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Section 1: 8-K (8-K)

Document


UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549



FORM 8-K

CURRENT REPORT


Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
Date of Report (Date of earliest event reported): February 28, 2017
38285729_keylogoa02.jpg
 
(Exact name of registrant as specified in charter)
 
 
 
 
 
 
Ohio
 
001-11302
 
34-6542451
(State or other jurisdiction of incorporation)
 
Commission File Number
 
(I.R.S. Employer Identification No.)
 
 
 
127 Public Square, Cleveland, Ohio
 
44114-1306
(Address of principal executive offices)
 
(Zip Code)
 
(216) 689-3000
Registrant’s telephone number, including area code
 
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
 
[ ] Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
 
[ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
 
[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
 
[ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))





Item 8.01    Other Events.

On August 1, 2016, First Niagara Financial Group, Inc. (“First Niagara”) merged with and into KeyCorp, with KeyCorp as the surviving entity (the “Merger”), as previously disclosed in the Current Report on Form 8-K filed by KeyCorp on August 1, 2016, as amended on August 16, 2016 (as amended, the “Previous Form 8-K”). KeyCorp is filing this Current Report on Form 8-K solely for the purpose of updating the financial statements and pro forma financial information originally included in the Previous Form 8-K.

Item 9.01
Financial Statements and Exhibits.

(a)    Financial Statements of Business Acquired

The unaudited consolidated financial statements of First Niagara as of June 30, 2016 and December 31, 2015 and for the six months ended June 30, 2016 and 2015, as well as the accompanying notes thereto, are filed as Exhibit 99.1 and incorporated herein by reference.

(b)    Pro Forma Financial Information

The unaudited pro forma combined condensed consolidated statement of income for the year ended December 31, 2016, giving effect to the Merger as if it occurred on January 1, 2016, is filed as Exhibit 99.2 attached hereto.

(d)    Exhibits

    
99.1
Unaudited consolidated financial statements of First Niagara as of and for the six months ended June 30, 2016 and 2015.

99.2
Unaudited pro forma combined condensed consolidated statement of income for the year ended December 31, 2016, giving effect to the Merger as if it occurred on January 1, 2016.







SIGNATURE
 
 
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
 
 
 
 
 
 
 
 
 
KEYCORP
 
 
(Registrant)
 
 
 
 
 
 
Date: February 28, 2017
 
/s/ Donald R. Kimble
 
 
By: Donald R. Kimble
 
 
Chief Financial Officer
 
 
 



(Back To Top)

Section 2: EX-99.1 (EXHIBIT 99.1)

Document


EXHIBIT 99.1
FIRST NIAGARA FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Condition (unaudited)
(in millions, except share and per share amounts)
 
 
June 30,
2016
December 31,
2015
ASSETS
Cash and cash equivalents
$
421

$
672

Investment securities:
 
 
Available for sale, at fair value (amortized cost of $5,457 and $5,485 in 2016 and 2015; includes pledged securities that can be sold or repledged of $125 and $91 in 2016 and 2015)
5,518

5,471

Held to maturity, at amortized cost (fair value of $6,458 and $6,378 in 2016 and 2015; includes pledged securities that can be sold or repledged of $25 and $9 in 2016 and 2015)
6,315

6,388

Federal Home Loan Bank and Federal Reserve Bank common stock, at amortized cost
402

410

Loans held for sale
52

46

Loans and leases (net of allowance for loan losses of $253 and $242 in 2016 and 2015)
24,080

23,796

Bank owned life insurance
442

437

Premises and equipment, net
389

410

Goodwill
1,348

1,348

Core deposit and other intangibles, net
41

48

Other assets
983

892

Total assets
$
39,991

$
39,918

LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
 
 
Deposits
$
28,959

$
28,701

Short-term borrowings
4,631

4,349

Long-term borrowings
1,733

2,308

Other
468

434

Total liabilities
35,792

35,792

Stockholders’ equity:
 
 
Preferred stock, $0.01 par value, 50,000,000 shares authorized; Series B, noncumulative perpetual preferred stock, $25 liquidation preference; 14,000,000 shares issued in 2016 and 2015
338

338

Common stock, $0.01 par value, 500,000,000 shares authorized; 366,002,045 shares issued in 2016 and 2015
4

4

Additional paid-in capital
4,224

4,231

Accumulated deficit
(237
)
(255
)
Accumulated other comprehensive loss
(4
)
(48
)
Treasury stock, at cost, 9,945,552 and 11,239,793 shares in 2016 and 2015
(125
)
(143
)
Total stockholders’ equity
4,200

4,126

Total liabilities and stockholders’ equity
$
39,991

$
39,918

See accompanying notes to consolidated financial statements.

