UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
þ
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2015
OR
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
 
Commission File No. 001-35390
 
 
 
 
FIRST NIAGARA FINANCIAL GROUP, INC
(Exact name of registrant as specified in its charter)
 
 
 
Delaware
 
42-1556195
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification Number)
 
 
 
726 Exchange Street, Suite 618, Buffalo, NY
 
14210
(Address of Principal Executive Offices)
 
(Zip Code)
(716) 819-5500
(Registrant’s telephone number)
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Class
 
Name of Exchange on which Registered
 
 
Common Stock, par value $0.01 per share
 
The NASDAQ Stock Market LLC
Fixed-to-Floating Rate Perpetual Non-Cumulative
 
New York Stock Exchange
Preferred Stock, Series B, par value $0.01 per share
 
 
Securities Registered Pursuant to Section 12(g) of the Act:
None
 
 
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES þ NO o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES o NO þ
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such requirements for the past 90 days. YES þ NO o
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES þ NO o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Large accelerated filer
þ
Accelerated filer
o
Non-accelerated filer
o
Smaller reporting company
o
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o NO þ
As of February 9, 2016 , there were issued and outstanding 354,756,081 shares of the Registrant’s Common Stock. The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant, computed by reference to the last sale price on June 30, 2015 , as reported by The NASDAQ Stock Market LLC, was approximately $3,322,379,869 .

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TABLE OF CONTENTS
ITEM
 
PAGE
NUMBER
 
NUMBER
 
 
 
 
PART I
 
 
 
 
1
1A
1B
2
3
4
 
 
 
 
PART II
 
 
 
 
5
6
7
7A
8
9
9A
9B
 
 
 
 
PART III
 
 
 
 
10
11
12
13
14
 
 
 
 
PART IV
 
 
 
 
15
 

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Unless the context otherwise requires, the terms “we”, “us”, and “our” refer to First Niagara Financial Group, Inc. and its subsidiaries on a consolidated basis.
PART I
 
 
 
ITEM 1.
 
Business
GENERAL
First Niagara Financial Group, Inc.
First Niagara Financial Group, Inc. (the “Company”) is a Delaware corporation and a bank holding company, subject to supervision and regulation by the Board of Governors of the Federal Reserve System (the “Federal Reserve”), serving both retail and commercial customers through our bank subsidiary, First Niagara Bank, N.A. (the “Bank”). Our principal executive offices are located at 726 Exchange Street, Suite 618, Buffalo, New York. At December 31, 2015 , we had $39.9 billion of assets, $28.7 billion of deposits and $4.1 billion of stockholders’ equity.
On October 30, 2015, the Company and KeyCorp (“KeyCorp”) entered into an Agreement and Plan of Merger (the “Merger Agreement”). The Merger Agreement provides that, upon the terms and subject to the conditions set forth therein, the Company will merge with and into KeyCorp (the “Merger”), with KeyCorp as the surviving corporation in the Merger. The Merger Agreement was unanimously approved by the Board of Directors of both the Company and KeyCorp.
Subject to the terms and conditions of the Merger Agreement, at the effective time of the Merger (the “Effective Time”), Company shareholders will have the right to receive (i) 0.680 shares (the “Exchange Ratio”) of KeyCorp common stock, par value $1.00 per share, and (ii) $2.30 in cash, for each share of Company common stock, par value $0.01 per share. Subject to the terms and conditions of the Merger Agreement, at the effective time of the Merger, each share of Company preferred stock, Series B, par value $0.01 per share, will be converted into the right to receive a share of a newly created series of preferred stock of KeyCorp having such rights, preferences, privileges and voting powers not materially less favorable to such holders than such Company preferred stock.
The Merger Agreement contains customary representations and warranties from both KeyCorp and the Company, and each party has agreed to customary covenants, including, among others, covenants relating to the conduct of its business during the interim period between the execution of the Merger Agreement and the Effective Time, its obligation to recommend that its shareholders adopt the Merger Agreement and, in the case of First Niagara, its non-solicitation obligations relating to alternative acquisition proposals.
The completion of the Merger is subject to customary conditions, including, among others, (1) the adoption of the Merger Agreement by the Company's and KeyCorp’s shareholders and the approval by KeyCorp’s shareholders of amendments to KeyCorp’s articles of incorporation, (2) authorization for listing on the New York Stock Exchange of the shares of KeyCorp common stock and KeyCorp preferred stock to be issued in the Merger, (3) the effectiveness of the registration statement on Form S-4 for the KeyCorp common stock and the KeyCorp preferred stock to be issued in the Merger, (4) the absence of any order, injunction or other legal restraint preventing the completion of the Merger or making the consummation of the Merger illegal and (5) the receipt of required regulatory approvals, including the approval of the Federal Reserve Board. Each party’s obligation to complete the Merger is also subject to certain additional customary conditions, including (i) subject to certain exceptions, the accuracy of the representations and warranties of the other party, (ii) performance in all material respects by the other party of its obligations under the Merger Agreement and (iii) receipt by such party of an opinion from its counsel to the effect that the Merger will qualify as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended.
Our profitability is primarily dependent on 1) the difference between the interest we receive on loans and investment securities, and the interest we pay on deposits and borrowings, 2) credit costs for nonperforming assets, and 3) our cost to deliver these products. The rates we earn on our assets and the rates we pay on our liabilities are a function of the general level of interest rates, the structure of the instrument, the credit worthiness

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of the borrower, and competition within our markets. These rates are also highly sensitive to conditions that are beyond our control, such as inflation, economic growth, and unemployment, as well as actions and policies of the federal government and its regulatory agencies, including the Federal Reserve. While the prolonged low interest rate and weak economic environment has pressured our net interest income and margin for several years, more recently, the competition from banks and non-banks has intensified both from a pricing and structural perspective. Absent an improvement in the competitive environment, net interest income will be challenged until we see additional increases in short term interest rates. Additionally, our pending Merger may further impede our ability to grow our balance sheet and our ability to retain and acquire customers and employees, which may result in impacting overall profitability. We manage our interest rate risk as described in "Market Risk" in this report, Part II Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations.”
The Federal Reserve implements national monetary policies (with objectives of maximum employment and targeted levels of inflation) through its open-market operations in U.S. Government securities, by adjusting depository institutions reserve requirements, by varying the target federal funds and discount rates and by varying the supply of money. The actions of the Federal Reserve in these areas influence the growth of our loans, investments, and deposits, and also affect interest rates that we earn on interest-earning assets and that we pay on interest-bearing liabilities.
During the third quarter of 2011, the Federal Reserve announced that it intended to keep interest rates low through mid-2013, and took certain actions, such as “Operation Twist” and Quantitative Easing, aimed at keeping short- and long-term interest rates low, thus spurring economic growth in the labor and housing markets. The most recent round of Quantitative Easing (QE3) began in September 2012, and was an open-ended program calling for the purchase of $40 billion per month in agency mortgage-backed securities.
These actions had the cumulative impact of flattening the yield curve, keeping interest rates low and therefore reducing the yields on our earning assets. We have been replacing higher yielding, fixed rate, longer duration loans that prepaid or refinanced away with lower yielding, shorter duration loans.
In June 2013, the Federal Reserve began discussing the tapering of the Quantitative Easing program. This discussion caused the yield curve to steepen appreciably, and slowed the refinancing market in our mortgage banking business. Subsequent to its December 2013 meeting, the Federal Reserve began tapering its monthly purchases of Treasury and agency mortgage-backed securities.
In September 2014, the Federal Reserve released its mechanisms for how they will raise interest rates when the decision is made to do so and include, in addition to conventional measures such as increases to the Federal Funds Rate, new tools such as paying interest on excess reserves and the use of reverse repurchase agreements. The timing and use of these tools may affect the direction and impact of short-term rate increases.
In October 2014, the Federal Reserve announced it had discontinued the quantitative easing program but Federal Reserve members were increasingly divided on the timing of any increase to short-term interest rates. Throughout 2015, the FOMC acknowledged that inflation was expected to remain low in the near term but stated they expect inflation to gradually rise toward their 2% target level over the medium term. The FOMC also expressed that it anticipated that it would be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market.
On June 17, 2015, the FOMC released their Meeting Statement and Economic Projections. Most notably, the FOMC members’ median projection for the federal funds rate at the end of 2016 decreased was 1.625% and the FOMC members’ median projection for the federal funds rate at the end of 2017 was 2.875%, each a 0.25% reduction from the previous projection. The median projection for 2015 remained unchanged at 0.625% suggesting potentially two rate hikes in the year. Minutes from the June Meeting suggested Federal Reserve officials believed they needed more time and more evidence that economic growth was sufficiently strong to justify a change in policy accommodation. Furthermore, Federal Reserve officials grew increasingly concerned about the potential "contagion" from international developments, specifically citing a sluggish Chinese economy and the potential departure of Greece from the Eurozone.

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In the third quarter of 2015, global growth concerns and the impact on the U.S. economy led the Federal Reserve to continue to delay increasing the federal funds rate. In the September 17, 2015 release, the Federal Reserve stated, ”Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term.” As a result, the market pushed out expectations for the Federal Reserve's initial rate increase to 2016 and interest rates decreased across most Treasury rate term points. However, the Federal Reserve Economic Projections indicated that 13 of 17 FOMC members still believed the appropriate timing to raise rates is in 2015. The Federal Reserve also updated the FOMC members’ median projection for the federal funds rate which decreased 0.25% from the June projections for 2015 through the long term.
Despite the Federal Reserve projections, the continued low levels of inflation and the decline in oil prices has caused the market to believe the Federal Reserve will not raise the federal funds rate as soon or as high as the Federal Reserve projections.
In October 2015, the Federal Reserve again did not raise the federal funds rate but did re-emphasize their expectations that they may still do so in December. As a result, interest rates began to rise. Finally, on December 16, 2015, the Federal Reserve announced the first federal funds rate hike in over nine years increasing the federal funds target rate 0.25% to a range of 0.25% to 0.50%. As a result of the October statement and the actual increase in December, the market reacted by taking the 2 year Treasury rate 0.42% higher during the fourth quarter to 1.06% though longer term rates did not increase as much as the 10 year Treasury rate only increased 0.21% to 2.27%. The result was a higher though flatter interest rate yield curve in December compared to September as the difference between the term points decreased from 1.41% to 1.21%.
Longer term interest rates had been volatile throughout 2015 and thus far in 2016. The 10 year Treasury rate has been as low of 1.64% on January 30, 2015, the lowest since the second quarter of 2013 but had risen to as high as 2.49% on June 26, 2015. Renewed U.S. economic concerns have again sent rates lower. On February 8, 2016, the 10 year Treasury was 1.76% while the 2 year Treasury rate was 0.67%, a spread of 1.09% between the term points.
We do not expect to see significant improvement in net interest income until short-term interest rates increase further, and the impact on net interest income will be influenced by the nature and timing of the market reaction and customer behavior, all of which are very unpredictable. There remain divergent views on the timing and pace of future increases to the federal funds rate with analyst estimates tracked by Bloomberg ranging from zero to seven implied additional rate increases of 0.25% by the end of 2016. The pace and magnitude of rising rates, and ultimately the shape of the yield curve (i.e. the difference between long and short term rates), will impact future profitability.
First Niagara Bank, N.A.
First Niagara Bank, N.A. was organized in 1870, and is a nationally chartered regional bank providing financial services to individuals, families and businesses. In November 2002, the Bank was converted from a New York State chartered savings bank to a federal charter and in April 2010, the Bank became a national bank subject to supervision and regulation by the Office of the Comptroller of the Currency (the “OCC”).
The Bank is positioned as a leading regional bank, with its footprint reaching across New York, Western and Eastern Pennsylvania, Connecticut and Western Massachusetts, providing our retail consumer and business customers with banking services including residential and commercial real estate loans, commercial business loans, consumer loans, wealth management products, as well as retail and commercial deposit products. Additionally, we offer insurance services through a wholly-owned subsidiary of the Bank. As of December 31, 2015 , the Bank consolidated with its subsidiaries had $39.9 billion of assets, $28.7 billion of deposits, and $4.4 billion of stockholder’s equity, employed over 5,400 people, and operated through 392 branches and several financial services subsidiaries.
The Bank’s subsidiaries provide a range of financial services to individuals and companies in our market and service areas: First Niagara Funding, Inc. and First Niagara Business Trust, each a real estate investment trust (“REIT”) which primarily originate and hold some of our commercial real estate and business loans, certain

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residential mortgages, and home equity loans; First Niagara Realty, Inc., which holds commercial other real estate owned; First Niagara Servicing Company, which owns and partially services loans that are collateralized by property in Connecticut; and First Niagara Risk Management, Inc. (“FNRM”), our full service insurance agency, which sells insurance products, including business and personal insurance, surety bonds, life, disability and long-term care coverage. FNRM also provides risk management advisory services such as alternative risk and self-insurance, claims investigation and adjusting services, and third-party administration of self-insured workers’ compensation plans.
OTHER INFORMATION
We maintain a website at www.firstniagara.com . Our annual reports on Form 10-K, proxy statements, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports, are made available, free of charge, on the Investor Relations page on our website, as soon as reasonably practicable after we electronically file them or furnish them to the Securities and Exchange Commission (“SEC”). You may also obtain copies, without charge, by writing to our Investor Relations Department, 726 Exchange Street, Suite 618, Buffalo, New York 14210.
We have adopted a Code of Ethics that is applicable to our senior financial officers, including our Chief Executive Officer, Chief Financial Officer and Corporate Controller, among others. The Code of Ethics is available on the Investor Relations page of our website. Additionally, we have adopted a general Code of Conduct that sets forth standards of ethical business conduct for all of our directors, officers and employees. This Code of Conduct is also available on our website.
FORWARD LOOKING STATEMENTS
Certain statements we make in this document may be considered “forward-looking statements” as that term is defined in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that involve substantial risks and uncertainties. You can identify these forward-looking statements by our use of such words as estimate, project, believe, intend, anticipate, plan, seek, expect, and other similar expressions. These forward-looking statements include: statements pertaining to our expectations regarding the planned merger of the Company with and into KeyCorp, with KeyCorp surviving the merger; statements of our goals, intentions, and expectations; statements regarding our business plans, prospects, growth, and operating strategies; statements regarding the asset quality of our loan and investment portfolios; statements surrounding the level of our allowance for loan losses; and estimates of our risks and future costs and benefits.
Forward-looking statements are subject to significant risks, assumptions, and uncertainties, including, among other things, the following important factors that could affect the actual outcome of future events:
•
Our ability to obtain regulatory approvals and meet other closing conditions to the Merger, including approval by KeyCorp shareholders on the expected terms and schedule;
•
Delay in closing the Merger;
•
Difficulties and delays in integrating the Company's businesses with those of KeyCorp or fully realizing the cost savings and other benefits of the Merger;
•
Business disruption following the announcement of the Merger;
•
General economic conditions, either nationally or in our market or service areas, that are worse than expected;
•
Increased competition among depository and other financial institutions;
•
Inflation and changes in the interest rate environment that reduce our margins or fair value of financial instruments;
•
Changes in laws or government regulations affecting financial institutions, including changes in regulatory fees and capital requirements;
•
Changes in consumer spending, borrowing, and savings habits;
•
Changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, taxing authorities and the Financial Accounting Standards Board;
•
Our ability to enter new markets successfully and capitalize on growth opportunities;
•
Changes in our organization, compensation, and benefit plans;

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•
Execution risk associated with our Strategic Investment plan; and
•
OCC approval to continue payment of Bank dividends.
Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements.
Important Additional Information and Where to Find it
In connection with the proposed merger, KeyCorp has filed with the SEC a Registration Statement on Form S-4, as amended, that includes the Joint Proxy Statement of KeyCorp and the Company and a Prospectus of KeyCorp, as well as other relevant documents concerning the proposed transaction. The definitive Joint Proxy Statement/Prospectus has been declared effective by the SEC and mailed to stockholders of KeyCorp and the Company. This communication does not constitute an offer to sell or the solicitation of an offer to buy any securities or a solicitation of any vote or approval. INVESTORS AND SHAREHOLDERS ARE URGED TO READ THE REGISTRATION STATEMENT AND THE JOINT PROXY STATEMENT/PROSPECTUS REGARDING THE MERGER AND ANY OTHER RELEVANT DOCUMENTS FILED WITH THE SEC, AS WELL AS ANY AMENDMENTS OR SUPPLEMENTS TO THOSE DOCUMENTS, BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION.
A free copy of the Joint Proxy Statement/Prospectus, as well as other filings containing information about KeyCorp and the Company, may be obtained at the SEC’s Internet site (http://www.sec.gov). You may also obtain these documents, free of charge, from KeyCorp at investor.key.com or from the Company by accessing the Company’s website at www.firstniagara.com. Copies of the Joint Proxy Statement/Prospectus can also be obtained, free of charge, by directing a request to KeyCorp Investor Relations at Investor Relations, KeyCorp, 127 Public Square, Mailcode OH-01-27-0737, Cleveland, Ohio 44114-1306, by calling (216) 689-3000, or by sending an e-mail to investor_relations@keybank.com or to First Niagara Investor Relations at 726 Exchange Street, Suite 618, Buffalo, New York 14210, by calling (716) 819-5669 or by sending an e-mail to investor@fnfg.com. In addition, KeyCorp and the Company use their respective Investor Relations websites and social media outlets as channels of distribution of material company information. Such information is accessible on KeyCorp’s and the Company’s Investor Relations websites, as well as on their respective Facebook pages and through their Twitter accounts and LinkedIn accounts.
KeyCorp and the Company and certain of their respective directors and executive officers may be deemed to be participants in the solicitation of proxies from the respective shareholders of KeyCorp and the Company in respect of the transaction described in the Joint Proxy Statement/Prospectus. Information regarding KeyCorp’s directors and executive officers is contained in KeyCorp’s Proxy Statement on Schedule 14A, dated April 7, 2015, which is filed with the SEC. Information regarding First Niagara’s directors and executive officers is contained in the Company’s Proxy Statement on Schedule 14A, dated March 23, 2015, which is filed with the SEC. Additional information regarding the interests of those participants and other persons who may be deemed participants in the transaction may be obtained by reading the Joint Proxy Statement/Prospectus regarding the proposed merger. Free copies of this document may be obtained as described in the preceding paragraph.
MARKET AREAS AND COMPETITION
Our business operations are concentrated in our primary market areas of New York, Western and Eastern Pennsylvania, Connecticut, Western Massachusetts and the Tri-State area which includes Lower Hudson Valley, Fairfield County, Connecticut, and Northern New Jersey. Therefore, our financial results are affected by economic conditions in these geographic areas. If economic conditions in our markets deteriorate or if we are unable to sustain our competitive posture, our ability to expand our business and the quality of our loan portfolio could materially impact our financial results.
Our primary lending and deposit gathering areas are generally concentrated in the same areas as our branches. We face significant competition in both making loans and attracting deposits in our markets as they have a high density of financial institutions, some of which are significantly larger than we are and have greater financial resources. Competition for loans comes principally from commercial banks, savings banks, savings and loan associations, mortgage banking companies, credit unions, insurance companies, and other financial services

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companies. Our most direct competition for deposits has historically come from commercial banks, savings banks, and credit unions, as well as additional competition for deposits from the mutual fund industry, internet banks, securities and brokerage firms, and insurance companies, as well as nontraditional competitors such as large retailers offering bank-like products. In addition to the traditional sources of competition for loans and deposits, payment processors and other companies exploring direct peer-to-peer banking provide additional competition for our products and services. In these marketplaces, opportunities to grow and expand are primarily a function of how we are able to differentiate our product offerings and customer experience from our competitors. We offer a variety of financial services to meet the needs of the communities that we serve, functioning under a philosophy that includes a commitment to customer service and the community. We have created a customer-centric organization structure that brings our customers' needs and preferences closer to the executive team that enables us to be more responsive to our customers.
More recently, competition for loans, particularly commercial loans, has intensified given the weak economic activity within our markets and nationally. This increased competition from banks and non-banks has resulted in accelerated loan prepayments, particularly in our investor owned commercial real estate portfolio as borrowers gravitate towards financial institutions that are more willing to compete on price, loan structures or tenor. This competition is most notable in Eastern Pennsylvania and New England.
We offer a variety of financial services to meet the needs of the communities that we serve, functioning under a philosophy that includes a commitment to customer service and the community. As of December 31, 2015 , we operated 392 bank branches, including 190 in New York primarily located near Buffalo, Rochester, Syracuse and Albany; 118 branches in Pennsylvania primarily located near Philadelphia, Pittsburgh, Erie, and Warren; 75 branches in Connecticut primarily located near New Haven and Hartford; and nine in Western Massachusetts primarily located near Springfield.
LENDING ACTIVITIES
Our principal lending activity has been the origination of commercial business and real estate loans, and residential mortgage loans to commercial and retail customers generally located within our primary market and service areas.
Our Commercial business is positioned for continuing success. Our footprint provides ample opportunity for growth and our strategy seeks to capitalize on our commercial business scale by driving organic growth, investing in infrastructure, and expanding our product set. We are focused on providing a full range of services to our commercial banking clients through a regional, decentralized approach with plans to invest further in healthcare capabilities, use asset based lending opportunities for access to broader markets and industries, enhance our leasing capability, lead more syndicated transactions, and leverage our risk management products to further increase fee income. Our Commercial business also offers indirect auto loan products to dealers.
Our Consumer Financial Services business is focused on acquiring core deposit relationships from consumer and small business customers. These core deposit relationships provide a low cost of funds and are the cornerstone of household profitability. Our Consumer Financial Services business provides merchant services and payroll to our small business customers and is also focused on consumer finance, offering an array of products including residential mortgage loans, home equity loans, and credit card products.
Winning, expanding and retaining consumer relationship customers is driven by a clear value proposition:
•
Doing business with us will be simple, easy, fast and secure for our customers.
•
We will deliver a friendly, helpful and proactive customer experience.
•
We will take a personal interest in helping our customers earn more, pay less and borrow wisely.
We are committed to delivering an improved customer experience by developing a customer-centric culture and providing our customers with the best experience possible based on their individual needs, however they choose to do business with us, whether it's in the branch, online, on their mobile phone, through our call center, or at an automated teller machine ("ATM"). We offer a convenient and efficient multi-channel customer experience and the strength of a dense and efficient branch network. Product development efforts are focused on meeting the

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banking, investment and insurance needs of our clients and our products are designed to be simple and easy to use while creating a fair value exchange for our customers and shareholders. Through a targeted and multi-channel marketing effort we deliver relevant offers to our customers and prospects and efficiently drive the sales and service experience.
Commercial Business Loans
Our commercial business loan portfolio includes business term loans and lines of credit issued to companies in our market and service areas, some of which are secured, in part, by owner occupied real estate. Additionally, we make secured and unsecured commercial loans and extend lines of credit for the purpose of financing equipment purchases, inventory, business expansion, working capital, and for other general purposes. The terms of these loans generally range from less than one year to seven years with either a fixed interest rate or a variable interest rate indexed to a London Inter-Bank Offered Rate (“LIBOR”) or our prime rate. Our lines of credit typically carry a variable interest rate indexed to either LIBOR or our prime rate.
As part of our strategic initiatives to fully service our larger corporate clients generally located within our primary market and service areas, we look to strengthen our commercial business relationships by offering not only larger loans, but more and better solutions. This includes products and services such as standby letters of credit, treasury management, foreign exchange, remote deposit capture, merchant services, wire transfers, lock-box, business credit and debit cards, and business online banking.
We also make commercial business and real estate loans which are 50% to 90% government guaranteed through the Small Business Administration. Based on the additional guarantee, terms of these loans range from one to 20 years and generally carry a variable rate of interest indexed to the prime rate. This insured loan product allows us to better meet the needs of our small business customers without subjecting us to undue credit risk.
In addition to loans to commercial clients, we also provide financing to commercial clients in the form of equipment finance agreements and capital leases. Our primary focus is middle market transactions with bank customers and prospects, municipal and healthcare tax exempt leases, and upper middle market/investment grade transactions purchased from quality independent leasing companies and other bank owned equipment finance subsidiaries located in the Northeast region of the United States, in amounts ranging from $250 thousand to $20 million.
Commercial Real Estate and Multi-family Lending
We originate commercial real estate loans secured predominantly by first liens on multi-family residential, office, retail, and industrial properties. Our current policy with regard to these loans is to minimize our risk by emphasizing geographic distribution within our primary market and service areas and diversification among these property types.
Commercial and multi-family real estate loans that we originate generally feature a term of not more than 10 years, with a payment schedule based on not more than a 30 year amortization schedule for multi-family loans, and 20 years for commercial real estate loans.
We also offer the availability of commercial real estate and multi-family construction loans to our better relationship borrowers. Most of our construction loans provide for disbursement of loan funds during the construction period and conversion to a permanent loan when the construction is complete, and either tenant lease-up provisions or prescribed debt service coverage ratios are met. We make the construction phase of the loan on a short-term basis, usually not exceeding two years, with floating interest rates that are almost exclusively indexed to LIBOR. The construction loan application process includes the same criteria which are required for our permanent commercial mortgage loans, as well as a submission of completed plans, specifications, and cost estimates related to the proposed construction. We use these items as an additional basis to determine the expected appraised value of the subject property upon its completion. The appraisal is an important component because construction loans involve additional risks related to advancing loan funds upon the security of the

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project under construction, which is of uncertain value prior to the completion of construction and subsequent lease-up.
Our multi-family portfolio has historically been a homogeneous portfolio of apartment complexes in Upstate New York. In recent years, we have expanded this offering by moving up market and making larger size loans throughout our footprint and in contiguous states. The collateral securing these loans now also includes mid and high rise urban multi-family properties.
We continue to emphasize commercial real estate and multi-family lending because of the higher interest rates, relative to expected losses, associated with this asset class. Commercial real estate and multi-family loans, however, carry more risk as compared to residential mortgage lending, because they typically involve larger loan balances concentrated with a single borrower or groups of related borrowers. Additionally, the payment experience on loans that are secured by income producing properties is typically dependent on the successful operation of the related real estate project and thus, may subject us to adverse conditions in the real estate market or to the general economy. To help manage this risk, we have put in place concentration limits based upon property types and maximum amounts that we lend to individuals, groups of related borrowers, industries, and property types. In addition, our policy for commercial lending generally requires a loan-to-value (“LTV”) ratio of 75% or lower on purchases of existing commercial real estate and 80% or lower on purchases of existing multi-family real estate. For construction loans, the maximum LTV ratio varies depending on the project, however it generally does not exceed the lesser of 75% to 80% LTV based on property type or 80% of cost.
Residential Real Estate Lending
We originate mortgage loans to enable our customers to finance residential real estate, both owner occupied and non-owner occupied, in our primary market and service areas. We offer traditional fixed-rate and adjustable-rate mortgage (“ARM”) products that have maturities up to 30 years, and maximum loan amounts generally up to $2.5 million.
We generally have sold newly originated conforming, conventional 15 to 30 year fixed-rate loans as well as FHA insured and VA guaranteed loans in the secondary market to government sponsored enterprises such as Federal National Mortgage Association (“FNMA”) and Federal Home Loan Mortgage Corporation (“FHLMC”) or to wholesale lenders. During 2015, we originated and held $228 million of fixed rate, 30 year jumbo loans and intend to continue to originate and hold these types of loans in 2016. We intend to continue to hold the majority of our newly originated ARMs in our portfolio, but may occasionally sell these loans to FNMA, FHLMC, or wholesale lenders. Our LTV requirements for residential real estate loans vary depending on the loan program as well as the secondary market investor. Loans with LTVs in excess of 80% are required to carry mortgage insurance. We generally originate loans that meet accepted secondary market underwriting standards.
We offer ARM products secured by residential properties. These ARMs have terms up to 30 years, with rates that generally adjust annually after five or seven years. After that initial fixed rate period of time, the interest rate on these loans resets based upon a spread or margin above a specified index (e.g., LIBOR). Our ARM loans are generally subject to limitations on interest rate increases and decreases of up to 2% per adjustment period and a total adjustment from the initial interest rate of up to 6% over the life of the loan. These loans generally require that any payment adjustment resulting from a change in the interest rate be sufficient to result in full amortization of the loan by the end of the loan term, and thus, do not permit any of the increased payment to be added to the principal amount of the loan, commonly referred to as negative amortization.
ARMs generally pose higher credit risks relative to fixed-rate loans primarily because, as interest rates rise, the payment amounts due from the borrowers rise, thereby increasing the potential for default. In order to manage this risk, we generally do not originate adjustable-rate loans with less than an initial fixed term of five years. Additionally, we do not offer ARM loans with initial teaser rates.
We generally originate Qualified Mortgages ("QM") or Temporary Qualified Mortgages ("TQM") under the Mortgage Reform and Anti-Predatory Lending Act of the Dodd Frank Wall Street Reform and Consumer Protection Act which is described more fully in "Supervision and Regulation."

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Home Equity Lending
We offer prime-based variable rate home equity lines of credit (“HELOCs”) within our market footprint. These products typically allow customers to borrow up to 85% of the appraised value of the collateral property (including the first mortgage) with a maximum loan amount generally no greater than $500 thousand. Our fixed-rate home equity loans generally have repayment terms up to 30 years. Our “Ultraflex” home equity line of credit product allows borrowers a 10 year draw period with a 20 year repayment period to follow. During the draw period, customers may elect a five year interest only payment option followed by a five year principal and interest period or pay principal and interest for all 10 years. Additionally, this product offers an option allowing customers to convert portions or all of their variable rate line balances to a fixed rate loan. Customers may have up to three fixed rate loans within their line of credit at one time.
Indirect Automobile Lending
We purchase motor vehicle retail installment sales contracts relating to new or used automobiles and light and medium-duty trucks from dealers who regularly originate these third party installment sales contracts. The contracts are sold and assigned to us pursuant to the terms of an approved dealer agreement. When a customer purchases a vehicle from a dealer, the customer and the dealer determine the contract amount, loan term, payment terms, and interest rate to be charged subject to our current program limits. We pay the dealer proceeds as determined by the itemization of the amount financed once all required disclosures and stipulations have been met by the dealer.
Each applicant for a motor vehicle loan request is evaluated based on our underwriting standards, which are intended to assess the applicant's ability and willingness to repay, along with the adequacy of the financed vehicle as collateral. We may also finance certain products as part of a motor vehicle loan, including credit life, accident and health insurance, Guaranteed Auto Protection ("GAP") insurance, service contracts, mechanical breakdown protection insurance, theft deterrent products, and maintenance agreements. The maximum term for any motor vehicle loan we offer is 84 months, depending on the applicant's credit bureau score and age of the financed vehicle. Our internal risk policy limits our exposure to 84 month term auto loans to 10% or less of total outstanding loan balances. At December 31, 2015 , approximately 7% of our outstanding indirect auto loan balances have 84 month terms.
Credit Cards
We originate a variety of different credit card products to provide our customers flexible and accommodating borrowing options. Most of our credit card customers were acquired as part of the acquisition of certain branches of HSBC Bank USA, National Association and its affiliates (the "HSBC Branch Acquisition") in 2012 and were not underwritten by us at origination. All credit card products are open-ended lines of credit with variable interest rates. Certain products offer rewards associated with usage that can be redeemed for a variety of pre-determined products and services. These lines of credit are unsecured (except for our Secured product offering) and are generally granted to our more creditworthy customers.
Other Consumer Loans
We offer a variety of consumer loans ranging from fixed-rate installment loans to variable rate lines of credit, including personal secured and unsecured loans and overdraft lines of credit. Terms of these loans range from six months to 72 months and typically do not exceed $50 thousand. Secured loans are generally collateralized by vehicles, savings accounts, or other non real estate assets. Unsecured loans and lines of credit are generally only granted to our most creditworthy customers. Consumer loans can generally entail greater risk of loss than residential mortgage loans, particularly in the case of consumer loans that are unsecured or secured by assets that tend to depreciate rapidly.
Asset Quality Review
We review loans on a regular basis. Consistent with regulatory guidelines, we provide for the classification of loans which are considered to be of lesser quality as special mention, substandard, doubtful, or loss. We consider a loan

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substandard if it is inadequately protected by the current net worth and paying capacity of the borrower or of the collateral pledged, if any. Substandard loans have a well defined weakness that jeopardizes collection of the loan. Substandard loans include those loans where there is the distinct possibility that we will sustain some loss of principal if the deficiencies are not corrected. Loans that we classify as doubtful have all of the weaknesses inherent in those loans that are classified as substandard but also have the added characteristic that the weaknesses presented make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, improbable. Loans that we classify as loss are those considered uncollectible and of such little value that their continuance as an asset is not appropriate and the uncollectible amounts are charged off. Loans that do not expose us to risk sufficient to warrant classification in one of the aforementioned categories, but which possess some weaknesses, are designated special mention. A special mention loan has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution’s credit position at some future date. Special mention assets are not adversely classified and do not expose an institution to sufficient risks to warrant classification. Any loan not rated special mention, substandard, doubtful, or loss is considered pass rated. Watch-list loans are performing and are considered pass, but warrant greater attention than those loans in other pass grades. While the watch-list loans warrant more attention than other pass grades, they do not exhibit characteristics of a special mention loan.
We classify certain substandard loans and all doubtful loans as nonaccrual loans and we evaluate them individually for impairment. Our threshold for evaluating commercial loan relationships individually for impairment is $1 million . When we classify problem loans as a loss, we charge-off the amount of impairment against the allowance for loan losses. Our determination as to the classification of our loans and the amount of our allowance is subject to ongoing review by regulatory agencies, which can require us to establish additional credit allowances. We regularly review our loan portfolio to ensure that loans are correctly graded and classified in accordance with our policy and applicable regulations.
WEALTH MANAGEMENT
We offer wealth management services through two delivery channels, Private Client Services (“PCS”) and First Niagara Investment Services (“FNIS”). PCS provides holistic wealth management solutions using investment, fiduciary and banking services. FNIS is the Bank’s branch based investment brokerage platform that offers third party mutual funds and annuities as well as other investment products using appropriately licensed financial consultants.
Private Client Services
Our PCS Group utilizes a comprehensive approach to wealth management incorporating wealth planning, investment management, fiduciary, risk management, credit and banking services for our customers. Revenue from PCS is primarily comprised of investment fees, estate settlement fees and credit and banking revenue paid by our clients. Investment management fees are based on the current market value of assets under management, the amount of which is impacted by fluctuations in stock and bond market prices. Estate settlement fees are based on the total market value of real and personal property settled. Credit and banking revenue is primarily generated from interest income earned on commercial and consumer loans. PCS offers wealth management services to manage client funds utilizing various third party investment vehicles including separately managed accounts, bonds, exchange traded funds and mutual funds.
First Niagara Investment Services
FNIS offers wealth management, retirement planning, education funding and wealth protection products and services to our mass, mass affluent and small business clients. Through a third party broker dealer relationship we offer investment vehicles including stocks, bonds, mutual funds, annuities, life insurance, long term care insurance, and advisory products. The planning services and products we offer are distributed through our branch network using Licensed Financial Advisors and Sales Professionals.

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Revenue from investment and insurance products consists of commissions and fee income paid by our clients, investment managers, and third party product providers. New business activity and the corresponding income that is earned can be affected by fluctuations in stock and bond market prices, the development of new products, interest rate fluctuations, commodity prices, regulatory changes, the relative attractiveness of investment products offered under current market conditions, and changes in the investment objectives of our clients.
FINANCIAL SERVICES
To complement our traditional core banking business, we offer a wide range of insurance products and consulting services to help both our retail and commercial customers achieve their financial goals. These products and services are delivered through FNRM, our financial services business, which includes risk management (insurance) consulting services.
Through FNRM, we offer a wide range of commercial and personal insurance products and services including our claims investigation and adjusting services, third party administration of self insured workers compensation plans, alternative risk management services, as well as self insurance consulting services. FNRM also provides industry specific insurance programs related to healthcare, moving and storage, construction/surety, non-profits, ice rinks, and municipalities.
The revenue attributable to FNRM consists primarily of fees paid by our clients as well as commissions, fees, and contingent profit sharing paid by insurance carriers. Commission rates that we earn vary based on the type of insurance product, the carrier being represented, and the services that our agency provides.
INVESTMENT ACTIVITIES
Our investment policy provides that investment decisions will be made based on the ability of an investment to generate earnings consistent with factors of quality, maturity, marketability, and risk diversification.
We invest in a diversified portfolio of investment securities. Residential mortgage backed securities and collateralized mortgage obligations ("CMOs") issued and guaranteed by the FNMA, FHLMC, and Government National Mortgage Association (“GNMA”) comprise the largest part of our portfolio. Our debt securities are primarily comprised of corporate debt, municipal bonds, and debt issued by U.S. government sponsored enterprises. We also invest in other investments which carry higher yields given their credit risk profile, including collateralized loan obligations (“CLOs”) backed by corporate loans and other types of structured financing, commercial mortgage backed securities ("CMBS") collateralized by commercial mortgages, and asset-backed securities (“ABS”) collateralized by auto loans, student loans, credit cards, or other consumer financial assets.
Our investment strategy utilizes a risk management approach of diversified investing to optimize investment yields while managing our overall credit risk, interest rate risk, and liquidity position. To accomplish these objectives, we focus on investments in mortgage related securities, including CMOs, and other structured products. We attempt to maintain a high degree of liquidity in our investment securities and generally do not invest in debt securities with expected average lives at purchase in excess of seven years. The portfolio also carries a certain level of regulatory risk as asset classes, such as CLOs, may be impacted by future regulations.
Consistent with our investment strategy laid out at the time of our announcement of the acquisition of HSBC branches, we began purchasing ABS and CLOs in the fourth quarter of 2011 and increased our portfolio allocation to Commercial Mortgage-Backed Securities. This strategy represented the commercial and consumer types of credits that normally would be included in an acquisition but were not included with the HSBC branches. From that point, we have allocated investment portfolio cash flows in the same allocation percentages.
As of December 31, 2015 , our investment portfolio's largest component is residential mortgage-backed securities. In addition, we have diversified the portfolio with commercial mortgage-backed securities, asset-backed securities, collateralized loan obligations and corporate bonds. Purchases made will generally be re-deployed into the same investment component, keeping the mix of the portfolio relatively unchanged.

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SOURCES OF FUNDS
Deposits and borrowed funds, primarily FHLB advances and repurchase agreements, are the primary sources of funds we use for lending, investing, and other general purposes. In addition, we receive repayments on and proceeds from our sales of loans and securities, and cash flows from our operations. We have available lines of credit with the FHLB of New York, Federal Reserve Bank (“FRB”), and commercial banks, which can provide us liquidity if the above funding sources are not sufficient to meet our short-term liquidity needs.
Deposits
Our strategy is to acquire and retain core checking households through a diversified product offering led by our Pinnacle family of products. We seek to deepen these relationships with competitive savings and money market deposit rates in addition to a variety of certificate of deposits.  Our commercial checking offerings include competitive small business and commercial analyzed accounts including an array of treasury management services such as account reconciliation, remote deposit capture, ACH payments, and cash vault services. In addition we offer business savings and money market products and also accept municipal deposits. In order to further diversify liquidity sources, we have obtained certificates of deposit and money market deposit accounts through brokers.
Borrowed Funds
We utilize borrowings to fund asset growth, to manage the overall maturity of our liabilities and to leverage our capital for the purpose of improving our return on equity. These borrowings primarily consist of advances and repurchase agreements with the FHLB, nationally recognized securities brokerage firms, and with our commercial and municipal customers. Our strategy is to use wholesale borrowings as a funding source based upon levels of our loans, investments, and deposits. Wholesale borrowings are also used as an alternative to higher acquisition cost money market deposit accounts.
SEGMENT INFORMATION
Information about our business segments is included in Note 18 of “Notes to Consolidated Financial Statements” filed herewith in Part II, Item 8, “Financial Statements and Supplementary Data.” We have identified two business segments: banking and financial services. Our financial services activities consist predominantly of insurance sales. All of our other activities are considered banking.
SUPERVISION AND REGULATION
General
The banking industry is highly regulated. Statutory and regulatory controls are designed primarily for the protection of depositors and the financial system, and not for the purpose of protecting our shareholders. The following discussion is not intended to be a complete list of all the activities regulated by the banking laws or of the impact of such laws and regulations on us and the Bank. Changes in applicable law or regulation, and in their interpretation and application by regulatory agencies, cannot be predicted and may have a material effect on our business and results.
We are registered as a bank holding company under the Bank Holding Company Act of 1956, as amended (the “BHC Act”). We have not elected to become a financial holding company and thus are not entitled to the broader powers granted to those entities under the BHC Act. As a bank holding company, we are subject to inspection, examination and supervision by the Federal Reserve. In general, the BHC Act limits the business of bank holding companies that are not financial holding companies to banking, managing or controlling banks, performing servicing activities for subsidiaries, and engaging in activities that the Federal Reserve has determined, by order or regulation, are so closely related to banking as to be a proper incident thereto under the BHC Act. Under the BHC Act a bank holding company that is not a financial holding company may not acquire 5% or more of the voting stock of any company engaged in activities other than these activities, and a bank holding company may not, in

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any event, acquire 5% or more of the voting stock or substantially all of the assets of any bank or bank holding company without prior Federal Reserve approval.
We are also subject to the disclosure and regulatory requirements of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, as administered by the Securities and Exchange Commission (“SEC”). Our common stock is listed on the NASDAQ Global Select Market (“NASDAQ”) under the trading symbol “FNFG” and is subject to NASDAQ rules for listed companies. Our fixed-to-floating rate perpetual non-cumulative preferred stock, series B is listed on the New York Stock Exchange (“NYSE”) under the trading symbol “FNFG PRB” and is subject to NYSE rules for listed companies.
The Bank is a national banking association organized under the National Bank Act. As a national bank, the Bank is subject to regulation and examination by the OCC and the Federal Deposit Insurance Corporation (the “FDIC”) and, with respect to Federal consumer protection laws, the Consumer Financial Protection Bureau (the “CFPB”). National banks, including the Bank, are subject to extensive regulation of many aspects of their business. These regulations relate to, among other things: (i) capital and liquidity requirements; (ii) the nature and amount of loans that may be made by the Bank and the rates of interest that may be charged; (iii) types and amounts of other investments; (iv) branching; (v) permissible activities; (vi) reserve requirements; and (vii) dealings with officers, directors and affiliates.
The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act” or “Dodd-Frank”) imposed enhanced prudential standards on bank holding companies having $50 billion or more of total consolidated assets. The Company currently has less than $50 billion of total consolidated assets and, accordingly, although we discuss briefly below some of these enhanced prudential standards, they do not currently apply to us. KeyCorp has $50 billion or more of total consolidated assets and, accordingly, if the Merger is consummated, we will be part of a larger organization that is subject to these enhanced prudential standards.
Dodd-Frank Wall Street Reform and Consumer Protection Act
The Dodd-Frank Act, which was enacted in July 2010, significantly restructured the financial regulatory regime in the United States. Not all the rules required or expected to be implemented under the Dodd-Frank Act have been adopted or even proposed, certain of the rules that have been adopted or proposed under the Dodd-Frank Act are subject to phase-in or transitional periods, and many of the rules that have been adopted are subject to interpretation or clarification. The implications of the Dodd-Frank Act for our businesses continue to depend to a large extent on the implementation of the legislation by the Federal Reserve and other agencies as well as how market practices and structures change in response to the requirements of the Dodd-Frank Act.
We will continue to assess our businesses and risk management and compliance practices to conform to developments in the regulatory environment.
Capital Requirements
General Risk-Based Capital Rules
    
As a bank holding company, we are subject to consolidated regulatory capital requirements administered by the Federal Reserve. The Bank is subject to similar capital requirements administered by the OCC. These rules are intended to ensure that banking organizations have adequate capital given the risk levels of assets and off-balance sheet obligations. The Federal banking agencies' risk-based capital rules applicable to all bank holding companies and banks, which they refer to as their “general risk-based capital rules” and as applied to us through December 31, 2014 are based upon the 1988 capital accord of the Basel Committee on Banking Supervision (the "Basel Committee"), are referred to as “Basel I”. Under these rules, bank holding companies and banks, which together we are referring to as “banking organizations,” were required to maintain minimum ratios for Tier 1 capital and Total capital to risk-weighted assets (including certain off-balance sheet items, such as loan commitments and letters of credit). For purposes of calculating the ratios, a banking organization's assets and some of its specified off-balance sheet commitments and obligations were assigned to various risk categories. A banking organization's capital, in turn, was classified in one of two tiers, depending on type:

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•
Tier 1 Capital . Tier 1 capital included common equity, retained earnings, qualifying non-cumulative perpetual preferred stock, minority interests in equity accounts of consolidated subsidiaries (and, under existing standards, a limited amount of qualifying trust preferred securities and qualifying cumulative perpetual preferred stock at the holding company level), less goodwill, most intangible assets, certain accumulated other comprehensive income items and certain other assets.
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Tier 2 Capital. Tier 2 capital included, among other things, perpetual preferred stock and trust preferred securities not meeting the Tier 1 definition, qualifying mandatory convertible debt securities, qualifying subordinated debt, and allowances for loan and lease losses, subject to limitations.
Under the Basel I general risk-based capital rules, banking organizations were required to maintain Tier 1 capital and “Total capital” (the sum of Tier 1 and Tier 2 capital) equal to at least 4.0% and 8.0%, respectively, of total risk-weighted assets (including various off-balance-sheet items, such as letters of credit).
Banking organizations also were generally required to maintain a leverage ratio of Tier 1 capital to total adjusted quarterly assets. The minimum leverage ratio requirement was 4.0%, unless a more stringent minimum requirement was specified by the relevant Federal banking agency. Under the general risk-based capital rules, the Company and the Bank were subject to the 4.0% minimum leverage ratio requirement. See Note 11 of the “Notes to Consolidated Financial Statements” filed herewith in Part II, Item 8, “Financial Statements and Supplementary Data” for our risk-based and leveraged capital ratios as of December 31, 2015 and 2014 .
The federal banking agencies’ capital rules also included advanced models-based approaches based on the Basel Committee’s framework referred to as “Basel II”. Those rules, however, only applied to banking organizations having $250 billion or more in total consolidated assets or $10 billion or more of foreign exposures (referred to as “advanced approaches” banking organizations) and, accordingly, did not apply to either the Company or the Bank.
Basel III and the New Capital Rules
In July 2013, the Federal Reserve and the OCC published final rules (the “New Capital Rules”) establishing a new comprehensive capital framework for U.S. banking organizations.
The New Capital Rules became effective for the Company and the Bank on January 1, 2015 (subject to phase-in periods for certain of their components), with full phase-in to be completed by January 1, 2019. The New Capital Rules implement the Basel Committee's December 2010 capital framework known as “Basel III” for strengthening international capital standards as well as certain provisions of the Dodd-Frank Act. The New Capital Rules substantially revise the risk-based capital requirements applicable to bank holding companies and depository institutions, including the Company and the Bank, compared to the current U.S. general risk-based capital rules. The New Capital Rules define the components of capital and address other issues affecting the numerator in banking institutions' regulatory capital ratios. The New Capital Rules also address risk weights and other issues affecting the denominator in banking institutions' regulatory capital ratios and replace the existing Basel I risk-weighting approach, with a more risk-sensitive one based, in part, on the standardized approach set forth in "Basel II." The New Capital Rules also implement the requirements of Section 939A of the Dodd-Frank Act to remove references to credit ratings from the Federal banking agencies' rules.
The New Capital Rules, among other things, (i) introduce a new capital measure called “Common Equity Tier 1” (“CET1”), (ii) specify that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting specified requirements, (iii) define CET1 narrowly by requiring that most deductions/adjustments to regulatory capital measures be made to CET1 and not to the other components of capital and (iv) expand the scope of the deductions from and adjustments to capital as compared to existing regulations. The New Capital Rules, like the current capital rules, specify that Total capital consists of Tier 1 capital and Tier 2 capital. For most banking organizations, the most common form of Additional Tier 1 capital is non-cumulative perpetual preferred stock, and the most common form of Tier 2 capital is subordinated notes and a portion of the allocation for loan and lease losses, in each case subject to the New Capital Rules' specific requirements. Under the New Capital Rules, all banking organizations are required to maintain a minimum leverage ratio of 4.0%, unless a more stringent minimum is specified by a relevant regulatory authority.

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Under the New Capital Rules, the minimum capital ratios as of January 1, 2015 are as follows:
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4.5% CET1 to total risk-weighted assets.
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6.0% Tier 1 capital to total risk-weighted assets.
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8.0% Total capital to total risk-weighted assets.
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as under the prior capital rules, 4% Tier 1 capital to total adjusted quarterly average assets (as defined for regulatory purposes) (known as the “leverage ratio”).
Beginning in 2016, the New Capital Rules will require the Company and the Bank to maintain a “capital conservation buffer” composed entirely of CET1. When it is fully phased-in in 2019, banking organizations will be required to maintain a minimum capital conservation buffer of 2.5% (CET1 to Total risk-weighted assets), in addition to the minimum risk-based capital ratios. Therefore, to satisfy both the minimum risk-based capital ratios and the capital conservation buffer, a banking organization will be required to maintain the following: (i) CET1 to total risk-weighted assets of at least 7%, (ii) Tier 1 capital to total risk-weighted assets of at least 8.5%, and (iii) Total capital (that is Tier I plus Tier 2) to total risk-weighted assets of at least 10.5% by January 1, 2019, upon full phase-in of the capital conservation buffer. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions that do not maintain a capital conservation buffer of 2.5% or more will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall.
The New Capital Rules provide for a number of deductions from and adjustments to CET1. These include, for example, the requirement that mortgage servicing rights, deferred tax assets dependent upon future taxable income and significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such categories in the aggregate exceed 15% of CET1. Under the general Basel I based risk based capital rules, the effects of accumulated other comprehensive income or loss items included in shareholders' equity (for example, marks-to-market of securities held in the available for sale portfolio) were reversed for the purposes of determining regulatory capital ratios. Under the New Capital Rules, the effects of certain accumulated other comprehensive items are not excluded; however, non-advanced approaches banks, including the Company and the Bank, were permitted to (and in the case of the Company and the Bank did) make a one-time permanent election to continue to exclude these items.
Consistent with the section 171 of the Dodd-Frank Act, the New Capital Rules allow certain banking holding companies to include certain hybrid securities, such as trust preferred securities, in Tier 1 capital. The Company had less than $15 billion in assets as of December 31, 2009. Accordingly, and based on Federal Reserve Board interpretations of our acquisitions, the trust preferred securities classified as long-term debt on our balance sheet will be included as Tier 1 capital while they are outstanding, unless we complete an acquisition of a depository institution holding company, or are acquired by such an organization, after January 1, 2014, at which time they would be subject to the stated phase-out requirements of the New Capital Rules and would be included as Tier 2 capital.
Implementation of the deductions and other adjustments to CET1 began on January 1, 2015 and will be phased-in over a 4-year period (beginning at 40% on January 1, 2015 and an additional 20% per year thereafter). The implementation of the capital conservation buffer will begin on January 1, 2016 at the 0.625% level and will be phased in over a four-year period (increasing by that amount on each subsequent January 1, until it reaches 2.5% on January 1, 2019).
With respect to the Bank, the New Capital Rules also revise the “prompt corrective action” regulations established pursuant to Section 38 of the Federal Deposit Insurance Act, by (i) introducing a CET1 ratio requirement for each capital category (other than critically undercapitalized), with the required CET1 ratio being 6.5% for well-capitalized status; (ii) increasing the minimum Tier 1 capital ratio requirement for each capital category, with the minimum Tier 1 capital ratio for well-capitalized status being 8.0% (as compared to the current 6.0%); and (iii) eliminating the current provision that allows certain highly-rated banking organizations to maintain a 3.0% leverage ratio and still be adequately capitalized. The New Capital Rules do not change the Total risk-based capital requirement for any capital category.

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The New Capital Rules prescribe a new standardized approach for risk weighted-assets that expands the risk-weight categories from the current four Basel I-derived categories (0%, 20%, 50% and 100%) to a much larger and more risk-sensitive number of categories, depending on the nature of the asset. The new risk-weight categories generally range from 0% for U.S. government and agency securities, to 1250% for certain securitized exposures, and result in higher risk weights for a variety of asset categories. In addition, the New Capital Rules provide more favorable risk weights for derivatives and repo-style transactions cleared through a qualifying central counterparty and increase the scope of eligible guarantors and eligible collateral for purposes of credit risk mitigation.
Requirements to maintain higher levels of capital or to maintain higher levels of liquid assets could adversely impact the Company's net income and return on equity. The current requirements and the Company's actual capital levels are detailed in Note 11 of “Notes to Consolidated Financial Statements” filed in Part II, Item 8, “Financial Statements and Supplementary Data.”
In addition to the changes outlined above, the New Capital Rules establish additional requirements for advanced approaches banks, including separate rules for denominator as well as an additional minimum leverage ratio of 3.0%, calculated as the ratio of Tier 1 capital to balance sheet exposures plus certain off-balance sheet exposures and referred to in the New Capital Rules as the “supplementary leverage ratio”. As a non-advanced approaches bank, these requirements do not apply to the Company or the Bank.
During 2015, the Federal Reserve issued a final rule, known as the "G-SIB surcharge rule," that imposes an additional capital surcharge that increases the capital conservation buffer requirement based in part on wholesale funding dependence for a global systemically important bank holding company. As we are not deemed a global systemically important bank holding company this rule does not apply to the Company or the Bank.
Liquidity Regulation
During 2014, the U.S. banking agencies adopted final rules implementing one of the two new standards provided for in the Basel III liquidity framework - its liquidity coverage ratio (“LCR”), which is designed to ensure that a bank maintains an adequate level of unencumbered high quality liquid assets equal to the bank’s expected net cash outflows for a thirty-day time horizon under an acute liquidity stress scenario. The rules as adopted apply in their most comprehensive form only to advanced approaches bank holding companies and depository institution subsidiaries of such bank holding companies and, in a modified form, to banking organizations having $50 billion or more in total consolidated assets. Accordingly they do not apply to either the Company or the Bank. As a result, we do not manage our balance sheet to be compliant with these rules.
The Basel III framework also included a second standard, referred to as the net stable funding ratio (“NSFR”), which is designed to promote more medium-and long-term funding of the assets and activities of banks over a one-year time horizon. Although the Basel committee finalized its formulation of the NSFR in 2014, the U.S. banking agencies have not yet proposed an NSFR for application to U.S. banking organizations or addressed the scope of banking organizations to which it will apply. The Basel Committee’s final NSFR document states that the NSFR applies to internationally active banks, as did its final LCR document as to that ratio.
See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations, Liquidity Risk," for a discussion of our liquidity risk management practices.
Stress Test Rules
In October 2012, federal banking agencies published their final rules regarding company run Dodd-Frank Stress Tests ("DFAST").  The rules as currently in effect require covered organizations with average total consolidated assets of greater than $10 billion, including the Company and the Bank, to conduct an annual company run stress test of its capital adequacy using data as of December 31 st to perform quarterly projections for a forward looking nine quarter time horizon for losses, pre-provision net revenue, balance sheet and projected regulatory capital ratios for scenarios provided by the regulators with results submitted by July 31 st . Our first DFAST submission complied with the rules then applicable and we continue to have ongoing positive dialogue with the regulators regarding our stress testing process. Our process to submit our second DFAST submission due on July 31, 2016,

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using data as of December 31, 2015 and the scenarios released by the regulators in early 2016, is underway. We expect to comply with the regulatory requirements. A summary of those stress test results will be required to be disclosed in October 2016.
Enhanced Prudential Standards for SIFIs
Dodd-Frank directed the Federal Reserve to enact enhanced prudential standards applicable to bank holding companies with total consolidated assets of $50 billion or more and non-bank covered companies designated as systemically important by the Financial Stability Oversight Council. A banking organization is deemed to have met the $50 billion asset criterion based on the average of the company's total consolidated assets as reported on its four most recent quarterly reports to the Federal banking agencies. We refer to such entities as “systemically important financial institutions” ("SIFIs"). The Company is not a SIFI. Dodd-Frank mandates that certain regulatory requirements applicable to systemically important financial institutions be more stringent than those applicable to other financial institutions.
In February 2014, the Federal Reserve adopted rules, which we refer to as the “SIFI rules,” to implement certain of these enhanced prudential standards as well as sound rules applicable to bank holding companies that are not SIFIs. Beginning in 2015, the rules require bank holding companies with $10 billion or more in total consolidated assets to establish risk committees and require bank holding companies with $50 billion or more in total consolidated assets to comply with enhanced liquidity and overall risk management standards, including a buffer of highly liquid assets based on projected funding needs for 30 days. Rules implementing two other components of Dodd-Frank's enhanced potential standards rules — the single-counterparty credit limits and early remediation requirements — are still under consideration by the Federal Reserve. Of the enhanced prudential standards rules adopted to date, only the risk committee requirement applies to the Company. The Company established a risk committee in January 2008 well ahead of any regulation. We are monitoring developments with respect to the SIFI Rules because of their application to us if our total consolidated assets reach $50 billion or more.
Volcker Rule
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 we have Volcker Rule applicability, including in connection with capital markets (e.g., risk mitigating hedging) and certain other activities, Volcker Rule conformance is not anticipated to have a material impact.  
The Volcker Rule's limitations on banking entities' investments in covered funds may apply to certain 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 grant banking entities an additional one-year

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extension of the 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.
At December 31, 2015 , we have $600 million of CLO investments with a weighted average yield of 3.2% that we believe are impacted by this rule ("legacy CLOs"). These investments are further described under “Risk Management—Investment Securities Portfolio.” While we believe it is unlikely that regulatory agencies will initiate any further changes in the Volcker Rule concerning the treatment of legacy CLOs, we continue to evaluate structural solutions that we can apply to our legacy CLO securities and monitor expected prepayments, refinancing and other solutions initiated by the asset managers of the CLO structure that we believe would make any remaining CLO securities compliant with the stated provisions of the final Volcker Rule. CLO securities that are not compliant with the Volcker Rule may bear greater price risk as the conformance date draws nearer.
As of December 31, 2015 , we have purchased $600 million of newly issued CLO investments that we believe to be structured in a manner consistent with the loan securitization exclusion set forth in the Volcker Rule.
Should we no longer be able to hold one or more CLO investments because of the Volcker Rule we could i) sell these securities expeditiously, and not be able to realize the value we might be able to realize with a normal market sale; ii) recognize all unrealized losses on such securities should we determine it is not more likely than not that we can hold any securities that have a fair value less than book value to a time when the fair value would be at least equal to its book value, which could be the security’s maturity; and iii) reinvest proceeds in other, likely lower yielding investments, which would reduce our revenues. Of the bonds that could be impacted by the Volcker Rule, at December 31, 2015 , we had $143 million of legacy CLO securities with fair values less than their book values, aggregating to a $1.2 million unrealized loss. We continue to believe it is more likely than not that we can hold any underwater bonds to recovery, which could be maturity as the Federal Reserve intends to extend the holding period to July 21, 2017 and we believe that expected prepayments, refinancing and other structural remedies would enable us to make any remaining CLO securities compliant with the stated ownership interest provisions of the final Volcker Rule and thus allow us to continue holding the bonds after the conformance period ends.
Prompt Corrective Action Regulations
The Federal Deposit Insurance Act, as amended (“FDIA”), requires the Federal banking agencies to take “prompt corrective action” in respect of depository institutions that do not meet specified capital requirements. The FDIA establishes five capital categories for FDIC-insured banks: well capitalized, adequately capitalized, under-capitalized, significantly under-capitalized and critically under-capitalized. Under rules in effect through December 31, 2014, a depository institution is deemed to be “well-capitalized” if the institution has a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater, and a leverage ratio of 5.0% or greater, and the institution is not subject to an order, written agreement, capital directive or prompt corrective action directive to meet and maintain a specific level for any capital measure. As of January 1, 2015, the standards for “well-capitalized” status under prompt corrective action regulations changed by, among other things, introducing a CET 1 ratio requirement of 6.5% and increasing the Tier 1 risk-based capital ratio requirement from 6.0% to 8.0%. The total risk-based capital ratio and Tier 1 leverage ratio requirements remain at 10.0% and 5.0%, respectively.
The FDIA imposes progressively more restrictive constraints on operations, management and capital distributions, depending on the capital category in which an institution is classified. The U.S. banking agencies' New Capital Rules, discussed above under “Capital Requirements,” amend the prompt corrective action requirements in certain respects, including adding a CET1 risk-based capital ratio as one of the metrics (with a minimum 6.5% ratio for well-capitalized status) and increasing the Tier 1 risk-based capital ratio required for each of the five capital categories, including an increase from 6.0% to 8.0% to be well-capitalized.
The current requirements and the actual levels for the Bank are detailed in Note 11 of “Notes to Consolidated Financial Statements” filed herewith in Part II, Item 8, “Financial Statements and Supplementary Data.”

