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:

                     

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         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         48,512         682         —           77,677   

Grade 5

     266         —           —           —           266   

Grade 6

     2,216         29,985         4,207         —           36,408   

Grade 7

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 31,930       $ 85,304       $ 4,889       $ —         $ 122,123   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

31


As of December 31, 2015

 
(In thousands)                                  

Originated Loans

   Commercial  
   C&I      CRE     Construction      Leases      Total  

Grade 1

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

Grade 2

     353,581         831        —           69,258         423,670   

Grade 3

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

Grade 4

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

Grade 5

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

Grade 6

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

Grade 7

     2,581         (1     —           —           2,580   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Acquired Loans

   Commercial  
   C&I      CRE     Construction      Leases      Total  

Grade 1

   $ 346       $ —        $ —         $ —         $ 346   

Grade 2

     —           —          —           —           —     

Grade 3

     15,548         27,387        —           —           42,935   

Grade 4

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

Grade 5

     11,735         12,546        —           —           24,281   

Grade 6

     11,780         29,440        733         —           41,953   

Grade 7

     —           —          —           —           —     
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

FDIC Acquired Loans

   Commercial  
   C&I      CRE     Construction      Leases      Total  

Grade 1

   $ —         $ —        $ —         $ —         $ —     

Grade 2

     1,072         —          —           —           1,072   

Grade 3

     —           7,004        —           —           7,004   

Grade 4

     31,637         49,917        819         —           82,373   

Grade 5

     295         —          —           —           295   

Grade 6

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

Grade 7

     —           —          —           —           —     
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

 

32


As of March 31, 2015

 
(In thousands)                                   

Originated Loans

   Commercial  
   C&I      CRE      Construction      Leases      Total  

Grade 1

   $ 59,380       $ 667       $ —         $ 13,052       $ 73,099   

Grade 2

     191,008         3,368         —           5,782         200,158   

Grade 3

     1,405,007         339,027         62,821         69,686         1,876,541   

Grade 4

     3,504,600         1,724,516         516,852         297,790         6,043,758   

Grade 5

     103,432         29,034         942         1,307         134,715   

Grade 6

     54,470         36,405         363         1,256         92,494   

Grade 7

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 5,317,897       $ 2,133,017       $ 580,978       $ 388,873       $ 8,420,765   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Acquired Loans

   Commercial  
   C&I      CRE      Construction      Leases      Total  

Grade 1

   $ 1,069       $ —         $ —         $ —         $ 1,069   

Grade 2

     —           —           —           —           —     

Grade 3

     22,875         24,834         —           —           47,709   

Grade 4

     359,751         496,213         5,612         —           861,576   

Grade 5

     15,363         21,487         —           —           36,850   

Grade 6

     21,752         41,538         676         —           63,966   

Grade 7

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 420,810       $ 584,072       $ 6,288       $ —         $ 1,011,170   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

FDIC Acquired Loans

   Commercial  
   C&I      CRE      Construction      Leases      Total  

Grade 1

   $ —         $ —         $ —         $ —         $ —     

Grade 2

     1,040         —           —           —           1,040   

Grade 3

     —           —           —           —           —     

Grade 4

     33,352         74,128         579         —           108,059   

Grade 5

     39         2,134         —           —           2,173   

Grade 6

     8,383         51,646         8,246         —           68,275   

Grade 7

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 42,814       $ 127,908       $ 8,825       $ —         $ 179,547   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

4. Allowance for Loan Losses

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

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

 

33


Allowance for Originated Loan Losses

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

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

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

 

34


The following tables show activity in the originated ALL, by portfolio segment for the three months ended March 31, 2016 and 2015, as well as the corresponding recorded investment in originated loans at the end of the period:

 

As of March 31, 2016

 
(In thousands)  

Originated Loans

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

Three Months Ended

  

           

Allowance for originated loan losses, beginning balance

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

Charge-offs

    (3,209     (109     —          —          (6,769     (1,027     (1,450     (450     (13,014

Recoveries

    532        24        2        19        3,806        624        357        20        5,384   

Provision for loan losses

    2,406        (2,302     (59     167        3,444        (163     853        1,064        5,410   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for originated loan losses, ending balance

  $ 44,489      $ 7,244      $ 1,537      $ 1,499      $ 14,664      $ 19,528      $ 8,591      $ 5,363      $ 102,915   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending allowance for originated loan losses balance attributable to loans:

  

Individually evaluated for impairment

  $ 6,194      $ 567      $ —        $ —        $ 1,081      $ 185      $ 225      $ 1,038      $ 9,290   

Collectively evaluated for impairment

    38,295        6,677        1,537        1,499        13,583        19,343        8,366        4,325        93,625   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total ending allowance for originated loan losses balance

  $ 44,489      $ 7,244      $ 1,537      $ 1,499      $ 14,664      $ 19,528      $ 8,591      $ 5,363      $ 102,915   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Originated loans:

  

Originated loans individually evaluated for impairment

  $ 46,996      $ 24,013      $ —        $ —        $ 40,134      $ 7,720      $ 687      $ 23,105      $ 142,655   

Originated loans collectively evaluated for impairment

    5,790,319        2,055,649        670,825        512,929        3,114,778        1,246,989        178,336        677,033        14,246,858   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total ending originated loan balance

  $ 5,837,315      $ 2,079,662      $ 670,825      $ 512,929      $ 3,154,912      $ 1,254,709      $ 179,023      $ 700,138      $ 14,389,513   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

As of March 31, 2015

 
(In thousands)  

Originated Loans

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

Three Months Ended

  

           

Allowance for originated loan losses, beginning balance

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

Charge-offs

    (510     (215     —          —          (5,055     (911     (1,452     (424     (8,567

Recoveries

    341        —          1        4        3,020        613        366        35        4,380   

Provision for loan losses

    2,632        (1,464     (451     (49     2,475        407        921        1,565        6,036   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for originated loan losses, ending balance

  $ 39,838      $ 8,813      $ 1,752      $ 629      $ 13,358      $ 19,433      $ 7,801      $ 5,921      $ 97,545   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending allowance for originated loan losses balance attributable to loans:

  

Individually evaluated for impairment

  $ 10,042      $ 317      $ —        $ —        $ 1,005      $ 254      $ 263      $ 1,416      $ 13,297   

Collectively evaluated for impairment

    29,796        8,496        1,752        629        12,353        19,179        7,538        4,505        84,248   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total ending allowance for originated loan losses balance

  $ 39,838      $ 8,813      $ 1,752      $ 629      $ 13,358      $ 19,433      $ 7,801      $ 5,921      $ 97,545   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Originated loans:

  

Originated loans individually evaluated for impairment

  $ 35,792      $ 15,000      $ —        $ —        $ 26,882      $ 7,632      $ 815      $ 24,822      $ 110,943   

Originated loans collectively evaluated for impairment

    5,282,105        2,118,017        580,978        388,873        2,473,406        1,126,606        159,951        615,158        12,745,094   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total ending originated loan balance

  $ 5,317,897      $ 2,133,017      $ 580,978      $ 388,873      $ 2,500,288      $ 1,134,238      $ 160,766      $ 639,980      $ 12,856,037   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

35


The following table presents the originated ALL and the recorded investment as of December 31, 2015:

 

As of December 31, 2015

 
(In thousands)  

Originated Loans

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

Ending allowance for originated loan losses balance attributable to loans:

  

Individually evaluated for impairment

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

Collectively evaluated for impairment

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total ending allowance for originated loan losses balance

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Originated loans:

  

Loans individually evaluated for impairment

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

Loans collectively evaluated for impairment

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total ending originated loan balance

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for Acquired Loan Losses

The Citizens’ loans were recorded at their fair value as of the Acquisition Date and the prior ALL was eliminated. An ALL for acquired nonimpaired loans is estimated using a methodology similar to that used for originated loans. The allowance determined for each acquired nonimpaired loan is compared to the remaining fair value adjustment for that loan. If the computed allowance is greater, the excess is added to the allowance through a provision for loan losses. If the computed allowance is less, no additional allowance is recognized. As of March 31, 2016, the computed ALL was less than the remaining fair value discount; therefore, no ALL for acquired nonimpaired loans was recorded.

Charge-offs and actual losses on an acquired nonimpaired loan first reduce any remaining fair value discount for that loan. Once a loan’s discount is depleted, charge-offs and actual losses are applied against the acquired ALL. During the three months ended March 31, 2016 and 2015, provision for loan losses, equal to net charge-offs, of $0.6 million and $2.2 million, respectively, were recorded. Charge-offs on acquired nonimpaired loans were mainly related to consumer loans that were written off in accordance with the Corporation’s credit policies based on a predetermined number of days past due.

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

 

36


The following table presents activity in the allowance for acquired impaired loan losses for the three months ended March 31, 2016 and 2015:

 

Allowance for Acquired Impaired Loan Losses

   Three Months Ended March 31,  

(In thousands)

   2016      2015  

Balance at beginning of the period

   $ 3,877       $ 7,457   

Charge-offs

     —           —     

Recoveries

     —           —     

Provision/(recapture) for loan losses

     546         36   
  

 

 

    

 

 

 

Balance at end of the period

   $ 4,423       $ 7,493   
  

 

 

    

 

 

 

Allowance for FDIC Acquired Loan Losses

The ALL on FDIC acquired nonimpaired loans is estimated similar to acquired loans as described above except any increase to the ALL and provision for loan losses is partially offset by an increase in the loss share receivable for the portion of the losses recoverable under the loss share agreements with the FDIC. As of March 31, 2016, the computed ALL was less than the remaining fair value discount; therefore, no ALL for FDIC acquired nonimpaired loans was recorded.

The following table presents activity in the allowance for FDIC acquired impaired loan losses for the three months ended March 31, 2016 and 2015:

 

Allowance for FDIC acquired Impaired Loan Losses

   Three Months Ended March 31,  

(In thousands)

   2016      2015  

Balance at beginning of the period

   $ 44,679       $ 40,496   

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

     1,537         4,225   

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

     (269      (4,227
  

 

 

    

 

 

 

Net provision/(recapture) for loan losses

     1,268         (2

Increase/(decrease) in loss share receivable

     269         4,227   

Loans charged-off

     (1,617      (3,207
  

 

 

    

 

 

 

Balance at end of the period

   $ 44,599       $ 41,514   
  

 

 

    

 

 

 

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

 

37


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

Credit Quality

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

Interest income recognized on impaired loans was $0.2 million for the three months ended March 31, 2016, compared to $118.0 thousand for the three months ended March 31, 2015. Interest income which would have been earned in accordance with the original terms was $1.2 million for the three months ended March 31, 2016, compared to $0.9 million for the three months ended March 31, 2015.

Loan impairment is measured based on either the present value of expected future cash flows discounted at the loan’s effective interest rate, at the observable market price of the loan, or the fair value of the collateral for certain collateral dependent loans. Impaired loans include all nonaccrual commercial, agricultural, construction, and commercial real estate loans, and loans modified as a TDR, regardless of nonperforming status. Acquired and FDIC acquired impaired loans are not considered or reported as impaired loans. Nonimpaired acquired loans that are subsequently placed on nonaccrual status are reported as impaired loans and included in the Troubled Debt Restructurings section below. Acquired loans restructured after acquisition are not considered or reported as TDRs if the loans evidenced credit deterioration as of the date of acquisition and are accounted for in pools.

 

38


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

 

As of March 31, 2016

 
Originated Loans           Unpaid             Average  

(In thousands)

   Recorded
Investment
     Principal
Balance
     Related
Allowance
     Recorded
Investment
 

Impaired loans with no related allowance

           

Commercial

           

C&I

   $ 32,520       $ 38,568       $ —         $ 30,827   

CRE

     20,598         22,604         —           13,776   

Construction

     —           —           —           —     

Leases

     —           —           —           —     

Consumer

           

Installment

     1,236         1,493         —           1,162   

Home equity line

     481         738         —           751   

Credit card

     13         13         —           20   

Residential mortgages

     11,184         13,562         —           11,775   
  

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

     66,032         76,978         —           58,311   

Impaired loans with a related allowance

           

Commercial

           

C&I

     14,476         14,617         6,194         14,117   

CRE

     3,415         3,447         567         2,435   

Construction

     —           —           —           —     

Leases

     —           —           —           —     

Consumer

           

Installment

     38,898         39,013         1,081         32,499   

Home equity line

     7,239         7,239         185         6,699   

Credit card

     674         674         225         725   

Residential mortgages

     11,921         12,036         1,038         12,394   
  

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

     76,623         77,026         9,290         68,869   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 142,655       $ 154,004       $ 9,290       $ 127,180   
  

 

 

    

 

 

    

 

 

    

 

 

 

Note 1: These tables exclude loans fully charged off.

Note 2: The differences between the recorded investment and unpaid principal balance amounts represent partial charge offs.

 

39


As of December 31, 2015

 
Originated Loans           Unpaid             Average  

(In thousands)

   Recorded
Investment
     Principal
Balance
     Related
Allowance
     Recorded
Investment
 

Impaired loans with no related allowance

           

Commercial

           

C&I

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

CRE

     15,465         17,456         —           13,031   

Construction

     —           —           —           —     

Consumer

           

Installment

     1,369         1,658         —           1,807   

Home equity line

     670         919         —           999   

Credit card

     21         21         —           20   

Residential mortgages

     11,550         13,901         —           11,979   
  

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

     50,141         57,809         —           55,051   

Impaired loans with a related allowance

           

Commercial

           

C&I

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

CRE

     1,149         1,173         128         3,037   

Construction

     —           —           —           —     

Consumer

           

Installment

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

Home equity line

     6,410         6,411         188         6,382   

Credit card

     696         696         243         757   

Residential mortgages

     12,355         12,458         944         12,619   
  

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

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

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

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

 

 

    

 

 

    

 

 

    

 

 

 

Note 1: These tables exclude loans fully charged off.

Note 2: The differences between the recorded investment and unpaid principal balance amounts represent partial charge offs.

 

40


As of March 31, 2015

 
Originated Loans           Unpaid             Average  

(In thousands)

   Recorded
Investment
     Principal
Balance
     Related
Allowance
     Recorded
Investment
 

Impaired loans with no related allowance

           

Commercial

           

C&I

   $ 28,513       $ 35,307       $ —         $ 25,006   

CRE

     9,343         15,478         —           9,634   

Construction

     —           —           —           —     

Consumer

           

Installment

     1,846         2,428         —           1,881   

Home equity line

     977         1,222         —           987   

Credit card

     21         21         —           23   

Residential mortgages

     12,424         15,125         —           12,488   
  

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

     53,124         69,581         —           50,019   

Impaired loans with a related allowance

           

Commercial

           

C&I

     7,279         7,350         10,042         5,984   

CRE

     5,657         5,664         317         5,668   

Construction

     —           —           —           —     

Consumer

           

Installment

     25,036         25,100         1,005         24,181   

Home equity line

     6,655         6,655         254         6,715   

Credit card

     794         794         263         823   

Residential mortgages

     12,398         12,487         1,416         12,414   
  

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

     57,819         58,050         13,297         55,785   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 110,943       $ 127,631       $ 13,297       $ 105,804   
  

 

 

    

 

 

    

 

 

    

 

 

 

Note 1: These tables exclude loans fully charged off.

Note 2: The differences between the recorded investment and unpaid principal balance amounts represent partial charge offs.