1



FIRST NIAGARA FINANCIAL GROUP, INC. AND SUBSIDIARIES    
Consolidated Statements of Income (unaudited)
(in millions, except per share amounts)
 
Three months ended June 30,
 
Six months ended June 30,
 
2016
2015
 
2016
2015
Interest income:
 
 
 
 
 
Loans and leases
$
220

$
212

 
$
439

$
422

Investment securities and other
86

86

 
176

173

Total interest income
306

298

 
615

595

Interest expense:
 
 
 
 
 
Deposits
20

17

 
39

32

Borrowings
24

19

 
47

37

Total interest expense
44

35

 
85

69

Net interest income
262

263

 
530

526

Provision for credit losses
12

21

 
34

34

Net interest income after provision for credit losses
250

242

 
495

493

Noninterest income:
 
 
 
 
 
Deposit service charges
22

22

 
43

43

Insurance commissions
16

17

 
30

33

Merchant and card fees
13

13

 
26

25

Wealth management services
13

16

 
27

30

Mortgage banking
6

6

 
9

11

Capital markets income
4

5

 
7

9

Lending and leasing
4

4

 
8

8

Bank owned life insurance
3

3

 
7

7

Realized (losses) gains on sale of investment securities
(12
)
2

 
(8
)
4

Other income

(2
)
 
(1
)
(1
)
Total noninterest income
69

87

 
148

169

Noninterest expense:
 
 
 
 
 
Salaries and employee benefits
112

114

 
227

226

Occupancy and equipment
25

26

 
52

53

Technology and communications
36

36

 
72

72

Marketing and advertising
7

10

 
16

20

Professional services
10

16

 
22

29

Amortization of intangibles
3

5

 
7

11

Federal deposit insurance premiums
11

12

 
22

23

Merger and acquisition integration expenses
25


 
38


Restructuring charges


 

18

Other expense
28

28

 
57

57

Total noninterest expense
258

248

 
513

509

Income before income taxes
61

81

 
130

152

Income tax
15

20

 
35

40

Net income
46

61

 
95

112

Preferred stock dividend
8

8

 
15

15

Net income available to common stockholders
$
39

$
53

 
$
80

$
97

Earnings per share:
 
 
 
 
 
Basic
$
0.11

$
0.15

 
$
0.22

$
0.27

Diluted
$
0.11

$
0.15

 
$
0.22

$
0.27

Weighted average common shares outstanding:
 
 
 
 
 
Basic
352

351

 
352

351

Diluted
354

353

 
354

353

Dividends per common share
$
0.08

$
0.08

 
$
0.16

$
0.16

See accompanying notes to consolidated financial statements.

2



FIRST NIAGARA FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (unaudited)
(in millions) 
 
Three months ended June 30,
 
Six months ended June 30,
 
2016
2015
 
2016
2015
Net income
$
46

$
61

 
$
95

$
112

Other comprehensive income, net of income taxes:
 
 
 
 
 
Securities available for sale:
 
 
 
 
 
Net unrealized gains (losses) arising during the period
29

(29
)
 
42

(12
)
Reclassification adjustment for realized losses (gains) included in net income
7

(1
)
 
5

(3
)
Net unrealized gains (losses) on securities available for sale
36

(31
)
 
47

(15
)
Net unrealized holding gains on securities transferred between available for sale and held to maturity:
 
 
 
 
 
Less: amortization of net unrealized holding gains to income during the period
(1
)
(2
)
 
(2
)
(3
)
Net unrealized (losses) gains on interest rate swaps designated as cash flow hedges arising during the period

1

 
(2
)

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

1

 
1

2

Total other comprehensive income (loss)
36

(31
)
 
44

(16
)
          Total comprehensive income
$
82

$
30

 
$
139

$
96

See accompanying notes to consolidated financial statements.


3



FIRST NIAGARA FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders’ Equity (unaudited)
(in millions, except share and per share amounts)    
 
 
Preferred
stock
Common
stock
Additional
paid-in
capital
Accumulated deficit
Accumulated
other
comprehensive
(loss) income
Treasury
stock
Total
Balances at January 1, 2016
$
338

$
4

$
4,231

$
(255
)
$
(48
)
$
(143
)
$
4,126

Net income



95



95

Total other comprehensive income, net




44


44

Stock-based compensation expense


9




9

Net tax expense from stock-based compensation


1




1

Stock option exercises and restricted stock activity (1,294,241 shares)


(16
)
(4
)

18

(3
)
Preferred stock dividends



(15
)


(15
)
Common stock dividends of $0.16 per share



(57
)


(57
)
Balances at June 30, 2016
$
338

$
4

$
4,224

$
(237
)
$
(4
)
$
(125
)
$
4,200

Balances at January 1, 2015
$
338

$
4

$
4,235

$
(330
)
$
9

$
(162
)
$
4,093

Net income



112



112

Total other comprehensive loss, net




(16
)

(16
)
Stock-based compensation expense


6




6

Restricted stock activity (1,501,798 shares)


(18
)
(5
)

20

(3
)
Preferred stock dividends



(15
)


(15
)
Common stock dividends of $0.16 per share



(57
)


(57
)
Balances at June 30, 2015
$
338

$
4

$
4,223

$
(294
)
$
(7
)
$
(142
)
$
4,121

See accompanying notes to consolidated financial statements.


