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
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
 
 
 





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

4

37

Charge-offs
(3
)
(17
)
 
(1
)
(3
)
(5
)
(6
)
(4
)
(39
)
Recoveries
3

7

 
—

1

1

1

1

14

Balance at end of period
$
78

$
132

 
$
2

$
6

$
14

$
12

$
5

$
248

Allowance for loan losses:
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
4

$
6

 
$
—

$
—

$
—

$
—

$
—

$
11

Collectively evaluated for impairment
74

125

 
1

6

14

12

5

236

Total
$
78

$
132

 
$
2

$
6

$
14

$
12

$
5

$
248

Loans receivable:
 
 
 
 
 
 
 
 
 
Balance at end of period
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
51

$
81

 
$
21

$
17

$
5

$
—

$
3

$
177

Collectively evaluated for impairment
7,950

5,895

 
2,454

2,155

2,533

287

227

21,501

Total
$
8,001

$
5,976

 
$
2,476

$
2,172

$
2,537

$
287

$
229

$
21,678

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

$
122

 
$
2

$
8

$
14

$
12

$
5

$
228

Provision for loan losses
14

5

 
—

(1
)
3

5

4

31

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

3

 
—

—

1

1

1

7

Balance at end of period
$
69

$
119

 
$
2

$
6

$
14

$
13

$
5

$
228

Allowance for loan losses:
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
4

$
3

 
$
1

$
—

$
—

$
—

$
—

$
8

Collectively evaluated for impairment
65

116

 
1

5

14

13

5

220

Total
$
69

$
119

 
$
2

$
6

$
14

$
13

$
5

$
228

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

$
60

 
$
23

$
6

$
3

$
—

$
3

$
168

Collectively evaluated for impairment
7,296

5,523

 
2,181

1,950

2,253

305

255

19,762

Total
$
7,369

$
5,583

 
$
2,204

$
1,956

$
2,256

$
305

$
257

$
19,930


16


 
 
 
 
 
 
 
 
 
 
 
Commercial
 
Consumer
 
Originated loans
Real estate
Business
 
Residential
Home equity
Indirect auto
Credit cards
Other
consumer
Total
Three months ended June 30, 2016
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
Balance at beginning of period
$
75

$
135

 
$
2

$
6

$
13

$
12

$
5

$
248

Provision for loan losses
3

2

 
—

2

2

2

2

14

Charge-offs
(2
)
(9
)
 
—

(2
)
(3
)
(3
)
(2
)
(20
)
Recoveries
1

3

 
—

—

1

1

—

6

Balance at end of period
$
78

$
132

 
$
2

$
6

$
14

$
12

$
5

$
248

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

$
117

 
$
2

$
6

$
14

$
11

$
4

$
224

Provision for loan losses
6

5

 
—

—

2

4

2

20

Charge-offs
(6
)
(4
)
 
—

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

1

 
—

—

1

1

—

3

Balance at end of period
$
69

$
119

 
$
2

$
6

$
14

$
13

$
5

$
228



17


The following table presents the activity in our allowance for loan losses and related recorded investment of the associated loans in our acquired loan portfolio for the periods indicated:
 
Commercial
 
Consumer
 
Acquired loans
Real estate
Business
 
Residential
Home equity
Credit cards
Other
consumer
Total
Six months ended June 30, 2016
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
Balance at beginning of period
$
1

$
—

 
$
2

$
2

$
—

$
—

$
5

Provision for loan losses
(2
)
—

 
—

—

—

—

(2
)
Charge-offs
(2
)
—

 
—

(1
)
—

—

(3
)
Recoveries
4

—

 
—

—

—

—

4

Balance at end of period
$
2

$
—

 
$
2

$
1

$
—

$
—

$
5

Allowance for loan losses:
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
—

$
—

 
$
—

$
—

$
—

$
—

$
—

Collectively evaluated for impairment
2

—

 
2

1

—

—

5

Total
$
2

$
—

 
$
2

$
1

$
—

$
—

$
5

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

$
—

 
$
—

$
4

$
—

$
—

$
4

Collectively evaluated for impairment
—

156

 
—

844

—

—

1,000

Loans acquired with deteriorated credit quality
729

—

 
883

39

—

—

1,650

Total
$
729

$
156

 
$
883

$
887

$
—

$
—

$
2,655

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

$
1

 
$
2

$
2

$
—

$
—

$
6

Provision for loan losses
2

—

 
—

2

—

—

4

Charge-offs
(2
)
—

 
—

(1
)
—

—

(4
)
Recoveries
1

—

 
—

—

—

—

1

Balance at end of period
$
2

$
1

 
$
2

$
3

$
—

$
—

$
7

Allowance for loan losses:
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
—

$
—

 
$
—

$
—

$
—

$
—

$
—

Collectively evaluated for impairment
2

1

 
2

3

—

—

7

Total
$
2

$
1

 
$
2

$
3

$
—

$
—

$
7

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

$
—

 
$
—

$
4

$
—

$
—

$
4

Collectively evaluated for impairment
—

280

 
—

921

—

—

1,201

Loans acquired with deteriorated credit quality
943

61

 
1,126

104

—

—

2,234

Total
$
943

$
341

 
$
1,126

$
1,029

$
—

$
—

$
3,439


18


 
 
 
 
 
 
 
 
 
 
Commercial
 
Consumer
 
Acquired loans
Real estate
Business
 
Residential
Home equity
Credit cards
Other
consumer
Total
Three months ended June 30, 2016
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
Balance at beginning of period
$
1

$
—

 
$
2

$
1

$
—

$
—

$
5

Provision for loan losses
(2
)
—

 
—

—

—

—

(2
)
Charge-offs
(2
)
—

 
—

—

—

—

(2
)
Recoveries
4

—

 
—

—

—

—

4

Balance at end of period
$
2

$
—

 
$
2

$
1

$
—

$
—

$
5

Three months ended June 30, 2015
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
Balance at beginning of period
$
2

$
1

 
$
2

$
3

$
—

$
—

$
7

Provision for loan losses
—

—

 
—

1

—

—

1

Charge-offs
—

—

 
—

(1
)
—

—

(1
)
Recoveries
—

—

 
—

—

—

—

—

Balance at end of period
$
2

$
1

 
$
2

$
3

$
—

$
—

$
7

Credit Quality
We monitor credit quality as indicated by various factors and utilize such information in our evaluation of the adequacy of the allowance for loan losses. The following sections discuss the various credit quality indicators that we consider.
Nonperforming loans
Our nonperforming loans consisted of the following at the dates indicated:
 
June 30, 2016
 
December 31, 2015
 
Originated
Acquired
Total
 
Originated
Acquired
Total
Commercial:
 
 
 
 
 
 
 
Real estate
$
47

$
—

$
47

 
$
44

$
—

$
44

Business
65

1

66

 
56

1

58

Total commercial
112

1

113

 
101

1

102

Consumer:
 
 
 
 
 
 
 
Residential real estate
28

—

28

 
32

—

32

Home equity
35

23

59

 
36

24

59

Indirect auto
18

—

18

 
15

—

15

Other consumer
5

—

5

 
5

—

5

Total consumer
86

23

110

 
87

24

111

Total
$
198

$
25

$
223

 
$
188

$
25

$
214

The table below provides information about the interest income that would have been recognized if our nonperforming loans had performed in accordance with terms for the periods indicated:
 
Three months ended
 
Six months ended
 
June 30,
 
June 30,
 
2016
2015
 
2016
2015
 
 
 
 
 
 
Additional interest income that would have been recorded if nonperforming loans had performed in accordance with original terms
$
4

$
3

 
$
7

$
5


19


Impaired loans
The following table provides information about our impaired originated loans including ending recorded investment, principal balance, and related allowance amount at the dates indicated. Loans with no related allowance for loan losses have adequate collateral securing their carrying value and in some circumstances have been charged down to their current carrying value based on the fair value of the collateral. The recorded investment of our impaired loans, less any related allowance for loan losses, was 70% and 64% of the loans’ unpaid principal balance at June 30, 2016 and December 31, 2015 , respectively. 
 