Troubled Debt Restructurings

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

 

41


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

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

 

42


The following tables provide the number of loans modified in a TDR and the recorded investment and unpaid principal balance by loan portfolio as of March 31, 2016, December 31, 2015, and March 31, 2015.

 

     As of March 31, 2016  

(Dollars in thousands)

   Number of
Loans
     Recorded
Investment
     Unpaid Principal
Balance
 

Originated loans

        

Commercial

        

C&I

     27       $ 28,160       $ 28,980   

CRE

     22         14,175         16,141   

Construction

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total originated commercial

     49         42,335         45,121   

Consumer

        

Installment

     1,224         40,134         40,506   

Home equity lines

     253         7,720         7,977   

Credit card

     201         687         687   

Residential mortgages

     307         23,105         25,598   
  

 

 

    

 

 

    

 

 

 

Total originated consumer

     1,985         71,646         74,768   
  

 

 

    

 

 

    

 

 

 

Total originated loans

     2,034       $ 113,981       $ 119,889   
  

 

 

    

 

 

    

 

 

 

Acquired loans

        

Commercial

        

C&I

     —         $ —         $ —     

CRE

     5         3,525         3,827   

Construction

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total acquired commercial

     5         3,525         3,827   

Consumer

        

Installment

     50         1,317         1,384   

Home equity lines

     171         7,508         7,572   

Residential mortgages

     31         2,050         2,277   
  

 

 

    

 

 

    

 

 

 

Total acquired consumer

     252         10,875         11,233   
  

 

 

    

 

 

    

 

 

 

Total acquired loans

     257       $ 14,400       $ 15,060   
  

 

 

    

 

 

    

 

 

 

FDIC acquired loans

        

Commercial

        

C&I

     —         $ —         $ —     

CRE

     3         13,176         11,466   

Construction

     1         580         677   
  

 

 

    

 

 

    

 

 

 

Total FDIC acquired commercial

     4         13,756         12,143   

Consumer

        

Home equity lines

     76         9,627         9,642   

Residential mortgages

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total FDIC acquired consumer

     76         9,627         9,642   
  

 

 

    

 

 

    

 

 

 

Total FDIC acquired loans

     80       $ 23,383       $ 21,785   
  

 

 

    

 

 

    

 

 

 

Total loans

        

Commercial

        

C&I

     27       $ 28,160       $ 28,980   

CRE

     30         30,876         31,434   

Construction

     1         580         677   
  

 

 

    

 

 

    

 

 

 

Total commercial

     58         59,616         61,091   

Consumer

        

Installment

     1,274         41,451         41,890   

Home equity lines

     500         24,855         25,191   

Credit card

     201         687         687   

Residential mortgages

     338         25,155         27,875   
  

 

 

    

 

 

    

 

 

 

Total consumer

     2,313         92,148         95,643   
  

 

 

    

 

 

    

 

 

 

Total loans

     2,371       $ 151,764       $ 156,734   
  

 

 

    

 

 

    

 

 

 

Note 1: For originated loans, the differences between the recorded investment and unpaid principal balance amounts represent partial charge offs.

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

 

43


     As of December 31, 2015  

(Dollars in thousands)

   Number of
Loans
     Recorded
Investment
     Unpaid Principal
Balance
 

Originated loans

        

Commercial

        

C&I

     26       $ 33,087       $ 33,740   

CRE

     24         14,671         16,648   

Construction

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total originated commercial

     50         47,758         50,388   

Consumer

        

Installment

     1,223         36,904         37,250   

Home equity lines

     257         7,080         7,330   

Credit card

     212         717         717   

Residential mortgages

     312         23,905         26,359   
  

 

 

    

 

 

    

 

 

 

Total originated consumer

     2,004         68,606         71,656   
  

 

 

    

 

 

    

 

 

 

Total originated loans

     2,054       $ 116,364       $ 122,044   
  

 

 

    

 

 

    

 

 

 

Acquired loans

        

Commercial

        

C&I

     1         7,611         7,611   

CRE

     3         918         1,044   
  

 

 

    

 

 

    

 

 

 

Total acquired commercial

     4         8,529         8,655   

Consumer

        

Installment

     51         1,117         1,211   

Home equity lines

     176         7,718         7,778   

Residential mortgages

     31         2,154         2,382   
  

 

 

    

 

 

    

 

 

 

Total acquired consumer

     258         10,989         11,371   
  

 

 

    

 

 

    

 

 

 

Total acquired loans

     262       $ 19,518       $ 20,026   
  

 

 

    

 

 

    

 

 

 

FDIC acquired loans

        

Commercial

        

C&I

     —         $ —         $ —     

CRE

     3         14,056         12,479   

Construction

     1         593         682   
  

 

 

    

 

 

    

 

 

 

Total FDIC acquired commercial

     4         14,649         13,161   

Consumer

        

Home equity lines

     81         10,215         10,281   

Residential Mortgages

     1         182         182   
  

 

 

    

 

 

    

 

 

 

Total FDIC acquired consumer

     82         10,397         10,463   
  

 

 

    

 

 

    

 

 

 

Total FDIC acquired loans

     86       $ 25,046       $ 23,624   
  

 

 

    

 

 

    

 

 

 

Total loans

        

Commercial

        

C&I

     27       $ 40,698       $ 41,351   

CRE

     30         29,645         30,171   

Construction

     1         593         682   
  

 

 

    

 

 

    

 

 

 

Total commercial

     58         70,936         72,204   

Consumer

        

Installment

     1,274         38,021         38,461   

Home equity lines

     514         25,013         25,389   

Credit card

     212         717         717   

Residential mortgages

     344         26,241         28,923   
  

 

 

    

 

 

    

 

 

 

Total consumer

     2,344         89,992         93,490   
  

 

 

    

 

 

    

 

 

 

Total loans

     2,402       $ 160,928       $ 165,694   
  

 

 

    

 

 

    

 

 

 

Note 1: For originated loans, the differences between the recorded investment and unpaid principal balance amounts represent partial charge offs.

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

 

44


     As of March 31, 2015  

(Dollars in thousands)

   Number of
Loans
     Recorded
Investment
     Unpaid Principal
Balance
 

Originated loans

        

Commercial

        

C&I

     47       $ 16,923       $ 23,666   

CRE

     64         12,076         17,325   

Construction

     31         —           —     
  

 

 

    

 

 

    

 

 

 

Total originated commercial

     142         28,999         40,991   

Consumer

        

Installment

     1,186         26,882         27,528   

Home equity lines

     276         7,632         7,877   

Credit card

     230         815         815   

Residential mortgages

     316         24,822         27,612   
  

 

 

    

 

 

    

 

 

 

Total originated consumer

     2,008         60,151         63,832   
  

 

 

    

 

 

    

 

 

 

Total originated loans

     2,150       $ 89,150       $ 104,823   
  

 

 

    

 

 

    

 

 

 

Acquired loans

        

Commercial

        

C&I

     1         2         3   

CRE

     3         2,453         2,635   
  

 

 

    

 

 

    

 

 

 

Total acquired commercial

     4         2,455         2,638   

Consumer

        

Installment

     51         1,195         1,281   

Home equity lines

     162         7,310         7,370   

Residential mortgages

     30         2,186         2,403   
  

 

 

    

 

 

    

 

 

 

Total acquired consumer

     243         10,691         11,054   
  

 

 

    

 

 

    

 

 

 

Total acquired loans

     247       $ 13,146       $ 13,692   
  

 

 

    

 

 

    

 

 

 

FDIC acquired loans

        

Commercial

        

C&I

     8       $ —         $ 1,355   

CRE

     24         23,895         39,596   

Construction

     9         346         9,552   
  

 

 

    

 

 

    

 

 

 

Total FDIC acquired commercial

     41         24,241         50,503   

Consumer

        

Home equity lines

     70         8,909         8,914   

Residential mortgages

     1         185         185   
  

 

 

    

 

 

    

 

 

 

Total FDIC acquired consumer

     71         9,094         9,099   
  

 

 

    

 

 

    

 

 

 

Total FDIC acquired loans

     112       $ 33,335       $ 59,602   
  

 

 

    

 

 

    

 

 

 

Total loans

        

Commercial

        

C&I

     56       $ 16,925       $ 25,024   

CRE

     91         38,424         59,556   

Construction

     40         346         9,552   
  

 

 

    

 

 

    

 

 

 

Total commercial

     187         55,695         94,132   

Consumer

        

Installment

     1,237         28,077         28,809   

Home equity lines

     508         23,851         24,161   

Credit card

     230         815         815   

Residential mortgages

     347         27,193         30,200   
  

 

 

    

 

 

    

 

 

 

Total consumer

     2,322         79,936         83,985   
  

 

 

    

 

 

    

 

 

 

Total loans

     2,509       $ 135,631       $ 178,117   
  

 

 

    

 

 

    

 

 

 

Note 1: For originated loans, the differences between the recorded investment and unpaid principal balance amounts represent partial charge offs.

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

 

45


The pre-modification and post-modification outstanding recorded investments of loans modified as TDRs during the three months ended March 31, 2016 and 2015 were not materially different. Post-modification balances may include capitalization of unpaid accrued interest and fees associated with the modification as well as forgiveness of principal. Loans modified as TDRs during the three months ended March 31, 2016 and 2015 did not involve the forgiveness of principal; accordingly, the Corporation did not record a charge-off at the modification date. Additionally, capitalization of any unpaid accrued interest and fees assessed to loans modified in the three months ended March 31, 2016 and 2015 were not material to the accompanying consolidated financial statements. Specific allowances for loan losses are established for loans whose terms have been modified in a TDR. Specific reserve allocations are generally assessed prior to loans being modified in a TDR, as most of these loans migrate from the Corporation’s internal watch list and have been specifically allocated for as part of the Corporation’s normal loan loss provisioning methodology. At March 31, 2016, December 31, 2015, and March 31, 2015, the Corporation had $8.3 million, $7.0 million, and $6.1 million, respectively, in commitments to lend additional funds to debtors owing receivables whose terms have been modified in a TDR.

 

46


The following tables provide a summary of the delinquency status of TDRs along with the specific allowance for loan loss, by loan type, as of March 31, 2016, December 31, 2015, and March 31, 2015, including TDRs that continue to accrue interest and TDRs included in nonperforming assets.

 

As of March 31, 2016

 
     Accruing TDRs      Nonaccruing TDRs      Total      Total  

(In thousands)

   Current      Delinquent      Total      Current      Delinquent      Total      TDRs      Allowance  

Originated loans

                       

Commercial

                       

C&I

   $ 13,306       $ 1,168       $ 14,474       $ 7,741       $ 5,945       $ 13,686       $ 28,160       $ 6,194   

CRE

     273         2,247         2,520         765         10,890         11,655         14,175         20   

Construction

     —           —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total originated commercial

     13,579         3,415         16,994         8,506         16,835         25,341         42,335         6,214   

Consumer

                       

Installment

     38,153         600         38,753         1,342         39         1,381         40,134         1,081   

Home equity lines

     6,891         101         6,992         713         15         728         7,720         185   

Credit card

     554         111         665         —           22         22         687         225   

Residential mortgages

     13,707         1,517         15,224         5,395         2,486         7,881         23,105         1,038   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total originated consumer

     59,305         2,329         61,634         7,450         2,562         10,012         71,646         2,529   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total originated TDRs

   $ 72,884       $ 5,744       $ 78,628       $ 15,956       $ 19,397       $ 35,353       $ 113,981       $ 8,743   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Acquired loans

                       

Commercial

                       

C&I

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

CRE

     2,758         —           2,758         665         102         767         3,525         29   

Construction

     —           —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total acquired commercial

     2,758         —           2,758         665         102         767         3,525         29   

Consumer

                       

Installment

     1,230         —           1,230         87         —           87         1,317         42   

Home equity lines

     7,281         108         7,389         119         —           119         7,508         59   

Residential mortgages

     1,156         247         1,403         623         24         647         2,050         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total acquired consumer

     9,667         355         10,022         829         24         853         10,875         101   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total acquired TDRs

   $ 12,425       $ 355       $ 12,780       $ 1,494       $ 126       $ 1,620       $ 14,400       $ 130   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

FDIC acquired loans

                       

Commercial

                       

C&I

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

CRE

     —           —           —           —           13,176         13,176         13,176         2,302   

Construction

     —           —           —           580         —           580         580         42   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total FDIC acquired commercial

     —           —           —           580         13,176         13,756         13,756         2,344   

Consumer

                       

Home equity lines

     9,395         181         9,576         51         —           51         9,627         26   

Residential mortgages

     —           —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total FDIC acquired consumer

     9,395         181         9,576         51         —           51         9,627         26   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total FDIC acquired TDRs

   $ 9,395       $ 181       $ 9,576       $ 631       $ 13,176       $ 13,807       $ 23,383       $ 2,370   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

                       

Commercial

                       

C&I

   $ 13,306       $ 1,168       $ 14,474       $ 7,741       $ 5,945       $ 13,686       $ 28,160       $ 6,194   

CRE

     3,031         2,247         5,278         1,430         24,168         25,598         30,876         2,351   

Construction

     —           —           —           580         —           580         580         42   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     16,337         3,415         19,752         9,751         30,113         39,864         59,616         8,587   

Consumer

                       

Installment

     39,383         600         39,983         1,429         39         1,468         41,451         1,123   

Home equity lines

     23,567         390         23,957         883         15         898         24,855         270   

Credit card

     554         111         665         —           22         22         687         225   

Residential mortgages

     14,863         1,764         16,627         6,018         2,510         8,528         25,155         1,038   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer

     78,367         2,865         81,232         8,330         2,586         10,916         92,148         2,656   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total TDRs

   $ 94,704       $ 6,280       $ 100,984       $ 18,081       $ 32,699       $ 50,780       $ 151,764       $ 11,243   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

47


As of December 31, 2015

 
     Accruing TDRs      Nonaccruing TDRs      Total      Total  

(In thousands)

   Current      Delinquent      Total      Current      Delinquent      Total      TDRs      Allowance  

Originated loans

                       

Commercial

                       

C&I

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

CRE

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

Construction

     —           —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total originated commercial

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

Consumer

                       

Installment

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

Home equity lines

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

Credit card

     575         140         715         —           2         2         717         243   

Residential mortgages

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total originated consumer

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total originated TDRs

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Acquired loans

                       

Commercial

                       

C&I

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

CRE

     —           —           —           659         259         918         918         201   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total acquired commercial

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

Consumer

                       

Installment

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

Home equity lines

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

Residential mortgages

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total acquired consumer

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total acquired TDRs

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

FDIC acquired loans

                       

Commercial

                       

C&I

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

CRE

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

Construction

     593         —           593         —           —           —           593         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total FDIC acquired commercial

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

Consumer

                       

Home equity lines

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

Residential mortgages

     182         —           182         —           —           —           182         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total FDIC acquired consumer

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total FDIC acquired TDRs

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Loans

                       

Commercial

                       

C&I

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

CRE

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

Construction

     593         —           593         —           —           —           593         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

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

Consumer

                       

Installment

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

Home equity lines

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

Credit card

     575         140         715         —           2         2         717         243   

Residential mortgages

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total TDRs

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

48


As of March 31, 2015

 
     Accruing TDRs      Nonaccruing TDRs      Total      Total  

(In thousands)

   Current      Delinquent      Total      Current      Delinquent      Total      TDRs      Allowance  