4



FIRST NIAGARA FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (unaudited)
(in millions)
 
Six months ended June 30,
 
2016
2015
Cash flows from operating activities:
 
 
Net income
$
95

$
112

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
Amortization of fees and discounts, net
4

16

Provision for credit losses
34

34

Depreciation of premises and equipment
40

38

Amortization of intangibles
7

11

Realized losses (gains) on sales of investment securities
8

(4
)
Origination of loans held for sale
(331
)
(372
)
Proceeds from sales of loans held for sale
329

353

Stock based-compensation expense
9

6

Deferred income tax expense
17

8

Other, net
(96
)
15

Net cash provided by operating activities
116

218

Cash flows from investing activities:
 
 
Proceeds from sales of securities available for sale
359

129

Proceeds from maturities of securities available for sale
284

153

Principal payments received on securities available for sale
482

653

Purchases of securities available for sale
(1,111
)
(780
)
Principal payments received on securities held to maturity
733

705

Purchases of securities held to maturity
(751
)
(975
)
Proceeds from maturities of securities held to maturity
79

25

Proceeds from sales of Federal Home Loan Bank and Federal Reserve Bank common stock
8

33

Net increase in loans and leases
(337
)
(358
)
Purchases of premises and equipment
(11
)
(45
)
Other, net
3

2

Net cash used in investing activities
(261
)
(458
)
Cash flows from financing activities:
 
 
Net increase in deposits
259

666

Proceeds from (repayments of) short-term borrowings, net
283

(1,196
)
Proceeds from long-term borrowings
300

950

Dividends paid on noncumulative preferred stock
(15
)
(15
)
Dividends paid on common stock
(57
)
(57
)
Other, net
1


Net cash (used in) provided by financing activities
(106
)
348

Net (decrease) increase in cash and cash equivalents
(251
)
107

Cash and cash equivalents at beginning of period
672

420

Cash and cash equivalents at end of period
$
421

$
527

Supplemental disclosures
 
 
Cash (received) paid during the period for:
 
 
Income taxes
$
(7
)
$
33

Interest expense
83

67

Other noncash activity:
 
 
Securities available for sale purchased not settled

42


See accompanying notes to consolidated financial statements.

5



Notes to Consolidated Financial Statements (unaudited)
(in millions, except as noted and per share amounts)
The accompanying consolidated financial statements of First Niagara Financial Group, Inc. (the “Company” or "First Niagara"), including its wholly owned subsidiary First Niagara Bank, N.A. (the “Bank”), have been prepared using U.S. generally accepted accounting principles (“GAAP”) for interim financial information.
These consolidated financial statements do not include all of the information and footnotes required by GAAP for a full year presentation and certain disclosures have been condensed or omitted in accordance with rules and regulations of the Securities and Exchange Commission. In our opinion, all adjustments necessary for a fair presentation have been included. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in First Niagara's 2015 Annual Report on Form 10-K. Results for the six months ended June 30, 2016 do not necessarily reflect the results that may be expected for the year ending December 31, 2016. We reviewed subsequent events and determined that no further disclosures or adjustments were required. Amounts in prior period financial statements are reclassified whenever necessary to conform to the current period presentation. First Niagara and the Bank are referred to collectively as “we” or “us” or “our.”
Note 1. Business Combination
On August 1, 2016 (the "Acquisition Date"), KeyCorp acquired all of the outstanding common shares of the Company for total consideration of approximately $4.0 billion and thereby acquired First Niagara Bank N.A.'s approximately 390 branch locations across New York, Pennsylvania, Connecticut, and Massachusetts (the "Merger"). On October 7, 2016, First Niagara Bank, N.A. merged with and into KeyBank, with KeyBank as the surviving entity.
Each outstanding share of Company common stock was converted into the right to receive 0.680 KeyCorp common shares and $2.30 in cash, for a total per share value of $10.26, based on the $11.70 closing price of KeyCorp’s stock on July 29, 2016. In the aggregate, Company stockholders received 240 million shares of KeyCorp common stock. Also under the terms of the merger agreement, First Niagara employee stock options and restricted stock awards converted into options to purchase and receive KeyCorp common stock. These options and restricted stock awards had a fair value of $26 million on the date of acquisition.
In addition, at the time of the Merger, each share of Company preferred stock was converted into the right to receive a share of KeyCorp preferred stock.
Direct costs related to the Merger were expensed as incurred and amounted to $38 million for the six months ended June 30, 2016. These costs were primarily comprised of professional services fees, employee retention expenses, classification of compensation of certain personnel dedicated to merger integration efforts, as well as costs related to securing shareholder approval for the pending Merger.