June 30, 2016
 
December 31, 2015
Originated loans
Recorded
investment
Unpaid
principal
balance
Related
allowance
 
Recorded
investment
Unpaid
principal
balance
Related
allowance
With no related allowance recorded:
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
Real estate
$
8

$
25

$
—

 
$
17

$
35

$
—

Business
33

57

—

 
37

80

—

Total commercial
41

82

—

 
54

115

—

Consumer:
 
 
 
 
 
 
 
Residential real estate
15

18

—

 
16

19

—

Home equity
12

16

—

 
12

15

—

Indirect auto
3

5

—

 
3

4

—

Other consumer
2

2

—

 
2

2

—

Total consumer
32

42

—

 
32

40

—

Total
$
73

$
124

$
—

 
$
86

$
155

$
—

With a related allowance recorded:
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
Real estate
$
43

$
48

$
4

 
$
31

$
38

$
2

Business
48

52

6

 
32

33

7

Total commercial
91

99

11

 
63

71

9

Consumer:
 
 
 
 
 
 
 
Residential real estate
6

6

—

 
6

6

—

Home equity
5

5

—

 
5

5

—

Indirect auto
1

1

—

 
1

1

—

Other consumer
1

1

—

 
1

1

—

Total consumer
13

13

—

 
13

13

—

Total
$
104

$
112

$
11

 
$
76

$
84

$
10

Total
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
Real estate
$
51

$
73

$
4

 
$
47

$
72

$
2

Business
81

109

6

 
69

113

7

Total commercial
132

182

11

 
116

186

9

Consumer:
 
 
 
 
 
 
 
Residential real estate
21

24

—

 
22

25

—

Home equity
17

21

—

 
17

20

—

Indirect auto
5

6

—

 
4

6

—

Other consumer
3

3

—

 
2

3

—

Total consumer
45

55

—

 
45

53

—

Total
$
177

$
236

$
11

 
$
162

$
239

$
10


20


The following table provides information about our impaired acquired loans with no related allowance at the dates indicated. There were no impaired acquired loans with a related allowance at the dates indicated. The remaining credit mark is considered adequate to cover any loss on these balances.
 
June 30, 2016
 
December 31, 2015
Acquired loans
Recorded
investment
Unpaid
principal
balance
Related
allowance
 
Recorded
investment
Unpaid principal balance
Related
allowance
Commercial:
 
 
 
 
 
 
 
Real estate
$
—

$
—

$
—

 
$
—

$
—

$
—

Business
—

—

—

 
—

—

—

Total commercial
—

—

—

 
—

—

—

Consumer:
 
 
 
 
 
 
 
Residential real estate
—

—

—

 
—

—

—

Home equity
4

6

—

 
4

6

—

Other consumer
—

—

—

 
—

—

—

Total consumer
4

6

—

 
4

6

—

Total (1)
$
4

$
6

$
—

 
$
4

$
6

$
—

(1)
Includes nonperforming purchased credit impaired loans.

21


The following table provides information about our impaired originated loans including the average recorded investment and interest income recognized on impaired loans for the periods indicated: 
 
2016
 
2015
Originated loans
Average
recorded
investment
Interest
income
recognized
 
Average
recorded
investment
Interest
income
recognized
Six months ended June 30,
 
 
 
 
 
Commercial:
 
 
 
 
 
Real estate
$
52

$
—

 
$
67

$
1

Business
64

—

 
76

1

Total commercial
117

1

 
143

1

Consumer:
 
 
 
 
 
Residential real estate
21

—

 
23

—

Home equity
17

—

 
7

—

Indirect auto
5

—

 
4

—

Other consumer
3

—

 
3

—

Total consumer
46

—

 
36

—

Total
$
163

$
1

 
$
179

$
2

Three months ended June 30,
 
 
 
 
 
Commercial:
 
 
 
 
 
Real estate
$
46

$
—

 
$
75

$
—

Business
83

—

 
68

—

Total commercial
129

—

 
142

1

Consumer:
 
 
 
 
 
Residential real estate
22

—

 
22

—

Home equity
17

—

 
6

—

Indirect auto
5

—

 
3

—

Other consumer
3

—

 
3

—

Total consumer
45

—

 
34

—

Total
$
174

$
1

 
$
177

$
1


22


The following table provides information about our impaired acquired loans including the average recorded investment and interest income recognized on impaired loans for the periods indicated:
 
2016
 
2015
Acquired loans
Average
recorded
investment
Interest
income
recognized
 
Average
recorded
investment
Interest
income
recognized
Six months ended June 30,
 
 
 
 
 
Commercial:
 
 
 
 
 
Real estate
$
—

$
—

 
$
—

$
—

Business
—

—

 
—

—

Total commercial
—

—

 
—

—

Consumer:
 
 
 
 
 
Residential real estate
—

—

 
—

—

Home equity
4

—

 
4

—

Other consumer
—

—

 
—

—

Total consumer
4

—

 
4

—

Total (1)
$
4

$
—

 
$
4

$
—

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

$
—

 
$
—

$
—

Business
—

—

 
1

—

Total commercial
—

—

 
1

—

Consumer:
 
 
 
 
 
Residential real estate
—

—

 
—

—

Home equity
4

—

 
4

—

Other consumer
—

—

 
—

—

Total consumer
4

—

 
4

—

Total (1)
$
4

$
—

 
$
5

$
—

(1)
Includes nonperforming purchased credit impaired loans.
Period end nonperforming loans differed from the amount of total impaired loans as certain TDRs, which are considered impaired loans, were accruing interest because the borrower demonstrated a consistent repayment record. Also contributing to the difference are nonperforming commercial loans less than $1 million and nonperforming consumer loans, which are not considered impaired unless they have been modified in a TDR as they are evaluated collectively when determining the allowance for loan losses.
The following table is a reconciliation between nonperforming loans and impaired loans at the dates indicated:
 
Commercial
Consumer
Total
June 30, 2016
 
 
 
Nonperforming loans
$
113

$
110

$
223

Plus: Accruing TDRs
52

14

66

Less: Smaller balance nonperforming loans evaluated collectively when determining the allowance for loan losses
(33
)
(74
)
(107
)
Total impaired loans (1)
$
132

$
50

$
181

December 31, 2015:
 
 
 
Nonperforming loans
$
102

$
111

$
214

Plus: Accruing TDRs
49

13

63

Less: Smaller balance nonperforming loans evaluated collectively when determining the allowance for loan losses
(35
)
(75
)
(110
)
Total impaired loans (1)
$
116

$
50

$
166

(1)  
Includes nonperforming purchased credit impaired loans.

23


Credit Quality Indicators
The primary indicators of credit quality are delinquency status and our internal loan gradings for our commercial loan portfolio segment and delinquency status and current FICO scores for our consumer loan portfolio segment.
The following tables contain an aging analysis of our loans by class at the dates indicated: 
 
30-59 days
past due
60-89 days
past due
Greater 
than
90 days
past due
Total
past due
Current
Total loans
receivable
Greater than
90 days
and accruing (1)
June 30, 2016
 
 
 
 
 
 
 
Originated loans
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
Real estate
$
19

$
1

$
23

$
44

$
7,957

$
8,001

$
—

Business
8

4

23

36

5,940

5,976

—

Total commercial
28

6

46

80

13,898

13,977

—

Consumer:
 
 
 
 
 
 
 
Residential real estate
5

2

17

24

2,452

2,476

—

Home equity
3

2

21

25

2,147

2,172

—

Indirect auto
19

4

6

29

2,508

2,537

—

Credit cards
1

1

2

4

283

287

2

Other consumer
2

1

3

5

224

229

—

Total consumer
30

10

48

88

7,613

7,701

2

Total
$
58

$
16

$
94

$
167

$
21,511

$
21,678

$
2

Acquired loans
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
Real estate
$
1

$
1

$
10

$
12

$
717

$
729

$
10

Business
—

—

1

1

155

156

—

Total commercial
1

1

11

13

872

885

10

Consumer:
 