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Source of Strength Doctrine
Federal Reserve policy has historically required bank holding companies to act as a source of financial and managerial strength to their subsidiary banks. The Dodd-Frank Act codified this policy as a statutory requirement. Under this requirement, the Company is expected to commit resources to support the Bank, including at times when we may not be in a financial position to provide such resources. Any capital loans by a bank holding company to any of its subsidiary banks are subordinate in right of payment to depositors and to certain other indebtedness of such subsidiary banks. In the event of a bank holding company's bankruptcy, any commitment by the bank holding company to a Federal banking agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to priority of payment.
In addition, under the National Bank Act if the capital stock of the Bank is impaired by losses or otherwise, the OCC is authorized to require us to pay the deficiency through an assessment. If the assessment is not paid within three months, the OCC could order us to sell our holdings of the Bank's stock to make good the deficiency.
Payment of Dividends
The principal source of the Company's liquidity is dividends from the Bank. If the total of all dividends declared by a national bank in any calendar year would exceed the sum of the bank's net profits for that year and its retained net profits for the preceding two calendar years, less any required transfers to surplus, the prior approval of the OCC is required. Federal law also prohibits national banks, such as the Bank, from paying dividends that would be greater than the bank's undivided profits after deducting statutory bad debt in excess of the bank's allowance for loan losses. In addition, Federal Reserve guidance sets forth the supervisory expectation that bank holding companies will inform and consult with Federal Reserve staff in advance of issuing a dividend that exceeds earnings for the quarter and should inform the Federal Reserve and should eliminate, defer or significantly reduce dividends if (i) net income available to shareholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividends, (ii) prospective rate of earnings retention is not consistent with the bank holding company’s capital needs and overall current and prospective financial condition, or (iii) the bank holding company will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy ratios.
In addition, we and the Bank are subject to other regulatory policies and requirements relating to the payment of dividends, including requirements to maintain adequate capital above regulatory minimum capital levels. The appropriate Federal banking agency is authorized to determine under certain circumstances relating to the financial condition of a banking organization that the payment of dividends would be an unsafe or unsound practice and to prohibit payment thereof. The Federal banking agencies have stated that paying dividends that deplete a banking organization's capital base to an inadequate level would be an unsafe and unsound banking practice and that banking organizations should generally pay dividends only out of current operating earnings. In addition, in the current financial and economic environment, the Federal Reserve has indicated that bank holding companies should carefully review their dividend policy and has discouraged payment ratios that are at maximum allowable levels unless both asset quality and capital are very strong.
Due to the $1.1 billion goodwill impairment charge taken in third quarter 2014, we are required to obtain regulatory approval from the OCC to make distributions or other returns of capital from the Bank to the Company until the first quarter of 2017. See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and "Liquidity Risk — Parent Company Liquidity," for a discussion of the $1.1 billion goodwill impairment charge we recorded in 2014 and the impact of the charge on dividends by the Bank to the Company and by the Company to its shareholders.
Under rules adopted by the Federal Reserve in November 2011, known as the Comprehensive Capital Analysis and Review (“CCAR”) Rules, bank holding companies with $50 billion or more of total consolidated assets are required to submit annual capital plans to the Federal Reserve and generally may pay dividends and repurchase stock only under a capital plan as to which the Federal Reserve has not objected. The CCAR rules do not apply to us for so long as our total consolidated assets remain below $50 billion. However, we anticipate that our capital ratios reflected in our annual DFAST submission discussed under "Stress Test Rules" above will be an important factor

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considered by the Federal Reserve in evaluating whether proposed payments of dividends or stock repurchases may be an unsafe or unsound practice.
Transactions with Affiliates
Federal laws strictly limit the ability of banks to engage in transactions with their affiliates, including their bank holding companies. Regulations promulgated by the Federal Reserve limit the types and amounts of these transactions (including loans due and extensions of credit from their U.S. bank subsidiaries) that may take place and generally require those transactions to be on an arm's-length basis. In general, these regulations require that “covered transactions” between a subsidiary bank and its parent company or the nonbank subsidiaries of the bank holding company are limited to 10% of the bank subsidiary's capital and surplus and, with respect to such parent company and all such nonbank subsidiaries, to an aggregate of 20% of the bank subsidiary's capital and surplus. Further, loans and extensions of credit to affiliates generally are required to be secured by eligible collateral in specified amounts. The Dodd-Frank Act significantly expands the coverage and scope of the limitations on affiliate transactions within a banking organization. For example, commencing in July 2011, the Dodd-Frank Act required that the 10% of capital limit on these transactions applies to financial subsidiaries as well. “Covered transactions” are defined by statute to include a loan or extension of credit, as well as a purchase of securities issued by an affiliate, a purchase of assets (unless otherwise exempted by the Federal Reserve) from the affiliate, the acceptance of securities issued by the affiliate as collateral for a loan, and the issuance of a guarantee, acceptance or letter of credit on behalf of an affiliate.
Federal law also limits a bank's authority to extend credit to its directors, executive officers and 10% shareholders, as well as to entities controlled by such persons. Among other things, extensions of credit to insiders are required to be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons. Also, the terms of such extensions of credit may not involve more than the normal risk of repayment or present other unfavorable features and may not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of the bank's capital.
Deposit Insurance
Deposits of the Bank are insured up to applicable limits by the Deposit Insurance Fund ("DIF") and are subject to deposit insurance assessments to maintain the DIF. A depository institution’s DIF assessment is calculated by multiplying its assessment rate by the assessment base, which is defined as the average consolidated total assets less the average tangible equity of the depository institution. The initial base assessment rate is based on its capital level and supervisory ratings (its “CAMELS ratings”), certain financial measures to assess an institution's ability to withstand asset related stress and funding related stress and, in some cases, additional discretionary adjustments by the FDIC to reflect additional risk factors. For large institutions, including the Bank, the initial base assessment rate ranges from five to 35 basis points on an annualized basis (basis points representing cents per $100 of assessable assets). After the effect of potential base-rate adjustments, the total base assessment rate could range from 2.5 to 45 basis points on an annualized basis. The potential adjustments to an institution's initial base assessment rate include (i) a potential decrease of up to five basis points for certain long-term unsecured debt except for well-capitalized institutions with a CAMELS rating of 1 or 2, and (ii) a potential increase of up to 10 basis points for brokered deposits in excess of 10% of domestic deposits. As the DIF reserve ratio grows, the rate schedule will be adjusted downward. Additionally, an institution must pay a premium equal to 50 basis points on every dollar of long-term, unsecured debt held by the depository institution to the extent that such debt exceeds 3% of an institution's Tier 1 capital held by that depository institution if such debt was issued by another insured depository institution (excluding debt guaranteed under the Temporary Liquidity Guarantee Program).
The FDIC’s current DIF restoration plan is designed to ensure that the fund reserve ratio reaches 1.35% by September 30, 2020, as required by the Dodd-Frank Act. At least semi-annually, the FDIC will update its loss and income projections for the fund and, if needed, will increase or decrease assessment rates, following notice-and-comment rulemaking if required. In October 2015, the FDIC published for comment a proposed rule that would enable the FDIC to reach the 1.35% DIF reserve ratio by imposing a surcharge on the quarterly assessments of

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depository institutions with total consolidated assets of $10 billion or more. We are monitoring developments with respect to the proposed rule and its potential impact on the Bank's deposit insurance assessments.
Under the FDIA, if the FDIC finds that an institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC, the FDIC may determine that such violation or unsafe or unsound practice or condition requires the termination of deposit insurance.
Insolvency of an Insured Depository Institution
If the FDIC is appointed the conservator or receiver of an insured depository institution, upon its insolvency or in certain other events, the FDIC has the power:
•
to transfer any of the depository institution's assets and liabilities to a new obligor without the approval of the depository institution's creditors;
•
to enforce the terms of the depository institution's contracts pursuant to their terms; or
•
to repudiate or disaffirm any contract or lease to which the depository institution is a party, the performance of which is determined by the FDIC to be burdensome and the disaffirmance or repudiation of which is determined by the FDIC to promote the orderly administration of the depository institution.
In addition, under Federal law, the claims of holders of deposit liabilities and certain claims for administrative expenses against an insured depository institution would be afforded priority over other general unsecured claims against such an institution, including claims of debt holders of the institution in the liquidation or other resolution of such an institution by any receiver. As a result, whether or not the FDIC ever sought to repudiate any debt obligations of the Bank, the debt holders would be treated differently from, and could receive, if anything, substantially less than the Bank's depositors.
Depositor Preference
The FDIA provides that, in the event of the “liquidation or other resolution” of an insured depository institution, the claims of depositors of the institution, including the claims of the FDIC standing in for insured depositors, and certain claims for administrative expenses of the FDIC as a receiver, will have priority over other general unsecured claims against the institution. If an insured depository institution fails, insured and uninsured depositors, along with the FDIC, will have priority in payment ahead of unsecured, non-deposit creditors, including depositors whose deposits are payable only outside of the United States, and the parent bank holding company with respect to any extensions of credit it has made to such insured depository institution.
Safety and Soundness Standards
The FDIA requires the Federal banking agencies to prescribe standards, through regulations or guidelines, relating to internal controls, information systems and internal audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, asset quality, earnings, stock valuation and compensation, fees and benefits, and such other operational and managerial standards as the agencies deem appropriate. Guidelines adopted by the Federal banking agencies establish general standards relating to internal controls and information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth and compensation, fees and benefits. In general, the guidelines require, among other things, appropriate systems and practices to identify and manage the risk and exposures specified in the guidelines. The guidelines prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director or principal stockholder. In addition, the agencies adopted regulations that authorize, but do not require, an agency to order an institution that has been given notice by an agency that it is not satisfying any of such safety and soundness standards to submit a compliance plan. If, after being so notified, an institution fails to submit an acceptable compliance plan or fails in any material respect to implement an acceptable compliance plan, the agency must issue an order directing action to correct the deficiency and may issue an order directing other actions of the types to which an undercapitalized institution is subject under the “prompt corrective action”

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provisions of the FDIA. If an institution fails to comply with such an order, the agency may seek to enforce such order in judicial proceedings and to impose civil money penalties.
Incentive Compensation
Our compensation practices are subject to oversight by the Federal Reserve and the OCC. In June 2010, the Federal banking agencies issued comprehensive final guidance on incentive compensation policies intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking. The guidance, which covers all employees that have the ability to materially affect the risk profile of an organization, either individually or as part of a group, is based upon the key principles that a banking organization's incentive compensation arrangements should (i) provide incentives that do not encourage risk-taking beyond the organization's ability to effectively identify and manage risks, (ii) be compatible with effective internal controls and risk management, and (iii) be supported by strong corporate governance, including active and effective oversight by the organization's board of directors.
Dodd-Frank requires the Federal banking agencies to establish joint regulations or guidelines prohibiting incentive-based payment arrangements at specified regulated entities having at least $1 billion in total consolidated assets (which would include the Company and the Bank) that encourage inappropriate risks by providing an executive officer, employee, director or principal shareholder with excessive compensation, fees or benefits or that could lead to material financial loss to the entity. In addition, the agencies must establish regulations or guidelines requiring enhanced disclosure to regulators of incentive-based compensation arrangements. The initial version of these regulations was proposed by agencies in early 2011 but the regulations have not yet been finalized. The proposed regulations include the three key principles from the June 2010 regulatory guidance discussed above. If the regulations are adopted in the form initially proposed, they will impose limitations on the manner in which we may structure compensation for our executives.
Federal Home Loan Bank System
We are a member of the Federal Home Loan Bank System (“FHLB System”), which consists of 12 regional Federal Home Loan Banks (each a “FHLB”). The FHLB System provides a central credit facility primarily for member banks. As a member of the FHLB of New York, we are required to acquire and hold shares of capital stock in the FHLB in an amount equal to 0.2% of the total principal amount of our unpaid residential real estate loans, commercial real estate loans, home equity loans, CMOs, and other similar obligations at the beginning of each year, and 4.5% of our borrowings from the FHLB. As of December 31, 2015 , we were in compliance with this requirement.
Anti-Money Laundering and the USA PATRIOT Act
A major focus of governmental policy on financial institutions in recent years has been aimed at combating money laundering and terrorist financing. The USA PATRIOT Act of 2001 (the “Patriot Act”) substantially broadened the scope of United States anti-money laundering laws and regulations by imposing significant new compliance and due diligence obligations, creating new crimes and penalties and expanding the extra-territorial jurisdiction of the United States. The United States Treasury Department (the “Treasury”) has issued regulations under the Patriot Act that impose obligations on financial institutions such as the Bank to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering and terrorist financing and to verify the identity of their customers. Certain of those regulations impose specific due diligence requirements on financial institutions that maintain correspondent or private banking relationships with non-U.S. financial institutions or persons. Failure of a financial institution to maintain and implement adequate programs to combat money laundering and terrorist financing, or to comply with all of the relevant laws or regulations, could have serious legal, financial, and reputational consequences for the institution.
Office of Foreign Assets Control Regulation
The United States has imposed economic sanctions that affect transactions with designated foreign countries, nationals and others. These are typically known as the “OFAC” rules based on their administration by the Treasury's Office of Foreign Assets Control (“OFAC”). The OFAC administers sanctions targeting countries take

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many different forms. Generally, however, they contain one or more of the following elements: (i) restrictions on trade with or investment in a sanctioned country, including prohibitions on “U.S. persons” engaging in financial transactions relating to making investments in, or providing investment related advice or assistance to, a sanctioned country; and (ii) a blocking of assets in which the government or specially designated nationals of the sanctioned country have an interest, by prohibiting transfers of property subject to U.S. jurisdiction (including property in the possession or control of U.S. persons). Blocked assets (e.g., property and bank deposits) cannot be paid out, withdrawn, set off or transferred in any manner without a license from OFAC. Failure to comply with these sanctions could have serious legal, financial, and reputational consequences.
Consumer Protection
Consumer Financial Protection Bureau Supervision
Dodd-Frank centralized responsibility for consumer financial protection by creating a new agency, the CFPB, and giving it responsibility for implementing, examining and enforcing compliance with Federal consumer protection laws. The CFPB is focusing on:
•
risks to consumers and compliance with the Federal consumer financial laws, when it evaluates the policies and practices of a financial institution;
•
the markets in which firms operate and risks to consumers posed by activities in those markets;
•
depository institutions that offer a wide variety of consumer financial products and services;
•
depository institutions with a more specialized focus;
•
non-depository companies that offer one or more consumer financial products or services; and
•
with respect to the indirect auto business, holding lenders accountable for discriminatory dealer mark-ups.
In July 2011, consistent with its mandate under Dodd-Frank to supervise depository institutions with more than $10 billion in assets, the CFPB notified the Bank that it will be supervised by the CFPB for certain consumer protection purposes.
Truth in Lending Act and the Real Estate Settlement Procedures Act
The Dodd-Frank Wall Street Reform and Consumer Protection Act directs the Consumer Financial Protection Bureau to integrate the mortgage loan disclosures under the Truth in Lending Act ("TILA") and the Real Estate Settlement Procedures Act ("RESPA"). The TILA-RESPA rule consolidates four existing disclosures required under TILA and RESPA for closed-end credit transactions secured by real property into two forms: a Loan Estimate and a Closing Disclosure, which have three business day timing requirements. The forms reconcile the differences between the existing forms and combine several other mandated disclosures. They use clear language and design to make it easier for consumers to locate key information such as the interest rate, monthly payments, and all costs of the transaction. The TILA-RESPA rule does not apply to HELOCs, reverse mortgages or mortgages secured by a mobile home or by a dwelling that is not attached to real property (i.e., land). The compliance date as amended was October 3, 2015. We successfully managed a project to comply with the requirements of the rule to meet the compliance date set forth. There were two very low volume products that have been suspended to allow time to implement and successfully test TRID requirements.
Community Reinvestment Act and Fair Lending Laws
The Community Reinvestment Act of 1977 (“CRA”) requires depository institutions to assist in meeting the credit needs of their market areas consistent with safe and sound banking practice. Under the CRA, each depository institution is required to help meet the credit needs of its market areas by, among other things, providing credit to low and moderate income individuals and communities. Depository institutions are periodically examined for compliance with the CRA and are assigned ratings. The Federal banking agencies take into account CRA ratings when considering approval of proposed acquisition transactions.
The Fair Housing Act (“FHA”) and Equal Credit Opportunity Act (“ECOA”) are commonly known as the Fair Lending Laws. The FHA is a civil rights law that makes discrimination in housing lending illegal. The ECOA is a customer protection law prohibiting discrimination in all types of credit-both consumer and commercial-and requiring that

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certain notifications be given to loan applicants. The Americans with Disabilities Act (“ADA”) also bears on lending activities. Banks are obligated to reasonably accommodate individuals with disabilities when they apply for loans as well as during the entire lending process. Depository institutions are periodically examined for compliance with the Fair Lending Laws. Regulators are required to refer matters to the U.S. Department of Justice whenever the regulator has reason to believe that a creditor has engaged in a pattern or practice of discouraging or denying applications for credit in violation of ECOA.
Other Consumer Protection Laws
There are a number of consumer protection laws, regulations and regulatory policies that are designed to protect the interests of consumers in their credit transactions and other transactions with banks and financial service providers. Under Dodd-Frank it is unlawful for any provider of consumer financial products or services to engage in any unfair, deceptive or abusive act or practice (“UDAAP”). We are also subject to laws, regulations and policies designed to protect our customers’ privacy and requiring us to adopt an information security program. A violation of the consumer protection and privacy laws, and in particular UDAAP, could have serious legal, financial and reputational consequences.
 
 
 
ITEM 1A.
 
Risk Factors
Making or continuing an investment in securities issued by the Company, including our common stock, involves certain risks that you should carefully consider. The following are the key risk factors that affect us. If any of the following risks actually occur, our business, financial condition or results of operations could be negatively affected, the market price for your securities could decline, and you could lose all or a part of your investment. Further, to the extent that any of the information contained in this Annual Report on Form 10-K constitutes forward-looking statements, the risk factors set forth below also are cautionary statements identifying important factors that could cause the Company’s actual results to differ materially from those expressed in any forward-looking statements made by or on behalf of the Company.
The Company will be subject to business uncertainties and contractual restrictions while the Merger with KeyCorp is pending, which could adversely affect its business.
Uncertainty about the effect of the Merger with KeyCorp on employees and customers may have an adverse effect on the Company, and, consequently, KeyCorp. These uncertainties may impair the Company's ability to attract, retain and motivate key personnel until the Merger is completed, and could cause customers and others that deal with the Company to seek to change their existing business relationships with the Company. Retention of certain employees at the Company may be challenging during the pendency of the Merger, as certain employees may experience uncertainty about their future roles. In addition, the Merger Agreement restricts the Company from making certain acquisitions and taking other specified actions without the consent of KeyCorp until the Merger occurs. These restrictions may prevent the Company from pursuing attractive business opportunities that may arise prior to the completion of the Merger. See the Proxy Statement/Prospectus for a description of the restrictive covenants to which the Company is subject.
The Merger Agreement may be terminated in accordance with its terms and the Merger may not be completed.
The Merger Agreement is subject to a number of conditions which must be fulfilled in order to complete the Merger. Those conditions include: the approval of the Merger proposal by Company and KeyCorp shareholders, as well as approval of the amendments to KeyCorp's articles by KeyCorp's shareholders, the receipt of all required regulatory approvals, absence of orders prohibiting completion of the Merger, approval of the shares of KeyCorp common stock and the new KeyCorp preferred stock to be issued to Company common and preferred shareholders, as applicable, and the continued representations and warranties by both parties (subject to the materiality standards set forth in the Merger Agreement), and the performance by both parties of their covenants and agreements, and the receipt by both parties of legal opinions from their respective tax counsels. These conditions to the closing of the Merger may not be fulfilled in a timely manner or at all, and, accordingly, the Merger may not be completed.

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In addition, if the Merger is not completed by October 30, 2016, either KeyCorp or the Company may choose not to proceed with the Merger. Moreover, the parties can mutually decide to terminate the Merger Agreement at any time, before or after shareholder approval. KeyCorp and the Company may also elect to terminate the Merger Agreement in certain other circumstances. If the Merger Agreement is terminated under certain circumstances, First Niagara may be required to pay a termination fee of $137.5 million to KeyCorp. See the Proxy Statement/Prospectus for a further description of these circumstances.
Termination of the Merger Agreement could negatively impact the Company.
If the Merger is not completed for any reason, including as a result of Company shareholders declining to approve the Merger Agreement, the ongoing business of the Company may be adversely affected and, without realizing any of the benefits of having completed the Merger, the Company would be subject to a number of risks, including the following:
•
the Company may experience negative reactions from the financial markets, including negative impacts on its stock price (including to the extent that the current market price reflects a market assumption that the Merger will be completed) and credit ratings downgrades;
•
the Company may experience negative reactions from its customers, vendors and employees;
•
the Company will have incurred substantial expenses and will be required to pay certain costs relating to the Merger, whether or not the Merger is completed, including the termination fee;
•
the Merger Agreement places certain restrictions on the conduct of the Company's businesses prior to completion of the Merger. Such restrictions, the waiver of which is subject to the consent of KeyCorp (not to be unreasonably withheld, conditioned or delayed), may prevent the Company from pursuing attractive business opportunities that may arise prior to the completion of the Merger, including acquisitions (see the Proxy Statement/Prospectus for a description of the restrictive covenants applicable to the Company); and
•
matters relating to Merger (including integration planning) will require substantial commitments of time and resources by Company management, which would otherwise have been devoted to other opportunities that may have been beneficial to the Company as an independent company.
In addition to the above risks, if the Merger Agreement is terminated and the Company's board of directors seeks another merger or business combination, Company shareholders cannot be certain that the Company will be able to find a party willing to offer equivalent or more attractive consideration than the consideration Keycorp has agreed to provide in the Merger. If the Merger Agreement is terminated under certain circumstances, the Company may be required to pay a termination fee of $137.5 million to KeyCorp. See the Proxy Statement/Prospectus for additional information.
Because the market price of KeyCorp common stock may fluctuate, Company shareholders cannot be sure of the value of the merger consideration they will receive in the Merger.
Upon completion of the Merger, each share of Company common stock will be converted into the per share merger consideration consisting of shares of KeyCorp common stock and cash pursuant to the terms of the Merger Agreement. The stock portion of the merger consideration that Company shareholders will receive is a fixed number of shares of KeyCorp common stock; it is not a number of shares with a particular fixed market value. The market value of KeyCorp common stock and Company common stock at the effective time of the Merger may vary significantly from their respective values on the date the merger agreement was executed or at other dates, including the date on which Company shareholders vote on the adoption of the Merger Agreement. Because the exchange ratio relating to the stock portion of the merger consideration is fixed at 0.680 and will not be adjusted to reflect any changes in the market value of KeyCorp common shares or Company common stock, the market value of the KeyCorp common shares issued in connection with the Merger and the Company common stock converted in connection with the Merger may be higher or lower than the values of those shares on earlier dates, and may be higher or lower than the value used to determine the exchange ratio.

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There will be a time lapse between each of the date of the Proxy Statement/Prospectus, the date on which Company shareholders vote to approve the Merger Agreement at the special meeting and the date on which Company shareholders entitled to receive shares of KeyCorp common stock actually receive such shares. The market value of KeyCorp common stock may fluctuate during these periods as a result of a variety of factors, including general market and economic conditions, changes in KeyCorp’s businesses, operations and prospects, and regulatory considerations. Many of these factors are outside of the control of the Company and KeyCorp. Consequently, at the time Company shareholders must decide whether to approve the Merger Agreement, they will not know the actual market value of the shares of KeyCorp common stock they will receive when the Merger is completed. The actual value of the shares of KeyCorp common stock received by Company shareholders will depend on the market value of shares of KeyCorp common stock on that date. This market value may be less or more than the value used to determine the Exchange Ratio.
Litigation relating to the Merger could require us to incur significant costs and suffer management distraction, as well as delay and/or enjoin the Merger
Eight shareholders of the Company have filed separate putative class action complaints challenging the merger. Six complaints are filed in New York State Supreme Court, Erie County. One complaint is filed in the Court of Chancery, Delaware, and one is filed in United States District Court, District of Delaware. The complaints are brought against the Company, each of its directors individually, and KeyCorp. The complaints allege generally that each of the directors breached his or her fiduciary duty to the Company's public shareholders in that: (a) the sales process was flawed; (b) the merger consideration is inadequate and undervalues the intrinsic value of the Company; (c) the merger agreement contains unfair preclusive deal protection devices; and (d) certain directors and officers of the Company will receive personal benefits from the merger not shared in by other public shareholders. Seven of the complaints further allege that KeyCorp and the Company aided and abetted the Company's directors’ fiduciary duty breaches. Some of the complaints also challenge KeyCorp’s anticipated contribution to the First Niagara Foundation or that the Company's Registration Statement filed on November 30, 2015 in connection with the proposed merger is materially misleading. The complaint filed in U.S. District Court, District of Delaware also alleges that the preliminary proxy filed in connection with the November 30, 2015 Registration Statement violated Sections 14(a) and 20(a) of the Securities Exchange Act of 1934 and the rules promulgated thereunder.
All of the lawsuits seek, among other things, to enjoin or rescind the Merger, and to obtain an award of costs and attorneys’ fees and damages for the alleged fiduciary breaches.
Plaintiffs in all six of the matters pending in Erie County, New York entered into and filed a joint stipulation seeking consolidation of the actions, and appointment of designated co-lead plaintiffs and co-lead counsel for the actions. The stipulation is pending before the court.
The defendants believe these lawsuits are entirely without merit, and intended to vigorously defend against the claims.
The Company and KeyCorp also could be subject to additional demands or litigation related to the Merger whether or not the Merger is completed.
Economic conditions may adversely affect our liquidity, profitability, and financial condition
From December 2007 through June 2009, the U.S. economy was in recession, and the recovery to date has been weaker than expected by many market participants at the end of the recession. Business activity across a wide range of industries and regions in the U.S. was greatly reduced. Although economic conditions have improved, certain sectors remain weak and unemployment remains high. Most recently, oil prices have declined significantly, with the price of oil decreasing to below $30 per barrel, from a high of $110 per barrel in 2011. Recovery by many businesses has been impaired by lower consumer spending. A return to prolonged or deteriorating economic conditions could have one or more of the following adverse effects on our business:
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Decrease in the demand for loans and other products and services that we offer driving even higher competition;

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Decrease in net interest income derived from our lending and deposit gathering activities;
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Decrease in the value of our investment securities;
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Decrease in the value of our loans held for sale or other assets secured by consumer or commercial real estate;
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Impairment of certain tangible and intangible assets, such as goodwill; and
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Increase in the number of customers and counterparties who become delinquent, file for protection under bankruptcy laws or default on their loans or other obligations to us. An increase in the number of delinquencies, bankruptcies or defaults could result in a higher level of nonperforming assets, net charge-offs, provision for loan losses and valuation adjustments on loans held for sale.
Overall interest rates have been at historically low levels for an unprecedented long time. Low interest rates, compounded by a flattening yield curve, challenge banks' net interest margin which is the main driver of income for banks of our size and scope.
Concentration in real estate loans in our footprint may increase our exposure to credit risk
At December 31, 2015 , our portfolio of commercial real estate loans totaled $8.7 billion , or 36% of total loans. While our concentration of commercial real estate loans in New York has steadily decreased over the past several years, from 68% at December 31, 2010 to 50% at December 31, 2015 , a large portion of this portfolio remains concentrated in this geographical area.
At December 31, 2015 , our portfolio of residential real estate loans (including home equity loans) totaled $6.4 billion , or 27% of total loans. While our concentration in these loans in New York has steadily decreased over the past several years, from 67% at December 31, 2010 to 45% at December 31, 2015 , a large portion of this portfolio remains concentrated in this geographical area.
A significant weakening in economic conditions in New York, such as unemployment or other factors beyond our control, could reduce our ability to generate new loans and increase default rates on these loans and otherwise negatively affect our financial results. A decline in real estate valuations in New York could lower the value of the collateral securing our residential real estate loans, leading to higher credit losses.
Commercial real estate and business loans increase our exposure to credit risks
At December 31, 2015 , our portfolio of commercial real estate and business loans totaled $14.7 billion , or 61% of total loans. We plan to continue to emphasize the origination of these types of loans, which generally expose us to a greater risk of nonpayment and loss than residential real estate loans because repayment of such loans often depends on the successful operations and income stream of the borrowers. Additionally, such loans typically involve larger loan balances to single borrowers or groups of related borrowers compared to residential real estate loans. Also, many of our borrowers have more than one commercial loan outstanding. Consequently, an adverse development with respect to one loan or one credit relationship can expose us to a significantly greater risk of loss compared to an adverse development with respect to a residential real estate loan.
More recently, we have emphasized our construction lending business. At December 31, 2015 , our construction loans totaled $1.3 billion , or 5% of total loans. There are risks inherent in construction lending, as the value of the project is uncertain prior to the completion of construction and subsequent lease-up. A sudden downturn in the economy could result in stalled projects or collateral shortfalls, thus exposing us to increased credit risk.
Concentration of loans in our primary market area may increase risk
Our success is impacted by the general economic conditions in the geographic areas in which we operate, primarily New York, Western and Eastern Pennsylvania, Connecticut, and Western Massachusetts. Accordingly, the local economic conditions in these markets have a significant impact on the ability of borrowers to repay loans. As such, a decline in real estate valuations in these markets would lower the value of the collateral securing those loans. In addition, a significant weakening in general economic conditions such as inflation, recession, unemployment, or other factors beyond our control could reduce our ability to generate new loans and increase default rates on those loans and otherwise negatively affect our financial results.

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A portion of our loan portfolio is acquired and was not underwritten by us at origination
At December 31, 2015 , 12% of our loan portfolio was acquired and was not underwritten by us at origination, and therefore is not necessarily reflective of our historical credit risk experience. We performed extensive credit due diligence prior to each acquisition and marked the loans to fair value upon acquisition, with such fair valuation considering expected credit losses that existed at the time of acquisition. Additionally, we evaluate the expected cash flows of these loans on a quarterly basis. However, there is a risk that credit losses could be larger than currently anticipated, thus adversely affecting our earnings. At December 31, 2015 , remaining credit marks available to absorb losses on a pool-by-pool basis totaled $62 million , representing a 2% coverage ratio.
Almost one-third of our assets are invested in securities, with over 10% of our securities portfolio in collateralized loan obligations, 9 % of our portfolio in commercial mortgage-backed securities, 5% of our portfolio in high yield corporate bond securities, and 3% of our portfolio in asset-backed securities
Our collateralized loan obligations, commercial mortgage-backed securities, and asset-backed securities are structured investments with complex formulas to determine the amount of cash flows that get paid to holders of each security type within the various structures. Changes in expected cash flows due to factors such as changing credit experience of the underlying collateral, changes in interest rates or changes in prepayment speeds could affect the amount of interest and principal cash flows we receive and the amount of interest income that we recognize. Additionally, given the structural complexities inherent in these types of securities, there could be cash flow provisions that we may not fully understand. Our high yield corporate bonds are not structured and therefore are susceptible to company specific liquidity and credit risks.
The Volcker Rule collateralized loan obligation provisions could result in adverse consequences for us, including lower earnings, lower tangible capital and/or lower regulatory capital        
The so-called “Volcker Rule” provisions of the Dodd-Frank Act restrict the ability of affiliates of insured depository institutions, such as the Bank, to sponsor or invest in private funds or to engage in certain types of proprietary trading. The Federal Reserve adopted final rules implementing the Volcker Rule in December, 2013. We are continuing to evaluate the impact of the Volcker Rule and the final rules adopted thereunder. We own $0.6 billion of legacy collateralized loan obligation ("CLO") securities that we believe are impacted by the Volcker Rule of which $237 million are currently not compliant with that rule that carry a weighted average yield of 3.1%. If we decide to sell or are required to sell these noncompliant securities, our future net interest income could be adversely impacted if our alternative use for these funds yields a lower rate. A 100 basis point reduction in yield upon reinvestment of the noncompliant securities into similar duration securities would result in reduced net interest income of $2 million , or less than one cent per diluted common share.
We are evaluating potentially significant price movements in these securities which could adversely impact our tangible capital. For instance, a hypothetical 10% reduction in current CLO market prices would result in a $24 million loss to our current noncompliant CLO securities valuation. Since these securities are currently held as available for sale, the resulting change in Other Comprehensive Income ("OCI"), after tax, would be approximately $16 million . Further, if we decide to sell these securities or if it is more likely than not that we will be required to sell such securities before recovery, we may recognize losses that could adversely impact our regulatory capital ratios. An after tax loss of $16 million would lower regulatory capital ratios by six basis points.
Our provision for credit losses may be insufficient
Our customers might not repay their loans according to the original terms, and the collateral securing the payment of those loans might be insufficient to pay any remaining loan balance. Hence, we may experience significant loan losses, which could have a materially adverse effect on our operating results. We make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of loans. In determining the amount of the allowance for loan losses, we rely on loan quality reviews, past loss experience, and an evaluation of economic conditions, among other factors. If our assumptions prove to be incorrect, our allowance for loan

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losses may not be sufficient to cover losses inherent in our loan portfolio, resulting in additions to the allowance. Material additions to the allowance would materially decrease our net income.
Our emphasis on the origination of commercial real estate and business loans is one of the more significant factors in evaluating our allowance for loan losses. As we continue to increase the amount of these loans, additional or increased provisions for credit losses may be necessary and as a result would decrease our earnings.
Bank regulators periodically review our allowance for loan losses and may require us to increase our provision for credit losses or loan charge-offs. Any increase in our allowance for loan losses or loan charge-offs as required by these regulatory authorities could have a materially adverse effect on our results of operations and/or financial condition.
We accept deposits that do not have a fixed term and which may be withdrawn by the customer at any time for any reason
At December 31, 2015 , we had $25.4 billion of deposit liabilities that have no maturity and, therefore, may be withdrawn by the depositor at any time.  These deposit liabilities include our checking, savings, and money market deposit accounts. 
Market conditions may impact the competitive landscape for deposits in the banking industry. The unprecedented low rate environment and future actions the Federal Reserve may take may impact pricing and demand for deposits in the banking industry. Additionally, while we are not currently subject to the LCR or capital surcharges related to reliance on wholesale funding as our total assets are less than $50 billion, the impacts of these may also lead to increased competition for deposits as the larger banks seek to comply with the regulations. In addition to increased competition for deposits in the banking industry, the Merger may have an impact on our ability to retain customer deposits.
The withdrawal of more deposits than we anticipate could have an adverse impact on our profitability as this source of funding, if not replaced by similar deposit funding, would need to be replaced with wholesale funding, the sale of interest earning assets, or a combination of these two actions.  The replacement of deposit funding with wholesale funding could cause our overall cost of funding to increase, which would reduce our net interest income.  A loss of interest earning assets could also reduce our net interest income.
Changes in interest rates could adversely affect our results of operations and financial condition
Our results of operations and financial condition could be significantly affected by changes in the level of interest rates and the steepness of the yield curve. Our financial results depend substantially on net interest income, which is the difference between the interest income that we earn on interest-earning assets and the interest expense we pay on interest-bearing liabilities. While we have modeled rising interest rate scenarios using historic data and such scenarios result in an increase in our net interest income, our interest-bearing liabilities may reprice or mature more quickly than modeled, thus resulting in a decrease in our net interest income. Further, a flatter yield curve than we modeled would also result in a decline net interest income.
Changes in interest rates also affect the value of our interest-earning assets and in particular our investment securities. Generally, the value of our investment securities fluctuates inversely with changes in interest rates. Decreases in the fair value of our investment securities, therefore, could have an adverse effect on our stockholders’ equity or our earnings if the decrease in fair value is deemed to be other than temporary.
Changes in interest rates may also affect the average life of our loans and mortgage related securities. Decreases in interest rates resulting from actions taken by the Federal Reserve has caused an increase in prepayments of our loans and mortgage-related securities, as borrowers refinance to reduce borrowing costs. As prepayment speeds on mortgage related securities increase, the premium amortization increases prospectively, and additionally there would be an adjustment required under the application of the interest method of income recognition, and will therefore result in lower net interest income. Under these circumstances, we are also subject to reinvestment risk to the extent that we are unable to reinvest the cash received from such prepayments at rates that are comparable

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to the rates on our existing loans and securities. Additionally, increases in interest rates may decrease loan demand and make it more difficult for borrowers to repay adjustable rate loans.
A reduction in the Company's credit rating to below investment grade could adversely impact us or the holders of our securities
We are regularly evaluated by ratings agencies. Their ratings are based on their interpretation of a number of factors, including our financial strength and factors outside of our control such as conditions affecting the financial services industry and the broader economy. Following the announcement of the Merger, each of the rating agencies have published updated reports regarding their view of the impact of the Merger on the Company’s credit ratings. During the fourth quarter 2015, Standard and Poor (“S&P”) affirmed the Company’s long term issuer rating of BBB- (which is at the investment grade minimum), but moved their outlook from stable to positive. Similarly in the fourth quarter 2015, Moody’s placed the Company’s ratings on review for upgrade and Fitch placed the Company’s ratings on Rating Watch Positive. Although the rating agencies currently hold positive outlooks for our ratings, there can be no assurances that we will maintain our current ratings and future downgrades could have adverse consequences for us. In addition to a negative perception by our customers, a downgrade of our debt securities could result in adverse price movements of such securities and higher borrowing costs on any debt securities we issue in the future. A rating downgrade of our Company to two notches below investment grade by any rating agency triggers a breach of covenant on our Company's line of credit, resulting in a possibility of limiting our access to that credit line. While this line of credit could potentially be renegotiated to cure the breach, it could result in higher interest and non-usage rates as well as additional fees.
If our total consolidated assets were to reach $50 billion, we would become subject to stricter prudential standards required by the Dodd-Frank Act for large bank holding companies
In December 2011, the Federal Reserve, pursuant to the requirements of the Dodd-Frank Act, proposed rules applying enhanced prudential standards to, among others, bank holding companies having $50 billion or more in total consolidated assets. The enhanced prudential standards include risk-based capital and leverage requirements, liquidity requirements, risk-management requirements, stress testing of capital, credit limits and early remediation regimes. The final rules also apply certain risk-management and stress testing requirements to bank holding companies like the Company with $10 billion or more but less than $50 billion in total consolidated assets. The Dodd-Frank Act permits, but does not require, the Federal Reserve to apply to these institutions heightened prudential standards in a number of other areas, including short-term debt limits and enhanced public disclosure.
Our total consolidated assets were $39.9 billion at December 31, 2015 . If our assets reach the $50 billion threshold, whether driven by organic growth or future acquisitions, we will become subject to the stricter prudential standards required by the Dodd-Frank Act and will incur higher levels of expense to comply with these standards. Moreover, KeyCorp has $50 billion or more in total consolidated assets and, accordingly, if the Merger is completed, we will be part of a larger organization that is subject to these stricter prudential standards.
See “Supervision and Regulation” for more information about the regulations to which we are subject.
Strong competition may limit our growth and profitability and the pending Merger may intensify this competition
Competition in the banking and financial services industry is intense. We compete with commercial banks, savings institutions, mortgage brokerage firms, credit unions, finance companies, mutual funds, insurance companies, and brokerage and investment banking firms (including hedge funds and other private equity investments) operating locally and elsewhere. More recently, peer to peer lending has emerged as an alternative borrowing source for our customers and many other non-banks offer lending and payment services in competition with banks. Many of these competitors (whether regional or national institutions) have substantially greater resources and lending limits than us and may offer certain services that we do not or cannot provide. Our profitability depends upon our ability to successfully compete in our market areas.

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We also face the risk that our competitors also may seek to use the pending Merger with KeyCorp to target our customers.
We may not be able to attract or retain skilled people
Our success depends, in large part, on our ability to attract new employees, retain and motivate our existing employees, and continue to compensate employees competitively amid intense public and regulatory scrutiny on the compensation practices of financial institutions. Our compensation plans are an important element in the attraction and retention of key employees. Competition for the best people in most activities engaged in by us can be intense and we may not be able to hire these people or to retain them.
We are subject to extensive government regulation and supervision
We are subject to extensive federal and state regulation and supervision. Banking regulations are primarily intended to protect depositors’ funds, federal deposit insurance funds and the financial system as a whole, not security holders. These regulations affect our lending practices, capital structure, investment practices, dividend policy and growth, among other things, and the costs of compliance with their regulations are significant. Congress and federal regulatory agencies continually review banking laws, regulations and policies for possible changes. The Dodd-Frank Act, enacted in July 2010, instituted major changes to the banking and financial institutions regulatory regimes in light of the recent performance of and government intervention in the financial services sector. Not all the rules required or expected to be implemented under the Dodd-Frank Act have been adopted or even proposed, certain of the rules that have been adopted or proposed under the Dodd-Frank Act are subject to phase-in or transitional periods, and many of the rules that have been adopted are subject to interpretation or clarification. The implications of the Dodd-Frank Act for our businesses continue to depend to a large extent on the implementation of the legislation by the Federal Reserve and other agencies as well as how market practices and structures change in response to the requirements of the Dodd-Frank Act.
Other changes to statutes, regulations or regulatory policies, including changes in interpretation or implementation of statutes, regulations or policies, could affect us in substantial and unpredictable ways. For example, since the establishment of the Consumer Finance Protection Bureau (CFPB), which has been focused on numerous consumer-based regulations, the exam focus of our regulators has evolved to include greater scrutiny and annual examinations of previously less reviewed regulations, such as the Servicemember's Civil Relief Act and the Flood Disaster Protection Act. Such changes could subject us to additional costs, limit the types of financial services and products we may offer and/or increase the ability of non-banks to offer competing financial services and products, among other things. Failure to comply with laws, regulations or policies could result in civil or criminal sanctions by state and federal agencies, the loss of FDIC insurance, the revocation of our banking charter, civil money penalties and/or reputation damage, which could have a material adverse effect on the Company’s business, financial condition and results of operations. See “Supervision and Regulation” for more information about the regulations to which we are subject.
Any future FDIC insurance premium increases may adversely affect our earnings
The amount that is assessed by the FDIC for deposit insurance is set by the FDIC based on a variety of factors. These include the DIF’s reserve ratio, the Bank’s assessment base, which is equal to average consolidated total assets minus average tangible equity, and various inputs into the FDIC’s assessment rate calculation, including the Bank’s:
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CAMELS rating,
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criticized and classified assets,
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capital levels, including the Tier 1 leverage ratio,
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higher-risk assets, defined as construction and development loans, leveraged loans and securities, nontraditional mortgages and subprime consumer loans, and higher risk securitizations,
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ratio of core earnings to average assets,
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ratio of core deposits to total liabilities,
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liquidity ratio (as defined by the FDIC),

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•
our projected shortfall (in event of failure) between projected insured deposits and the projected assets available to pay off projected insured deposits as a percentage of current domestic deposits,
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balance sheet composition,
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amount of unsecured debt, including subordinated debt and debt issues by another depository institution, and
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amount of brokered deposits.
If there are additional financial institution failures we may be required to pay even higher FDIC premiums than the recently increased levels. Moreover, in October 2015 the FDIC published for comment a proposed rule that would enable the FDIC to reach the 1.35% DIF reserve ratio by imposing a surcharge on the quarterly assessments of depository institutions with total consolidated assets of $10 billion or more.  The proposed rule could result in a significant additional deposit insurance expense for the Bank and, on a consolidated basis, the Company. Such increases or required prepayments of FDIC insurance premiums may adversely impact our earnings. See “Supervision and Regulation–Deposit Insurance” for more information about FDIC insurance premiums.
We are a holding company and depend on our subsidiaries for dividends, distributions and other payments
We are a legal entity separate and distinct from our banking and other subsidiaries. Our principal source of cash flow, including cash flow to pay dividends to our stockholders and principal and interest on our outstanding debt, is dividends from the Bank. The Company's ability to pay dividends to our stockholders is substantially dependent upon the Bank's ability to pay dividends to the Company. Subject to the Bank meeting or exceeding regulatory capital requirements, the prior approval of the OCC is required if the total of all dividends declared by the Bank in any calendar year would exceed the sum of the Bank's net profits for that year and its retained net profits for the preceding two calendar years, less any required transfers to surplus. In addition, Federal Reserve guidance sets forth the supervisory expectation that bank holding companies will inform and consult with Federal Reserve staff in advance of issuing a dividend that exceeds earnings for the quarter and should not pay dividends in a rolling four quarter period in an amount that exceeds net income for that period. Federal law also prohibits the Bank from paying dividends that would be greater than its undivided profits after deducting statutory bad debt in excess of its allowance for loan losses.
The $1.1 billion goodwill impairment charge we recorded in the third quarter of 2014 impacted our regulatory dividend capacity formula. Even though the non-cash goodwill charge did not impact cash flow for dividends, the size of the charge does require that we get regulatory approval from the OCC to make distributions or other returns of capital from the Bank to the Company in the future.
Based on current estimates, we expect to need quarterly approval from the OCC until the first quarter of 2017 based on their calculation formula. While we cannot be assured that the OCC will approve our quarterly dividend requests going forward, based on conversations with the regulators and barring any unforeseen future developments that would materially impact our profitability, we believe that we can maintain our holding company common and preferred dividend payments at their current levels.
The Bank paid dividends of $100 million and $80 million to the Company during 2015 and 2014 , respectively. Additionally, the Bank returned capital of $90 million and $85 million to the Company during 2015 and 2014 , respectively.
If the Bank is unable to make dividend payments to the Company, and sufficient cash is not otherwise available at the Company, we may not be able to make dividend payments to our common stockholders or principal and interest payments on our outstanding debt. See “Payment of Dividends” above under “Supervision and Regulation.”
In addition, our right to participate in a distribution of assets upon a subsidiary’s liquidation or reorganization is subject to the prior claims of the subsidiary’s creditors.

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Our goodwill could become impaired again in the future. If our goodwill were to become impaired again, it could further limit the ability of our bank to pay dividends to our holding company, adversely impacting the holding company’s liquidity and ability to pay dividends or repay debt
The most significant assumptions affecting our goodwill impairment evaluation are variables including the sales price of the Company to KeyCorp, the current market price of our common stock, projections of earnings, and the control premium above our current stock price that an acquirer would pay to obtain control of the Company. We are required to test our goodwill for impairment on an annual basis, or between annual impairment tests if a triggering event occurs. If an impairment determination is made in a future reporting period, our earnings and the book value of goodwill will be reduced. If an impairment loss is recorded, it will have little impact on the tangible book value of our common shares or our regulatory capital levels, but such an impairment loss could significantly restrict the Bank’s ability to make dividend payments to us without prior regulatory approval. At December 31, 2015 , the book value of our goodwill was $1.3 billion .
In the third quarter of 2014, we recorded a $1.1 billion goodwill impairment charge. As discussed in the immediately preceding risk factor, the size of the charge impacted our regulatory capacity formula. Negative changes to the assumptions necessary for the determination of the significant estimates used in computing fair value of our Banking reporting unit would result in further impairment. When we performed our annual goodwill impairment assessment as of November 1, 2015, we concluded that our goodwill balance was not impaired.
A goodwill impairment charge could impact the Bank’s ability to pay dividends to the Company. See Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations–Liquidity Risk” and Part II, Item 8, “Financial Statements and Supplementary Data–Note 11 . Capital” for further details.
We are subject to a variety of operational risks, including reputational risk, legal and compliance risk, the risk of fraud or theft by employees or outsiders, which may adversely affect our business and results of operations
We are exposed to many types of operational risks, including reputational risk, legal and compliance risk, the risk of fraud or theft by employees or outsiders, unauthorized transactions by employees, or operational errors, including clerical or record keeping errors or those resulting from faulty or disabled computer or telecommunications systems or disclosure of confidential proprietary information of our customers. Negative public opinion can result from our actual or alleged conduct in any number of activities, including lending practices, sales practices, customer treatment, corporate governance and acquisitions and from actions taken by government regulators and community organizations in response to those activities. Negative public opinion can adversely affect our ability to attract and keep customers and can expose us to litigation and regulatory action. Actual or alleged conduct by the Company can result in negative public opinion about our other business.
If personal, nonpublic, confidential, or proprietary information of customers in our possession were to be mishandled or misused, we could suffer significant regulatory consequences, reputational damage, and financial loss. Such mishandling or misuse could include, for example, if such information were erroneously provided to parties who are not permitted to have the information, either by fault of our systems, employees or counterparties, or where such information is intercepted or otherwise inappropriately taken by third parties.
Because the nature of the financial services business involves a high volume of transactions, certain errors may be repeated or compounded before they are discovered and successfully rectified. Our necessary dependence upon automated systems to record and process transactions and the large transaction volumes may further increase the risk that technical flaws or employee tampering or manipulation of those systems will result in losses that are difficult to detect. We also may be subject to disruptions of our operating systems arising from events that are wholly or partially beyond our control (for example, computer viruses or electrical or telecommunications outages), which may give rise to disruption of service to customers and to financial loss or liability. We are further exposed to the risk that our external vendors may be unable to fulfill their contractual obligations (or will be subject to the same risk of fraud or operational errors by their respective employees as we are) and to the risk that we (or our vendors’) business continuity and data security systems prove to be inadequate. The occurrence of any of these risks could result in a diminished ability to operate our business, potential liability to clients, reputational

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damage, and regulatory intervention, which could adversely affect our business, financial condition, and results of operations, perhaps materially.
We may not be able to successfully realize the benefits from our Strategic Investment Plan, which could adversely affect our business operations and profitability
In light of the announced Merger with KeyCorp, we have decided to temporarily pause several aspects of the Strategic Investment Plan previously announced in January 2014 and aimed at improved revenue generation and operational efficiencies by improving our feature functionalities and reducing the cost to serve as well as address growing industrywide regulatory imperatives.
Should the Merger with KeyCorp not be completed, resuming the Strategic Investment Plan may not produce the financial returns or benefits previously contemplated.  Timelines and cost estimates may vary materially given the need to re-engage vendors and talent to complete these projects, which may prove to be difficult.  Additionally, we may be required to record impairment of assets created by the Strategic Investment Plan if the Merger is not completed and we decide to permanently discontinue some or all aspects of the Strategic Investment Plan.
We rely on third-party relationships to conduct our business, which subjects us to strategic, reputation, compliance and transaction (operational) risk
We rely on third party service providers to leverage subject matter expertise and industry best practice, provide enhanced products and services, and reduce costs. Although there are benefits in entering into third party relationships with vendors, there are risks associated with such activities. When entering a third party relationship, the risks associated with that activity are not passed to the third party but remain our responsibility. Management and the Board of Directors are ultimately responsible for the activities conducted by vendors. To that end, Management is accountable for the review and evaluation of all new and existing vendor relationships. Management is responsible for ensuring that adequate controls are in place at First Niagara and our vendors to protect the bank and its customers from the risks associated with vendor relationships.
Increased risk most often arises from poor planning, oversight, and control on the part of the bank and inferior performance or service on the part of the third party, and may result in legal costs or loss of business. While we have implemented a vendor management program to actively manage the risks associated with the use of third party service providers, any problems caused by third party service providers could adversely affect our ability to deliver products and services to our customers and to conduct our business. Replacing third party vendors could also take a long period of time and result in increased expenses.
We are exposed to fraud in many aspects of the services and products that we provide
We offer debit cards and credit cards to our banking customers and expanded our online banking and online account opening capabilities in 2014.  Historically, we have experienced operational losses from fraud committed by third parties that steal credentials from our customers or merchants utilized by our customers.  We have little ability to manage how merchants or our banking customers protect the credentials that our customers have to transact with us.  When customers and merchants do not adequately protect customer account credentials, our risks and potential costs increase.  As (a) our sales of these services and products expand, (b) those who are committing fraud become more sophisticated and more determined, and (c) our banking services and product offerings expand, our operational losses could increase.
There are risks resulting from the complex models we utilize as part of our planning and decision making processes
Like most banks, we use models for a broad range of activities, including but not limited to: evaluating credit exposures; investment securities, including collateralized mortgage obligation prepayments and refinancing; measuring risk; preparing DFAST capital calculations; deposit behavior to changing rates; and determining capital and adequacy of allowance for loan losses. We have implemented a model risk governance framework and other control procedures commensurate with business activities, and the extent and complexity of the models used considering the materiality of model risk at an individual model level and in the aggregate. While models can

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improve business decisions, they can also increase our risk profile due to the potential for adverse consequences from decisions based on models that are either incorrect or misinterpreted. Such adverse consequences include poor decision making leading to lower revenues, higher expenses (including provisions for loan losses) and inaccurate financial reporting.
We may be adversely affected by the soundness of other financial institutions
Financial services institutions are interrelated as a result of trading, clearing, counterparty, or other relationships. We have exposure to many different industries and counterparties, and routinely execute transactions with counterparties in the financial services industry. Many of these transactions expose us to credit risk in the event of a default by a counterparty or client. In addition, our credit risk may be exacerbated when the collateral held by us cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the credit or derivative exposure due to us. Any such losses could have a material adverse effect on our financial condition and results of operations.
Our information systems may experience an interruption or security breach
We rely heavily on communications and information systems to conduct our business. Any failure or interruption of these systems could result in failures or disruptions in our customer relationship management, general ledger, deposit, loan and other systems. While we have policies and procedures designed to prevent or limit the effect of the possible failure or interruption of our information systems, there can be no assurance that any such failure or interruption will not occur or, if they do occur, that they will be adequately addressed. A breach in security of our systems, including a breach resulting from our newer online capabilities such as mobile banking, increases the potential for fraud losses. The occurrence of any failure, interruption or security breach of our information systems could damage our reputation, result in a loss of customer business, subject us to additional regulatory scrutiny or expose us to civil litigation and possible financial liability.
Anti-takeover laws and certain agreements and charter provisions may adversely affect share value
Certain provisions of our certificate of incorporation and state and federal banking laws, including regulatory approval requirements, could make it more difficult for a third party to acquire control of the Company without our board of directors' approval. Under federal law, subject to certain exemptions, a person, entity or group must notify the Federal Reserve before acquiring control of a bank holding company. Acquisition of 10% or more of any class of voting stock of a bank holding company, including shares of our common stock or shares of our preferred stock were those shares to become entitled to vote upon the election of two directors because of missed dividends, creates a rebuttable presumption that the acquirer “controls” the bank holding company. Also, a bank holding company must obtain the prior approval of the Federal Reserve before, among other things, acquiring direct or indirect ownership or control of more than 5% of any class of voting shares of any bank, including the Bank. There also are provisions in our certificate of incorporation that may be used to delay or block a takeover attempt. Taken as a whole, these statutory provisions and provisions in our certificate of incorporation could result in the Company being less attractive to a potential acquirer and thus could adversely affect the market price of our common stock.
Financial services companies depend on the accuracy and completeness of information about customers and counterparties
In deciding whether to extend credit or enter into other transactions, we may rely on information furnished by or on behalf of customers and counterparties, including financial statements, credit reports and other financial information. We may also rely on representations of those customers, counterparties or other third parties, such as independent auditors, as to the accuracy and completeness of that information. Reliance on inaccurate or misleading financial statements, credit reports or other financial information could have a material adverse impact on our business and, in turn, our financial condition and results of operations.

37

Severe weather, natural disasters, acts of war or terrorism and other external events could significantly impact our business
Severe weather, natural disasters, acts of war or terrorism and other adverse external events could have a significant impact on our ability to conduct business. In addition, such events could affect the stability of our deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in loss of revenue and/or cause us to incur additional expenses. Although management has established business continuity and disaster recovery policies and procedures, the occurrence of any such event in the future could have a material adverse effect on our business, which, in turn, could have a material adverse effect on our financial condition and results of operations.
We are exposed to risk of environmental liability when we take title to property
In the course of our business, we may foreclose on and take title to real estate. As a result, we could be subject to environmental liabilities with respect to these properties. We may be held liable to a governmental entity or to third parties for property damage, personal injury, investigation and clean-up costs incurred by these parties in connection with environmental contamination or may be required to investigate or clean up hazardous or toxic substances or chemical releases at a property. The costs associated with investigation or remediation activities could be substantial. In addition, if we are the owner or former owner of a contaminated site, we may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from the property. If we become subject to significant environmental liabilities, our business, financial condition or results of operations could be adversely affected.
 
 
 
ITEM 1B.
 
Unresolved Staff Comments
None.
 
 
 
ITEM 2.
 
Properties
Our headquarters are located in our Buffalo regional market center at 726 Exchange Street, Suite 618, Buffalo, New York where we lease 161,000 square feet of space. At December 31, 2015 , we conducted our business through 190 full-service branches located across New York, 118 full-service branches in Western and Eastern Pennsylvania, 75 branches in Connecticut, and nine branches in Western Massachusetts, including several financial services offices. One hundred forty-two ( 142 ) of our branches are owned and 250 are leased.
In addition to our branch network and Buffalo regional market center, we occupy office space in our seven other regional market centers located in Rochester, Albany, and Syracuse, New York and Pittsburgh and Philadelphia, Pennsylvania and New Haven, Connecticut where we provide financial services and perform certain back office operations. We also lease or own other facilities which are used as training centers and storage. Some of our facilities contain tenant leases that are subleases. These properties include 39 leased offices and 14 buildings which we own with a total occupancy of approximately 720,000 square feet, including our administrative center in Lockport, New York which has 76,000 square feet. At December 31, 2015 , our premises and equipment had a net book value of $410 million . See Note 5 of the “Notes to Consolidated Financial Statements” filed herewith in Part II, Item 8, “Financial Statements and Supplementary Data” for further detail on our premises and equipment. All of these properties are generally in good condition and are appropriate for their intended use.
 
 
 
ITEM 3.
 
Legal Proceedings
The nature of our business ordinarily results in a variety of pending as well as threatened legal proceedings, in the form of regulatory/governmental investigations as well as private, civil litigation and arbitration proceedings. The private, civil litigations range from individual actions involving a single plaintiff to putative class action lawsuits with potentially thousands of class members. Investigations involve both formal and informal proceedings, by both government agencies and self-regulatory bodies. The legal proceedings are at varying stages of adjudication, arbitration or investigation and involve a variety of claims.

38

On at least a quarterly basis, we assess our liabilities and contingencies in connection with outstanding legal proceedings utilizing the latest information available. Where it is probable that we will incur a loss and the amount of the loss can be reasonably estimated, we record a liability in our consolidated financial statements. These reserves may be increased or decreased to reflect any relevant developments on a quarterly basis. Where a loss is not probable or the amount of the loss is not estimable, we have not accrued reserves, consistent with applicable accounting guidance.
Since the announcement of the Merger, eight shareholders of the Company have filed separate putative class action complaints challenging the Merger. Six complaints are filed in New York State Supreme Court, Erie County. One complaint is filed in the Court of Chancery, Delaware, and one is filed in United States District Court, District of Delaware. The complaints are brought against the Company, each of its directors individually, and KeyCorp. The complaints allege generally that each of the directors breached his or her fiduciary duty to the Company's public shareholders in that: (a) the sales process was flawed; (b) the merger consideration is inadequate and undervalues the intrinsic value of the Company; (c) the merger agreement contains unfair preclusive deal protection devices; and (d) certain directors and officers of the Company will receive personal benefits from the merger not shared in by other public shareholders. Seven of the complaints further allege that KeyCorp and the Company aided and abetted the Company's directors’ fiduciary duty breaches. Some of the complaints also challenge KeyCorp’s anticipated contribution to the First Niagara Foundation or that the Company's Registration Statement filed on November 30, 2015 in connection with the proposed merger is materially misleading. The complaint filed in U.S. District Court, District of Delaware also alleges that the preliminary proxy filed in connection with the November 30, 2015 Registration Statement violated Sections 14(a) and 20(a) of the Securities Exchange Act of 1934 and the rules promulgated thereunder.
All of the lawsuits seek, among other things, to enjoin or rescind the Merger, and to obtain an award of costs and attorneys’ fees and damages for the alleged fiduciary breaches.
Plaintiffs in all six of the matters pending in Erie County, New York entered into and filed a joint stipulation seeking consolidation of the actions, and appointment of designated co-lead plaintiffs and co-lead counsel for the actions. The stipulation is pending before the court.
The defendants believe these lawsuits are entirely without merit, and intended to vigorously defend against the claims.
Based on information currently available to us, and on advice of counsel, management does not believe that judgments or settlements arising from all current pending or threatened legal proceedings will have a material adverse effect on our consolidated financial position. We note, however, that the outcomes of these legal proceedings are often unpredictable and the actual results of these proceedings, including their impact on the Company, cannot be determined with precision or at all. As a result, the outcome of a particular proceeding or a combination of proceedings, whether pending or threatened, may be material to our results of operations or cash flow for a particular period, depending upon our results for the period when the matter is resolved or its impact otherwise occurs.
ITEM 4.
 
Mine Safety Disclosures
Not applicable.

39

PART II
 
 
 
ITEM 5.
 
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is traded under the symbol ‘FNFG’ on the NASDAQ Global Select Market. At December 31, 2015 , we had approximately 23,000 stockholders of record. During 2015 , the high sales price of our common stock was $11.22 and the low sales price of our common stock was $7.42 . We paid dividends of $0.32 per common share during 2015 . See additional information regarding the market price and dividends paid in Item 6, “Selected Financial Data.”
We did not repurchase any shares of our common stock during 2015 and 2014 under stock repurchase plans approved by our Board of Directors. Under the current stock repurchase plan, approved by our Board of Directors on July 27, 2010, we are authorized to repurchase up to an additional 12 million shares of our common stock. This plan does not have an expiration date.

40

Stock Performance Graph
Below is a stock performance graph comparing (i) the cumulative total return on our common stock for the period beginning December 31, 2010 as reported by the NASDAQ Global Select Market, through December 31, 2015 , (ii) the cumulative total return on stocks included in the NASDAQ Composite Index over the same period, and (iii) the cumulative total return of publicly traded regional banks and thrifts over the same period. Cumulative return assumes the reinvestment of dividends, and is expressed in dollars based on an assumed investment of $100.
FIRST NIAGARA FINANCIAL GROUP, INC.
 
Period Ended
Index
12/31/2010
12/31/2011
12/31/2012
12/31/2013
12/31/2014
12/31/2015
First Niagara Financial Group, Inc.
$100.00
$65.20
$62.20
$86.13
$71.07
$94.65
NASDAQ Composite Index
$100.00
$99.21
$116.82
$163.75
$188.03
$201.40
KBW Regional Bank Index
$100.00
$94.86
$107.58
$157.96
$161.80
$171.51


41

ITEM 6.
 