6



Note 2. Investment Securities
The amortized cost, gross unrealized gains and losses, and fair value of our investment securities at the dates indicated are summarized as follows:
 
Amortized
Unrealized
Unrealized
Fair
June 30, 2016
cost
gains
losses
value
Investment securities available for sale:
 
 
 
 
Debt securities:
 
 
 
 
States and political subdivisions
$
308

$
5

$

$
313

U.S. Treasury
65

1


66

U.S. government sponsored enterprises
136

1


136

Corporate
683

11

(6
)
687

Total debt securities
1,191

17

(6
)
1,202

Mortgage-backed securities:
 
 
 
 
Residential mortgage-backed securities:
 
 
 
 
Government National Mortgage Association
25



26

Federal National Mortgage Association
59

3


62

Federal Home Loan Mortgage Corporation
73

3


76

Collateralized mortgage obligations:
 
 
 
 
Government National Mortgage Association
695

10


705

Federal National Mortgage Association
831

15


845

Federal Home Loan Mortgage Corporation
406

8


414

Total collateralized mortgage obligations
1,931

33


1,964

Total residential mortgage-backed securities
2,088

40

(1
)
2,128

Commercial mortgage-backed securities, non-agency issued
791

11


802

Total mortgage-backed securities
2,879

51

(1
)
2,930

Collateralized loan obligations, non-agency issued
1,120

4

(7
)
1,117

Asset-backed securities collateralized by:
 
 
 
 
Student loans
153

3


155

Credit cards
20

1


21

Auto loans
19



19

Other
52



52

Total asset-backed securities
244

4

(1
)
247

Other
22



22

Total securities available for sale
$
5,457

$
76

$
(14
)
$
5,518

Investment securities held to maturity:
 
 
 
 
Debt securities, U.S. government agencies
$
60

$

$

$
60

Residential mortgage-backed securities:
 
 
 
 
Government National Mortgage Association
16



16

Federal National Mortgage Association
82

1


83

Federal Home Loan Mortgage Corporation
43



43

Collateralized mortgage obligations:
 
 
 
 
Government National Mortgage Association
1,562

42

(2
)
1,602

Federal National Mortgage Association
2,359

46

(2
)
2,402

Federal Home Loan Mortgage Corporation
2,194

59

(1
)
2,251

Total collateralized mortgage obligations
6,114

147

(5
)
6,256

Total residential mortgage-backed securities
6,255

148

(6
)
6,398

Total securities held to maturity
$
6,315

$
148

$
(6
)
$
6,458


7



 
Amortized
Unrealized
Unrealized
Fair
December 31, 2015
cost
gains
losses
value
Investment securities available for sale:
 
 
 
 
Debt securities:
 
 
 
 
States and political subdivisions
$
374

$
5

$

$
379

U.S. Treasury
55



55

U.S. government sponsored enterprises
268

2

(2
)
269

Corporate
828

7

(34
)
801

Total debt securities
1,525

15

(36
)
1,504

Mortgage-backed securities:
 
 
 
 
Residential mortgage-backed securities:
 
 
 
 
Government National Mortgage Association
27


(1
)
26

Federal National Mortgage Association
68

3


71

Federal Home Loan Mortgage Corporation
84

4


87

Collateralized mortgage obligations:
 
 
 
 
Government National Mortgage Association
94


(1
)
94

Federal National Mortgage Association
738

1

(9
)
730

Federal Home Loan Mortgage Corporation
359

1

(4
)
355

Total collateralized mortgage obligations
1,191

2

(14
)
1,179

Total residential mortgage-backed securities
1,369

10

(15
)
1,364

Commercial mortgage-backed securities, non-agency issued
1,067

17


1,085

Total mortgage-backed securities
2,437

27

(15
)
2,449

Collateralized loan obligations, non-agency issued
1,192

5

(11
)
1,186

Asset-backed securities collateralized by:
 
 
 
 
Student loans
170

2


171

Credit cards
20



20

Auto loans
66



66

Other
53



53

Total asset-backed securities
309

3

(1
)
310

Other
22



22

Total securities available for sale
$
5,485

$
49

$
(63
)
$
5,471

Investment securities held to maturity:
 
 
 
 
Debt securities, U.S. government agencies
$
42

$

$

$
42

Residential mortgage-backed securities:
 
 
 