Originated loans

                       

Commercial

                       

C&I

   $ 16,558       $ —         $ 16,558       $ —         $ 365       $ 365       $ 16,923       $ 124   

CRE

     6,031         1,493         7,524         3,724         828         4,552         12,076         71   

Construction

     —           —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total originated commercial

     22,589         1,493         24,082         3,724         1,193         4,917         28,999         195   

Consumer

                       

Installment

     24,701         409         25,110         1,528         244         1,772         26,882         1,005   

Home equity lines

     6,680         113         6,793         811         28         839         7,632         254   

Credit card

     721         77         798         —           17         17         815         263   

Residential mortgages

     14,299         2,286         16,585         5,020         3,217         8,237         24,822         1,416   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total originated consumer

     46,401         2,885         49,286         7,359         3,506         10,865         60,151         2,938   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total originated TDRs

   $ 68,990       $ 4,378       $ 73,368       $ 11,083       $ 4,699       $ 15,782       $ 89,150       $ 3,133   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Acquired loans

                       

Commercial

                       

C&I

   $ —         $ —         $ —         $ 2       $ —         $ 2       $ 2       $ 2   

CRE

     —           —           —           954         1,499         2,453         2,453         135   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total acquired commercial

     —           —           —           956         1,499         2,455         2,455         137   

Consumer

                       

Installment

     1,139         33         1,172         23         —           23         1,195         48   

Home equity lines

     6,610         564         7,174         136         —           136         7,310         —     

Residential mortgages

     1,335         —           1,335         616         235         851         2,186         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total acquired consumer

     9,084         597         9,681         775         235         1,010         10,691         48   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total acquired TDRs

   $ 9,084       $ 597       $ 9,681       $ 1,731       $ 1,734       $ 3,465       $ 13,146       $ 185   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

FDIC acquired loans

                       

Commercial

                       

C&I

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

CRE

     —           23,895         23,895         —           —           —           23,895         2,026   

Construction

     —           346         346         —           —           —           346         293   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total FDIC acquired commercial

     —           24,241         24,241         —           —           —           24,241         2,319   

Consumer

                       

Home equity lines

     7,703         939         8,642         267         —           267         8,909         24   

Residential mortgages

     185         —           185         —           —           —           185         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total FDIC acquired consumer

     7,888         939         8,827         267         —           267         9,094         24   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total FDIC acquired TDRs

   $ 7,888       $ 25,180       $ 33,068       $ 267       $ —         $ 267       $ 33,335       $ 2,343   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

                       

Commercial

                       

C&I

   $ 16,558       $ —         $ 16,558       $ 2       $ 365       $ 367       $ 16,925       $ 126   

CRE

     6,031         25,388         31,419         4,678         2,327         7,005         38,424         2,232   

Construction

     —           346         346         —           —           —           346         293   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     22,589         25,734         48,323         4,680         2,692         7,372         55,695         2,651   

Consumer

                       

Installment

     25,840         442         26,282         1,551         244         1,795         28,077         1,053   

Home equity lines

     20,993         1,616         22,609         1,214         28         1,242         23,851         278   

Credit card

     721         77         798         —           17         17         815         263   

Residential mortgages

     15,819         2,286         18,105         5,636         3,452         9,088         27,193         1,416   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer

     63,373         4,421         67,794         8,401         3,741         12,142         79,936         3,010   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total TDRs

   $ 85,962       $ 30,155       $ 116,117       $ 13,081       $ 6,433       $ 19,514       $ 135,631       $ 5,661   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

49


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

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

 

50


The following tables provide the number of loans modified in a TDR within the previous 12 months that subsequently defaulted during the three months ended March 31, 2016 and March 31, 2015, as well as the amount defaulted in these restructured loans.

 

     Three Months Ended March 31, 2016  

(Dollars in thousands)

   Number of Loans      Amount Defaulted  

Originated loans

     

Commercial

     

C&I

     —         $ —     

CRE

     —           —     

Construction

     —           —     
  

 

 

    

 

 

 

Total originated commercial

     —           —     

Consumer

     

Installment

     8         83   

Home equity lines

     —           —     

Credit card

     3         2   

Residential mortgages

     1         76   
  

 

 

    

 

 

 

Total originated consumer

     12       $ 161   
  

 

 

    

 

 

 

FDIC acquired loans

     

Commercial

     

C&I

     —         $ —     

CRE

     —           —     

Construction

     —           —     
  

 

 

    

 

 

 

Total FDIC acquired commercial

     —         $ —     
  

 

 

    

 

 

 

Acquired loans

     

Commercial

     

C&I

     —         $ —     

CRE

     1         255   

Construction

     —           —     
  

 

 

    

 

 

 

Total acquired commercial

     1       $ 255   
  

 

 

    

 

 

 

Consumer

     

Installment

     2         31   

Home equity lines

     1         14   

Residential mortgages

     —           —     
  

 

 

    

 

 

 

Total acquired consumer

     3       $ 45   
  

 

 

    

 

 

 

Total loans

     

Commercial

     

C&I

     —         $ —     

CRE

     1         255   

Construction

     —           —     
  

 

 

    

 

 

 

Total commercial

     1         255   

Consumer

     

Installment

     10         114   

Home equity lines

     1         14   

Credit card

     3         2   

Residential mortgages

     1         76   
  

 

 

    

 

 

 

Total consumer

     15         206   
  

 

 

    

 

 

 

Total

     16       $ 461   
  

 

 

    

 

 

 

 

51


     Three Months Ended March 31, 2015  

(Dollars in thousands)

   Number of Loans      Recorded Investment  

Originated loans

     

Commercial

     

C&I

     —         $ —     

CRE

     —           —     

Construction

     —           —     
  

 

 

    

 

 

 

Total originated commercial

     —           —     

Consumer

     

Installment

     2         —     

Home equity lines

     —           —     

Credit card

     2         17   

Residential mortgages

     —           —     
  

 

 

    

 

 

 

Total originated consumer

     4       $ 17   
  

 

 

    

 

 

 

FDIC acquired loans

     

Commercial

     

C&I

     1       $ 427   

CRE

     —           —     

Construction

     —           —     
  

 

 

    

 

 

 

Total FDIC acquired commercial

     1       $ 427   
  

 

 

    

 

 

 

Acquired loans

     

Commercial

     

C&I

     1       $ 55   

CRE

     —           —     

Construction

     —           —     
  

 

 

    

 

 

 

Total acquired commercial

     1       $ 55   
  

 

 

    

 

 

 

Total loans

     

Commercial

     

C&I

     2       $ 482   

CRE

     —           —     

Construction

     —           —     
  

 

 

    

 

 

 

Total commercial

     2         482   

Consumer

     

Installment

     2         —     

Home equity lines

     —           —     

Credit card

     2         17   

Residential mortgages

     —           —     
  

 

 

    

 

 

 

Total consumer

     4         17   
  

 

 

    

 

 

 

Total

     6       $ 499   
  

 

 

    

 

 

 

 

52


5. Goodwill and Other Intangible Assets

Goodwill

Goodwill totaled $741.7 million as of March 31, 2016, December 31, 2015, and March 31, 2015. Goodwill is not amortized but is evaluated for impairment on an annual basis at November 30 of each year or whenever events or changes in circumstances indicate the carrying value may not be recoverable. No events or circumstances since the November 30, 2015 annual impairment test were noted that would indicate it was more likely than not a goodwill impairment exists.

Other Intangible Assets

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

 

     March 31, 2016  

(In thousands)

   Gross Carrying
Amount
     Accumulated
Amortization
     Net Carrying
Amount
 

Core deposit intangibles (1)

   $ 82,323       $ (30,194    $ 52,129   

Lease intangible

     238         (220      18   

Trust Relationships (2)

     14,000         (7,823      6,177   
  

 

 

    

 

 

    

 

 

 
   $ 96,561         (38,237    $ 58,324   
  

 

 

    

 

 

    

 

 

 
     December 31, 2015  

(In thousands)

   Gross Carrying
Amount
     Accumulated
Amortization
     Net Carrying
Amount
 

Core deposit intangibles (1)

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

Lease intangible

     238         (212      26   

Trust Relationships (2)

     14,000         (7,417      6,583   
  

 

 

    

 

 

    

 

 

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

 

 

    

 

 

    

 

 

 
     March 31, 2015  

(In thousands)

   Gross Carrying
Amount
     Accumulated
Amortization
     Net Carrying
Amount
 

Core deposit intangibles (1)

   $ 82,323       $ (22,073    $ 60,250   

Lease intangible

     238         (185      53   

Trust relationships (2)

     14,000         (5,881      8,119   
  

 

 

    

 

 

    

 

 

 
   $ 96,561         (28,139    $ 68,422   
  

 

 

    

 

 

    

 

 

 

 

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

Amortization expense for intangible assets was $2.3 million in the three months ended March 31, 2016, compared to $2.6 million in the three months ended March 31, 2015. Estimated amortization expense for each of the next five years is as follows: remainder of 2016 - $6.9 million; 2017 - $8.2 million; 2018 - $7.3 million; and 2019 - $6.5 million; 2020 - $5.2 million.

 

53


6. Shareholders’ Equity

Common Stock Warrant

On May 13, 2015, the Corporation repurchased a warrant previously issued by Citizens to the U.S. Treasury. The warrant, which entitled the U.S. Treasury to purchase 2,571,998 shares of FirstMerit Common Stock at an adjusted strike price of $17.50, was purchased for $12.2 million. In accordance with GAAP, the Corporation recorded a reduction to capital surplus in the amount of $9.2 million in conjunction with this warrant repurchase that reflected the excess amount paid over the previously stated amount.

Preferred Stock

The Corporation has 7,000,000 shares of authorized Preferred Stock and has designated 115,000 shares of its Preferred Stock as 5.875% Non-Cumulative Perpetual Preferred Stock, Series A. On February 4, 2013, the Corporation issued 100,000 shares of its Non-Cumulative Perpetual Preferred Stock, Series A, which began paying cash dividends on May 4, 2013, quarterly in arrears on the 4th day of February, May, August, and November.

Earnings Per Share

Basic net income per common share is calculated using the two-class method to determine income attributable to common shareholders. Net income attributable to Common Stock is then divided by the weighted-average number of Common Stock outstanding during the period.

Diluted net income per common share is calculated under the more dilutive of either the treasury method or two-class method. Adjustments to the weighted-average number of shares of Common Stock outstanding are made only when such adjustments will dilute earnings per common share. Net income attributable to Common Stock is then divided by the weighted-average number of Common Stock and Common Stock equivalents outstanding during the period.

 

54


The reconciliation between basic and diluted EPS using the two-class method and treasury stock method is presented as follows:

 

     Three Months Ended March 31,  

(Dollars in thousands, except per share amounts)

   2016      2015  

Basic EPS:

     

Net income

   $ 54,136       $ 57,139   

Less:

     

Cash dividends on 5.875% non-cumulative perpetual series A, Preferred Stock

     1,469         1,469   

Income allocated to participating securities

     387         407   
  

 

 

    

 

 

 

Net income attributable to common shareholders

   $ 52,280       $ 55,263   
  

 

 

    

 

 

 

Weighted average Common Stock outstanding used in basic EPS

     165,745         165,411   
  

 

 

    

 

 

 

Basic net income per common share

   $ 0.32       $ 0.33   
  

 

 

    

 

 

 

Diluted EPS:

     

Income used in diluted earnings per common share calculation

   $ 52,280       $ 55,263   
  

 

 

    

 

 

 

Weighted average Common Stock outstanding used in basic EPS

     165,745         165,411   

Add: Common Stock equivalents

     

Employee stock award plans

     494         592   
  

 

 

    

 

 

 

Weighted average Common and Common Stock equivalent shares outstanding

     166,239         166,003   
  

 

 

    

 

 

 

Diluted net income per common share

   $ 0.31       $ 0.33   
  

 

 

    

 

 

 

Common Stock equivalents consist of employee stock award plans. These Common Stock equivalents do not enter into the calculation of diluted EPS if the impact would be anti-dilutive, that is, increase EPS or reduce a loss per share. Antidilutive potential Common Stock for the three months ended March 31, 2016 and 2015 totaled 0.5 million and 0.8 million, respectively.

 

55


7. Segment Information

Management monitors the Corporation’s results by an internal performance measurement system, which provides lines of business results and key performance measures. The profitability measurement system is based on internal financial management practices designed to produce consistent results and reflect the underlying economics of the businesses. The development and application of these methodologies is a dynamic process. Accordingly, these measurement tools and assumptions may be revised periodically to reflect methodological, product, and/or management organizational changes. Further, these tools measure financial results that support the strategic objectives and internal organizational structure of the Corporation. Consequently, the information presented is not necessarily comparable with similar information for other financial institutions.

A description of each business, selected financial performance, and the methodologies used to measure financial performance are presented below.

 

    Commercial The commercial line of business provides a full range of lending, depository, and related financial services to middle-market corporate, industrial, financial, core business banking, public entities, and leasing clients. Commercial also includes personal business from commercial loan clients in coordination with the Wealth Management segment. Products and services offered include commercial term loans, revolving credit arrangements, asset-based lending, leasing, commercial mortgages, real estate construction lending, letters of credit, treasury management, government banking, international banking, merchant card and other depository products and services.

 

    Retail The retail line of business includes consumer lending and deposit gathering, residential mortgage loan origination and servicing, and branch-based small business banking. Retail offers a variety of retail financial products and services including consumer direct and indirect installment loans, debit and credit cards, residential mortgage loans, home equity loans and lines of credit, deposit products, fixed and variable annuities and ATM network services. Deposit products include checking, savings, money market accounts and certificates of deposit.

 

    Wealth The wealth line of business offers a broad array of asset management, private banking, financial planning, estate settlement and administration, credit and deposit products and services. Trust and investment services include personal trust and planning, investment management, estate settlement and administration services. Retirement plan services focus on investment management and fiduciary activities. Brokerage and insurance delivers retail mutual funds, other securities, variable and fixed annuities, personal disability and life insurance products and brokerage services. Private banking provides credit, deposit and asset management solutions for affluent clients.

 

   

Other The other line of business includes activities that are not directly attributable to one of the three principal lines of business. Included in the Other category are the Parent Company, eliminating companies, community development operations, the treasury group, which includes the securities

 

56


 

portfolio, wholesale funding and asset liability management activities, and the economic impact of certain assets, capital and support functions not specifically identifiable with the three primary lines of business.

The accounting policies of the lines of businesses are the same as those of the Corporation described in Note 1 (Summary of Significant Accounting Policies) to the 2015 Form 10-K. Funds transfer pricing is used in the determination of net interest income by assigning a cost for funds used or credit for funds provided to assets and liabilities within each business unit. Assets and liabilities are match-funded based on their maturity, prepayment and/or repricing characteristics. As a result, the three primary lines of business are generally insulated from changes in interest rates. Changes in net interest income due to changes in rates are reported in Other by the treasury group. Capital has been allocated on an economic risk basis. Loans and lines of credit have been allocated capital based upon their respective credit risk. Asset management holdings in the Wealth segment have been allocated capital based upon their respective market risk related to assets under management. Normal business operating risk has been allocated to each line of business by the level of noninterest expense. Mismatches between asset and liability cash flows as well as interest rate risk for mortgage servicing rights and mortgage origination business have been allocated capital based upon their respective asset/liability management risk. The provision for loan loss is allocated based upon the actual net charge-offs of each respective line of business, adjusted for loan growth and changes in risk profile. Noninterest income and expenses directly attributable to a line of business are assigned to that line of business. Expenses for centrally provided services are allocated to the business line by various activity based cost formulas.