 
 
 
 
 
 
Residential real estate
9

8

39

55

828

883

39

Home equity
3

1

17

21

866

887

1

Total consumer
11

9

56

76

1,694

1,770

40

Total
$
12

$
10

$
66

$
89

$
2,566

$
2,655

$
50

 
 
 
 
 
 
 
 

24


 
30-59 days
past due
60-89 days
past due
Greater 
than
90 days
past due
Total
past due
Current
Total loans
receivable
Greater than
90 days
and accruing (1)
December 31, 2015
 
 
 
 
 
 
 
Originated loans
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
Real estate
$
8

$
2

$
29

$
39

$
7,778

$
7,817

$
—

Business
26

3

23

51

5,802

5,853

—

Total commercial
34

5

52

90

13,580

13,670

—

Consumer:
 
 
 
 
 
 
 
Residential real estate
5

1

20

26

2,323

2,349

—

Home equity
3

2

22

26

2,107

2,133

—

Indirect auto
20

4

6

30

2,364

2,393

—

Credit cards
2

1

2

5

306

311

2

Other consumer
2

1

3

6

239

245

—

Total consumer
31

9

53

92

7,339

7,431

2

Total
$
64

$
13

$
104

$
182

$
20,919

$
21,101

$
3

Acquired loans
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
Real estate
$
2

$
1

$
20

$
23

$
812

$
835

$
20

Business
—

—

1

2

159

160

—

Total commercial
3

1

21

25

971

996

20

Consumer:
 
 
 
 
 
 
 
Residential real estate
12

5

43

60

945

1,005

43

Home equity
3

1

18

22

914

936

1

Total consumer
15

6

61

82

1,859

1,941

45

Total
$
18

$
7

$
82

$
107

$
2,830

$
2,937

$
65

 
(1)  
Includes credit card loans, loans that have matured and are in the process of collection, and acquired loans that were originally recorded at fair value upon acquisition. Acquired loans are considered to be accruing as we can reasonably estimate future cash flows on these acquired loans and we expect to fully collect the carrying value of these loans net of the allowance for acquired loan losses. Therefore, we are accreting the difference between the carrying value of these loans and their expected cash flows into interest income.

25


Our internal loan risk assessment provides information about the financial health of our commercial borrowers and our risk of potential loss. The following tables present information about the credit quality of our commercial loan portfolio at the dates indicated:
 
Real estate
Business
Total
Percent of total
June 30, 2016
 
 
 
 
Originated loans:
 
 
 
 
Pass
$
7,664

$
5,598

$
13,262

94.9
%
Criticized: (1)
 
 
 
 
Accrual
290

314

603

4.3

Nonaccrual
47

65

112

0.8

Total criticized
337

378

715

5.1

Total
$
8,001

$
5,976

$
13,977

100.0
%
Acquired loans:
 
 
 
 
Pass
$
656

$
138

$
794

89.7
%
Criticized: (1)
 
 
 
 
Accrual
73

17

90

10.2

Nonaccrual
—

1

1

0.1

Total criticized
73

18

91

10.3

Total
$
729

$
156

$
885

100.0
%
December 31, 2015
 
 
 
 
Originated loans:
 
 
 
 
Pass
$
7,510

$
5,488

$
12,998

95.1
%
Criticized: (1)
 
 
 
 
Accrual
262

308

571

4.2

Nonaccrual
44

56

101

0.7

Total criticized
307

365

672

4.9

Total
$
7,817

$
5,853

$
13,670

100.0
%
Acquired loans:
 
 
 
 
Pass
$
748

$
133

$
881

88.5
%
Criticized: (1)
 
 
 
 
Accrual
87

26

113

11.4

Nonaccrual
—

1

1

0.1

Total criticized
87

27

114

11.5

Total
$
835

$
160

$
996

100.0
%
 
(1)  
Includes special mention, substandard, doubtful, and loss, which are consistent with regulatory definitions, and as described in Item 1, “Business,” under “Asset Quality Review” in First Niagara's Annual Report on 10-K for the year ended December 31, 2015 .

26


Borrower FICO scores provide information about the credit quality of our consumer loan portfolio as they provide an indication as to the likelihood that a debtor will repay their debts. The scores are obtained from a nationally recognized consumer rating agency and are presented in the table below at the dates indicated: 
 
Residential
real estate
Home 
equity
Indirect auto
Credit cards
Other
consumer
Total
Percent of
total
June 30, 2016
 
 
 
 
 
 
 
Originated loans by refreshed FICO score:
 
 
 
 
 
 
 
Over 700
$
2,195

$
1,810

$
1,822

$
205

$
152

$
6,184

80.3
%
660-700
156

197

379

46

38

816

10.6

620-660
63

84

186

20

19

372

4.8

580-620
30

39

74

9

11

163

2.1

Less than 580
27

40

76

6

9

158

2.1

No score (1)
4

2

—

1

—

8

0.1

Total
$
2,476

$
2,172

$
2,537

$
287

$
229

$
7,701

100.0
%
Acquired loans by refreshed FICO score:
 
 
 
 
 
 
 
Over 700
$
587

$
714

$
—

$
—

$
—

$
1,301

73.5
%
660-700
72

74

—

—

—

146

8.2

620-660
56

40

—

—

—

95

5.4

580-620
42

23

—

—

—

65

3.7

Less than 580
36

22

—

—

—

59

3.3

No score (1)
90

14

—

—

—

103

5.8

Total
$
883

$
887

$
—

$
—

$
—

$
1,770

100.0
%
December 31, 2015
 
 
 
 
 
 
 
Originated loans by refreshed FICO score:
 
 
 
 
 
 
 
Over 700
$
2,084

$
1,767

$
1,700

$
220

$
161

$
5,932

79.8
%
660-700
139

197

364

50

41

791

10.7

620-660
60

85

177

23

21

365

4.9

580-620
30

39

74

10

12

166

2.2

Less than 580
31

44

78

7

10

169

2.3

No score (1)
4

2

—

2

—

8

0.1

Total
$
2,349

$
2,133

$
2,393

$
311

$
245

$
7,431

100.0
%
Acquired loans by refreshed FICO score:
 
 
 
 
 
 
 
Over 700
$
682

$
750

$
—

$
—

$
—

$
1,432

73.8
%
660-700
77

76

—

—

—

154

7.9

620-660
59

42

—

—

—

100

5.2

580-620
43

29

—

—

—

72

3.7

Less than 580
44

24

—

—

—

68

3.5

No score (1)
100

16

—

—

—

115

5.9

Total
$
1,005

$
936

$
—

$
—

$
—

$
1,941

100.0
%
 
(1)  
Primarily includes loans that are serviced by others for which refreshed FICO scores were not available as of the date indicated.

27


Troubled Debt Restructures
The following table details additional information about our TDRs at the dates indicated:
 
June 30,
2016
December 31,
2015
Aggregate recorded investment of impaired loans with terms modified through a troubled debt restructuring:
 
 
Accruing interest
$
66

$
63

Nonaccrual
69

52

Total troubled debt restructurings (1)
$
135

$
115

(1)  
Includes 102 and 102 acquired loans that were restructured with a recorded investment of $4 million and $4 million at June 30, 2016 and December 31, 2015 , respectively.
The modifications made to loans classified as TDRs typically consist of an extension of the payment terms, providing for a period with interest-only payments with deferred principal payments, rate reduction, or loans restructured in a Chapter 7 bankruptcy. We generally do not forgive principal when restructuring loans.
The financial effects of our modifications are as follows for the periods indicated:
Type of Concession
Count
Postmodification
recorded
investment (1)
Premodification
allowance for
loan losses
Postmodification
allowance for
loan losses
Six months ended June 30, 2016
 
 
 
 
Commercial:
 
 
 
 
Commercial real estate
 
 
 
 
Extension of term
3

$
6

$
—

$
—

Commercial business
 
 
 
 
Extension of term
5

5

—

—

Deferral of principal
2

11

—

—

Other
2

5

—

—

Total commercial
12

27

—

—

Consumer:
 