 
Government National Mortgage Association
17



17

Federal National Mortgage Association
93


(1
)
92

Federal Home Loan Mortgage Corporation
50



50

Collateralized mortgage obligations:
 
 
 
 
Government National Mortgage Association
1,571

14

(6
)
1,579

Federal National Mortgage Association
2,297

8

(26
)
2,279

Federal Home Loan Mortgage Corporation
2,318

20

(19
)
2,319

Total collateralized mortgage obligations
6,186

42

(51
)
6,177

Total residential mortgage-backed securities
6,345

43

(53
)
6,336

Total securities held to maturity
$
6,388

$
43

$
(53
)
$
6,378


8



The table below details certain information regarding our investment securities that were in an unrealized loss position at the dates indicated by the length of time those securities were in a continuous loss position:
 
Less than 12 months
 
12 months or longer
 
Total
 
Fair
Unrealized
 
 
Fair
Unrealized
 
 
Fair
Unrealized
 
June 30, 2016
value
losses
Count
 
value
losses
Count
 
value
losses
Count
Investment securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
Debt securities:
 
 
 
 
 
 
 
 
 
 
 
States and political subdivisions
$
12

$

8

 
$
1

$

2

 
$
14

$

10

U.S. government sponsored enterprises
42


8

 



 
42


8

Corporate
98

(1
)
56

 
125

(5
)
56

 
223

(6
)
112

Total debt securities
153

(1
)
72

 
126

(5
)
58

 
279

(6
)
130

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


5

 
17


5

 
17


10

Federal Home Loan Mortgage Corporation


2

 



 


2

Collateralized mortgage obligations:
 
 
 
 
 
 
 
 
 
 
 
Government National Mortgage Association
46


2

 



 
46


2

Federal National Mortgage Association
8


1

 
12


1

 
20


2

Federal Home Loan Mortgage Corporation
7


1

 



 
7


1

Total collateralized mortgage obligations
61


4

 
12


1

 
72


5

Total residential mortgage-backed securities
61


11

 
29


6

 
90

(1
)
17

Commercial mortgage-backed securities, non-agency issued
17


5

 



 
17


5

Total mortgage-backed securities
78


16

 
29


6

 
107

(1
)
22

Collateralized loan obligations, non-agency issued
389

(3
)
42

 
285

(4
)
27

 
674

(7
)
69

Asset-backed securities collateralized by:
 
 
 
 
 
 
 
 
 
 
 
Student loans
10


2

 
13


3

 
23


5

Auto loans



 
1


1

 
1


1

Other
7


2

 
2


1

 
9


3

Total asset-backed securities
17


4

 
16


5

 
33

(1
)
9

Other



 
9


3

 
9


3

Total securities available for sale in an unrealized loss position
$
636

$
(5
)
134

 
$
465

$
(10
)
99

 
$
1,101

$
(14
)
233

 
 
 
 
 
 
 
 
 
 
 
 

9



 
Less than 12 months
 
12 months or longer
 
Total
 
Fair
Unrealized
 
 
Fair
Unrealized
 
 
Fair
Unrealized
 
June 30, 2016
value
losses
Count
 
value
losses
Count
 
value
losses
Count
Investment securities held to maturity:
 
 
 
 
 
 
 
 
 
 
 
Debt securities, U.S. government agencies
$
10

$

1

 
$

$


 
$
10

$

1

Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Government National Mortgage Association
1


1

 


1

 
1


2

Federal National Mortgage Association
9


8

 
19


9

 
28


17

Federal Home Loan Mortgage Corporation
5


4

 
4


3

 
8


7

Collateralized mortgage obligations:
 
 
 
 
 
 
 
 
 
 
 
Government National Mortgage Association
59

(1
)
31

 
70

(1
)
34

 
129

(2
)
65

Federal National Mortgage Association
81

(1
)
6

 
236

(2
)
18

 
317

(2
)
24

Federal Home Loan Mortgage Corporation
18


5

 
241

(1
)
18

 
259

(1
)
23

Total collateralized mortgage obligations
159

(1
)
42

 
547

(4
)
70

 
706

(5
)
112

Total residential mortgage-backed securities
173

(2
)
55

 
570

(4
)
83

 
743

(6
)
138

Total securities held to maturity in an unrealized loss position
$
183

$
(2
)
56

 
$
570

$
(4
)
83

 
$
753

$
(6
)
139


10



 
Less than 12 months
 
12 months or longer
 
Total
 
Fair
Unrealized
 
 
Fair
Unrealized
 
 
Fair
Unrealized
 
December 31, 2015
value
losses
Count
 
value
losses
Count
 
value
losses
Count
Investment securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
Debt securities:
 
 
 
 
 
 
 
 
 
 
 
States and political subdivisions
$
22

$

32

 
$
2

$

3

 
$
24

$

35

U.S. Treasury
30


2

 