Selected Financial Data
At or for the year ended December 31,
2015
2014 (1)
2013
2012 (2)
2011 (3)
 
(In millions, except per share amounts)
Selected financial condition data:
 
 
 
 
 
Total assets
$
39,918

$
38,551

$
37,628

$
36,806

$
32,811

Loans and leases, net
23,796

22,803

21,230

19,547

16,352

Investment securities:
 
 
 
 
 
Available for sale
5,471

5,915

7,423

10,994

9,348

Held to maturity
6,388

5,942

4,042

1,300

2,670

Goodwill and other intangibles
1,396

1,417

2,543

2,618

1,803

Deposits
28,701

27,781

26,665

27,677

19,405

Borrowings
6,657

6,206

5,556

3,716

8,127

Stockholders’ equity
$
4,126

$
4,093

$
4,993

$
4,927

$
4,798

Common shares outstanding
355

353

354

353

352

Selected operations data:
 
 
 
 
 
Interest income
$
1,198

$
1,207

$
1,210

$
1,176

$
1,065

Interest expense
142

122

117

153

184

Net interest income
1,056

1,086

1,093

1,023

881

Provision for credit losses
76

96

105

92

58

Net interest income after provision for credit losses
980

990

988

931

823

Noninterest income (4)
342

310

366

360

245

Restructuring charges
21

22

—

6

43

Goodwill impairment
—

1,100

—

—

—

Deposit account remediation
—

22

—

—

—

Merger and acquisition integration expenses
14

—

—

178

98

Other noninterest expense
984

980

931

867

666

Income (loss) before income tax
302

(824
)
423

239

262

Income tax expense (benefit)
79

(109
)
128

71

88

Net income (loss)
224

(715
)
295

168

174

Preferred stock dividend
30

30

30

28

—

Net income (loss) available to common stockholders
$
193

$
(745
)
$
265

$
141

$
174

Common stock and related per share data:
 
 
 
 
 
Earnings (loss) per common share:
 
 
 
 
 
Basic
$
0.55

$
(2.13
)
$
0.75

$
0.40

$
0.64

Diluted
0.54

(2.13
)
0.75

0.40

0.64

Cash dividends
0.32

0.32

0.32

0.32

0.64

Book value (5)
10.78

10.71

13.31

13.15

12.79

Tangible book value per common share (5)(6)
6.81

6.67

6.04

5.65

7.62

Market Price (NASDAQ: FNFG):
 
 
 
 
 
High
11.22

10.65

11.34

10.35

15.10

Low
7.42

7.00

7.68

7.08

8.22

Close
$
10.85

$
8.43

$
10.62

$
7.93

$
8.63

(1)  
Includes the impact of the $1.1 billion goodwill impairment charge and $22 million deposit account remediation.
(2)  
Includes the impact of the HSBC Branch Acquisition on May 18, 2012.
(3)  
Includes the impact of the merger with NewAlliance Bancshares, Inc. on April 15, 2011.
(4)  
Includes $21 million gain on sale of mortgage-backed securities from the securities portfolio repositioning in 2012.
(5)  
Excludes unallocated employee stock ownership plan shares and unvested restricted stock shares.
(6)  
This is a non-GAAP measure that we believe is useful in understanding our financial performance and condition. Refer to the GAAP to Non-GAAP Reconciliation for further information.

42

At or for the year ended December 31,
2015
2014 (1)
2013
2012 (2)
2011 (3)
 
(Dollars in millions)
Selected financial ratios and other data:
 
 
 
 
 
Performance ratios (4) :
 
 
 
 
 
Return on average assets
0.57
%
(1.87
)%
0.80
%
0.48
%
0.62
%
Common equity:
 
 
 
 
 
Return on average common equity
5.08

(16.57
)
5.73

3.09

4.71

Return on average tangible common equity (5)
8.06

(33.16
)
12.86

6.30

8.40

Total equity:
 
 
 
 
 
Return on average equity
5.40

(14.79
)
5.95

3.45

4.68

Return on average tangible equity (5)
8.17

(27.66
)
12.31

6.55

8.33

Earnings (loss) to fixed charges:
 
 
 
 
 
Including interest on deposits
2.97

(5.21
)
2.84

2.48

2.34

Excluding interest on deposits
4.46

(9.39
)
3.63

3.51

3.34

Net interest rate spread
2.92

3.14

3.31

3.24

3.46

Net interest rate margin
3.01

3.23

3.39

3.34

3.58

Efficiency ratio (6)
72.9

152.2

63.8

76.0

71.6

Operating expenses as a percent of average loans and deposits (7)
1.97

4.28

1.96

2.47

2.52

Effective tax rate (benefit)
26.0

(13.3
)
30.2

29.6

33.7

Dividend payout ratio
58.18

N/M

42.67

80.00

100.00

Capital ratios:
 
 
 
 
 
First Niagara Financial Group, Inc.
 
 
 
 
 
Total risk-based capital
12.01

11.75

11.53

11.23

17.84

Tier 1 risk-based capital
10.08

9.81

9.56

9.29

15.60

Common equity tier 1 capital (8)
8.55

N/A

N/A

N/A

N/A

Tier 1 risk-based common capital (5)(8)
N/A

8.20

7.86

7.45

13.23

Leverage ratio
7.62

7.50

7.26

6.75

9.97

Ratio of stockholders’ equity to total assets
10.34

10.62

13.27

13.39

14.62

Ratio of tangible common stockholders’ equity to tangible assets
6.21

6.30

6.02

5.77

8.57

Risk-weighted assets
$
28,881

$
28,186

$
26,412

$
24,379

$
18,971

First Niagara Bank:
 
 
 
 
 
Total risk-based capital
11.55
%
11.37
 %
10.99
%
10.66
%
16.47
%
Tier 1 risk-based capital
10.65

10.48

10.15

9.94

14.66

Common equity tier 1 capital (8)
10.65

N/A

N/A

N/A

N/A

Leverage ratio
8.05

8.01

7.70

7.23

9.38

Risk-weighted assets
$
28,813

$
28,146

$
26,365

$
24,379

$
18,997

Other data:
 
 
 
 
 
Number of full service branches
392

411

421

430

333

Full time equivalent employees
5,428

5,572

5,807

5,927

4,827

(1)  
Includes the impact of the $1.1 billion goodwill impairment charge and $22 million deposit account remediation.
(2)  
Includes the impact of the HSBC Branch Acquisition on May 18, 2012.
(3)  
Includes the impact of the merger with NewAlliance Bancshares, Inc. on April 15, 2011.
(4)  
Computed using daily averages.
(5)  
This is a non-GAAP measure that we believe is useful in understanding our financial performance and condition. Refer to the GAAP to Non-GAAP Reconciliation for further information.
(6)  
Computed by dividing noninterest expense by the sum of net interest income and noninterest income.
(7)  
Computed by dividing noninterest expense by the sum of average total loans and deposits.
(8)  
Basel III Transitional rules became effective for us on January 1, 2015. Risk-based ratios and amounts presented prior to March 31, 2015 are calculated under Basel I rules. As of March 31, 2015, risk-based ratios and amounts presented are calculated under the Basel III Standardized Transitional Approach. Common equity tier 1 capital under Basel III replaced tier 1 common capital under Basel I. Prior to Basel III becoming effective on January 1, 2015, tier 1 common capital under Basel I was a non-GAAP financial measure.

43

GAAP to Non-GAAP Reconciliation
At or for the year ended December 31,
2015
2014
2013
2012
2011
 
(in millions)
Reconciliation of noninterest income on operating basis to reported noninterest income:
 
 
 
 
 
Total noninterest income on operating basis (Non-GAAP)
$
342

$
310

$
366

$
338

$
245

Gain on securities portfolio repositioning
—

—

—

21

—

Total reported noninterest income (GAAP)
$
342

$
310

$
366

$
360

$
245

 
 
 
 
 
 
Computation of ending tangible assets:
 
 
 
 
 
Total assets
$
39,918

$
38,551

$
37,628

$
36,806

$
32,811

Less: goodwill and other intangibles
(1,396
)
(1,417
)
(2,543
)
(2,618
)
(1,803
)
Tangible assets
$
38,522

$
37,134

$
35,085

$
34,188

$
31,008

 
 
 
 
 
 
Computation of ending tangible common equity:
 
 
 
 
 
Total stockholders' equity
$
4,126

$
4,093

$
4,993

$
4,927

$
4,798

Less: goodwill and other intangibles
(1,396
)
(1,417
)
(2,543
)
(2,618
)
(1,803
)
Less: preferred stockholders' equity
(338
)
(338
)
(338
)
(338
)
(338
)
Tangible common equity
$
2,392

$
2,338

$
2,113

$
1,971

$
2,657

 
 
 
 
 
 
Computation of average tangible equity:
 
 
 
 
 
Total stockholders' equity
$
4,144

$
4,834

$
4,966

$
4,887

$
3,713

Less: goodwill and other intangibles
(1,405
)
(2,249
)
(2,567
)
(2,315
)
(1,625
)
Tangible equity
$
2,739

$
2,585

$
2,399

$
2,572

$
2,088

 
 
 
 
 
 
Computation of average tangible common equity:
 
 
 
 
 
Total stockholders' equity
$
4,144

$
4,834

$
4,966

$
4,887

$
3,713

Less: goodwill and other intangibles
(1,405
)
(2,249
)
(2,567
)
(2,315
)
(1,625
)
Less: preferred stockholders' equity
(338
)
(338
)
(338
)
(338
)
(17
)
Tangible common equity
$
2,401

$
2,247

$
2,061

$
2,234

$
2,072

 
 
 
 
 
 
Computation of Tier 1 common capital:
 
 
 
 
 
Tier 1 capital
N/A

$
2,764

$
2,526

$
2,265

$
2,962

Less: qualifying restricted core capital elements
N/A

(114
)
(113
)
(112
)
(112
)
Less: perpetual non-cumulative preferred stock
N/A

(338
)
(338
)
(338
)
(338
)
Tier 1 common capital (Non-GAAP)
N/A

$
2,312

$
2,075

$
1,815

$
2,512

 
 
 
 
 
 

44

 
2015
 
2014
Selected Quarterly Data
Fourth
quarter
Third
quarter
Second
quarter
First
quarter
 
Fourth
quarter
Third
quarter
Second
quarter
First
quarter
 
(In millions, except per share amounts)
Interest income
$
304

$
299

$
298

$
297

 
$
302

$
304

$
302

$
300

Interest expense
37

36

35

34

 
32

31

30

29

Net interest income
267

263

263

263

 
270

273

272

271

Provision for credit losses
23

20

21

13

 
36

17

20

24

Net interest income after provision for credit losses
244

244

242

250

 
234

257

252

247

Noninterest income
89

83

87

82

 
77

75

81

77

Restructuring charges
3

—

—

18

 
9

2

—

10

Goodwill impairment
—

—

—

—

 
—

1,100

—

—

Deposit account remediation
—

—

—

—

 
(23
)
45

—

—

Merger and acquisition integration expenses
14

—

—

—


—

—





Other noninterest expense
247

245

248

244

 
248

249

244

238

Income (loss) before income tax
68

82

81

71

 
77

(1,065
)
89

75

Income tax expense (benefit)
17

21

20

20

 
8

(145
)
13

15

Net income (loss)
51

60

61

51

 
69

(920
)
76

60

Preferred stock dividend
8

8

8

8

 
8

8

8

8

Net income (loss) available to common stockholders
$
43

$
53

$
53

$
44

 
$
62

$
(928
)
$
68

$
53

 
 
 
 
 
 
 
 
 
 
Earnings (loss) per common share:
 
 
 
 
 
 
 
 
 
Basic
$
0.12

$
0.15

$
0.15

$
0.12

 
$
0.17

$
(2.65
)
$
0.19

$
0.15

Diluted
0.12

0.15

0.15

0.12

 
0.17

(2.65
)
0.19

0.15

Cash dividends
$
0.08

$
0.08

$
0.08

$
0.08

 
$
0.08

$
0.08

$
0.08

$
0.08

Book value (1)
10.78

10.82

10.77

10.80

 
10.71

10.72

13.54

13.4

Tangible book value per share (1)(2)
6.81

6.84

6.77

6.78

 
6.67

6.66

6.32

6.15

Market Price (NASDAQ: FNFG):
 
 
 
 
 
 
 
 
 
High
11.22

10.57

9.86

9.20

 
8.61

9.05

9.61

10.65

Low
10.07

8.54

8.45

7.42

 
7.00

8.32

8.27

8.19

Close
10.85

10.21

9.44

8.84

 
8.43

8.33

8.74

9.45

(1)  
Excludes unallocated employee stock ownership plan shares and unvested restricted stock shares.
(2)  
This is a non-GAAP measure that we believe is useful in understanding our financial performance and condition. Refer to the GAAP to Non-GAAP Reconciliation for further information.



45

ITEM 7.
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following is an analysis of our financial condition and results of operations. You should read this item in conjunction with our Consolidated Financial Statements and related notes filed with this report in Part II, Item 8, “Financial Statements and Supplementary Data” and the description of our business filed here within Part I, Item I, “Business.”
OVERVIEW
First Niagara Financial Group, Inc. is a Delaware corporation and a bank holding company, subject to supervision and regulation by the Federal Reserve, serving both retail and commercial customers through our bank subsidiary, First Niagara Bank, N.A., a national bank subject to supervision and regulation by the OCC. We are a multi-faceted regional bank, with a community banking model, in New York, Western and Eastern Pennsylvania, Connecticut, and Western Massachusetts with $39.9 billion of assets, $28.7 billion of deposits, and 392 branch locations as of December 31, 2015 .
We were organized in April 1998 in connection with the conversion of First Niagara Bank, N.A. from a mutual savings bank to a stock savings bank. Since that time we have strategically deployed capital through the acquisition of community banks and financial services companies throughout New York; our September 2009 acquisition of National City Bank branch locations in Western Pennsylvania; our April 2010 merger with Harleysville National Corporation ("Harleysville") in Eastern Pennsylvania; our April 2011 merger with NewAlliance Bancshares, Inc. ("NewAlliance"), which allowed us to further build our organization by adding operations in Connecticut and Western Massachusetts; and our May 2012 acquisition of full-service branches from HSBC in the Buffalo, Rochester, Syracuse, Albany, Downstate New York and Connecticut banking markets. We provide our customers with a full range of products and services delivered through our customer focused operations, which include retail and commercial banking and financial services and risk management (insurance). These include commercial real estate loans, commercial business loans and leases, residential real estate, home equity, indirect auto, credit cards, and other consumer loans, as well as retail and commercial deposit products and insurance services. We also provide wealth management products and services. The markets we compete in exhibit attractive characteristics of economic growth and stability.
On October 30, 2015, the Company and KeyCorp entered into a Merger Agreement which provides that, upon the terms and subject to the conditions set forth therein, the Company will merge with and into KeyCorp, with KeyCorp as the surviving corporation in the Merger. The Merger Agreement was unanimously approved by the Board of Directors of each of the Company and KeyCorp.
Subject to the terms and conditions of the Merger Agreement, at the Effective Time of the Merger, Company shareholders will have the right to receive (i) 0.680 shares of KeyCorp common stock, par value $1.00 per share, and (ii) $2.30 in cash, for each share of Company common stock, par value $0.01 per share. Subject to the terms and conditions of the Merger Agreement, at the effective time of the Merger, each share of Company preferred stock, Series B, par value $0.01 per share, will be converted into the right to receive a share of a newly created series of preferred stock of KeyCorp having such rights, preferences, privileges and voting powers not materially less favorable to such holders than such Company preferred stock.
In January 2014, we announced a Strategic Investment Plan that represented a pivot in our strategic imperatives by choosing to collectively accelerate certain investments in our business focused on enhancing the customer experience. As a result of the Merger announcement, we have decided to temporarily pause several aspects of the Strategic Investment Plan.
In 2015, approximately $62 million of the $73 million in cash expenditures related to our Strategic Investment Plan were capitalized, and will be amortized over the useful lives of the assets. Of the $11 million that has been expensed, $1 million was classified as “Salaries and Benefits” expense, $1 million was classified as "Technology and communications" expense, and $9 million was classified as “Professional services” expense. In addition, we have recorded $26 million of amortization expense in 2015 in connection with the Strategic Investment Plan.

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In 2014, our cash expenditures related to implementing our Strategic Investment Plan approximated $58 million. In 2014, approximately $41 million of the $58 million in costs related to our Strategic Investment Plan were capitalized, and will be amortized over the useful lives of the assets. Of the $17 million that was expensed, $2 million was classified as “Salaries and Benefits” expense, $1 million was classified as “Technology and communications” expense and $14 million was classified as “Professional services” expense. In addition, we recorded $9 million of amortization expense in 2014 in connection with the Strategic Investment Plan.
FINANCIAL OVERVIEW
The following table summarizes our results of operations for the periods indicated on a GAAP basis and on an operating (non-GAAP) basis. Our results for 2015 reflect $21 million in pre-tax restructuring charges incurred primarily in connection with the consolidation of 17 branches and the completion of our organization simplification during the first quarter, as well as third party professional fees incurred in connection with the overstatement of the allowance for loan losses resulting from mid-level employee misconduct that was discovered in February 2015, and $14 million in merger and acquisition integration expenses related to the Merger with KeyCorp. Our results for 2014 reflect the impact of a $1.1 billion pre-tax goodwill impairment charge, $22 million in pre-tax restructuring severance expenses incurred in connection with a branch staffing realignment and our organization simplification, and a $22 million pre-tax reserve to fund potential costs of a self-identified process issue related to certain customer deposit accounts. Our results for 2015 and 2014 also included $6 million and $33 million , respectively, in amortization of certain tax credits that reduced noninterest income with a corresponding benefit to income tax expense. Our results for 2013 reflect a $6 million pre-tax charge, or $0.01 per share, related to two executive departures.
Our operating results exclude certain nonoperating expense items as detailed below. We believe these non-GAAP measures provide a meaningful comparison of our underlying operational performance, helping to facilitate management and investor assessments of business and performance trends in comparison to others in the financial services industry and period over period analysis of our fundamental results. In addition, we believe the exclusion of some nonoperating items from our performance allows a more effective evaluation by which to compare our results and assess our performance in relation to our ongoing operations. 
 
Year ended December 31,
(in millions, except per share amounts)
2015
2014
2013
Operating results (Non-GAAP):
 
 
 
Net interest income
$
1,056

$
1,086

$
1,093

Provision for credit losses
76

96

105

Noninterest income
342

310

366

Noninterest expense
984

980

931

Income tax expense
91

41

128

Net operating income (Non-GAAP)
$
247

$
279

$
295

Operating earnings per diluted share (Non-GAAP)
$
0.61

$
0.70

$
0.75

Reconciliation of net operating income to net income
$
247

$
279

$
295

Nonoperating expenses, net of tax at effective tax rate:
 
 
 
Restructuring charges ($21 million and $22 million pre-tax in 2015 and 2014, respectively)
(13
)
(16
)
—

Goodwill impairment ($1.1 billion pre-tax)
—

(963
)
—

Deposit account remediation ($22 million pre-tax)
—

(14
)
—

Merger and acquisition integration expenses ($14 million pre-tax)
(10
)
—

—

Total nonoperating expenses, net of tax
(23
)
(994
)
—

Net income (loss) (GAAP)
$
224

$
(715
)
$
295

Earnings (loss) per diluted share (GAAP)
$
0.54

$
(2.13
)
$
0.75


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Our 2015 performance as compared to 2014 reflects lower net interest income driven by the continued impact of reinvestments and repricing of assets in the current low interest rate and competitive pricing environment as well as $0.10 per diluted share of reduced benefits from the taxable reorganization of a subsidiary and tax credit investments, partially offset by strong balance sheet growth and lower provision for loan losses. We closed 2015 with strong core business fundamentals and as we begin 2016, we remain focused on keeping our customers at the center of all we do and maintaining a strong competitive position.
2015 compared to 2014
Our GAAP net income for 2015 was $224 million , or $0.54 per diluted share, compared to a net loss of $715 million , or $2.13 per diluted share, for 2014 . Excluding $21 million in pre-tax restructuring charges incurred primarily in connection with the consolidation of 17 branches and the completion of our organization simplification during the first quarter as well as third party professional fees incurred in connection with the overstatement of the allowance for loan losses resulting from mid-level employee misconduct that was discovered in February 2015 and $14 million in merger and acquisition integration expenses related to our Merger with KeyCorp, our 2015 non-GAAP operating net income was $247 million , or $0.61 per diluted share. Excluding a $1.1 billion pre-tax goodwill impairment charge, $22 million in pre-tax restructuring severance expenses incurred in connection with a branch staffing realignment and our organization simplification, and a $22 million pre-tax reserve to fund potential costs of a self-identified process issue related to certain customer deposit accounts, our 2014 non-GAAP operating net income was $279 million , or $0.70 per diluted share.
Our net interest income for 2015 decreased $30 million from 2014 to $1.1 billion and was driven by a 22 basis points decrease in our taxable equivalent net interest margin to 3.01% partially offset by a 4% increase in average interest-earning assets. The 22 basis points decrease in net interest margin in 2015 reflected continued compression of earning asset yields in the current low interest rate and competitive pricing environment, lower discount accretion income on prepayment of collateralized loan obligations and lower benefits from purchase accounting accretion on acquired loans. Yields on loans decreased 17 basis points to 3.69 %, reflecting continued pressure on loan yields due to low interest rates and competitive pressures, as well as lower benefits from purchase accounting accretion. Yields on investment securities decreased 20 basis points to 2.89 % due primarily to lower premium amortization on our residential mortgage-backed securities portfolio and lower prepayments on CLOs that were purchased at a discount. The average cost of interest-bearing deposits increased to 0.29% in 2015 from 0.24% in 2014 .
Compared to 2014 , average loan balances increased 5% in 2015 driven primarily by increases in our commercial real estate and business, home equity, and indirect auto portfolios. Total average commercial loans increased 5% and average commercial real estate and business loans each increased 5% as well. Period end total loan balances increased 4% and were driven by a 5% increase in commercial loan balances and a 10% increase in indirect auto loan balances partially offset by a 12% decrease in other consumer loan balances.
Average consumer loans increased 6% driven by a 6% and 21% increase in our home equity and indirect auto portfolios, respectively, partially offset by a 10% decrease in other consumer loans. Average indirect auto loan balances increased $402 million , or 21% , to $2.4 billion as strong new origination activity was partially offset by increased paydowns. New originations in 2015 totaled $1.1 billion and had a weighted average yield of 3.34% , net of dealer reserve. Average home equity balances increased 6% to $3.0 billion from 2014 reflecting continued strength in originations, higher customer draws and the benefits of promotional and cross-sell campaigns.
Average deposits increased $942 million , or 3% , from December 31, 2014 to $28.4 billion , driven by growth in commercial deposits. Average noninterest-bearing checking balances increased $425 million , or 8% , driven by a 10% increase in commercial balances while average money market balances increased $434 million , or 4% , reflecting the benefits of promotional marketing campaigns and strength in commercial deposits. Average savings balances decreased $142 million , or 4% , due to lower consumer balances and average time deposits decreased $78 million , or 2% , due to declines across retail and municipal, partially offset by an increase in brokered certificates of deposit. Average transactional deposit balances, which include interest-bearing and noninterest-bearing checking accounts, increased 7% over the prior year and represent 38% of our average deposit balances, up from 37% a year ago.

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Our provision for credit losses totaled $76 million and $96 million for 2015 and 2014 , respectively. The provision for loan losses on originated loans was $74 million and $85 million for 2015 and 2014 , respectively. Nonperforming originated loans as a percentage of originated loans decreased to 0.89% at December 31, 2015 from 0.90% at December 31, 2014 . Net charge-offs equaled 0.32% of average originated loans in 2015 and 0.34% in 2014 . Our provision for credit losses on originated loans in the fourth quarter of 2014 included $5 million to cover exposure to borrowers servicing the energy sector following the fall in oil prices, $11 million to cover a $10 million charge-off plus an additional reserve of $1 million, both related to a single borrower in the oil and gas industry, and $5 million related to impairment of a commercial loan that was sold in March 2015. The provision for credit losses for 2014 also included $3 million of provision for unfunded loan commitments. The provision for credit losses for unfunded loan commitments was not material in 2015 .
The provision for losses on acquired loans totaled $3 million and $8 million for 2015 and 2014 , respectively. Net charge-offs for acquired loans equaled 0.11% of average acquired loans for 2015 , compared to 0.14% for 2014 .
For 2015 , noninterest income increased $32 million , or 10% , from 2014 . Increases in merchant and card fees, mortgage banking, and other income were partially offset by decreases in deposit service charges, wealth management services, lending and leasing, and bank owned life insurance. Other income for 2015 and 2014 included a reduction of $6 million and $33 million , respectively, for amortization for certain tax credit investments, which was more than offset by lower tax expense.
Noninterest expenses decreased $1.1 billion during the same period. Excluding $21 million in pre-tax restructuring and severance charges and $14 million in merger and acquisition integration expenses in 2015 and the $1.1 billion pre-tax goodwill impairment charge, $22 million pre-tax reserve to address a process issue related to certain customer deposit accounts, and $22 million in pre-tax restructuring and severance expenses in 2014, noninterest expenses increased $4 million , or less than 1%. Increases in technology and communications, marketing and advertising, professional services, and federal deposit insurance premiums were partially offset by decreases in salaries and benefits, occupancy and equipment, amortization of intangibles, and other expense.
The provision for income taxes for 2015 was $79 million , resulting in an effective tax rate of 26.0% . The provision for income taxes for 2014 was a benefit of $109 million , resulting in an effective tax rate benefit of 13.3% . The effective tax rate for 2015 reflects the benefit of investments in certain tax credits originated by our commercial real estate business and the partial utilization of a capital loss carryover. The effective tax rate benefit for 2014 reflects the impact of the goodwill impairment charge, of which only a portion was tax deductible, benefits from a taxable reorganization of a subsidiary, investments in certain tax credits, and other small savings. The benefit from the taxable reorganization of a subsidiary and the net impact of the tax credit investments totaled $0.10 per share in 2014.
2014 compared to 2013
Our GAAP net loss for 2014 was $715 million, or $2.13 per diluted share, and included a pre-tax $1.1 billion goodwill impairment charge, a $22 million pre-tax reserve to address a process issue, and $22 million in pre-tax restructuring and severance expenses. Excluding these charges, our non-GAAP operating net income was $279 million, or $0.70 per diluted share, for 2014. GAAP net income for 2013 was $295 million, or $0.75 per diluted share, and included a $6 million, or $0.01 per diluted share, charge related to two executive departures.
Our net interest income for 2014 decreased $8 million from 2013 to $1.1 billion and was driven by a 16 basis points decrease in our taxable equivalent net interest margin to 3.23% partially offset by a 5% increase in average interest-earning assets. The 16 basis points decrease in net interest margin in 2014 reflected lower yields on our loans resulting from the effect of new loan pricing and prepayments, the effects of which were partially mitigated by strong loan growth. However, average investment securities were lower by $175 million for 2014.
Average loan balances increased 8% in 2014 and average commercial business and real estate loans increased 8%. Average consumer loans increased 9% driven by growth in home equity and indirect auto loan balances partially offset by a decrease in residential real estate loans.

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Average transactional deposit balances increased 9% over the prior year and represent 37% of our average deposit balances, up from 34% the previous year. Average noninterest-bearing checking deposits increased $461 million, or 10%, and average interest-bearing checking balances increased $333 million, or 7%, for 2014 from 2013. Average money market deposits decreased by 2% from 2013 to 2014. The average cost of interest-bearing deposits of 0.24% for 2014 was unchanged from 2013.
Our provision for credit losses totaled $96 million and $105 million for 2014 and 2013, respectively. The provision for loan losses on originated loans was $85 million and $96 million for 2014 and 2013, respectively. Nonperforming originated loans as a percentage of originated loans decreased to 0.90% at December 31, 2014 from 0.93% at December 31, 2013. Net charge-offs equaled 0.34% of average originated loans for 2014 and 2013. Our provision for credit losses on originated loans in the fourth quarter of 2014 covered originated net charge-offs of $21 million, and included $5 million to cover exposure to borrowers servicing the energy sector and $5 million related to impairment of a commercial loan that was sold in March 2015. The provision for credit losses also included $3 million and $2 million of provision for unfunded loan commitments in 2014 and 2013, respectively.
The provision for losses on acquired loans totaled $8 million and $7 million for 2014 and 2013, respectively. Net charge-offs for acquired loans equaled 0.14% of average acquired loans for 2014, compared to 0.09% for 2013.
For 2014, noninterest income decreased $55 million, or 15%, from 2013. Decreases in revenues from deposit service charges, capital markets income, and other income were partially offset by increases in revenues from merchant and card fees and wealth management services. Included in the decline for deposit service charges was $5 million associated with the process issue. Other income for 2014 included $33 million in amortization for tax credit investments, which was more than offset by lower tax expense. Noninterest expenses increased $1.2 billion during the same period. Excluding the $1.1 billion goodwill impairment charge, $22 million reserve to address a process issue, and $22 million in pre-tax restructuring and severance expenses, noninterest expenses increased $49 million, or 5%. We incurred higher expenses in all line items except amortization of intangibles during 2014 as compared to the same period in 2013.
The provision for income taxes for 2014 was a benefit of $109 million, resulting in an effective tax rate benefit of 13.3%. The effective tax rate was 30.2% for the same period in 2013, resulting in income tax expense of $128 million. The effective tax rate for 2014 reflects the impact of the goodwill impairment charge, of which only a portion was tax deductible, benefits from a taxable reorganization of a subsidiary, investments in certain tax credits originated by our commercial real estate business, and other small savings. The benefit from the taxable reorganization of a subsidiary and the net impact of the tax credit investments totaled $0.10 per share in 2014.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We evaluate those accounting policies and estimates that we judge to be critical: those most important to the presentation of our financial condition and results of operations, and those which require our most subjective and complex judgments. Accordingly, our accounting estimates relating to the valuation of our investment securities, prepayment assumptions on our collateralized mortgage obligations and mortgage-backed securities, adequacy of our allowance for loan losses, the accounting treatment and valuation of our acquired loans, and the analysis of the carrying value of goodwill for impairment are deemed to be critical as our judgments could have a material effect on our results of operations.
Investment Securities
As of December 31, 2015 , our available for sale and held to maturity investment securities totaled $11.9 billion , or 30% of our total assets. We use third party pricing services to value our investment securities portfolio, which is comprised almost entirely of Level 2 fair value measured securities. Fair value of our investment securities is based upon quoted market prices of identical securities, where available. If such quoted prices are not available, fair value is determined using valuation models that consider cash flow, security structure, and other observable information. For the vast majority of the portfolio, we validate the prices received from these third parties, on a monthly basis, by comparing them to prices provided by a different independent pricing service. For the remaining securities that are priced by these third parties where we are unable to obtain a secondary independent price, we

50

review material price changes for reasonableness based upon changes in interest rates, credit outlook based upon spreads for similar securities, and the weighted average life of the debt securities. We have also reviewed detailed valuation methodologies provided to us by our pricing services. We did not adjust any of the prices provided to us by the independent pricing services at December 31, 2015 or 2014 . Where sufficient information is not available from the pricing services to produce a reliable valuation, we estimate fair value based on broker quotes, which are reviewed using the same process that is applied to our securities priced by pricing services where we are unable to obtain a secondary independent price, or based on internally developed models that consider estimated prepayment speeds, losses, recoveries, default rates that are implied by the underlying performance of collateral in the structure or similar structures, and discount rates that are implied by market prices for similar securities and collateral structure types.
Our investment securities portfolio includes residential mortgage backed securities ("RMBS") and CMOs. As the underlying collateral of each of these securities is comprised of a large number of similar residential mortgage loans for which prepayments are probable and the timing and amount of such prepayments can be reasonably estimated, we estimate future principal prepayments of the underlying residential mortgage loans to determine a constant effective yield used to apply the interest method, with retroactive adjustments as warranted.
In order to compute the constant effective yield for the RMBS and CMO securities, we estimate pooled level cash flows for each security based on a variety of factors, including historical and projected prepayment speeds, current and future interest rates, yield curve assumptions, security issuer and the current political environment. These cash flows are then translated into security level cash flows based on the tranche we own and the unique structure and status of each security. At December 31, 2015 , the par value of our portfolio of residential mortgage-backed securities totaled $7.6 billion , which included $7.3 billion of collateralized mortgage obligations. In the determination of our constant effective yield, we estimate that we will receive $1.6 billion of principal cash flows on our collateralized mortgage obligations over the next 12 months.
Allowance for Loan Losses
We establish our allowance for loan losses through a provision for credit losses. The level of the allowance for loan losses is based on our evaluation of the overall credit quality of our total 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.
Originated loans
We determine our allowance for loan losses by portfolio segment, which consists of commercial loans and consumer loans. Our commercial loan portfolio includes both business and commercial real estate loans. Our consumer loan portfolio includes residential real estate, home equity, indirect auto, credit card and other consumer 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”.)
Commercial loan portfolio
Commercial loans are initially evaluated using quantitative models whereby loans are grouped into pools based on similar risk characteristics such as loan type and grade to determine the historical loss rate. Our loan grading system is described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the heading “Credit Risk.” By loan type, the historical loss experience over an established loss emergence and look back period for each loan pool is used to calculate historical loss rates that are used as the primary driver

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of the quantitative historical allowance estimate. The loss emergence and historical loss look-back periods may vary based on a variety of factors. For example, a relatively long look-back may be the appropriate measure during times of economic stability; however, during a period of significant or rapid economic expansion or contraction, a shorter measurement period may be more appropriate. The loss emergence and look back periods may vary by loan pool and are considered in the determination of the historical loss rates for each pool.

Management acknowledges that mathematical models have varying levels of inherent limitations and therefore it is always necessary to analyze the model output and apply management judgment.  Accordingly, once the quantitative historical loss rates are established they may be adjusted for qualitative factors to reflect portfolio characteristics, credit concentrations and model imprecision conditions that are not captured in the historical loss rates, recent trends in loan volume and mix, delinquency, local and national economic factors, changes to the Bank’s lending policies and procedures, experience of lending staff, industrial and geographic factors, competition and legal or regulatory requirements. Simulation techniques such as Monte Carlo modeling, using varying levels of confidence, are used to make such qualitative adjustments. These simulations help estimate the impact of concentrations such as large loan risk aspects within a loan portfolio and ensure that a reasonable amount of tail risk is captured. The Monte Carlo output may be adjusted for changes in loss severity based on recent trends that would affect charge-off levels. All qualitative adjustments are supported with trend (or other relevant data), which are documented in the quarterly allowance for loan loss analysis. In addition, historical loss rates are modified when loan growth patterns or other trends indicate that the historical loss factors would not accurately reflect losses inherent in the current portfolio. Final adjustments to the historical loss rate calculation are made for known portfolio characteristics such as 100% cash secured loans and SBA guaranteed loans not captured in the modeling approach. Combining the quantitative and qualitative measurements, the Commercial loan component of our allowance for loan losses is recorded.
Consumer loan portfolio
We estimate the allowance for loan losses for our consumer loan portfolio by estimating the amount of loans that will eventually default based on their current delinquency severity. We then apply a loss rate to the amount of loans that we predict will default based on our historical net loss experience. This amount may be then adjusted, if necessary, for qualitative considerations to reflect changes in underwriting, market or industry conditions or based on changes in trends in the composition of the portfolio, including risk composition, seasoning, and underlying collateral. We obtain and review refreshed FICO scores on a quarterly basis, and trends are evaluated for consideration as a qualitative adjustment to the allowance. Other qualitative considerations include, but are not limited to, the evaluation of trends in property values, building permits and unemployment.
Impaired loans
We consider a commercial loan impaired, when, based on current information, it is probable that we will be unable to collect all amounts of principal and interest due under the original terms of the agreement. Our threshold for evaluating commercial loan relationships individually for impairment is $1 million . Additionally, all loans (commercial and consumer) modified in a troubled debt restructuring (“TDR”), regardless of size, are considered impaired. We measure the impairment in these loans based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, as a practical alternative, the loan’s observable market price or the fair value of the underlying collateral, if the loan is collateral dependent. We then factor any related allowance for loan losses for these loans. Confirmed losses are charged off immediately. We typically would obtain an appraisal to use as the basis for the fair value of the underlying collateral.
Acquired Loans
Acquired loans accounted for under ASC 310-30 (including those accounted for under ASC 310-30 by analogy)
For our acquired loans accounted for under ASC 310-30 for which subsequent decreases to the expected cash flows requires us to evaluate the need for an addition to the allowance for loan losses, our modeling techniques are similar to those we utilize for our originated loans. To the extent that we experience a deterioration in borrower credit quality resulting in a decrease in our expected cash flows subsequent to the acquisition of the

52

loans, an allowance for loan losses would be established based on our estimate of future credit losses over the remaining life of the loans.
Acquired loans accounted for under ASC 310-20
We establish our allowance for loan losses through a provision for credit losses based upon an evaluation process that is similar to our evaluation process used for originated loans. This evaluation, which includes a review of loans on which full collectability may not be reasonably assured, considers, among other matters, the estimated fair value of the underlying collateral, economic conditions, historical net loan loss experience, carrying value of the loans, which includes the remaining net purchase discount or premium, and other factors that warrant recognition in determining our allowance for loan losses.
Acquired Loans
Loans that we acquired in acquisitions subsequent to January 1, 2009 were recorded at fair value with no carryover of the related allowance for loan losses at the time of acquisition. Determining the fair value of the loans involved estimating the amount and timing of principal and interest cash flows expected to be collected on the loans and discounting those cash flows at a market rate of interest.
We have acquired loans in four separate acquisitions between January 2009 and May 2012. For each acquisition, we reviewed all loans greater than $1 million and considered the following factors as indicators that such an acquired loan had evidence of deterioration in credit quality and was therefore in the scope of Accounting Standards Codification (“ASC”) 310-30 (Loans and Debt Securities Acquired with Deteriorated Credit Quality):
•
Loans that were 90 days or more past due;
•
Loans that had an internal risk rating of substandard or worse. Substandard is consistent with regulatory definitions and is defined as having a well defined weakness that jeopardizes liquidation of the loan;
•
Loans that were classified as nonaccrual by the acquired bank at the time of acquisition; or
•
Loans that had been previously modified in a troubled debt restructuring.
Individual acquired loans determined to have evidence of deterioration in credit quality are accounted for individually in accordance with ASC 310-30. Any acquired loans that were not individually in the scope of ASC 310-30 because they did not meet the criteria above were either (i) pooled into groups of similar loans based on the borrower type, loan purpose, and collateral type and accounted for under ASC 310-30 by analogy, or (ii) accounted for under ASC 310-20 (Nonrefundable Fees and Other Costs).
Based on the guidance included in the December 18, 2009 letter from the AICPA Depository Institutions Panel to the Office of the Chief Accountant of the SEC, we have made an accounting policy election to apply ASC 310-30 by analogy to qualifying acquired pools of loans that (i) were acquired in a business combination or asset purchase, (ii) resulted in recognition of a discount attributable, at least in part, to credit quality, and (iii) were not subsequently accounted for at fair value.
Acquired loans accounted for under ASC 310-30
The excess of expected cash flows from acquired loans over the estimated fair value of acquired loans at acquisition is referred to as the accretable discount and is recognized into interest income over the remaining life of the acquired loans using the interest method. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the nonaccretable discount. The nonaccretable discount represents estimated future credit losses expected to be incurred over the life of the acquired loans. Subsequent decreases to the expected cash flows require us to evaluate the need for an addition to the allowance for loan losses. Subsequent improvements in expected cash flows result in the reversal of a corresponding amount of the nonaccretable discount which we then reclassify as accretable discount that is recognized into interest income over the remaining life of the loan using the interest method. Our evaluation of the amount of future cash flows that we expect to collect takes into account actual credit performance of the acquired loans to date and our best estimates for the expected lifetime credit performance of the loans using currently available information. Charge-offs on acquired loans would be first applied to the nonaccretable discount

53

portion of the fair value adjustment. To the extent that we experience a deterioration in credit quality in our expected cash flows subsequent to the acquisition of the loans, an allowance for loan losses would be established based on our estimate of future credit losses over the remaining life of the loans.

In accordance with ASC 310-30, recognition of income is dependent on having a reasonable expectation about the timing and amount of cash flows expected to be collected.  We perform such an evaluation on a quarterly basis on both our acquired loans individually accounted for under ASC 310-30 and those in pools accounted for under ASC 310-30 by analogy. 

Cash flows for acquired loans individually accounted for under ASC 310-30 are estimated on a quarterly basis.  Based on this evaluation, a determination is made as to whether or not we have a reasonable expectation about the timing and amount of cash flows.  Such an expectation includes cash flows from normal customer repayment, foreclosure or other collection efforts.  Cash flows for acquired loans accounted for on a pooled basis under ASC 310-30 by analogy are also estimated on a quarterly basis.  For residential real estate, home equity and other consumer loans, cash flow loss estimates are calculated by a vintage and FICO based model which incorporates a projected forward loss curve.  For commercial loans, lifetime loss rates are assigned to each pool with consideration given for pool make-up, including risk rating profile.  Lifetime loss rates are developed from internally generated loss data and are applied to each pool. 

To the extent that we cannot reasonably estimate cash flows, interest income recognition is discontinued.  The unit of account for loans in pools accounted for under ASC 310-30 by analogy is the pool of loans.  Accordingly, as long as we can reasonably estimate cash flows for the pool as a whole, accretable yield on the pool is recognized and all individual loans within the pool - even those more than 90 days past due - would be considered to be accruing interest, and reported as such, in our financial statement disclosures, regardless of whether or not we expected to collect any principal or interest cash flows on an individual loan 90 days or more past due.
Goodwill
We record the excess of the cost of acquired entities over the fair value of identifiable tangible and intangible assets acquired less the fair value of liabilities assumed as goodwill. We do not amortize goodwill and we review it for impairment at our reporting unit level on an annual basis, and when events or changes in circumstances indicate that the carrying amounts may be impaired. We define a reporting unit as a distinct, separately identifiable component of one of our operating segments for which complete, discrete financial information is available and reviewed regularly by that segment’s management. We have two reporting units: Banking and Financial Services. At December 31, 2015 and 2014 , our goodwill totaled $1.3 billion . Of this, approximately 95% was allocated to our Banking reporting unit at December 31, 2015 and 2014 .
We perform our annual impairment review of goodwill on November 1 st of each year utilizing valuation methods we believe appropriate, given the availability and applicability of market-based data and inputs for those methods. After giving appropriate consideration to all available information at that point in time, we determined that the fair value of each reporting unit exceeded its carrying value (Step 1) and, therefore, there was no impairment of goodwill in 2015. As both of our reporting units’ fair value exceeded their carrying amount, we were not required to perform Step 2 of the goodwill impairment review.
Under Step 1 of the goodwill impairment review, we compare each reporting unit’s fair value to carrying value to identify potential impairment. If the estimated fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered impaired. Determining the fair value of a reporting unit as part of Step 1 analysis involves significant judgment. Inputs and assumptions, such as the market price of our common stock, future cash flows and earnings, discount rates, the assessment of relevant market transactions for comparability and the resulting control premium assumption, and multiples of relevant financial statement metrics, such as tangible book value and estimated earnings are all estimates involving significant judgment.
If the carrying amount of the reporting unit were to exceed its estimated fair value, a second step (Step 2) would be performed that would compare the implied fair value of the reporting unit’s goodwill with the carrying amount

54

of goodwill that is recognized in a business combination. Significant judgment and estimates also are involved in estimating the fair value of the assets and liabilities of the reporting units, and therefore the implied fair value of goodwill, as part of this Step 2 analysis. The most significant estimates involved related to our Banking unit would be the fair valuation of our loans and core deposit intangible asset. We would determine fair value of our loan portfolio by reference to market observable transactions for loan portfolios with similar characteristics, while we would estimate the value of the core deposit intangible asset using a discounted cash flow approach and market comparable transactions. Both of these estimates are highly subjective and involve many estimates.
In previous years, we used both a market approach and an income approach to determine the fair value of our Banking reporting unit under Step 1. However, given the announcement on October 30, 2015 that Key Bank will be acquiring the Company, the valuation of the Banking Reporting Unit as of November 1, 2015 was based on the agreed upon value that KeyCorp will pay to acquire the common stock of the Company, adjusted to reflect the portion of the sales price that is attributable to the Financial Services reporting unit. At November 1, 2015 that price was $11.40 per share.
The objective of a fair value measurement is to determine the price that would be received to sell an asset or paid to transfer a liability at the measurement date. Since a sales price has been agreed upon between the Company and KeyCorp, that price represents the best estimate of overall entity fair value at the November 1, 2015 measurement date.
For our Financial Services reporting unit, we used both an income approach and a market approach to determine the fair value under Step 1. Our income approach was based upon assumptions of income statement activity. An internal forecast was developed through consideration of current year financial performance and near term expectations regarding key business drivers. Long-term growth rates of 3% were then applied in determining the terminal value. A discount rate of 15% was used based upon consideration of the risk free rate, leverage factors, equity risk premium, and Company specific risk factors. In our market approach for our financial services reporting unit, we utilized a 30% control premium assumption based on our review of transactions observable in the market place that we determined were comparable to earnings for our financial services reporting unit. The market and income approaches were weighted equally to arrive at the estimate of fair value to compare against the carrying value.
NET INTEREST INCOME
2015 compared to 2014
Our net interest income decreased $30 million , or 3% , to $1.1 billion for 2015 from 2014 , reflecting a decrease in our net interest rate margin of 22 basis points and an increase in net-interest earning assets of $490 million . The decrease in our net interest rate margin reflects compression of earning asset yields in the current low interest rate and competitive pricing environment, lower discount accretion income on prepayments of collateralized loan obligations, and lower benefits from purchase accounting accretion on acquired loans.
The premium amortization on our residential mortgage-backed securities portfolio increased from $21 million for 2014 to $27 million for 2015 . In 2015 , we had a total benefit of $4 million from prepayments of some collateralized loan obligations that were carried at a discount, down from $10 million for 2014 . The yield on average interest-earning assets decreased 17 basis points from the prior year due to the impact of the roll off of higher earning assets and paydowns of lower earning assets.
Average interest-earning assets increased $1.5 billion , or 4% , during 2015 , while average interest-bearing liabilities increased by $1.0 billion over the same period. Growth in average interest-earning assets reflected continued loan growth, particularly in commercial real estate and business, home equity, and indirect auto loans. Average investment securities increased 3% during 2015 , driven by a $1.2 billion , or 19% , increase in residential mortgage-backed securities partially offset by a $333 million , or 21% , decrease in commercial mortgage-backed securities and a $439 million , or 11% , decrease in other investment securities. The increase in residential mortgage-backed securities demonstrates the mix shift in the securities portfolio from higher yielding credit to lower yielding non-

55

credit securities. Although the CLO balance was relatively flat, $600 million of new securities replaced an equal amount of roll off of older, higher yielding CLOs.
During 2013, the yield curve steepened appreciably driven by increased anticipation that the Federal Reserve will begin tapering its Quantitative Easing Bond-Buying program.  The steepening of the yield curve resulted from an increase in the mid-to-long end of the curve which has the positive impact of increasing reinvestment rates on certain securities purchases and mitigating premium amortization due to lower prepayment activity driven by higher mortgage rates. However, these benefits to net interest income continue to be more than offset by continued prepayments and/or refinancing of higher-yielding loans and new loan growth at current lower market rates. An intensifying competitive landscape, particularly for commercial and commercial real estate loans may drive spread compression in the future, which will likely impact net interest income.
Throughout 2015, the FOMC acknowledged that inflation was expected to remain low in the near term but stated they expected inflation to gradually rise toward their 2% target level over the medium term. The FOMC also expressed that it anticipated that it would be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market.
On June 17, 2015, the FOMC released its Meeting Statement and Economic Projections. Most notably, the FOMC members’ median projection for the federal funds rate at the end of 2016 was 1.625% and the FOMC members’ median projection for the federal funds rate at the end of 2017 was 2.875%. The median projection for 2015 remained unchanged at 0.625% suggesting potentially two rate hikes in the year. Minutes from the June Meeting suggested Federal Reserve officials believed they needed more time and more evidence that economic growth was sufficiently strong to justify a change in policy accommodation. Furthermore, Federal Reserve officials grew increasingly concerned about the potential "contagion" from international developments, specifically citing a sluggish Chinese economy and the potential departure of Greece from the Eurozone.
In the third quarter of 2015, global growth concerns and the impact on the U.S. economy led the Federal Reserve to continue to delay increasing the federal funds rate. In the September 17, 2015 release, the Federal Reserve stated, ”Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term.” As a result, the market has pushed out expectations for the Federal Reserve's initial rate increase to 2016 and interest rates decreased across most Treasury rate term points. However, the Federal Reserve Economic Projections indicated that 13 of 17 FOMC members still believed the appropriate timing to raise rates is in 2015. The Federal Reserve also updated the FOMC members’ median projection for the federal funds rate which decreased 0.25% from the June projections for 2015 through the long term.
Despite the FOMC projections, the continued low levels of inflation and the decline in oil prices had caused the market to believe the Federal Reserve will not raise the federal funds rate as soon or as high as the Federal Reserve projections.
In October 2015, the Federal Reserve again did not raise the federal funds rate but did re-emphasize their expectations that they may still do so in December. As a result, interest rates began to rise. Finally, on December 16, 2015, the Federal Reserve announced the first federal funds rate hike in over nine years increasing the federal funds target rate 0.25% to a range of 0.25% to 0.50%. As a result of the October statement and the actual increase in December, the market reacted by taking the 2 year Treasury rate 0.42% higher during the fourth quarter to 1.06% though longer term rates did not increase as much as the 10 year Treasury rate only increased 0.21% to 2.27%. The result was a higher though flatter interest rate yield curve in December compared to September as the difference between the term points decreased from 1.41% to 1.21%.
Longer term interest rates had been volatile throughout 2015 and thus far in 2016. The 10 year Treasury rate has been as low as 1.64% on January 30, 2015, the lowest since the second quarter of 2013 but had risen to as high as 2.49% on June 26, 2015. Renewed U.S. economic concerns have again sent rates lower. On February 8, 2016, the 10 year Treasury rate was 1.76% while the 2 year Treasury was 0.67%, a spread of 1.09% between the term points.

56

We do not expect to see significant improvement in net interest income until short-term interest rates increase further, and the impact on net interest income will be influenced by the nature, timing, market reaction and customer behavior, all of which are very unpredictable. There remain divergent views on the timing and pace of future increases to the federal funds rate with analyst estimates tracked by Bloomberg ranging from zero to seven implied additional rate increases of 0.25% by the end of 2016. The pace and magnitude of rising rates, and ultimately the shape of the yield curve (i.e. the difference between long and short term rates), will impact future profitability.
Our 2015 taxable equivalent net interest income of $1.1 billion decreased $29 million from 2014 . Overall, the yield on interest-earning assets decreased 17 basis points as a result of the combined effects of yield compression on our loan portfolio and mortgage-backed securities portfolio due to the impact of reinvestments and repricing of assets in the current low interest rate and competitive pricing environment as well as lower discount accretion income on prepayments of collateralized loan obligations. Average interest-earning assets increased $1.5 billion , or 4% , from 2014 primarily driven by growth in our loan and investment securities portfolios.
Our average balance of investment securities increased 3% year over year. Yields on our investment securities decreased 20 basis points to 2.89 % primarily due to a lower interest rate environment, higher premium amortization on our residential mortgage-backed securities portfolio, lower concentration of higher yielding credit securities, and lower discount accretion income on prepayments of collateralized loan obligations. During 2015 , $4 million in prepayments of CLOs that were purchased at a discount positively impacted the yields on securities as compared to $10 million in 2014 . However, while such income from CLO payoffs benefits the quarter in which they are recognized, the long-term implication is that these assets had above market interest rates that are being replaced with other lower yielding assets.
Loan yields decreased 17 basis points to 3.69 %, reflecting pressure on loan yields due to low interest rates and competitive pressures, as well as lower benefits from purchase accounting accretion. The decline in loan yields was driven by the roll-on/roll-off impact of commercial loan originations as well as lower credit mark accretion on acquired loans previously reclassified from nonaccretable to accretable yield. The total credit mark accretion in 2015 was $12 million , down from $18 million in 2014 . Average loan balances increased $1.1 billion , or 5% , in 2015 . Commercial loans increased $651 million , or 5% , and home equity and indirect auto remained a source of growth through 2015 , contributing $157 million , or 6% , and $402 million , or 21% , respectively, of the average net loan growth. These increases were partially offset by a $36 million , or 1% , decrease in residential real estate loans and a $30 million , or 10% , decrease in other consumer loans.
The yield on our commercial real estate and commercial business loan portfolios decreased by 18 basis points and 15 basis points, respectively, as a result of repayments and reinvestments at current market rates. Consumer loan yields dropped 18 basis points during the year, driven primarily by a four basis points decline in indirect auto yields, 11 basis points decline in residential real estate yields, and 18 basis points decline in home equity yields. Partially offsetting these declines was a one basis point increase in credit card yields.
During 2015 , our average interest-bearing deposits increased $517 million , or 2% . The increase in our average balances was driven by a $434 million , or 4% , increase in our average money market deposits resulting from higher consumer and commercial balances. The rate paid on interest-bearing deposits increased five basis points from 0.24% for 2014 to 0.29% for 2015 . Noninterest-bearing deposits, which increased $425 million , or 8% , also served as a funding source during 2015 .
Average short-term borrowings decreased $279 million , or 6% , while average long-term borrowings more than doubled to $1.5 billion for 2015 as we reduced our reliance on interest-bearing deposits as a funding source. Our cost of borrowings increased by one basis point for 2015 to 1.28 %.
2014 compared to 2013
Our net interest income decreased $8 million, or less than 1%, to $1.1 billion for 2014 from 2013, reflecting a decrease in our net interest margin of 16 basis points and an increase in net-interest earning assets of $681 million. Average interest-earning assets increased $1.5 billion while average interest-bearing liabilities increased

57

by $798 million over the same period. During 2014, compression in loan yields resulted in a 17 basis points decrease in the yield on interest-earning assets, while rates paid on interest-bearing liabilities were unchanged at 0.44%, resulting in a 16 basis points decrease in our tax equivalent net interest margin. Our 2014 net interest income benefited from $18 million in accretable yield attributable to better than expected credit performance of certain acquired loans as compared to $19 million in 2013.
Our average balance of investment securities decreased 1% year over year while yields on securities were unchanged. During 2014, $10 million in prepayments of CLOs that were purchased at a discount positively impacted the yields on securities as compared to $3 million in 2013.
Average loan balances increased $1.7 billion, or 8%, in 2014. Commercial loans increased $981 million, or 8%, as the pipeline remained stable throughout 2014. Indirect auto was a source of growth through 2014, as evidenced by the $793 million, or 74%, increase in average balances. Originations in this portfolio totaled $1.3 billion with a weighted average yield of 2.98% for 2014. Also contributing to our loan growth was the $151 million, or 6%, increase in our home equity portfolio. These increases were partially offset by a $196 million, or 5%, decrease in residential real estate loans and a $25 million, or 8%, decrease in other consumer loans.
The yield on our commercial real estate and commercial business loan portfolios decreased by 41 basis points and 15 basis points, respectively, as a result of repayments and reinvestments at current market rates. Consumer loan yields dropped 27 basis points during the same period, driven primarily by a 26 basis points decline in indirect auto yields, 13 basis points decline in residential real estate, and 18 basis points decline in home equity yields. Partially offsetting these declines was a 30 basis points increase in credit card yields and 12 basis points increase in other consumer loan yields.
During 2014, our average interest-bearing deposits decreased $138 million, or less than 1%, and rates paid were unchanged from 2013, while average short-term borrowings increased $934 million, or 25%, as a result of our decision to fund our balance sheet growth and rotation through low cost short-term borrowings. This funding strategy also decreased the rate paid on borrowings by 15 basis points. Noninterest-bearing deposits, which increased $461 million, or 10%, also served as a funding source during 2014.


58

The following table presents our condensed average balance sheet and taxable equivalent interest income and yields. Yields earned on interest-earning assets, rates paid on interest-bearing liabilities and average balances are based on average daily balances:
 
2015
 
2014
 
2013
(dollars in millions)
Average outstanding balance
Interest earned/paid (1)
Yield/rate (1)
 
Average outstanding balance
Interest earned/paid (1)
Yield/rate (1)
 
Average outstanding balance
Interest earned/paid (1)
Yield/rate (1)
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Loans and leases (2)
 
 
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
Real estate
$
8,319

$
302

3.57
%
 
$
7,944

$
302

3.75
%
 
$
7,446

$
314

4.16
%
Business
5,893

201

3.36

 
5,617

200

3.51

 
5,134

190

3.66

Total commercial lending
14,212

503

3.49

 
13,561

502

3.65

 
12,580

504

3.95

Consumer:
 
 
 
 
 
 
 
 
 
 
 
Residential real estate
3,337

123

3.70

 
3,373

129

3.81

 
3,569

141

3.94

Home equity
2,989

115

3.85

 
2,832

114

4.03

 
2,681

113

4.21

Indirect auto
2,272

64

2.82

 
1,870

53

2.86

 
1,077

34

3.12

Credit cards
306

35

11.51

 
312

36

11.50

 
307

34

11.20

Other consumer
260

22

8.51

 
290

25

8.55

 
315

27

8.43

Total consumer lending
9,164

359

3.93

 
8,677

357

4.11

 
7,949

348

4.38

Total loans
23,376

862

3.69

 
22,238

859

3.86

 
20,529

853

4.15

Residential mortgage-backed securities (3)
7,437

179

2.41

 
6,274

164

2.61

 
5,500

146

2.66

Commercial mortgage-backed securities (3)
1,262

47

3.69

 
1,595

53

3.35

 
1,844

68

3.69

Other investment securities (3)
3,555

128

3.61

 
3,994

149

3.72

 
4,694

158

3.36

Total investment securities
12,254

354

2.89

 
11,863

366

3.09

 
12,038

372

3.09

Money market and other investments
114

2

1.60

 
134

2

1.58

 
189

3

1.65

Total interest-earning assets
35,744

$
1,218

3.41
%
 
34,235

$
1,227

3.58
%
 
32,756

$
1,228

3.75
%
Noninterest-earning assets (4)(5)
3,320

 
 
 
3,985

 
 
 
4,311

 
 
Total assets
$
39,064

 
 
 
$
38,220

 
 
 
$
37,067

 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Deposits
 
 
 
 
 
 
 
 
 
 
 
Savings deposits
$
3,429

$
3

0.09
%
 
$
3,571

$
3

0.09
%
 
$
3,813

$
4

0.10
%
Checking accounts
5,159

2

0.03

 
4,857

2

0.03

 
4,524

2

0.04

Money market deposits
10,378

30

0.29

 
9,944

22

0.22

 
10,167

21

0.21

Certificates of deposit
3,792

31

0.84

 
3,870

27

0.69

 
3,875

26

0.68

Total interest-bearing deposits
22,758

66

0.29

 
22,241

53

0.24

 
22,379

53

0.24

Borrowings
 
 
 
 
 
 
 
 
 
 
 
Short-term borrowings
4,399

22

0.50

 
4,678

20

0.43

 
3,744

15

0.41

Long-term borrowings
1,515

54

3.56

 
733

48

6.61

 
732

48

6.61

Total borrowings
5,914

76

1.28

 
5,411

69

1.27

 
4,476

64

1.42

Total interest-bearing liabilities
28,672

$
142

0.49
%
 
27,653

$
122

0.44
%
 
26,855

$
117

0.44
%
Noninterest-bearing deposits
5,598

 
 
 
5,173

 
 
 
4,712

 
 
Other noninterest-bearing liabilities
650

 
 
 
560

 
 
 
534

 
 
Total liabilities
34,920

 
 
 
33,386

 
 
 
32,101

 
 
Stockholders’ equity (4)
4,144

 
 
 
4,834

 
 
 
4,966

 
 
Total liabilities and stockholders’ equity
$
39,064

 
 
 
$
38,220

 
 
 
$
37,067

 
 
Net interest income
 
$
1,076

 
 
 
$
1,105

 
 
 
$
1,111

 
Net interest rate spread
 
 
2.92
%
 
 
 
3.14
%
 
 
 
3.31
%
Net earning assets
$
7,071

 
 
 
$
6,582

 
 
 
$
5,902

 
 
Net interest rate margin
 
 
3.01
%
 
 
 
3.23
%
 
 
 
3.39
%
Ratio of average interest-earning assets to average interest-bearing liabilities
125
%
 
 
 
124
%
 
 
 
122
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 

59

(1)  
We use a taxable equivalent basis based on a 35% tax rate in order to provide the most comparative yields among all types of interest-earning assets.
(2)  
Average outstanding balances are net of deferred costs and unearned discounts and include nonperforming loans.
(3)  
Average outstanding balances are at amortized cost.
(4)  
Average outstanding balances include unrealized gains/losses on securities available for sale.
(5)  
Average outstanding balances include allowance for loan losses and bank-owned life insurance, earnings from which are reflected in noninterest income.
Rate/Volume Analysis
The following table presents (on a taxable-equivalent basis) the extent to which changes in interest rates and changes in the volume of our interest-earning assets and interest-bearing liabilities have affected our net interest income during the years indicated. We have provided information in each category with respect to: (i) changes attributable to changes in volume (changes in volume multiplied by prior rate); (ii) changes attributable to changes in rate (changes in rate multiplied by prior volume); and (iii) the net change. The changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate for the years ended December 31:
 
2015 vs. 2014
 
2014 vs. 2013
 
Increase/(decrease)
due to
Total
increase
 
Increase/(decrease)
due to
Total
increase
(in millions)
Volume
Rate
(decrease)
 
Volume
Rate
(decrease)
Interest income on:
 
 
 
 
 
 
 
Real estate
$
14

$
(14
)
$
—

 
$
20

$
(32
)
$
(12
)
Business
10

(9
)
1

 
17

(8
)
10

Total commercial lending
23

(22
)
1

 
37

(40
)
(3
)
Residential real estate
(1
)
(4
)
(5
)
 
(7
)
(5
)
(12
)
Home equity
6

(5
)
1

 
6

(5
)
1

Indirect auto
11

(1
)
11

 
23

(3
)
20

Credit cards
(1
)
—

(1
)
 
1

1

2

Other consumer
(3
)
—

(3
)
 
(2
)
—

(2
)
Total consumer
19

(16
)
3

 
31

(22
)
9

Total loans
43

(39
)
4

 
68

(62
)
6

Residential mortgage-backed securities
28

(13
)
15

 
20

(3
)
17

Commercial mortgage-backed securities
(12
)
5

(7
)
 
(9
)
(6
)
(14
)
Other investment securities
(16
)
(4
)
(21
)
 
(25
)
16

(9
)
Money market and other investments
—

—

—

 
(1
)
—

(1
)
Total interest-earning assets
43

(52
)
(9
)
 
54

(55
)
(1
)
Interest expense of:
 
 
 
 
 
 
 
Savings deposits
—

—

—

 
—

—

(1
)
Checking accounts
—

—

—

 
—

—

—

Money market deposits
1

7

8

 
—

1

1

Certificates of deposit
(1
)
6

5

 
—

—

—

Borrowings
7

1

7

 
12

(7
)
5

Total interest-bearing liabilities
7

13

20

 
12

(7
)
5

Net interest income
$
36

$
(64
)
$
(29
)
 
$
42

$
(48
)
$
(6
)

60

PROVISION FOR CREDIT LOSSES
Our provision for credit losses is comprised of three components: consideration of the adequacy of our allowance for originated loan losses; needs for allowance for acquired loan losses due to deterioration in credit quality subsequent to acquisition; and probable losses associated with our unfunded loan commitments.