 
 
 
Residential real estate
 
 
 
 
Rate reduction
2

—

—

—

Deferral of principal
1

—

—

—

Extension of term and rate reduction
2

—

—

—

Chapter 7 Bankruptcy
2

—

—

—

Other
4

1

—

—

Home equity
 
 
 
 
Extension of term and rate reduction
2

—

—

—

Chapter 7 Bankruptcy
43

2

—

—

Other
10

—

—

—

Indirect auto
 
 
 
 
Chapter 7 Bankruptcy
171

3

—

—

Other consumer
 
 
 
 
Chapter 7 Bankruptcy
6

—

—

—

Other
3

—

—

—

Total consumer
246

7

—

—

Total
258

$
34

$
—

$
—

 
 
 
 
 

28


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

$
4

$
—

$
—

Deferral of principal
6

10

—

—

Deferral of principal and extension of term
1

—

—

—

Commercial business
 
 
 
 
Deferral of principal
1

1

—

—

Rate reduction
2

—

—

—

Other
1

—

—

—

Total commercial
14

14

—

—

Consumer:
 
 
 
 
Residential real estate
 
 
 
 
Extension of term
11

1

—

—

Rate reduction
6

1

—

—

Extension of term and rate reduction
7

1

—

—

Chapter 7 Bankruptcy
8

1

—

—

Home equity
 
 
 
 
Extension of term
2

—

—

—

Extension of term and rate reduction
3

—

—

—

Chapter 7 Bankruptcy
49

3

—

—

Indirect auto
 
 
 
 
Chapter 7 Bankruptcy
119

2

—

—

Other consumer
 
 
 
 
Extension of term and rate reduction
1

—

—

—

Chapter 7 Bankruptcy
7

—

—

—

Total consumer
213

9

—

—

Total
227

$
23

$
—

$
—

(1) Postmodification balances approximate premodification balances. The aggregate amount of charge-offs as a result of the restructurings was $1 million for the six months ended June 30, 2016 and was $2 million six months ended June 30, 2015 .       
 
 
 
 
 
Type of Concession
Count
Postmodification
recorded
investment (1)
Premodification
allowance for
loan losses
Postmodification
allowance for
loan losses
Three months ended June 30, 2016
 
 
 
 
Commercial:
 
 
 
 
Commercial real estate
 
 
 
 
Extension of term
3

$
6

$
—

$
—

Commercial business
 
 
 
 
Extension of term
5

$
5

—

—

Deferral of principal
2

11

—

—

Other
2

5

—

—

Total commercial
12

27

—

—

Consumer:
 
 
 
 
Residential real estate
 
 
 
 

29


 
 
 
 
 
Type of Concession
Count
Postmodification
recorded
investment (1)
Premodification
allowance for
loan losses
Postmodification
allowance for
loan losses
Chapter 7 Bankruptcy
2

—

—

—

Other
1

—

—

—

Home equity
 
 
 
 
Chapter 7 Bankruptcy
25

1

—

—

Other
10

—

—

—

Indirect Auto
 
 
 
 
Chapter 7 Bankruptcy
81

1

—

—

Other consumer
 
 
 
 
Chapter 7 Bankruptcy
3

—

—

—

Other
2

—

—

—

Total consumer
124

3

—

—

Total
136

$
30

$
—

$
—

Three months ended June 30, 2015
 
 
 
 
Commercial:
 
 
 
 
Commercial real estate
 
 
 
 
Extension of term
3

$
4

$
—

$
—

Deferral of principal
6

$
10

$
—

$
—

Deferral of principal and extension of term
1

—

—

—

Commercial business
 
 
 
 
Deferral of principal
1

1

—

—

Other
1

—

—

—

Total commercial
12

14

—

—

Consumer:
 
 
 
 
Residential real estate
 
 
 
 
Extension of term
4

$
—

$
—

$
—

Rate reduction
6

1

—

—

Extension of term and rate reduction
3

—

—

—

Chapter 7 Bankruptcy
3

—

—

—

Home equity
 
 
 
 
Extension of term
1

—

—

—

Extension of term and rate reduction
2

—

—

—

Chapter 7 Bankruptcy
26

1

—

—

Indirect auto
 
 
 
 
Chapter 7 Bankruptcy
66

1

—

—

Other consumer
 
 
 
 
Extension of term and rate reduction
1

—

—

—

Chapter 7 Bankruptcy
5

—

—

—

Total consumer
117

4

—

—

Total
129

$
19

$
—

$
—

The recorded investment in loans modified as TDRs within 12 months of the balance sheet date and for which there was a payment default was not significant for the six months ended June 30, 2016 or the six months ended June 30, 2015 .

30


Residential Mortgage Banking
The following table provides information about our residential mortgage banking activities at the dates indicated: 
 
June 30,
 
2016
2015
Mortgages serviced for others
$
4,071

$
3,924

Mortgage servicing asset recorded for loans serviced for others, net
38

37

Note 4. Derivative Financial Instruments
We are a party to derivative financial instruments in the normal course of business to manage our own exposure to fluctuations in interest rates and to meet the needs of our customers. These financial instruments have been limited to interest rate swap agreements, which are entered into with counterparties that meet established credit standards and, where appropriate, contain master netting and collateral provisions protecting the party at risk. We believe that the credit risk inherent in all of our derivative contracts is minimal based on our credit standards and the netting and collateral provisions of the interest rate swap agreements.
Our derivative positions include both instruments that are designated as hedging instruments and instruments that are customer related and not designated in hedging relationships. The following table presents information regarding our derivative financial instruments at the dates indicated:
 
Asset derivatives
 
Liability derivatives
 
Notional
amount
Fair value   (1)
 
Notional
amount
Fair value   (2)
June 30, 2016
 
 
 
 
 
Derivatives designated as hedging instruments:
 
 
 
 
 
Interest rate swap agreements
$
—

$
—

 
$
262

$
11

Derivatives not designated as hedging instruments:
 
 
 
 
 
Interest rate swap agreements
4,469

264

 
4,452

268

Total derivatives
$
4,469

$
264

 
$
4,714

$
279

December 31, 2015
 
 
 
 
 
Derivatives designated as hedging instruments:
 
 
 
 
 
Interest rate swap agreements
$
2

$
—

 
$
263

$
4

Derivatives not designated as hedging instruments:
 
 
 
 
 
Interest rate swap agreements
4,221

123

 
4,224

124

Total derivatives
$
4,224

$
123

 
$
4,487

$
128

 
(1)  
Represents gross amounts, included in Other Assets in our Consolidated Statements of Condition.
(2)  
Represents gross amounts, included in Other Liabilities in our Consolidated Statements of Condition.
All of our interest rate swaps for which we had master netting positions with the counterparty were in a liability position at June 30, 2016 and December 31, 2015 . Accordingly, there was no offsetting in our Consolidated Statements of Condition at June 30, 2016 and December 31, 2015 . We posted collateral for liability positions with a fair value of $322 million and $195 million at June 30, 2016 and December 31, 2015 , respectively.
Derivatives designated in hedging relationships
We designate interest rate swap agreements used to manage changes in the fair value of loans due to interest rate changes as fair value hedges. We have designated the risk of changes in the fair value of loans attributable to changes in the benchmark rate as the hedged risk. Accordingly, changes to the fair value of the hedged items attributable to a change in credit risk are excluded from our assessment of hedge effectiveness. The change in fair value of the derivatives, including both the effective and ineffective portions, is recognized in earnings and, so long as our fair value hedging relationships remain highly effective, such change is offset by the gain or loss due to the change in fair value of the loans attributable to the hedged risk. The net impact of the fair value hedging relationships on net income was not significant for the six months ended June 30, 2016 and 2015 .