 
30


2

U.S. government sponsored enterprises
132

(2
)
15

 


1

 
132

(2
)
16

Corporate
311

(16
)
195

 
102

(18
)
71

 
413

(34
)
266

Total debt securities
495

(18
)
244

 
104

(18
)
75

 
599

(36
)
319

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Government National Mortgage Association
1


6

 
17

(1
)
5

 
18

(1
)
11

Federal National Mortgage Association



 


1

 


1

Federal Home Loan Mortgage Corporation


1

 



 


1

Collateralized mortgage obligations:
 
 
 
 
 
 
 
 



Government National Mortgage Association
94

(1
)
4

 



 
94

(1
)
4

Federal National Mortgage Association
326

(3
)
26

 
166

(6
)
10

 
492

(9
)
36

Federal Home Loan Mortgage Corporation
212

(3
)
14

 
39

(2
)
2

 
251

(4
)
16

Total collateralized mortgage obligations
631

(6
)
44

 
205

(8
)
12

 
836

(14
)
56

Total residential mortgage-backed securities
632

(6
)
51

 
222

(8
)
18

 
854

(15
)
69

Commercial mortgage-backed securities, non-agency issued
35


6

 



 
35


6

Total mortgage-backed securities
667

(6
)
57

 
222

(8
)
18

 
889

(15
)
75

Collateralized loan obligations, non-agency issued
698

(10
)
68

 
154

(1
)
18

 
852

(11
)
86

Asset-backed securities collateralized by:
 
 
 
 
 
 
 
 
 
 
 
Student loans
27


6

 
9


2

 
36


8

Credit card
8


1

 



 
8


1

Auto loans
2


2

 



 
2


2

Other
33


5

 



 
33


5

Total asset-backed securities
71

(1
)
14

 
9


2

 
79

(1
)
16

Other
12


2

 
9


3

 
21


5

Total securities available for sale in an unrealized loss position
$
1,942

$
(35
)
385

 
$
498

$
(28
)
116

 
$
2,441

$
(63
)
501

 
 
 
 
 
 
 
 
 
 
 
 

11



 
Less than 12 months
 
12 months or longer
 
Total
 
Fair
Unrealized
 
 
Fair
Unrealized
 
 
Fair
Unrealized
 
December 31, 2015
value
losses
Count
 
value
losses
Count
 
value
losses
Count
Investment securities held to maturity:
 
 
 
 
 
 
 
 
 
 
 
Debt securities, U.S. government agencies
$
20

$

1

 
$

$


 
$
20

$

1

Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Government National Mortgage Association
6


4

 


1

 
7


5

Federal National Mortgage Association
35


14

 
27

(1
)
9

 
62

(1
)
23

Federal Home Loan Mortgage Corporation
31


13

 
4


2

 
35


15

Collateralized mortgage obligations:
 
 
 
 
 
 
 
 
 
 
 
Government National Mortgage Association
675

(5
)
85

 
63

(1
)
22

 
738

(6
)
107

Federal National Mortgage Association
946

(13
)
57

 
398

(13
)
27

 
1,345

(26
)
84

Federal Home Loan Mortgage Corporation
1,019

(10
)
66

 
310

(9
)
24

 
1,329

(19
)
90

Total collateralized mortgage obligations
2,641

(28
)
208

 
771

(23
)
73

 
3,412

(51
)
281

Total residential mortgage-backed securities
2,713

(29
)
239

 
803

(24
)
85

 
3,516

(53
)
324

Total securities held to maturity in an unrealized loss position
$
2,733

$
(29
)
240

 
$
803

$
(24
)
85

 
$
3,535

$
(53
)
325

We have assessed the securities in an unrealized loss position at June 30, 2016 and at December 31, 2015 and determined that the declines in fair value below amortized cost were temporary.
The Volcker Rule provisions of the Dodd-Frank Act restrict the ability of affiliates of insured depository institutions to sponsor or invest in private funds or to engage in certain types of proprietary trading. Although the Volcker Rule became effective on July 21, 2012 and the final rules became effective April 1, 2014, in connection with the adoption of the final rules on December 10, 2013 by the responsible agencies, the Federal Reserve issued an order extending the period during which institutions have to conform their activities and investments to the requirements of the Volcker Rule to July 21, 2015.
In connection with conforming our activities to the Volcker Rule, including the establishment of a compliance program by July 21, 2015, we engaged in an enterprise wide review and established a cross functional working group. Our Volcker Rule conformance efforts included the establishment of a corporate-wide compliance program, required for banks with assets over $10 billion, which reviews and monitors Volcker Rule compliance on an on-going basis.
A significant portion of our Volcker Rule conformance efforts included confirming that our activities are either excluded or exempted from the Volcker Rule.  In areas where the Volcker Rule applies to our activities, including in connection with capital markets (e.g., risk mitigating hedging), residential lending (e.g., secondary mortgage originations) and certain other activities, Volcker Rule conformance is not anticipated to have a material impact. 
The Volcker Rule's potential impact on us is most significant in connection with Collateralized Loan Obligations ("CLOs") held in our investment securities portfolio. The issuance of the final Volcker Rule restricts our ability to hold debt securities issued by CLOs where our investment in these debt securities is deemed to be an ownership interest in a CLO and the CLO itself does not qualify for an exclusion in the final rule for loan securitizations. On December 18, 2014, the Federal Reserve Board announced it would give banking entities until July 21, 2016 to conform investments in covered funds that were in place prior to December 31, 2013 ("legacy covered funds"). The Board also announced its intention to act in 2016 to grant banking entities an additional one-year extension of the