Substantially all of the Corporation’s business is conducted in the United States of America. The following tables present a summary of financial results as of and for the three months ended March 31, 2016 and March 31, 2015:

 

(In thousands)

   Commercial      Retail      Wealth     Other     FirstMerit
Consolidated
 

March 31, 2016

   QTD      QTD      QTD     QTD     QTD  

OPERATIONS:

            

Net interest income/(loss)

   $ 102,619       $ 94,728       $ 6,552      $ (18,743   $ 185,156   

Provision/(recapture) for loan losses

     5,772         4,047         (155     (1,855     7,809   

Noninterest income

     21,179         23,594         14,309        8,312        67,394   

Noninterest expense

     61,020         88,694         13,353        3,896        166,963   

Net income/(loss)

     37,054         16,628         4,981        (4,527     54,136   

AVERAGES:

            

Assets

   $ 9,592,202       $ 6,232,255       $ 305,566      $ 9,640,834      $ 25,770,857   

Loans

     9,709,788         6,020,757         297,143        51,759        16,079,447   

Earning assets

     10,074,234         6,027,689         297,143        6,491,016        22,890,082   

Deposits

     7,478,489         11,025,256         1,319,711        812,209        20,635,665   

Economic capital

     1,252,294         872,762         131,588        713,523        2,970,167   

 

57


(In thousands)

   Commercial     Retail      Wealth     Other     FirstMerit
Consolidated
 

March 31, 2015

   QTD     QTD      QTD     QTD     QTD  

OPERATIONS:

           

Net interest income/(loss)

   $ 99,844      $ 91,095       $ 5,353      $ (10,669   $ 185,623   

Provision/ (recapture) for loan losses

     (526     7,533         (170     1,411        8,248   

Noninterest income

     22,490        21,737         13,976        7,644        65,847   

Noninterest expense

     61,653        88,271         13,719        (2,991     160,652   

Net income/(loss)

     39,785        11,068         3,756        2,530        57,139   

AVERAGES:

           

Assets

   $ 9,454,218      $ 5,845,417       $ 302,186      $ 9,303,273      $ 24,905,094   

Loans

     9,506,529        5,570,590         292,016        58,046        15,427,181   

Earning assets

     9,794,483        5,582,849         292,016        6,431,069        22,100,417   

Deposits

     6,886,945        11,124,158         1,240,960        536,862        19,788,925   

Economic capital

     848,890        479,188         55,187        1,483,097        2,866,362   

 

8. Derivatives and Hedging Activities

The Corporation, through its mortgage banking and risk management operations, is party to various derivative instruments that are used for asset and liability management and customers’ financing needs. Derivative instruments are contracts between two or more parties that have a notional amount and underlying variable, require no net investment and allow for the net settlement of positions. The notional amount serves as the basis for the payment provision of the contract and takes the form of units, such as shares or dollars. The underlying variable represents a specified interest rate, index or other component. The interaction between the notional amount and the underlying variable determines the number of units to be exchanged between the parties and influences the market value of the derivative contract.

The predominant derivative and hedging activities include interest rate swaps and certain mortgage banking activities. Generally, these instruments help the Corporation manage exposure to market risk, and meet customer financing needs. Market risk represents the possibility that economic value or net interest income will be adversely affected by fluctuations in external factors, such as interest rates, market-driven rates and prices or other economic factors. Foreign exchange contracts are entered into to accommodate the needs of customers.

Derivatives Designated in Hedge Relationships

The Corporation’s fixed rate loans result in exposure to losses in value as interest rates change. The risk management objective for hedging fixed rate loans is to convert the fixed rate received to a floating rate. The Corporation hedges exposure to changes in the fair value of fixed rate loans through the use of swaps. For a qualifying fair value hedge, changes in the value of the derivatives that have been highly effective as hedges are recognized in current period earnings along with the corresponding changes in the fair value of the designated hedged item attributable to the risk being hedged.

 

58


At March 31, 2016, December 31, 2015, and March 31, 2015, the notional values or contractual amounts and fair value of the Corporation’s derivatives designated in hedge relationships were as follows:

 

    Asset Derivatives     Liability Derivatives  
    March 31, 2016     December 31, 2015     March 31, 2015     March 31, 2016     December 31, 2015     March 31, 2015  

(In thousands)

  Notional/
Contract
Amount
    Fair
Value (1)
    Notional/
Contract
Amount
    Fair
Value (1)
    Notional/
Contract
Amount
    Fair
Value (1)
    Notional/
Contract
Amount
    Fair
Value (2)
    Notional/
Contract
Amount
    Fair
Value (2)
    Notional/
Contract
Amount
     Fair
Value (2)
 

Interest rate swaps:

                        

Commercial loan swaps (FRAPS)

  $ —        $ —        $ —        $ —        $ —        $ —        $ 52,821      $ 3,238      $ 55,689      $ 3,536      $ 89,591       $ 6,063   

Sub debt swap

    250,000        22,718        250,000        8,739        250,000        12,688        —          —          —          —          —           —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Fair value hedges

  $ 250,000      $ 22,718      $ 250,000      $ 8,739      $ 250,000      $ 12,688      $ 52,821      $ 3,238      $ 55,689      $ 3,536      $ 89,591       $ 6,063   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

(1) Included in “Other assets” on the Consolidated Balance Sheets
(2) Included in “Other liabilities” on the Consolidated Balance Sheets

Commercial Loan Swaps. Prior to 2008, the Corporation entered into interest rate swaps with dealer counterparties to convert certain fixed rate loans to variable rate instruments over the terms of the loans (termed by the Corporation as the FRAP Program). These interest rate swaps are designated as fair value hedges and met the criteria to qualify for the short cut method of accounting. Based on this shortcut method of accounting treatment, no ineffectiveness is assumed. The Corporation discontinued originating interest rate swaps under the FRAP Program in February 2008.

Sub Debt Swap. During the fourth quarter of 2014, the Corporation entered into a $250.0 million interest rate swap simultaneously with its long-term debt issuance for interest rate risk management purposes. This interest rate swap effectively modifies the receipt of fixed-rate interest amounts in exchange for floating-rate interest payments over the life of the swap, without an exchange of the underlying principal amount. This interest rate swap was designated as a fair value hedge, and through application of the “shortcut method of accounting”, there is an assumption that the hedge is effective in offsetting changes in the fair value of the long-term debt due to changes in the U.S. LIBOR swap rate (the designated benchmark interest rate).

Derivatives Not Designated in Hedge Relationships

As of March 31, 2016, December 31, 2015, and March 31, 2015, the notional values or contractual amounts and fair value of the Corporation’s derivatives not designated in hedge relationships were as follows:

 

    Asset Derivatives     Liability Derivatives  
    March 31, 2016     December 31, 2015     March 31, 2015     March 31, 2016     December 31, 2015     March 31, 2015  

(In thousands)

  Notional/
Contract
Amount
    Fair
Value (1)
    Notional/
Contract
Amount
    Fair
Value (1)
    Notional/
Contract
Amount
    Fair
Value (1)
    Notional/
Contract
Amount
    Fair
Value (2)
    Notional/
Contract
Amount
    Fair
Value (2)
    Notional/
Contract
Amount
    Fair
Value (2)
 

Interest rate swaps

  $ 1,850,414      $ 75,139      $ 1,824,576      $ 48,920      $ 1,718,850      $ 59,147      $ 1,850,414      $ 75,139      $ 1,824,576      $ 48,920      $ 1,718,850      $ 59,147   

Mortgage loan commitments

    40,904        240        20,635        149        51,937        388        —          —          —          —          —          —     

Forward sales contracts

        —          —          —          —          7,527        82        9,659        5        11,758        68   

Credit contracts

    —          —          —          —          —          —          74,315        8        73,715        —          80,047        —     

Foreign exchange

    15,467        452        13,671        299        40,537        350        8,641        154        11,706        284        10,052        169   

Equity swap

    —          —          —          —          —          —          36,125        —          36,631        —          30,896        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 1,906,785      $ 75,831      $ 1,858,882      $ 49,368      $ 1,811,324      $ 59,885      $ 1,977,022      $ 75,383      $ 1,956,287      $ 49,209      $ 1,851,603      $ 59,384   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Included in “Other assets” on the Consolidated Balance Sheets
(2) Included in “Other liabilities” on the Consolidated Balance Sheets

 

59


Interest Rate Swaps. The Corporation’s Back-to-Back Program is an interest rate swap program for commercial loan customers that provides the customer with a fixed rate loan while creating a variable rate asset for the Corporation through the customer entering into an interest rate swap with the Corporation on terms that match the loan. The Corporation offsets its risk exposure by entering into an offsetting interest rate swap with a dealer counterparty. These swaps do not qualify as designated hedges; therefore, each swap is accounted for as a standalone derivative.

Mortgage banking. In the normal course of business, the Corporation sells originated mortgage loans into the secondary mortgage loan markets. During the period of loan origination and prior to the sale of the loans in the secondary market, the Corporation has exposure to movements in interest rates associated with mortgage loans that are in the “mortgage pipeline” and the “mortgage warehouse”. A pipeline loan is one in which the Corporation has entered into a written mortgage loan commitment with a potential borrower that will be held for resale. Once a mortgage loan is closed and funded, it is included within the mortgage warehouse of loans awaiting sale and delivery into the secondary market.

Written loan commitments that relate to the origination of mortgage loans that will be held for resale are considered free-standing derivatives and do not qualify for hedge accounting. Written loan commitments generally have a term of up to 60 days before the closing of the loan. The loan commitment does not bind the potential borrower to entering into the loan, nor does it guarantee that the Corporation will approve the potential borrower for the loan. Therefore, when determining fair value, the Corporation makes estimates of expected “fallout” (loan commitments not expected to close), using models which consider cumulative historical fallout rates and other factors. In addition, expected net future cash flows related to loan servicing activities are included in the fair value measurement of a written loan commitment.

Written loan commitments in which the borrower has locked in an interest rate result in market risk to the Corporation to the extent market interest rates change from the rate quoted to the borrower. The Corporation economically hedges the risk of changing interest rates associated with its interest rate lock commitments by entering into forward sales contracts.

The Corporation’s warehouse (mortgage loans held for sale) is subject to changes in fair value, due to fluctuations in interest rates from the loan’s closing date through the date of sale of the loan into the secondary market. Typically, the fair value of the warehouse declines in value when interest rates increase and rises in value when interest rates decrease. To mitigate this risk, the Corporation enters into forward sales contracts on a significant portion of the warehouse to provide an economic hedge against those changes in fair value. Mortgage loans held for sale and the forward sales contracts were recorded at fair value with ineffective changes in value recorded in current earnings as Loan sales and servicing income.

Credit contracts. The Corporation has bought and sold credit protection in the form of participations in interest rate swaps (swap participations). These swap participations, which meet the definition of credit derivatives, were entered into in the ordinary course of business. Credit derivatives, whereby the Corporation has purchased credit protection, entitles the Corporation to receive a payment from the counterparty when the

 

60


customer fails to make payment on any amounts due to the Corporation. Swap participations whereby the Corporation has purchased credit protection have maturities that range between two to seven years. For swap participations where the Corporation sold credit protection, the Corporation has guaranteed payment in the event that the counterparty experiences a loss on the swap due to a failure to pay by the Corporation’s commercial loan customer. The Corporation simultaneously entered into reimbursement agreements with the commercial loan customers obligating the customers to reimburse the Corporation for any payments it makes under the swap participations. The Corporation monitors its payment risk on its swap participations by monitoring the creditworthiness of its commercial loan customers, which is based on the normal credit review process the Corporation would have performed had it entered into these derivative instruments directly with the commercial loan customers. Credit derivatives whereby the Corporation has sold credit protection have maturities ranging from less than one year to nine years. The Corporation’s maximum estimated exposure to sold swap participations, as measured by projecting a maximum value of the guaranteed derivative instruments based on interest rate curve simulations and assuming 100% default by all obligors on the maximum values, was approximately $6.4 million as of March 31, 2016. The fair values of the written swap participations were not material at March 31, 2016, December 31, 2015, and March 31, 2015.

Gains and losses recognized in income on non-designated hedging instruments for the three months ended March 31, 2016 and 2015 are as follows:

 

Derivatives not designated as hedging instruments

 

Location of Gain/(Loss) Recognized in Income on
Derivative

  Amount of Gain / (Loss) Recognized in
Income on Derivatives 
(In thousands)
 
    Three Months Ended March 31,  
    2016     2015  

Mortgage loan commitments

 

Loan sales and servicing income

  $ 92      $ (1,020

Forward sales contracts

 

Loan sales and servicing income

    (77     204   

Foreign exchange contracts

 

Other operating income

    819        (877

Equity swap

 

Other operating expense

    —          —     
   

 

 

   

 

 

 

Total

    $ 834      $ (1,693
   

 

 

   

 

 

 

Counterparty Credit Risk

Like other financial instruments, derivatives contain an element of “credit risk” or the possibility that the Corporation will incur a loss because a counterparty, which may be a bank, a broker-dealer, a derivative clearing organization, or a customer, fails to meet its contractual obligations. This risk is measured as the expected positive replacement value of contracts. All derivative contracts may be executed only with exchanges or counterparties approved by the Corporation’s Board of Directors. Where contracts have been created for customers, the Corporation enters into derivatives with dealers to offset its risk exposure. To manage the credit exposure to exchanges and counterparties, the Corporation generally enters into bilateral collateral agreements with collateral delivery thresholds on all bilateral derivatives. Beyond the threshold levels, collateral in the form of securities made available from the investment portfolio or other forms of collateral acceptable under the bilateral collateral agreements are provided. The threshold levels for each counterparty are approved by the Corporation’s Board of Directors. The Corporation generally posts collateral in the form of highly rated Government Agency issued bonds or MBS.

 

61


The majority of the Corporation’s over-the-counter derivative transactions are cleared through a recognized derivative clearing organization (“Clearinghouse”). For cleared derivatives, the Clearinghouse is the Corporation’s counterparty. The Clearinghouse notifies the clearing agent of the required initial and variation margin and the clearing agent notifies the Corporation of the required initial and variation margin. The requirement that the Corporation post initial and variation margin through the clearing agent to the Clearinghouse exposes the Corporation to institutional credit risk if the clearing agent or the Clearinghouse fails to meet its obligations. The use of cleared derivatives is intended to mitigate credit risk exposure because a central counterparty is substituted for individual counterparties and collateral is posted daily through a clearing agent for changes in the value of cleared derivatives.

The fair value of investment securities posted as collateral against derivative liabilities was $45.1 million, $47.2 million, and $53.6 million as of March 31, 2016, December 31, 2015, and March 31, 2015, respectively.

Derivative assets and liabilities are recorded at fair value on the balance sheet and do not take into account the effects of master netting agreements the Corporation has with its financial institution counterparties. These master netting agreements allow the Corporation to settle all derivative contracts held with a single financial institution counterparty on a net basis, and to offset net derivative positions with related collateral, where applicable. Collateral, usually in the form of investment securities, is posted by the counterparty in the net liability position in accordance with contract thresholds. The following tables illustrate the potential effect of the Corporation’s derivative master netting arrangements, by type of financial instrument, on the Corporation’s statement of financial position as of March 31, 2016, December 31, 2015, and March 31, 2015. The swap agreements the Corporation has in place with its commercial customers are not subject to enforceable master netting arrangements, and, therefore, are excluded from these tables.

