       $ 670,825       $ 512,929       $ 9,100,731   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Acquired Loans

   Commercial  
   C&I      CRE      Construction      Leases      Total  

Grade 1

   $ —         $ —         $ —         $ —         $ —     

Grade 2

     596         615         —           —           1,211   

Grade 3

     27,818         23,221         —           —           51,039   

Grade 4

     169,906         327,406         4,749         —           502,061   

Grade 5

     24,577         11,663         —           —           36,240   

Grade 6

     7,803         28,958         718         —           37,479   

Grade 7

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 230,700       $ 391,863       $ 5,467       $ —         $ 628,030   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

FDIC Acquired Loans

   Commercial  
   C&I      CRE      Construction      Leases      Total  

Grade 1

   $ —         $ —         $ —         $ —         $ —     

Grade 2

     965         —           —           —           965   

Grade 3

     —           6,807         —           —           6,807   

Grade 4

     28,483