12



conformance period for legacy covered funds which together would extend until July 21, 2017 the time period for institutions to conform their ownership interests to the stated provisions of the final Volcker Rule.
For our CLOs subject to the Volcker Rule in an unrealized loss position, we believe it is more likely than not that we will be able to hold these securities to recovery, which could be maturity as the Federal Reserve announcement extends the conformance period to July 2017 and we believe that other structural remedies are available to us to allow us to continue holding the bonds after the conformance period.
In making the determination that the declines in fair value below amortized cost for the remainder of the portfolio were temporary, we considered some or all of the following factors: the period of time the securities were in an unrealized loss position, the percentage decline in comparison to the securities’ amortized cost, credit rating, the financial condition of the issuer and guarantor, where applicable, the delinquency or default rates of underlying collateral, projected collateral losses, projected cash flows and credit enhancement. If the level of credit enhancement is sufficient based on our expectations of future collateral losses, we conclude that we will receive all of the originally scheduled cash flows. If the present value of the cash flows indicates that we should not expect to recover the amortized cost basis of the security, we would consider the security to be other than temporarily impaired and write down the credit component of the unrealized loss through a charge to current period earnings. We do not intend to sell these securities in an unrealized loss position and it is not more likely than not that we will be required to sell these securities before the recovery of their amortized cost bases, which may be at maturity.
Realized gains and losses related to our securities available for sale were as follows for the periods indicated:
 
Six months ended June 30,
 
2016
2015
Realized gains
4,810

4,300

Realized losses
(13,306
)
(212
)
Net investment securities realized (losses) gains
$
(8,496
)
$
4,087

 
 
 
Scheduled contractual maturities of our investment securities at June 30, 2016 were as follows:
 
Amortized cost
Fair value
Debt securities:
 
 
Within one year
$
329

$
331

After one year through five years
428

436

After five years through ten years
486

486

After ten years
9

9

Total debt securities
1,251

1,262

Mortgage-backed securities
9,135

9,328

Collateralized loan obligations
1,120

1,117

Asset-backed securities
244

247

Other
22

22

 
$
11,772

$
11,976

While the contractual maturities of our mortgage-backed securities, collateralized loan obligations, asset-backed securities, and other securities generally exceed ten years, we expect the effective lives to be significantly shorter due to prepayments of the underlying loans and the nature of these securities. The duration of our investment securities portfolio increased to 3.6 years at June 30, 2016 from 3.3 years at December 31, 2015.

13



Note 3. Loans and Leases
Overall Portfolio
Our loan portfolio is made up of two segments, commercial loans and consumer loans. Those segments are further segregated between our loans initially accounted for under the amortized cost method (referred to as “originated” loans) and loans acquired (referred to as “acquired” loans). Our commercial loan portfolio segment includes both business and commercial real estate loans. Our consumer portfolio segment includes residential real estate, home equity, indirect auto, credit cards, and other consumer loans.
Our loans and leases receivable consisted of the following at the dates indicated: 
 
June 30, 2016
 
December 31, 2015
 
Originated
Acquired
Total
 
Originated
Acquired
Total
Commercial:
 
 
 
 
 
 
 
Real estate
$
6,540

$
729

$
7,269

 
$
6,539

$
835

$
7,375

Construction
1,461


1,461

 
1,278


1,278

Business
5,976

156

6,133

 
5,853

160

6,013

Total commercial
13,977

885

14,863

 
13,670

996

14,665

Consumer:
 
 
 
 
 
 
 
Residential real estate
2,476

883

3,358

 
2,349

1,005

3,355

Home equity
2,172

887

3,059

 
2,133

936

3,069

Indirect auto
2,537


2,537

 
2,393


2,393

Credit cards
287


287

 
311


311

Other consumer
229


229

 
245


245

Total consumer
7,701

1,770

9,471

 
7,431

1,941

9,372

Total loans and leases
21,678

2,655

24,333

 
21,101

2,937

24,038

Allowance for loan losses
(248
)
(5
)
(253
)
 