 

     As of March 31, 2016  
     Gross amounts
recognized
     Gross amounts
offset in the

consolidated
balance sheet
     Net amounts
presented in
the
consolidated
balance sheet
     Gross amounts not offset in the
consolidated balance sheet
    Net amount  

(In thousands)

            Financial
instruments (1)
    Collateral (2)    

Derivative Assets

               

Interest rate swaps - designated

   $ 22,718       $ —         $ 22,718       $ —        $ —        $ 22,718   

Interest rate swaps - non-designated

     20       $ —           20         (20     —          —     

Foreign exchange

     27         —           27         (27     —          —     
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total derivative assets

   $ 22,765       $ —         $ 22,765       $ (47   $ —        $ 22,718   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Derivative liabilities

               

Interest rate swaps - designated

   $ 3,238       $ —         $ 3,238       $ —        $ (3,238   $ —     

Interest rate swaps - non-designated

     75,119         —           75,119         (20     (75,099     —     

Foreign exchange

     121         —           121         (27     (94     —     
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total derivative liabilities

   $ 78,478       $ —         $ 78,478       $ (47   $ (78,431   $ —     
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

62


     As of December 31, 2015  
     Gross amounts
recognized
     Gross amounts
offset in the
consolidated
balance sheet
     Net amounts
presented in
the
consolidated
balance sheet
     Gross amounts not offset in the
consolidated balance sheet
    Net amount  

(In thousands)

            Financial
instruments (1)
    Collateral (2)    

Derivative assets

               

Interest rate swaps - designated

   $ 8,739       $ —         $ 8,739       $ —        $ —        $ 8,739   

Interest rate swaps - non-designated

     155         —           155         (155     —          —     

Foreign exchange

     270         —           270         (32     (238     —     
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total derivative assets

   $ 9,164       $ —         $ 9,164       $ (187   $ (238   $ 8,739   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Derivative liabilities

               

Interest rate swaps - designated

   $ 3,536       $ —         $ 3,536       $ —        $ (3,536   $ —     

Interest rate swaps - non-designated

     48,765         —           48,765         (155     (48,610     —     

Foreign exchange

     32         —           32         (32     —          —     
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total derivative liabilities

   $ 52,333       $ —         $ 52,333       $ (187   $ (52,146   $ —     
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

     As of March 31, 2015  
     Gross amounts
recognized
     Gross amounts
offset in the
consolidated
balance sheet
     Net amounts
presented in
the
consolidated
balance sheet
     Gross amounts not offset in the
consolidated balance sheet
    Net amount  

(In thousands)

            Financial
instruments (1)
    Collateral (2)    

Derivative assets

               

Interest rate swaps - designated

     12,688         —           12,688         —          —          12,688   

Interest rate swaps - non-designated

   $ 67       $ —         $ 67       $ (67   $ —        $ —     

Foreign exchange

     219         —           219         (47     (172     —     
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total derivative assets

   $ 12,974       $ —         $ 12,974       $ (114   $ (172   $ 12,688   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Derivative liabilities

               

Interest rate swaps - designated

   $ 6,063       $ —         $ 6,063       $ —        $ (6,063   $ —     

Interest rate swaps - non-designated

     59,080         —           59,080         (67     (59,013     —     

Foreign exchange

     47         —           47         (47     —          —     
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total derivative liabilities

   $ 65,190       $ —         $ 65,190       $ (114   $ (65,076   $ —     
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

(1) For derivative assets, this includes any derivative liability fair values that could be offset in the event of counterparty default. For derivative liabilities, this includes any derivative asset fair values that could be offset in the event of counterparty default.
(2) For derivate assets, this includes the fair value of collateral received by the Corporation from the counterparty. Securities received as collateral are not included in the Consolidated Balance Sheets unless the counterparty defaults. For derivative liabilities, this includes the fair value of securities pledged by the Corporation to the counterparty. These securities are included in the Consolidated Balance Sheets unless the Corporation defaults.

 

63


9. Benefit Plans

The Corporation sponsors several qualified and nonqualified pension and other postretirement plans for certain of its employees. The net periodic pension cost is based on estimated values provided by an outside actuary. The components of net periodic benefit cost are as follows:

 

     Pension Benefits  
     Three Months Ended March 31,  

(In thousands)

   2016      2015  

Service cost

   $ 198       $ 207   

Interest cost

     3,649         3,517   

Expected return on assets

     (3,788      (3,902

Amortization of unrecognized prior service costs

     75         570   

Amortization of actuarial losses/(gains)

     830         1,057   
  

 

 

    

 

 

 

Net periodic pension cost

   $ 964       $ 1,449   
  

 

 

    

 

 

 

 

     Postretirement Benefits  
     Three Months Ended March 31,  

(In thousands)

   2016      2015  

Service cost

   $ 26       $ 41   

Interest cost

     64         144   

Amortization of unrecognized prior service costs

     (636      (160

Amortization of actuarial losses/(gains)

     245         81   
  

 

 

    

 

 

 

Net periodic postretirement cost

   $ (301    $ 106   
  

 

 

    

 

 

 

For further information on the Corporation’s employee benefit plans, refer to Note 13 (Benefit Plans) to the consolidated financial statements in the 2015 Form 10-K.

 

10. Fair Value Measurement

As defined in ASC 820, Fair Value Measurements and Disclosures, fair value is defined as the price to sell an asset or transfer a liability in an orderly transaction between market participants in the principal market or most advantageous market for the asset or liability. Fair value is based on quoted market prices, when available, for identical or similar assets or liabilities. In the absence of quoted market prices, Management determines the fair value of the Corporation’s assets and liabilities using valuation models or third-party pricing services. Both of these approaches rely on market-based parameters when available, such as interest rate yield curves, option volatilities and credit spreads, or unobservable inputs. Unobservable inputs may be based on Management’s judgment, assumptions and estimates related to credit quality, liquidity, interest rates and other relevant inputs.

GAAP establishes a three-level valuation hierarchy for determining fair value that is based on the transparency of the inputs used in the valuation process. The inputs used in determining fair value in each of the three levels of the hierarchy, highest ranking to lowest, are as follows:

 

    Level 1 — Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

 

64


    Level 2 — Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

 

    Level 3 — Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The level in the fair value hierarchy ascribed to a fair value measurement in its entirety is based on the lowest level input that is significant to the overall fair value measurement.

Valuation adjustments, such as those pertaining to counterparty and the Corporation’s own credit quality and liquidity, may be necessary to ensure that assets and liabilities are recorded at fair value. Credit valuation adjustments are made when market pricing does not accurately reflect the counterparty’s credit quality. As determined by Management, liquidity valuation adjustments may be made to the fair value of certain assets to reflect the uncertainty in the pricing and trading of the instruments when Management is unable to observe recent market transactions for identical or similar instruments. Liquidity valuation adjustments are based on the following factors:

 

    the amount of time since the last relevant valuation;

 

    whether there is an actual trade or relevant external quote available at the measurement date; and

 

    volatility associated with the primary pricing components.

Management ensures that fair value measurements are accurate and appropriate by relying upon various controls, including:

 

    an independent review and approval of valuation models;

 

    recurring detailed reviews of profit and loss; and

 

    a validation of valuation model components against benchmark data and similar products, where possible.

Management reviews any changes to its valuation methodologies to ensure they are appropriate and justified, and refines valuation methodologies as more market-based data becomes available. Transfers between levels of the fair value hierarchy are recognized at the end of the reporting period.

Additional information regarding the Corporation’s accounting policies for determining fair value is provided in Note 1 (Summary of Significant Accounting Policies) under the heading “Fair Value Measurements”.

 

65


The following tables present the balance of assets and liabilities measured at fair value on a recurring and nonrecurring basis as of March 31, 2016, December 31, 2015, and March 31, 2015:

 

            Fair Value by Hierarchy  

(In thousands)

   March 31, 2016      Level 1      Level 2      Level 3  

Recurring fair value measurement

           

Available-for-sale securities:

           

Marketable equity securities

   $ 2,873       $ 2,873       $ —         $ —     

U.S. government agency debentures

     2,520         —           2,520         —     

U.S. States and political subdivisions

     173,141         —           173,141         —     

Residential mortgage-backed securities:

           

U.S. government agencies

     907,656         —           907,656         —     

Commercial mortgage-backed securities:

           

U.S. government agencies

     184,248         —           184,248         —     

Residential collateralized mortgage-backed securities:

           

U.S. government agencies

     2,226,737         —           2,226,737         —     

Non-agency

     4         —           —           4   

Commercial collateralized mortgage-backed securities:

           

U.S. government agencies

     272,882         —           272,882         —     

Corporate debt securities

     48,756         —           —           48,756   

Asset-backed securities:

           

Collateralized loan obligations

     285,397         —           —           285,397   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available for sale securities

     4,104,214         2,873         3,767,184         334,157   

Residential loans held for sale

     5,249         —           5,249         —     

Derivative assets:

           

Interest rate swaps - fair value hedges

     22,718         —           22,718         —     

Interest rate swaps - nondesignated

     75,139         —           75,139         —     

Mortgage loan commitments

     240         —           240         —     

Foreign exchange

     452         —           452         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total derivative assets

     98,549         —           98,549         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total fair value of assets (1)

   $ 4,208,012       $ 2,873       $ 3,870,982       $ 334,157   
  

 

 

    

 

 

    

 

 

    

 

 

 

Derivative liabilities:

           

Interest rate swaps - fair value hedges

   $ 3,238       $ —         $ 3,238       $ —     

Interest rate swaps - nondesignated

     75,139         —           75,139         —     

Forward sales contracts

     82         —           82         —     

Credit contracts

     8         —           8         —     

Foreign exchange

     154         —           154         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total derivative liabilities

     78,621         —           78,621         —     

True-up liability

     15,115         —           —           15,115   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total fair value of liabilities (1)

   $ 93,736       $ —         $ 78,621       $ 15,115   
  

 

 

    

 

 

    

 

 

    

 

 

 

Nonrecurring fair value measurement

           

Mortgage servicing rights (2)

   $ 17,460       $ —         $ —         $ 17,460   

Impaired loans (3)

     86,315         —           —           86,315   

Other property (4)

     13,629         —           —           13,629   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total nonrecurring fair value

   $ 117,404       $ —         $ —         $ 117,404   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) There were no transfers between levels 1, 2 or 3 of the fair value hierarchy during the three months ended March 31, 2016.
(2) MSRs with a recorded investment of $18.1 million were reduced by a specific valuation allowance totaling $0.9 million to a reported carrying value of $17.3 million resulting in recognition of $0.5 million in expense included in loan sales and servicing income in the three months ended March 31, 2016.
(3) At March 31, 2016, collateral dependent impaired loans with a recorded investment of $94.1 million were reduced by specific valuation allowance allocations totaling $7.8 million to a reported net carrying value of $86.3 million.
(4) Amounts do not include assets held at cost at March 31, 2016. During the three months ended March 31, 2016, the re-measurement of foreclosed assets at fair value subsequent to initial recognition resulted in losses of $2.0 million included in noninterest expense.

 

66


            Fair Value by Hierarchy  

(In thousands)

   December 31, 2015      Level 1      Level 2      Level 3  

Recurring fair value measurement

           

Available-for-sale securities:

           

Marketable equity securities

   $ 2,821       $ 2,821       $ —         $ —     

U.S treasury notes & bonds

     5,000         —           5,000         —     

U.S. government agency debentures

     2,498         —           2,498         —     

U.S. States and political subdivisions

     192,795         —           192,795         —     

Residential mortgage-backed securities:

           

U.S. government agencies

     906,229         —           906,229         —     

Commercial mortgage-backed securities:

           

U.S. government agencies

     172,109         —           172,109         —     

Residential collateralized mortgage-backed securities:

           

U.S. government agencies

     2,128,320         —           2,128,320         —     

Non-agency

     4         —           —           4   

Commercial collateralized mortgage-backed securities:

           

U.S. government agencies

     216,319         —           216,319         —     

Corporate debt securities

     52,229         —           —           52,229   

Asset-backed securities

           

Collateralized loan obligations

     289,411         —           —           289,411   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale securities

     3,967,735         2,821         3,623,270         341,644   

Residential loans held for sale

     5,472         —           5,472         —     

Derivative assets:

           

Interest rate swaps - fair value hedges

     8,739         —           8,739         —     

Interest rate swaps - nondesignated

     48,920         —           48,920         —     

Mortgage loan commitments

     149         —           149         —     

Foreign exchange

     299         —           299         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total derivative assets

     58,107         —           58,107         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total fair value of assets (1)

   $ 4,031,314       $ 2,821       $ 3,686,849       $ 341,644   
  

 

 

    

 

 

    

 

 

    

 

 

 

Derivative liabilities:

           

Interest rate swaps - fair value hedges

   $ 3,536       $ —         $ 3,536       $ —     

Interest rate swaps - nondesignated

     48,920         —           48,920         —     

Forward sale contracts

     5         —           5         —     

Foreign exchange

     284         —           284         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total derivative liabilities

     52,745         —           52,745         —     

True-up liability

     14,750         —           —           14,750   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total fair value of liabilities (1)

   $ 67,495       $ —         $ 52,745       $ 14,750   
  

 

 

    

 

 

    

 

 

    

 

 

 

Nonrecurring fair value measurement

           

Mortgage servicing rights (2)

   $ 19,149       $ —         $ —         $ 19,149   

Impaired loans (3)

     71,428         —           —           71,428   

Other property (4)

     18,576         —           —           18,576   

Other real estate covered by loss share (5)

     365         —           —           365   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total nonrecurring fair value

   $ 109,518       $ —         $ —         $ 109,518   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

 

(1) There were no transfers between levels 1, 2 or 3 of the fair value hierarchy during the year ended December 31, 2015.
(2) MSRs with a recorded investment of $18.9 million were reduced by a specific valuation allowance totaling $0.4 million to a reported carrying value of $18.5 million resulting in a recovery of previously recognized expense of $0.6 million in recoveries included in loans sales and servicing income in the year ended December 31, 2015.
(3) At December 31, 2015, collateral dependent impaired loans with a recorded investment of $84.3 million were reduced by specific valuation allowance allocations totaling $12.9 million to a reported net carrying value of $71.4 million.
(4) Amounts do not include assets held at cost at December 31, 2015. During the year ended December 31, 2015, the re-measurement of foreclosed assets at fair value subsequent to initial recognition resulted in losses of $4.5 million included in noninterest expense.
(5) Amounts do not include assets held at cost at December 31, 2015. During the year ended December 31, 2015, the re-measurement of covered foreclosed assets at fair value subsequent to initial recognition resulted in losses of $0.6 million included in noninterest expense.