31


We have entered into interest rate swaps to reduce our exposure to variability in interest-related cash outflows attributable to changes in forecasted LIBOR based borrowings. These derivative instruments are designated as cash flow hedges. We have designated the risk of changes in the amount of interest payment cash flows to be made during the term of the borrowings attributable to changes in the benchmark rate as the hedged risk. Accordingly, changes to the amount of interest payment cash flows for the hedged transactions attributable to a change in credit risk are excluded from our assessment of hedge effectiveness. Our interest rate swaps designated as cash flow hedges have maturities that correspond to the maturity of the forecasted hedged borrowing. Any gain or loss associated with the effective portion of our cash flow hedges is recognized in other comprehensive income and is subsequently reclassified into earnings in the period during which the hedged forecasted transactions affects earnings. Any gain or loss associated with the ineffective portion of our cash flow hedges, including ineffectiveness, is recognized immediately in earnings. At June 30, 2016 , there was a $4 million loss recognized in accumulated other comprehensive income related to these swaps.
At June 30, 2016 , there was a $4 million loss recognized in accumulated other comprehensive income related to borrowings that were previously hedged using interest rate swaps that were classified as cash flow hedges. This amount will be reclassified out of accumulated other comprehensive income and into earnings over the remaining life of the hedged borrowings as an adjustment of yield.
The following table presents certain information about amounts recognized for our derivative financial instruments designated in cash flow hedging relationships for the periods indicated.
 
Three months ended June 30,
 
Six months ended June 30,
Cash Flow Hedges
2016
 
2015
 
2016
 
2015
Interest rate swap agreements:
 
 
 
 
 
 
 
Amount of (loss) on derivatives recognized in other comprehensive income, net of tax
$
—

 
$
1

 
$
(2
)
 
$
—

Amount of (loss) on derivatives reclassified from other comprehensive income to income (1)
—


—


(1
)
 
(1
)
 
 
 
 
 
 
 
 
  
(1) Recognized in interest expense on borrowings in our Consolidated Statements of Income.
Derivatives not designated in hedging relationships
In addition to our derivatives designated in hedging relationships, we act as an interest rate swap counterparty for certain commercial borrowers in the normal course of servicing our customers, which are accounted for at fair value. We manage our exposure to such interest rate swaps by entering into corresponding and offsetting interest rate swaps with third parties that mirror the terms of the interest rate swaps we have with the commercial borrowers. These positions (referred to as “customer swaps”) directly offset each other and our exposure is the positive fair value of the derivatives due to changes in credit risk of our commercial borrowers and third parties. We recognized revenue for this service that we provide our customers of $5 million and $14 million for the six months ended June 30, 2016 and 2015 , respectively, included in Capital Markets income in our Consolidated Statements of Income.

32


Note 5. Earnings Per Share
The following table is a computation of our basic and diluted earnings per share using the two-class method for the periods indicated:
 
Three months ended June 30,
 
Six months ended June 30,
 
2016
2015
 
2016
2015
Net income available to common stockholders
$
39

$
53

 
$
80

$
97

Less income allocable to unvested restricted stock awards
—

1

 
1

1

Net income allocable to common stockholders
$
38

$
53

 
$
79

$
96

Weighted average common shares outstanding:
 
 
 
 
 
Total shares issued
366

366

 
366

366

Unvested restricted stock awards
(3
)
(3
)
 
(3
)
(3
)
Treasury shares
(10
)
(11
)
 
(11
)
(12
)
Total basic weighted average common shares outstanding
352

351

 
352

351

Effect of dilutive stock-based awards
2

2

 
2

2

Total diluted weighted average common shares outstanding
354

353

 
354

353

Basic earnings per common share
$
0.11

$
0.15

 
$
0.22

$
0.27

Diluted earnings per common share
$
0.11

$
0.15

 
$
0.22

$
0.27

Anti-dilutive stock-based awards excluded from the diluted weighted average common share calculations
3

10

 
3

11


33


Note 6. Other Comprehensive Income
The following table presents the activity in our Other Comprehensive Income for the periods indicated:
 
Three months ended June 30,
 
Six months ended June 30,
 
Pretax
Income 
taxes
Net
 
Pretax
Income 
taxes
Net
2016
 
 
 
 
 
 
 
Securities available for sale:
 
 
 
 
 
 
 
Net unrealized holding gains arising during the period
$
46

$
17

$
29

 
$
67

$
25

$
42

Reclassification adjustment for realized losses included in net income (1)
12

4

7


8

3

5

Net unrealized gains on securities available for sale
58

22

36

 
75

28

47

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

—

—

 
(4
)
(1
)
(2
)
Reclassification adjustment for realized losses included in net income (2)
—

—

—

 
1

—

—

Net unrealized losses on interest rate swaps designated as cash flow hedges
—

—

—

 
(3
)
(1
)
(2
)
Amortization of net loss related to pension and post-retirement plans
1

—

—

 
1

1

1

Total other comprehensive income
$
57

$
21

$
36

 
$
71

$
27

$
44

2015
 
 
 
 
 
 
 
Securities available for sale:
 
 
 
 
 
 
 
Net unrealized holding losses arising during the period
$
(47
)
$
(18
)
$
(29
)
 
$
(20
)
$
(7
)
$
(12
)
Reclassification adjustment for realized gains included in net income (1)
(2
)
(1
)
(1
)
 
(4
)
(2
)
(3
)
Net unrealized losses on securities available for sale
(49
)
(19
)
(31
)
 
(24
)
(9
)
(15
)
Net unrealized holding gains on securities transferred between available for sale and held to maturity:
 
 
 
 
 
 
 
Amortization of net unrealized holding gains to income during the period (2)
(3
)
(1
)
(2
)
 
(5
)
(2
)
(3
)
Interest rate swaps designated as cash flow hedges:
 
 
 
 
 
 
 
Net unrealized gains (losses) arising during the period
1

—

—

 
(1
)
—

(1
)
Reclassification adjustment for realized losses included in net income (3)
—

—

—


1

—

—

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

—

1

 
(1
)
—

—

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

—

1

 
2

—

2

Total other comprehensive loss
$
(50
)
$
(19
)
$
(31
)
 
$
(27
)
$
(11
)
$
(16
)
(1)  
Included in Noninterest income in our Consolidated Statements of Income.
(2)  
Included in Interest income on investment securities and other in our Consolidated Statements of Income.

34


(3)  
Included in Interest expense on borrowings our Consolidated Statements of Income.
The following table presents the activity in our accumulated other comprehensive income (loss) for the periods indicated:
 
Net unrealized (losses) gains on securities available for sale
Net unrealized gains (losses) on
securities transferred from
available for sale to
held to maturity
Unrealized losses on 
interest rate
swaps designated as
cash flow hedges
Pension and postretirement plans
Total
Balance, January 1, 2016
$
(10
)
$
6

$
(6
)
$
(39
)
$
(48
)
Period change, net of tax
47

(2
)
(2
)
1

44

Balance, June 30, 2016
$
37

$
4

$
(8
)
$
(38
)
$
(4
)
Balance, January 1, 2015
$
52

$
12

$
(5
)
$
(51
)
$
9

Period change, net of tax
(15
)
(3
)
—

2

(16
)
Balance, June 30, 2015
$
37

$
9

$
(5
)
$
(49
)
$
(7
)
During the next twelve months, we expect to reclassify $1 million of pre-tax net loss on previous cash flow hedges from accumulated other comprehensive income to earnings.