The following table details the composition of our provision for credit losses for the periods indicated:
 
Year ended December 31,
(in millions)
2015
2014
2013
Provision for originated loans
$
74

$
85

$
96

Provision for acquired loans
3

8

7

Provision for unfunded commitments
—

3

2

Total
$
76

$
96

$
105

2015 compared to 2014
Our provision for credit losses in 2015 amounted to $76 million , a $20 million decrease from 2014 , when our provision for credit losses totaled $96 million . The year over year decline was mainly driven by elevated provision for the fourth quarter of 2014 .
Our provision for loan losses related to our originated loans is based upon the inherent risk of our loans and considers interrelated factors such as the composition and other credit risk factors of our loan portfolio, loan growth, trends in asset quality including loan concentrations, and delinquencies within the portfolio. Consideration is also given to collateral value, government guarantees, and regional and global economic indicators. The provision for loan losses related to originated loans amounted to $74 million , or 0.37% of average originated loans, for 2015 , compared to $85 million , or 0.47% of average originated loans, for 2014 . Our provision in 2015 included $65 million to cover net charge-offs and $9 million to support organic loan growth. The provision for 2014 included $62 million for net charge-offs, $5 million to cover exposure to borrowers servicing the energy sector following the fall in oil prices, $11 million to cover a $10 million charge-off plus an additional reserve of $1 million, both related to a single borrower in the oil and gas industry, and $5 million related to the impairment of a commercial loan that was sold in March 2015.
Our provision for loan losses related to our acquired loans is based upon a deterioration in expected cash flows subsequent to the acquisition of the loans. These acquired loans were originally recorded at fair value on the date of acquisition. As the fair value at the time of acquisition incorporated lifetime expected credit losses, there was no carryover of the related allowance for loan losses. Subsequent to acquisition, we periodically reforecast the expected cash flows for our acquired loans and compare this to our original estimates to evaluate the need for a loan loss provision. Our provision related to our acquired loans was $3 million for 2015 and $8 million for 2014 . In 2014 , we recorded $7 million of provision related to the charge-off of several commercial loans acquired in the Harleysville acquisition and to adjust our estimate of the lifetime loss expected in the home equity portfolio acquired in the Harleysville acquisition.
The provision for credit losses for unfunded loan commitments was not material in 2015. This was the result of a $1.4 million release of provision during the first quarter of 2015 following the funding of one previously unfunded loan commitment. The release during the first quarter was offset by $1.3 million of provision booked in the second through fourth quarters of 2015. The provision for credit losses for 2014 included $3 million of provision for unfunded loan commitments. Our total unfunded commitments were $11.7 billion and $11.0 billion at December 31, 2015 and 2014 , respectively. The liability for unfunded commitments is included in Other Liabilities in our Consolidated Statements of Condition and amounted to $16 million at December 31, 2015 and 2014 .
2014 compared to 2013
The provision for credit losses of $96 million for 2014 as compared to $105 million for 2013 reflected growth in our commercial and indirect auto portfolios, as well as the changing complexion of our portfolio. The provision for

61

credit losses related to originated loans amounted to $85 million, or 0.47% of average originated loans, for 2014, compared to $96 million, or 0.64% of average originated loans, for 2013. The provision for 2014 covered net charge-offs of $62 million, and included $5 million to cover exposure to borrowers servicing the energy sector and $5 million related to impairment of a commercial loan that was sold in March 2015. The provision for 2013 included $44 million to support sequential originated loan growth and $52 million to cover net charge offs.
As mentioned above, we recorded an additional $5 million of provision expense in the fourth quarter of 2014 to cover exposure to borrowers servicing the energy sector. Our direct exposure to the oil and gas industry was about $141 million in balances, or 0.6% of our total loan portfolio at December 31, 2014. Additionally, our indirect exposure to the sector was about $144 million in balances, or 0.6% of our total loan portfolio at December 31, 2014.
Our provision related to our acquired loans was $8 million for 2014 and $7 million for 2013. In both 2014 and 2013, we recorded $7 million of provision related to the charge-off of several commercial loans acquired in the Harleysville acquisition and to adjust our estimate of the lifetime loss expected in the home equity portfolio acquired in the Harleysville acquisition.
The provision for credit losses included $3 million and $2 million of provision for unfunded loan commitments in 2014 and 2013, respectively, as a result of the organic growth in our unfunded commitments. Our total unfunded commitments were $11.0 billion and $9.5 billion at December 31, 2014 and 2013, respectively. The liability for unfunded commitments amounted to $16 million and $13 million at December 31, 2014 and 2013, respectively.
NONINTEREST INCOME
The following table presents our noninterest income for the years ended December 31:
 
 
 
Increase (decrease)
(dollars in millions)
2015
2014
2013
 
2015 vs. 2014
2014 vs. 2013
Deposit service charges
$
88

$
90

$
104

 
$
(2
)
$
(14
)
Insurance commissions
66

66

67

 
—

(1
)
Merchant and card fees
52

50

49

 
2

2

Wealth management services
60

61

58

 
(2
)
3

Mortgage banking
21

18

18

 
3

(1
)
Capital markets income
19

18

22

 
—

(4
)
Lending and leasing
17

18

17

 
(1
)
—

Bank owned life insurance
13

15

17

 
(2
)
(2
)
Other income excluding tax credit amortization
13

7

12

 
6

(5
)
Total noninterest income excluding tax credit amortization (non-GAAP)
348

343

366

 
4

(22
)
Tax credit amortization
(6
)
(33
)
—

 
27

(33
)
Total noninterest income (GAAP)
$
342

$
310

$
366

 
$
32

$
(55
)
Noninterest income excluding tax credit amortization as a percentage of net revenue (non-GAAP)
24.8
%
24.0
%
25.1
%
 
 
 
Noninterest income as a percentage of net revenue
24.4
%
22.2
%
25.1
%
 
 
 
2015 compared to 2014
GAAP noninterest income of $342 million increased $32 million , or 10% , for 2015 compared to 2014 , driven primarily by lower tax credit amortization and higher revenues from merchant and card fees, mortgage banking, capital markets income, and other income, partially offset by lower revenues from deposit service charges, wealth management services, lending and leasing, and bank owned life insurance. Other income for 2015 and 2014 includes $6 million and $33 million , respectively, in amortization for certain tax credit investments, which was offset by lower tax expense. These investments are amortized in the first year of funding and we recognized the

62

amortization as contra-fee income, with an offsetting benefit that reduced our income tax expense. Excluding this amortization, noninterest income increased $4 million , or 1% .
The $2 million , or 3% , increase in merchant and card fees primarily stemmed from higher debit card transaction volumes. Mortgage banking revenues increased $3 million , or 17% , from the prior year as a result of higher close volumes and higher gain on sale margins. The modest increase in capital markets income resulted from higher derivatives and foreign exchange income partially offset by lower syndication fees. Excluding the tax credit amortization, other income increased $6 million , or 84% , due to higher equity and investment gains and gain from the sale of a low income housing property.
Revenues from deposit service charges decreased $2 million , or 2% , as a result of lower nonsufficient funds incident rates and other retail service charges due to changes in customer behavior, while revenues from wealth management services decreased $2 million , or 3% , as a result of lower annuity and mutual funds commissions caused by negative market conditions. The $1 million , or 5% , decrease in lending and leasing stemmed from lower letter of credit fees. The $2 million , or 13% , decrease in bank owned life insurance was attributable to benefits received on two insurance claims in the first quarter of 2014.
GAAP noninterest income as a percentage of net revenue increased from 22.2% for 2014 to 24.4% for 2015 . Excluding the tax credit amortization, recorded as contra noninterest income, this ratio increased from 24.0% for 2014 to 24.8% for 2015 .
2014 compared to 2013
Excluding $33 million in amortization for certain tax credit investments reported in other income, noninterest income decreased $22 million for 2014 compared to 2013 primarily due to lower deposit service charges, as well as lower capital markets and bank owned life insurance income. Partially offsetting these decreases were higher merchant and card fees and revenues from wealth management services.
A portion of the decrease in deposit service charges, approximately $5 million, was related to the process issue while this revenue source continues to be pressured by lower customer incident rates consistent with industry trends. The 18% decrease in capital markets income was driven by lower derivative fee income partially offset by modestly higher syndication fees. Long-term fixed rate pricing and competitive terms in the market place, coupled with the impact of the Dodd-Frank Act, has resulted in diminished customer demand for interest rate derivatives. The $5 million decrease in other income was primarily due to lower equity and investment income. During 2014, we recorded $33 million in amortization for certain tax credit investments. These investments are amortized in the first year of funding and we recognized the amortization as contra-fee income, included in other income, with an offsetting benefit that reduced our income tax expense.
Merchant and card fees increased 3% during the year ended December 31, 2014 from the same period in 2013, stemming from higher debit card revenues and volume driven interchange fees. Wealth management services income increased $3 million, or 5%, for the year ended December 31, 2014 from the same period in 2013 driven by growth in annuity sales resulting from favorable spreads between time deposits and fixed annuity rates. Bank owned life insurance income decreased 10% from elevated 2013 levels.

63

NONINTEREST EXPENSES
The following table presents our noninterest expense for the years ended December 31:
 
Year ended December 31,
 
Increase (decrease)
(dollars in millions)
2015
2014
2013
 
2015 vs. 2014
2014 vs. 2013
Salaries and benefits
$
452

$
463

$
461

 
$
(11
)
$
2

Occupancy and equipment
105

112

111

 
(7
)
2

Technology and communications
148

127

115

 
21

12

Marketing and advertising
38

35

20

 
3

15

Professional services
63

56

39

 
7

17

Amortization of intangibles
19

27

40

 
(8
)
(13
)
FDIC premiums
43

40

35

 
3

5

Restructuring charges
21

22

—

 
(1
)
(22
)
Goodwill impairment
—

1,100

—

 
(1,100
)
1,100

Deposit account remediation
—

22

—

 
(22
)
22

Merger and acquisition integration expenses
14

—

—

 
14

—

Other
115

120

110

 
(5
)
10

Total noninterest expenses
1,019

2,124

931

 
(1,105
)
1,193

Less nonoperating expenses:
 
 
 
 
 
 
Restructuring charges
(21
)
(22
)
—

 
1

(22
)
Goodwill impairment
—

(1,100
)
—

 
1,100

1,100

Deposit account remediation
—

(22
)
—

 
22

(22
)
Merger and acquisition integration expenses
(14
)
—

—

 
(14
)
—

Total operating noninterest expense (1)
$
984

$
980

$
931

 
$
4

$
49

Efficiency ratio (2)
72.9
%
152.2
%
63.8
%
 
 
 
Operating efficiency ratio (1)
70.4
%
70.2
%
63.8
%
 
 
 
(1)  
We believe this non-GAAP measure provides a meaningful comparison of our underlying operational performance and facilitates management’s and investors’ assessments of business and performance trends in comparison to others in the financial services industry and period over period analysis of our fundamental results. The operating efficiency ratio is computed by dividing operating noninterest expense by the sum of net interest income and noninterest income.
(2)  
The efficiency ratio is computed by dividing noninterest expense by the sum of net interest income and noninterest income.
2015 compared to 2014
GAAP noninterest expenses decreased $1.1 billion , or 52% , for 2015 from 2014 . Noninterest expenses for 2015 included $21 million in pre-tax restructuring and severance charges incurred primarily in connection with the consolidation of 17 branches and the completion of our organization simplification initiative during the first quarter as well as third party professional fees incurred in connection with the overstatement of the allowance for loan losses and $14 million in merger and acquisition integration expenses related to the Merger with KeyCorp. Noninterest expenses for 2014 included a $1.1 billion pre-tax goodwill impairment charge, a $22 million pre-tax reserve to address a process issue related to certain customer deposit accounts, and $22 million in pre-tax restructuring charges related to our branch staffing realignment, consolidation of ten branches during the first quarter, and executive departure charges. Excluding these charges, operating (non-GAAP) noninterest expenses increased $4 million , or less than 1%.
Technology and communications expenses for 2015 increased $21 million , or 17% , from 2014 primarily as a result of higher hardware and software expenses as well as higher depreciation related to completed technology projects. Marketing and advertising was $3 million , or 9% , higher for 2015 due to our core customer acquisition strategy. Professional services increased $7 million , or 13% , due to vendor and other consulting costs. FDIC premiums increased $3 million , or 8% , due to higher construction loans and the impact of our $1.1 billion goodwill impairment charge in the third quarter of 2014.

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Partially offsetting these increases were an $11 million , or 2% , decrease in salaries and employee benefits, a $7 million , or 7% , decrease in occupancy and equipment, and an $8 million , or 29% , decrease in amortization of intangibles. The decrease in salaries and employee benefits was primarily driven by lower regular salaries, reflective of the 3% decrease in our headcount resulting from our organization simplification initiative, partially offset by higher incentive compensation and benefits costs. The decrease in occupancy and equipment reflects the benefits of consolidating 17 branches during the first quarter of 2015. Contributing to the $5 million , or 4% decrease in other expenses were $7 million of elevated charges in the third quarter of 2014 related to the valuation writedown of a single other real estate owned property, higher state franchise taxes, and expenses incurred to protect our customers in response to the widely publicized Home Depot data security breach that impacted debit and credit card holders and banks across North America.
Pre-tax restructuring charges of $21 million for 2015 were comprised of $4 million in salaries and employee benefits, $6 million in occupancy and equipment, $8 million in professional services, and $2 million in other expenses. Pre-tax restructuring charges of $22 million for 2014 were comprised of $14 million in salaries and employee benefits, $4 million in occupancy and equipment, and $3 million in professional services.
Pre-tax merger and acquisition integration expenses of $14 million for 2015 included investment banker fees and other professional services fees, employee retention expenses, and classification of compensation of certain personnel dedicated to merger integration efforts.
2014 compared to 2013
GAAP noninterest expenses increased $1.2 billion, or 128%, for 2014 from 2013. Noninterest expenses for 2014 included a pre-tax $1.1 billion goodwill impairment charge, a $22 million pre-tax reserve to address a process issue related to certain customer deposit accounts, and $22 million in pre-tax restructuring and severance expenses incurred primarily in connection with a previously announced branch staffing realignment as well as the previously mentioned organization simplification. Excluding these charges, operating (non-GAAP) noninterest expenses increased $49 million, or 5%.
Salaries and benefits increased $2 million, or less than 1%, primarily as a result of higher salaries partially offset by lower medical expenses driven by the redesign of our health plan offerings. Higher depreciation contributed to the 2% increase in occupancy and equipment. The 10% increase in technology and communications reflects higher depreciation related to loan processing platforms as well as higher hardware and software costs. Higher marketing and advertising expenses of 71% resulted from our increased focus on customer and deposit acquisitions as well as the introduction of our new Simple Checking product. Increases in legal fees and other corporate costs resulted in the 44% increase in professional fees. FDIC premiums increased 14% due to higher construction loans and the impact of the $1.1 billion goodwill impairment charge. Included in other expense for 2014 are other expenses which include a $3 million valuation writedown of a single other real estate owned property, $2 million related to higher state franchise taxes, and $2 million in losses and expenses incurred in protecting our customers in response to the widely publicized Home Depot data security breach that impacted debit and credit card holders across North America. These increases were partially offset by a $13 million, or 32%, decrease in amortization of intangibles.
Pre-tax restructuring charges for 2014 were comprised of $14 million in salaries and employee benefits, $4 million in occupancy and equipment, and $3 million in professional services.
INCOME TAXES
The provision for income taxes for 2015 was $79 million , resulting in an effective tax rate of 26.0% . The provision for income taxes for 2014 was a benefit of $109 million , resulting in an effective tax rate benefit of 13.3% . The effective tax rate for 2015 reflects the benefit of tax credits originated by our commercial real estate business and the partial utilization of a capital loss carryover. The effective tax rate benefit for 2014 reflects the impact of the goodwill impairment charge, of which only a portion was tax deductible, benefits of a taxable reorganization of a subsidiary, investments in certain tax credits originated by our commercial real estate business, and other small

65

savings. The benefit from the taxable reorganization of a subsidiary and the net impact of the tax credit investments totaled $0.10 per share in 2014.
The provision for income taxes for 2014 was a benefit of $109 million, resulting in an effective tax rate benefit of 13.3%. The effective tax rate was 30.2% for 2013, resulting in income tax expense of $128 million. The effective tax rate for the year ended December 31, 2014 reflects the impact of the goodwill impairment charge, of which only a portion was tax deductible, benefits of a taxable reorganization of a subsidiary, investments in certain tax credits originated by our commercial real estate business, and other small savings. The benefit from the taxable reorganization of a subsidiary and the net impact of the tax credit investments totaled $0.10 per share in 2014.
FOURTH QUARTER RESULTS
The following table summarizes our results of operations for the periods indicated on a GAAP basis and on an operating (non-GAAP) basis. Our operating results exclude certain nonoperating expense items as detailed below. We believe this non-GAAP measure provides a meaningful comparison of our underlying operational performance and facilitates management’s and investors’ assessments of business and performance trends in comparison to others in the financial services industry and period over period analysis of our fundamental results. In addition, we believe the exclusion of the nonoperating items from our performance enables management and investors to perform a more effective evaluation and comparison of our results and to assess performance in relation to our ongoing operations. 
 
Three months ended
 
December 31,
September 30,
December 31,
(in millions, except per share data)
2015
2015
2014
Operating results (Non-GAAP):
 
 
 
Net interest income
$
267

$
263

$
270

Provision for credit losses
23

20

36

Noninterest income
89

83

77

Noninterest expense
247

245

248

Income tax expense
23

21

2

Net operating income (Non-GAAP)
$
63

$
60

$
61

Operating earnings per diluted share (Non-GAAP)
$
0.15

$
0.15

$
0.15

Reconciliation of net operating income to net income
$
63

$
60

$
61

Nonoperating expenses, net of tax at effective tax rate:
 
 
 
Restructuring charges ($3 million and $9 million pre-tax for the three months ended December 31, 2015 and 2014, respectively)
(2
)
—

(6
)
Deposit account remediation ($23 million pre-tax)
—

—

15

Merger and acquisition integration expenses ($14 million pre-tax)
(10
)
—

—

Total nonoperating expenses, net of tax
(12
)
—

8

Net income (GAAP)
$
51

$
60

$
69

Earnings per diluted share (GAAP)
$
0.12

$
0.15

$
0.17

Comparison to Prior Quarter
Our fourth quarter 2015 GAAP net income was $51 million , or $0.12 per diluted share, and included $14 million in merger and acquisition integration expenses related to our pending Merger with KeyCorp and $3 million in restructuring charges related to third party professional fees incurred in connection with the overstatement of the allowance for loan losses. Excluding these charges our operating (non-GAAP) net income was $63 million , or $0.15 per diluted share, for the fourth quarter of 2015 . By comparison, in the third quarter of 2015 , we reported GAAP net income of $60 million , or $0.15 per diluted share, and there were no nonoperating expenses during the quarter.

66

Our fourth quarter 2015 net interest income increased $3 million , or 1% , from the prior quarter to $267 million , driven in part by earning asset growth and greater benefits from prepayment income and purchase accounting accretion. Average interest-earning assets increased 5% while our net interest rate margin was unchanged at 2.98% , which reflects the benefits of an additional day in the quarter offset by continued compression of earning asset yields in the current low interest rate and competitive pricing environment, and lower discount accretion income on prepayment of collateralized loan obligations. Yields on loans increased one basis point to 3.65 %, reflecting higher prepayment income and purchase accounting accretion offset by continued pressure on loan yields due to lower interest rates and competitive pressures. Yields on investment securities decreased two basis points to 2.90 % due primarily to lower discount accretion income on prepayment of collateralized loan obligations. The average cost of interest-bearing deposits increased one basis point compared from the prior quarter to 0.30% .
Compared to the prior quarter, average loans increased 6% annualized during the fourth quarter of 2015 driven primarily by increases in our commercial real estate, home equity, and indirect auto portfolios. Average commercial business and real estate loans increased 6% annualized. Average commercial loan growth was driven by growth primarily in our New England and Tri-State markets. Average commercial real estate loans increased 10% annualized, driven by commercial mortgage and construction lending offset by borrower prepayments, while commercial business loans decreased less than 1% annualized, reflecting higher paydown activity. Total period end loan balances increased 6% annualized and were driven by a 14% annualized increase in commercial real estate loan balances, a 5% annualized increase in home equity balances, an 11% annualized increase in indirect auto loan balances, and a 7% annualized increase in credit card balances.
Average consumer loans increased 6% annualized driven by a 7% and 13% annualized increase in our home equity and indirect auto portfolios, respectively, partially offset by an 8% annualized decrease in other consumer loans. Average indirect auto loan balances increased $76 million , or 13% annualized, to $2.4 billion as strong new origination activity was partially offset by increased paydowns. New originations in the quarter, which totaled $295 million , yielded 3.30% , net of dealer reserve. Average home equity balances increased for the eleventh consecutive quarter to $3.1 billion , or 7% annualized, from the prior quarter reflecting higher customer draws as well as the benefits of promotional and cross-sell campaigns.
Average deposits increased 3% annualized from the prior quarter to $28.8 billion , driven by growth in commercial deposits. Average interest-bearing checking balances increased $168 million , or 13% annualized, reflecting seasonally strong municipal deposit balances. Noninterest-bearing checking balances averaged $5.9 billion , a 15% annualized increase from the prior quarter, driven by increases in business and municipal noninterest-bearing deposit balances. Average transactional deposits, which include interest-bearing and noninterest-bearing checking account balances, increased 14% annualized and currently represent 39% of average total deposits. Average money market deposit balances increased $316 million , or 12% annualized, reflecting the benefits of promotional marketing and pricing campaigns and seasonally strong municipal deposit balances. Average savings balances decreased 7% annualized from the prior quarter due to lower customer balances and seasonality. Average time deposits decreased $447 million , or 45% annualized, from the prior quarter primarily as a result of lower brokered certificates of deposit.
Our provision for credit losses increased to $23 million for the three months ended December 31, 2015 from $20 million for the three months ended September 30, 2015 . Nonperforming assets increased to $230 million , or 0.58% of total assets, at December 31, 2015 from $229 million , or 0.58% of total assets at September 30, 2015 .
The provision for loan losses on originated loans increased to $22 million for the fourth quarter of 2015 from $21 million for the third quarter of 2015 and annualized net charge-offs increased to 0.37% of average originated loans for the fourth quarter of 2015 from 0.31% for the third quarter of 2015 . Nonperforming originated loans of $188 million increased $3 million , or 1% , from September 30, 2015 and at December 31, 2015 , the allowance for loan losses on originated loans totaled $237 million , or 1.12% of such loans, compared to $233 million, or 1.13% of such loans at September 30, 2015 . The modest decline in allowance coverage ratio reflects the impact of charge-offs during the fourth quarter that were previously provided for as of September 30, 2015.
We did not record a provision for loan losses related to our acquired loans in the fourth quarter of 2015 and we recorded a negative provision for loan losses related to our acquired loans of $1 million in the third quarter of

67

2015 , both reflecting paydowns in acquired loan balances. We did not charge-off any acquired loan balances for the fourth quarter of 2015 , compared to $1 million in charge-offs, or 0.08% annualized of average acquired loans, for the third quarter of 2015 . At December 31, 2015 , the allowance for loan losses on acquired loans totaled $5 million , unchanged from September 30, 2015 . Acquired nonperforming loans totaled $25 million at December 31, 2015 , also unchanged from the prior quarter. At December 31, 2015 , remaining credit marks available to absorb losses on a pool-by-pool basis totaled $62 million , representing a 2% coverage ratio. In the third quarter of 2015, we transferred approximately $11 million of credit marks from nonaccretable to accretable yields. This amount will be accreted into interest income over a period of approximately five to seven years.
Noninterest income increased $6 million , or 7% , in the fourth quarter of 2015 compared to the third quarter of 2015 , reflecting higher capital markets and other income partially offset by lower insurance commissions. Noninterest income for the three months ended December 31, 2015 and September 30, 2015 included $1 million and $2 million , respectively, in tax credit amortization. Excluding this amortization, noninterest income increased $5 million , or 6% . Capital markets income, which includes income from derivatives and syndications, more than doubled to $7 million , primarily driven by strong derivative activity in the fourth quarter as well as the impact of a favorable credit valuation adjustment on interest rate swap assets. Excluding the tax credit amortization, the increase in other noninterest income reflects the gain from the sale of a low income housing property and higher equity and investment gains. Insurance commissions decreased $3 million , or 18% , due to seasonally lower renewal volumes during the fourth quarter.
Noninterest expenses for the fourth quarter of 2015 increased $20 million , or 8% , from the third quarter of 2015 . Noninterest expenses for the fourth quarter of 2015 included $14 million in merger and acquisition integration expenses and $3 million in restructuring charges. Excluding these nonoperating expenses, noninterest expenses increased $2 million , or 1% , primarily driven by higher marketing and advertising and other expenses, which were partially offset by lower salaries and benefits and professional services. Timing of promotional campaigns resulted in an increase of $1 million , or 15% , in marketing and advertising. The $3 million , or 13% , increase in other expense was the result of higher other real estate owned valuation writedowns, litigation expenses, and new credit and debit card issuance costs. Salaries and benefits decreased $1 million , or 1% , as higher medical costs were offset by lower incentive compensation expense. Professional fees decreased $3 million , or 15% , from the prior quarter due primarily to lower spend on vendor and other consulting fees.
Our effective tax rate was 25.4% and 26.0% for the three months ended December 31, 2015 and September 30, 2015 , respectively. Our effective tax rate for the three months ended December 31, 2015 reflects the benefits of tax credit investments and the partial utilization of a capital loss carryover that reduced our income tax expense. Our effective tax rate for the three months ended September 30, 2015 reflects the benefit of tax credit investments.
Comparison to Prior Year Quarter
Our fourth quarter 2015 GAAP net income was $51 million , or $0.12 per diluted share, and included $14 million in merger and acquisition integration expenses related to our pending Merger with KeyCorp and $3 million in restructuring charges related to third party professional fees incurred in connection with the overstatement of the allowance for loan losses. Excluding these charges our operating (non-GAAP) net income was $63 million , or $0.15 per diluted share, for the fourth quarter of 2015 . Our fourth quarter of 2014 GAAP net income was $69 million , or $0.17 per diluted share, and included a $23 million pre-tax reversal of reserves to address a process issue related to certain customer deposit accounts, as well as the expense impact of $9 million in pre-tax restructuring charges primarily associated with our organization simplification. Excluding these charges, our operating (non-GAAP) net income for the fourth quarter of 2014 was $61 million , or $0.15 per diluted share.
Our fourth quarter of 2015 net interest income decreased $3 million , or 1% , from the fourth quarter of 2014 . Our taxable equivalent net interest rate margin decreased 13 basis points to 2.98% at December 31, 2015 from 3.11% in the fourth quarter of 2014 . During the current quarter, yields on average interest-earning assets decrease d nine basis points, compared to the same quarter in 2014 , driven by lower yields in our commercial, residential real estate, and home equity loan portfolios. The cost of interest-bearing deposits of 0.30% for the current quarter

68

increased four basis points from the same quarter in 2014 due to promotional pricing on money market deposit accounts and the expiration of certain favorable purchase accounting marks on acquired certificates of deposit.
Average loans increased 4% for the quarter ended December 31, 2015 compared to the same quarter in 2014 . Average commercial business and real estate loans increased 4% over the same quarter in 2014 , with our commercial real estate portfolio increasing 5% and commercial business portfolio increasing 3% . Average consumer loans increased 4% , primarily driven by growth in home equity and indirect auto loan balances, partially offset by decreases in residential real estate and other consumer loan portfolios.
Average transactional deposit balances, which include interest-bearing and noninterest-bearing checking accounts, increased 6% over the prior year and represent 39% of our average deposit balances, compared to 38% a year ago. Average interest-bearing checking balances increased $284 million , or 6% , for the quarter ended December 31, 2015 from the same quarter in the prior year and average noninterest-bearing checking balances increased $383 million , or 7% . The increase in noninterest-bearing checking balances was primarily driven by increases in consumer, municipal, and business checking balances. Total average commercial deposits increased 10% from the year ago quarter driven by higher noninterest checking and money market balances. Average money market balances increased 7% compared to the prior year quarter while time deposits decreased 10% .
Our provision for credit losses totaled $23 million and $36 million for the three months ended December 31, 2015 and 2014 , respectively. The provision for loan losses on originated loans was $22 million and $31 million in the fourth quarter of 2015 and 2014 , respectively. The provision for loan losses on originated loans for the three months ended December 31, 2014 included $11 million to cover a $10 million charge-off and $1 million of additional reserve related to a single borrower in the oil and gas industry, $5 million to cover exposure to borrowers servicing the energy sector following the fall in oil prices, and an additional $5 million related to impairment of a commercial loan that was sold in March 2015. Annualized net charge-offs amounted to 0.37% and 0.44% of average originated loans for the three months ended December 31, 2015 and 2014 , respectively. Nonperforming originated loans as a percentage of originated loans decreased to 0.89% at December 31, 2015 from 0.90% at December 31, 2014 . At December 31, 2015 and 2014 , the allowance for loan losses on originated loans totaled 1.12% and 1.18% , respectively, of such loans reflecting continued improvements in underlying asset quality metrics.
We did not record a provision for loan losses related to our acquired loans or charge-off any acquired loan balances in the fourth quarter of 2015 and experienced paydowns in acquired loan balances. Our provision for loan losses related to our acquired loans was $3 million in the fourth quarter of 2014 . Annualized net charge-offs equaled 0.17% of average acquired loans for the quarter ended December 31, 2014 . Acquired nonperforming loans totaled $25 million and $30 million at December 31, 2015 and 2014 , respectively.
For the quarter ended December 31, 2015 , noninterest income increased $12 million , or 16% , from the same period in 2014 , driven by an increase in other income, partially offset by a decrease in capital markets income resulting from lower derivatives income. Other income for the quarters ended December 31, 2015 and 2014 included $1 million and $11 million , respectively, in amortization for tax credit investments, which was more than offset by lower tax expense in each quarter.
GAAP noninterest expenses increased $31 million , or 13% , during the same period. Noninterest expenses in the fourth quarter of 2015 included $14 million in merger and acquisition integration expenses related to our pending Merger with KeyCorp and $3 million in restructuring charges related to third party professional fees incurred in connection with the overstatement of the allowance for loan losses resulting from mid-level employee misconduct that was discovered in February 2015. Noninterest expenses in the fourth quarter of 2014 included a pre-tax benefit of $23 million related to the reversal of reserves to address a process issue related to certain customer deposit accounts, as well as $9 million in restructuring charges related to our organization simplification. Excluding these charges, noninterest expenses decreased $1 million , or less than 1%. Lower occupancy and equipment, marketing and advertising, professional services, amortization of intangibles, and FDIC premiums were partially offset by increases in salaries and benefits, technology and communications, and other expense. The $2 million decrease in occupancy and equipment resulted from the branch consolidations in the first quarter of 2015 and the $2 million decrease in marketing and advertising was due to marketing campaigns in 2014. Professional services

69

expenses decreased $1 million due to reduced legal costs and the $2 million reduction in FDIC premiums primarily resulted from the expiration of the impact of our third quarter 2014 goodwill impairment charge. The $2 million increase in salaries and benefits resulted from higher incentive compensation partially offset by lower regular salaries and the $4 million increase in technology and communications resulted from higher hardware and software costs and depreciation expense. Other expenses increased $2 million as a result of higher lending and leasing and other real estate owned writedowns.
The provision for taxes in the fourth quarter of 2015 and 2014 was $17 million and $8 million , respectively, resulting in an effective tax rate of 25.4% and 10.2% , respectively. The effective tax rate for the fourth quarter of 2015 reflects our investments in certain tax credits originated by our commercial real estate business and the partial utilization of a capital loss carryover. The effective tax rate for the three months ended December 31, 2014 reflects the benefits of a taxable reorganization of a subsidiary and from investments in certain tax credits.
Other
In October 2014, we reviewed an operational issue related to certain customer deposit accounts and determined that redress to certain customers was appropriate. We self-disclosed the issue to the Consumer Financial Protection Bureau, Office of the Comptroller of the Currency, and the Federal Reserve Bank of New York and established a $45 million reserve in the third quarter of 2014.
Following the initial assessment of the process issue, we engaged a third party expert to determine the precise amount of customer redress that should be provided to all impacted customers. The precise estimate of customer restitution was based on a detailed analysis performed by the third party expert for each of the impacted customer accounts and took approximately 3 months to complete.  The data set the third party ultimately had to review included over 3600 files, over 2.2 billion records, almost one terabyte of stored data and over 1.5 billion transactions. In the fourth quarter of 2014 upon completion of this detailed analysis, we lowered our estimated reserve to $25 million.
We believe that the reserve we have established for the process issue redress plan is adequate to cover our estimated total costs and that any reasonably possible losses in addition to amounts accrued will not materially impact future earnings or capital levels. Additionally, early in 2015 we corrected the process issue and we believe that the resolution of the process issue will not materially impact the amount of noninterest deposit income that we will earn in the future.
RISK MANAGEMENT
The risks we are subject to in the normal course of business, include, but are not limited to, strategic, credit, market (including liquidity, interest rate, and price risks), capital, compliance and regulatory, operational, information technology/information security, and reputation (as a component of the risks noted above). We maintain capital at a level that we believe protects us against these risks. In addition, business uncertainties have been introduced due to the pending Merger with KeyCorp. The Board, Board Committees and senior management are regularly engaged in monitoring potential risks and impacts through the company’s governance structures. Metrics and monitoring reports have been created to allow for oversight and actions, as necessary. Specifically and as previously noted, the impact to employees and customers may have an adverse effect on the company. Proactive steps have been taken in an effort to retain both employees and customers during this period. To the extent there are not contractual restrictions, both First Niagara and KeyCorp, assess and manage these identified risks in the planning of the combined entity. Both First Niagara and KeyCorp are taking a focused view in understanding the level of risk and the impact those risks have on the integration process.
As with all companies, we face uncertainty and the management of these risks is an important component of driving shareholder value and financial returns. We do this through robust governance processes and appropriate risk and control framework. Our Board of Directors, through the Risk Committee of the Board, sets the tone by establishing our consolidated risk appetite statement. This risk appetite statement provides guidance to ensure risk-taking is appropriate and strategy and tactics are properly aligned in the pursuit of financial objectives. Risk appetite and risk tolerances throughout the Company are an extension of this consolidated risk appetite

70

statement. This is managed through an Enterprise Risk Management (“ERM”) framework which includes methods and processes to identify, monitor, manage, and report on risk. The ERM division, led by our Chief Risk Officer, is responsible for this framework. Successful management of risk allows us to identify situations that may significantly or materially interfere with the achievement of desired goals, or an event or activity which may cause a significant opportunity to be missed.
We employ a three lines of defense model as our primary means to ensure roles, responsibilities and accountabilities are defined and to allow for quick identification and response to risk events. The lines of business and functional areas represent the first line of defense. These areas own, identify, and manage the risks. The second line (those independent risk areas reporting to the Chief Risk Officer), have responsibility for the facilitation and implementation of robust enterprise risk management and compliance processes to effectively monitor and oversee (governance, policy, identification, assessment, analysis, monitoring, reporting) risks being managed by the first line. The third line of defense is Internal Audit which provides independent objective assurance services which audit and report on the design and operating effectiveness of internal controls, risk management framework and governance processes. The results of internal audit reviews are reported to the Audit Committee of the Board of Directors.
The Board of Directors has the fundamental responsibility of directing the management of the Bank's business and affairs, and establishing a corporate culture that prevents the circumvention of safe and sound policies and procedures. Our Board of Directors and Executive Management utilize various committees in the management of risk. The main risk governance committees are the Risk Committee and Audit Committee of the Board and the Enterprise Risk Management Committee ("ERMC"), Capital Management Committee ("CMC") and Disclosure Committee of Management. The purpose of the Risk Committee of the Board of Directors is to assist the Board in fulfilling its oversight responsibilities of the Company with respect to understanding inherent risks impacting the Company and related control activities; and, assessing the risks of the Company. Sub-committees of the ERMC, which support the core risk areas, are the Operational Risk Committee, Allowance for Loan and Lease Losses Committee, Commercial Credit Risk and Policy Committee, Consumer Credit Risk and Policy Committee, Asset/Liability Committee, Compliance Management Committee, the Information Security and Privacy Committee, and the Community Reinvestment Act Committee. These sub-committees are supported by various working groups. The purpose of the CMC is to provide oversight to the Company's capital adequacy assessment activities, DFAST, and assess/recommend capital actions.
The purpose of the Audit Committee is to assist the Board in fulfilling its financially related oversight responsibilities of the Company. The Disclosure Committee supports the Audit Committee and carries out Management’s responsibilities for the review and approval of reports submitted to the Securities and Exchange Commission under the authority granted to Management by the Board of Directors.
Credit Risk
As a bank, we make loans and loan commitments, and purchase securities whose realization is dependent on future principal and interest repayments. Credit risk is the risk associated with the potential inability of a borrower to repay their debt according to their contractual terms. This inability to repay could result in higher levels of nonperforming assets and credit losses, which could potentially reduce our earnings.

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Loans
Loan Portfolio Composition
The table below reflects the composition of our loan and lease portfolios at December 31:
 
2015
 
2014
 
2013
 
2012
 
2011
(dollars in millions)
Amount
Percent
 
Amount
Percent
 
Amount
Percent
 
Amount
Percent
 
Amount
Percent
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Real estate
$
7,375

30.7
%
 
$
7,231

31.4
%
 
$
6,914

32.3
%
 
$
6,466

32.8
%
 
$
5,879

35.7
%
Construction
1,278

5.3

 
973

4.2

 
864

4.0

 
627

3.2

 
366

2.2

Business
6,013

25.0

 
5,775

25.1

 
5,290

24.7

 
4,953

25.1

 
3,772

22.9

Total commercial
14,665

61.0

 
13,979

60.7

 
13,068

61.0

 
12,047

61.1

 
10,016

60.8

Consumer:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential real estate
3,355

14.0

 
3,353

14.6

 
3,448

16.1

 
3,762

19.1

 
4,012

24.4

Home equity
3,069

12.7

 
2,936

12.7

 
2,752

12.8

 
2,652

13.5

 
2,166

13.1

Indirect auto
2,393

10.0

 
2,166

9.4

 
1,544

7.2

 
601

3.0

 
—

—

Credit cards
311

1.3

 
324

1.4

 
325

1.5

 
315

1.6

 
—

—

Other consumer
245

1.0

 
278

1.2

 
302

1.4

 
334

1.7

 
278

1.7

Total consumer
9,372

39.0

 
9,058

39.3

 
8,371

39.0

 
7,663

38.9

 
6,456

39.2

Total loans and leases
24,038

100.0
%
 
23,037

100.0
%
 
21,440

100.0
%
 
19,710

100.0
%
 
16,473

100.0
%
Allowance for loan losses
(242
)
 
 
(234
)
 
 
(209
)
 
 
(163
)
 
 
(120
)
 
Total loans and leases, net
$
23,796

 
 
$
22,803

 
 
$
21,230

 
 
$
19,547

 
 
$
16,352

 
Our total loans and leases outstanding increased $1.0 billion , or 4% , from December 31, 2014 to December 31, 2015 . This was the result of continued growth in our commercial, home equity, and indirect auto portfolios.
Total commercial loans outstanding increased $686 million , or 5% , reflecting new business volumes and our continued focus on balancing volume growth with prudent credit underwriting. Our year over year results display the organic growth across our footprint in our commercial lending activities, slightly offset by decreased utilization of line commitments to 40% at December 31, 2015 from 42% at December 31, 2014 . Commercial loans accounted for 61% of our total loans at year end, comprising the largest part of our lending book and remaining unchanged from the loan type composition at December 31, 2014 .
Commercial real estate loans represent 36% of our total loan portfolio and $8.7 billion in balances at December 31, 2015. Our CRE loans consist of $7.4 billion in commercial real estate loans and $1.3 billion of construction loans. During 2015, new construction loan originations were the largest contributor to the growth of this portfolio; balances increased by $304 million , or 31% , from 2014 to 2015.
Our commercial business loan portfolio increased $238 million , or 4% , from December 31, 2014 . This was the result of increases in the middle market, government banking and asset based lending segments. At the end of the fourth quarter of 2015 , our commercial pipeline was robust and elevated from historical norms.
During 2015 , our home equity portfolio increased by $133 million , or 5% , reflecting continued strength in originations and increased utilization by current customers resulting from promotional and cross-sell campaigns. Our indirect auto portfolio increased $227 million , or 10% , from December 31, 2014 , the result of $1.1 billion in new originations during 2015 with a weighted average yield of 3.34% , net of dealer reserve, compared to $1.3 billion in new originations during 2014 with a weighted average yield of 3.00%. The average weighted FICO score for new indirect auto loans was 753 in 2015 and 762 in 2014.
Our residential real estate loan portfolio increased by $2 million , or less than 1%, from December 31, 2014 to December 31, 2015 which reflected prepayments of adjustable rate mortgages and our strategy of selling most newly originated fixed rate residential real estate loans in the secondary market. Conversely, our credit card and other consumer loan portfolios decreased by 4% and 12% , respectively.

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Included in the table above are acquired loans with a carrying value of $2.9 billion , $3.7 billion and $4.5 billion at December 31, 2015 , 2014 and 2013 , respectively. Such loans were acquired through our mergers and acquisitions and were initially recorded at fair value with no carryover of any related allowance for loan losses.
We continue to expand our commercial lending activities by taking advantage of opportunities to move up market while remaining focused on credit discipline. Our enhanced specialty offerings in equipment financing, healthcare, and loan syndications continue to provide additional opportunities to deepen our relationships with our existing commercial customer base, as well as attract new customers. We have also continued to emphasize the origination of construction loans as part of our commercial lending offerings.
Our loan portfolio has grown significantly over the past five years, both through origination activity and through acquisitions, across all loan categories. Acquired loans provided the bulk of the increases in real estate loans from 2011 to 2012, as we expanded our presence in New York with the acquisition of the HSBC branches. After reaching 75% at December 31, 2011, our total real estate loans outstanding have decreased to 63% of total loans at December 31, 2015.
Our lending standards have remained consistent over this time period. Our real estate loan underwriting standards remain conservative and consistent with guidance provided by various regulatory agencies. Residential mortgages are underwritten to secondary market standards, and commercial real estate loans are structured with sufficient borrower equity positions and guarantees of principal (in most instances) which provide a cushion against unexpected changes in property cash flow or collateral values.

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The table below presents the composition of our loan and lease portfolios, including net deferred costs and unearned discounts, based on the region in which the loan was originated, except for our residential real estate and credit cards portfolios which are assigned to a region based on the primary address of the consumer:
(in millions)
 New York
 Western Pennsylvania
 Eastern Pennsylvania
 Connecticut and Western Massachusetts
Other (1)
 Total loans and leases
December 31, 2015:
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
Real estate
$
4,331

$
933

$
1,604

$
1,784

$
—

$
8,652

Business
2,797

1,074

865

728

549

6,013

Total commercial
7,128

2,007

2,469

2,512

549

14,665

Consumer:
 
 
 
 
 
 
Residential real estate
1,235

151

289

1,679

—

3,355

Home equity
1,658

331

559

521

—

3,069

Indirect auto
769

78

55

432

1,059

2,393

Credit cards
245

33

16

16

—

311

Other consumer
160

44

28

13

—

245

Total consumer
4,068

638

947

2,661

1,059

9,372

Total loans and leases
$
11,196

$
2,644

$
3,416

$
5,174

$
1,608

$
24,038

December 31, 2014
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
Real estate
$
4,083

$
939

$
1,535

$
1,647

$
—

$
8,204

Business
2,658

991

818

754

556

5,775

Total commercial
6,740

1,929

2,353

2,401

556

13,979

Consumer:
 
 
 
 
 
 
Residential real estate
1,221

140

290

1,702

—

3,353

Home equity
1,537

295

568

536

—

2,936

Indirect auto
733

48

41

390

954

2,166

Credit cards
261

33

15

15

—

324

Other consumer
183

48

32

15

—

278

Total consumer
3,936

564

946

2,658

954

9,058

Total loans and leases
$
10,676

$
2,494

$
3,299

$
5,059

$
1,510

$
23,037

(1)  
Other consists of indirect auto loans made in states that border our footprint, and our capital markets portfolio. Our capital markets portfolio includes participations in syndicated loans that have been underwritten and purchased by us where we are not the lead bank. Nearly all of these loans are to companies in our footprint states or in states that border our footprint states.
Commercial loan portfolios continued to exhibit steady growth in our Western Pennsylvania, Eastern Pennsylvania, and New England markets, increasing by $77 million , or 4% , $116 million , or 5% , and $111 million , or 5% , respectively, from the end of 2014 . Over the same period, our New York market also contributed to the growth in commercial loans, with a $388 million increase, or 6% .

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The table below presents a breakout of the unpaid principal balance of individual loans for our commercial real estate and commercial business loan portfolios by individual loan size at December 31:
 
2015
 
2014
(dollars in millions)
Amount
Count
 
Amount
Count
Commercial real estate loans by balance size (1)
 
 
 
 
 
Greater than or equal to $20 million
$
754

31

 
$
687

27

$10 million to $20 million
1,949

138

 
1,520

109

$5 million to $10 million
1,682

239

 
1,589

226

$1 million to $5 million
2,678

1,236

 
2,733

1,263

Less than $1 million (2)
1,589

6,315

 
1,675

6,826

Total commercial real estate loans
$
8,652

7,959

 
$
8,204

8,451

Commercial business loans by size (1)
 
 
 
 
 
Greater than or equal to $20 million
$
343

14

 
$
325

13

$10 million to $20 million
1,179

86

 
1,114

80

$5 million to $10 million
1,172

169

 
1,181

167

$1 million to $5 million
1,716

791

 
1,626

729

Less than $1 million (2)
1,602

35,095

 
1,529

32,865

Total commercial business loans
$
6,013

36,155

 
$
5,775

33,854

(1)  
Multiple loans to one borrower have not been aggregated for purposes of this table.
(2)  
Caption includes net deferred fees and costs and other adjustments.

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At December 31, 2015 and 2014 , non-owner occupied commercial real estate represented 66% of our total commercial real estate balances. Loans for construction, acquisition and development increased $256 million from December 31, 2014 due to the funding of previously committed construction loans and new construction originations. The table below provides the principal balance of our non-owner occupied commercial real estate loans by location and property type at December 31:
(in millions)
New
York
Western
Pennsylvania
Eastern
Pennsylvania
Connecticut
and Western
Massachusetts
Other (1)
Total
2015
 
 
 
 
 
 
Non-owner occupied commercial real estate loans:
 
 
 
 
 
 
Construction, acquisition and development
$
469

$
96

$
156

$
205

$
198

$
1,123

Multifamily and apartments
1,102

107

137

263

104

1,713

Office and professional space
506

84

86

296

133

1,106

Retail
287

48

126

243

111

814

Warehouse and industrial
130

24

52

81

11

298

Other
330

52

80

122

82

666

Total non-owner occupied commercial real estate loans
2,825

410

636

1,210

638

5,720

Owner occupied commercial real estate loans
1,223

384

470

455

401

2,932

Total commercial real estate loans
$
4,048

$
795

$
1,106

$
1,665

$
1,039

$
8,652

2014
 
 
 
 
 
 
Non-owner occupied commercial real estate loans:
 
 
 
 
 
 
Construction, acquisition and development
$
322

$
108

$
117

$
182

$
137

$
867

Multifamily and apartments
1,103

98

167

245

98

1,712

Office and professional space
501

87

103

277

101

1,069

Retail
314

45

113

203

113

787

Warehouse and industrial
158

23

42

105

13

342

Other
314

47

83

158

65

666

Total non-owner occupied commercial real estate loans
2,712

409

625

1,170

528

5,444

Owner occupied commercial real estate loans
1,191

392

460

417

301

2,760

Total commercial real estate loans
$
3,903

$
800

$
1,085

$
1,587

$
828

$
8,204

(1)  
Primarily consists of loans located in states bordering our footprint.

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The table below provides detail on commercial business loans and owner occupied commercial real estate loans by industry classification (as defined by the North American Industry Classification System) at December 31:
(in millions)
2015
2014
Health Care and Social Assistance
$
1,450

$
1,242

Manufacturing
1,374

1,434

Real Estate and Rental and Leasing
1,039

1,019

Wholesale Trade
624

587

Retail Trade
530

500

Public Administration
511

456

Educational Services
467

384

Construction
414

413

Finance and Insurance
317

337

Other Services (except Public Administration)
315

373

Transportation and Warehousing
302

252

Professional, Scientific, and Technical Services
288

304

Accommodation and Food Services
223

189

Other
1,090

1,032

Total
$
8,946

$
8,536

Energy Related Exposure
Included within our commercial portfolio are certain loans categorized as energy related, including both oil and gas related exposures as well as exposures to utilities and alternative energy. The table below provides the outstanding loan balance and unfunded commitments for energy related exposures at December 31:
 
2015
 
2014
 
Outstanding
Unused commitments
Total credit exposure
 
Outstanding
Unused commitments
Total credit exposure
 
(in millions)
Oil and gas related
$
276

$
176

$
452

 
$
305

$
191

$
496

Utilities and alternative energy
127

175

302

 
114

109

223

Total
$
403

$
351

$
754

 
$
418

$
301

$
719

Risk Management of the Energy Related Portfolio
We do not have a dedicated energy lending business. Our exposures are managed in our regional commercial banking business units. Our energy exposures consist of only senior loans, with no junior or second lien positions; additionally, we generally avoid making first lien loans to borrowers that employ significant leverage through the use of junior lien loans or large unsecured senior tranches of debt. During our energy portfolio review in the fourth quarter , we noted only a few individual credits that have been impacted enough to warrant a downgrade in their associated risk ratings. These downgrades added slightly over $2 million to our model driven allowance. Since December 31, 2014, our model driven allowance for the energy sector increased by $5 million due to downgrades. In light of the ongoing impact of low oil and natural gas prices, downgrades, and the model driven increase in allowance, we recorded a qualitative adjustment of $3 million as of December 31, 2015 , a $2 million decrease from December 31, 2014 . As of December 31, 2015 , two energy loans were in nonaccrual status in the amount of $11 million.
We believe that our exposure to the utilities and alternative energy sectors, while appropriate to include in the energy exposure, are unlikely to be affected in the near-term by the recent decline in oil and natural gas prices. This portfolio includes exposure to alternative power generation, transmission, control, and distribution such as

77

hydro-electric and solar sources, and is generally not dependent on oil. However, a prolonged period of extremely low oil prices could ultimately undercut such cost-efficient alternative energy sources and result in lower demand.
With respect to our oil and gas related exposures, our oil and gas related outstandings of $276 million included both direct and indirect exposure to energy related obligors at December 31, 2015 of $142 million and $134 million , respectively. These combined outstandings represented a modest 1.1% of total loan outstanding balances at December 31, 2015 . At December 31, 2014 , our oil and gas related outstandings of $305 million included both direct and indirect exposure to energy related obligors of $161 million and $144 million , respectively. These combined outstandings represented 1.3% of total loan outstanding balances at December 31, 2014 . The energy-related exposure can be primarily classified into three subcategories: 1) upstream, 2) midstream, and 3) downstream.
The table below provides the outstanding loan balance and unfunded commitments for oil and gas related exposures at December 31, 2015 and 2014 . Due to the fact that many borrowers operate in multiple businesses, judgment has been applied in characterizing a borrower as energy-related, and to a particular segment of energy related activity (e.g. upstream or downstream).
 
Outstanding
 
Unused commitments
(in millions)
Direct
Indirect
Total
 
Direct
Indirect
Total
December 31, 2015
 
 
 
 
 
 
 
Upstream:
 
 
 
 
 
 
 
Drillers
$
15

$
—

$
15

 
$
1

$
—

$
1

Midstream:
 
 
 
 
 
 
 
Drilling field services
88

—

88

 
48

—

48

Other
39

—

39

 
10

—

10

Total midstream
127

—

127

 
58

—

58

Downstream:
 
 
 
 
 
 
 
Gas stations and convenience stores
—

55

55

 
—

26

26

Non-drilling support
—

40

40

 
—

10

10

Wholesale distribution
—

19

19

 
—

48

48

Other
—

20

20

 
—

34

34

Total downstream
—

134

134

 
—

117

117

Total
$
142

$
134

$
276

 
$
59

$
117

$
176

December 31, 2014  (1)
 
 
 
 
 
 
 
Upstream:
 
 
 
 
 
 
 
Drillers
$
25

$
—

$
25

 
$
1

$
—

$
1

Midstream:
 
 
 
 
 
 
 
Drilling field services
89

—

89

 
49

—

49

Other
48

—

48

 
19

—

19

Total midstream
137

—

137

 
68

—

68

Downstream:
 
 
 
 
 
 
 
Gas stations and convenience stores
—

67

67

 
—

17

17

Non-drilling support
—

24

24

 
—

26

26

Wholesale distribution
—

30

30

 
—

51

51

Other
—

22

22

 
—

29

29

Total downstream
—

144

144

 
—

122

122

Total
$
161

$
144

$
305

 
$
69

$
122

$
191

(1)     Prior period amounts have been revised to reflect additional oil and gas credits that were in our portfolio at December 31, 2014.

78

The table above does not include $83 million and $67 million in outstanding loan balances and $10 million and $27 million of unused commitments at December 31, 2015 and 2014 , respectively, related to commercial real estate loans in which the direct counterparty to the loan is not involved in upstream or midstream activities. However, such properties have a large tenant exposure to companies directly involved in such activities at December 31, 2015 and 2014 .
Upstream exposure
Our exposures to the upstream sector include exposures related to the extraction and production of oil and natural gas, such as drilling and the operations of wells. We do not have any loans margined against estimated reserves or similar asset based energy loan structures. Direct exposures to the upstream category are low with $15 million and $25 million in outstanding loan balances made directly to counterparties involved in the drilling and operations of wells at December 31, 2015 and 2014 , respectively.
Midstream exposure
Our exposures to the midstream sector primarily consist of exposures to counterparties who provide products, services, and logistical support to exploration and production enterprises. Direct exposure of $127 million and $137 million in outstanding loan balances at December 31, 2015 and 2014 , respectively, relate to loans made directly to counterparties whose operations are involved in the processing of crude oil and natural gas, including companies who provide supplies to drilling field operations. The majority of this exposure is in our Western Pennsylvania region supporting the Marcellus Shale natural gas market.
Downstream exposure
Our exposures to the downstream sector include exposures to companies involved in the refining process and distribution of refined products, such as wholesale oil and gas distributors, gas stations and convenience stores, which we consider to be indirect based upon the nature of their involvement in the oil and gas industry. Indirect exposure of $134 million and $144 million in outstanding loan balances at December 31, 2015 and 2014 , respectively, relate to loans made to counterparties whose operations are primarily involved in the wholesale and retail distribution of refined products, including companies that provide support and/supplies to such entities.
Home Equity Portfolio
Our home equity portfolio (loans and lines of credit) consists of both first-lien and junior-lien mortgage loans with underwriting criteria based on minimum credit scores, debt to income ratios, and LTV ratios. Within the home equity line of credit portfolio, the standard product has a 10 year draw period with a 20 year fully amortizing term upon utilization of the line. Interest-only draw periods are limited to 5 years, and are available at the request of the mortgagor. Applications are underwritten centrally in conjunction with an automated underwriting system.
Of the $3.1 billion and $2.9 billion home equity portfolio at December 31, 2015 and December 31, 2014 , respectively, approximately $1.2 billion and $1.1 billion were in a first lien position for each of the respective periods. 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 December 31, 2015 and 2014 .

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The table below summarizes the principal balances of our home equity lines of credit by portfolio at December 31:
 
2015
 
2014
(in millions)
Interest only
Principal and interest
Total
 
Interest only
Principal and interest
Total
Originated
$
403

$
1,582

$
1,985

 
$
339

$
1,387

$
1,725

Acquired
244

662

906

 
291

692

983

Total home equity lines of credit
$
647

$
2,244

2,891

 
$
630

$
2,079

2,708

Home equity loans
 
 
178

 
 
 
228

Total home equity portfolio
 
 
$
3,069

 
 
 
$
2,936

The principal and interest payment associated with the term structure will be higher than the interest-only payment, resulting in “maturity” risk. We have taken steps to mitigate such risk by (1) stressing each applicant based on principal and interest during underwriting and (2) placing draw restrictions on HELOCs in past due status. We monitor the risk of junior lien HELOCs by monitoring the payment status on senior lien mortgages not owned or serviced by us, and obtaining refreshed credit scores on a regular basis.
The table below summarizes our home equity line of credit portfolio still in the draw period by draw period end date at December 31, 2015 :
(in millions)
2016
2017
2018
2019
Thereafter
Total
In draw - interest only
$
70

$
129

$
168

$
130

$
150

$
647

In draw - principal and interest
40

72

117

88

1,800

2,117

Total
$
110

$
201

$
285

$
218

$
1,950

$
2,764

Delinquency statistics for the HELOC portfolio are as follows at December 31:
 
2015
 
2014
 
 
Delinquencies
 
 
Delinquencies
(dollars in millions)
Balance
Amount
Percent of balance
 
Balance
Amount
Percent of balance
HELOC status:
 
 
 
 
 
 
 
Still in draw period
$
2,764

$
37

1.3
%
 
$
2,601

$
36

1.4
%
Amortizing payment
127

12

9.7

 
108

8

7.6

Allowance for Loan Losses and Nonperforming Assets
Credit risk is the risk associated with the potential inability of some of our borrowers to repay their loans according to their contractual terms. This inability to repay could result in higher levels of nonperforming assets and credit losses, which could potentially reduce our earnings.
A detailed description of our methodology for calculating our allowance for loan losses is included in “Critical Accounting Policies and Estimates” in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Allowance for Loan Losses
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. We place non-credit card originated loans on nonaccrual status when they become more than 90 days past due, or earlier if we do not expect the full collection of interest or principal. When a loan is placed on nonaccrual status, any interest previously accrued and not collected is reversed from interest income. Credit cards are not placed on nonaccrual status until 180 days past due, at which time they are charged-off.