 

67


            Fair Value by Hierarchy  

(In thousands)

   March 31, 2015      Level 1      Level 2      Level 3  

Recurring fair value measurement

           

Available-for-sale securities:

           

Marketable equity securities

   $ 2,869       $ 2,869       $ —         $ —     

U.S. government agency debentures

     2,513         —           2,513         —     

U.S. States and political subdivisions

     215,164         —           215,164         —     

Residential mortgage-backed securities:

           

U.S. government agencies

     947,303         —           947,303         —     

Commercial mortgage-backed securities:

           

U.S. government agencies

     140,359         —           140,359         —     

Residential collateralized mortgage-backed securities:

           

U.S. government agencies

     1,892,560         —           1,892,560         —     

Non-agency

     6         —           1         5   

Commercial collateralized mortgage-backed securities:

           

U.S. government agencies

     244,059         —           244,059         —     

Corporate debt securities

     52,264         —           —           52,264   

Asset-backed securities:

           

Collateralized loan obligations

     293,962         —           —           293,962   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale securities

     3,791,059         2,869         3,441,959         346,231   

Residential loans held for sale

     3,568         —           3,568         —     

Derivative assets:

           

Interest rate swaps - fair value hedges

     12,688         —           12,688         —     

Interest rate swaps - nondesignated

     59,147         —           59,147         —     

Mortgage loan commitments

     388         —           388         —     

Foreign exchange

     350         —           350         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total derivative assets

     72,573         —           72,573         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total fair value of assets (1)

   $ 3,867,200       $ 2,869       $ 3,518,100       $ 346,231   
  

 

 

    

 

 

    

 

 

    

 

 

 

Derivative liabilities:

           

Interest rate swaps - fair value hedges

   $ 6,063       $ —         $ 6,063       $ —     

Interest rate swaps - nondesignated

     59,147         —           59,147         —     

Forward sale contracts

     68         —           68         —     

Foreign exchange

     169         —           169         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total derivative liabilities

     65,447         —           65,447         —     

True-up liability

     13,707         —           —           13,707   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total fair value of liabilities (1)

   $ 79,154       $ —         $ 65,447       $ 13,707   
  

 

 

    

 

 

    

 

 

    

 

 

 

Nonrecurring fair value measurement

           

Mortgage servicing rights (2)

   $ 20,526       $ —         $ —         $ 20,526   

Impaired loans (3)

     63,839         —           —           63,839   

Other property (4)

     16,956         —           —           16,956   

Other real estate covered by loss share (5)

     7,293         —           —           7,293   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total nonrecurring fair value

   $ 108,614       $ —         $ —         $ 108,614   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) There were no transfers between levels 1, 2 and 3 of the fair value hierarchy during the three months ended March 31, 2015.
(2) MSRs with a recorded investment of $21.5 million were reduced by a specific valuation allowance totaling $1.1 million to a reported carrying value of $20.4 million resulting in recovery of a previously recognized expense of $0.2 million in the three months ended March 31, 2015.
(3) At March 31, 2015, collateral dependent impaired loans with a recorded investment of $75.6 million were reduced by specific valuation allowance allocations totaling $11.8 million to a reported net carrying value of $63.8 million.
(4) Amounts do not include assets held at cost at March 31, 2015. During the three months ended March 31, 2015, the re-measurement of foreclosed assets at fair value subsequent to initial recognition resulted in losses of $0.9 million included in noninterest expense.
(5) Amounts do not include assets held at cost at March 31, 2015. During the three months ended March 31, 2015, the re-measurement of covered foreclosed assets at fair value subsequent to initial recognition resulted in losses of $0.3 million included in noninterest expense.

 

68


The following section describes the valuation methodologies used by the Corporation to measure financial assets and liabilities at fair value. During the three months ended March 31, 2016 and 2015, there were no significant changes to the valuation techniques used by the Corporation to measure fair value.

Available-for-sale securities. When quoted prices are available in an active market, securities are valued using the quoted price and are classified as Level 1. The quoted prices are not adjusted. Level 1 instruments include money market mutual funds.

Securities are classified as Level 2 if quoted prices for identical securities are not available, and fair value is determined using pricing models by a third-party pricing service. Approximately 92% of the available-for-sale portfolio is Level 2. For the majority of available-for sale securities, the Corporation obtains fair value measurements from an independent third party pricing service. These instruments include: municipal bonds; bonds backed by the U.S. government; corporate bonds; MBS; securities issued by the U.S. Treasury; and certain agency CMOs. The independent pricing service uses industry-standard models to price U.S. government agencies and MBS that consider various assumptions, including time value, yield curves, volatility factors, prepayment speeds, default rates, loss severity, current market and contractual prices for the underlying financial instruments, as well as other relevant economic measures. Obligations of state and political subdivisions are valued using a matrix, or grid, pricing in which securities are benchmarked against the treasury rate based on credit rating. For collateralized mortgage securities, depending on the characteristics of a given tranche, a volatility driven multidimensional static model or Option-Adjusted Spread model is generally used. Substantially all assumptions used by the independent pricing service for securities classified as Level 2 are observable in the marketplace, can be derived from observable data, or are supported by observable levels at which transactions are executed in the marketplace.

Securities are classified as Level 3 when there is limited activity in the market for a particular instrument and fair value is determined by obtaining broker quotes. As of March 31, 2016, 8% of the available-for-sale portfolio is Level 3, which consists of single issuer trust preferred securities and CLOs.

The single issuer trust preferred securities are measured at unadjusted prices obtained from the independent pricing service. The independent pricing service prices these instruments through a broker quote when sufficient information, such as cash flows or other security structure or market information, is not available to produce an evaluation. Broker-quoted securities are adjusted by the independent pricing service based solely on the receipt of updated quotes from market makers or broker-dealers recognized as market participants. A list of such issues is compiled by the independent pricing service daily. For broker-quoted issues, the independent pricing service applies a zero spread relationship to the bid-side valuation, resulting in the same values for the mean and ask.

CLO are securitized products where payments from multiple middle-sized and large business loans are pooled together and segregated into different classes of bonds with payments on these bonds based on their

 

69


priority within the overall deal structure. The markets for such securities are generally characterized by low trading volumes and wide bid-ask spreads, all driven by more limited market participants. Although estimated prices are generally obtained for such securities, the level of market observable assumptions used is limited in the valuation. Specifically, market assumptions regarding credit adjusted cash flows and liquidity influences on discount rates were difficult to observe at the individual bond level. Accordingly, the securities are currently valued by a third party that primarily utilizes dealer or pricing service prices and, subsequently, verifies this pricing through a disciplined process to ensure proper valuations and to highlight differences in cash flow modeling or other risks to determine if the market perception of the risk of a CLO is beginning to deviate from other similar tranches. This is done by establishing ranges for appropriate pricing yields for each CLO tranche and, using a standardized cash flow scenario, ensuring yields are consistent with expectations.

On a monthly basis, Management validates the pricing methodologies utilized by our independent pricing service to ensure the fair-value determination is consistent with the applicable accounting guidance and that the investments are properly classified in the fair value hierarchy. Management substantiates the fair values determined for a sample of securities held in portfolio by reviewing the key assumptions used by the independent pricing service to value the securities and comparing the fair values to prices from other independent sources for the same and similar securities. Management analyzes variances and conducts additional research with the independent pricing service, if necessary, and takes appropriate action based on its findings.

Loans held for sale. These loans are regularly traded in active markets through programs offered by FHLMC and FNMA, and observable pricing information is available from market participants. The prices are adjusted as necessary to include any embedded servicing value in the loans and to take into consideration the specific characteristics of certain loans. These adjustments represent unobservable inputs to the valuation but are not considered significant to the fair value of the loans. Accordingly, residential real estate loans held for sale are classified as Level 2.

Impaired loans. Certain impaired collateral dependent loans are reported at fair value less costs to sell the collateral. Collateral values are estimated using Level 3 inputs, consisting of third-party appraisals or price opinions and internal adjustments necessary in the judgment of Management to reflect current market conditions and current operating results for the specific collateral. Collateral may be in the form of real estate or personal property including equipment and inventory. The vast majority of the collateral is real estate. When impaired collateral dependent loans are individually re-measured and reported at fair value of the collateral, less costs to sell, a direct loan charge off to the ALL and/or a specific valuation allowance allocation is recorded.

Other Property. Certain other property which consists of foreclosed assets and properties securing residential and commercial loans, upon initial recognition and transfer from loans, are re-measured and reported at fair value less costs to sell to the property through a charge-off to the ALL based on the fair value of the foreclosed assets. The fair value of a foreclosed asset, upon initial recognition, is estimated using Level 3 inputs, consisting of third-party appraisals or price opinions and internal adjustments necessary in the judgment of Management to reflect current market conditions and current operating results for the specific collateral. Subsequent to foreclosure, valuations are updated periodically, and the assets may be written down further through a charge to noninterest expense.

 

70


Mortgage Servicing Rights. The Corporation carries its MSRs at lower of cost or fair value, and, therefore, they are subject to fair value measurements on a nonrecurring basis. Since sales of MSRs tend to occur in private transactions and the precise terms and conditions of the sales are typically not readily available, there is a limited market to refer to in determining the fair value of MSRs. As such, like other participants in the mortgage banking business, the Corporation relies primarily on a discounted cash flow model, incorporating assumptions about loan prepayment rates, discount rates, servicing costs and other economic factors, to estimate the fair value of its mortgage servicing rights. Since the valuation model uses significant unobservable inputs, the Corporation classifies MSRs within Level 3.

The Corporation utilizes a third-party vendor to perform the modeling to estimate the fair value of its MSRs. The Corporation reviews the estimated fair values and assumptions used by the third party in the model on a quarterly basis. The Corporation also compares the estimates of fair value and assumptions to recent market activity and against its own experience. See Note 11 (Mortgage Servicing Rights and Mortgage Servicing Activity) for further information on MSRs valuation assumptions.

Derivatives. The Corporation’s derivatives include interest rate swaps and written loan commitments and forward sales contracts related to residential mortgage loan origination activity. Valuations for interest rate swaps are derived from third-party models whose significant inputs are readily observable market parameters, primarily yield curves, with appropriate adjustments for liquidity and credit risk. These fair value measurements are classified as Level 2. The fair values of written loan commitments and forward sales contracts on the associated loans are based on quoted prices for similar loans in the secondary market, consistent with the valuation of residential mortgage loans held for sale. Expected net future cash flows related to loan servicing activities are included in the fair value measurement of written loan commitments. A written loan commitment does not bind the potential borrower to entering into the loan, nor does it guarantee that the Corporation will approve the potential borrower for the loan. Therefore, when determining fair value, the Corporation makes estimates of expected “fallout” (interest rate locked pipeline loans not expected to close), using models, which consider cumulative historical fallout rates and other factors. Fallout can occur for a variety of reasons including falling rate environments when a borrower will abandon a fixed rate loan commitment at one lender and enter into a new lower fixed rate loan commitment at another, when a borrower is not approved as an acceptable credit by the lender or for a variety of other non-economic reasons. Fallout is not a significant input to the fair value of the written loan commitments in their entirety. These measurements are classified as Level 2.

Derivative assets are typically secured through securities with financial counterparties or cross collateralization with a borrowing customer. Derivative liabilities are typically secured through the Corporation pledging securities to financial counterparties or, in the case of a borrowing customer, by the right of setoff. The Corporation considers factors such as the likelihood of default by itself and its counterparties, right of setoff, and remaining maturities in determining the appropriate fair value adjustments. All derivative counterparties approved by the Bank’s Board are regularly reviewed, and appropriate business action is taken to adjust the

 

71


exposure to certain counterparties, as necessary. Counterparty exposure is evaluated by netting positions that are subject to master netting agreements, as well as considering the amount of marketable collateral securing the position. This approach used to estimate impacted exposures to counterparties is also used by the Corporation to estimate its own credit risk on derivative liability positions. To date, no material losses have been incurred due to a counterparty’s inability to pay any uncollateralized position. There was no significant change in value of derivative assets and liabilities attributed to credit risk for the three months ended March 31, 2016.

True-up liability. In connection with the George Washington and Midwest FDIC assisted acquisitions in 2010, the Bank has agreed to pay the FDIC should the estimated losses on the acquired loan portfolios as well as servicing fees earned on the acquired loan portfolios not meet thresholds as stated in the loss share agreements (the “true-up liability”). This contingent consideration is classified as a liability within accrued taxes, expenses and other liabilities on the consolidated balance sheets and is remeasured at fair value each reporting date until the contingency is resolved. The changes in fair value are recognized in earnings in the current period.

An expected value methodology is used as a starting point for determining the fair value of the true-up liability based on the contractual terms prescribed in the loss share agreements. The resulting values under both calculations are discounted over 10 years (the period defined in the loss share agreements) to reflect the uncertainty in the timing and payment of the true-up liability by the Bank to arrive at a net present value. The discount rate used to value the true-up liability was 3.46% and 3.05% as of March 31, 2016 and 2015, respectively. Increasing or decreasing the discount rate by one percentage point would change the liability by approximately $0.6 million and $0.6 million, respectively, as of March 31, 2016.

In accordance with the loss share agreements governing the Midwest acquisition, on July 15, 2020 (the “Midwest True-Up Measurement Date”), the Bank has agreed to pay to the FDIC half of the amount, if positive, calculated as: (1) 20% of the intrinsic loss estimate of the FDIC (approximately $152 million); minus (2) the sum of (A) 25% of the asset premium paid in connection with the Midwest acquisition (approximately $21 million); plus (B) 25% of the cumulative shared-loss payments (as defined below) plus (C) the cumulative servicing amount (as defined below). The fair value of the true-up liability associated with the Midwest acquisition was $9.6 million, $9.3 million, and $8.6 million as of March 31, 2016, December 31, 2015, and March 31, 2015, respectively.

In accordance with the loss share agreements governing the George Washington acquisition, on April 14, 2020 (the “George Washington True-Up Measurement Date”), the Bank has agreed to pay to the FDIC 50% of the excess, if any, of (1) 20% of the stated threshold (approximately $34.4 million) less (2) the sum of (A) 25% of the asset discount (approximately $12 million) received in connection with the George Washington acquisition plus (B) 25% of the cumulative shared-loss payments (as defined below) plus (C) the cumulative servicing amount (as defined below). The fair value of the true-up liability associated with the George Washington acquisition was $5.5 million, $5.5 million, and $5.1 million as of March 31, 2016, December 31, 2015, and March 31, 2015, respectively.

 

72


For the purposes of the above calculations, cumulative shared-loss payments means: (i) the aggregate of all of the payments made or payable to the Bank under the loss share agreements minus (ii) the aggregate of all of the payments made or payable to the FDIC. The cumulative servicing amount means the period servicing amounts (as defined in the loss share agreements) for every consecutive twelve-month period prior to and ending on the Midwest and George Washington True-Up Measurement Dates. The cumulative loss share payments and cumulative service amounts are components of the true-up calculations and are estimated each period end based on the expected amount and timing of cash flows of the acquired loan portfolios. See Note 3 (Loans) and Note 4 (Allowance for Loan Losses) for additional information on the estimated cash flows of the acquired loan portfolios.

The changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the three months ended March 31, 2016 and 2015 are summarized as follows:

 

     Three Months Ended March 31,  
     2016      2015  

(In thousands)

   Available-
for-sale
securities
     True-up
liability
     Available-
for-sale
securities
     True-up
liability
 

Balance at beginning of period

   $ 341,644       $ 14,750       $ 339,187       $ 13,294   

(Gains) losses included in earnings (1)

     —           365         —           413   

Unrealized gains (losses) (2)

     (7,556      —           6,682         —     

Purchases

     —           —           —           —     

Sales

     —           —           

Settlements

     69         —           362         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance at ending of period

   $ 334,157       $ 15,115       $ 346,231       $ 13,707   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Reported in “Other expense”
(2) Reported in “Other comprehensive income (loss)”

Fair Value Option

Residential mortgage loans held for sale are recorded at fair value under fair value option accounting guidance. The election of the fair value option aligns the accounting for these loans with the related hedges. It also eliminates the requirements of the hedge accounting under GAAP.