35


Note 7. Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Current accounting guidance establishes a fair value hierarchy based on the transparency of inputs participants use to price an asset or liability. The fair value hierarchy prioritizes these inputs into the following three levels:
Level 1 Inputs —Unadjusted quoted prices in active markets for identical assets or liabilities that are available at the measurement date.
Level 2 Inputs —Inputs, other than quoted prices included within Level 1, that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.), or inputs that are derived principally from or corroborated by market data through correlation or other means.
Level 3 Inputs —Unobservable inputs for determining the fair value of the asset or liability and are based on the entity’s own estimates about the assumptions that market participants would use to price the asset or liability.
A financial instrument’s categorization within the valuation hierarchy is based on the lowest level of input that is significant to the fair value measurement. A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.
Our valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While we believe our valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Securities Available for Sale
The fair value estimates of available for sale securities are based on quoted market prices of identical securities, where available (Level 1). However, as quoted prices of identical securities are not often available, the fair value estimate for almost our entire investment portfolio is based on quoted market prices of similar securities, adjusted for differences between the securities (Level 2). Adjustments may include amounts to reflect differences in underlying collateral, interest rates, estimated prepayment speeds, and counterparty credit quality. Where sufficient information is not available from the pricing services to produce a reliable valuation, we estimate fair value based on either broker quotes or internally developed models. We determine the fair value using third party pricing services, including brokers. As of June 30, 2016 , none of our investment securities were priced utilizing broker quotes. For details regarding our pricing process and sources, refer to Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Income-Critical Accounting Policies and Estimates” in First Niagara's 2015 Annual Report on Form 10-K.
Loans held for sale
We have elected the fair value option for certain residential real estate loans held for sale as we believe the fair value measurement of such loans reduces certain timing differences in our Statement of Income and better aligns with our management of the portfolio from a business perspective. This election is made at the time of origination, on a loan by loan basis, and is irrevocable. The secondary market for securities backed by similar loan types is actively traded, which provides readily observable market pricing to be used as input for the estimate for the fair value of our loans. Accordingly, we have classified this fair value measurement as Level 2. Interest income on these loans is recognized in Interest Income—Loans and Leases in our Consolidated Statements of Income.

36


The table below presents information about our loans held for sale for which we elected the fair value option at the dates indicated: 
 
June 30,
2016
December 31,
2015
Fair value carrying amount
$
49

$
43

Aggregate unpaid principal balance
47

42

Fair value carrying amount less aggregate unpaid principal balance
$
2

$
1

Additionally, included in loans held for sale on our Consolidated Statements of Condition are $3 million of commercial loans held for sale that are carried at the lower of cost or market at June 30, 2016 and December 31, 2015 .
Derivatives
We obtain fair value measurements of our interest rate swaps from a third party. The fair value measurements are determined using a market standard methodology of netting discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). Variable cash payments (or receipts) are based on an expectation of future interest rates derived from observable market interest rate curves. Credit valuation adjustments are incorporated to appropriately reflect our nonperformance risk as well as the counterparty’s nonperformance risk. The impact of netting and any applicable credit enhancements, such as bilateral collateral postings, thresholds, mutual puts, and guarantees are also considered in the fair value measurement.
The fair value of our interest rate swaps was estimated using primarily Level 2 inputs. However, Level 3 inputs were used to determine credit valuation adjustments, such as estimates of current credit spreads to evaluate the likelihood of default. We have determined that the impact of these credit valuation adjustments was not significant to the overall valuation of our interest rate swaps. Therefore, we have classified the entire fair value of our interest rate swaps in Level 2 of the fair value hierarchy.

37


Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following tables summarize our assets and liabilities measured at fair value on a recurring basis at the dates indicated:
 
Fair Value Measurements
 
Total
Level 1
Level 2
Level 3
June 30, 2016
 
 
 
 
Assets:
 
 
 
 
Investment securities available for sale:
 
 
 
 
Debt securities:
 
 
 
 
States and political subdivisions
$
313

$
—

$
313

$
—

U.S. Treasury
66

66

—

—

U.S. government sponsored enterprises
136

—

136

—

Corporate
687

—

683

4

Total debt securities
1,202

66

1,132

4

Mortgage-backed securities:
 
 
 
 
Residential mortgage-backed securities:
 
 
 
 
Government National Mortgage Association
26

—

26

—

Federal National Mortgage Association
62

—

62

—

Federal Home Loan Mortgage Corporation
76

—

76

—

Collateralized mortgage obligations:

 
 
 
Government National Mortgage Association
705

—

705

—

Federal National Mortgage Association
845

—

845

—

Federal Home Loan Mortgage Corporation
414

—

414

—

Total collateralized mortgage obligations
1,964

—

1,964

—

Total residential mortgage-backed securities
2,128

—

2,128

—

Commercial mortgage-backed securities, non-agency issued
802

—

802

—

Total mortgage-backed securities
2,930

—

2,930

—

Collateralized loan obligations, non-agency issued
1,117

—

1,117

—

Asset-backed securities collateralized by:
 
 
 
 
Student loans
155

—

155

—

Credit cards
21

—

21

—

Auto loans
19

—

19

—

Other
52

—

52

—

Total asset-backed securities
247

—

247

—

Other
22

21

1

—

Total securities available for sale
5,518

87

5,426

4

Loans held for sale  (1)
49

—

49

—

Derivatives
264

—

264

—

Total assets
$
5,831

$
87

$
5,740

$
4

Liabilities:
 
 
 
 
Derivatives
$
279

$
—

$
279

$
—

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

38


 
Fair Value Measurements
 
Total
Level 1
Level 2
Level 3
December 31, 2015
 
 
 
 
Assets:
 
 
 
 
Investment securities available for sale:
 
 
 
 
Debt securities:
 
 
 
 
States and political subdivisions
$
379

$
—

$
379

$
—

U.S. Treasury
55

55

—

—

U.S. government sponsored enterprises
269

—

269

—

Corporate
801

—

797

4

Total debt securities
1,504

55

1,445

4

Mortgage-backed securities:
 
 
 
 
Residential mortgage-backed securities:
 
 
 
 
Government National Mortgage Association
26

—

26

—

Federal National Mortgage Association
71

—

71

—

Federal Home Loan Mortgage Corporation
87

—

87

—

Collateralized mortgage obligations:
 
 
 
 
Government National Mortgage Association
94

—

94

—

Federal National Mortgage Association
730

—

730

—

Federal Home Loan Mortgage Corporation
355

—

355

—

Total collateralized mortgage obligations
1,179

—

1,179

—

Total residential mortgage-backed securities
1,364

—

1,364

—

Commercial mortgage-backed securities, non-agency issued
1,085

—

1,085

—

Total mortgage-backed securities
2,449

—

2,449

—

Collateralized loan obligations, non-agency issued
1,186

—

1,186

—

Asset-backed securities collateralized by:
 
 
 
 
Student loans
171

—

171

—

Credit cards
20

—

20

—

Auto loans
66

—

66

—

Other
53

—

53

—

Total asset-backed securities
310

—

310

—

Other
22

21

1

—

Total securities available for sale
5,471

76

5,391

4

Loans held for sale (1)
43

—

43

—

Derivatives
123

—

123

—

Total assets
$
5,637

$
76

$
5,557

$
4

Liabilities:
 
 
 
 
Derivatives
$
128

$
—

$
128

$
—

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

39


Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
The following table summarizes our assets and liabilities measured at fair value on a nonrecurring basis for the periods indicated:
 
Fair Value Measurements
Total gains
 
Total
Level 1
Level 2
Level 3
(losses)
Six months ended June 30, 2016
 
 
 
 
 
Collateral dependent impaired loans
$
8

$
—

$
8

$
—

$
—

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

$
—

$
11

$
—

$
(1
)
Collateral Dependent Impaired Loans
We record nonrecurring fair value adjustments to the carrying value of collateral dependent impaired loans when establishing the allowance for loan losses. Such amounts are generally based on the fair value of the underlying collateral supporting the loan less estimated costs to sell the collateral. When the fair value of such collateral, less costs to sell, is less than the carrying value of the loan, a specific allowance or charge off is recorded through a provision for credit losses. Real estate collateral is typically valued using independent appraisals that we review for acceptability, or other indications of value based on recent comparable sales of similar properties or assumptions generally observable in the marketplace and the related nonrecurring fair value measurements have been classified as Level 2. Under certain circumstances significant adjustments may be made to the appraised value due to the lack of direct marketplace information. Such adjustments are made as determined necessary in the judgment of our experienced senior credit officers to reflect current market conditions and current operating results for the specific collateral. When the fair value of collateral dependent impaired loans is based on appraisals containing significant adjustments, such collateral dependent impaired loans are classified as Level 3. We obtain new appraisals from an approved appraiser, in accordance with Interagency Appraisal and Evaluation Guidelines and internal policy. Appraisals or evaluations for assets securing substandard rated loans are usually completed within 90 days of the downgrade. An appraisal may be obtained more frequently when volatile or unusual market conditions exist that could affect the ultimate realization of the value of the real estate collateral.
During the six months ended June 30, 2016 , we recorded a decrease of $0.1 million to our specific allowance as a result of adjusting the fair value of the collateral for certain collateral dependent impaired loans to $8 million at June 30, 2016 , which is included in our provision for credit losses. During the six months ended June 30, 2015 we recorded an increase of $1 million to our specific allowance as a result of adjusting the fair value of the collateral for certain collateral dependent impaired loans to $11 million at June 30, 2015 , which is included in our provision for credit losses.
Level 3 Assets
Due to the lack of observable market data, we have classified our trust preferred securities, which are included in corporate debt securities and amounted to $4 million at June 30, 2016 and December 31, 2015 , in Level 3 of the fair value hierarchy. There were no changes in our trust preferred securities during the six months ended June 30, 2016 and 2015 . As of June 30, 2016 and December 31, 2015 , the fair values of our trust preferred securities are based upon third party pricing without adjustment.
 