80

Our evaluation of our allowance for loan losses is based on a continuous review of our loan portfolio. The methodology that we use for determining the quantitative and qualitative amount of the allowance for loan losses consists of several elements. We use an internal loan grading system with nine categories of loan grades used in evaluating our business and commercial real estate loans. In our loan grading system, pass loans are graded 1 through 5, special mention loans are graded 6, substandard loans are graded 7, doubtful loans are graded 8 and loss loans (which are fully charged off) are graded 9. Our definition of special mention, substandard, doubtful and loss are consistent with regulatory definitions.
In the normal course of our loan monitoring process, we review all pass graded individual commercial and commercial real estate loans and/or total loan concentration to one borrower no less frequently than annually for those greater than $3 million, every 18 months for those greater than $1 million but less than $3 million and every 36 months for those greater than $500 thousand but less than $1 million.
As part of our commercial credit monitoring process, our loan officers perform formal reviews based upon the credit attributes of the respective loans. Pass graded loans are continually monitored through our review of current information related to each loan. The nature of the current information available and used by us includes, as applicable, review of payment status and delinquency reporting, receipt and analysis of interim and annual financial statements, rent roll data, delinquent property tax searches, periodic loan officer inspections of properties, and loan officer knowledge of their borrowers, as well as the business environment in their respective market areas. We perform a formal review on a more frequent basis if the above considerations indicate that such review is warranted. Further, based upon consideration of the above information, if appropriate, loan grading can be reevaluated prior to the scheduled full review.
Quarterly Criticized Asset Reports ("QCARs") are prepared every quarter for all commercial special mention Total Aggregate Exposures ("TAEs") greater than $300 thousand and substandard or doubtful TAEs greater than $200 thousand. The purpose of the QCAR is to document as applicable, current payment status, payment history, charge-off amounts, collateral valuation information (including appraisal dates), and commentary on collateral valuations, guarantor information, interim financial data, cash flow, historical data and projections, rent roll data, and account history.
QCARs for substandard TAEs greater than $200 thousand are reviewed on a quarterly basis by either management's Criticized and Classified Loan Review Committee (for such TAEs greater than $2 million) or by a Senior Credit Manager (for such TAEs between $200 thousand and $2 million). QCARs for all special mention TAEs greater than $300 thousand are reviewed on a quarterly basis by either management's Classified Loan Review Committee (for such TAEs greater than $2 million) or by a Senior Credit Manager (for such TAEs between $300 thousand and $2 million). Special mention and substandard TAEs below $300 thousand and $200 thousand, respectively, are reviewed by a loan officer on a quarterly basis ensuring that the credit risk rating and accrual status are appropriate.
Updated valuations are obtained periodically in accordance with Interagency Appraisal and Evaluation Guidelines and internal policy. Appraisals or evaluations for commercial assets securing substandard rated loans are completed within 90 days of the downgrade. On an ongoing basis, real estate collateral supporting substandard loans with an outstanding balance greater than $500 thousand is required to have an appraisal or evaluation performed at least every 18 months for general commercial properties and at least every 12 months for land and acquisition and development loans. Real estate collateral supporting substandard loans with an outstanding balance equal to or less than $500 thousand is required to have an appraisal or evaluation performed at least every 24 months for general commercial properties and at least every 18 months for land and acquisition and development loans. However, an appraisal or evaluation may be obtained more frequently than 18 to 24 months when volatile or unusual market conditions exist that could affect the ultimate realization of the value of the real estate collateral. Non-real estate collateral is reappraised on an as-needed basis, as determined by the loan officer, our Criticized and Classified Loan Review Committee, or by credit risk management based upon the facts and circumstances of the individual relationship.
Among other factors, our quarterly reviews consist of an assessment of the fair value of collateral for all loans reviewed, including collateral dependent impaired loans. During this review process, an internal estimate of

81

collateral value, as of each quarterly review date, is determined utilizing current information such as comparables from more current appraisals in our possession for similar collateral in our portfolio, recent sale information, current rent rolls, operating statements and cash flow information for the specific collateral. Further, we have an Appraisal Institute designated MAI appraiser on staff available for consultation during our quarterly estimation of collateral fair value. This current information is compared to the assumptions made in the most recent appraisal as well as in previous quarters. Quarterly adjustments to the estimated fair value of the collateral 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.
Adjustments are made each quarter to the related allowance for loan losses for collateral dependent impaired loans to reflect the change, if any, in the estimated fair value of the collateral less estimated costs to sell as compared to the previous quarter. The determination of the appropriateness of obtaining new appraisals is also specifically addressed in each quarterly review. New appraisals will be obtained prior to the above noted required time frames if it is determined appropriate during these quarterly reviews. Further, our in-house MAI appraiser is available for consultation regarding the need for new valuations.
In addition to the credit monitoring procedures described above, our credit risk review department, which is independent of the lending function and is part of our risk management function, verifies the accuracy of loan grading, classification, and, compliance with lending policies.
The following table details our allocation of our originated and acquired allowance for loan losses by loan category at December 31:
 
2015
 
2014
 
2013
 
2012
 
2011
(dollars in millions)
Amount of
allowance
for loan
losses
Percent of
loans to
total loans
 
Amount of
allowance
for loan
losses
Percent of
loans to
total loans
 
Amount of
allowance
for loan
losses
Percent of
loans to
total loans
 
Amount of
allowance
for loan
losses
Percent of
loans to
total loans
 
Amount of
allowance
for loan
losses
Percent of
loans to
total loans
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Real estate and construction
$
76

36.0
%
 
$
66

35.6
%
 
$
48

36.3
%
 
$
38

36.0
%
 
$
50

37.9
%
Business
124

25.0

 
122

25.1

 
119

24.7

 
99

25.1

 
57

22.9

Total commercial
200

61.0

 
189

60.7

 
167

61.0

 
137

61.1

 
107

60.8

Consumer:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential real estate
4

14.0

 
4

14.6

 
3

16.1

 
5

19.1

 
4

24.4

Home equity
8

12.7

 
11

12.7

 
10

12.8

 
5

13.5

 
4

13.1

Indirect auto
13

10.0

 
14

9.4

 
10

7.2

 
3

3.0

 
—

—

Credit cards
13

1.3

 
12

1.4

 
13

1.5

 
7

1.6

 
—

—

Other consumer
5

1.0

 
5

1.2

 
6

1.4

 
6

1.7

 
4

1.7

Total consumer
42

39.0

 
45

39.3

 
42

39.0

 
26

38.9

 
13

39.2

Total
$
242

100.0
%
 
$
234

100.0
%
 
$
209

100.0
%
 
$
163

100.0
%
 
$
120

100.0
%
Allowance for loan losses to total loans
1.01
%
 
 
1.02
%
 
 
0.98
%
 
 
0.82
%
 
 
0.73
%
 
Provision to average total loans
0.33
%
 
 
0.42
%
 
 
0.50
%
 
 
0.50
%
 
 
0.37
%
 
Allowance for loan losses to originated loans
1.12
%
 
 
1.18
%
 
 
1.21
%
 
 
1.20
%
 
 
1.20
%
 
Provision to average originated loans
0.37
%
 
 
0.47
%
 
 
0.64
%
 
 
0.73
%
 
 
0.58
%
 

82

The following table presents the activity in our allowance for originated loan losses by portfolio segment for the years ended December 31:
 
Commercial
 
Consumer
 
Originated loans   (in millions)
Real estate
Business
 
Residential
Home equity
Indirect auto
Credit cards
Other
consumer
Total
2015
 
 
 
 
 
 
 
 
 
Balance at beginning of year
$
65

$
122

 
$
2

$
8

$
14

$
12

$
5

$
228

Provision for loan losses
24

26

 
—

1

5

10

7

74

Charge-offs
(19
)
(30
)
 
(1
)
(4
)
(9
)
(12
)
(8
)
(83
)
Recoveries
5

5

 
—

1

2

3

1

18

Balance at end of year
$
75

$
124

 
$
2

$
6

$
13

$
13

$
5

$
237

2014
 
 
 
 
 
 
 
 
 
Balance at beginning of year
$
48

$
119

 
$
2

$
7

$
10

$
13

$
6

$
205

Provision for loan losses
23

30

 
1

4

11

10

6

85

Charge-offs
(10
)
(30
)
 
(1
)
(4
)
(9
)
(13
)
(8
)
(75
)
Recoveries
4

3

 
—

1

1

2

1

13

Balance at end of year
$
65

$
122

 
$
2

$
8

$
14

$
12

$
5

$
228

2013
 
 
 
 
 
 
 
 
 
Balance at beginning of year
$
38

$
99

 
$
5

$
5

$
3

$
7

$
5

$
161

Provision for loan losses
17

48

 
(1
)
6

9

11

8

96

Charge-offs
(10
)
(31
)
 
(2
)
(3
)
(3
)
(6
)
(8
)
(63
)
Recoveries
4

3

 
1

—

1

1

2

11

Balance at end of year
$
48

$
119

 
$
2

$
7

$
10

$
13

$
6

$
205

The following table presents the activity in our allowance for loan losses for our acquired loan portfolio by portfolio segment for the years ended December 31:
 
Commercial
 
Consumer (1)
 
Acquired loans (in millions)
Real estate
Business
 
Residential
Home equity
Other
consumer
Total
2015
 
 
 
 
 
 
 
Balance at beginning of year
$
1

$
1

 
$
2

$
2

$
—

$
6

Provision for loan losses
2

—

 
—

1

—

3

Charge-offs
(2
)
—

 
—

(2
)
—

(5
)
Recoveries
1

—

 
—

—

—

1

Balance at end of year
$
1

$
—

 
$
2

$
2

$
—

$
5

2014
 
 
 
 
 
 
 
Balance at beginning of year
$
—

$
—

 
$
1

$
3

$
—

$
4

Provision for loan losses
3

1

 
1

3

—

8

Charge-offs
(2
)
—

 
—

(4
)
—

(6
)
Recoveries
—

—

 
—

—

—

—

Balance at end of year
$
1

$
1

 
$
2

$
2

$
—

$
6

2013
 
 
 
 
 
 
 
Balance at beginning of year
$
—

$
—

 
$
—

$
—

$
1

$
2

Provision for loan losses
4

—

 
1

3

(1
)
7

Charge-offs
(4
)
—

 
—

—

(1
)
(5
)
Recoveries
—

—

 
—

—

—

—

Balance at end of year
$
—

$
—

 
$
1

$
3

$
—

$
4

(1)  
Credit card losses were recorded against the credit mark and therefore excluded from table.

83

Our liability for unfunded commitments was $16 million at December 31, 2015 and 2014 . For the year ended 2015 , our provision for credit loss related to unfunded loan commitments was immaterial, compared to $3 million for 2014 . Our total unfunded commitments were $ 11.7 billion and $11.0 billion as of December 31, 2015 and 2014 , respectively.
During 2015 , our total net charge-offs were $69 million , which remained in line with our net charge-offs of $68 million in 2014 . Total net charge-offs for 2015 represented 0.29% of average total loans compared with 0.31% of average total loans for 2014 . Excluding our acquired loans, our net charge-off ratio for originated loans was 0.32% and 0.34% for 2015 and 2014 , respectively.
The following table details our total net charge-offs by loan category for the years ended December 31:
 
2015
 
2014
 
2013
 
2012
 
2011
(dollars in millions)
Amount
Percent of average loans
 
Amount
Percent of average loans
 
Amount
Percent of average loans
 
Amount
Percent of average loans
 
Amount
Percent of average loans
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Real estate
$
16

0.19
%
 
$
8

0.10
%
 
$
10

0.13
%
 
$
12

0.18
%
 
$
10

0.18
%
Business
24

0.41

 
27

0.48

 
28

0.55

 
25

0.56

 
15

0.46

Total commercial
40

0.28

 
35

0.26

 
38

0.30

 
37

0.33

 
25

0.28

Consumer:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential real estate
1

0.02

 
1

0.03

 
1

0.03

 
2

0.06

 
1

0.03

Home equity
5

0.16

 
7

0.24

 
3

0.13

 
4

0.15

 
2

0.11

Indirect auto
6

0.28

 
7

0.40

 
3

0.25

 
—

0.10

 
—

—

Credit cards
10

3.14

 
11

3.57

 
5

1.56

 
1

0.47

 
—

—

Other consumer
7

2.71

 
7

2.31

 
7

2.20

 
4

1.40

 
2

0.64

Total consumer
29

0.31

 
33

0.38

 
19

0.24

 
11

0.16

 
5

0.08

Total
$
69

0.29
%
 
$
68

0.31
%
 
$
57

0.28
%
 
$
48

0.26
%
 
$
30

0.20
%
Net charge-offs of originated loans to average originated loans
 
0.32
%
 
 
0.34
%
 
 
0.34
%
 
 
0.35
%
 
 
0.32
%
Our nonperforming loans increased to $214 million at December 31, 2015 from $204 million at December 31, 2014 . New nonperforming loans during the current year totaled $155 million , compared to $154 million in 2014 . During the year ended 2015 , $25 million of nonperforming loans returned to accruing status, $68 million were charged-off, and there were $52 million in paydowns and transfers to real estate owned. Nonperforming loans comprised 0.89% of total loans at December 31, 2015 , a slight increase from 0.88% at December 31, 2014 . Excluding our acquired loans, 0.89% of our originated loans were nonperforming at December 31, 2015 , compared to 0.90% at December 31, 2014 . While our total nonperforming loans increased modestly from the prior year end, our total criticized loans decreased by 9% from December 31, 2014 to December 31, 2015 . The decrease was driven by favorable credit migration and paydowns.
In the previous year, our nonperforming loans increased to $204 million at December 31, 2014 from $188 million at December 31, 2013 . Activity during 2014 consisted of new nonaccruing loans of $154 million being partially offset by charge-offs of $45 million, paydowns of $54 million, and loans returning to accruing status of $39 million.


84

Nonperforming assets to total assets were 0.58% for 2015 and 2014 . The composition of our nonperforming loans and total nonperforming assets consisted of the following at December 31:
(dollars in millions)
2015 (1)
2014 (1)
2013 (1)
2012 (1)
2011
Nonperforming loans:
 
 
 
 
 
Commercial:
 
 
 
 
 
Real estate
$
44

$
53

$
54

$
52

$
43

Business
58

53

51

56

20

Total commercial
102

106

105

108

63

Consumer:
 
 
 
 
 
Residential real estate
32

34

31

27

19

Home equity
59

47

39

33

7

Indirect auto
15

13

6

1

—

Other consumer
5

5

6

3

1

Total consumer
111

98

82

65

27

Total nonperforming loans
214

204

188

173

90

Real estate owned
16

21

25

10

4

Total nonperforming assets (2)
$
230

$
224

$
212

$
183

$
94

Loans 90 days past due and still accruing interest (3)
$
68

$
94

$
113

$
172

$
143

Total nonperforming assets as a percentage of total assets
0.58
%
0.58
%
0.56
%
0.50
%
0.29
%
Total nonperforming loans as a percentage of total loans
0.89
%
0.88
%
0.87
%
0.88
%
0.55
%
Total nonperforming originated loans as a percentage of total originated loans
0.89
%
0.90
%
0.93
%
1.07
%
0.91
%
Allowance for loan losses to nonperforming loans
113.3
%
115.0
%
111.6
%
94.1
%
133.7
%
(1)  
Includes $25 million , $30 million, $30 million, and $29 million of nonperforming acquired lines of credit, primarily in home equity, at December 31, 2015 , 2014 , 2013 , and 2012 , respectively.
(2)  
Nonperforming assets do not include $63 million , $67 million, $52 million, $46 million, and $44 million of performing renegotiated loans that are accruing interest at December 31, 2015 , 2014 , 2013 , 2012 , and 2011 , respectively.
(3)  
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.
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. Early stage delinquencies (loans that are 30 to 89 days past due) of $78 million at December 31, 2015 in our originated loan portfolio increased from $60 million at December 31, 2014 . Our acquired loans that were 30 to 89 days past due decreased $5 million from $30 million as of December 31, 2014 to $25 million as of December 31, 2015 .

85

The following table contains a percentage breakout of the delinquency composition of our loan portfolio segments as of December 31:
 
Percent of loans
30-59 days past due
 
Percent of loans 60-89
days past due
 
Percent of loans 90 or
more days past due
 
Percent of loans past due
 
2015
2014
 
2015
2014
 
2015
2014
 
2015
2014
Originated loans
 
 
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
Real estate
0.1
%
0.1
%
 
—
%
—
%
 
0.4
%
0.4
%
 
0.5
%
0.6
%
Business
0.4

0.1

 
—

0.1

 
0.4

0.3

 
0.9

0.5

Total commercial
0.2

0.1

 
—

0.1

 
0.4

0.4

 
0.7

0.5

Consumer:
 
 
 
 
 
 
 
 
 
 
 
Residential real estate
0.2

0.2

 
0.1

0.1

 
0.8

1.0

 
1.1

1.3

Home equity
0.1

0.2

 
0.1

0.1

 
1.0

0.8

 
1.2

1.0

Indirect auto
0.8

0.8

 
0.2

0.2

 
0.2

0.2

 
1.2

1.3

Credit cards
0.5

0.6

 
0.3

0.5

 
0.8

0.7

 
1.6

1.8

Other consumer
0.8

1.2

 
0.3

0.4

 
1.2

1.0

 
2.3

2.5

Total consumer
0.4

0.4

 
0.1

0.1

 
0.7

0.7

 
1.2

1.3

Total
0.3
%
0.2
%
 
0.1
%
0.1
%
 
0.5
%
0.5
%
 
0.9
%
0.8
%
Acquired loans
 
 
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
Real estate
0.3
%
0.3
%
 
0.1
%
0.2
%
 
2.4
%
2.5
%
 
2.8
%
3.0
%
Business
0.2

0.1

 
0.2

—

 
0.8

1.9

 
1.1

2.1

Total commercial
0.3

0.2

 
0.1

0.2

 
2.1

2.3

 
2.5

2.8

Consumer:
 
 
 
 
 
 
 
 
 
 
 
Residential real estate
1.2

0.9

 
0.5

0.4

 
4.3

4.4

 
6.0

5.7

Home equity
0.3

0.6

 
0.1

0.2

 
1.9

1.9

 
2.4

2.7

Total consumer
0.8

0.7

 
0.3

0.3

 
3.1

3.3

 
4.2

4.3

Total
0.6
%
0.6
%
 
0.2
%
0.3
%
 
2.8
%
2.9
%
 
3.6
%
3.7
%

86

Our internal loan gradings provide information about the financial health of our commercial borrowers and our risk of potential loss. The following table presents a breakout of our commercial loans by loan grade at December 31:
 
Percent of Total
 
2015
2014
Originated loans:
 
 
Pass
95.1
%
94.2
%
Criticized: (1)
 
 
Accrual
4.2

5.0

Nonaccrual
0.7

0.8

Total criticized
4.9

5.8

Total
100.0
%
100.0
%
Acquired loans:
 
 
Pass
88.5
%
89.1
%
Criticized: (1)
 
 
Accrual
11.4

10.4

Nonaccrual
0.1

0.5

Total criticized
11.5

10.9

Total
100.0
%
100.0
%
(1)  
Includes special mention, substandard, doubtful, and loss, which are consistent with regulatory definitions, and as described in Item 1, “Business”, under the heading “Asset Quality Review.”
Borrower FICO scores provide information about the credit quality of our consumer loan portfolio as they provide an indication as to the likelihood that debtors will repay their debts. We obtain the scores from a nationally recognized consumer rating agency on a quarterly basis and trends are evaluated for consideration as a qualitative adjustment to the allowance. The composition of our consumer portfolio segment is presented in the table below at December 31:
 
Percent of Total
 
2015
2014
Originated loans by refreshed FICO score:
 
 
Over 700
79.8
%
78.9
%
660-700
10.7

11.2

620-660
4.9

5.0

580-620
2.2

2.2

Less than 580
2.3

2.2

No score (1)
0.1

0.5

Total
100.0
%
100.0
%
Acquired loans by refreshed FICO score:
 
 
Over 700
73.8
%
73.4
%
660-700
7.9

7.7

620-660
5.2

4.8

580-620
3.7

3.8

Less than 580
3.5

3.9

No score (1)
5.9

6.4

Total
100.0
%
100.0
%
(1)  
Primarily includes loans that are serviced by others for which refreshed FICO scores were not available as of the indicated date.
We maintain an allowance for loan losses for our originated portfolio segment, which is concentrated in the New York region and includes to a lesser degree, loan balances from organic growth in our acquired markets of Eastern

87

Pennsylvania, Western Pennsylvania, Connecticut and Western Massachusetts. Despite the challenging market conditions, our asset quality continues to perform well when compared to peer averages.
As part of our determination of the fair value of our acquired loans at time of acquisition, we established a credit mark to provide for future losses in our acquired loan portfolio. Our credit mark, which represents the remaining principal balance on acquired loans that we do not expect to collect, decreased to $62 million at December 31, 2015 from $93 million as of December 31, 2014 as a result of $21 million in charge-offs and $11 million in transfers to accretable yield. In addition, we maintain an allowance for loan losses on our acquired loans, if necessary, for losses in excess of any remaining credit discount.
The following table provides information about our acquired loan portfolio by acquisition at the dates indicated or for the related year: 
(dollars in millions)
HSBC
NewAlliance
Harleysville
National City
Total
December 31, 2015
 
 
 
 
 
Provision for loan losses
$
—

$
—

$
1

$
2

$
3

Net charge-offs
—

—

1

2

3

Net charge-offs to average loans
0.01
%
—
%
0.25
%
0.97
%
0.11
%
Nonperforming loans
$
7

$
9

$
8

$
1

$
25

Total loans (1)
667

1,603

570

159

2,999

Allowance for acquired loan losses
—

—

3

1

5

Credit related discount (2)
13

41

6

1

62

Credit related discount as percentage of loans
1.94
%
2.58
%
1.14
%
0.55
%
2.06
%
Criticized loans (3)
$
22

$
87

$
42

$
32

$
183

Classified loans (4)
20

70

34

29

152

Greater than 90 days past due and accruing (5)
9

35

16

5

65

December 31, 2014
 
 
 
 
 
Provision for loan losses
$
1

$
—

$
6

$
1

$
8

Net charge-offs
—

—

6

—

6

Net charge-offs to average loans
—
%
—
%
0.68
%
0.02
%
0.14
%
Nonperforming loans
$
8

$
11

$
10

$
2

$
30

Total loans  (1)
800

2,043

782

210

3,835

Allowance for acquired loan losses
1

—

4

1

6

Credit related discount (2)
18

55

18

2

93

Credit related discount as percentage of loans
2.29
%
2.71
%
2.27
%
0.84
%
2.43
%
Criticized loans (3)
$
30

$
129

$
55

$
22

$
237

Classified loans (4)
24

69

50

15

158

Greater than 90 days past due and accruing (5)
10

46

27

8

91

(1)  
Carrying value of acquired loans plus the principal not expected to be collected.
(2)  
Principal on acquired loans not expected to be collected.
(3)  
Includes special mention, substandard, doubtful, and loss, which are consistent with regulatory definitions, and as described in Item 1, “Business”, under the heading “Asset Quality Review”.
(4)  
Includes consumer loans, which are considered classified when they are 90 days or more past due. Classified loans include substandard, doubtful, and loss, which are consistent with regulatory definitions, and as described in Item 1, “Business”, under the heading “Asset Quality Review”.
(5)  
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.

88

The following table provides information about our originated loan portfolio at December 31: 
(dollars in millions)
2015
2014
Provision for loan losses
$
74

$
85

Net charge-offs
65

62

Net charge-offs to average loans
0.32
%
0.34
%
Nonperforming loans
$
188

$
174

Nonperforming loans to total loans
0.89
%
0.90
%
Total loans
$
21,101

$
19,296

Allowance for originated loan losses
237

228

Allowance for originated loan losses to total originated loans
1.12
%
1.18
%
Criticized loans
$
762

$
804

Classified loans (1)
$
451

$
451

Greater than 90 days past due and accruing  (2)
3

3

 
(1)  
Includes consumer loans, which are considered classified when they are 90 days or more past due. Classified loans include substandard, doubtful, and loss, which are consistent with regulatory definitions, and as described in Item 1, “Business”, under the heading “Asset Quality Review”.
(2)  
Includes credit card loans and loans that have matured and are in the process of collection.
Our total allowance for loan losses related to both our originated and acquired loans increased by $8 million from $234 million at December 31, 2014 to $ 242 million at December 31, 2015 due to our total provision for loan losses of $ 76 million exceeding our total net charge-offs of $69 million during 2015 . The ratio of our total allowance for loan losses to total loans was 1.01% at December 31, 2015 , a slight decrease from 1.02% as of December 31, 2014 . Excluding acquired loans, the ratio of our allowance for originated loan losses to total originated loans was 1.12% at December 31, 2015 , a six basis point decrease from 1.18% at December 31, 2014 .
As part of our credit risk management, we enter into modification agreements with troubled borrowers in order to mitigate our credit losses. Our aggregate recorded investment in impaired loans modified through troubled debt restructurings (“TDRs”) decreased to $115 million at December 31, 2015 from $120 million at December 31, 2014 . The modifications made to these restructured loans 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. These modifications were considered to be concessions provided to the respective borrower due to the borrower’s financial distress. Our aggregate recorded investment in TDRs does not include modifications to acquired loans that are accounted for as part of a pool under ASC 310-30. We accrue interest on a TDR once the borrower has demonstrated the ability to perform for six consecutive payments. TDRs accruing interest totaled $63 million and $67 million at December 31, 2015 and 2014 , respectively.
Certain pass-graded commercial loans may have repayment dates extended at or near original maturity dates in the normal course of business. When such extensions are considered to be concessions and provided as a result of the financial distress of the borrower, these loans are classified as TDRs and considered to be impaired. However, if such extensions or other modifications at or near the original maturity date or at any time during the life of a loan are not made as a result of financial distress related to the borrower, such a loan would not be classified as a TDR or as an impaired loan. Repayment extensions typically provided in a TDR are for periods of greater than six months. When providing loan modifications because of the financial distress of the borrowers, we consider that, after the modification, the borrower would be in a better position to continue with the payment of principal and interest. While such loans may be collateralized, they are not typically considered to be collateral dependent for accounting measurement purposes.

89

Residential Mortgage Banking
We often originate and sell residential mortgage loans with servicing retained. Our loan sales activity is generally conducted through loan sales in a secondary market sponsored by FNMA and FHLMC. Subsequent to the sale of mortgage loans, we do not typically retain any interest in the underlying loans except through our relationship as the servicer of the loans.
As is customary in the mortgage banking industry, we, or banks we have acquired, have made certain representations and warranties related to the sale of residential mortgage loans (including loans sold with servicing released) and to the performance of our obligations as servicer. The breach of any such representations or warranties could result in losses for us. Our maximum exposure to loss is equal to the outstanding principal balance of the sold loans; however, any loss would be reduced by any payments received on the loans or through the sale of collateral.
Our portfolio of mortgages serviced for others amounted to $4.0 billion and $3.8 billion at December 31, 2015 and 2014 , respectively. Our liability for estimated repurchase obligations on loans sold, which is included in other liabilities in our Consolidated Statements of Condition, was $5 million and $6 million at December 31, 2015 and 2014 , respectively.
The delinquencies in our serviced loan portfolio were as follows at December 31:
 
2015
2014
2013
30 to 59 days past due
0.21
%
0.20
%
0.30
%
60 to 89 days past due
0.11

0.11

0.11

Greater than 90 days past due
0.67

0.69

0.72

Total past due loans
0.99
%
1.01
%
1.13
%

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Investment Securities
The following table shows certain information with respect to the amortized cost and fair values of our portfolio as of December 31:
 
2015
 
2014
 
2013
(dollars in millions)
Amortized
cost
Fair
value
 
Amortized
cost
Fair
value
 
Amortized
cost
Fair
value
Investment securities available for sale:
 
 
 
 
 
 
 
 
Debt securities:
 
 
 
 
 
 
 
 
States and political subdivisions
$
374

$
379

 
$
444

$
453

 
$
516

$
529

U.S. Treasury
55

55

 
25

25

 
20

20

U.S. government sponsored enterprises
268

269

 
187

191

 
306

312

Corporate
828

801

 
820

823

 
863

872

Total debt securities
1,525

1,504

 
1,476

1,492

 
1,705

1,734

Other
22

22

 
22

22

 
33

33

Total debt and other securities
$
1,547

$
1,526

 
$
1,497

$
1,514

 
$
1,738

$
1,766

Average remaining life of debt securities (1)
3.4 years

 

 
3.3 years

 

 
4.0 years

 
Mortgage-backed securities:
 
 
 
 
 
 
 
 
Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
GNMA
$
27

$
26

 
$
34

$
34

 
$
41

$
40

FNMA
68

71

 
96

100

 
134

139

FHLMC
84

87

 
115

120

 
154

159

Collateralized mortgage obligations:
 
 
 
 
 
 
 
 
GNMA
94

94

 
—

—

 
—

—

FNMA
738

730

 
694

682

 
797

761

FHLMC
359

355

 
353

350

 
396

379

Non-agency issued
—

—

 
—

—

 
12

13

Total collateralized mortgage obligations
1,191

1,179

 
1,047

1,032

 
1,205

1,152

Total residential mortgage-backed securities
1,369

1,364

 
1,291

1,286

 
1,534

1,490

Commercial mortgage-backed securities
1,067

1,085

 
1,450

1,500

 
1,759

1,831

Total mortgage-backed securities
$
2,437

$
2,449

 
$
2,741

$
2,786

 
$
3,294

$
3,321

Average remaining life of mortgage-backed securities (1)
3.2 years

 
 
3.6 years

 
 
4.6 years

 
Collateralized loan obligations:
$
1,192

$
1,186

 
$
1,001

$
1,016

 
$
1,392

$
1,431

Average remaining life of collateralized loan obligations (1)
4.6 years

 
 
3.4 years

 
 
3.8 years

 
Asset-backed securities collateralized by:
 
 
 
 
 
 
 
 
Student loans
$
170

$
171

 
$
228

$
235

 
$
306

$
312

Credit cards
20

20

 
42

42

 
73

73

Auto loans
66

66

 
193

194

 
331

335

Other
53

53

 
127

127

 
186

186

Total asset-backed securities
$
309

$
310

 
$
591

$
599

 
$
896

$
905

Average remaining life of asset-backed securities (1)
1.8 years

 
 
2.2 years

 
 
2.7 years

 
Total securities available for sale
$
5,485

$
5,471

 
$
5,830

$
5,915

 
$
7,319

$
7,423

Average remaining life of investment securities available for sale (1)
3.5 years

 

 
3.5 years

 

 
4.0 years

 
 
 
 
 
 
 
 
 
 

91

 
2015
 
2014
 
2013
(dollars in millions)
Amortized
cost
Fair
value
 
Amortized
cost
Fair
value
 
Amortized
cost
Fair
value
Investment securities held to maturity:
 

 

 
 

 

 
 

 

Debt securities, U.S. government agencies
$
42

$
42

 
$
60

$
60

 
$
5

$
5

Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
GNMA
17

17

 
12

12

 
17

17

FNMA
93

92

 
118

118

 
146

143

FHLMC
50

50

 
65

65

 
81

81

Collateralized mortgage obligations:
 
 
 
 
 
 
 
 
GNMA
1,571

1,579

 
1,755

1,779

 
1,713

1,727

FNMA
2,297

2,279

 
1,965

1,954

 
1,074

1,027

FHLMC
2,318

2,319

 
1,967

1,976

 
1,007

989

Total collateralized mortgage obligations
6,186

6,177

 
5,687

5,709

 
3,793

3,742

Total residential mortgage-backed securities
6,345

6,336

 
5,882

5,904

 
4,037

3,983

Total securities held to maturity
$
6,388

$
6,378

 
$
5,942

$
5,964

 
$
4,042

$
3,988

Average remaining life of investment securities held to maturity (1)
4.6 years

 

 
5.1 years

 

 
5.0 years

 
(1)
Average remaining life is computed utilizing estimated maturities and prepayment assumptions.
The net unamortized purchase premiums on our CMO portfolio amounted to $72 million , or 1.0% of the portfolio, at December 31, 2015 and $78 million , or 1.2% of the portfolio, at December 31, 2014 . The net unamortized purchase premiums on our other residential mortgage-backed securities decreased to $7 million , or 2.2% of the portfolio, at December 31, 2015 , from $9 million , or 2.1% of the portfolio, at December 31, 2014.
Changes in our expectations regarding the magnitude and duration of a lower interest rate environment could have a material impact on our net interest income in both the period of change, attributable to any retroactive accounting adjustment that would be required to maintain a constant effective yield, and in subsequent periods attributable to changes to the prospective yields on our investment securities.
During the third and fourth quarters of 2014, certain portions of our CMO portfolio experienced higher than expected prepayments given increases in home sales and lower mortgage rates that occurred throughout 2014. As a result, we increased the expected future prepayment speeds for certain portions of the portfolio that resulted in $2 million retroactive adjustments over the two quarters. Mortgage rates continued to decline into 2015 and as a result, national applications for mortgages increased sharply.
Our holdings in residential mortgage-backed securities were 65% and 61% of our total investment securities portfolio at December 31, 2015 and 2014 , respectively. At December 31, 2015 and 2014 , all of our residential mortgage-backed securities in our available for sale portfolio were issued by Government National Mortgage Association (“GNMA”), Federal National Mortgage Association (“FNMA”), or Federal Home Loan Mortgage Corporation (“FHLMC”). GNMA, FNMA, and FHLMC guarantee the contractual cash flows of these investments. FNMA and FHLMC are government sponsored enterprises that are currently under the conservatorship of the U.S. government. Our GNMA mortgage-backed securities are backed by the full faith and credit of the U.S. government. At December 31, 2015 and 2014 , 11% and 14% , respectively, of our investment securities were variable rate, and are predominantly CLOs.
Our investment in FHLB stock consisted of $280 million of FHLB of New York common stock at December 31, 2015 and of $256 million and $25 million of FHLB of New York common stock and FHLB of Boston common stock, respectively, at December 31, 2014 . Our investment in FRB stock amounted to $131 million at December 31, 2015 and 2014 .

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The following table presents the latest available underlying investment ratings of the fair value of our investment securities portfolio at the dates indicated:
 
 
 
Average credit rating of fair value amount
(in millions)
Amortized cost
Fair value
AA or better
A
BBB
BB or less
Not rated
December 31, 2015
 
 
 
 
 
 
 
Securities backed by U.S. Treasury and U.S. government sponsored enterprises:
 
 
 
 
 
 
 
Collateralized mortgage obligations
$
7,377

$
7,356

$
7,356

$
—

$
—

$
—

$
—

Residential mortgage-backed securities
338

344

344

—

—

—

—

Debt securities
365

365

355

10

—

—

—

Total
8,080

8,065

8,055

10

—

—

—

Commercial mortgage-backed securities
1,067

1,085

620

388

77

—

—

Collateralized loan obligations
1,192

1,186

830

350

6

—

—

Asset-backed securities
309

310

273

37

—

—

—

Corporate debt
828

801

—

181

111

509

1

States and political subdivisions
374

379

220

138

1

—

21

Other
22

22

—

—

—

—

22

Total investment securities
$
11,872

$
11,848

$
9,996

$
1,104

$
196

$
509

$
44

December 31, 2014
 
 
 
 
 
 
 
Securities backed by U.S. Treasury and U.S. government sponsored enterprises:
 
 
 
 
 
 
 
Collateralized mortgage obligations
$
6,734

$
6,741

$
6,741

$
—

$
—

$
—

$
—

Residential mortgage-backed securities
438

448

448

—

—

—

—

Debt securities
272

277

266

11

—

—

—

Total
7,445

7,466

7,455

11

—

—

—

Commercial mortgage-backed securities
1,450

1,500

928

406

166

—

—

Collateralized loan obligations
1,001

1,016

721

273

21

—

—

Asset-backed securities
591

599

497

101

—

—

—

Corporate debt
820

823

—

102

193

526

1

States and political subdivisions
444

453

260

170

2

—

22

Other
22

22

—

—

—

—

22

Total investment securities
$
11,772

$
11,879

$
9,862

$
1,064

$
382

$
526

$
45

The weighted average credit rating of our portfolio was AA at December 31, 2015 and 2014 .
Our Credit Portfolio Oversight Committee (the "Committee") meets monthly to analyze and monitor our securities portfolio from a credit perspective. We utilize external credit ratings but have also developed our own internal ratings process based on quantitative and qualitative factors for each of the securities to evaluate credit risk within the portfolio. In addition to reviewing security ratings, which are one measure of risk, the Committee reviews various credit metrics for each of the portfolios including these metrics under stressed environments. For structured securities, the Committee generally reviews changes in the underlying collateral and changes in credit enhancement. In the discussion of our investment portfolio, we have included certain credit rating information because the information is one indication of the degree of credit risk to which we are exposed and significant changes in ratings classifications for our investment portfolio could result in increased risk for us.
Our Corporate Debt portfolio included $623 million and $594 million of High Yield bonds at December 31, 2015 and 2014 , respectively. Our High Yield bonds are not structured and therefore, are susceptible to company specific liquidity and credit risks. The High Yield portfolio is well diversified with an average hold size of $7 million and rating of Ba2/BB. Approximately 13% and 16% of the High Yield bond portfolio amortized cost consisted of companies rated Investment Grade at December 31, 2015 and 2014 , respectively. Currently $96 million , or less than 1% , of our total investment securities portfolio, consists of companies exposed to the energy sector. This subset of the portfolio with exposure to energy is very granular with an average security exposure of $6 million and largest exposure of $10 million . The portfolio is liquid with regular trading activity. As of December 31, 2015 ,

93

the energy portfolio had a net unrealized loss of $20 million , compared to $4 million at December 31, 2014 . The remainder of the High Yield portfolio, which amounted to $527 million , had an unrealized loss of $9 million . During the fourth quarter, continued declines in commodity prices, Federal Reserve tightening and global economic concerns led to decreased demand for credit sensitive instruments that hurt the stock markets and widened credit spreads. As a result, valuations in the High Yield portfolio declined. More recently, global concerns and lower commodity prices, particularly oil, have continued to send equity and High Yield bond prices lower. As of January 29, 2016, the energy portfolio net unrealized loss has increased to $26 million and the remainder of the High Yield portfolio unrealized loss increased to $9 million.  The High Yield bond portfolio is actively monitored and reviewed, including at the monthly Credit Portfolio Oversight Committee and additional High Yield portfolio review meetings with senior management. Each individual bond is also reviewed to determine if it is other than temporarily impaired. Of the $509 million corporate debt rated BB or less, $68 million consists of companies exposed to the energy sector .
Our CMBS portfolio had an amortized cost of $1.1 billion at December 31, 2015 . The net unamortized premiums on our CMBS portfolio amounted to $4 million , or 0.4% of the portfolio at December 31, 2015 and $28 million , or 2.0% of the portfolio at December 31, 2014 . Gross unrealized losses on our CMBS portfolio amounted to less than $100 thousand at December 31, 2015 and $0.2 million at December 31, 2014 . Securities in our CMBS portfolio have significant credit enhancement that provides us protection from default, and 93% of this portfolio was rated A or higher at December 31, 2015 . Our entire CMBS portfolio has either credit enhancement greater than 25% or underlying loans which collateralize our securities with loan to values of less than 100%.
The following table provides information on the credit enhancements of securities in our CMBS portfolio at December 31:
 
2015
 
2014
Credit enhancement
Amortized cost
% of total CMBS portfolio
 
Amortized cost
% of total CMBS portfolio
 
(dollars in millions)
30+%
$
875

82
%
 
$
1,075

74
%
25 - 30%
142

13

 
223

16

20 - 25%
50

5

 
118

8

18 - 20%
—

—

 
33

2

Total
$
1,067

100
%
 
$
1,450

100
%
Our collateralized loan obligation ("CLO") portfolio had an amortized cost of $1.2 billion at December 31, 2015 . Gross unrealized losses on our CLO portfolio amounted to $11 million and $3 million at December 31, 2015 and December 31, 2014 , respectively. Our CLO portfolio is predominantly variable rate and returns an approximate 2.5% yield at a credit quality level we believe superior to middle market lending. The collateral underlying our CLOs consists of over 95% senior secured loans, and over 90% of the obligors are domiciled in the United States. Approximately three quarters of the portfolio is comprised of CLOs originated in 2011 or later, and no CLO investments were made by us until the fourth quarter of 2011. As of December 31, 2015 , we have purchased $600 million of newly issued CLO investments that we believe to be exempt from the Volcker Rule. These CLOs are structured in a manner consistent with the loan securitization exclusion set forth in the Volcker Rule.
As shown in the table above, of the underlying investment ratings of our portfolio, 99% of our CLO portfolio was rated A or higher at December 31, 2015 and significant credit enhancements for our securities provide us protection from default.

94

The following table provides information on the credit enhancements for our securities in our CLO portfolio at December 31:
 
2015
 
2014
Credit Enhancement
Amortized cost
% of total CLO portfolio
 
Amortized cost
% of total CLO portfolio
 
(dollars in millions)
40+%
$
91

8
%
 
$
73

7
%
35 - 40%
172

14

 
224

23

30 - 35%
61

5

 
83

8

25 - 30%
300

25

 
223

22

20 - 25%
252

21

 
133

13

15 - 20%
310

26

 
240

24

10 - 15%
6

1

 
25

3

0 - 10%
—

—

 
—

—

Total
$
1,192

100
%
 
$
1,001

100
%
(1)  
Credit enhancement is calculated by dividing the remaining unpaid principal balance of bonds subordinated to the bonds we own plus any overcollateralization remaining in the securitization structure by the remaining unpaid principal balance of all bonds in the securitization structure.
Liquidity Risk
Liquidity risk is the risk to earnings or capital arising from our inability to meet our obligations as they come due. Liquidity risk arises from our failure to recognize or address changes in market conditions that affect the ability to liquidate assets quickly or to obtain adequate funding to continue to operate profitably.
Liquidity refers to our ability to obtain cash, or to convert assets into cash timely, efficiently, and economically. Our Asset and Liability Committee ("ALCO") establishes procedures, guidelines and limits for managing and monitoring our liquidity to ensure we maintain adequate liquidity under both normal and stressed operating conditions at all times. We manage our liquidity to ensure that we have sufficient cash to:
•
Support our operating activities,
•
Meet increases in demand for loans and other assets,
•
Provide for repayments of deposits and borrowings, and
•
To fulfill contract obligations.
Factors or conditions that could affect our liquidity management objectives include profitability, changes in the mix of assets and liabilities on our balance sheet; our actual investment, loan, and deposit balances; our available collateralized wholesale borrowings; our reputation; and our credit rating. A significant change in our financial performance, our ability to maintain our deposit levels, the amount of our available collateralized wholesale borrowings, or credit rating could reduce the availability, or increase the cost, of our funding sources.
As part of our liquidity risk management framework, we have a contingency funding plan (“CFP”) that is designed to address temporary and long-term liquidity disruptions.  The CFP assesses liquidity needs under normal and various stress scenarios, encompassing both idiosyncratic and systemic conditions.  The plan provides for on-going monitoring of the liquidity environment by using numerous indicators and metrics that are regularly reviewed by ALCO.  Furthermore, the CFP provides for the ongoing monitoring of the unused borrowing capacity and available sources of contingent liquidity to address unexpected liquidity needs under adverse conditions.
Consolidated liquidity
Sources of liquidity
We obtain our liquidity from multiple sources, including gathering deposit balances, cash generated by principal and interest repayments on our investment and loan portfolios, short and long-term borrowings, as well as short-

95

term federal funds, internally generated capital, and other credit facilities. The primary source of our non-deposit borrowings are FHLB advances, of which we had $5.5 billion outstanding at December 31, 2015 .
While core deposits and loan and investment securities repayments are principal sources of liquidity, funding diversification is another key element of liquidity management. We are rated by Moody’s, Standard and Poor’s (“S&P”), and Fitch Ratings (“Fitch”). Credit ratings relate to our ability to issue debt securities and the cost to borrow money, and should not be viewed as an indication of future stock performance or a recommendation to buy, sell, or hold securities. Among other factors, the credit ratings are based on financial strength, credit quality and concentrations in the loan portfolio, the level and volatility of earnings, capital adequacy, the quality of management, the liquidity of the balance sheet, the availability of a significant base of core deposits, and our ability to access a broad array of wholesale funding sources. Adverse changes in these factors could result in a negative change in credit ratings and impact not only the ability to raise funds in the capital markets but also the cost of these funds. Ratings are subject to revision or withdrawal at any time and each rating should be evaluated independently.
We have included the Company's credit rating information in the table below because significant changes in ratings classifications for debt we issue could result in increased liquidity risk for us. The following table presents our credit ratings by agency as of December 31, 2015 :
 
Moody's
S&P
Fitch
Senior unsecured
Ba1
BBB-
BBB-
Subordinated debt
Ba1
BB+
BB+
Following the announcement of the Merger, each of the rating agencies have published updated reports regarding their view of the impact of the Merger on the Company’s credit ratings. During the fourth quarter 2015, Standard and Poor (“S&P”) affirmed the Company’s long term issuer rating of BBB- (which is at the investment grade minimum), but moved their outlook from stable to positive. Similarly in the fourth quarter 2015, Moody’s placed the Company’s ratings on review for upgrade and Fitch placed the Company’s ratings on Rating Watch Positive. Although the rating agencies currently hold positive outlooks for our ratings, there can be no assurances that we will maintain our current ratings and future downgrades could have adverse consequences for us.
Our total collateralized wholesale borrowings amounted $5.5 billion and $5.0 billion at December 31, 2015 and 2014 , respectively. In addition to this amount, we had additional collateralized wholesale borrowing capacity of $4.9 billion and $5.7 billion at December 31, 2015 and 2014 , respectively, from various funding sources which include the FHLB, Federal Reserve Bank, and commercial banks that we can use to fund lending activities, liquidity needs, and/or to adjust and manage our asset and liability position, of which $0.9 billion was available at the Federal Reserve's discount window at both December 31, 2015 and 2014 .
Uses of Liquidity
The primary uses of our liquidity are to support our operating activities, fund loans or obtain other assets, and provide for repayments of deposits and borrowings.
In addition to cash flow from operations, deposits and borrowings, our funding is provided from the principal and interest payments that we receive from our loans and investment securities. While maturities and scheduled amortization of loans and securities are predictable sources of funds, our deposit balances and loan prepayments are greatly influenced by the level of interest rates, the economic environment and local competitive conditions.
Parent Company liquidity
The Company obtains its liquidity from multiple sources, including dividends from the Bank, principal repayments on investment securities, interest received from the Bank, a $100 million line of credit facility with a bank, and the issuance of debt and equity securities. Our line of credit facility with a bank has never been drawn and is not a significant component of our CFP. The primary uses of the Company's liquidity are dividends to common and preferred stockholders, capital contributions to the Bank, debt service, operating expenses, repurchases of our

96

common stock, and acquisitions. The Company's most liquid assets are cash it holds at the Bank and interest-bearing demand accounts at correspondent banks, all of which totaled $394 million at December 31, 2015 . As of December 31, 2015 , the Company has in excess of eight quarters of cash liquidity to maintain the current dividends to common and preferred stockholders without reliance on dividends from the Bank.
The Company’s ability to pay dividends to our stockholders is substantially dependent upon the Bank’s ability to pay dividends to the Company. Subject to the Bank meeting or exceeding regulatory capital requirements, the prior approval of the OCC is required if the total of all dividends declared by the Bank in any calendar year would exceed the sum of the Bank’s net profits for that year and its retained net profits for the preceding two calendar years, less any required transfers to surplus. In addition, Federal Reserve guidance sets forth the supervisory expectation that bank holding companies will inform and consult with Federal Reserve staff in advance of issuing a dividend that exceeds earnings for the quarter and should not pay dividends in a rolling four quarter period in an amount that exceeds net income for that period.  Federal law also prohibits the Bank from paying dividends that would be greater than its undivided profits after deducting statutory bad debt in excess of its allowance for loan losses.
While the size of our 2014 $1.1 billion goodwill impairment charge did not adversely impact our capital ratios, it did impact our regulatory dividend capacity formula. Simply stated, even though the non-cash goodwill charge did not impact cash flow for dividends, the size of the charge does require that we get regulatory approval from the OCC to make distributions or other returns of capital from the Bank to the Company in the future. Following the goodwill impairment charge, we were also required to consult with the Federal Reserve before paying the Company dividend to our common and preferred stockholders through the payment of dividends for the second quarter of 2015.
Based on current estimates, we expect to need quarterly approval from the OCC until the first quarter of 2017 based on their calculation formula. While we cannot be assured that the OCC will approve our quarterly dividend requests going forward, based on conversations with the regulators and barring any unforeseen future developments that would materially impact our profitability, we believe that we can maintain our holding company common and preferred dividend payments at their current levels.
The Bank paid dividends of $100 million and $80 million to the Company during 2015 and 2014 , respectively. Additionally, the Bank made $90 million and $85 million in capital distributions to the Company during 2015 and 2014 , respectively.

97

Borrowings
The following table shows certain information about our borrowings for the dates indicated:
 
At or for the year ended December 31,
(dollars in millions)
2015
2014
2013
Period-end balance:
 
 
 
FHLB advances
$
5,525

$
5,049

$
4,304

Repurchase agreements
399

423

518

Senior notes
298

298

298

Subordinated notes
299

298

298

Junior subordinated debentures
115

114

113

Other borrowings
21

23

25

Total borrowings
$
6,657

$
6,206

$
5,556

Maximum balance at any month end:
 
 
 
FHLB advances
$
5,525

$
5,049

$
4,304

Repurchase agreements
481

570

593

Senior notes
298

298

298

Subordinated notes
299

298

298

Junior subordinated debentures
115

114

113

Other borrowings
23

25

25

Average balance:
 
 
 
FHLB advances
$
4,744

$
4,168

$
3,157

Repurchase agreements
437

509

587

Senior notes
298

298

298

Subordinated notes
298

298

298

Junior subordinated debentures
114

113

112

Other borrowings
23

24

25

Period-end weighted average interest rate:
 
 
 
FHLB advances
0.76
%
0.48
%
0.46
%
Repurchase agreements
0.10

0.14

0.18

Senior notes
6.75

6.75

6.75

Subordinated notes
7.25

7.25

7.25

Junior subordinated debentures
2.83

2.57

2.65

Other
3.95

3.94

3.92

Weighted average maturity (years):
 
 
 
FHLB advances
0.5

0.5

0.4

Senior notes
4.2

5.2

6.2

Subordinated notes
6.0

7.0

8.0

Junior subordinated debentures
19.6

20.7

21.7

Other
10.2

11.1

11.9

Borrowings increased to $6.7 billion at December 31, 2015 from $6.2 billion at December 31, 2014 . Long-term borrowings increased $1.6 billion to $2.3 billion while short-term borrowings decreased by $1.1 billion from December 31, 2014 to $4.3 billion .
At December 31, 2015 , wholesale borrowings totaled $6.2 billion . Wholesale borrowings are generally used as an alternative to deposit funding. Wholesale funding is generally utilized over deposits if the wholesale funding can be originated at lower incremental costs than deposits or if the structure of the wholesale borrowing is more advantageous to the bank's interest rate risk or for hedging the bank's balance sheet.

98

Our junior subordinated debentures include amounts related to First Niagara Financial Group Statutory Trust I as well as junior subordinated debentures associated with six statutory trust affiliates that were acquired from our merger with Harleysville and three statutory trusts acquired from NewAlliance (the “Trusts”). The Trusts qualify as variable interest entities and were formed to issue mandatorily redeemable trust preferred securities to investors and loan the proceeds to us for general corporate purposes. The Trusts hold, as their sole assets, junior subordinated debentures of the Company with face amounts totaling $142 million at December 31, 2015 . The carrying value of the trust preferred junior subordinated debentures, net of the unamortized purchase accounting fair value adjustment of approximately $28 million , was $115 million at December 31, 2015 . We own all of the common securities of the Trusts and have accordingly recorded $4 million in equity method investments classified as other assets in our Consolidated Statement of Condition at December 31, 2015 representing our investment in those common securities. As the shareholders of the trust preferred securities are the primary beneficiaries of these trusts, the Trusts are not consolidated in our financial statements.
Our junior subordinated debentures are redeemable prior to the maturity date at our option upon each trust’s stated option repurchase dates, and from time to time thereafter. These debentures are also redeemable in whole at any time upon the occurrence of specific events defined within the trust indenture. Our obligations under the debentures and related documents, taken together, constitute a full and unconditional guarantee by the Company of the issuers’ obligations under the trust preferred securities.
Deposits
The table below contains selected information on the composition of our deposits as of December 31:
 
2015
2014
 
2013
(dollars in millions)
Amount
Percent
Weighted
average rate
 
Amount
Percent
Weighted
average rate
 
Amount
Percent
Weighted
average rate
Core deposits:
 
 
 
 
 
 
 
 
 
 
 
Savings
$
3,390

11.8
%
0.09
%
 
$
3,452

12.4
%
0.09
%
 
$
3,667

13.8
%
0.10
%
Interest-bearing checking
5,479

19.1

0.03

 
5,084

18.3

0.03

 
4,744

17.8

0.04

Money market deposits
10,654

37.1

0.29

 
9,962

35.8

0.22

 
9,740

36.5

0.21

Noninterest-bearing
5,835

20.3

—

 
5,407

19.5

—

 
4,866

18.2

—

Total core deposits
25,357

88.3

0.14

 
23,906

86.0

0.11

 
23,016

86.3

0.12

Certificates
3,344

11.7

0.84

 
3,876

14.0

0.69

 
3,649

13.7

0.68

Total deposits
$
28,701

100.0
%
0.23
%
 
$
27,781

100.0
%
0.19
%
 
$
26,665

100.0
%
0.20
%

99

The table below contains selected information on the composition of our deposits by geographic region at the dates indicated:
(in millions)
New
York (1)
Western
Pennsylvania
Eastern
Pennsylvania
Connecticut
and Western
Massachusetts
Total deposits
December 31, 2015
 
 
 
 
 
Core deposits:
 
 
 
 
 
Savings
$
2,182

$
183

$
225

$
800

$
3,390

Interest-bearing checking
3,507

686

583

703

5,479

Money market deposits
6,851

1,365

934

1,503

10,654

Noninterest-bearing
3,571

804

648

812

5,835

Total core deposits
16,111

3,038

2,390

3,817

25,357

Certificates
2,068

431

280

564

3,344

Total deposits
$
18,180

$
3,469

$
2,670

$
4,382

$
28,701

December 31, 2014
 
 
 
 
 
Core deposits:
 
 
 
 
 
Savings
$
2,223

$
170

$
218

$
842

$
3,452

Interest-bearing checking
3,083

674

672

656

5,084

Money market deposits
6,455

1,205

895

1,407

9,962

Noninterest-bearing
3,219

830

636

722

5,407

Total core deposits
14,980

2,878

2,421

3,627

23,906

Certificates
2,421

450

300

705

3,876

Total deposits
$
17,401

$
3,329

$
2,720

$
4,331

$
27,781

(1)  
Includes brokered money market deposits of $420 million and $412 million at December 31, 2015 and December 31, 2014 , respectively, and brokered certificates of deposit of $941 million and $1.2 billion at December 31, 2015 and December 31, 2014 , respectively.
The following table shows maturities of outstanding certificates of deposit and other time deposits in denominations of $250,000 and greater at December 31, 2015 :
(in millions)
Over
$250,000
Less than three months
$
52

Over three months to six months
10

Over six months to 12 months
33

Over 12 months
120

Total
$
215

Our total deposits increased $920 million , or 3% , from December 31, 2014 to $28.7 billion at December 31, 2015 . Our strategic focus remains on efforts to grow our customer base, re-position our account mix and introduce new products and services that further enhance our value proposition to customers. Recent investments in mobile banking and remote deposit capture have further enhanced customers’ ability to transact in the delivery channel of their choice while at the same time lowering our cost to acquire and serve such customers. Current and anticipated investments as part of our Strategic Investment Plan in new digital features and functionalities such as online account opening will further enhance customers’ ability to do business with us across all delivery channels.

100

Transactional deposits, which include interest-bearing and noninterest bearing checking balances, increased $822 million , or 8% , from December 31, 2014 . Transactional deposits currently represent 39% of our deposit base, up from 38% a year ago. Money market balances increased 7% from December 31, 2014 driven by strength in commercial deposits and promotional campaigns while interest-bearing checking balances increased 8% driven by growth in municipal and retail balances. Noninterest-bearing checking balances increased $427 million , or 8% , from December 31, 2014 , driven by higher municipal and commercial deposits. Total commercial deposits increased 10% from December 31, 2014 to December 31, 2015.
The 14% decrease in certificates of deposit from December 31, 2014 to December 31, 2015 reflects decreases across retail, municipal, and brokered certificates of deposit. The terms on the brokered certificates of deposit are between six months and 24 months with interest rates ranging between 0.25% and 1.15%.
The average cost of interest-bearing deposits for the year ended December 31, 2015 of 0.29% increased five basis points from the year ended December 31, 2014 , reflecting the impact of promotional pricing campaigns to gather money market deposit balances as well as purchase accounting mark to market adjustments on maturing certificates of deposit.
Contractual Obligations and Other Commitments (1 )  
The following table indicates certain of our funding obligations by time remaining until maturity as of December 31, 2015 :
(in millions)
Less than 1
year
Over 1 to 3
years
Over 3 to 5
years
Over 5
years
Total
Certificates of deposit
$
1,763

$
1,175

$
385

$
21

$
3,344

Long-term borrowings
1,275

300

—

712

2,287

Commitments to extend credit   (2)
11,609

—

—

—

11,609

Standby letters of credit (2)
252

—

—

—

252

Operating leases
35

59

48

71

213

Purchase obligations
30

5

—

—

35

Capital leases
3

5

5

13

27

Partnership investment commitments
47

14

1

3

64

Other
3

7

7

19

36

Total contractual obligations
$
15,017

$
1,566

$
445

$
838

$
17,866

(1)
Amounts do not include contractual interest.
(2)
We do not expect all of our commitments to extend credit and standby letters of credit to be fully funded. Thus, the total commitment amounts do not necessarily represent our future cash requirements. Our commitments to extend credit include $9.9 billion available under lines of credit and credit cards.
Loan Commitments
In the ordinary course of business, we extend commitments to originate commercial and consumer loans. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Our commitments generally have fixed expiration dates or other termination clauses and may require our customer to pay us a fee. Since we do not expect all of our commitments to be funded, the total commitment amounts do not necessarily represent our future cash requirements. We evaluate each customer’s creditworthiness on a case-by-case basis. We may obtain collateral based upon our assessment of the customer’s creditworthiness. We may write a commitment to extend credit on a fixed rate basis exposing us to interest rate risk given the possibility that market rates may change between the commitment date and the actual extension of credit. We had outstanding commitments to originate residential real estate, commercial real estate and business, and consumer loans of approximately $11.7 billion and $11.0 billion at December 31, 2015 and 2014 , respectively.

101

Included in these commitments are lines of credit to both consumer and commercial customers. The borrowers are able to draw on these lines as needed, making our funding requirements generally difficult to predict. Indicative of our strategic focus on commercial lending and relationship based home equity lending, our unused commercial lines of credit increased to $4.1 billion at December 31, 2015 from $3.8 billion at December 31, 2014 , and our unused home equity and other consumer lines of credit increased to $5.8 billion at December 31, 2015 from $5.3 billion at the end of 2014 . Our commercial business lines of credit generally possess an expiration period of less than one year and our home equity and other consumer lines of credit have an expiration period of up to ten years.
In addition to the commitments discussed above, we issue standby letters of credit to third parties that guarantee payments on behalf of our commercial customers in the event the customer fails to perform under the terms of the contract between our customer and the third party. Our standby letters of credit, which generally have an expiration period of less than two years, amounted to $252 million and $266 million at December 31, 2015 and 2014 , respectively. Since the majority of our unused lines of credit and outstanding standby letters of credit expire without being fully funded, our actual funding requirements may be substantially less than the amounts above. We anticipate that we will have sufficient funds available to meet our current loan commitments and other obligations through our normal business operations. The credit risk involved in our issuance of these commitments is essentially the same as that involved in extending loans to customers and is limited to the contractual notional amount of those instruments.
Given the current interest rate environment and current customer preference for long-term fixed rate mortgages, coupled with our desire to not hold these assets in our portfolio, we generally sell newly originated fixed rate conventional, 20 to 30 year and most FHA and VA loans in the secondary market to government sponsored enterprises such as FNMA and FHLMC or to wholesale lenders. We generally retain the servicing rights on residential mortgage loans sold which results in monthly service fee income. We will, however, sell select loans with servicing released on a nonrecourse basis. Not reflected in the table above, our commitments to sell residential mortgages decreased to $130 million at December 31, 2015 from $137 million at the end of 2014 .