Interest income on loans held for sale is accrued on the principal outstanding primarily using the “simple-interest” method. None of these loans were 90 days or more past due, nor were any on nonaccrual as of March 31, 2016, December 31, 2015, and March 31, 2015. The aggregate fair value, contractual balance and gain or loss on loans held for sale was as follows:

 

(In thousands)

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

Aggregate fair value carrying amount

   $ 5,249       $ 5,472       $ 3,568   

Aggregate unpaid principal / contractual balance

     5,084         5,320         3,400   
  

 

 

    

 

 

    

 

 

 

Carrying amount over aggregate unpaid principal (1)

   $ 165       $ 152       $ 168   
  

 

 

    

 

 

    

 

 

 

 

(1) These changes are included in “Loan sales and servicing income” in the Consolidated Statements of Income.

 

73


Disclosures about Fair Value of Financial Instruments

The carrying amount and estimated fair value of the Corporation’s financial instruments that are carried at either fair value or cost as of March 31, 2016, December 31, 2015, and March 31, 2015 are shown in the tables below.

 

     March 31, 2016  
     Carrying
Amount
     Fair Value  

(In thousands)

      Total      Level 1      Level 2      Level 3  

Financial assets:

              

Cash and cash equivalents

   $ 759,897       $ 759,897       $ 759,897       $ —         $ —     

Available-for-sale securities

     4,104,214         4,104,214         2,873         3,767,184         334,157   

Held-to-maturity securities

     2,613,700         2,632,274         —           2,632,274         —     

Other securities

     148,159         148,159         —           148,159         —     

Loans held for sale

     5,249         5,249         —           5,249         —     

Net originated loans

     14,286,598         14,069,307         —           —           14,069,307   

Net acquired loans

     1,629,283         1,681,087         —           —           1,681,087   

Net FDIC acquired loans and loss share receivable

     157,632         157,632         —           —           157,632   

Accrued interest receivable

     70,280         70,280         —           70,280         —     

Derivatives

     98,549         98,549         —           98,549         —     

Financial liabilities:

              

Deposits

   $ 21,101,366       $ 21,109,594       $ —         $ 21,109,594       $ —     

Federal funds purchased and securities sold under agreements to repurchase

     719,850         719,850         —           719,850         —     

Wholesale borrowings

     378,996         383,432         —           383,432         —     

Long-term debt

     519,249         504,468         —           504,468         —     

Accrued interest payable

     10,093         10,093         —           10,093         —     

Derivatives

     78,621         78,621         —           78,621         —     

 

74


     December 31, 2015  
     Carrying
Amount
     Fair Value  

(In thousands)

      Total      Level 1      Level 2      Level 3  

Financial assets:

              

Cash and cash equivalents

   $ 463,817       $ 463,817       $ 463,817       $ —         $ —     

Available-for-sale securities

     3,967,735         3,967,735         2,821         3,623,270         341,644   

Held-to-maturity securities

     2,674,093         2,659,119         —           2,659,119         —     

Other securities

     148,172         148,172         —           148,172         —     

Loans held for sale

     5,472         5,472         —           5,472         —     

Net originated loans

     14,013,370         13,795,058         —           —           13,795,058   

Net acquired loans

     1,739,194         1,796,314         —           —           1,796,314   

Net FDIC acquired loans and loss share receivable

     170,690         170,690         —           —           170,690   

Accrued interest receivable

     67,887         67,887         —           67,887         —     

Derivatives

     58,107         58,107         —           58,107         —     

Financial liabilities:

              

Deposits

   $ 20,108,003       $ 20,116,298       $ —         $ 20,116,298       $ —     

Federal funds purchased and securities sold under agreements to repurchase

     1,037,075         1,037,075         —           1,037,075         —     

Wholesale borrowings

     580,648         582,120         —           582,120         —     

Long-term debt

     505,173         503,675         —           503,675         —     

Accrued interest payable

     10,758         10,758         —           10,758         —     

Derivatives

     52,745         52,745         —           52,745         —     

 

75


     March 31, 2015  
     Carrying
Amount
     Fair Value  

(In thousands)

      Total      Level 1      Level 2      Level 3  

Financial assets:

              

Cash and cash equivalents

   $ 532,425       $ 532,425       $ 532,425       $ —         $ —     

Available-for-sale securities

     3,791,059         3,791,059         2,869         3,441,959         346,231   

Held-to-maturity securities

     2,855,174         2,848,912         —           2,848,912         —     

Other securities

     148,475         148,475         —           148,475         —     

Loans held for sale

     3,568         3,568         —           3,568         —     

Net originated loans

     12,758,492         12,588,147         —           —           12,588,147   

Net acquired loans

     2,317,386         2,393,942         —           —           2,393,942   

Net FDIC acquired loans and loss share receivable

     268,459         268,459         —           —           268,459   

Accrued interest receivable

     69,086         69,086         —           69,086         —     

Derivatives

     72,573         72,573         —           72,573         —     

Financial liabilities:

              

Deposits

   $ 19,925,595       $ 19,932,571       $ —         $ 19,932,571       $ —     

Federal funds purchased and securities sold under agreements to repurchase

     1,113,371         1,113,371         —           1,113,371         —     

Wholesale borrowings

     316,628         320,180         —           320,180         —     

Long-term debt

     512,625         527,018         —           527,018         —     

Accrued interest payable

     9,620         9,620         —           9,620         —     

Derivatives

     65,447         65,447         —           65,447         —     

The following methods and assumptions were used to estimate the fair values of each class of financial instrument presented:

Cash and cash equivalents – Due to their short-term nature, the carrying amount of these instruments approximates the estimated fair value.

Investment securities – See Financial Instruments Measured at Fair Value above.

Loans held for sale – The majority of loans held for sale are residential mortgage loans which are recorded at fair value. All other loans held for sale are recorded at the lower of cost or market, less costs to sell. See Financial Instruments Measured at Fair Value above.

Net originated loans – The originated loan portfolio was segmented based on loan type and repricing characteristics. Carrying values are used to estimate fair values of variable rate loans. A discounted cash flow method was used to estimate the fair value of fixed-rate loans. Discounting was based on the contractual cash flows, and discount rates are based on the quarter-end yield curve plus a spread that reflects current pricing on loans with similar characteristics. If applicable, prepayment assumptions are factored into the fair value determination based on historical experience and current economic conditions.

 

76


Net acquired and FDIC acquired loans – Fair values for acquired and FDIC acquired loans were estimated based on a discounted projected cash flow methodology that considered factors including the type of loan and related collateral, classification status, fixed or variable interest rate, term of loan and whether or not the loan was amortizing, and current discount rates. Loans were grouped together according to similar characteristics and were treated in the aggregate when applying various valuation techniques. The discount rates used for loans are based on current market rates for new originations of comparable loans and include adjustments for liquidity concerns. The discount rate does not include a factor for credit losses as that has been included in the estimated cash flows.

Loss share receivable – This loss sharing asset is measured separately from the related covered assets as it is not contractually embedded in the covered assets and is not transferable with the covered assets should the Bank choose to dispose of them. Fair value was estimated using discounted projected cash flows related to the FDIC loss share agreements based on the expected reimbursements for losses and the applicable loss sharing percentages. These cash flows were discounted to reflect the uncertainty of the timing and receipt from the FDIC.

Accrued interest receivable – The carrying amount is considered a reasonable estimate of fair value.

Mortgage servicing rights – See Financial Instruments Measured at Fair Value above.

Deposits – The estimated fair value of deposits with no stated maturity, which includes demand deposits, money market accounts and other savings accounts, are established at carrying value because of the customers’ ability to withdraw funds immediately. A discounted cash flow method is used to estimate the fair value of fixed rate time deposits. Discounting was based on the contractual cash flows and the current rates at which similar deposits with similar remaining maturities would be issued.

Federal funds purchased and securities sold under agreements to repurchase, wholesale borrowings and long-term debt – The carrying amount of variable rate borrowings including federal funds purchased approximates the estimated fair value. Quoted market prices or the discounted cash flow method was used to estimate the fair value of the Corporation’s long-term debt. Discounting was based on the contractual cash flows and the current rate at which debt with similar terms could be issued.

Accrued interest payable – The carrying amount is considered a reasonable estimate of fair value.

Derivative assets and liabilities – See Financial Instruments Measured at Fair Value above.

True-up liability – See Financial Instruments Measured at Fair Value above.

 

77


11. Mortgage Servicing Rights and Mortgage Servicing Activity

In the three months ended March 31, 2016 and 2015, the Corporation sold residential mortgage loans from the held for sale portfolio with unpaid principal balances of $7.7 million and $50.3 million, respectively, and recognized pretax gains of $0.2 million and $0.6 million, respectively, which are included as a component of loan sales and servicing income. As of March 31, 2016 and 2015, the Corporation retained the related MSRs, for which it receives servicing fees, on $3.3 million and $45.2 million, respectively, of the loans sold.

The Corporation serviced for third parties approximately $2.3 billion of residential mortgage loans at March 31, 2016 and $2.6 billion at March 31, 2015. Loan servicing fees, not including valuation changes included in loan sales and servicing income, were $1.4 million and $1.6 million, respectively, for the three months ended March 31, 2016 and 2015.

Servicing rights are presented within other assets on the accompanying Consolidated Balance Sheets. The retained servicing rights are initially valued at fair value. Since MSRs do not trade in an active market with readily observable prices, the Corporation relies primarily on a discounted cash flow analysis model to estimate the fair value of its MSRs. Additional information can be found in Note 10 (Fair Value Measurement). MSRs are subsequently measured using the amortization method. Accordingly, the MSRs are amortized over the period of, and in proportion to, the estimated net servicing income and is recorded in loan sales and servicing income.

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

 

     Three Months Ended March 31,  

(In thousands)

   2016      2015  

Carrying amount of MSRs

     

Beginning balance

   $ 18,938       $ 22,011   

Additions

     28         470   

Amortization

     (839      (991
  

 

 

    

 

 

 

Ending balance

     18,127         21,490   

Valuation Allowance:

     

Beginning balance

     (399      (955

Recoveries/(Additions)

     (469      (176
  

 

 

    

 

 

 

Ending balance

     (868      (1,131
  

 

 

    

 

 

 

MSRs, net carrying balance

   $ 17,259       $ 20,359   
  

 

 

    

 

 

 

Fair value at end of period

   $ 17,460       $ 20,526   
  

 

 

    

 

 

 

On a quarterly basis, the Corporation assesses its capitalized servicing rights for impairment based on their current fair value. For purposes of the impairment, the servicing rights are disaggregated based on loan type and interest rate which are the predominant risk characteristics of the underlying loans. A valuation allowance is established through a charge to earnings to the extent the amortized cost of the MSRs exceeds the estimated fair value by stratification. If it is later determined that all or a portion of the temporary impairment no longer exists for the stratification, the valuation is reduced through a recovery to earnings. No permanent impairment losses were written off against the allowance during the three months ended March 31, 2016 and 2015.

 

78


Key economic assumptions and the sensitivity of the current fair value of the MSRs related to immediate 10% and 25% adverse changes in those assumptions at March 31, 2016 are presented in the following table below. These sensitivities are hypothetical and should be used with caution. As the figures indicate, changes in the fair value based on 10% variation in the prepayment speed assumption generally cannot be extrapolated because the relationship of the change in the prepayment speed assumption to the change in fair value may not be linear. Also, in the below table, the effect of a variation in the discount rate assumption on the fair value of the MSRs is calculated independently without changing any other assumption. In reality, changes in one factor may result in changes in another (for example, changes in prepayment speed estimates could result in changes in the discount rates), which might magnify or counteract the sensitivities.

 

(Dollars in thousands)       

Prepayment speed assumption (annual CPR)

     13.30

Decrease in fair value from 10% adverse change

   $ 691   

Decrease in fair value from 25% adverse change

   $ 1,342   

Discount rate assumption

     9.39

Decrease in fair value from 100 basis point adverse change

   $ 528   

Decrease in fair value from 200 basis point adverse change

   $ 1,022   

Expected weighted-average life (in months)

     90   

 

12. Commitments and Guarantees

Commitments to Extend Credit

Commitments to extend credit are agreements to lend to a customer provided there is no violation of any condition established in the contract. Loan commitments to originate residential mortgage loans held for sale and forward commitments to sell residential mortgage loans are considered derivative instruments, and the fair value of these commitments is recorded on the consolidated balance sheets. Additional information is provided in Note 10 (Fair Value Measurement). Commitments generally are extended at the then-prevailing interest rates, have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Loan commitments involve credit risk not reflected on the balance sheet. The Corporation mitigates exposure to credit risk with internal controls that guide how applications for credit are reviewed and approved, how credit limits are established and, when necessary, how demands for collateral are made. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties. Management evaluates the creditworthiness of each prospective borrower on a case-by-case basis and, when appropriate, adjusts the allowance for probable credit losses inherent in all commitments. The reserve for unfunded lending commitments at March 31, 2016, December 31, 2015, and March 31, 2015, included in “accrued expenses and other liabilities” on the Consolidated Balance Sheets, was $4.9 million, $4.1 million, and $4.3 million, respectively.

 

79


The Corporation’s credit risk associated with these instruments is represented by the contractual amounts indicated in the following table.

Unused commitments to extend credit

 

(In thousands)

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

Commercial

   $ 3,609,266       $ 3,992,089       $ 3,691,193   

Consumer

     2,458,973         2,393,058         2,343,677   
  

 

 

    

 

 

    

 

 

 

Total unused commitments to extend credit

   $ 6,068,239       $ 6,385,147       $ 6,034,870   
  

 

 

    

 

 

    

 

 

 

Unused Commitments to Extend Credit. Commitments to extend credit are legally binding agreements to lend to a customer, provided there is no violation of any condition established in the contract. These commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties. Since many commitments expire without being drawn upon, the total contractual amount of commitments does not necessarily represent future cash requirements of the Corporation.

Loan commitments to originate residential mortgage loans held for sale and forward commitments to sell residential mortgage loans are considered derivative instruments, and the fair value of these commitments is recorded on the consolidated balance sheets. Additional information is provided in Note 8 (Derivatives and Hedging Activities).

Guarantees

The Corporation is a guarantor in certain agreements with third parties. The Corporation’s maximum credit risk associated with these instruments is represented by the contractual amounts indicated in the following table.

Financial guarantees

 

(In thousands)

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

Standby letters of credit

   $ 236,642       $ 254,703       $ 275,736   

Loans sold with recourse

     11,781         12,902         39,996   
  

 

 

    

 

 

    

 

 

 

Total financial guarantees

   $ 248,423       $ 267,605       $ 315,732   
  

 

 

    

 

 

    

 

 

 

Standby Letters of Credit. Standby letters of credit obligate the Corporation to pay a specified third party when a customer fails to repay an outstanding loan or debt instrument, or fails to perform some contractual nonfinancial obligation. The Corporation has recourse against the customer for any amount required to be paid to a third party under a standby letter of credit. Collateral held varies, but may include marketable securities, equipment, inventory, and real estate. Except for short-term guarantees of $118.2 million at March 31, 2016, the remaining guarantees extend in varying amounts through 2024.