(237
)
(5
)
(242
)
Total loans and leases, net
$
21,430

$
2,650

$
24,080

 
$
20,864

$
2,932

$
23,796

As of June 30, 2016 and December 31, 2015, we had a liability for unfunded loan commitments of $16 million. For the six months ended June 30, 2016, we did not recognize a provision for credit losses related to our unfunded loan commitments. For the six months ended June 30, 2015, we recognized a release of provision for credit losses related to our unfunded commitments of $1 million.
At June 30, 2016 and December 31, 2015, our home equity portfolio totaled $3.1 billion, of which $1.3 billion and $1.2 billion was in the first lien position as of June 30, 2016 and December 31, 2015, respectively. We hold or service the first lien loan for approximately 10% of the remainder of the home equity portfolio that was in a second lien position as of June 30, 2016 and December 31, 2015.
As of June 30, 2016, commitments to extend credit to related parties amounted to $41 million, and the outstanding balance of loans to related parties was $42 million.
Acquired loan portfolios
We have acquired loans in four acquisitions since January 1, 2009. All acquired loans were initially measured at fair value and subsequently accounted for under either Accounting Standards Codification Topic (“ASC”) 310-30 (Loans and Debt Securities Acquired with Deteriorated Credit Quality) or ASC 310-20 (Nonrefundable Fees and Other Costs.)

14



The outstanding principal balance and the related carrying amount of our acquired loans included in our Consolidated Statements of Condition were as follows at the dates indicated: 
 
June 30,
2016
December 31,
2015
Credit impaired acquired loans evaluated individually for future credit losses
 
 
Outstanding principal balance
$
5

$
5

Carrying amount
5

5

Acquired loans evaluated collectively for future credit losses
 
 
Outstanding principal balance
1,679

1,918

Carrying amount
1,646

1,883

Other acquired loans
 
 
Outstanding principal balance
1,023

1,069

Carrying amount
1,005

1,049

Total acquired loans
 
 
Outstanding principal balance
2,706

2,992

Carrying amount
2,655

2,937

The following table presents changes in the accretable yield, which includes income recognized from contractual interest cash flows, for the dates indicated. Acquired lines of credit accounted for under ASC 310-20 are not included in this table. 
Balance at January 1, 2015
$
(663
)
Net reclassifications from nonaccretable yield
(9
)
Accretion
104

Balance at December 31, 2015
(569
)
Net reclassifications from nonaccretable yield
(5
)
Accretion
44

Balance at June 30, 2016
$
(530
)
Allowance for loan losses
We establish our allowance for loan losses through a provision for credit losses based on our evaluation of the credit quality of our loan portfolio. We segregate our loans between loans we originated which are accounted for under the amortized cost method (referred to as “originated” loans) and loans acquired (referred to as “acquired” loans), as acquired loans were originally recorded at fair value, which included an estimate of lifetime credit losses, resulting in no carryover of the related allowance for loan losses. We continue to monitor and modify the level of our allowance for loan losses to ensure it is adequate to cover losses inherent in our loan portfolio.
We determined our allowance for loan losses by portfolio segment as defined above. For our originated loans, the allowance for loan losses is comprised of two components. The first component covers pools of loans for which there are incurred losses that are not yet individually identifiable. The allowance for pools of loans is based on net historical loan loss experience for similar loans with similar inherent risk characteristics and performance trends adjusted, as appropriate, for quantitative and qualitative risk factors specific to respective loan types. The second component covers loans that have been identified as impaired or are nonperforming as well as troubled debt restructurings (“TDRs”.)
We also maintain an allowance for loan losses on acquired loans when: (i) for loans accounted for under ASC 310-30, there is deterioration in credit quality subsequent to acquisition, and (ii) for loans accounted for under ASC 310-20, the inherent losses in the loans exceed the remaining credit discount recorded at the time of acquisition.
Our threshold for evaluating commercial loans individually for impairment is $1 million. Impaired loans to commercial borrowers with outstandings less than $1 million are pooled and measured for impairment collectively.

15



Additionally, all loans modified in a troubled debt restructuring ("TDR"), regardless of dollar size, are considered impaired.
The following table presents the activity in our allowance for loan losses on originated loans and related recorded investment of the associated loans in our originated loan portfolio segment for the periods indicated:
 
Commercial
 
Consumer
 
Originated loans
Real estate
Business
 
Residential
Home equity
Indirect auto
Credit cards
Other
consumer
Total
Six months ended June 30, 2016
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
Balance at beginning of period
$
75

$
124

 
$
2

$
6

$
13

$
13

$
5

$
237

Provision for loan losses
4

17

 

2

5

4