102

Security Yields, Maturities and Repricing Schedule
The following table sets forth certain information as of December 31, 2015 regarding the carrying value, weighted average yields and contractual maturities of our investment securities portfolio. Our adjustable-rate securities are included in the period in which interest rates are next scheduled to adjust and fixed-rate securities are included in the period in which the final contractual repayment is due. We have made no adjustments for prepayment of principal. Actual maturities are expected to be significantly shorter as a result of loan repayments underlying mortgage-backed securities. The tax benefits of certain of our tax exempt investment securities have not been factored into the yield calculations in this table:
 
 
 
More than one
More than five
 
 
 
One year or less
year to five years
years to ten years
After ten years
Total
(dollars in millions)
Carrying
value
Weighted
average
yield
Carrying
value
Weighted
average
yield
Carrying
value
Weighted
average
yield
Carrying
value
Weighted
average
yield
Carrying
value
Weighted
average
yield
Investment securities available for sale
 
 
 
 
 
 
 
 
 
 
Debt securities:
 
 
 
 
 
 
 
 
 
 
States and political subdivisions
$
175

3.40
%
$
168

3.45
%
$
34

3.62
%
$
1

6.27
%
$
379

3.45
%
U.S. Treasury
20

1.58

35

1.49

—

—

—

—

55

1.52

U.S. government sponsored enterprises
34

3.16

55

3.16

177

2.27

2

0.61

269

2.55

Corporate
95

3.64

287

3.89

414

5.06

5

1.34

801

4.46

Total debt securities
324

3.33

545

3.53

626

4.19

9

1.94

1,504

3.76

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
GNMA
—

8.78

—

9.58

3

3.59

23

2.58

26

2.69

FNMA
—

5.65

2

4.73

22

3.74

47

3.28

71

3.47

FHLMC
—

5.75

5

5.15

50

3.50

32

3.25

87

3.51

Collateralized mortgage obligations:
 
 
 
 
 
 
 
 
 
 
GNMA
—

—

—

—

20

2.44

74

2.40

94

2.41

FNMA
25

2.31

—

8.77

—

2.60

705

2.14

730

2.15

FHLMC
—

—

—

3.90

—

3.90

355

2.25

355

2.25

Total collateralized mortgage obligations
25

2.31

—

3.90

20

2.44

1,134

2.19

1,179

2.20

Total residential mortgage-backed securities
25

2.37

8

5.03

94

3.33

1,237

2.27

1,364

2.36

Commercial mortgage-backed securities
—

—

—

—

—

—

1,085

3.99

1,085

3.99

Total mortgage-backed securities
25

2.37

8

5.03

94

3.33

2,322

3.07

2,449

3.08

Collateralized loan obligations
—

—

49

2.83

577

3.05

560

2.84

1,186

2.94

Asset-backed securities
—

—

109

2.37

32

2.47

169

3.04

310

2.75

Other (1)
—

—

—

—

—

—

—

—

22

6.94

Total securities available for sale
$
350

3.26
%
$
710

3.18
%
$
1,330

3.62
%
$
3,060

3.04
%
$
5,471

3.23
%
 
 
 
 
 
 
 
 
 
 
 

103

 
 
 
More than one
More than five
 
 
 
One year or less
year to five years
years to ten years
After ten years
Total
(dollars in millions)
Carrying
value
Weighted
average
yield
Carrying
value
Weighted
average
yield
Carrying
value
Weighted
average
yield
Carrying
value
Weighted
average
yield
Carrying
value
Weighted
average
yield
Investment securities held to maturity
 
 
 
 
 
 
 
 
 
 
Debt securities, U.S. government agencies
$
—

—
%
$
7

2.20
%
$
35

2.27
%
$
—

—
%
$
42

2.26
%
Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
GNMA
—

—

1

2.96

4

3.22

11

3.24

17

3.22

FNMA
—

—

6

3.81

14

2.74

74

2.92

93

2.95

FHLMC
—

—

3

4.21

28

2.42

19

3.38

50

2.89

Collateralized mortgage obligations:
 
 
 
 
 
 
 
 
 
 
GNMA
—

—

—

—

95

2.46

1,477

2.67

1,571

2.66

FNMA
45

2.39

2

3.17

110

2.47

2,141

2.26

2,297

2.27

FHLMC
25

2.27

1

3.89

10

2.76

2,282

2.37

2,318

2.37

Total collateralized mortgage obligations
69

2.35

3

3.51

214

2.48

5,899

2.41

6,186

2.41

Total residential mortgage-backed securities
69

2.35

13

3.76

260

2.50

6,003

2.42

6,345

2.42

Total securities held to maturity
$
69

2.35
%
$
20

3.18
%
$
295

2.47
%
$
6,003

2.41
%
$
6,388

2.42
%
(1)  
Other securities available for sale include investments with no stated maturity date.
Loan Maturity and Repricing Schedule
The following table sets forth certain information at December 31, 2015 regarding the amount of loans maturing or repricing in our portfolio. Demand loans having no stated schedule of repayment and no stated maturity are reported as due in one year or less. At December 31, 2015 and 2014 , 55% and 51% , respectively, of loans were variable rate and unencumbered by floors. The impact of loan floors on our net interest income sensitivity is not significant. Adjustable-rate loans are included in the period in which interest rates are next scheduled to adjust rather than the period in which they contractually mature, and fixed-rate loans (including bi-weekly loans) are included in the period in which contractual payments are due. No adjustments have been made for prepayment of principal.
(in millions)
Within one
year
One through
five years
After five
years
Total
Commercial:
 
 
 
 
Real estate
$
5,562

$
1,698

$
115

$
7,375

Construction
1,255

14

9

1,278

Business
4,788

997

228

6,013

Total commercial
11,604

2,709

352

14,665

 
 
 
 
 
Consumer:
 
 
 
 
Residential real estate
888

1,430

1,036

3,355

Home equity
2,549

352

168

3,069

Indirect auto
950

1,418

25

2,393

Credit cards
311

—

—

311

Other consumer
150

65

30

245

Total consumer
4,848

3,265

1,259

9,372

Total loans and leases
$
16,453

$
5,974

$
1,611

$
24,038


104

For the loans reported in the preceding table, the following sets forth at December 31, 2015 , the dollar amount of all of our fixed-rate and adjustable-rate loans due after December 31, 2016 :
(in millions)
Fixed
Adjustable
Total
Commercial:
 
 
 
Real estate
$
673

$
1,140

$
1,813

Construction
21

2

23

Business
1,134

91

1,225

Total commercial
1,828

1,234

3,061

 
 
 
 
Consumer:
 
 
 
Residential real estate
1,479

988

2,467

Home equity
510

10

519

Indirect auto
1,443

—

1,443

Credit cards
—

—

—

Other consumer
95

—

95

Total consumer
3,526

998

4,524

Total loans and leases
$
5,354

$
2,231

$
7,585

The following table sets forth at December 31, 2015 , the dollar amount of all of our fixed-rate loans due after December 31, 2016 by the period in which the loans mature:
Maturity
Commercial
Residential
real estate
Home equity
Indirect auto
Other consumer
Total
 
(in millions)
1 to 2 years
$
603

$
191

$
110

$
654

$
22

$
1,581

2 to 3 years
467

172

94

431

18

1,183

3 to 5 years
446

282

139

332

24

1,223

Total 1 to 5 Years
1,517

645

342

1,418

65

3,987

5 to 10 years
271

423

146

25

20

885

More than 10 years
40

411

22

—

10

483

Total
$
1,828

$
1,479

$
510

$
1,443

$
95

$
5,354

The following table sets forth at December 31, 2015 , the dollar amount of all of our adjustable-rate loans due after December 31, 2016 by the period in which the loans reprice:
Maturity
Commercial
Residential
real estate
Home equity
and consumer
Total
 
(in millions)
1 to 2 years
$
436

$
327

$
10

$
773

2 to 3 years
364

161

—

525

3 to 5 years
393

297

—

690

Total 1 to 5 Years
1,192

785

10

1,987

5 to 10 years
41

201

—

243

More than 10 years
—

1

—

1

Total
$
1,234

$
988

$
10

$
2,231

Market Risk
Our primary market risk is interest rate risk, which is defined as the potential variability of our earnings that arises from changes in market interest rates and the magnitude of the change at varying points along the yield curve. Changes in market interest rates, whether they are increases or decreases, can trigger repricings and changes in the pace of payments for both assets and liabilities (prepayment risk), which individually or in combination may affect our net income, net interest income and net interest margin, either positively or negatively.

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Most of the yields on our earning assets, including adjustable-rate loans and investments, and the rates we pay on interest-bearing deposits and liabilities are related to market interest rates. Interest rate risk occurs when the interest income (yields) we earn on our assets changes at a pace that differs from the interest expense (rates) we pay on liabilities.
The primary tool we use to assess our exposure to interest rate risk is a quantitative modeling technique that simulates the effects of variations in interest rates on net interest income. These monthly simulations compare multiple hypothetical interest rate scenarios to a stable or current interest rate environment. As a result of these simulations, we take actions to limit the variability of our net interest income due to changes in interest rates. Such actions include: (i) employing interest rate swaps; (ii) emphasizing the origination and retention of residential and commercial adjustable-rate loans, home equity loans, and residential fixed-rate mortgage loans having contractual maturities of no more than 20 years; (iii) selling the majority of 30 year fixed-rate, conforming residential mortgage loans into the secondary market without recourse; (iv) investing in securities with predictable cash flows; (v) growing core deposits; and (vi) utilizing wholesale borrowings to support cash flow needs and help match asset repricing.
Our Asset and Liability Committee ("ALCO") monitors our sensitivity to interest rates and approves strategies to manage our exposure to interest rate risk. Our goal is to prudently manage the bank’s exposure to changes in the interest rate environment and resultant impacts on earnings and capital.
Net Interest Income Sensitivity
The following table shows the estimated impact on net interest income for the next 12 months resulting from parallel interest rate shifts of varying magnitude and different timing assumptions (gradual ramps up in rates over twelve months versus an immediate rate shock). These measurements assume the balance sheet remains static, meaning there is no net growth or change in balance sheet composition. Accordingly, the impact of the rate scenario run in calculating these measurements is reflected via the repricing of existing positions and reinvestment of runoff balances into similar positions at the periodic rate dictated by the scenario.
 
Calculated increase (decrease)
 
December 31, 2015
 
December 31, 2014
Changes in interest rates (1)
Net interest income
% change
 
Net interest income
% change
 
(dollars in millions)
+ 200 basis points   (gradual) (2)
$
58

5.4
 %
 
$
53

4.9
 %
+ 100 basis points (gradual)
27

2.5

 
28

2.6

- 50 basis points (gradual)
(23
)
(2.1
)
 
(15
)
(1.4
)
(1)  
Our ERMC has established a policy limiting the adverse change to net interest income to less than -5% under this scenario.
(2)  
Under a shock scenario where interest rates increase 200 basis points immediately, net interest income was estimated to increase by approximately 11.6 % and 9.7% at December 31, 2015 and 2014 , respectively.
Assumptions / Limitations: The assumption of maintaining a static balance sheet and parallel rate shocks are key elements of this assessment of interest rate risk exposure. Certain variable impacts on these assumptions, such as the direction of future interest rates not moving in a parallel manner across the yield curve and how the balance sheet will dynamically respond and shift based on a change in future interest rates and how the Company will actually respond, are not contemplated in these measures and limit the predictive value of these scenarios. The Company is cognizant of the methodology and assumptions used in these standard interest rate risk measures, along with their resultant benefits and limitations. Key variables not included in these interest rate risk measures include, but are not limited to:
▪
Rates are unlikely to change in a parallel manner: There will likely be changes in yield curve slope and the spread between key market indices. For example, the 10-year U.S. Treasury Bond yielded 2.17% at December 31, 2014 and yielded 2.27% as of December 31, 2015 while the 2-year U.S. Treasury yielded 0.67% to 1.06% over that same period resulting in the spread difference between the

106

yields decreasing from 150 bps at December 31, 2014 to 121 bps at December 31, 2015. The dynamic of the short end of the yield curve increasing more than the long end of the yield curve is referred to as a “bear flattener.” With different points of the interest rate curve moving in varying degrees, the balance sheet may dynamically adjust and not remain static as assumed in the standard interest rate risk measures. Examples of mix shifts in the balance sheet include, but are not limited to, shifts between variable and fixed rate assets originated and the composition and absolute levels of deposit categories.
▪
Changes in customer behaviors: Changing market rates re-define customer incentives and alternatives. For example, on the asset side the direction of mortgage rates will influence customer behavior and therefore housing turnover and refinance activity resulting in greater mortgage prepayments when long-term rates are declining, but create extension risk when those rates are increasing. In a rising rate environment mortgage activity may decline as lower prepayments on existing positions would likely be balanced by reduced originations. On the liability side, changing interest rate spreads between deposit categories will likely cause product shifts and changes in CD maturity terms. For example, as rates rise we would likely see customers migrate from non-reactive deposit categories (Savings and Checking) to more reactive categories (CDs and Money Market), which would carry higher rates than non-reactive deposits. These types of mix shifts are not contemplated in the assumptions for the standard interest rate risk measures.
▪
Responses to the competitive environment: Deposit reactivity, a key determinant to quantify interest rate risk and estimates of profitability, is also driven by the competitive environment for deposits. Our deposit reactivity modeling, like most others, is derived from experience in prior rate cycles. The prolongation of the low rate environment, including the actions taken by the Federal Reserve to keep interest rates low through its Quantitative Easing program and the resulting excess liquidity in the financial system, renders historical modeling and experience of how non-contractual deposits may actually react in an increasing interest rate environment potentially less effective as the historical data set is not representative of current dynamics and may not be a good indicator of future performance. Equally, the release by the Federal Reserve during September 2014 of its mechanisms for how they will raise interest rates when the decision is made to do so include, in addition to conventional measures such as increases to the Federal Funds Rate, new tools such as paying interest on excess reserves and the use of reverse repurchase agreements. The impact of these new tools as excess liquidity is reversed from the financial system is unprecedented. Additionally, the potential increases to the competitive pressures amongst financial institutions to retain deposits is not contemplated in the historical data set and thus modeling output.
▪
Static balance sheet: These measurements assume the balance sheet remains static as of the last day in the year with no net growth or change in balance sheet composition. The balance sheet on that particular day may not appropriately represent the typical balance sheet. In particular, on December 31, 2015, a larger than typical overnight cash position at the Federal Reserve had a positive impact on net interest income sensitivity given the daily re-pricing nature of that asset. As a result, the net interest income sensitivity reflected may be temporary based on the specific dynamics balance sheet on the measurement date.
Scenario Analysis: Assumptions on future rate paths and their impacts are inherently uncertain and, as a result, the impact of changes in interest rates on our net interest income cannot be precisely predicted. In conjunction with standard interest rate risk metrics, ALCO formulates and analyzes a range of alternative scenarios in which rate moves are not parallel and the balance sheet is not static. Certain assumptions are stressed to provide a broader range of potential outcomes. Thus, both static interest rate risk measures and dynamic scenario analysis are factored into risk assessment and strategic decisions of the Company.
To measure the potential impacts of rate driven dynamics on net interest income, we utilize multivariate quantitative modeling that simulates the effects of changing market rates on the amount and timing of cash flows. A range of rate scenarios are analyzed, including parallel rate shocks, partial shocks and non-parallel

107

rate moves. In addition, there are deterministic scenarios, such as flat rates (including bull flatteners where long-term rates move lower relative to short-term rates and bear flatteners where short-term increase more relative to long-term rates), implied forward curves and stressed environments. Scenario specific assumptions are formulated to project customer behaviors, the competitive environment and pricing implications on new and existing positions. Sensitivity analysis is applied to assumptions which are key to the outcome but inherently uncertain, such as prepayments, deposit reactivity and disintermediation.
The goal of these simulations is to quantify the full range of interest rate risk, and identify the key drivers of rate driven exposure. Results of these standard analyses are presented to ALCO. Strategies which foster prudent management of the bank’s exposure to interest rates and the resultant impacts on earnings and capital are reviewed, approved and monitored.
Mitigants of interest rate risk exposure include the following business practices and possible initiatives to manage balance sheet structure:
•
targeting of security portfolio size and duration
•
diversification of security portfolio collateral and credit profiles
•
management of balance sheet growth:
•
limited growth in longer duration assets, such as the sale of conforming fixed mortgage originations and capping the production of non-conforming mortgages
•
fostered growth of shorter duration assets (e.g. variable rate loans) or longer duration liabilities (e.g. core deposits)
•
disposition of current positions (sale / securitization)
•
hedging of current positions, or anticipatory hedging of projected positions
•
monitoring leverage to remain within prudent bounds
Economic Value of Equity (EVE) Sensitivity
In addition to the Net Interest Income Sensitivity approach, our interest rate risk position is also evaluated using an Economic Value of Equity ("EVE") approach. The assessment of both short-term earnings (Net Interest Income Sensitivity) and long-term valuation (EVE) approaches provides a more comprehensive analysis of interest rate risk exposure than Net Interest Income Sensitivity alone.
The EVE calculation represents a hypothetical valuation of equity, and is defined as the present value of projected asset cash flows less the present value of projected liability cash flows plus the current market value of any off balance sheet positions. EVE values only the current balance sheet positions and therefore does not incorporate the growth assumptions inherent in the Net Interest Income Sensitivity approach. All positions are evaluated in a current rate and parallel shock scenarios, which range from (100) bps to +300 bps.
The key indicator of interest rate risk is the EVE profile, which measures the percentage change in the hypothetical equity value versus the base rate scenario. The profile reflects the duration gap between assets, liabilities and off balance sheet positions. The impacts of embedded options are incorporated, including applicable caps / floors, behavioral assumptions on mortgage positions and reactivity assumptions on deposits. Governance limits define the tolerable degree of duration mismatch in rising rate environments.
•
A negative EVE percentage in a rising rate scenario indicates that asset duration exceeds liability duration. Future liability repricing and refunding may have a detrimental impact on net interest income.
•
A positive EVE percentage in a rising rate scenario indicates that liability duration exceeds asset duration. Future asset repricing and reinvestment may have a beneficial impact on net interest income.
•
The converse of the above would apply to falling rate environments.     

108

The following table shows our EVE sensitivity profile as of December 31:
 
Change in EVE
 
Calculated increase (decrease)
Changes in interest rates
2015
2014
- 100 basis points
(4.0
)%
(3.6
)%
+ 100 basis points
(3.0
)
(2.2
)
+ 200 basis points (1)
(7.6
)
(7.1
)
+ 300 basis points (2)
(12.9
)
(13.0
)
(1)  
Our ERMC has established a policy limiting the adverse change to -20% under this scenario.
(2)  
Our ERMC has established a policy limiting the adverse change to -30% under this scenario.
Our EVE measures remained consistent as growth in variable rate commercial loans was offset by the continued migration to fixed rate collateralized mortgage obligations.
The EVE profile is useful as an indicator of longer term interest rate risk exposure. However, the measure is subject to limitations, as it does not factor in variables such as balance sheet growth, changes in balance sheet composition, adjustments to pricing spreads or strategic responses to changing interest rate environments. Also, the shocked rates represent stress scenarios, generating exposures which may overstate actual experience. Actual rate changes would be expected to be more gradual, with changes in yield curve relationships, and would thereby produce lesser impacts to future net interest income.
Operational Risk
Like all companies, we are subject to Operational Risk. We define Operational Risk as the risk to current or anticipated earnings or capital arising from inadequate or failed internal processes or systems, the misconduct or errors of people, and adverse external events. Operational losses may result from internal fraud; external fraud; employment practices and workplace safety; clients, products, and business practices; damage to physical assets; business disruption and systems failures; and execution, delivery, and process management. These events may include, but are not limited to, third party attempts to disrupt or penetrate our critical systems (for example, hacking, cyber attacks or denial-of-service attacks), inadequate vendor management or oversight, clerical errors, theft and other criminal conduct.
We manage Operational Risk through our ERM framework and internal control processes. Within this framework, our business lines have direct and primary responsibility and accountability for accessing, identifying, controlling, and monitoring operational risks embedded in their business activities. Risk assessment and the regular monitoring of significant operating risks is performed by business units with oversight from Risk Management. Risk Management provides oversight and establishes internal policies and reviews procedures to assist business unit’s assessment, monitoring and mitigation of operational risks. In addition, we are continuing to invest in risk management systems and technology to support our businesses. The Operational Risk Committee, a senior management committee, provides oversight to the operational risk management process. The most significant operational risks we face are reported and reviewed by the ERMC and the Board Risk Committee. In addition, Risk Management is responsible for establishing compliance and operational risk program standards and policies, and provides effective challenge to management's self-assessments in their execution against program standards and policies.
The ERMC provides oversight of the Operational Risk Committee, our risk management functions and reviews our system of internal controls. ERMC reports to the Risk Committee of our Board of Directors on its activities.
Capital
We manage our capital position to ensure that our capital base is sufficient to support our current and future business needs, satisfy existing regulatory requirements, and meet appropriate standards of safety and soundness.

109

As of December 31, 2015 , we met all capital adequacy requirements to which we were subject and both First Niagara Financial Group, Inc. and First Niagara Bank, N.A. were considered well-capitalized under the Federal Reserve’s Regulation Y (in the case of First Niagara Financial Group, Inc.) and the OCC’s prompt corrective action regulations (in the case of First Niagara Bank, N.A.).
Beginning on January 1, 2015, we became subject to the federal banking agencies' capital rules which were issued in July 2013 to implement the Basel Committee's December 2010 capital framework known as "Basel III" and certain provisions of the Dodd-Frank Act (the "New Capital Rules"). The New Capital Rules are subject to phase-in periods for certain of their components, with full phase-in to be completed by January 1, 2019.
Our Tier 1 risk-based capital ratio on a consolidated basis was 10.08% and 9.81% at December 31, 2015 and 2014 , respectively. Our common equity Tier 1 capital ratio under Basel III was 8.55% at December 31, 2015 and our Tier 1 common capital ratio was 8.20% at December 31, 2014 . The change in regulatory capital ratios from December 31, 2014 to December 31, 2015 reflected a positive impact related to the implementation of Basel III for both the Company and the Bank. The positive impact resulted from the benefits of a reduction in disallowed intangibles and deferred tax assets as well as overall risk-weighted assets slightly decreasing.
Due to the $1.1 billion goodwill impairment charge we recorded in the third quarter of 2014, we are required to obtain regulatory approval from the OCC to make distributions or other returns of capital from the Bank to the Company until the first quarter of 2017 based on their calculation formula. We were also required to consult with the Federal Reserve before paying the Company dividend to our common and preferred stockholders through the payment of dividends for the second quarter of 2015.
While we cannot be assured that the OCC will approve our quarterly dividend requests going forward, based on conversations with the regulators and barring any unforeseen future developments that would materially impact our profitability, we believe that we can maintain our holding company common and preferred dividend payments at their current levels.
During 2015 , our stockholders’ equity increased $34 million driven primarily by our net income of $224 million , $12 million in actuarial gains, net of taxes, on our benefit plans, and an increase of $ 10 million related to stock-based compensation activity, partially offset by $68 million in unrealized losses, net of taxes, on our investment securities available for sale, $113 million , or $0.32 per share, in common stock dividends, and $30 million in preferred stock dividends.
First Niagara Financial Group, Inc. and our bank subsidiary, First Niagara Bank, N.A. are subject to regulatory capital requirements administered by the Federal Reserve and the OCC, respectively. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on our financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. Such quantitative measures are also subject to qualitative judgment of the regulators regarding components, risk weightings, and other factors.
The current requirements and our actual capital levels are detailed in Note 11 of “Notes to Consolidated Financial Statements” in Part II, Item 8, “Financial Statements and Supplementary Data.”
Our preferred stock has a liquidation preference of $25 per share and pays dividends quarterly, when, as and if declared by our Board of Directors, at a rate per annum of 8.625% until February 15, 2017, and thereafter at a floating rate per annum equal to three month LIBOR plus 7.327%. The preferred stock has no maturity date. We may redeem the preferred stock, in whole or in part, from time to time, on any dividend payment date on or after February 15, 2017, at a redemption price of $25 per share, plus any declared and unpaid dividends.
At December 31, 2015 , we held 11 million shares of our common stock as treasury shares. During 2015 , we did not repurchase any shares of our common stock. We currently have authorization from our Board of Directors to repurchase an additional 12 million shares as part of our capital management initiatives. We issued 1 million

110

shares from treasury stock in connection with exercises of stock options and grants of restricted stock awards during 2015 . Although treasury stock purchases are an important component of our capital management strategy, the extent to which we repurchase shares in the future will depend on a number of factors including the market price of our stock and alternative uses for our capital.
ITEM 7A.
 
Quantitative and Qualitative Disclosures about Market Risk
A discussion regarding our management of market risk is included in “Market Risk” in this report in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

111

ITEM 8.
 
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Management’s Report on Internal Control Over Financial Reporting
We are responsible for establishing and maintaining adequate internal control over financial reporting for First Niagara Financial Group, Inc. and its subsidiaries (“we” and “our”), as that term is defined in Exchange Act Rules 13a-15(f). We conducted an evaluation of the effectiveness of our internal control over our financial reporting as of December 31, 2015 based on the framework in “Internal Control—Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. Based on that evaluation, we concluded that our internal control over financial reporting is effective as of December 31, 2015 .
KPMG LLP, an independent registered public accounting firm, has audited the consolidated financial statements included in this Annual Report and has issued a report on the effectiveness of our internal control over financial reporting. Their reports follow this statement.

/s/ Gary M. Crosby
 
/s/ Gregory W. Norwood
Gary M. Crosby
 
Gregory W. Norwood
President and Chief Executive Officer
 
Senior Executive Vice President and Chief Financial Officer

112

Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
First Niagara Financial Group, Inc.:
We have audited First Niagara Financial Group, Inc. and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statements of condition of First Niagara Financial Group, Inc. and subsidiaries as of December 31, 2015 and 2014, and the related consolidated statements of operations, comprehensive income (loss), changes in stockholders’ equity, and cash flows for each of the years in the three‑year period ended December 31, 2015, and our report dated February 10, 2016 expressed an unqualified opinion on those consolidated financial statements.

/s/ KPMG LLP

KPMG LLP
Buffalo, New York
February 10, 2016

113


Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
First Niagara Financial Group, Inc.:
We have audited the accompanying consolidated statements of condition of First Niagara Financial Group, Inc. and subsidiaries (the Company) as of December 31, 2015 and 2014, and the related consolidated statements of operations, comprehensive income (loss), changes in stockholders’ equity, and cash flows for each of the years in the three‑year period ended December 31, 2015. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of First Niagara Financial Group, Inc. and subsidiaries as of December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the years in the three‑year period ended December 31, 2015, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control ‑ Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 10, 2016 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
/s/ KPMG LLP

KPMG LLP
Buffalo, New York
February 10, 2016

114

FIRST NIAGARA FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Condition
(in millions, except share and per share amounts)
 
December 31,
 
2015
2014
 
 
 
ASSETS
Cash and cash equivalents
$
672

$
420

Investment securities:
 
 
Available for sale, at fair value (amortized cost of $5,485 and $5,830 in 2015 and 2014; includes pledged securities that can be sold or repledged of $91 and $39 in 2015 and 2014)
5,471

5,915

Held to maturity, at amortized cost (fair value of $6,378 and $5,964 in 2015 and 2014; includes pledged securities that can be sold or repledged of $9 and $128 in 2015 and 2014)
6,388

5,942

Federal Home Loan Bank and Federal Reserve Bank common stock, at amortized cost
410

412

Loans held for sale
46

40

Loans and leases (net of allowance for loan losses of $242 and $234 in 2015 and 2014)
23,796

22,803

Bank owned life insurance
437

426

Premises and equipment, net
410

407

Goodwill
1,348

1,350

Core deposit and other intangibles, net
48

67

Other assets
892

769

Total assets
$
39,918

$
38,551

LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
 
 
Deposits
$
28,701

$
27,781

Short-term borrowings
4,349

5,472

Long-term borrowings
2,308

734

Other
434

471

Total liabilities
35,792

34,458

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 2015 and 2014
338

338

Common stock, $0.01 par value, 500,000,000 shares authorized; 366,002,045 shares issued in 2015 and 2014
4

4

Additional paid-in capital
4,231

4,235

Accumulated deficit
(255
)
(330
)
Accumulated other comprehensive (loss) income
(48
)
9

Treasury stock, at cost, 11,239,793 and 12,613,836 shares in 2015 and 2014
(143
)
(162
)
Total stockholders’ equity
4,126

4,093

Total liabilities and stockholders’ equity
$
39,918

$
38,551

See accompanying notes to consolidated financial statements.

115

FIRST NIAGARA FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(in millions, except per share amounts)
 
Year ended December 31,
 
2015
2014
2013
Interest income:
 
 
 
Loans and leases
$
849

$
847

$
845

Investment securities and other
349

361

365

Total interest income
1,198

1,207

1,210

Interest expense:
 
 
 
Deposits
66

53

53

Borrowings
76

69

64

Total interest expense
142

122

117

Net interest income
1,056

1,086

1,093

Provision for credit losses
76

96

105

Net interest income after provision for credit losses
980

990

988

Noninterest income:
 
 
 
Deposit service charges
88

90

104

Insurance commissions
66

66

67

Merchant and card fees
52

50

49

Wealth management services
60

61

58

Mortgage banking
21

18

18

Capital markets income
19

18

22

Lending and leasing
17

18

17

Bank owned life insurance
13

15

17

Other income
7

(26
)
12

Total noninterest income
342

310

366

Noninterest expense:
 
 
 
Salaries and employee benefits
452

463

461

Occupancy and equipment
105

112

111

Technology and communications
148

127

115

Marketing and advertising
38

35

20

Professional services
63

56

39

Amortization of intangibles
19

27

40

Federal deposit insurance premiums
43

40

35

Restructuring charges
21

22

—

Goodwill impairment
—

1,100

—

Deposit account remediation
—

22

—

Merger and acquisition integration expenses
14

—

—

Other expense
115

120

110

Total noninterest expense
1,019

2,124

931

Income (loss) before income taxes
302

(824
)
423

Income tax (benefit)
79

(109
)
128

Net income (loss)
224

(715
)
295

Preferred stock dividend
30

30

30

Net income (loss) available to common stockholders
$
193

$
(745
)
$
265

Earnings (loss) per share:
 
 
 
Basic
$
0.55

$
(2.13
)
$
0.75

Diluted
0.54

(2.13
)
0.75

Weighted average common shares outstanding:
 
 
 
Basic
351

350

350

Diluted
353

350

350

Dividends per common share
$
0.32

$
0.32

$
0.32

See accompanying notes to financial statements.

116

FIRST NIAGARA FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss)
(in millions)
 
Year ended December 31,
 
2015
2014
2013
Net income (loss)
$
224

$
(715
)
$
295

Other comprehensive loss, net of income taxes:
 
 
 
Securities available for sale:
 
 
 
Net unrealized losses arising during the year
(62
)
(12
)
(109
)
Reclassification adjustment for net unrealized holding gains on securities transferred between available for sale and held to maturity during the year
—

—

(34
)
Net unrealized losses on securities available for sale
(62
)
(12
)
(143
)
Net unrealized holding gains on securities transferred between available for sale and held to maturity:
 
 
 
Net unrealized holding gains on securities transferred during the year
—

—

34

Less: amortization of net unrealized holding gains to income during the year
(6
)
(8
)
(12
)
Net unrealized holding (losses) gains on securities transferred during the year
(6
)
(8
)
22

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

1

Pension and post-retirement actuarial gains (losses)
12

(34
)
25

Total other comprehensive loss
(56
)
(53
)
(95
)
          Total comprehensive income (loss)
$
167

$
(768
)
$
200

See accompanying notes to consolidated financial statements.

117

FIRST NIAGARA FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders’ Equity
(in millions, except share and per share amounts)
 
Preferred
stock
Common
stock
Additional
paid-in
capital
Retained earnings (accumulated deficit)
Accumulated
other
comprehensive
income (loss)
Common
stock
held by
ESOP
Treasury
stock
Total
Balances at January 1, 2013
$
338

$
4

$
4,231

$
399

$
157

$
(18
)
$
(184
)
$
4,927

Net income
—

—

—

295

—

—

—

295

Total other comprehensive loss, net
—

—

—

—

(95
)
—

—

(95
)
ESOP shares committed to be released (177,942 shares)
—

—

—

—

—

1

—

2

Stock-based compensation expense
—

—

9

—

—

—

—

9

Net tax expense from stock-based compensation
—

—

(1
)
—

—

—

—

(1
)
Restricted stock activity (1,320,324 shares)
—

—

(4
)
(15
)
—

—

19

(1
)
Preferred stock dividends



(30
)



(30
)
Common stock dividends of $0.32 per share
—

—

—

(112
)
—

—

—

(112
)
Balances at December 31, 2013
338

4

4,235

536

62

(17
)
(165
)
4,993

Net loss
—

—

—

(715
)
—

—

—

(715
)
Total other comprehensive loss, net
—

—

—

—

(53
)
—

—

(53
)
ESOP shares committed to be released (297,080 shares)
—

—

—

—

—

2

—

2

Repurchase of shares upon ESOP termination (1,704,290)
—

—

—

—

—

15

(14
)
1

Stock-based compensation expense
—

—

11

—

—

—

—

11

Net tax expense from stock-based compensation
—

—

(1
)
—

—

—

—

(1
)
Restricted stock activity (1,151,193 shares)
—

—

(11
)
(8
)
—

—

17

(2
)
Preferred stock dividends
 
 
 
(30
)
 
 
 
(30
)
Common stock dividends of $.32 per share
—

—

—

(113
)
—

—

—

(113
)
Balances at December 31, 2014
338

4

4,235

(330
)
9

—

(162
)
4,093

Net income
—

—

—

224

—

—

—

224

Total other comprehensive loss, net
—

—

—

—

(56
)
—

—

(56
)
Stock-based compensation expense
—

—

13

—

—

—

—

13

Exercise of stock options and restricted stock activity (1,374,043 shares)
—

—

(17
)
(6
)
—

—

19

(3
)
Preferred stock dividends
—

—

—

(30
)
—

—

—

(30
)
Common stock dividends of $0.32 per share
—

—

—

(113
)
—

—

—

(113
)
Balances at December 31, 2015
$
338

$
4

$
4,231

$
(255
)
$
(48
)
$
—

$
(143
)
$
4,126

See accompanying notes to consolidated financial statements.

118

FIRST NIAGARA FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in millions)
 
Year ended December 31,
 
2015
2014
2013
Cash flows from operating activities:
 
 
 
Net income (loss)
$
224

$
(715
)
$
295

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Goodwill impairment
—

1,100

—

Amortization of fees and discounts, net
23

45

49

Provision for credit losses
76

96

105

Depreciation of premises and equipment
78

58

53

Amortization of intangibles
19

27

40

Origination of loans held for sale
(754
)
(648
)
(1,295
)
Proceeds from sales of loans held for sale
755

668

1,412

ESOP and stock based-compensation expense
13

13

11

Deferred income tax expense (benefit)
6

(150
)
5

Other, net
(77
)
(10
)
40

Net cash provided by operating activities
364

484

716

Cash flows from investing activities:
 
 
 
Proceeds from sales of securities available for sale
271

331

485

Proceeds from maturities of securities available for sale
339

371

196

Principal payments received on securities available for sale
1,064

952

1,124

Purchases of securities available for sale
(1,362
)
(162
)
(1,497
)
Principal payments received on securities held to maturity
1,388

781

868

Purchases of securities held to maturity
(1,917
)
(2,743
)
(636
)
Proceeds from maturities of securities held to maturity
53

35

—

Proceeds from sales of (payments for purchases of) Federal Home Loan Bank and Federal Reserve Bank common stock
1

57

(49
)
Net increase in loans and leases
(1,058
)
(1,634
)
(1,767
)
Purchases of premises and equipment
(99
)
(57
)
(67
)
Other, net
(17
)
(68
)
(32
)
Net cash used in investing activities
(1,337
)
(2,136
)
(1,375
)
Cash flows from financing activities:
 
 
 
Net increase (decrease) in deposits
920

1,119

(1,004
)
(Repayments of) proceeds from short-term borrowings, net
(1,123
)
650

1,839

Proceeds from long-term borrowings
1,575

—

—

Repayments of long-term borrowings
(2
)
(2
)
—

Repurchase of shares upon ESOP termination
—

(14
)
—

Dividends paid on noncumulative preferred stock
(30
)
(30
)
(30
)
Dividends paid on common stock
(113
)
(113
)
(112
)
Other, net
—

(1
)
(1
)
Net cash provided by financing activities
1,225

1,610

692

Net increase (decrease) in cash and cash equivalents
252

(43
)
32

Cash and cash equivalents at beginning of period
420

463

431

Cash and cash equivalents at end of period
$
672

$
420

$
463

Supplemental disclosures
 
 
 
Cash paid during the period for:
 
 
 
Income taxes
$
66

$
52

$
57

Interest expense
138

123

126

Other noncash activity:
 
 
 
Securities available for sale purchased not settled
—

18

—

Securities transferred from available for sale to held to maturity (at fair value)
—

—

3,001

See accompanying notes to consolidated financial statements.

119

FIRST NIAGARA FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended December 31, 2015 , 2014 , and 2013
(Amounts in millions, except as noted and per share amounts)

Note 1. Summary of Significant Accounting Policies
First Niagara Financial Group, Inc. (the “Company”), a Delaware corporation, and its subsidiaries provide financial services to individuals and businesses in New York, Western and Eastern Pennsylvania, Connecticut, and Western Massachusetts. Through our wholly owned subsidiary, First Niagara Bank, N.A. (the “Bank”), a federally chartered national bank, we provide a full range of products and services through our retail consumer, commercial, business services, and wealth management operations, including retail banking, consumer and commercial lending, cash management, insurance and wealth management products.
Our accounting and reporting policies conform to U.S. generally accepted accounting principles (“GAAP”) and general practices within the banking industry. Reclassifications of prior years’ amounts are made whenever necessary to conform to the current year’s presentation. The following is a description of our significant accounting policies:
Principles of Consolidation
Our Consolidated Financial Statements include the accounts of the Company and its subsidiaries. We have eliminated all significant intercompany balances in consolidation.
Subsequent Events
We reviewed subsequent events and determined that no further disclosures or measurements were required.
Cash and Cash Equivalents
For purposes of our Consolidated Statement of Cash Flows, cash and cash equivalents include cash and due from banks, money market investments, and federal funds sold which have an original term of less than three months.
Investment Securities
We have classified our investments in debt and equity securities as held to maturity or available for sale. We classify investment securities as held to maturity if we have the positive intent and ability to hold them to maturity. Held to maturity securities are reported at amortized cost. We classify investment securities not classified as held to maturity as available for sale, and report them at fair value with unrealized gains and losses, net of deferred taxes, reported in other comprehensive income as a separate component of stockholders’ equity.
We are required to maintain an investment in common stock of the Federal Home Loan Bank (“FHLB”) of New York and Boston as well as the Federal Reserve Bank because our Bank is a member of the FHLB and the Federal Reserve System. We consider these stocks to be nonmarketable equity securities and carry them at cost.
We conduct a quarterly review and evaluation of our investment securities portfolio to determine if any declines in fair value below amortized cost are other than temporary. In making this determination, we consider some or all of the following factors: the period of time the securities have been in an unrealized loss position, the percentage decline in fair value 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, credit enhancement, projected losses, level of credit loss, and projected cash flows. If we intend to sell a security with a fair value below amortized cost or if it is more likely than not that we will be required to sell such a security before recovery, we record an other than temporary impairment charge through current period earnings for the full decline in fair value below amortized cost. For debt securities that we do not intend to sell or it is more likely than not that we will not be required to sell before recovery, we record an other than temporary impairment charge through current period earnings for the amount of the valuation decline below amortized cost that is attributable

120

to credit losses. The remaining difference between the debt security’s fair value and amortized cost (that is, decline in fair value not attributable to credit losses) is recognized in other comprehensive income.
Our investment securities portfolio includes residential mortgage-backed securities and collateralized mortgage obligations. As the underlying collateral of each of these securities is comprised of a large number of similar residential mortgage loans for which prepayments are probable and the timing and amount of such prepayments can be reasonably estimated, we consider estimates of future principal prepayments of these underlying residential mortgage loans in the calculation of the constant effective yield used to apply the interest method for income recognition, with retroactive adjustments made as warranted.
Purchases and sales of investment securities are recorded on trade date, with realized gains and losses on sales included in our Consolidated Statements of Income using the specific identification method. We amortize premiums and accrete discounts on our investment securities to interest income utilizing the interest method.
Originated Loans and Leases
Loans we originate and intend to hold in our portfolio are stated at the principal amount outstanding, adjusted for unamortized deferred fees and costs which we amortize to interest income over the expected life of the loan using the interest method. We discontinue accrual of interest on originated loans after payments become more than 90 days past due, or earlier if we do not expect the full collection of principal or interest, with the exception of credit cards. Credit cards are placed on nonaccrual status at 180 days past due. The delinquency status is based upon the contractual terms of the loans. We reverse all uncollected interest income that we previously recognized on nonaccrual loans. When we have doubt as to the collectibility of a loan’s principal, we apply interest payments to principal. With the exception of residential mortgage loans that are well secured and in the process of collection, cash receipts received on nonperforming impaired loans are first applied to the loan’s principal. Once the remaining principal balance has been collected in full, cash receipts are then applied as recoveries of any partially charged-off amount on the loan. Once a loan’s principal balance, including any previously charged-off amounts are collected in full, cash receipts are recorded as interest income. For residential mortgage loans, where the loan is both well secured and in the process of collection, we recognize interest income on a cash basis. Interest income on performing troubled debt restructurings, which are considered impaired loans, are applied in accordance with the terms of the modified loan.
We return loans to accrual status when principal and interest payments are current, we expect full collectibility of principal and interest, and a consistent repayment record has been demonstrated.
We charge loans off against our allowance for loan losses when it becomes evident that we will not fully collect the balance of the loan. For business and commercial real estate loans, we record a charge off when it is determined that the collection of all or a portion of a loan may not be collected and the amount of that loss is reasonably estimable. For our consumer loans secured by real estate, including our residential mortgages, home equity loans and home equity lines of credit, we order broker price opinions (“BPOs”) at 90  days past due and record partial or full charge-offs based upon the results of such valuations by no later than 180  days past due. All other closed end consumer loans are charged off at 120  days past due and all other open ended consumer lines, including credit card loans, are charged off at 180 days past due.
We consider a loan impaired when, based on current information, it is probable that we will be unable to collect all amounts of principal and interest due under the original terms of the agreement. Nonaccrual commercial real estate and business loans greater than $1 million are evaluated individually for impairment. Additionally, all loans modified in a troubled debt restructuring (“TDR”), regardless of size, are considered impaired. We measure the impairment in these loans based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, as a practical alternative, the loan’s observable market price or the fair value of the underlying collateral, if the loan is collateral dependent.
At origination, a determination is made whether a loan will be held in our portfolio or is intended for sale in the secondary market. Loans that will be held in our portfolio are carried at amortized cost. Beginning in the second quarter of 2011, we elected the fair value option for substantially all residential mortgage loans held for sale as we

121

believe the fair value measurement of such loans reduces certain timing differences in our Statement of Operations and better aligns with our management of the portfolio from a business perspective. This loan by loan election is made at the time of origination and is irrevocable. Residential mortgage loans held for sale for which the fair value option has not been elected, are recorded at the lower of the aggregate cost or market value (“LOCOM”). For residential mortgage loans held for sale where we have elected the fair value option any change in fair value subsequent to origination is recognized immediately in earnings in mortgage banking income. For residential mortgage loans held for sale that are recorded at LOCOM, we recognize any subsequent decreases in fair value in a valuation allowance through a charge to earnings at the time the decline in value occurs. We include gains and losses occurring during the holding period as well as those resulting from sales of our loans held for sale in mortgage banking income.
Acquired Loans
Loans that we acquired in acquisitions subsequent to January 1, 2009 were recorded at fair value with no carryover of the related allowance for loan losses at the time of acquisition. Determining the fair value of the loans involved estimating the amount and timing of principal and interest cash flows expected to be collected on the loans and discounting those cash flows at a market rate of interest.
We have acquired loans in four separate acquisitions between January 2009 and May 2012. For each acquisition, we reviewed all loans greater than $1 million and considered the following factors as indicators that such an acquired loan had evidence of deterioration in credit quality and was therefore in the scope of Accounting Standards Codification (“ASC”) 310-30 (Loans and Debt Securities Acquired with Deteriorated Credit Quality):
•
Loans that were 90 days  or more past due;
•
Loans that had an internal risk rating of substandard or worse. Substandard is consistent with regulatory definitions and is defined as having a well defined weakness that jeopardizes liquidation of the loan;
•
Loans that were classified as nonaccrual by the acquired bank at the time of acquisition; or
•
Loans that had been previously modified in a troubled debt restructuring.

Individual acquired loans determined to have evidence of deterioration in credit quality are accounted for individually in accordance with ASC 310-30. Any acquired loans that were not individually in the scope of ASC 310-30 because they did not meet the criteria above were either (i) pooled into groups of similar loans based on the borrower type, loan purpose, and collateral type and accounted for under ASC 310-30 by analogy or (ii) accounted for under ASC 310-20 (Nonrefundable Fees and Other Costs.)
Based on the guidance included in the December 18, 2009 letter from the AICPA Depository Institutions Panel to the Office of the Chief Accountant of the SEC, we have made an accounting policy election to apply ASC 310-30 by analogy to qualifying acquired pools of loans that (i) were acquired in a business combination or asset purchase, (ii) resulted in recognition of a discount attributable, at least in part, to credit quality; and (iii) were not subsequently accounted for at fair value.
Acquired loans accounted for under ASC 310-30
The excess of expected cash flows from acquired loans over the estimated fair value of acquired loans at acquisition is referred to as the accretable discount and is recognized into interest income over the remaining life of the acquired loans using the interest method. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the nonaccretable discount. The nonaccretable discount represents estimated future credit losses expected to be incurred over the life of the acquired loans. Subsequent decreases to the expected cash flows require us to evaluate the need for an addition to the allowance for loan losses. Subsequent improvements in expected cash flows result in the reversal of a corresponding amount of the nonaccretable discount which we then reclassify as accretable discount that is recognized into interest income over the remaining life of the loan using the interest method. Our evaluation of the amount of future cash flows that we expect to collect takes into account actual credit performance of the acquired loans to date and our best estimates for the expected lifetime credit performance of the loans using currently available information. Charge-offs on acquired loans would be first applied to the nonaccretable discount

122

portion of the fair value adjustment. To the extent that we experience a deterioration in credit quality in our expected cash flows subsequent to the acquisition of the loans, an allowance for loan losses would be established based on our estimate of future credit losses over the remaining life of the loans.

In accordance with ASC 310-30, recognition of income is dependent on having a reasonable expectation about the timing and amount of cash flows expected to be collected.  We perform such an evaluation on a quarterly basis on both our acquired loans individually accounted for under ASC 310-30 and those in pools accounted for under ASC 310-30 by analogy. 

Cash flows for acquired loans individually accounted for under ASC 310-30 are estimated on a quarterly basis.  Based on this evaluation, a determination is made as to whether or not we have a reasonable expectation about the timing and amount of cash flows.  Such an expectation includes cash flows from normal customer repayment, foreclosure or other collection efforts.  Cash flows for acquired loans accounted for on a pooled basis under ASC 310-30 by analogy are also estimated on a quarterly basis.  For residential real estate, home equity and other consumer loans, cash flow loss estimates are calculated by a vintage and FICO based model which incorporates a projected forward loss curve.  For commercial loans, lifetime loss rates are assigned to each pool with consideration given for pool make-up, including risk rating profile.  Lifetime loss rates are developed from internally generated loss data and are applied to each pool. 

To the extent that we cannot reasonably estimate cash flows, interest income recognition is discontinued.  The unit of account for loans in pools accounted for under ASC 310-30 by analogy is the pool of loans.  Accordingly, as long as we can reasonably estimate cash flows for the pool as a whole, accretable yield on the pool is recognized and all individual loans within the pool - even those more than 90 days past due - would be considered to be accruing interest, and reported as such, in our financial statement disclosures, regardless of whether or not we expected to collect any principal or interest cash flows on an individual loan 90 days or more past due.
Allowance for Loan Losses
We establish our allowance for loan losses through a provision for credit losses. The level of the allowance for loan losses is based on our evaluation of the overall credit quality of our total 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.
Originated loans
We determine our allowance for loan losses by portfolio segment, which consists of commercial loans and consumer loans. Our commercial loan portfolio includes both business and commercial real estate loans. Our consumer loan portfolio includes residential real estate, home equity, indirect auto, credit card and other consumer 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”.)
Commercial loan portfolio
Commercial loans are initially evaluated using quantitative models whereby loans are grouped into pools based on similar risk characteristics such as loan type and grade to determine the historical loss rate. By loan type, the historical loss experience over an established loss emergence and look back period for each loan pool is used to calculate historical loss rates that are used as the primary driver of the quantitative historical allowance estimate. The loss emergence and historical loss look-back periods may vary based on a variety of factors. For example, a

123

relatively long look-back may be the appropriate measure during times of economic stability; however, during a period of significant or rapid economic expansion or contraction, a shorter measurement period may be more appropriate. The loss emergence and look back periods may vary by loan pool and are considered in the determination of the historical loss rates for each pool.
Once the quantitative historical loss rates are established they may be adjusted for qualitative factors to reflect portfolio characteristics, credit concentrations and model imprecision conditions that are not captured in the historical loss rates, recent trends in loan volume and mix, delinquency, local and national economic factors, changes to the Bank’s lending policies and procedures, experience of lending staff, industrial and geographic factors, competition and legal or regulatory requirements. Simulation techniques such as Monte Carlo modeling, using varying levels of confidence, are used to make such qualitative adjustments. These simulations help estimate the impact of concentrations such as large loan risk aspects within a loan portfolio and ensure that a reasonable amount of tail risk is captured. The Monte Carlo output may be adjusted for changes in loss severity based on recent trends that would affect charge-off levels. All qualitative adjustments are supported with trend (or other relevant data), which are documented in the quarterly allowance for loan loss analysis. In addition, historical loss rates are modified when loan growth patterns or other trends indicate that the historical loss factors would not accurately reflect losses inherent in the current portfolio. Final adjustments to the historical loss rate calculation are made for known portfolio characteristics such as 100% cash secured loans and SBA guaranteed loans not captured in the modeling approach. Combining the quantitative and qualitative measurements, the Commercial loan component of our allowance for loan losses is recorded.
Consumer loan portfolio
We estimate the allowance for loan losses for our consumer loan portfolio by estimating the amount of loans that will eventually default based on their current delinquency severity. We then apply a loss rate to the amount of loans that we predict will default based on our historical net loss experience. This amount may be then adjusted, if necessary, for qualitative considerations to reflect changes in underwriting, market or industry conditions or based on changes in trends in the composition of the portfolio, including risk composition, seasoning, and underlying collateral. We obtain and review refreshed FICO scores on a quarterly basis, and trends are evaluated for consideration as a qualitative adjustment to the allowance. Other qualitative considerations include, but are not limited to, the evaluation of trends in property values, building permits and unemployment.
Impaired loans
We consider a commercial loan impaired, when, based on current information, it is probable that we will be unable to collect all amounts of principal and interest due under the original terms of the agreement. Our threshold for evaluating commercial loans individually for impairment is $1 million . Additionally, all loans (commercial and consumer) modified in a troubled debt restructuring (“TDR”), regardless of size, are considered impaired. The need for specific valuation allowances are determined for impaired loans and recorded as necessary. We measure the impairment in these loans based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, as a practical alternative, the loan’s observable market price or the fair value of the underlying collateral, if the loan is collateral dependent. We then factor any related allowance for loan losses for these loans. Confirmed losses are charged off immediately. We typically would obtain an appraisal to use as the basis for the fair value of the underlying collateral.
Acquired Loans
Acquired loans accounted for under ASC 310-30 (including those accounted for under ASC 310-30 by analogy)
For our acquired loans accounted for under ASC 310-30 for which subsequent decreases to the expected cash flows requires us to evaluate the need for an addition to the allowance for loan losses, our modeling techniques are similar to those we utilize for our originated loans. To the extent that we experience a deterioration in borrower credit quality resulting in a decrease in our expected cash flows subsequent to the acquisition of the loans, an allowance for loan losses would be established based on our estimate of future credit losses over the remaining life of the loans.

124

Acquired loans accounted for under ASC 310-20
We establish our allowance for loan losses through a provision for credit losses based upon an evaluation process that is similar to our evaluation process used for originated loans. This evaluation, which includes a review of loans on which full collectability may not be reasonably assured, considers, among other matters, the estimated fair value of the underlying collateral, economic conditions, historical net loan loss experience, carrying value of the loans, which includes the remaining net purchase discount or premium, and other factors that warrant recognition in determining our allowance for loan losses.
Premises and Equipment
Our premises and equipment are carried at cost, net of accumulated depreciation and amortization. We compute depreciation on the straight-line method over the estimated useful lives of the assets. We amortize our leasehold improvements on the straight-line method over the lesser of the life of the improvements or the lease term. We generally depreciate buildings over a period of 20 to 39  years, furniture and equipment over a period of 3 to 10  years, and capital leases over the lesser of the useful life or the respective lease term.
Certain costs associated with software that is acquired, developed, or modified solely to meet internal needs are capitalized and amortized on a straight line basis over a period of 3 to 10 years. Direct costs of materials and services consumed in developing the software and internal payroll and payroll-related costs related to activities such as coding and testing the software are the types of costs capitalized. Capitalized costs for internal-use software are included in “Premises and equipment, net” in our balance sheet. Amortization of these costs is classified as “Technology and communications” expenses in our income statement.
Goodwill and Intangible Assets
We record the excess of the cost of acquired entities over the fair value of identifiable tangible and intangible assets acquired less the fair value of liabilities assumed as goodwill. We amortize our acquired identifiable intangible assets with definite useful economic lives over their useful economic life utilizing an accelerated amortization method. On a periodic basis, we assess whether events or changes in circumstances indicate that the carrying amounts of our core deposit and other intangible assets may be impaired. We do not amortize goodwill or any acquired identifiable intangible assets with an indefinite useful economic life, but we review them for impairment on an annual basis, or when events or changes in circumstances indicate that the carrying amounts may be impaired. Goodwill is reviewed for impairment at the reporting unit level. We define a reporting unit as a distinct, separately identifiable component of one of our operating segments for which complete, discrete financial information is available and reviewed regularly by that segment’s management.
We have the option to first assess qualitative factors to determine whether there are events or circumstances that exist that make it more likely than not that the fair value of the reporting unit is less than its carrying amount (Step 0). If it is more likely than not that the fair value of the reporting unit is less than its carrying amount, or if we choose to bypass the qualitative assessment, we proceed to compare each reporting unit's fair value to carrying value to identify potential impairment (Step 1). If the estimated fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered impaired. However, if the carrying amount of the reporting unit were to exceed its estimated fair value, a second step (Step 2) would be performed that would compare the implied fair value of the reporting unit's goodwill with the carrying amount of the goodwill for the reporting unit. The implied fair value of goodwill is determined in the same manner as goodwill that is recognized in a business combination. Significant judgment and estimates are involved in estimating the fair value of the assets and liabilities of the reporting units.
We perform our annual impairment review of goodwill on November 1 of each year utilizing valuation methods we believe appropriate, given the availability and applicability of market-based inputs for those methods.
Derivative Instruments
We use interest rate swaps to manage our interest rate risk. We also act as an interest rate swap counterparty for certain commercial customers, and manage the interest rate risk of these positions by entering into offsetting

125

interest rate swap agreements with third parties. Interest rate swaps are recorded on our Consolidated Statements of Condition as either an asset or liability at estimated fair value and recognition of the changes in fair value in the income statement depends upon whether the interest rate swaps are in a designated hedging relationship. The change in the fair value of interest rate swaps designated as fair value hedges, including both the effective and ineffective portions, is recognized in earnings. These amounts are offset by the change in fair value of the hedged item, which is also recognized in earnings. The 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. The gain or loss associated with the ineffective portion of our cash flow hedges is recognized immediately in earnings. We formally document our risk management objectives, strategy, and the relationship between the hedging instrument and the hedged items. We evaluate the effectiveness of the hedge relationship both at inception of the hedge and on an ongoing basis. If the interest rate swap is not designated in a hedge relationship, gains or losses reflecting changes in fair value are recorded in earnings.
Employee Benefits
We maintain an employer sponsored 401(k) plan where participants may make contributions in the form of salary deferrals and we provide matching contributions in accordance with the terms of the plan. Contributions due under the terms of our defined contribution plans are accrued as earned by employees.
We also maintain noncontributory, qualified, defined benefit pension plans for certain employees who meet age and service requirements. We provide post-retirement benefits, principally health care and group life insurance, to employees who meet certain age and service requirements. We have frozen all benefit participation in our pension and post-retirement plans. Pension plans that we acquired in connection with our previous whole-bank acquisitions were frozen prior to or shortly after the completion of the transactions. The actuarially determined pension benefit in the form of a life annuity is based on the employee’s combined years of service, age, and compensation. The cost of our pension plan is based on actuarial estimates of current and future benefits for employees and is charged to current operating expenses.
We recognize an asset for a plan’s overfunded status or a liability for a plan’s underfunded status in our financial statements. We report changes in the funded status of our pension and postretirement plans as a component of other comprehensive income, net of applicable taxes, in the year in which changes occur.
We measure our plans’ assets and obligations that determine its future funded status as of December 31 st each year.
Stock-Based Compensation
We maintain various long-term incentive stock benefit plans under which we grant stock options, restricted stock awards, and restricted stock units to certain key employees and directors. We recognize compensation expense in our income statement over the requisite service period, based on the grant-date fair value of the award. The fair values of stock options are estimated using the Black-Scholes option pricing model. For restricted stock awards and units, we recognize compensation expense on a straight-line basis over the vesting period for the fair value of the award, measured at the grant date.
Income Taxes
We account for income taxes under the asset and liability method. Our deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the periods in which we expect the deferred tax assets or liabilities to be realized or settled. Deferred tax assets are recognized only to the extent that it is probable that sufficient taxable profit will be available against which those unused tax losses, unused tax credits or deductible temporary differences can be utilized. As changes in tax laws or rates are enacted, we adjust our deferred tax assets and liabilities through income tax expense. We recognize penalties and accrued interest related to unrecognized tax benefits in income tax expense. Federal and State tax credits are accounted for as a reduction of income tax expense.

126

Earnings per Share
We compute earnings per common share (“EPS”) in accordance with the two-class method, which requires that our unvested restricted stock awards that contain nonforfeitable rights to dividends be treated as participating securities in the computation of EPS pursuant to the two-class method. The two-class method is an earnings allocation that determines EPS for each class of common stock and participating security. Our basic EPS is computed by dividing net income allocable to common stockholders by the weighted average number of our common shares outstanding for the period. Our diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in our earnings.
Investment and Fiduciary Services
Assets that we hold in a fiduciary or agency capacity for our customers are not included in our accompanying Consolidated Statements of Condition, since these assets are not our assets and we are not the primary beneficiary. We recognize fee income from the management of these assets using the accrual method.
Use of Estimates
We have made a number of estimates and assumptions relating to the reporting of assets and liabilities and disclosure of contingent assets and liabilities in order to prepare these financial statements in conformity with GAAP. The estimates and assumptions that we deem to be critical involve our accounting policies relating to our valuation of our investment securities, prepayment assumptions on our collateralized mortgage obligations and mortgage-backed securities, the accounting treatment and valuation of our acquired loans, adequacy of our allowance for loan losses, and the analysis of the carrying value of goodwill for impairment. These estimates and assumptions are based on management’s best estimates and judgment and we evaluate them on an ongoing basis using historical experience and other factors, including the current economic environment. We adjust our estimates and assumptions when facts and circumstances dictate. As future events cannot be determined with precision, actual results could differ significantly from our estimates.
Accounting Standards Adopted in 2015
In January 2014, the Financial Accounting Standards Board ("FASB") issued guidance on accounting for investments by a reporting entity in flow-through limited liability entities that manage or invest in affordable housing projects that qualify for the low-income housing tax credit.  The low-income housing tax credit program is designed to encourage private capital investment in the construction and rehabilitation of low-income housing.  The guidance became effective for us on January 1, 2015 with early adoption permitted.  We did not early adopt this guidance and it did not have a significant impact on our current or prior year financial statements.
In January 2014, the FASB issued guidance on when a creditor should reclassify a collateralized mortgage loan such that the loan should be derecognized and the collateral asset recognized.  The objective of the guidance is to reduce diversity by clarifying when an in substance repossession or foreclosure occurs, that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real estate property recognized.  The guidance became effective for us on January 1, 2015 with early adoption permitted.  We did not early adopt this guidance and it did not have a significant impact on our financial statements.
In April 2014, the FASB issued guidance that changed the requirements for reporting discontinued operations.  The new guidance requires that a disposal of an entity or a group of components of an entity be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results.  The guidance became effective for us on January 1, 2015 and it did not have a significant impact on our financial statements.
In August 2014, the FASB issued guidance that requires a mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure if the following conditions are met: (1) the loan has a government guarantee that is not separable from the loan before foreclosure; (2) at the time of foreclosure, the creditor has

127

the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that claim; and (3) at the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed. Upon foreclosure, the separate other receivable should be measured based on the amount of the loan balance (principal plus interest) expected to be recovered from the guarantor. The guidance became effective for us on January 1, 2015, and did not have a significant impact on our financial statements.
Accounting Standards Not Yet Required to be Adopted as of December 31, 2015
In May 2014, the FASB issued guidance that improves the revenue recognition requirements for contracts with customers. The core principle is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015, the FASB delayed the effective date for this guidance for one year to fiscal years beginning after December 15, 2017, and we do not expect this to have a significant impact on our financial statements.
In June 2014, the FASB issued guidance that clarifies the accounting for share-based payments granted to employees in which the terms of the award provide that a performance target, that affects vesting, could be achieved after the requisite service period. The amendments require that those performance targets should be treated as performance conditions. The guidance becomes effective for us on January 1, 2016, with early adoption permitted, and we do not expect this to have a significant impact on our financial statements.
In August 2014, the FASB issued guidance on determining when and how to disclose going-concern uncertainties in the financial statements. The new standard requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued. An entity must provide certain disclosures if “conditions or events raise substantial doubt about the entity’s ability to continue as a going concern.” The guidance applies to all entities and is effective for us for annual periods ending after December 15, 2016, and interim periods thereafter, with early adoption permitted, and we do not expect this to have a significant impact on our financial statements.
In November 2014, the FASB issued guidance for determining whether the nature of the host contract within a hybrid instrument is more akin to debt or equity. The guidance requires evaluating the nature of the host contract by considering the economic characteristics and risks of the entire hybrid, including the embedded feature that is being evaluated for separation. The guidance becomes effective for us on January 1, 2016, and we do not expect this to have a significant impact on our financial statements.
In January 2015, the FASB issued guidance that eliminates the concept of extraordinary items from GAAP. The guidance becomes effective for us on January 1, 2016 and may be applied on either a prospective or retrospective basis and we do not expect this to have a significant impact on our financial statements.
In February 2015, the FASB issued guidance that amends existing standards regarding the evaluation of certain legal entities and their consolidation in the financial statements. The amendments modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities or voting interest entities and eliminate the presumption that a general partner should consolidate a limited partnership. The amendments also affect the consolidation analysis of reporting entities that are involved with variable interest entities and provide a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds. The guidance becomes effective for us on January 1, 2016 and we do not expect this to have a significant impact on our financial statements.
In April 2015, the FASB issued guidance that requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct reduction from the carrying amount of that debt liability, consistent with debt discounts.  In August 2015, amendments were made to SEC paragraphs related to the presentation and subsequent measurement of debt issuance costs associated with line of credit arrangements. Given the absence of authoritative guidance within this accounting standard update for debt issuance costs related to line of credit

128

arrangements, the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and amortized ratably over the term of the line of credit arrangement, regardless of whether there are any outstanding borrowings on the line of credit arrangement. The guidance becomes effective for us on January 1, 2016, and we do not expect this to have a significant impact on our financial statements.
In September 2015, the FASB issued guidance that requires an acquirer in a business combination to recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The guidance becomes effective for us on January 1, 2016, and we do not expect this to have a significant impact on our financial statements.
In November 2015, the FASB issued guidance that requires deferred tax liabilities and assets to be classified as noncurrent in a classified statement of financial position. The guidance becomes effective for us on January 1, 2017, and we do not expect this to have a significant impact on our financial statements.
In January 2016, the FASB issued guidance to address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments.  Specifically the guidance (1) requires equity investments to be measured at fair value with changes in fair value recognized in earnings, (2) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, (3) eliminates the requirement to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost, (4) requires the use of the exit price notion when measuring the fair value of financial instruments for disclosure purposes, (5) requires an entity to present separately in other comprehensive income the portion of the total change in fair value of a liability resulting from a change in  the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option, (6) requires separate presentation of financial assets and liabilities by measurement category and form on the balance sheet or the notes to the financial statements, and (7) clarifies that the need for a valuation allowance on a deferred tax asset related to an available for sale security should be evaluated with other deferred tax assets.  The guidance becomes effective for us on January 1, 2018 and we are currently evaluating the impact on our financial statements.
Pending FASB Rule Proposals
The FASB currently has two projects underway that could have a meaningful impact on bank financial statements, capital levels and regulatory capital ratios. The first project, which addresses the amount and timing of loss recognition for loans and investment securities, would generally result in an increase in overall allowance levels and lower capital levels. This project has been exposed for public comment three times since 2010. A final standard is expected to be issued in the first half of 2016 with an effective date of January 1, 2019 for calendar year entities.
The second project relates to leases and requires an operating lease to be recognized on the balance sheet as a "right to use" asset and as a corresponding liability representing the obligation to pay rent. This project would result in an increase to assets and liabilities recognized and therefore increase risk-weighted assets for regulatory capital purposes. This project has been exposed for public comment twice since 2010. A final standard is expected to be issued in 2016 with an effective date of January 1, 2019 for calendar year entities.
We are evaluating the projects as proposed and the possible range of impacts and will determine any impact of these projects to capital or future earnings once the final rules are issued.