 
 

40


Fair Value of Financial Instruments
The carrying value and estimated fair value of our financial instruments, including those that are not measured and reported at fair value on a recurring basis or nonrecurring basis, at the dates indicated are as follows: 
 
June 30, 2016
 
 
December 31, 2015
 
 
Carrying value
Estimated fair
value
Fair value
level
 
Carrying value
Estimated fair
value
Fair value
level
Financial assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
421

$
421

1

 
 
$
672

$
672

1

 
Investment securities available for sale
5,518

5,518

1,2,3

(1)  
 
5,471

5,471

1,2,3

(1)  
Investment securities held to maturity
6,315

6,458

2

 
 
6,388

6,378

2

 
Federal Home Loan Bank and Federal Reserve Bank common stock
402

402

2

 
 
410

410

2

 
Loans held for sale
52

52

2

 
 
46

46

2

 
Loans and leases, net
24,080

24,063

2,3

(2)  
 
23,796

23,749

2,3

(2)  
Derivatives
264

264

2

 
 
123

123

2

 
Accrued interest receivable
104

104

2

 
 
104

104

2

 
Financial liabilities:
 
 
 
 
 
 
 
 
 
Deposits
$
28,959

$
28,974

2

 
 
$
28,701

$
28,705

2

 
Borrowings
6,364

6,302

2

 
 
6,657

6,666

2

 
Derivatives
279

279

2

 
 
128

128

2

 
Accrued interest payable
16

16

2

 
 
14

14

2

 
 
(1)  
For a detailed breakout of our investment securities available for sale, refer to our table of recurring fair value measurements.
(2)  
Loans and leases classified as level 2 are made up of $8 million of collateral dependent impaired loans without significant adjustments made to appraised values at June 30, 2016 and December 31, 2015 . All other loans and leases are classified as level 3.
Our fair value estimates are based on our existing on and off balance sheet financial instruments without attempting to estimate the value of any anticipated future business and the value of assets and liabilities that are not considered financial instruments. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on our fair value estimates and have not been considered in these estimates.
Our fair value estimates are made as of the dates indicated, based on relevant market information and information about the financial instruments, including our judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in our assumptions could significantly affect the estimates. Our fair value estimates, methods, and assumptions are set forth below for each type of financial instrument. The method of estimating the fair value of the financial instruments disclosed in the table above does not necessarily incorporate the exit price concept used to record financial instruments at fair value in our Consolidated Statements of Condition or when measuring goodwill for impairment.
Cash and Cash Equivalents
The carrying value of our cash and cash equivalents approximates fair value because these instruments have original maturities of three months or less.
Investment Securities
The fair value estimates of securities are based on quoted market prices of identical securities, where available. However, as quoted prices of identical securities are not often available, the fair value estimate for almost our entire

41


investment portfolio is based on quoted market prices of similar securities, adjusted for differences between the securities. Adjustments may include amounts to reflect differences in underlying collateral, interest rates, estimated prepayment speeds, and counterparty credit quality.
Federal Home Loan Bank and Federal Reserve Bank Common Stock
The carrying value of our Federal Home Loan Bank and Federal Reserve Bank common stock, which are non-marketable equity investments, approximates fair value.
Loans and Leases
Our variable rate loans reprice as the associated rate index changes. The calculation of fair value for our variable rate loans is driven by the comparison between the loan’s margin and the prevailing margin observed in the market at the time of the valuation. Any caps and floors embedded in the loan’s pricing structure are also incorporated into the fair value. We calculated the fair value of our fixed-rate loans and leases by discounting scheduled cash flows through the estimated maturity using credit adjusted period end origination rates. Our estimate of maturity is based on the contractual cash flows adjusted for prepayment estimates based on current economic and lending conditions.
Accrued Interest Receivable and Accrued Interest Payable
The carrying value of accrued interest receivable and accrued interest payable approximates fair value.
Deposits
The fair value of our deposits with no stated maturity, such as savings and checking, as well as mortgagors’ payments held in escrow, is equal to the amount payable on demand. The fair value of our certificates of deposit is based on the discounted value of contractual cash flows, using the period end rates offered for deposits of similar remaining maturities.
Borrowings
The fair value of our borrowings is calculated by discounting scheduled cash flows through the estimated maturity using period end market rates for borrowings of similar remaining maturities.
Commitments
The fair value of our commitments to extend credit, standby letters of credit, and financial guarantees are not included in the above table as the carrying value generally approximates fair value. These instruments generate fees that approximate those currently charged to originate similar commitments.

42


Note 8. Segment Information
We have two business segments: banking and financial services. The banking segment includes all of our retail and commercial banking operations. The financial services segment includes our insurance operations. Substantially all of our assets relate to the banking segment. Transactions between our banking and financial services segments are eliminated in consolidation. Selected financial information for our segments follows for the periods indicated: 
 
Banking
Financial
services
Consolidated
total
Three months ended June 30, 2016
 
 
 
Net interest income
$
262

$
—

$
262

Provision for credit losses
12

—

12

Net interest income after provision for credit losses
250

—

250

Noninterest income
53

16

69

Amortization of intangibles
3

—

3

Other noninterest expense
241

13

255

Income before income taxes
59

2

61

Income tax expense
14

1

15

Net income
$
45

$
1

$
46

Three months ended June 30, 2015
 
 
 
Net interest income
$
263

$
—

$
263

Provision for credit losses
21

—

21

Net interest income after provision for credit losses
242

—

242

Noninterest income
70

17

87

Amortization of intangibles
5

1

5

Other noninterest expense
229

14

243

Income before income taxes
78

3

81

Income tax expense
19

1

20

Net income
$
59

$
2

$
61

Six months ended June 30, 2016
 
 
 
Net interest income
$
530

$
—

$
530

Provision for credit losses
34

—

34

Net interest income after provision for credit losses
495

—

495

Noninterest income
117

30

148

Amortization of intangibles
6

1

7

Other noninterest expense
480

26

506

Income before income taxes
126

4

130

Income tax expense
34

1

35

Net income
$
92

$
2

$
95

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

$
—

$
526

Provision for credit losses
34

—

34

Net interest income after provision for credit losses
493

—

493

Noninterest income
136

33

169

Amortization of intangibles
10

1

11

Other noninterest expense
471

27

498

Income before income taxes
148

5

152

Income tax expense
38

2

40

Net income
$
110

$
3

$
112


43


Note 9. Condensed Parent Company Only Financial Statements
The following condensed statements of condition, the related condensed statements of income, and cash flows should be read in conjunction with our Consolidated Financial Statements and related notes:
Condensed Statements of Condition
June 30,
2016
December 31,
2015
Assets:
 
 
Cash and cash equivalents
$
383

$
394

Investment in subsidiary
4,501

4,418

Deferred taxes
29

33

Other assets
18

12

Total assets
$
4,931

$
4,857

Liabilities and Stockholders’ Equity:
 