 

80


Loans Sold with Recourse. The Corporation regularly sells service retained residential mortgage loans to GSEs as part of its mortgage banking activities. The Corporation provides customary representation and warranties to the GSEs in conjunction with these sales. These representations and warranties generally require the Corporation to repurchase assets if it is subsequently determined that a loan did not meet specified criteria, such as a documentation deficiency or rescission of mortgage insurance. If the Corporation is unable to cure or refute a repurchase request, the Corporation is generally obligated to repurchase the loan or otherwise reimburse the counterparty for losses. The Corporation also sells service released residential mortgage loans to other investors which contain early payment default recourse provisions. As of March 31, 2016, December 31, 2015, and March 31, 2015, the Corporation had sold $9.2 million, $10.1 million, and $33.1 million, respectively, of outstanding residential mortgage loans to GSEs and other investors with recourse provisions. The Corporation had reserved $2.6 million, $2.7 million, and $6.7 million as of March 31, 2016, December 31, 2015, and March 31, 2015, respectively, for estimated losses from representation and warranty obligations and early payment default recourse provisions.

The reserve associated with loans sold with recourse is included in accrued taxes, expenses and other liabilities on the Consolidated Balance Sheets. The Corporation’s reserve reflects Management’s best estimate of losses. The Corporation’s reserving methodology uses current information about investor repurchase requests, and assumptions about repurchase mix and loss severity, based upon the Corporation’s most recent loss trends. The Corporation also considers qualitative factors that may result in anticipated losses differing from historical loss trends, such as loan vintage, underwriting characteristics and macroeconomic trends.

Changes in the repurchase reserves for the three months ended March 31, 2016 and 2015 are as follows:

 

     Three Months Ended March 31,  

(In thousands)

   2016      2015  

Balance at beginning of period

   $ 2,725       $ 7,250   

Net increase/(decrease) to reserve

     (53      (402

Net realized (losses)/gains

     (47      (198
  

 

 

    

 

 

 

Balance at end of period

   $ 2,625       $ 6,650   
  

 

 

    

 

 

 

 

81


Litigation

In the normal course of business, the Corporation and its subsidiaries are at all times subject to pending and threatened legal actions, some for which the relief or damages sought are substantial. Based on information currently available, consultation with counsel, available insurance coverage and established reserves, Management believes that the eventual outcome of all claims against the Corporation and its subsidiaries will not, individually or in the aggregate, have a material adverse effect on its consolidated financial position or results of operations. However, it is possible that the ultimate resolution of these matters, if unfavorable, may be material to the results of operations for a particular period. The Corporation has not established any reserves with respect to any of this disclosed litigation because it is not possible to determine (i) whether a liability has been incurred; or (ii) an estimate of the ultimate or minimum amount of such liability.

Reserves are established for legal claims only when losses associated with the claims are judged to be probable, and the loss can be reasonably estimated. In many lawsuits and arbitrations, including almost all of the class action lawsuits, it is not possible to determine whether a liability will be incurred or to estimate the ultimate or minimum amount of that liability until the case is close to resolution, in which case a reserve will not be recognized until that time.

Overdraft Litigation

Commencing in December 2010, two separate lawsuits were filed in the Summit County Court of Common Pleas and the Lake County Court of Common Pleas against the Corporation and the Bank. The complaints were brought as putative class actions on behalf of Ohio residents who maintained a checking account at the Bank and who incurred one or more overdraft fees as a result of the alleged re-sequencing of debit transactions. The lawsuit that had been filed in Summit County Court of Common Pleas was dismissed without prejudice on July 11, 2011. The remaining suit in Lake County seeks actual damages, disgorgement of overdraft fees, punitive damages, interest, injunctive relief and attorney fees. In December 2012, the trial court issued an order certifying a proposed class and the Bank and Corporation appealed the order to the Eleventh District Court of Appeals. In September 2013, the Eleventh District Court of Appeals affirmed in part and reversed in part the trial court’s class certification order, and remanded the case back to the trial court for further consideration, in particular with respect to the class definition. On October 9, 2013, the Bank and Corporation filed with the Eleventh District Court of Appeals an application for reconsideration and application for consideration en banc. On November 20, 2013, the Eleventh District denied those applications. On December 4, 2013, the Bank and Corporation filed a notice of appeal with the Ohio Supreme Court, and on January 3, 2014, they filed with the Ohio Supreme Court a memorandum in support of the Court’s exercising its jurisdiction and accepting the appeal. The plaintiffs filed an opposition, and, on April 24, 2014, the Ohio Supreme Court declined to accept jurisdiction. On August 6, 2014, the Bank and Corporation filed a motion asking the trial court to stay the lawsuit pending arbitration of claims subject to an arbitration agreement. That motion has been fully briefed and is awaiting a decision by the court. On August 25, 2014, the parties stipulated to a revised class definition (without affecting the pending motion to stay), and an order approving that stipulation is awaiting court approval.

 

82


CRBC 401(k) Litigation

Participants in the Citizens Republic Bancorp 401(k) Plan filed a lawsuit in the United States Court for the Eastern District of Michigan in 2011, alleging that Citizens and certain of its officers and directors violated the Employee Retirement Income Security Act by offering Citizens common stock as an investment alternative in the Plan during periods when it was imprudent to do so and by failing to adequately monitor fiduciaries responsible for administering the Plan. The lawsuit, captioned Kidd v. Citizens Republic Bancorp, Inc. et al., Case No. 2:11-cv-11709, asserts claims for monetary and injunctive relief on behalf of a purported class of participants and beneficiaries in the Plan who held Citizens stock in their Plan accounts during the period from April 17, 2008 to “the present.” The plaintiffs filed a third amended complaint in November 2015, and the defendants have filed a motion that the complaint be dismissed.

Merger litigation

Five putative derivative and class action lawsuits have been filed by separate shareholders of FirstMerit Corporation (“FirstMerit”) relating to the proposed merger between Huntington Bancshares, Inc. (“Huntington”) and FirstMerit. Two of those lawsuits were filed in the Summit County Common Pleas Court, Ohio: W. Patrick Murray v. Huntington Bancshares Incorporated, Case No. CV-2016-02-0917, was filed on February 11, 2016; and The Robinson Family Trust v. Paul Greig, Case No. CV-2016-02-0981, was filed on February 17, 2016 (the “State Court Lawsuits”). On April 14, 2016, the State Court Lawsuits were consolidated. The State Court Lawsuits consolidated complaint alleges that the individual directors of FirstMerit breached their fiduciary duties by approving a proposed merger that allegedly undervalues FirstMerit, allegedly provides the directors with benefits not afforded FirstMerit shareholders, and allegedly includes deal protection devices to ensure that the proposed merger will be consummated. The consolidated complaint also alleges that the directors approved a Registration Statement on S-4, filed on March 4, 2016, (the “Registration Statement”) that omits material information about the proposed merger. It also alleges that Huntington aided and abetted the alleged breaches of fiduciary duty. It seeks declaratory and injunctive relief to prevent the consummation of the proposed merger, an award of fees and costs, and other equitable relief.

The other three lawsuits were filed in the United States District Court for the Northern District of Ohio: Wojno v. FirstMerit Corp., Case No. 5:16-cv-461, was filed on February 26, 2016; Wilkinson v. FirstMerit Corp., Case No. 5:16-cv-723, was filed on March 23, 2016; and Hafner v. Greig, Case No 5:16-cv-762, was filed on March 28, 2016 (the “Federal Court Lawsuits”). On April 8, 2016, the parties to the Federal Court Lawsuits filed a stipulation that, among other things, would consolidate the actions and designate a consolidated complaint. The stipulation remains pending. Each complaint in the Federal Court Lawsuits makes similar allegations to the State Court Lawsuits consolidated complaint, and also alleges that the directors violated Sections 14(a) and 20(a) of the Securities Exchange of 1934 and Rule 14a-9 promulgated thereunder by approving the Registration Statement. The Hafner complaint also alleges that Huntington violated Section 20(a) of the Securities Exchange Act in connection with the Registration Statement. Each complaint in the Federal Court Lawsuits seeks similar relief to the State Court Lawsuits consolidated complaint.

 

83


On April 13, 2016, the defendants in the State Court Lawsuits filed a motion to stay the State Court Lawsuits pending the resolution of the parallel Federal Court Lawsuits. The motion to stay remains pending.

 

84


13. Changes and Reclassifications Out of Accumulated Other Comprehensive Income

The following table presents the changes in AOCI by component of comprehensive income for the three months ended March 31, 2016 and 2015:

 

     Three Months Ended
March 31, 2016
 

(In thousands)

   Pretax      Tax      After tax  

Unrealized and realized securities gains and losses:

        

Balance at the beginning of the period

   $ (32,786    $ (15,840    $ (16,946

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   
  

 

 

    

 

 

    

 

 

 

Balance at the end of the period

     14,447         1,682         12,765   
  

 

 

    

 

 

    

 

 

 

Pension plans and other postretirement benefits:

        

Balance at the beginning of the period

     (95,760      (33,432      (62,328
  

 

 

    

 

 

    

 

 

 

Current year actual losses/(gains)

     —           —           —     

Amortization of actuarial losses/(gains)

     2,168         773         1,395   

Amortization of prior service cost reclassified to other noninterest expense

     (260      (87      (173
  

 

 

    

 

 

    

 

 

 

Balance at the end of the period

     (93,852      (32,746      (61,106
  

 

 

    

 

 

    

 

 

 

Total Accumulated Other Comprehensive Income

   $ (79,405    $ (31,064    $ (48,341
  

 

 

    

 

 

    

 

 

 
     Three Months Ended
March 31, 2015
 

(In thousands)

   Pretax      Tax      After tax  

Unrealized and realized securities gains and losses:

        

Balance at the beginning of the period

   $ (8,531    $ (2,985    $ (5,546

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
  

 

 

    

 

 

    

 

 

 

Balance at the end of the period

     24,728         8,656         16,072   
  

 

 

    

 

 

    

 

 

 

Pension plans and other postretirement benefits:

        

Balance at the beginning of the period

     (102,068      (35,722      (66,346
  

 

 

    

 

 

    

 

 

 

Amortization of actuarial losses/(gains)

     1,138         398         740   

Amortization of prior service cost reclassified to other noninterest expense

     410         143         267   
  

 

 

    

 

 

    

 

 

 

Balance at the end of the period

     (100,520      (35,181      (65,339
  

 

 

    

 

 

    

 

 

 

Total Accumulated Other Comprehensive Income

   $ (75,792    $ (26,525    $ (49,267
  

 

 

    

 

 

    

 

 

 

 

85


The following table presents current period reclassifications out of AOCI by component of comprehensive income for the three months ended March 31, 2016 and 2015:

 

(In thousands)

   Three Months Ended
March 31, 2016
   

Income statement line item presentation

Realized (gains)/losses on sale of securities

   $ 295      Investment securities losses (gains), net

Tax expense (benefit) (36.3%)

     107      Income tax expense (benefit)
  

 

 

   

Reclassified amount, net of tax

   $ 188     
  

 

 

   

(In thousands)

   Three Months Ended
March 31, 2015
   

Income statement line item presentation

  

 

 

   

 

Realized (gains)/losses on sale of securities

   $ (354   Investment securities losses (gains), net

Tax expense (benefit) (35%)

     (124   Income tax expense (benefit)
  

 

 

   

Reclassified amount, net of tax

   $ (230  
  

 

 

   

 

14. Subsequent Events

In preparing these financial statements, subsequent events were evaluated through the time the financial statements were issued. Financial statements are considered issued when they are widely distributed to all shareholders and other financial statement users, or filed with the SEC. In accordance with applicable accounting standards, all material subsequent events have been either recognized in the financial statements or disclosed in the notes to the financial statements.

 

86


The acronyms and abbreviations identified below are used herein.

 

Acquisition Date    Citizens Republic Bancorp Inc. acquisition date of April 12, 2013    Federal Reserve    The Board of Governors of the Federal Reserve System
ALCO    Asset/Liability Management Committee    FHLB    Federal Home Loan Bank, including the Federal Home Loan
ALL    Allowance for loan losses    FHLMC    Federal Home Loan Mortgage Corporation
AOCI    Accumulated other comprehensive income (loss)    FICO    Fair Isaac Corporation
APBO    Accumulated pension benefit obligation    FINRA    Financial Industry Regulatory Authority
ASC    Accounting standards codification    FNMA    Federal National Mortgage Association
ASU    Accounting standards update    FRAP    Fixed Rate Advantage Program
Bank    FirstMerit Bank N.A.    FRB    Federal Reserve Bank
Basel I    Basel Committee’s 1988 Capital Accord    FSOC    Financial Stability Oversight Council
Basel III    Basel Committee regulatory capital reforms, Third Basel Accord    GAAP    United States generally accepted accounting principles
Basel Committee    Basel Committee on Banking Supervision    GSE    Government sponsored enterprise
BHC    Bank holding company    G-SIFI    Globally Systematically Important Financial Institution
BHCA    Bank Holding Company Act of 1956, as amended    ISDA    International Swaps and Derivatives Association
CCAR    Comprehensive Capital Analysis and Review    LIBOR    London Interbank Offered Rate
CET1    Common equity tier 1 capital    Management    FirstMerit Corporation’s Management
CFPB    Consumer Financial Protection Bureau    MBS    Mortgage-backed securities
Citizens    Citizens Republic Bancorp Inc.    MSRs    Mortgage servicing rights
Citizens TARP Preferred    Citizens TARP Preferred issued to the U.S. Treasury as part of the Troubled Assets Relief Program    NASDAQ    The NASDAQ Stock Market LLC
CLO    Collateralized loan obligations    NPR    Notice of Proposal Rulemaking
CMO    Collateralized mortgage obligations    NYSE    New York Stock Exchange
Common Stock    Common Shares, without par value    OCC    Office of the Comptroller of the Currency
Corporation    FirstMerit Corporation and its Subsidiaries    OCI    Other comprehensive income (loss)
CPR    Conditional Prepayment Rate    OREO    Other real estate owned
CRA    The Community Reinvestment Act    OTTI    Other-than-temporary impairment
CRE    Commercial Real Estate    Parent Company    FirstMerit Corporation
Dodd-Frank Act    Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010    Preferred Stock    5.875% Non-Cumulative Perpetual Preferred Stock, Series A
DIF    Federal Deposit Insurance Fund    RIP    Retirement Investment Plan
DTA    Deferred tax asset    ROA    Return on average assets
DTL    Deferred tax liability    ROE    Return on average equity
EPS    Earnings per share    SEC    United States Securities and Exchange Commission
ERISA    Employee Retirement Income Security Act of 1974    TARP    Troubled Asset Relief Program
ERM    Enterprise risk management    TDR    Troubled debt restructuring
ESOP    Employee stock ownership plan    TE    Fully taxable equivalent
EVE    Economic value of equity    U.S. Treasury    United States Department of the Treasury
FASB    Financial Accounting Standards Board    UTB    Unrecognized tax balance
FDIA    Federal Deposit Insurance Act    VIE    Variable interest entity
FDIC    The Federal Deposit Insurance Corporation      

 

87