129

Note 2. Business Combination
On October 30, 2015, the Company and KeyCorp (“KeyCorp”) entered into an Agreement and Plan of Merger (the “Merger Agreement”). The Merger Agreement provides that, upon the terms and subject to the conditions set forth therein, the Company will merge with and into KeyCorp (the “Merger”), with KeyCorp as the surviving corporation in the Merger. The Merger Agreement was approved by the Board of Directors of each of the Company and KeyCorp.
Subject to the terms and conditions of the Merger Agreement, at the effective time of the Merger (the “Effective Time”), Company shareholders will have the right to receive (i)  0.680 shares (the “Exchange Ratio”) of KeyCorp common stock, par value $1.00 per share, and (ii)  $2.30 in cash, for each share of Company common stock, par value $0.01 per share. Subject to the terms and conditions of the Merger Agreement, at the effective time of the Merger, each share of Company preferred stock, Series B, par value $0.01 per share, will be converted into the right to receive a share of a newly created series of preferred stock of KeyCorp having such rights, preferences, privileges and voting powers not materially less favorable to such holders than such Company preferred stock.
The Merger Agreement contains customary representations and warranties from both KeyCorp and the Company, and each party has agreed to customary covenants, including, among others, covenants relating to the conduct of its business during the interim period between the execution of the Merger Agreement and the Effective Time, its obligation to recommend that its shareholders adopt the Merger Agreement and, in the case of First Niagara, its non-solicitation obligations relating to alternative acquisition proposals.
The completion of the Merger is subject to customary conditions, including, among others, (1) the adoption of the Merger Agreement by the Company's and KeyCorp’s shareholders and the approval by KeyCorp’s shareholders of amendments to KeyCorp’s articles of incorporation, (2) authorization for listing on the New York Stock Exchange of the shares of KeyCorp common stock and KeyCorp preferred stock to be issued in the Merger, (3) the effectiveness of the registration statement on Form S-4 for the KeyCorp common stock and the KeyCorp preferred stock to be issued in the Merger, (4) the absence of any order, injunction or other legal restraint preventing the completion of the Merger or making the consummation of the Merger illegal and (5) the receipt of required regulatory approvals, including the approval of the Federal Reserve Board. Each party’s obligation to complete the Merger is also subject to certain additional customary conditions, including (i) subject to certain exceptions, the accuracy of the representations and warranties of the other party, (ii) performance in all material respects by the other party of its obligations under the Merger Agreement and (iii) receipt by such party of an opinion from its counsel to the effect that the Merger will qualify as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended.
Direct costs related to the Merger were expensed as incurred and amounted to $14 million for the year ended December 31, 2015 . These costs were primarily comprised of investment banker fees and other professional services fees, employee retention expenses, and classification of compensation of certain personnel dedicated to merger integration efforts.

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Note 3. Investment Securities
The amortized cost, gross unrealized gains and losses, and fair value of our investment securities are as follows at December 31:
 
Amortized
Unrealized
Unrealized
Fair
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


131

 
Amortized
Unrealized
Unrealized
Fair
2014
cost
gains
losses
value
Investment securities available for sale:
 
 
 
 
Debt securities:
 
 
 
 
States and political subdivisions
$
444

$
10

$
—

$
453

U.S. Treasury
25

—

—

25

U.S. government sponsored enterprises
187

5

—

191

Corporate
820

15

(12
)
823

Total debt securities
1,476

29

(12
)
1,492

Mortgage-backed securities:
 
 
 
 
Residential mortgage-backed securities:
 
 
 
 
Government National Mortgage Association
34

1

(1
)
34

Federal National Mortgage Association
96

5

—

100

Federal Home Loan Mortgage Corporation
115

5

—

120

Collateralized mortgage obligations:
 
 
 
 
Federal National Mortgage Association
694

2

(13
)
682

Federal Home Loan Mortgage Corporation
353

1

(4
)
350

Total collateralized mortgage obligations
1,047

3

(18
)
1,032

Total residential mortgage-backed securities
1,291

13

(19
)
1,286

Commercial mortgage-backed securities, non-agency issued
1,450

51

—

1,500

Total mortgage-backed securities
2,741

64

(19
)
2,786

Collateralized loan obligations, non-agency issued
1,001

18

(3
)
1,016

Asset-backed securities collateralized by:
 
 
 
 
Student loans
228

7

—

235

Credit cards
42

—

—

42

Auto loans
193

1

—

194

Other
127

1

(1
)
127

Total asset-backed securities
591

9

(1
)
599

Other
22

—

—

22

Total securities available for sale
$
5,830

$
121

$
(35
)
$
5,915

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

$
—

$
—

$
60

Residential mortgage-backed securities:
 
 
 
 
Government National Mortgage Association
12

—

—

12

Federal National Mortgage Association
118

1

(1
)
118

Federal Home Loan Mortgage Corporation
65

1

—

65

Collateralized mortgage obligations:
 
 
 
 
Government National Mortgage Association
1,755

27

(3
)
1,779

Federal National Mortgage Association
1,965

11

(22
)
1,954

Federal Home Loan Mortgage Corporation
1,967

25

(17
)
1,976

Total collateralized mortgage obligations
5,687

63

(41
)
5,709

Total residential mortgage-backed securities
5,882

64

(42
)
5,904

Total securities held to maturity
$
5,942

$
64

$
(42
)
$
5,964


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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
 
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

 
 
 
 
 
 
 
 
 
 
 
 

133

 
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


134

 
Less than 12 months
 
12 months or longer
 
Total
 
Fair
Unrealized
 
 
Fair
Unrealized
 
 
Fair
Unrealized
 
December 31, 2014
value
losses
Count
 
value
losses
Count
 
value
losses
Count
Investment securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
Debt securities:
 
 
 
 
 
 
 
 
 
 
 
States and political subdivisions
$
16

$
—

22

 
$
1

$
—

5

 
$
17

$
—

27

U.S. Treasury
5

—

1

 
—

—

—

 
5

—

1

U.S. government sponsored enterprises
18

—

7

 
42

—

4

 
60

—

11

Corporate
176

(7
)
127

 
102

(5
)
61

 
278

(12
)
188

Total debt securities
215

(7
)
157

 
145

(5
)
70

 
360

(12
)
227

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

—

—

 
19

(1
)
5

 
19

(1
)
5

Collateralized mortgage obligations:
 
 
 
 
 
 
 
 
 
 
 
Federal National Mortgage Association
26

—

3

 
517

(13
)
30

 
542

(13
)
33

Federal Home Loan Mortgage Corporation
47

—

3

 
216

(4
)
12

 
263

(4
)
15

Total collateralized mortgage obligations
73

—

6

 
733

(18
)
42

 
806

(18
)
48

Total residential mortgage-backed securities
73

—

6

 
752

(19
)
47

 
825

(19
)
53

Commercial mortgage-backed securities, non-agency issued
13

—

3

 
24

—

3

 
36

—

6

Total mortgage-backed securities
85

—

9

 
776

(19
)
50

 
861

(19
)
59

Collateralized loan obligations, non-agency issued
276

(2
)
32

 
146

(1
)
15

 
422

(3
)
47

Asset-backed securities collateralized by:
 
 
 
 
 
 
 
 
 
 
 
Student loans
26

—

4

 
2

—

2

 
28

—

6

Credit card
8

—

1

 
—

—

—

 
8

—

1

Auto loans
3

—

2

 
—

—

—

 
3

—

2

Other
—

—

1

 
52

(1
)
5

 
52

(1
)
6

Total asset-backed securities
37

—

8

 
55

(1
)
7

 
92

(1
)
15

Other
—

—

—

 
9

—

3

 
9

—

3

Total securities available for sale in an unrealized loss position
$
614

$
(10
)
206

 
$
1,130

$
(26
)
145

 
$
1,744

$
(35
)
351

 
 
 
 
 
 
 
 
 
 
 
 

135

 
Less than 12 months
 
12 months or longer
 
Total
 
Fair
Unrealized
 
 
Fair
Unrealized
 
 
Fair
Unrealized
 
December 31, 2014
value
losses
Count
 
value
losses
Count
 
value
losses
Count
Investment securities held to maturity:
 
 
 
 
 
 
 
 
 
 
 
Debt securities, U.S. government agencies
$
38

$
—

5

 
$
—

$
—

—

 
$
38

$
—

5

Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Government National Mortgage Association
—

—

—

 
2

—

2

 
2

—

2

Federal National Mortgage Association
4

—

1

 
51

(1
)
12

 
55

(1
)
13

Federal Home Loan Mortgage Corporation
33

—

9

 
9

—

2

 
42

—

11

Collateralized mortgage obligations:
 
 
 
 
 
 
 
 
 
 
 
Government National Mortgage Association
360

(2
)
48

 
46

(1
)
12

 
407

(3
)
60

Federal National Mortgage Association
240

(1
)
18

 
648

(21
)
36

 
888

(22
)
54

Federal Home Loan Mortgage Corporation
422

(5
)
27

 
463

(12
)
28

 
885

(17
)
55

Total collateralized mortgage obligations
1,022

(8
)
93

 
1,157

(34
)
76

 
2,179

(41
)
169

Total residential mortgage-backed securities
1,059

(8
)
103

 
1,219

(35
)
92

 
2,278

(42
)
195

Total securities held to maturity in an unrealized loss position
$
1,097

$
(8
)
108

 
$
1,219

$
(35
)
92

 
$
2,316

$
(42
)
200

We have assessed our securities that were in an unrealized loss position at December 31, 2015 and 2014 and determined that any decline in fair value below amortized cost was 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 we have Volcker Rule applicability, 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.  
We have significant Volcker Rule applicability 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 next year to grant banking entities an additional one-year extension of the

136

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.
Scheduled contractual maturities of our investment securities were as follows at December 31, 2015 :
 
Amortized cost
Fair value
Debt securities:
 
 
Within one year
$
321

$
324

After one year through five years
552

552

After five years through ten years
685

660

After ten years
9

9

Total debt securities
1,568

1,546

Mortgage-backed securities
8,782

8,785

Collateralized loan obligations
1,192

1,186

Asset-backed securities
309

310

Other
22

22

 
$
11,873

$
11,849

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 was 3.3 years at December 31, 2015 , compared to 3.7 years at December 31, 2014 .
At December 31, 2015 and 2014 , $6.9 billion and $6.1 billion , respectively, of our investment securities were pledged to secure borrowings and lines of credit from the FHLB and Federal Reserve Bank (“FRB”), as well as repurchase agreements, certain deposits, and derivative instruments. At December 31, 2015 , our investment portfolio included securities issued by the Federal Home Loan Mortgage Corporation, Federal National Mortgage Association, and Government National Mortgage Association with a fair value of $2.8 billion , $3.2 billion , and $1.7 billion , respectively. We had no other investments in securities of a single issuer that exceeded 10% of our stockholders’ equity.
Our investment in FHLB stock consists of $280 million of FHLB of New York common stock at December 31, 2015 and of $256 million and $25 million of FHLB of New York common stock and FHLB of Boston common stock, respectively, at December 31, 2014 .
Our investment in FRB stock amounted to $131 million at December 31, 2015 and 2014 .

137

Note 4. 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 December 31:
 
2015
 
2014
 
Originated
Acquired
Total
 
Originated
Acquired
Total
Commercial:
 
 
 
 
 
 
 
Real estate
$
6,539

$
835

$
7,375

 
$
6,181

$
1,050

$
7,231

Construction
1,278

—

1,278

 
973

1

973

Business
5,853

160

6,013

 
5,430

345

5,775

Total commercial
13,670

996

14,665

 
12,584

1,395

13,979

Consumer:
 
 
 
 
 
 
 
Residential real estate
2,349

1,005

3,355

 
2,096

1,257

3,353

Home equity
2,133

936

3,069

 
1,847

1,089

2,936

Indirect auto
2,393

—

2,393

 
2,166

—

2,166

Credit cards
311

—

311

 
324

—

324

Other consumer
245

—

245

 
278

—

278

Total consumer
7,431

1,941

9,372

 
6,711

2,347

9,058

Total loans and leases
21,101

2,937

24,038

 
19,296

3,742

23,037

Allowance for loan losses
(237
)
(5
)
(242
)
 
(228
)
(6
)
(234
)
Total loans and leases, net
$
20,864

$
2,932

$
23,796

 
$
19,067

$
3,736

$
22,803

As of December 31, 2015 and 2014 , we had a liability for unfunded loan commitments of $16 million . For 2014 , we recognized provision for credit losses related to our unfunded loan commitments of $3 million . For 2015 , our provision for credit losses related to our unfunded loan commitments was not material.
Of the $3.1 billion and $2.9 billion home equity portfolio at December 31, 2015 and 2014 , respectively, $1.2 billion and $1.1 billion were in a first lien position at each period end, 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 December 31, 2015 and 2014 .
As of December 31, 2015 , commitments to extend credit to related parties amounted to $41 million , of which $32 million was outstanding and due as of December 31, 2015 .
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).

138

The outstanding principal balance and the related carrying amount of our acquired loans included in our Consolidated Statements of Condition were as follows at December 31:
 
2015
2014
Credit impaired acquired loans evaluated individually for future credit losses
 
 
Outstanding principal balance
$
5

$
10

Carrying amount
5

6

Acquired loans evaluated collectively for future credit losses
 
 
Outstanding principal balance
1,918

2,549

Carrying amount
1,883

2,496

Other acquired loans
 
 
Outstanding principal balance
1,069

1,274

Carrying amount
1,049

1,240

Total acquired loans
 
 
Outstanding principal balance
2,992

3,832

Carrying amount
2,937

3,742

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, 2014
$
(851
)
Net reclassifications from nonaccretable yield
(5
)
Accretion
138

Other  (1)
55

Balance at December 31, 2014
(663
)
Net reclassifications from nonaccretable yield
(9
)
Accretion
104

Balance at December 31, 2015
$
(569
)
 
 

(1)
Includes changes in expected cash flows from changes in interest rate and prepayment assumptions.
During the first quarter of 2014, we reduced our estimate of future cash flows on acquired loans to reflect our current outlook for prepayment speeds on these balances. The increase in prepayment speed assumptions reduced our accretable discount by $55 million in 2014.  This change did not materially impact our interest income or net interest margin. 
Allowance for loan losses
As further discussed in Note 1, Summary of Significant Accounting Policies, we establish our allowance for loan losses through a provision for credit losses based on our evaluation of the overall credit quality of our total 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”.)

139

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.
Beginning in the second quarter of 2014, we raised our threshold for evaluating commercial loans individually for impairment from $200 thousand to $1 million . Impaired loans to commercial borrowers with outstandings less than $1 million are pooled and measured for impairment collectively. Additionally, all loans modified in a troubled debt restructuring ("TDR"), regardless of dollar size, are considered impaired. The impact of this change to our allowance for loan losses was not significant. This change is being implemented on a prospective basis, accordingly, prior period financial disclosures have not been revised.

140

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 years ended December 31: 
 
Commercial
 
Consumer
 
Originated loans
Real estate
Business
 
Residential
Home equity
Indirect auto
Credit cards
Other
consumer
Total
2015
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
Balance at beginning of year
$
65

$
122

 
$
2

$
8

$
14

$
12

$
5

$
228

Provision for loan losses
24

26

 
—

1

5

10

7

74

Charge-offs
(19
)
(30
)
 
(1
)
(4
)
(9
)
(12
)
(8
)
(83
)
Recoveries
5

5

 
—

1

2

3

1

18

Balance at end of year
$
75

$
124

 
$
2

$
6

$
13

$
13

$
5

$
237

Allowance for loan losses:
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
2

$
7

 
$
—

$
—

$
—

$
—

$
—

$
10

Collectively evaluated for impairment
73

117

 
1

6

13

13

5

227

Total
$
75

$
124

 
$
2

$
6

$
13

$
13

$
5

$
237

Loans receivable:
 
 
 
 
 
 
 
 
 
Balance at end of year
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
47

$
69

 
$
22

$
17

$
4

$
—

$
2

$
162

Collectively evaluated for impairment
7,770

5,784

 
2,327

2,117

2,389

311

242

20,940

Total
$
7,817

$
5,853

 
$
2,349

$
2,133

$
2,393

$
311

$
245

$
21,101

2014
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
Balance at beginning of year
$
48

$
119

 
$
2

$
7

$
10

$
13

$
6

$
205

Provision for loan losses
23

30

 
1

4

11

10

6

85

Charge-offs
(10
)
(30
)
 
(1
)
(4
)
(9
)
(13
)
(8
)
(75
)
Recoveries
4

3

 
—

1

1

2

1

13

Balance at end of year
$
65

$
122

 
$
2

$
8

$
14

$
12

$
5

$
228

Allowance for loan losses:
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
2

$
2

 
$
1

$
1

$
—

$
—

$
—

$
6

Collectively evaluated for impairment
63

120

 
1

7

14

12

5

222

Total
$
65

$
122

 
$
2

$
8

$
14

$
12

$
5

$
228

Loans receivable:
 
 
 
 
 
 
 
 
 
Balance at end of year
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
64

$
61

 
$
20

$
7

$
2

$
—

$
2

$
156

Collectively evaluated for impairment
7,089

5,370

 
2,076

1,840

2,164

324

276

19,139

Total
$
7,154

$
5,430

 
$
2,096

$
1,847

$
2,166

$
324

$
278

$
19,296


141

 
Commercial
 
Consumer
 
Originated loans
Real estate
Business
 
Residential
Home Equity
Indirect auto
Credit cards
Other
Consumer
Total
2013
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
Balance at beginning of year
$
38

$
99

 
$
5

$
5

$
3

$
7

$
5

$
161

Provision for loan losses
17

48

 
(1
)
6

9

11

8

96

Charge-offs
(10
)
(31
)
 
(2
)
(3
)
(3
)
(6
)
(8
)
(63
)
Recoveries
4

3

 
1

—

1

1

2

11

Balance at end of year
$
48

$
119

 
$
2

$
7

$
10

$
13

$
6

$
205

Allowance for loan losses:
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
4

$
2

 
$
1

$
3

$
—

$
—

$
—

$
9

Collectively evaluated for impairment
44

117

 
1

4

10

13

6

196

Total
$
48

$
119

 
$
2

$
7

$
10

$
13

$
6

$
205

Loans receivable:
 
 
 
 
 
 
 
 
 
Balance at end of year
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
72

$
59

 
$
20

$
8

$
1

$
—

$
3

$
163

Collectively evaluated for impairment
6,282

4,818

 
1,882

1,610

1,543

325

299

16,759

Total
$
6,354

$
4,876

 
$
1,902

$
1,618

$
1,544

$
325

$
302

$
16,922



142

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 years ended December 31:
 
Commercial
 
Consumer
 
Acquired loans
Real estate
Business
 
Residential
Home equity
Credit cards
Other
consumer
Total
2015
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
Balance at beginning of year
$
1

$
1

 
$
2

$
2

$
—

$
—

$
6

Provision for loan losses
2

—

 
—

1

—

—

3

Charge-offs
(2
)
—

 
—

(2
)
—

—

(5
)
Recoveries
1

—

 
—

—

—

—

1

Balance at end of year
$
1

$
—

 
$
2

$
2

$
—

$
—

$
5

Allowance for loan losses:
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
—

$
—

 
$
—

$
—

$
—

$
—

$
—

Collectively evaluated for impairment
1

—

 
2

2

—

—

5

Total
$
1

$
—

 
$
2

$
2

$
—

$
—

$
5

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

$
—

 
$
—

$
4

$
—

$
—

$
4

Collectively evaluated for impairment
—

160

 
—

885

—

—

1,045

Loans acquired with deteriorated credit quality
835

—

 
1,005

47

—

—

1,888

Total
$
835

$
160

 
$
1,005

$
936

$
—

$
—

$
2,937

2014
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
Balance at beginning of year
$
—

$
—

 
$
1

$
3

$
—

$
—

$
4

Provision for loan losses
3

1

 
1

3

—

—

8

Charge-offs
(2
)
—

 
—

(4
)
—

—

(6
)
Recoveries
—

—

 
—

—

—

—

—

Balance at end of year
$
1

$
1

 
$
2

$
2

$
—

$
—

$
6

Allowance for loan losses:
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
—

$
—

 
$
—

$
—

$
—

$
—

$
—

Collectively evaluated for impairment
1

1

 
2

2

—

—

6

Total
$
1

$
1

 
$
2

$
2

$
—

$
—

$
6

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

$
3

 
$
—

$
4

$
—

$
—

$
7

Collectively evaluated for impairment
—

269

 
—

964

—

—

1,233

Loans acquired with deteriorated credit quality
1,050

73

 
1,257

122

—

—

2,502

Total
$
1,050

$
345

 
$
1,257

$
1,089

$
—

$
—

$
3,742


143

 
Commercial
 
Consumer
 
Acquired loans
Real estate
Business
 
Residential
Home equity
Credit cards
Other
consumer
Total
2013
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
Balance at beginning of year
$
—

$
—

 
$
—

$
—

$
—

$
1

$
2

Provision for loan losses
4

—

 
1

3

—

(1
)
7

Charge-offs
(4
)
—

 
—

—

—

(1
)
(5
)
Recoveries
—

—

 
—

—

—

—

—

Balance at end of year
$
—

$
—

 
$
1

$
3

$
—

$
—

$
4

Allowance for loan losses:
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
—

$
—

 
$
—

$
—

$
—

$
—

$
—

Collectively evaluated for impairment
—

—

 
1

3

—

—

4

Total
$
—

$
—

 
$
1

$
3

$
—

$
—

$
4

Loans receivable:
 
 
 
 
 
 
 
 
Balance at end of year
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
1

$
7

 
$
—

$
1

$
—

$
—

$
10

Collectively evaluated for impairment
—

305

 
—

960

—

—

1,264

Loans acquired with deteriorated credit quality
1,423

102

 
1,546

173

—

—

3,244

Total
$
1,423

$
414

 
$
1,546

$
1,134

$
—

$
—

$
4,517

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 December 31:
 
2015
 
2014
 
Originated
Acquired
Total
 
Originated
Acquired
Total
Commercial:
 
 
 
 
 
 
 
Real estate
$
44

$
—

$
44

 
$
53

$
—

$
53

Business
56

1

58

 
45

7

53

Total commercial
101

1

102

 
98

7

106

Consumer:
 
 
 
 
 
 
 
Residential real estate
32

—

32

 
34

—

34

Home equity
36

24

59

 
24

23

47

Indirect auto
15

—

15

 
13

—

13

Other consumer
5

—

5

 
5

—

5

Total consumer
87

24

111

 
75

23

98

Total
$
188

$
25

$
214

 
$
174

$
30

$
204


144

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 years ending December 31:
 
2015
2014
2013
Additional interest income that would have been recorded if nonperforming loans had performed in accordance with original terms
$
12

$
8

$
7


145

Impaired loans
The following table provides information about our impaired originated loans including ending recorded investment, principal balance, and related allowance amount at December 31. 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 64% and 70% of the loans’ unpaid principal balance at December 31, 2015 and 2014 , respectively.
 
2015
 
2014
Originated loans
Recorded
investment
Unpaid
principal
balance
Related
allowance
 
Recorded
investment
Unpaid
principal
balance
Related
allowance
With no related allowance recorded:
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
Real estate
$
17

$
35

$
—

 
$
40

$
59

$
—

Business
37

80

—

 
29

51

—

Total commercial
54

115

—

 
69

110

—

Consumer:
 
 
 
 
 
 
 
Residential real estate
16

19

—

 
8

9

—

Home equity
12

15

—

 
3

4

—

Indirect auto
3

4

—

 
2

3

—

Other consumer
2

2

—

 
2

2

—

Total consumer
32

40

—

 
16

18

—

Total
$
86

$
155

$
—

 
$
85

$
128

$
—

With a related allowance recorded:
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
Real estate
$
31

$
38

$
2

 
$
24

$
27

$
2

Business
32

33

7

 
32

43

2

Total commercial
63

71

9

 
56

70

4

Consumer:
 
 
 
 
 
 
 
Residential real estate
6

6

—

 
11

13

1

Home equity
5

5

—

 
4

4

1

Indirect auto
1

1

—

 
—

—

—

Other consumer
1

1

—

 
—

—

—

Total consumer
13

13

—

 
16

17

2

Total
$
76

$
84

$
10

 
$
71

$
87

$
6

Total
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
Real estate
$
47

$
72

$
2

 
$
64

$
86

$
2

Business
69

113

7

 
61

93

2

Total commercial
116

186

9

 
125

179

4

Consumer:
 
 
 
 
 
 
 
Residential real estate
22

25

—

 
20

22

1

Home equity
17

20

—

 
7

8

1

Indirect auto
4

6

—

 
2

3

—

Other consumer
2

3

—

 
2

2

—

Total consumer
45

53

—

 
31

36

2

Total
$
162

$
239

$
10

 
$
156

$
215

$
6


146

The following table provides information about our impaired acquired loans with no related allowance at December 31. 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.
 
2015
 
2014
Acquired loans
Recorded
investment
Unpaid principal balance
Related
allowance
 
Recorded
investment
Unpaid principal balance
Related
allowance
Commercial:
 
 
 
 
 
 
 
Real estate
$
—

$
—

$
—

 
$
—

$
—

$
—

Business
—

—

—

 
3

3

—

Total commercial
—

—

—

 
3

3

—

Consumer:
 
 
 
 
 
 
 
Residential real estate
—

—

—

 
—

—

—

Home equity
4

6

—

 
4

6

—

Other consumer
—

—

—

 
—

—

—

Total consumer
4

6

—

 
4

6

—

Total (1)
$
4

$
6

$
—

 
$
7

$
9

$
—

(1)
Includes nonperforming purchased credit impaired loans.
The following table provides information about our impaired originated loans including the average recorded investment and interest income recognized on impaired loans for the years ended December 31: 
 
2015
 
2014
 
2013
Originated loans
Average
recorded
investment
Interest
income
recognized
 
Average
recorded
investment
Interest
income
recognized
 
Average
recorded
investment
Interest
income
recognized
Commercial:
 
 
 
 
 
 
 
 
Real estate
$
59

$
1

 
$
69

$
1

 
$
80

$
1

Business
104

2

 
53

1

 
63

1

Total commercial
163

3

 
122

3

 
142

2

Consumer:
 
 
 
 
 
 
 
 
Residential real estate
22

1

 
21

—

 
20

—

Home equity
13

1

 
5

—

 
5

—

Indirect auto
5

—

 
3

—

 
1

—

Other consumer
3

—

 
3

—

 
3

—

Total consumer
43

3

 
31

—

 
29

1

Total
$
205

$
5

 
$
153

$
3

 
$
172

$
3


147

The following table provides information about our impaired acquired loans including the average recorded investment and interest income recognized on impaired loans for the years ended December 31:
 
2015
 
2014
 
2013
Acquired loans
Average
recorded
investment
Interest
income
recognized
 
Average
recorded
investment
Interest
income
recognized
 
Average
recorded
investment
Interest
income
recognized
Commercial:
 
 
 
 
 
 
 
 
Real estate
$
—

$
—

 
$
—

$
—

 
$
1

$
—

Business
—

—

 
2

—

 
7

—

Total commercial
—

—

 
2

—

 
8

—

Consumer:
 
 
 
 
 
 
 
 
Residential real estate
—

—

 
—

—

 
—

—

Home equity
1

—

 
1

—

 
—

—

Other consumer
—

—

 
—

—

 
—

—

Total consumer
1

—

 
1

—

 
—

—

Total (1)
$
1

$
—

 
$
3

$
—

 
$
9

$
—

 
 
 
 
 
 
 
 
 
(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 its ability to satisfy the terms of the restructured loan for at least six consecutive payments. Also contributing to the difference are nonperforming commercial loans of 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 December 31: 
 
2015
 
2014
 
Commercial
Consumer
Total
 
Commercial
Consumer
Total
 
 
 
 
 
 
 
 
Nonperforming loans
$
102

$
111

$
214

 
$
106

$
98

$
204

Plus: Accruing TDRs
49

13

63

 
59

8

67

Less: Smaller balance nonperforming loans evaluated collectively when determining the allowance for loan losses
(35
)
(75
)
(110
)
 
(36
)
(71
)
(108
)
Total impaired loans (1)
$
116

$
50

$
166

 
$
128

$
35

$
163

 
 
 
 
 
 
 
 
(1)  
Includes nonperforming purchased credit impaired loans.
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.

148

The following table contains an aging analysis of our loans by class at December 31:
 
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)
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

2014
 
 
 
 
 
 
 
Originated loans
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
Real estate
$
7

$
2

$
31

$
40

$
7,113

$
7,154

$
—

Business
5

7

17

28

5,402

5,430

—

Total commercial
11

9

49

69

12,515

12,584

—

Consumer:
 
 
 
 
 
 
 
Residential real estate
4

2

21

27

2,069

2,096

—

Home equity
3

1

15

19

1,828

1,847

—

Indirect auto
17

4

5

27

2,139

2,166

—

Credit cards
2

2

2

6

318

324

2

Other consumer
3

1

3

7

271

278

—

Total consumer
29

10

46

85

6,626

6,711

2

Total
$
41

$
19

$
95

$
154

$
19,141

$
19,296

$
3

Acquired loans
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
Real estate
$
3

$
3

$
26

$
31

$
1,019

$
1,050

$
26

Business
—

—

7

7

338

345

4

Total commercial
3

3

33

38

1,357

1,395

30

Consumer:
 
 
 
 
 
 
 
Residential real estate
11

5

56

72

1,186

1,257

56

Home equity
6

2

21

29

1,060

1,089

6

Total consumer
17

7

77

101

2,246

2,347

62

Total
$
21

$
9

$
109

$
139

$
3,603

$
3,742

$
91

(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.

149

Therefore, we are accreting the difference between the carrying value of these loans and their expected cash flows into interest income.
Our internal loan risk assessment provides information about the financial health of our commercial borrowers and our risk of potential loss. The following table presents information about the credit quality of our commercial loan portfolio at December 31:  
 
Real estate
Business
Total
Percent of total
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
%
2014
 
 
 
 
Originated loans:
 
 
 
 
Pass
$
6,791

$
5,067

$
11,858

94.2
%
Criticized: (1)
 
 
 
 
Accrual
310

318

628

5.0
%
Nonaccrual
53

45

98

0.8
%
Total criticized
363

363

726

5.8
%
Total
$
7,154

$
5,430

$
12,584

100.0
%
Acquired loans:
 
 
 
 
Pass
$
948

$
294

$
1,243

89.1
%
Criticized: (1)
 
 
 
 
Accrual
102

43

145

10.4
%
Nonaccrual
—

7

7

0.5
%
Total criticized
102

51

153

10.9
%
Total
$
1,050

$
345

$
1,395

100.0
%
(1)  
Includes special mention, substandard, doubtful, and loss, which are consistent with regulatory definitions, and as described in Part I, Item 1, “Business,” under the heading “Asset Quality Review.”


150

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 December 31:
 
Residential
real estate
Home equity
Indirect Auto
Credit cards
Other
consumer
Total
Percent of
total
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
%
2014
 
 
 
 
 
 
 
Originated loans by refreshed FICO score:
 
 
 
 
 
 
 
Over 700
$
1,841

$
1,529

$
1,533

$
226

$
167

$
5,296

78.9
%
660-700
124

182

347

53

46

752

11.2

620-660
62

71

159

24

24

339

5.0

580-620
28

31

64

11

13

148

2.2

Less than 580
32

32

63

8

12

146

2.2

No score (1)
9

1

—

3

17

31

0.5

Total
$
2,096

$
1,847

$
2,166

$
324

$
278

$
6,711

100.0
%
Acquired loans by refreshed FICO score:
 
 
 
 
 
 
 
Over 700
$
872

$
851

$
—

$
—

$
—

$
1,723

73.4
%
660-700
87

93

—

—

—

180

7.7

620-660
61

52

—

—

—

113

4.8

580-620
49

40

—

—

—

88

3.8

Less than 580
57

34

—

—

—

91

3.9

No score (1)
131

20

—

—

—

151

6.4

Total
$
1,257

$
1,089

$
—

$
—

$
—

$
2,347

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

151

Troubled Debt Restructures
The following table details additional information about our TDRs at December 31:
 
2015
2014
2013
Aggregate recorded investment of impaired loans with terms modified through a troubled debt restructuring:
 
 
 
Accruing interest
$
63

$
67

$
52

Nonaccrual
52

53

56

Total troubled debt restructurings (1)
$
115

$
120

$
108

(1)  
Includes 102 and 87 acquired loans that were restructured with a recorded investment of $4 million at both December 31, 2015 and 2014 .
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 years ended December 31:
Type of Concession
Count
Postmodification
recorded
investment (1)
Premodification
allowance for
loan losses
Postmodification
allowance for
loan losses
2015
 
 
 
 
Commercial:
 
 
 
 
Commercial real estate
 
 
 
 
Extension of term
6

$
5

$
—

$
—

Deferral of principal
8

15

—

—

Deferral of principal and extension of term
1

—

—

—

Extension of term and rate reduction
1

—

—

—

Commercial business
 
 
 
 
Deferral of principal
1

1

—

—

Rate reduction
2

—

—

—

Deferral of principal and extension of term
2

—

—

—

Other
1

—

—

—

Total commercial
22

21

—

—

Consumer:
 
 
 
 
Residential real estate
 
 
 
 
Extension of term
14

2

—

—

Rate reduction
8

1

—

—

Extension of term and rate reduction
10

1

—

—

Chapter 7 Bankruptcy
15

1

—

—

Home equity
 
 
 
 
Extension of term
3

—

—

—

Extension of term and rate reduction
5

—

—

—

Chapter 7 Bankruptcy
93

6

—

—

Other
2

—

—

—

Indirect auto
 
 
 
 
Chapter 7 Bankruptcy
273

4

—

—


152

Type of Concession
Count
Postmodification
recorded
investment (1)
Premodification
allowance for
loan losses
Postmodification
allowance for
loan losses
Other consumer
 
 
 
 
Extension of term and rate reduction
1

—

—

—

Chapter 7 Bankruptcy
12

—

—

—

Total consumer
436

16

—

—

Total
458

$
37

$
—

$
—

2014
 
 
 
 
Commercial:
 
 
 
 
Commercial real estate
 
 
 
 
Extension of term
10

$
20

$
1

$
—

Rate reduction
1

3

—

1

Extension of term and rate reduction
3

1

—

—

Commercial business
 
 
 
 
Extension of term
15

32

6

1

Extension of term and rate reduction
2

—

—

—

Total commercial
31

56

8

2

Consumer:
 
 
 
 
Residential real estate
 
 
 
 
Extension of term
6

1

—

—

Rate reduction
2

—

—

—

Deferral of principal and extension of term
7

1

—

—

Extension of term and rate reduction
14

2

—

—

Chapter 7 Bankruptcy
14

1

—

—

Other
3

—

—

—

Home equity
 
 
 
 
Extension of term
3

—

—

—

Deferral of principal and extension of term
2

—

—

—

Extension of term and rate reduction
10

—

—

—

Chapter 7 Bankruptcy
79

3

—

—

Other
18

1

—

—

Indirect auto
 
 
 
 
Chapter 7 Bankruptcy
273

5

—

—

Other consumer
 
 
 
 
Extension of term
1

—

—

—

Chapter 7 Bankruptcy
33

—

—

—

Total consumer
465

14

—

—

Total
496

$
70

$
8

$
2

(1)  
Postmodification balances approximate premodification balances. The aggregate amount of charge-offs as a result of the restructurings was $3 million for the year ended December 31, 2015 and was not significant for the year ended December 31, 2014 .
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 $4 million for 2015 and was not significant for 2014 .

153

Residential Mortgage Banking
The following table provides information about our residential mortgage banking activities at December 31:
 
2015
2014
2013
Loans classified as held for sale
$
46

$
40

$
50

Loans sold during the year
746

663

1,400

Gains on sale of loans, net
8

5

12

Mortgages serviced for others
4,023

3,841

3,665

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

37

35

Note 5 . Premises and Equipment
The following table presents the composition of our premises and equipment at December 31:
 
2015
2014
Land
$
26

$
29

Buildings and leasehold improvements
241

290

Furniture and equipment
417

339

Total
683

658

Accumulated depreciation
(274
)
(251
)
Premises and equipment, net
$
410

$
407

Our rent expense, which is included in occupancy and equipment in our Consolidated Statements of Income, was $35 million , $32 million , and $33 million , for 2015 , 2014 , and 2013 , respectively.
Note 6. Goodwill and Other Intangible Assets
Goodwill
The following table shows information regarding our goodwill for the periods indicated:
 
Banking
Financial
services
Consolidated
total
Balances at January 1, 2014
$
2,381

$
68

$
2,449

Acquisitions
—

1

1

Impairment
(1,100
)
—

(1,100
)
Balances at December 31, 2014
1,281

69

1,350

Disposal
—

(2
)
(2
)
Balances at December 31, 2015
$
1,281

$
67

$
1,348

We perform our annual impairment test of goodwill on November 1st of each year or more often if events or circumstances have changed significantly from the annual test date. After giving appropriate consideration to all available information, we determined that no impairment of goodwill had been incurred in 2015 .
In 2014, we determined that the implied fair value of the Banking reporting unit was less than the carrying amount of the goodwill for the Banking reporting unit and therefore, recorded an impairment of our Banking reporting unit goodwill of $1.1 billion . When we performed our annual goodwill impairment assessment as of November 1, 2014, we concluded that there was no additional impairment.

154

Other Intangible Assets
The following table provides information regarding our amortizing intangible assets at December 31:
 
2015
2014
Core deposit intangible
$
191

$
191

Accumulated amortization
(170
)
(158
)
Net carrying amount
21

33

Customer lists
100

100

Accumulated amortization
(73
)
(66
)
Net carrying amount
27

34

Total amortizing intangible assets, net
$
48

$
67

The estimated future amortization expense for our amortizing intangible assets is as follows at December 31, 2015 :
 
First quarter
Second quarter
Third quarter
Fourth quarter
Total
2016
$
4

$
3

$
3

$
3

$
13

2017
3

3

3

3

12

2018
3

2

2

2

9

2019
2

1

1

1

5

2020
1

1

1

1

4

Thereafter
 
 
 
 
6

Note 7. Deposits
Our deposits consisted of the following at December 31:
 
2015
 
2014
 
Balance
Weighted
average
rate
 
Balance
Weighted
average
rate
Core deposits:
 
 
 
 
 
Savings
$
3,390

0.09
%
 
$
3,452

0.09
%
Interest-bearing checking
5,479

0.03

 
5,084

0.03

Money market deposits
10,654

0.29

 
9,962

0.22

Noninterest-bearing
5,835

—

 
5,407

—

Total core deposits
25,357

0.14

 
23,906

0.11

Certificates
3,344

0.84

 
3,876

0.69

Total deposits
$
28,701

0.23
%
 
$
27,781

0.19
%
Included in total deposits are municipal deposits totaling $3.4 billion and $3.3 billion at December 31, 2015 and 2014 , respectively. Additionally, Included in total deposits are brokered money market deposits of $420 million and $412 million at December 31, 2015 and 2014 , respectively, and brokered certificates of deposit of $941 million and $1.2 billion at December 31, 2015 and 2014 , respectively.

155

Interest expense on our deposits is summarized as follows for the years ended December 31:
 
2015
2014
2013
Certificates
$
31

$
27

$
26

Money market deposits
30

22

21

Savings
3

3

4

Interest-bearing checking
2

2

2

Total interest expense
$
66

$
53

$
53

Interest rates on our certificates range from 0.05% to 4.50% at December 31, 2015 . Certificates of deposit that we issued in amounts over $100 thousand amounted to $812 million , $938 million , and $928 million at December 31, 2015 , 2014 , and 2013 , respectively. Interest expense on certificates of deposit over $100 thousand totaled $9 million , $10 million , and $11 million in 2015 , 2014 , and 2013 , respectively. Included in certificates of deposit issued in amounts over $100 thousand at December 31, 2015 , 2014 and 2013 are $941 million , $1.2 billion and $739 million , respectively, of brokered deposits.
Note 8. Borrowings
Our outstanding borrowings are summarized as follows at December 31:
 
2015
2014
Short-term borrowings:
 
 
FHLB advances
$
3,950

$
5,049

Repurchase agreements
399

423

Total short-term borrowings
4,349

5,472

Long-term borrowings:
 
 
FHLB advances
1,575

—

Senior notes (maturing in 2020)
298

298

Subordinated notes (maturing in 2021)
299

298

Junior subordinated debentures (maturing between 2030 and 2037)
115

114

Other (maturing between 2015 and 2032)
21

23

Total long-term borrowings
2,308

734

Total borrowings
$
6,657

$
6,206

Our FHLB advances bear interest rates ranging from 0.48% to 1.13% and had a weighted average rate of 0.76% at December 31, 2015 and 0.48% at December 31, 2014 . Our repurchase agreements bear interest rates ranging from 0.02% to 0.15% and had a weighted average rate of 0.10% at December 31, 2015 and 0.14% at December 31, 2014 . Our senior notes and subordinated notes bear interest at annual rates of 6.75% and 7.25% , respectively. Our junior subordinated debentures bear interest rates ranging from 1.60% to 10.88% and have a weighted average interest rate of 2.83% at December 31, 2015 .
Interest expense on our borrowings is summarized as follows for the years ended December 31:
 
2015
2014
2013
FHLB advances
$
27

$
19

$
14

Repurchase agreements
1

1

1

Senior notes
21

21

21

Subordinated notes
23

23

23

Junior subordinated debentures
5

5

5

Total interest expense
$
76

$
69

$
64

Our Bank has borrowing facilities with the FHLB, FRB, and commercial banks that serve as secondary funding sources for lending, liquidity, and asset and liability management. At December 31, 2015 and 2014 , the FHLB facility totaled $5.9 billion and $5.7 billion , respectively, of which $5.6 billion and $5.1 billion was utilized and

156

secured by approximately $4.1 billion and $4.3 billion , respectively, of our commercial real estate, residential real estate, and multifamily loans. Investment securities used to secure the FHLB facility totaled $1.9 billion and $1.4 billion at December 31, 2015 and 2014 , respectively. As of December 31, 2015 and 2014 , our borrowing capacity totaled $908 million and $867 million , respectively with the FRB, and $250 million at December 31, 2015 and 2014 with commercial banks, neither of which was utilized at December 31, 2015 and 2014 . Our lines of credit with commercial banks include a committed line of credit agreement, which contains a negative pledge against our First Niagara Bank, N.A. stock and the maintenance of certain standard financial covenants. The interest rate on outstanding borrowings under this line of credit is, at our election, equal to London Interbank Offered Rate (“LIBOR”) plus 185 basis points , resetting every 30 or 90  days. Interest on the other lines of credit with commercial banks is payable at the overnight federal funds rate.
At times we may enter into repurchase agreements with various broker-dealers, whereby certain of our securities available for sale and certain of our securities held to maturity were pledged to collateralize the borrowings. We treat these repurchase agreements as financing transactions and our obligation to repurchase is reflected as a borrowing in our Consolidated Statements of Condition. The dollar amount of our securities underlying the agreements is included in our securities available for sale and securities held to maturity in our Consolidated Statements of Condition. These securities however, are delivered to the dealer with whom we execute each transaction. The dealers may sell, loan or otherwise dispose of these securities to other parties in the normal course of their business, but they agree to resell to us the same securities at the maturity of the agreements. We also retain the right of substitution of collateral throughout the terms of the agreements. During 2015 and 2014 , we did not enter into any repurchase agreements with broker-dealers and therefore, none of our investment securities were pledged to collateralize these borrowings.
Our junior subordinated debentures include amounts related to our First Niagara Financial Group Statutory Trust I as well as junior subordinated debentures associated with six statutory trust affiliates that were acquired from our merger with Harleysville and three statutory trusts acquired from NewAlliance (the “Trusts”). The Trusts qualify as variable interest entities and were formed to issue mandatorily redeemable trust preferred securities to investors and loan the proceeds to us for general corporate purposes. We own all of the common securities of the Trusts and have accordingly recorded $4 million in equity method investments classified as other assets in our Consolidated Statement of Condition at December 31, 2015 . As the shareholders of the trust preferred securities are the primary beneficiaries of these trusts, the Trusts are not consolidated in our financial statements. Our junior subordinated debentures are redeemable prior to the maturity date at our option upon each trust’s stated option repurchase dates, and from time to time thereafter. These debentures are also redeemable in whole at any time upon the occurrence of specific events defined within the trust indenture. Our obligations under the debentures and related documents, taken together, constitute a full and unconditional guarantee by the Company of the issuers’ obligations under the trust preferred securities.
The Trusts hold, as their sole assets, junior subordinated debentures of the Company with face amounts totaling $142 million at December 31, 2015 .

157

The following table summarizes our junior subordinated debentures at December 31, 2015 :
Trust Preferred Subordinated Debentures
Maturity
Interest rate
Principal amount of subordinated debentures
Principal amount of trust preferred securities
 
 
 
 
(dollars in millions)
HNC Statutory Trust III
2035
3 month LIBOR +
1.40%
$
26

$
25

Willow Grove Statutory Trust I
2036
3 month LIBOR +
1.31%
26

25

HNC Statutory Trust IV
2037
3 month LIBOR +
1.28%
23

23

HNC Statutory Trust II
2034
3 month LIBOR +
2.70%
21

20

First Niagara Financial Group Statutory Trust I
2034
3 month LIBOR +
2.70%
12

12

Westbank Capital Trust II
2034
3 month LIBOR +
2.19%
9

9

Westbank Capital Trust III
2034
3 month LIBOR +
2.19%
9

9

East Penn Statutory Trust I
2033
3 month LIBOR +
3.10%
8

8

Harleysville Statutory Trust I
2031

10.20%
5

5

Alliance Capital Trust II
2030

10.88%
4

4

 
 
 
 
 
 
Total
 
 
 
$
142

$
138

The carrying value of the trust preferred junior subordinated debentures, net of the unamortized purchase accounting fair value adjustment of approximately $28 million , is $115 million .
The aggregate maturities of our long-term borrowings are as follows at December 31, 2015 (by year of maturity):
2016
$
1,277

2017
302

2018
2

2019
2

2020
2

Thereafter
723

 
 

Total
$
2,308

 
 

Note 9. 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.

158

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 December 31:
 
Asset derivatives
 
Liability derivatives
 
Notional
amount
Fair value   (1)
 
Notional
amount
Fair value   (2)
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

2014
 
 
 
 
 
Derivatives designated as hedging instruments:
 
 
 
 
 
Interest rate swap agreements
$
4

$
—

 
$
30

$
2

Derivatives not designated as hedging instruments:
 
 
 
 
 
Interest rate swap agreements
3,629

96

 
3,649

96

Total derivatives
$
3,633

$
96

 
$
3,679

$
97

(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.

At December 31, 2015 , all of our interest rate swaps for which we had master netting arrangements with the counterparty were in a net liability position. Accordingly, there was no offsetting in our Consolidated Statement of Financial Condition at December 31, 2015 . Interest rate swaps for which we had master netting arrangements with the counterparty at December 31, 2014 were in a net liability position of $93 million . We offset $96 million of liabilities with $3 million of assets in our Consolidated Statements of Financial Condition at December 31, 2014 related to these interest rate swaps and we did not include any cash collateral in the netting. We posted collateral for liability positions with a fair value of $195 million and $130 million at December 31, 2015 and 2014 , 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 during 2015 and 2014 .
We have entered into forward starting 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 December 31, 2015 , there was a $1 million loss recognized in accumulated other comprehensive income related to these swaps.

159

At December 31, 2015 , 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 information about amounts recognized for our derivative financial instruments designated in cash flow hedging relationships for the years ended December 31:
Cash Flow Hedges
2015
2014
2013
Interest rate swap agreements:
 
 
 
Amount of (loss) gain on derivatives recognized in other comprehensive income, net of tax
$
(1
)
$
1

$
1

Amount of (loss) on derivatives reclassified from other comprehensive income to income (1)
(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 hedge 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 $14 million and $13 million for the years ended December 31, 2015 and 2014 , respectively, included in Capital Markets income in our Consolidated Statements of Income.
Note 10. Commitments and Contingent Liabilities
Loan Commitments
In the ordinary course of business, we extend commitments to originate commercial and residential mortgages, commercial loans, and consumer loans. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established under the contract. Our commitments generally have fixed expiration dates or other termination clauses, and may require our customer to pay us a fee. Since we do not expect all of our commitments to be funded, the total commitment amounts do not necessarily represent our future cash requirements. We evaluate each customer’s creditworthiness on a case-by-case basis. We may obtain collateral based upon our assessment of the customer’s creditworthiness. We may write a commitment on a fixed rate basis exposing us to interest rate risk given the possibility that market rates may change between the commitment date and the actual extension of credit. We also extend credit to our retail and commercial customers, up to a specified amount, through lines of credit. The borrowers are able to draw on these lines as needed, making our funding requirements for these products generally more difficult to predict.
In addition to the commitments discussed above, we issue standby letters of credit to third parties that guarantee payments on behalf of our commercial customers in the event our customer fails to perform under the terms of the contract between our customer and the third party. Since the majority of our unused commercial lines of credit and our outstanding standby letters of credit expire without being funded, our actual funding requirements may be substantially less than the amounts that we report. We anticipate that we will have sufficient funds available to meet our current loan commitments and other obligations through our normal business operations. The credit risk involved in our issuance of these commitments is essentially the same as that involved in extending loans to customers and is limited to the contractual notional amount of these instruments.
We had a liability for unfunded commitments of $16 million as of December 31, 2015 and 2014 . For 2015 , our provision for loan losses related to our unfunded commitments was not material. For 2014 , we recognized provision for credit losses related to our unfunded commitments of $3 million .

160

Information pertaining to our loan commitments is as follows at December 31:
 
2015
2014
Outstanding commitments to originate loans:
 
 
Fixed rate
$
252

$
265

Variable rate
1,579

1,522

Total commitments outstanding
$
1,832

$
1,787

Unused lines of credit
$
9,891

$
9,319

Standby letters of credit
252

266

Commitments to sell residential mortgages
130

137

Given the current interest rate environment and current customer preference for long-term fixed rate mortgages, coupled with our desire to not hold these assets in our portfolio, we generally sell newly originated fixed rate conventional, 20 to 30 year and most FHA and VA loans in the secondary market to government sponsored enterprises such as FNMA and FHLMC or to wholesale lenders. We generally retain the servicing rights on residential mortgage loans sold which results in the recognition of a mortgage service asset upon sale and monthly service fee income, thereafter, net of servicing asset amortization.
Lease Obligations
Our future minimum rental commitments for premises and equipment under non-cancelable operating leases and capital lease obligations are as follows at December 31:
 
Operating leases
 
Capital leases
 
2016
$
35

 
$
3

 
2017
31

 
3

 
2018
28

 
3

 
2019
26

 
3

 
2020
22

 
3

 
Thereafter
71

(1)  
13

(2)  
(1)
Thereafter through 2041.
(2)  
Thereafter through 2032.
Contingent Liabilities
In the ordinary course of our business there are various threatened and pending legal proceedings against us. Based on our review and consultation with our outside legal counsel, we believe that the aggregate liability, if any, arising from such litigation would not have a material adverse effect on our Consolidated Financial Statements at December 31, 2015 .
Since the announcement of the Merger, eight shareholders of the Company have filed separate putative class action complaints challenging the Merger. Six complaints are filed in New York State Supreme Court, Erie County. One complaint is filed in the Court of Chancery, Delaware, and one is filed in United States District Court, District of Delaware. The complaints are brought against the Company, each of its directors individually, and KeyCorp. The complaints allege generally that each of the directors breached his or her fiduciary duty to the Company's public shareholders in that: (a) the sales process was flawed; (b) the merger consideration is inadequate and undervalues the intrinsic value of the Company; (c) the merger agreement contains unfair preclusive deal protection devices; and (d) certain directors and officers of the Company will receive personal benefits from the merger not shared in by other public shareholders. Seven of the complaints further allege that KeyCorp and the Company aided and abetted the Company's directors’ fiduciary duty breaches. Some of the complaints also challenge KeyCorp’s anticipated contribution to the First Niagara Foundation or that the Company's Registration Statement filed on November 30, 2015 in connection with the proposed merger is materially misleading. The complaint filed in U.S. District Court, District of Delaware also alleges that the preliminary proxy filed in connection with the November

161

30, 2015 Registration Statement violated Sections 14(a) and 20(a) of the Securities Exchange Act of 1934 and the rules promulgated thereunder.
All of the lawsuits seek, among other things, to enjoin or rescind the Merger, and to obtain an award of costs and attorneys’ fees and damages for the alleged fiduciary breaches.
Plaintiffs in all six of the matters pending in Erie County, New York entered into and filed a joint stipulation seeking consolidation of the actions, and appointment of designated co-lead plaintiffs and co-lead counsel for the actions. The stipulation is pending before the court.
The defendants believe these lawsuits are entirely without merit, and intended to vigorously defend against the claims.
Note 11 . Capital
First Niagara Financial Group, Inc. and our bank subsidiary, First Niagara Bank, N.A. are subject to regulatory capital requirements administered by the Board of Governors of the Federal Reserve System (the “Federal Reserve”) and the Office of the Comptroller of Currency (the “OCC”), respectively. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on our financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. Such quantitative measures are also subject to qualitative judgment of the regulators regarding components, risk weightings, and other factors.

162

The actual capital amounts, ratios, and requirements for First Niagara Financial Group, Inc. and First Niagara Bank, N.A. are as follows at December 31. Basel III Transitional rules became effective for us on January 1, 2015. Ratios and amounts presented as of December 31, 2014 are calculated under Basel I rules. As of December 31, 2015 , the ratios presented are calculated under the Basel III Standardized Transitional Approach. Common equity tier 1 capital under Basel III replaced Tier 1 common capital under Basel I.
 
 
 
 
For capital adequacy
 
Minimum amount to be
 
Actual
 
purposes
 
well-capitalized
 
Amount
Ratio
 
Amount
Ratio
 
Amount
Ratio
First Niagara Financial Group, Inc.:
 
 
 
 
 
 
 
 
2015
 
 
 
 
 
 
 
 
Leverage ratio
$
2,911

7.62
%
 
$
1,528

4.00
%
 
$
1,910

5.00
%
Tier 1 risk-based capital
2,911

10.08

 
1,733

6.00

 
2,311

8.00

Total risk-based capital
3,468

12.01

 
2,310

8.00

 
2,888

10.00

Common equity tier 1 capital
2,470

8.55

 
1,300

4.50

 
1,878

6.50

2014
 
 
 
 
 
 
 
 
Leverage ratio
$
2,764

7.50
%
 
$
1,474

4.00
%
 
$
1,843

5.00
%
Tier 1 risk-based capital
2,764

9.81

 
1,127

4.00

 
1,691

6.00

Total risk-based capital
3,313

11.75

 
2,256

8.00

 
2,819

10.00

Tier 1 common capital
2,312

8.20

 
N/A

N/A

 
N/A

N/A

First Niagara Bank, N.A.:
 
 
 
 
 
 
 
 
2015
 
 
 
 
 
 
 
 
Leverage ratio
$
3,070

8.05
%
 
$
1,525

4.00
%
 
$
1,907

5.00
%
Tier 1 risk-based capital
3,070

10.65

 
1,729

6.00

 
2,306

8.00

Total risk-based capital
3,328

11.55

 
2,305

8.00

 
2,881

10.00

Common equity tier 1 capital
3,070

10.65

 
1,297

4.50

 
1,874

6.50

2014
 
 
 
 
 
 
 
 
Leverage ratio
$
2,949

8.01
%
 
$
1,473

4.00
%
 
$
1,841

5.00
%
Tier 1 risk-based capital
2,949

10.48

 
1,126

4.00

 
1,688

6.00

Total risk-based capital
3,199

11.37

 
2,251

8.00

 
2,814

10.00

As of December 31, 2015 , we met all capital adequacy requirements to which we were subject and both First Niagara Financial Group, Inc. and First Niagara Bank, N.A. were considered well-capitalized under the Federal Reserve’s Regulation Y (in the case of First Niagara Financial Group, Inc.) and the OCC’s prompt corrective action regulations (in the case of First Niagara Bank, N.A.). We are unaware of any conditions or events since the latest notification from federal regulators that have changed our capital adequacy categories.
The Company had less than $15 billion in assets as of December 31, 2009. Accordingly, and based on Federal Reserve Board interpretations of our acquisitions, the trust preferred securities classified as long-term debt on our balance sheet, in the amount of $115 million at December 31, 2015 , will be included as Tier 1 capital while they are outstanding, unless we complete an acquisition of a depository institution holding company after January 1, 2014, at which time they would be subject to the stated phase-out requirements of the New Capital Rules, as described in this report in Part I, Item 1, "Business, Supervision and Regulation," and would be included as Tier 2 capital.
The amount of our subordinated debt issued by the Company will begin to lose eligibility for inclusion in Tier 2 capital at the beginning of each of the last five years of the life of the instrument. Our subordinated debt will mature in December 2021 and accordingly, the amount of subordinated debt eligible for inclusion in Tier 2 capital

163

will be reduced by 20 percent beginning in December 2016 and will continue to be reduced by 20 percent in each subsequent year.
Our ability to pay dividends to our stockholders is substantially dependent upon the Bank’s ability to pay dividends to the Company. Subject to the Bank meeting or exceeding regulatory capital requirements, the prior approval of the OCC is required if the total of all dividends declared by the Bank in any calendar year would exceed the sum of the Bank’s net profits for that year and its retained net profits for the preceding two calendar years, less any required transfers to surplus. In addition, Federal Reserve guidance sets forth the supervisory expectation that bank holding companies will inform and consult with Federal Reserve staff in advance of issuing a dividend that exceeds earnings for the quarter and should not pay dividends in a rolling four quarter period in an amount that exceeds net income for that period.  Federal law also prohibits the Bank from paying dividends that would be greater than its undivided profits after deducting statutory bad debt in excess of its allowance for loan losses.
While the size of our 2014 $1.1 billion goodwill impairment charge did not adversely impact our capital ratios, it did impact our regulatory dividend capacity formula. Even though the non-cash goodwill charge did not impact cash flow for dividends, the size of the charge does require that we get regulatory approval from the OCC to make distributions or other returns of capital from the Bank to the Company in the future. Following the goodwill impairment charge, we were also required to consult with the Federal Reserve before paying the Company dividend to our common and preferred stockholders through the payment of dividends for the second quarter of 2015.
Based on current estimates, we expect to need quarterly approval from the OCC until the first quarter of 2017 based on their calculation formula. While we cannot be assured that the OCC will approve our quarterly dividend requests going forward, based on conversations with the regulators and barring any unforeseen future developments that would materially impact our profitability, we believe that we can maintain our holding company common and preferred dividend payments at their current levels.
The Bank paid $100 million and $80 million in dividends to the Company in 2015 and 2014 , respectively. Additionally, the Bank made a $90 million and $85 million capital distribution to the Company during 2015 and 2014 , respectively.
Common Stock Repurchases
We did not repurchase shares of our common stock during 2015 under stock repurchase plans approved by our Board of Directors. As of December 31, 2015 , we are authorized to repurchase up to 12 million shares of our common stock.
Preferred Stock
Our preferred stock pays dividends quarterly when, as and if declared by our board of directors, at a rate of 8.625% per year until February 15, 2017, whereby the dividends are then paid at a floating rate equal to three month LIBOR plus 7.327% per year. Additionally, the preferred stock has no maturity date. We may redeem the preferred stock, in whole or in part, from time to time, on any dividend payment date on or after February 15, 2017, at a redemption price of $25 per share, plus any declared and unpaid dividends.