 

Accounts payable and other liabilities
$
18

$
19

Borrowings
712

712

Stockholders’ equity
4,200

4,126

Total liabilities and stockholders’ equity
$
4,931

$
4,857


 
Three months ended June 30,
 
Six months ended June 30,
Condensed Statements of Income
2016
2015
 
2016
2015
Dividends received from subsidiary
45

—

 
$
85

$
—

Interest expense
12

12

 
24

24

Net interest income
33

(12
)
 
61

(24
)
Noninterest income
—

1

 
1

1

Noninterest expense
14

8

 
24

14

Income (loss) before income taxes and undisbursed income of subsidiary
19

(20
)
 
38

(37
)
Income tax benefit
(10
)
(7
)
 
(17
)
(14
)
Income (loss) before undisbursed income of subsidiary
29

(12
)
 
56

(23
)
Undisbursed income of subsidiary
18

73

 
39

136

Net income
46

61

 
95

112

Preferred stock dividend
8

8

 
15

15

Net income available to common stockholders
$
39

$
53

 
$
80

$
97

 
 
 
 
 
 
Net income
$
46

$
61

 
$
95

$
112

Other comprehensive income (loss) (1)
36

(31
)
 
44

(16
)
Total comprehensive income
$
82

$
30

 
$
139

$
96

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

44


 
Six months ended June 30,
Condensed Statements of Cash Flows
2016
2015
Cash flows from operating activities:
 
 
Net income
$
95

$
112

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
Undisbursed income of subsidiaries
(39
)
(136
)
Stock-based compensation expense
9

6

Deferred income tax benefit
(4
)
(2
)
(Increase) decrease in other assets
(1
)
1

Decrease in other liabilities
—

(1
)
Net cash provided by (used in) operating activities
59

(19
)
Cash flows from financing activities:
 
 
Return of capital from subsidiary
—

90

Dividends paid on preferred stock
(15
)
(15
)
Dividends paid on common stock
(57
)
(57
)
Net cash (used in) provided by financing activities
(70
)
18

Net decrease in cash and cash equivalents
(10
)
—

Cash and cash equivalents at beginning of period
394

383

Cash and cash equivalents at end of period
$
383

$
382



45


EXHIBIT 99.2

KeyCorp and Subsidiaries
Unaudited Pro Forma Combined Condensed Consolidated Income Statement
For the year ended December 31, 2016
 
 KeyCorp
 
 First Niagara
 
 
 
 
 
 
 
Twelve months
 
Seven months
 
 
 
 
 
Pro Forma
 
ended December
 
ended July
 
Pro Forma
 
 
 
Combined
in millions
31, 2016
 
31, 2016 (a)
 
 Adjustments
 
 Ref
 
 KeyCorp (a)
 Interest income
$
3,319

 
$
720

 
$
148

 
 A
 
$
4,187

 Interest expense
400

 
99

 
(18
)
 
 B
 
481

 Net interest income
2,919

 
620

 
166

 
 
 
3,705

 Provision for credit losses
266

 
40

 
(28
)
 
 C
 
278

 Net interest income after provision for credit losses
2,653

 
579

 
194

 
 
 
3,426

 Noninterest income
2,071

 
173

 
(13
)
 
 D
 
2,231

 Noninterest expense
3,756

 
600

 
(418
)
 
 E
 
3,938

 Income from continuing operations before income taxes
968

 
152

 
599

 
 
 
1,719

 Income taxes
179

 
41

 
221

 
 F
 
441

 Income from continuing operations
789

 
111

 
378

 
 
 
1,278

 Less: Net income (loss) attributable to noncontrolling interests
(1
)
 
—

 
—

 
 
 
(1
)
 Less: Dividends on preferred stock
37

 
18

 
—

 
 
 
55

 Income (loss) attributable to common shareholders
753

 
94

 
378

 
 
 
1,225

 Income (loss) from discontinued operations net of taxes
1

 
—

 
—

 
 
 
1

 Net income (loss)
$
754

 
$
94

 
$
378

 
 
 
$
1,226

 
 
 
 
 
 
 
 
 
 
 See accompanying notes.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 (a) May not foot due to rounding.
 
 
 
 
 
 
 
 
 

Note 1. Basis of Presentation

The accompanying unaudited pro forma combined condensed consolidated income statement (referred to herein as the “pro forma income statement”) presents the pro forma combined consolidated results of operations of the company based upon the historical financial statements of KeyCorp and First Niagara Financial Group, Inc. (“First Niagara”), after giving effect to the merger and adjustments described in these footnotes. The pro forma income statement gives effect to the merger as if the transaction had become effective on January 1, 2016. The pro forma income statement is presented for illustrative purposes only and does not indicate the financial results of the combined company had the companies actually been combined on January 1, 2016, nor the impact of possible business model changes. The pro forma income statement also does not consider any potential effects of changes in market conditions on revenues or expense efficiencies, among other factors.

The pro forma income statement should be read in conjunction with KeyCorp’s Annual Report on Form 10-K for the year ended December 31, 2016, and First Niagara’s Quarterly Report on Form 10-Q for the period ended June 30, 2016.

The merger of First Niagara with and into KeyCorp was completed on August 1, 2016. The merger provided that each outstanding share of First Niagara common stock, par value $0.01 per share, was canceled and converted into the right to receive 0.680 shares of KeyCorp common stock, par value $1.00 per share, and $2.30 in cash. The merger qualified as a “reorganization” within the meaning of Section 368(a) of the Internal Revenue Code. Accordingly, a First Niagara stockholder who received KeyCorp common shares and cash in exchange for First Niagara common stock pursuant to the merger will generally recognize gain (but not loss) in an amount equal to the lesser of (1) the amount by which the sum of the fair market value of the KeyCorp common shares and cash (other than cash received instead of a fractional KeyCorp common share) received by the First Niagara stockholder exceeds such holder’s tax basis in its First Niagara common stock, and (2) the amount of cash received by such First Niagara stockholder (except with respect to any cash received instead of fractional interests in KeyCorp common shares).

On September 9, 2016, KeyCorp sold to Northwest Bank, a wholly-owned subsidiary of Northwest Bancshares, Inc., 18 branches in the Buffalo, New York market. The branches were divested in connection with the merger between First Niagara and KeyCorp and pursuant to an agreement with the United States Department of Justice and commitments to the Board of Governors of the Federal Reserve System following a customary antitrust review in connection with the merger. The divestiture included $439 million of loans and $1.6 billion of deposits associated with the 18 branches.




Note 2. Pro Forma Adjustments

The following pro forma adjustments have been reflected in the pro forma income statement. All adjustments are based on current assumptions and valuations, which are subject to change.

A.
Net adjustments to interest income of $148 million for the year ended December 31, 2016, to eliminate merger-related charges and record estimated amortization of premiums and accretion of discounts on acquired loans of First Niagara. Adjustments also include the elimination of interest income associated with the 18 branches that were divested.

B.
Net adjustments to interest expense of $18 million for the year ended December 31, 2016, to record estimated amortization of premiums and accretion of discounts on acquired deposits of First Niagara. Adjustments also include the elimination of interest expense associated with the 18 branches that were divested.

C.
Net adjustments to provision for credit losses of $28 million for the year ended December 31, 2016, to eliminate the provision for credit losses associated with the 18 branches that were divested and to account for the provision for credit losses on new loans originated during the periods presented.

D.
Net adjustments to noninterest income of $13 million for the year ended December 31, 2016, to eliminate merger-related charges and noninterest income associated with the 18 branches that were divested.

E.
Net adjustments to noninterest expense of $418 million for the year ended December 31, 2016, to eliminate merger-related charges and record estimated amortization of acquired other intangible assets. Adjustments also include the elimination of noninterest expense associated with the 18 branches that were divested.

F.
Net adjustments to income tax expense of $221 million for the year ended December 31, 2016, to record the income tax effect of merger-related charges and pro forma adjustments at the estimated statutory tax rate of 37.2%.