164

Note 12. Income Taxes
The components of our income tax expense (benefit) are as follows for the years ended December 31:
 
2015
2014
2013
Current:
 
 
 
Federal
$
69

$
36

$
119

State
3

4

4

 
72

41

123

Deferred taxes:
 
 
 
Federal
5

(136
)
3

State
1

(14
)
1

 
6

(150
)
5

Total income tax expense (benefit)
$
79

$
(109
)
$
128

Our effective tax rates for 2015 and 2013 were 26.0% and 30.2% , respectively. Our effective tax rate benefit for 2014 was 13.3% . Our income tax expense (benefit) differs from our expected tax expense (benefit) (computed by applying the Federal corporate tax rate of 35% to income before income taxes) as follows for the years ended December 31:
 
2015
2014
2013
Tax expense (benefit) at statutory rate
$
106

$
(289
)
$
148

Increase (decrease) attributable to:
 
 
 
State income taxes, net of Federal benefit
3

(11
)
4

Bank owned life insurance income
(5
)
(5
)
(6
)
Tax exempt interest
(13
)
(13
)
(11
)
Tax credits
(11
)
(29
)
(13
)
Goodwill impairment
—

259

—

Subsidiary reorganization
—

(27
)
—

Capital loss utilization
(12
)
—

—

Other
10

5

6

Income tax expense (benefit)
$
79

$
(109
)
$
128


165

The tax effects of our temporary differences that give rise to significant portions of our deferred tax assets and deferred tax liabilities are as follows at December 31:
 
2015
2014
Deferred tax assets:
 
 
Net operating loss and other carryforwards
$
49

$
56

Capital loss carryforward
33

44

Financial statement allowance for credit losses
108

112

Partnerships
15

9

Employee benefits
30

33

Other accrued expenses not currently deductible
23

20

Acquired intangibles
71

88

Nonperforming loan interest
15

14

Other
42

37

Total gross deferred tax assets
386

413

 
 
 
Valuation allowance
(33
)
(44
)
 
 
 
Deferred tax liabilities:
 
 
Unrealized gain on investment securities available for sale
—

(40
)
Leases
(31
)
(32
)
Pension benefits
(27
)
(22
)
Other
(15
)
(20
)
Total gross deferred tax liabilities
(73
)
(114
)
Net deferred tax asset
$
280

$
255

 
 
 
In assessing the realizability of our deferred tax assets, we consider whether it is more likely than not that we will not realize some portion or all of our deferred tax assets. Our ultimate realization of our deferred tax assets is dependent upon our generation of future taxable income during the periods in which those temporary differences become deductible. We consider the scheduled reversal of our deferred tax liabilities, availability of operating loss carrybacks, our projected future taxable income, and our tax planning strategies in making this assessment. Based upon the level of our available historical taxable income, the opportunity for our net operating loss carrybacks, and projections for our future taxable income over the periods which our deferred tax assets are realizable, we believe it is more likely than not that we will realize the benefits of these deductible differences at December 31, 2015 , except for the deferred taxes for which a valuation allowance has been established. We had a valuation allowance of $33 million and $44 million , at December 31, 2015 and 2014 , respectively.
We may carry net operating losses back to the preceding two taxable years for Federal income tax purposes and forward to the succeeding 20 taxable years for Federal income tax purposes, subject to certain limitations. At December 31, 2015 , we had net operating loss carryforwards of $102 million for Federal income tax purposes, which will begin to expire in 2020 . These losses, subject to an annual limitation, were obtained through our acquisitions of Great Lakes Bancorp, Inc. and Harleysville. The New York net operating loss carryforwards were converted to post apportioned net operating loss carryforwards due to the New York law change in 2014. The New York apportioned net operating loss carryforwards were $29 million at December 31, 2015 and are expected to expire by 2034 . As of December 31, 2015 , there is no valuation allowance for net operating loss carryover that is not expected to be utilized by the end of the carryover period.
We generated approximately $14 million in Federal and State tax credits in 2015 associated with investment tax credits. We have Federal alternative minimum tax credits of approximately $7 million that have an unlimited carryforward period.
At December 31, 2015 , our Bank’s Federal pre-1988 reserve, for which no Federal income tax provision has been made, was approximately $92 million . Under current Federal law, these reserves are subject to recapture into taxable income should our Bank make nondividend distributions, make distributions in excess of earnings and

166

profits retained, as defined, or cease to maintain a banking type charter. A deferred tax liability is not recognized for the base year amount unless it becomes apparent that those temporary differences will reverse into taxable income in the foreseeable future. No deferred tax liability has been established as these two events are not expected to occur in the foreseeable future.
A reconciliation of our unrecognized tax benefits is as follows for the years ended December 31:
 
2015
2014
2013
Balance at beginning of year
$
9

$
6

$
3

Additions based on tax positions related to the current year
1

2

1

Additions for tax positions of prior years
1

1

3

Reductions related to settlements with taxing authorities
—

—

(1
)
Balance at end of year
$
10

$
9

$
6

The entire balance of unrecognized tax benefits, if recognized, would favorably affect our effective income tax rate. We recognize penalties and accrued interest related to unrecognized tax benefits in tax expense. Accrued penalties and interest amounted to $1 million and $0.9 million at December 31, 2015 and 2014 , respectively. The change in accrued penalties and interest for the current year impacted Consolidated Statements of Income as a component of provision for income taxes. We anticipate that approximately $5 million in unrecognized tax benefits, including interest, will reverse in 2016 .
As a large taxpayer, we are under continuous audit by the IRS and other taxing authorities. Although we do not anticipate that a significant impact to our unrecognized tax benefit balance will occur during the next 12 months as a result of these audits, it remains possible that the amount of our liability for unrecognized tax benefits could change over that time period. We are no longer subject to Federal income tax examinations by the Internal Revenue Service for years before 2012 and to State income tax examinations by such authorities for years before 2011 . There are no indications of any material adjustments relating to any examination currently being conducted by any taxing authority.
Note 13. Earnings Per Share
The following table is a computation of our basic and diluted earnings per share using the two-class method for the years ended December 31:
 
2015
2014
2013
Net income (loss) available to common stockholders
$
193

$
(745
)
$
265

Less income allocable to unvested restricted stock awards
2

1

1

Net income (loss) allocable to common stockholders
$
192

$
(746
)
$
264

Weighted average common shares outstanding:
 
 
 
Total shares issued
366

366

366

Unallocated employee stock ownership plan shares
—

(2
)
(2
)
Unvested restricted stock awards
(3
)
(3
)
(2
)
Treasury shares
(12
)
(11
)
(12
)
Total basic weighted average common shares outstanding
351

350

350

Effect of dilutive stock-based awards
2

—

1

Total diluted weighted average common shares outstanding
353

350

350

Basic earnings (loss) per common share
$
0.55

$
(2.13
)
$
0.75

Diluted earnings (loss) per common share
$
0.54

$
(2.13
)
$
0.75

Anti-dilutive stock-based awards excluded from the diluted weighted average common share calculations
7

11

11


167

Note 14. Other Comprehensive Income
The following table presents the activity in our other comprehensive income for the years ended December 31:
 
Pretax
Income taxes
Net
 
2015
 
 
 
 
Securities available for sale:
 
 
 
 
Net unrealized holding losses arising during the year
$
(99
)
$
(37
)
$
(62
)
 
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 year
(10
)
(4
)
(6
)
(1)  
Interest rate swaps designated as cash flow hedges:
 
 
 
 
Net unrealized losses arising during the year
(2
)
(1
)
(1
)
 
Reclassification adjustment for realized losses included in net income
1

—

1

(2)  
Net unrealized losses on interest rate swaps designated as cash flow hedges
(1
)
—

(1
)
 
Pension and post-retirement actuarial gains
16

4

12

 
Total other comprehensive loss
$
(93
)
$
(37
)
$
(56
)
 
2014
 
 
 
 
Securities available for sale:
 
 
 
 
Net unrealized holding losses arising during the year
$
(19
)
$
(7
)
$
(12
)
 
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 year
(13
)
(5
)
(8
)
(1)  
Interest rate swaps designated as cash flow hedges:
 
 
 
 
Reclassification adjustment for realized losses included in net income
1

1

1

(2)  
Pension and post-retirement actuarial losses
(51
)
(16
)
(34
)
 
Total other comprehensive loss
$
(81
)
$
(27
)
$
(53
)
 
2013
 
 
 
 
Securities available for sale:
 
 
 
 
Net unrealized holding losses arising during the year
$
(177
)
$
(68
)
$
(109
)
 
Reclassification adjustment for net unrealized holding gains on securities transferred between available for sale and held to maturity
(55
)
(21
)
(34
)
 
Net unrealized losses on securities available for sale
(232
)
(89
)
(143
)
 
Net unrealized holding gains on securities transferred between available for sale and held to maturity:
 
 
 
 
Net unrealized holding gains transferred during the year
55

21

34

 
Amortization of net unrealized holding gains to income during the year
(20
)
(7
)
(12
)
(1)  
Net unrealized holding gains on securities transferred during the year
35

14

22

 
Interest rate swaps designated as cash flow hedges:
 
 
 
 
Reclassification adjustment for realized losses included in net income
1

1

1

(2)  
Pension and post-retirement actuarial gains
40

15

25

 
Total other comprehensive loss
$
(154
)
$
(59
)
$
(95
)
 
(1)  
Included in Interest income on investment securities and other in our Consolidated Statements of Operations.
(2)  
Included in Interest expense on borrowings in our Consolidated Statements of Operations.

168

The following table presents the activity in our accumulated other comprehensive income for the periods indicated:
 
Net unrealized gains (losses) on securities available for sale
Net unrealized (losses) gains on
securities transferred from
available for sale to
held to maturity
Unrealized loss on 
interest rate
swaps designated as
cash flow hedges
Pension and postretirement plans
Total
Balance, January 1, 2013
$
207

$
(2
)
$
(6
)
$
(41
)
$
157

Period change, net of tax
(143
)
22

1

25

(95
)
Balance, December 31, 2013
64

20

(6
)
(16
)
62

Period change, net of tax
(12
)
(8
)
1

(34
)
(53
)
Balance, December 31, 2014
52

12

(5
)
(51
)
9

Period change, net of tax
(62
)
(6
)
(1
)
12

(56
)
Balance, December 31, 2015
$
(10
)
$
6

$
(6
)
$
(39
)
$
(48
)
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.
Note 15. Stock-Based Compensation
We offer several stock-based incentive awards under one equity based incentive plan, the First Niagara Financial Group, Inc. 2012 Equity Incentive Plan (the "2012 Plan"), which expires in 2022 and authorizes us to issue up to 17 million shares of common stock for grants of stock options, stock appreciation rights, accelerated ownership option rights, restricted stock awards or restricted stock units, or performance unit awards. At December 31, 2015 , we had approximately 10 million shares available for grant under the 2012 plan.
Stock-based compensation expense for 2015 , 2014 , and 2013 totaled $13 million , $11 million , and $10 million , respectively, which is included in salaries and benefits in our Consolidated Statements of Income.
Stock Options
We granted stock options under the 2012 Plan in 2014 and 2013. We granted stock options with an exercise price equal to the market price of our stock on the date of grant. All options have a ten year term and become fully vested and exercisable over a period of three years from the grant date. When option recipients exercise their options, we issue shares from treasury stock and record the proceeds as additions to capital.
Restricted Stock Awards and Units
During 2015 , we granted time-based restricted stock units to key employees and restricted stock awards and restricted stock units to non-employee directors. Restricted stock grants to non-employee directors vest over one year while grants to key employees generally vest over three years from the grant date. When restricted stock grants are forfeited before they vest, we reacquire the shares into treasury stock, and hold them to use for new awards.
During 2015 , we granted approximately 563 thousand performance-based restricted stock units to key employees under the 2012 Plan. Performance-based restricted stock units vest at the conclusion of a three year performance period and distribute based on our total shareholder return performance relative to an industry index.
At December 31, 2015 , we held approximately 11 million shares of our stock as treasury shares, which is adequate to meet the share requirements of our current stock-based compensation plans. During 2015 , we issued 1 million shares from treasury stock in connection with grants of restricted stock.

169

Stock Options
The following is a summary of our stock option activity for the year ended December 31, 2015 :
 
Number of
shares (in thousands)
Weighted average
exercise price
Weighted average remaining
contractual term
Aggregate intrinsic
value (1)
Outstanding at January 1, 2015
10,879

$
12.90

 
 
Exercised
(322
)
9.33

 
 
Expired
(7,141
)
13.20

 
 
Outstanding at December 31, 2015
3,416

$
12.61

3.6 years
$
1

Exercisable at December 31, 2015
2,998

$
13.09

3.0 years
$
1

(1)  
Intrinsic value is the difference between the fair value of our stock at December 31, 2015 and the exercise price of the stock award.
The following is a summary of our nonvested stock option activity for the year ended December 31, 2015 :
 
Number of
shares (in thousands)
Weighted
average
exercise price
Weighted average
grant date
fair value
Nonvested at January 1, 2015
748

$
9.21

$
2.54

Vested
(330
)
9.26

2.55

Nonvested at December 31, 2015
418

$
9.17

$
2.54

The following is a summary of our stock options outstanding at December 31:
Exercise price
Options outstanding (in thousands)
Weighted average exercise price
Weighted average remaining life (years)
Options exercisable (in thousands)
Weighted average exercise price
2015
 
 
 
 
 
$8.86 – $10.00
893

$
9.38

6.4
475

$
9.57

$10.01 – $13.50
1,450

11.67

3.2
1,450

11.67

$13.51 – $15.50
945

14.30

2.1
945

14.30

$15.51 – $51.78
128

33.32

0.2
128

33.32

Total
3,416

12.61

3.6
2,998

13.09

2014
 
 
 
 
 
$8.86 – $12.00
2,135

$
10.12

6.3
1,388

$
10.61

$12.01 – $13.50
7,628

13.05

0.6
7,628

13.05

$13.51 – $15.50
965

14.31

3.0
965

14.31

$15.51 – $51.78
151

35.38

1.0
151

35.38

Total
10,879

12.90

2.0
10,132

13.17

2013
 
 
 
 
 
$8.86 – $12.00
1,835

$
10.25

6.8
1,225

$
10.80

$12.01 – $15.00
9,099

13.20

1.9
9,056

13.19

$15.01 – $18.00
42

15.25

0.5
42

15.25

$18.01 – $57.75
210

40.07

1.5
210

40.07

Total
11,186

13.23

2.7
10,533

13.46

The total intrinsic value of stock options exercised during 2015 was $0.4 million . No stock options were exercised in 2014 . As of December 31, 2015 , we have $0.2 million of unrecognized compensation cost related to unvested options that we have granted. We expect this cost to be recognized over a weighted average period of 1.1 years.

170

We use the Black-Scholes valuation method to estimate the fair value of our stock option awards. This method is dependent upon certain assumptions. The following is a summary of our stock options granted for the years ended December 31, as well as the weighted average assumptions that we utilized to compute the fair value of the options:
 
2015
2014
2013
Options granted (in thousands)
—

505

434

Grant date weighted average fair value per stock option
N/A

$
2.59

$
2.36

Grant date weighted average share price
N/A

$
9.27

$
8.86

Dividend yield
N/A

3.45
%
3.61
%
Risk-free interest rate
N/A

2.05
%
0.99
%
Expected volatility factor
N/A

38.59
%
40.70
%
Expected life (in years)
N/A

6.6

5.7

In the table above, the risk-free interest rate is the zero coupon U.S. Treasury rate commensurate with the expected life of options on the date of their grant. We based the volatility of our stock on historical volatility over a span of time equal to the expected life of the options.
Time-Vested Restricted Stock Awards and Restricted Stock Units
We expense the grant date fair value of our restricted stock awards and restricted stock units over their respective vesting periods. At December 31, 2015 , we had $17 million of unrecognized compensation cost related to unvested restricted stock awards and units and we expect this cost to be recognized over a weighted average period of 1.7 years.
The following is a summary of our restricted stock and restricted stock unit activity for 2015 :
 
Number of
shares (in thousands)
Weighted average grant date fair value
Unvested at January 1, 2015
2,701

$
9.14

Awarded
1,890

9.08

Vested
(926
)
9.03

Forfeited
(254
)
9.06

Unvested at December 31, 2015
3,411

$
9.11

The fair value of restricted stock awards and restricted stock units that vested during 2015 , 2014 , and 2013 was $9 million , $6 million , and $5 million , respectively.
Restricted stock units granted to certain members of our Board of Directors vested on December 31, 2015 and 2014 but are not released until the board member retires. Dividend equivalent units earned during 2015 and 2014 on these restricted stock units totaled 3,872 and 5,295 , respectively.
Note 16. Benefit Plans
We account for our pension and postretirement plans by recognizing in our financial statements an asset for a plan’s overfunded status or a liability for a plan’s underfunded status. We report changes in the funded status of our pension and postretirement plan as a component of other comprehensive income, net of applicable taxes, in the year in which changes occur.
Pension Plans
We maintain a legacy employer sponsored defined benefit pension plan (the “First Niagara Plan”) for which participation and benefit accruals have been frozen since 2002. Additionally, any pension plans acquired in connection with previous whole-bank acquisitions, and subsequently merged into the First Niagara Plan, were frozen prior to or shortly after completion of the transactions. Upon our merger with NewAlliance, we acquired

171

the Employees’ Retirement Plan of NewAlliance Bank (the “NewAlliance Plan”), an employer sponsored defined benefit pension plan. The NewAlliance Plan was frozen prior to completion of the merger and has not been merged into the First Niagara Plan.
Accordingly, no employees are permitted to commence participation in the First Niagara Plan or the NewAlliance Plan (collectively, the “Plans”) and future salary increases and years of credited service are not considered when computing an employee’s benefits under the Plans. As of December 31, 2015 , we have met all minimum ERISA funding requirements.
We also have unfunded supplemental executive retirement plans (“SERPs”) for which we have recorded an accumulated other comprehensive loss of $5 million and $6 million at December 31, 2015 and 2014 , respectively. We had assumed these plans in connection with the NewAlliance and other previous acquisitions, therefore no employees are eligible to commence participation in the SERPs. The projected benefit obligation and accumulated benefit obligation for these SERPs was $21 million and $23 million , respectively, at December 31, 2015 and 2014 .
Information regarding our pension plans is as follows at December 31:
 
2015
2014
Change in projected benefit obligation:
 
 
Projected benefit obligation at beginning of year
$
260

$
214

Service cost
1

1

Interest cost
10

10

Actuarial (gain) loss
(21
)
49

Benefits paid
(17
)
(15
)
Projected benefit obligation at end of year
232

260

Change in fair value of plan assets:
 
 
Fair value of plan assets at beginning of year
296

290

Employer contributions
2

2

Actual return on plan assets
1

19

Benefits paid
(17
)
(14
)
Fair value of plan assets at end of year
281

296

Overfunded status at year end
$
49

$
36

Net pension cost is comprised of the following for the years ended December 31:
 
2015
2014
2013
Service cost
$
1

$
1

$
1

Interest cost
10

10

10

Expected return on plan assets
(16
)
(17
)
(16
)
Amortization of unrecognized loss
4

1

3

Net periodic pension (gain)
$
(1
)
$
(5
)
$
(2
)
Changes in plan assets and benefit obligations recognized in other comprehensive income are as follows for the years ended December 31:
 
2015
2014
Net (gain) loss
$
(10
)
$
46

Total (gain) loss recognized in other comprehensive income
(10
)
46

Total recognized in net periodic pension cost and other comprehensive income
$
(11
)
$
42


172

The principal actuarial assumptions we used were as follows for the years ended December 31:
 
2015
2014
2013
Projected benefit obligation:
 
 
 
Discount rate
4.03
%
3.99
%
5.02
%
Net periodic pension cost:
 
 
 
Discount rate
5.47
%
5.01
%
4.07
%
Expected long-term rate of return on plan assets
5.50
%
5.89
%
5.89
%
For the 2015 pension plan valuations, we utilized the RP-2014 Healthy Annuitant/Employee Mortality table with Projection Scale MP-2015. The discount rate that we used in the measurement of our pension obligation is determined by modeling the pension plan expected future retirement payment cash flows to the Milliman Bond Matching Model as of the measurement date. The expected long-term rate of return on plan assets reflects long-term earnings expectations on existing plan assets and those contributions expected to be received during the current plan year. In estimating that rate, we gave appropriate consideration to historical returns earned by plan assets in the fund and the rates of return expected to be available for reinvestment. We adjusted rates of return to reflect current capital market assumptions and changes in investment allocations.
Our overall investment strategy with respect to the assets of our Plans is primarily for preservation of capital and to provide regular dividend and interest payments. The Plans' target asset allocation for 2015 was 57% fixed income securities, 38% equity securities and 5% cash. The fixed income portion of the Plans' assets is to be managed as a high-grade intermediate term fixed income account. Equity securities primarily include investments in large cap value and growth stocks as well as mid and small cap companies. We assumed equity securities to earn a return in the range of 6.8% to 8.0% and fixed income securities to earn a return in the range of 2.5% to 4.0% . The long-term inflation rate was estimated to be 2.5% . When these overall return expectations are applied to our Plan's target allocation, we expect the rate of return to be approximately 5.5% .
The fair values of the Plans’ assets by asset category and level within the fair value hierarchy are as follows at December 31:
Asset Category
Total
Level 1
Level 2
Level 3
2015
 
 
 
 
Cash
$
14

$
14

$
—

$
—

Fixed income securities:
 
 
 
 
Corporate bonds
2

—

2

—

Exchange traded funds:
 
 
 
 
Diversified emerging markets
1

1

—

—

Mutual fund investments:
 
 
 
 
Inflation protected bond fund
31

31

—

—

Small and mid cap blend
13

13

—

—

Foreign large value and blend
9

9

—

—

Large cap growth and blend
80

80

—

—

Real estate
4

4

—

—

High yield bond
17

17

—

—

World bond
17

17

—

—

Intermediate term bond
93

93

—

—

 
$
281

$
279

$
2

$
—


173

Asset Category
Total
Level 1
Level 2
Level 3
2014
 
 
 
 
Cash
$
14

$
14

$
—

$
—

Equity securities:
 
 
 
 
First Niagara Financial Group, Inc. common stock
1

1

—

—

Fixed income securities:
 
 
 
 
Corporate bonds
3

—

3

—

Exchange traded funds:
 
 
 
 
Large cap growth
23

23

—

—

Foreign large cap value and blend
4

4

—

—

High yield bond fund
7

7

—

—

Inflation protected bond fund
43

43

—

—

Intermediate term bond fund
91

91

—

—

Diversified emerging markets
1

1

—

—

Real estate
5

5

—

—

Mortgage-backed securities
7

7

—

—

Small and mid cap blend
5

5

—

—

World bond
18

18

—

—

Mutual fund investments:
 
 
 
 
Foreign large value and blend
5

5

—

—

Small and midcap growth, value, and blend
3

3

—

—

Large cap growth, value, and blend
60

60

—

—

Real estate
4

4

—

—

Diversified emerging markets
2

2

—

—

 
$
296

$
294

$
3

$
—

The Plans did not hold any assets classified as Level 3 during 2015 or 2014 .
Estimated benefit payments under our pension plans over the next ten years are as follow at December 31, 2015 :
2016
$
14

2017
14

2018
14

2019
14

2020
15

2021-2025
73


174

Other Post-Retirement Benefits
We have an unfunded post-retirement medical plan which we have modified so that participation is closed to those employees who did not meet the retirement eligibility requirements by December 31, 2001. We also acquired three unfunded post-retirement employee benefit plans from our merger with NewAlliance which are also frozen. Information regarding these post-retirement plans is as follows at December 31:
 
2015
2014
Change in accumulated post-retirement benefit obligation:
 
 
Accumulated post-retirement benefit obligation at beginning of year
$
14

$
10

Interest cost
1

1

Plan amendments
(4
)
—

Actuarial (gain) loss
(1
)
4

Benefits paid
(5
)
(1
)
Accumulated post-retirement benefit obligation at end of year
$
5

$
14

Unfunded status at year end
$
(5
)
$
(14
)
The components of net periodic post-retirement benefit cost are as follows for the years ended December 31:
 
2015
2014
2013
Interest cost
$
1

$
1

$
1

Amortization of unrecognized loss
1

—

—

Settlement loss
1

—

—

Total periodic post-retirement cost
$
2

$
1

$
—

Changes in plan benefit obligations recognized in other comprehensive income are as follows for the years ended December 31:
 
2015
2014
Net (gain) loss
$
(2
)
$
4

Amortization of unrecognized loss
(1
)
—

Prior service credit
(4
)
—

Total (gain) loss recognized in other comprehensive income
$
(7
)
$
4

Total recognized in net periodic post-retirement cost and other comprehensive income
$
(5
)
$
5

The principal actuarial assumptions used were as follows for the years ended December 31:
 
2015
2014
2013
Accumulated post-retirement benefit obligation:
 
 
 
Discount rate
4.12
%
3.90
%
4.87
%
Total periodic cost:
 
 
 
Discount rate
3.90
%
4.87
%
3.89
%
For the 2015 unfunded post-retirement medical plan valuations, we utilized the RP-2014 Healthy Annuitant/Employee Mortality table with Projection Scale MP-2015. The assumed health care cost trend rate used in measuring the accumulated post-retirement benefit obligation was 6.1% for 2015 , and gradually decreased to 5.6% by 2017 . This assumption can have a significant effect on the amounts reported. If the rate were increased one percent, our total periodic cost for 2015 would have increased by 7% and if the rate were decreased one percent, our total periodic cost would have decreased by 6% . Beginning January 1, 2016, we transitioned our retirees to a private exchange for medical, dental and vision coverage; we will fund a health reimbursement arrangement ("HRA") for eligible retirees.
We do not anticipate making any contributions to the post-retirement plan in 2016 , except to continue funding benefit payments as they come due.

175

Estimated benefit payments under the post-retirement plan over the next ten years are as follows at December 31, 2015 :
2016
$
1

2017
—

2018
—

2019
—

2020
—

2021-2025
2

Amounts recognized in our Consolidated Statements of Condition related to our pension and post-retirement plans are as follows for the years ended December 31:
 
2015
2014
Other assets:
 
 
Fair value of plan assets in excess of projected benefit obligation
$
49

$
36

Other liabilities:
 
 
Accumulated post-retirement benefit obligation
$
5

$
14

 
 
 
Accumulated other comprehensive loss (income), net of taxes:
 
 
Pension plans
$
40

$
50

Post-retirement benefit plan
(1
)
1

 
$
39

$
51

401(k) Plan
Our employees that meet certain age and service requirements are eligible to participate in our employer sponsored 401(k) plan. Under the plan, participants may make contributions, in the form of salary deferrals, up to the maximum Internal Revenue Code limit. We contribute to the plan an amount equal to 100% of the first 4% of employee contributions plus 50% of employee contributions between 5% and 6% . These matching contributions are 100% vested. Our total contributions to the 401(k) plan amounted to $13 million , $14 million , and $13 million for 2015 , 2014 , and 2013 , respectively.
Employee Stock Ownership Plan (“ESOP”)
In 2014, the Board of Directors approved the termination of our ESOP as of December 31, 2014.  All participants in the ESOP on the termination date became 100% vested.  We applied to the Internal Revenue Service ("IRS") for a determination letter in the first quarter of 2015.  After the IRS issues a determination letter, we will notify ESOP participants of the available options for receiving their ESOP distributions.  The distribution options include an in-kind distribution to a qualified retirement plan, a direct in-kind distribution, a cash distribution to a qualified retirement plan, or a direct lump sum cash distribution. We recorded additional compensation expense of $1 million in 2014 related to the additional shares released as a result of the termination.
Our employees that met certain age and service requirements were eligible to participate in our ESOP. Our ESOP held shares of First Niagara Financial Group, Inc. common stock that were purchased in our 1998 initial public offering and in the open market. The purchased shares were funded by loans in 1998 and 2003 from the Company to the Bank payable in equal annual installments over 30  years bearing a fixed interest rate. Loan payments were funded by cash contributions from the Bank and dividends on allocated and unallocated First Niagara Financial Group, Inc. stock held by the ESOP. Upon the termination of the ESOP, the loans were prepaid without penalty. As the loan was internally leveraged, the loan receivable from the Bank to the Company was not reported as an asset nor was the debt of the Bank shown as a liability in the Company’s financial statements.
Shares purchased by the ESOP were maintained in a suspense account and held for allocation among the participants. As annual loan payments were made, shares were released and allocated to employee accounts. We recognized compensation expense in an amount equal to the average market price of the shares released during

176

the respective periods in which they were committed to be released. Compensation expense of $2 million , and $1 million was recognized for 2014 and 2013 , respectively, in connection with 297 thousand and 178 thousand shares allocated to participants during 2014 and 2013 , respectively. The amount of allocated shares was 2 million at December 31, 2015 and 2014 . Due to the termination of the ESOP during 2014, there were no unallocated shares at December 31, 2015 and 2014 .
We also sponsor various nonqualified compensation plans for officers and employees. Awards are payable if certain earnings and performance objectives are met. Expenses under these plans amounted to $30 million , $25 million and $27 million for 2015 , 2014 , and 2013 , respectively.
Note 17. 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 December 31, 2015 , none of our investment securities were priced utilizing broker quotes. See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Critical Accounting Policies and Estimates," for details regarding our pricing process and sources.

177

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 Operations 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 Operations.
The table below presents information about our loans held for sale for which we elected the fair value option at December 31:
 
2015
2014
Fair value carrying amount
$
43

$
35

Aggregate unpaid principal balance
42

34

Fair value carrying amount less aggregate unpaid principal balance
$
1

$
1

Additionally, included in loans held for sale on our Consolidated Statements of Condition are $3 million and $5 million of commercial loans held for sale that are carried at the lower of cost or market at December 31, 2015 and 2014 , respectively.
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.

178

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 December 31:
 
Fair Value Measurements
 
Total
Level 1
Level 2
Level 3
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.

179

 
Fair Value Measurements
 
Total
Level 1
Level 2
Level 3
2014
 
 
 
 
Assets:
 
 
 
 
Investment securities available for sale:
 
 
 
 
Debt securities:
 
 
 
 
States and political subdivisions
$
453

$
—

$
453

$
—

U.S. Treasury
25

25

—

—

U.S. government sponsored enterprises
191

—

191

—

Corporate
823

—

818

4

Total debt securities
1,492

25

1,463

4

Mortgage-backed securities:
 
 
 
 
Residential mortgage-backed securities:
 
 
 
 
Government National Mortgage Association
34

—

34

—

Federal National Mortgage Association
100

—

100

—

Federal Home Loan Mortgage Corporation
120

—

120

—

Collateralized mortgage obligations:
 
 
 
 
Federal National Mortgage Association
682

—

682

—

Federal Home Loan Mortgage Corporation
350

—

350

—

Total collateralized mortgage obligations
1,032

—

1,032

—

Total residential mortgage-backed securities
1,286

—

1,286

—

Commercial mortgage-backed securities, non-agency issued
1,500

—

1,500

—

Total mortgage-backed securities
2,786

—

2,786

—

Collateralized loan obligations, non-agency issued
1,016

—

1,016

—

Asset-backed securities collateralized by:
 
 
 
 
Student loans
235

—

235

—

Credit cards
42

—

42

—

Auto loans
194

—

194

—

Other
127

—

127

—

Total asset-backed securities
599

—

599

—

Other
22

21

1

—

Total securities available for sale
5,915

47

5,865

4

Loans held for sale (1)
35

—

35

—

Derivatives
93

—

93

—

Total assets
$
6,043

$
47

$
5,993

$
4

Liabilities:
 
 
 
 
Derivatives
$
94

$
—

$
94

$
—

(1)  
Represents loans for which we have elected the fair value option.
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 years ended December 31:
 
Fair Value Measurements
 
Total gains
 
Total
Level 1
Level 2
Level 3
 
(losses)
2015
 
 
 
 
 
 
Collateral dependent impaired loans
$
8

$
—

$
8

$
—

 
$
—

2014
 
 
 
 
 
 
Collateral dependent impaired loans
$
10

$
—

$
10

$
—

 
$
—


180

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 2015 , 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 December 31, 2015 , which is included in our provision for credit losses. During 2014 , 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 $10 million at December 31, 2014 , 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 December 31, 2015 and 2014 , in Level 3 of the fair value hierarchy. There were no changes in our trust preferred securities during the year ended December 31, 2015 and 2014 . As of December 31, 2015 and 2014 , the fair values of our trust preferred securities are based upon third party pricing without adjustment.

181

 
 
 
 
 
 
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, are as follows at December 31:
 
2015
 
2014
 
Carrying value
Estimated fair
value
Fair value
level
 
Carrying value
Estimated fair
value
Fair value
level
 
Financial assets:
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
672

$
672

1

 
$
420

$
420

1

 
Investment securities available for sale
5,471

5,471

1,2,3

(1)  
5,915

5,915

1,2,3

(1)  
Investment securities held to maturity
6,388

6,378

2

 
5,942

5,964

2

 
Federal Home Loan Bank and Federal Reserve Bank common stock
410

410

2

 
412

412

2

 
Loans held for sale
46

46

2

 
40

40

2

 
Loans and leases, net
23,796

23,749

2,3

(2)  
22,803

23,037

2,3

(2)  
Derivatives
123

123

2

 
93

93

2

 
Accrued interest receivable
104

104

2

 
101

101

2

 
Financial liabilities:
 
 
 
 
 
 
 
 
Deposits
$
28,701

$
28,705

2

 
$
27,781

$
27,793

2

 
Borrowings
6,657

6,666

2

 
6,206

6,215

2

 
Derivatives
128

128

2

 
94

94

2

 
Accrued interest payable
14

14

2

 
11

11

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 and $10 million of collateral dependent impaired loans without significant adjustments made to appraised values at December 31, 2015 and 2014 , respectively. 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.
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.

182

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 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.

183

Note 18 . 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 years ended December 31:
 
Banking
Financial
services
Consolidated
total
2015
 
 
 
Net interest income
$
1,056

$
—

$
1,056

Provision for credit losses
76

—

76

Net interest income after provision for credit losses
980

—

980

Noninterest income
276

66

342

Amortization of intangibles
17

2

19

Other noninterest expense
948

53

1,000

Income before income taxes
291

11

302

Income tax expense
74

4

79

Net income
$
217

$
7

$
224

2014
 
 
 
Net interest income
$
1,086

$
—

$
1,086

Provision for credit losses
96

—

96

Net interest income after provision for credit losses
990

—

990

Noninterest income
244

66

310

Amortization of intangibles
24

3

27

Goodwill impairment
1,100

—

1,100

Other noninterest expense
940

57

997

(Loss) income before income taxes
(831
)
7

(824
)
Income tax (benefit) expense
(112
)
3

(109
)
Net (loss) income
$
(719
)
$
4

$
(715
)
2013
 
 
 
Net interest income
$
1,093

$
—

$
1,093

Provision for credit losses
105

—

105

Net interest income after provision for credit losses
988

—

988

Noninterest income
298

67

366

Amortization of intangibles
37

3

40

Other noninterest expense
839

52

891

Income before income taxes
411

12

423

Income tax expense
123

5

128

Net income
$
288

$
7

$
295


184

Note 19. Condensed Parent Company Only Financial Statements
The following condensed statements of condition of the Company at December 31, 2015 and 2014 and the related condensed statements of operations and cash flows for the years ended December 31, 2015 , 2014 , and 2013 should be read in conjunction with our Consolidated Financial Statements and related notes:
Condensed Statements of Condition
2015
2014
Assets:
 
 
Cash and cash equivalents
$
394

$
383

Investment in subsidiary
4,418

4,388

Deferred taxes
33

32

Other assets
12

13

Total assets
$
4,857

$
4,815

Liabilities and Stockholders’ Equity:
 

 

Accounts payable and other liabilities
$
19

$
12

Borrowings
712

710

Stockholders’ equity
4,126

4,093

Total liabilities and stockholders’ equity
$
4,857

$
4,815


Condensed Statements of Operations
2015
2014
2013
Interest income
$
—

$
1

$
2

Dividends received from subsidiary
100

80

175

Total interest and dividend income
100

81

177

Interest expense
49

48

49

Net interest income
52

33

128

Noninterest income
2

3

2

Noninterest expense
36

27

30

Income before income taxes and undisbursed income of subsidiary
17

9

100

Income tax benefit
(31
)
(28
)
(29
)
Income before undisbursed income of subsidiary
48

36

129

Undisbursed income (loss) of subsidiary
176

(751
)
167

Net income (loss)
224

(715
)
295

Preferred stock dividend
30

30

30

Net income (loss) available to common stockholders
$
193

$
(745
)
$
265

 
 
 
 
Net income (loss)
$
224

$
(715
)
$
295

Other comprehensive (loss) income (1)
(56
)
(53
)
(95
)
Total comprehensive income (loss)
$
167

$
(768
)
$
200

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

185

Condensed Statements of Cash Flows
2015
2014
2013
Cash flows from operating activities:
 
 
 
Net income (loss)
$
224

$
(715
)
$
295

Adjustments to reconcile net (loss) income to net cash provided by operating activities:
 
 
 
Undisbursed (income) loss of subsidiaries
(176
)
751

(167
)
Stock-based compensation expense
13

11

9

Deferred income tax (benefit) expense
(2
)
2

(18
)
Decrease (increase) in other assets
(2
)
(2
)
7

Decrease in other liabilities
7

(1
)
(9
)
Net cash provided by operating activities
64

46

118

Cash flows from investing activities:
 
 
 
Proceeds from maturities of securities available for sale
—

3

—

Principal payments received on securities available for sale
—

—

1

Purchases of securities available for sale
—

—

(2
)
Repayment of ESOP loan receivable
—

15

1

Other, net
1

1

(1
)
Net cash provided by investing activities
1

19

—

Cash flows from financing activities:
 
 
 
Return of capital from subsidiary
90

85

—

Repurchase of shares upon ESOP termination
—

(14
)
—

Dividends paid on preferred stock
(30
)
(30
)
(30
)
Dividends paid on common stock
(113
)
(113
)
(112
)
Net cash used in financing activities
(54
)
(72
)
(143
)
Net increase (decrease) in cash and cash equivalents
11

(7
)
(25
)
Cash and cash equivalents at beginning of period
383

390

415

Cash and cash equivalents at end of period
$
394

$
383

$
390


186

ITEM 9.
 
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
 
 
 
ITEM 9A.
 
CONTROLS AND PROCEDURES
Management’s Report on Internal Control Over Financial Reporting — Filed herewith under Part II, Item 8, “Financial Statements and Supplementary Data.”
Evaluation of Disclosure Controls and Procedures — With the participation of management, the Principal Executive Officer and Principal Financial Officer have evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2015 . Based upon that evaluation, the Principal Executive Officer and Principal Financial Officer concluded that, as of that date, the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms.
As a result of the material weakness related to the process for determining the allowance as of December 31, 2014, Management made improvements to its internal controls during 2015 to address the control deficiencies identified. During the fourth quarter of 2015, Management remediated the material weakness as these control improvements were implemented and successfully tested.
There have been no other changes in the Company's internal control over financial reporting during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect the Company's internal control over financial reporting.
 
 
 
ITEM 9B.
 
OTHER INFORMATION
None.
PART III
 
 
 
ITEM 10.
 
DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
Information regarding directors, executive officers, and corporate governance of the Company will be presented in the Proxy Statement for the 2016 Annual Meeting of Stockholders or will be included in an amendment or amendments to this Form 10-K and is incorporated by reference.
 
 
 
ITEM 11.
 
EXECUTIVE COMPENSATION
Information regarding executive compensation will be presented in the Proxy Statement for the 2016 Annual Meeting of Stockholders or will be included in an amendment or amendments to this Form 10-K and is incorporated by reference.
ITEM 12.
 
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Information regarding security ownership of certain beneficial owners and management and related stockholder matters of the Company will be presented in the Proxy Statement for the 2016 Annual Meeting of Stockholders or will be included in an amendment or amendments to this Form 10-K and is incorporated by reference.

187

All of our equity compensation plans were approved by stockholders. Shown below is certain information at December 31, 2015 regarding equity compensation to our directors and employees that have been approved by stockholders.
Equity compensation plans approved by stockholders
Number of securities to be issued upon exercise of outstanding options and rights
 
Weighted average exercise price
Number of securities remaining available for issuance under the plan
First Niagara Financial Group, Inc. Amended and Restated 2002 Long-term Incentive Stock Benefit Plan
 
 
 
—

Stock options
1,509,410

 
$
12.93

 
Restricted stock awards and units
65,192

(1)  
Not applicable

 
First Niagara Financial Group, Inc. 2012 Executive Incentive Plan
 
 
 
10,026,037

Stock options
585,208

 
$
9.14

 
Restricted stock awards and units
3,345,948

(1)  
Not applicable

 
Performance stock awards and units
1,430,823

(1)  
Not applicable

 
Stock options assumed pursuant to the merger with Harleysville National Corporation on April 9, 2010
128,126

 
$
33.32

—

Stock options assumed pursuant to the merger with NewAlliance Bancshares, Inc. on April 15, 2011
1,193,391

 
$
11.68

—

Total
8,258,098

 
 
10,026,037

(1)  
Represents shares that have been granted but have not yet vested.
 
 
 
ITEM 13.
 
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Information regarding certain relationships and related transactions, and director independence will be presented in the Proxy Statement for the 2016 Annual Meeting of Stockholders or will be included in an amendment or amendments to this Form 10-K and is incorporated by reference.
 
 
 
ITEM 14.
 
PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information regarding principal accounting fees and services will be presented in the Proxy Statement for the 2016 Annual Meeting of Stockholders or will be included in an amendment or amendments to this Form 10-K and is incorporated by reference.
PART IV
 
 
 
ITEM 15.
 
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Financial statements are filed as part of this Annual Report on Form 10-K. See Part II, Item 8. “Financial Statements and Supplementary Data.”
(b) Exhibits
The exhibits listed below are filed herewith or are incorporated by reference to other filings.
Exhibit Index to Form 10-K
Exhibit 2.1
 
Agreement and Plan of Merger by and between First Niagara Financial Group, Inc. and KeyCorp, dated as of October 30, 2015. (Incorporated by reference to the Current Report on Form 8-K, filed with the SEC on November 2, 2015.)
 
 
 

188

Exhibit 3.1
 
Certificate of Incorporation.   (Incorporated by reference to the Current Report on Form 8-K, filed with the SEC on April 27, 2011.)
 
 
 
Exhibit 3.2
 
Certificate of Designations of Fixed-to-Floating Rate Perpetual Non-Cumulative Preferred Stock, Series B, dated December 13, 2011. (Incorporated by reference to the Current Report on Form 8-K, filed with the SEC on December 14, 2011.)
 
 
 
Exhibit 3.3
 
Amended and Restated Bylaws. (Incorporated by reference to the Current Report on Form 8-K filed with the SEC on December 11, 2015.)
 
 
 
Exhibit 4.1
 
Form of Common Stock Certificate of First Niagara Financial Group, Inc. (Incorporated by reference to the Current Report on Form 8-K, filed with the SEC on April 27, 2011.)
 
 
 
Exhibit 4.2
 
Instruments defining the rights of security holders, including indentures. The registrant hereby agrees to furnish to the SEC upon request copies of instruments defining the rights of holders of long-term debt of the registrant and its consolidated subsidiaries; no issuance of debt exceeds 10 percent of the assets of the registrant and its subsidiaries on a consolidated basis.
 
 
 
Exhibit 10.1
 
Letter Agreement, dated as of December 19, 2013, among First Niagara Financial Group, Inc., First Niagara Bank, N.A. and Gary M. Crosby.* (Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the SEC on December 19, 2013.)
 
 
 
Exhibit 10.2
 
First Niagara Financial Group, Inc. Restricted Stock Unit Agreement for Gary M. Crosby, dated April 5. 2013.* (Incorporated by reference to Exhibit 10.6 to the Quarterly Report on Form 10-Q for the quarter ended March 31, 2013 filed with the SEC on May 7, 2013.)
 
 
 
Exhibit 10.3
 
First Niagara Bank Executive Change in Control Severance Plan.* (Incorporated by reference to Exhibit 10.9 to the Annual Report on Form 10-K for the year ended December 31, 2014 filed with the SEC on March 17, 2015.)
 
 
 
Exhibit 10.4
 
First Niagara Bank Change in Control Severance Plan.* (Incorporated by reference to Exhibit 10.10 to the Annual Report on Form 10-K for the year ended December 31, 2014 filed with the SEC on March 17, 2015.)
 
 
 
Exhibit 10.5
 
First Niagara Bank Executive Change in Control Severance Plan, Amendment Number One.* (Incorporated by reference to Exhibit 10.11 to the Annual Report on Form 10-K for the year ended December 31, 2014 filed with the SEC on March 17, 2015.)
 
 
 
Exhibit 10.6
 
First Niagara Bank Change in Control Severance Plan, Amendment Number One.* (Incorporated by reference to Exhibit 10.12 to the Annual Report on Form 10-K for the year ended December 31, 2014 filed with the SEC on March 17, 2015.)
 
 
 
Exhibit 10.7
 
First Niagara Financial Group Amended and Restated Executive Severance Plan, effective as of December 19, 2013.* (Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the SEC on December 19, 2013.)
 
 
 
Exhibit 10.8
 
First Niagara Financial Group, Inc. Amended and Restated 2002 Long-Term Incentive Stock Benefit Plan* (Incorporated by reference to our 2005 Annual Report on Form 10-K filed with the SEC on March 15, 2006.)
 
 
 
Exhibit 10.9
 
Form of Executive Performance Based Restricted Stock Unit Agreement under First Niagara Financial Group, Inc. 2012 Equity Incentive Plan for CEO.* (Incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q for the quarter ended March 31, 2015 filed with the SEC on May 4, 2015.)
 
 
 
Exhibit 10.10
 
Form of Executive Time-vested Restricted Stock Unit Agreement under First Niagara Financial Group, Inc. 2012 Equity Incentive Plan for CEO.* (Incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q for the quarter ended March 31, 2015 filed with the SEC on May 4, 2015.)
 
 
 
Exhibit 10.11
 
Form of Executive Performance Based Restricted Stock Agreement under First Niagara Financial Group, Inc. 2012 Equity Incentive Plan (for executive officers other than CEO).* (Incorporated by reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q for the quarter ended March 31, 2015 filed with the SEC on May 4, 2015.)
 
 
 
Exhibit 10.12
 
Form of Executive Time-vested Restricted Stock Agreement under First Niagara Financial Group, Inc. 2012 Equity Incentive Plan (for executive officers other than CEO).* (Incorporated by reference to Exhibit 10.4 to the Quarterly Report on Form 10-Q for the quarter ended March 31, 2015 filed with the SEC on May 4, 2015.)
 
 
 
Exhibit 10.13
 
Form of Executive Performance Based Restricted Stock Unit Agreement under First Niagara Financial Group, Inc. 2012 Equity Incentive Plan.* (Incorporated by reference to Exhibit 10.7 to the Quarterly Report on Form 10-Q for the quarter ended March 31, 2013 filed with the SEC on May 7, 2013.)

189

 
 
 
Exhibit 10.14
 
Form of Executive Time-vested Restricted Stock Unit Agreement under First Niagara Financial Group, Inc. 2012 Equity Incentive Plan.* (Incorporated by reference to Exhibit 10.8 to the Quarterly Report on Form 10-Q for the quarter ended March 31, 2013 filed with the SEC on May 7, 2013.)
 
 
 
Exhibit 10.15
 
Form of Executive Performance Based Restricted Stock Agreement under First Niagara Financial Group, Inc. 2012 Equity Incentive Plan.* (Incorporated by reference to Exhibit 10.9 to the Quarterly Report on Form 10-Q for the quarter ended March 31, 2013 filed with the SEC on May 7, 2013.)
 
 
 
Exhibit 10.16
 
Form of Executive Time-vested Restricted Stock Agreement under First Niagara Financial Group, Inc. 2012 Equity Incentive Plan.* (Incorporated by reference to Exhibit 10.10 to the Quarterly Report on Form 10-Q for the quarter ended March 31, 2013 filed with the SEC on May 7, 2013.)
 
 
 
Exhibit 10.17
 
Form of Stock Option Agreement under First Niagara Financial Group, Inc. 2012 Equity Incentive Plan.* (Incorporated by reference to Exhibit 10.11 to the Quarterly Report on Form 10-Q for the quarter ended March 31, 2013 filed with the SEC on May 7, 2013.)
 
 
 
Exhibit 10.18
 
Form of General Performance Based Restricted Stock Agreement under First Niagara Financial Group, Inc. 2012 Equity Incentive Plan.* (Incorporated by reference to Exhibit 10.12 to the Quarterly Report on Form 10-Q for the quarter ended March 31, 2013 filed with the SEC on May 7, 2013.)
 
 
 
Exhibit 10.19
 
Form of General Time-vested Restricted Stock Unit Agreement under First Niagara Financial Group, Inc. 2012 Equity Incentive Plan.* (Incorporated by reference to Exhibit 10.13 to the Quarterly Report on Form 10-Q for the quarter ended March 31, 2013 filed with the SEC on May 7, 2013.)
 
 
 
Exhibit 10.20
 
Form of Time-vested Restricted Stock Unit Agreement under First Niagara Financial Group, Inc. 2012 Equity Incentive Plan.* (Incorporated by reference to Exhibit 99.1 to the Current Report on Form 8-K, filed with the SEC on April 25, 2013.)
 
 
 
Exhibit 10.21
 
First Niagara Financial Group, Inc. 2012 Equity Incentive Plan* (Incorporated by reference to our Proxy Statement for the 2012 Annual Meeting of Stockholders filed with the SEC on March 15, 2012.)
 
 
 
Exhibit 10.22
 
First Niagara Financial Group, Inc. 2012 Equity Incentive Plan, Amendment Number One.* (Incorporated by reference to our Proxy Statement for the 2014 Annual Meeting of Stockholders filed with the SEC on March 21, 2014.)
 
 
 
Exhibit 10.23
 
First Niagara Financial Group, Inc. 2012 Equity Incentive Plan, Amendment Number Two.* (Incorporated by reference to our Proxy Statement for the 2014 Annual Meeting of Stockholders filed with the SEC on March 21, 2014.)
 
 
 
Exhibit 10.24
 
First Niagara Financial Group, Inc. Executive Annual Incentive Plan* (Incorporated by reference to our Proxy Statement for the 2012 Annual Meeting of Stockholders filed with the SEC on March 15, 2012.)
 
 
 
Exhibit 10.25
 
Non-employee director compensation practices as described in under “Director Compensation” in our Proxy Statement for the 2015 Annual Meeting of Stockholders filed with the SEC on March 23, 2015, except that for 2016, annual grants of restricted stock awards will occur on or about April 29, 2016.*
 
 
 
Exhibit 10.26
 
Amended and Restated First Niagara Bank and First Niagara Financial Group, Inc. Directors Deferred Fees Plan.* (Incorporated by reference to Exhibit 10.28 to the Annual Report on Form 10-K for the year ended December 31, 2013 filed with the SEC on February 25, 2014.)
 
 
 
Exhibit 10.27
 
First Niagara Financial Group, Inc. Pinnacle Incentive Compensation Plan.* (Incorporated by reference to our 2008 Annual Report on Form 10-K filed with the SEC on February 27, 2009.)
 
 
 
Exhibit 10.28
 
Separation, Waiver and Release Agreement, dated March 18, 2014, between Daniel E. Cantara, III and First Niagara Financial Group, Inc.* (Incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q for the quarter ended March 31, 2014 filed with the SEC on May 6, 2014.)
 
 
 
Exhibit 10.29
 
First Niagara Bank Nonqualified Deferred Compensation Plan.* (Incorporated by reference to Exhibit 10.37 to the Annual Report on Form 10-K for the year ended December 31, 2014 filed with the SEC on March 17, 2015.)
 
 
 
Exhibit 11
 
Calculations of Basic Earnings Per Share and Diluted Earnings Per Share (See Note 13 of Notes to Consolidated Financial Statements)
 
 
 
Exhibit 12
 
Ratio of Earnings to Fixed Charges and Earnings to Combined Fixed Charges and Preferred Stock Dividends
 
 
 
Exhibit 21
 
Subsidiaries of First Niagara Financial Group, Inc.
 
 
 
Exhibit 23
 
Consent of Independent Registered Public Accounting Firm
 
 
 

190

Exhibit 24
 
Powers of Attorney
 
 
 
Exhibit 31.1
 
Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
 
Exhibit 31.2
 
Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
 
Exhibit 32
 
Certification of Principal Executive Officer and Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
 
Exhibit 101
 
Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Statements of Condition, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Comprehensive (Loss) Income, (iv) the Consolidated Statements of Changes in Stockholders’ Equity, (v) the Consolidated Statements of Cash Flows, and (vi) the Notes to Consolidated Financial Statements tagged as blocks of text and in detail
* Management contract or compensatory plan or arrangement.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
 
 
 
FIRST NIAGARA FINANCIAL GROUP, INC.
Date: February 10, 2016
By:  
/s/ Gary M. Crosby
 
 
Gary M. Crosby
 
 
President and Chief Executive Officer
 
 
(Principal Executive Officer)

191

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
 
 
 
 
 
Signatures
 
Title
 
Date
 
 
 
 
 
/s/ Gary M. Crosby
 
President and Chief Executive Officer
 
February 10, 2016
Gary M. Crosby
 
(Principal Executive Officer)
 
 
 
 
 
 
 
/s/ Gregory W. Norwood
 
Chief Financial Officer
 
February 10, 2016
Gregory W. Norwood
 
(Principal Financial Officer)
 
 
 
 
 
 
 
/s/ Brian M. Dempsey
 
Senior Vice President and Controller
 
February 10, 2016
Brian M. Dempsey
 
(Principal Accounting Officer)
 
 
 
 
 
 
 
/s/ Austin A. Adams*
 
Director
 
February 10, 2016
Austin A. Adams
 
 
 
 
 
 
 
 
 
/s/ G. Thomas Bowers*
 
Director, Chairman
 
February 10, 2016
G. Thomas Bowers
 
 
 
 
 
 
 
 
 
/s/ Roxanne J. Coady*
 
Director
 
February 10, 2016
Roxanne J. Coady
 
 
 
 
 
 
 
 
 
/s/ Carl A. Florio*
 
Director
 
February 10, 2016
Carl A. Florio
 
 
 
 
 
 
 
 
 
/s/ Susan S. Harnett*
 
Director
 
February 10, 2016
Susan S. Harnett
 
 
 
 
 
 
 
 
 
/s/ Carlton L. Highsmith*
 
Director
 
February 10, 2016
Carlton L. Highsmith
 
 
 
 
 
 
 
 
 
/s/ George M. Philip*
 
Director
 
February 10, 2016
George M. Philip
 
 
 
 
 
 
 
 
 
/s/ Peter B. Robinson*
 
Director
 
February 10, 2016
Peter B. Robinson
 
 
 
 
 
 
 
 
 
/s/ Nathaniel D. Woodson*
 
Director
 
February 10, 2016
Nathaniel D. Woodson
 
 
 
 
 
 
 
 
 
*By: /s/ Gary M. Crosby
 
Attorney-in-fact
 
 

192


Exhibit 12



Ratios of earnings to fixed charges and earnings to combined fixed charges and preferred stock dividends

Our ratios of earnings to fixed charges and earnings to combined fixed charges and preferred stock dividends are calculated in accordance with SEC requirements and computed by dividing earnings by fixed charges and earnings by preferred stock dividend requirements. For purposes of computing these ratios, earnings consist of net income before extraordinary items plus applicable income taxes and fixed charges. Fixed charges, excluding interest on deposits, consist of interest expense on borrowings and one-third of our rental expense, which we deem to represent interest. Preferred share dividend requirements represent the amount of pre-tax income required to pay the dividends on preferred shares. We issued Noncumulative Perpetual Preferred Stock, Series B, par value $0.01 per share, on December 14, 2011, but did not declare any dividends in 2011. Therefore, the ratio of earnings to combined fixed charges and preferred share dividends is identical to the ratio of earnings to fixed charges for the year ended December 31, 2011. Our consolidated ratios for the periods indicated are as follows (amounts in millions):
 
Years ended December 31,
 
2015
2014
2013
2012
2011
 
 
 
 
 
 
Earnings:
 
 
 
 
 
Income (loss) before taxes
$
302

$
(824
)
$
423

$
239

$
262

Fixed charges
154

133

128

162

195

Earnings (loss), including interest on deposits
456

(692
)
550

401

458

Less interest on deposits
66

53

53

67

83

Earnings (loss), excluding interest on deposits
$
390

$
(745
)
$
497

$
335

$
374

 
 
 
 
 
 
Fixed charges:
 
 
 
 
 
Interest on deposits
$
66

$
53

$
53

$
67

$
83

Interest on borrowings
76

69

64

86

101

Estimated interest component of rent expense
12

11

11

9

11

Fixed charges, including interest on deposits
154

133

128

162

195

Less interest on deposits
66

53

53

67

83

Fixed charges, excluding interest on deposits
87

79

75

95

112

Preferred stock dividend requirements
48

48

49

45

—

Combined fixed charges and preferred stock dividend requirements
$
136

$
128

$
124

$
140

$
112

 
 
 
 
 
 
Ratio of earnings (loss) to fixed charges:
 
 
 
 
 
Excluding interest on deposits
4.46

(9.39
)
6.67

3.51

3.34

Including interest on deposits
2.97

(5.21
)
4.31

2.48

2.34

 
 
 
 
 
 
Ratio of earnings (loss) to combined fixed charges and preferred stock dividend requirements:
 
 
 
 
 
Excluding interest on deposits
2.51

(6.21
)
3.63

2.06

3.34

Including interest on deposits
2.02

(4.09
)
2.84

1.72

2.34



1



Exhibit 21

Subsidiaries of First Niagara Financial Group, Inc.


Name of subsidiary
State or other jurisdiction of incorporation or organization
Percentage of voting securities owned by First Niagara Financial Group, Inc.
 
 
 
First Niagara Bank, N.A.
United States
100%
First Niagara Realty, Inc.
New York
100%
First Niagara Servicing Company
Connecticut
100%
First Niagara Business Trust
Maryland
100%
First Niagara Funding, Inc.
New York
100%
 
 
 



241


Exhibit 23


Consent of Independent Registered Public Accounting Firm
The Board of Directors
First Niagara Financial Group, Inc.:
We consent to the incorporation by reference in the registration statements (No. 333‑57736, No. 333‑105525, No. 333‑105526, No. 333‑139004, No. 333‑166367, No. 333‑173726, No. 333‑175464, No. 333‑181037, No. 333‑192773 and No. 333‑195942) on Form S-8 and (No. 333‑198839) on Form S-3, of First Niagara Financial Group, Inc. of our reports dated February 10, 2016, with respect to the consolidated statements of condition of First Niagara Financial Group, Inc. and subsidiaries as of December 31, 2015 and 2014, and the related consolidated statements of operations, comprehensive income (loss), changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2015, and the effectiveness of internal control over financial reporting as of December 31, 2015, which reports appear in the December 31, 2015 annual report on Form 10‑K of First Niagara Financial Group, Inc.

/s/ KPMG LLP

KPMG LLP
Buffalo, New York
February 10, 2016






Exhibit 24


Power of Attorney


Know all persons by these presents, that each person whose signature appears below constitutes and appoints Gary M. Crosby and Gregory W. Norwood, and each of them, such person's true and lawful attorney-in-fact and agent, with full power of substitution and revocation, for such person and in such person's name, place and stead, in any and all capacities, to sign one or more Annual Reports on Form 10-K pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, for First Niagara Financial Group, Inc. for the year ended December 31, 2015 , and any and all amendments thereto, and to file same with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission and with the NASDAQ Stock Market LLC and the New York Stock Exchange, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as such person might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents and each of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

This power of attorney shall be effective as of January 1, 2016 and shall continue in full force and effect until revoked by the undersigned in a writing filed with the secretary of the Corporation.

/s/ Austin A. Adams
 
 
/s/ Carlton L. Highsmith
 
Austin A. Adams, Director
 
 
Carlton L. Highsmith, Director
 
 
 
 
 
 
/s/ G. Thomas Bowers
 
 
/s/ George M. Philip
 
G. Thomas Bowers, Director
 
 
George M. Philip, Director
 
 
 
 
 
 
/s/ Roxanne J. Coady
 
 
/s/ Peter B. Robinson
 
Roxanne J. Coady, Director
 
 
Peter B. Robinson, Director
 
 
 
 
 
 
/s/ Carl A. Florio
 
 
/s/ Nathaniel D. Woodson
 
Carl A. Florio, Director
 
 
Nathaniel D. Woodson, Director
 
 
 
 
 
 
/s/ Susan S. Harnett
 
 
 
 
Susan S. Harnett, Director
 
 
 
 
 
 
 
 
 



187
Exhibit 31.1
Certification of Principal Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Gary M. Crosby, certify that:

1.
I have reviewed this Annual Report on Form 10-K of First Niagara Financial Group, Inc.;

2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a–15(e) and 15d–15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a–15(f) and 15d–15(f)) for the registrant and have:

a)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.
The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions)

a)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. 
 
Date: February 10, 2016
/s/ Gary M. Crosby
 
Gary M. Crosby
 
President and Chief Executive Officer


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Exhibit 31.2
Certification of Principal Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Gregory W. Norwood, certify that:
 
1.
I have reviewed this Annual Report on Form 10-K of First Niagara Financial Group, Inc.;

2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a–15(e) and 15d–15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a–15(f) and 15d–15(f)) for the registrant and have:

a)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.
The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
                    
Date: February 10, 2016
/s/ Gregory W. Norwood
 
Gregory W. Norwood
 
Senior Executive Vice President and Chief Financial Officer


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Exhibit 32
Certification pursuant to
18 U.S.C. Section 1350,
as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002

Gary M. Crosby, President and Chief Executive Officer, and Gregory W. Norwood, Executive Vice President and Chief Financial Officer of First Niagara Financial Group, Inc. (the “Company”), each certify in his capacity as an officer of the Company that he has reviewed the Annual Report of the Company on Form 10-K for the year ended December 31, 2015 and that to the best of his knowledge:
 
1.
the report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and

2.
the information contained in the report fairly presents, in all material respects, the financial condition and results of operations of the Company.

The purpose of this statement is solely to comply with Title 18, Chapter 63, Section 1350 of the United States Code, as amended by Section 906 of the Sarbanes-Oxley Act of 2002.

                             
Date: February 10, 2016
/s/ Gary M. Crosby
 
Gary M. Crosby
 
President and Chief Executive Officer
 
                            
                            
Date: February 10, 2016
/s/ Gregory W. Norwood
 
Gregory W. Norwood
 
Senior Executive Vice President and Chief Financial Officer


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