HUNTINGTON BANCSHARES INC /MD/ - FORM 8-K - EX-99.2

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EX-99.3 - EX-99.3 - HUNTINGTON BANCSHARES INC /MD/	d234029dex993.htm
EX-99.1 - EX-99.1 - HUNTINGTON BANCSHARES INC /MD/	d234029dex991.htm
8-K - FORM 8-K - HUNTINGTON BANCSHARES INC /MD/	d234029d8k.htm

Exhibit 99.2

CONSOLIDATED BALANCE SHEETS

FIRSTMERIT CORPORATION AND SUBSIDARIES


(In thousands) (Unaudited, except for December 31, 2015)	June 30, 2016			December 31, 2015			June 30, 2015
ASSETS
Cash and due from banks	$	420,818		$	380,799		$	472,848
Interest-bearing deposits in banks		103,469			83,018			114,741

Total cash and cash equivalents		524,287			463,817			587,589
Investment securities:
Held-to-maturity		2,514,161			2,674,093			2,787,513
Available-for-sale		4,318,688			3,967,735			3,838,509
Other investments		148,367			148,172			147,967
Loans held for sale		3,962			5,472			5,432
Loans		16,343,606			16,076,945			15,705,110
Allowance for loan losses		(149,649	)		(153,691	)		(148,259	)

Net loans		16,193,957			15,923,254			15,556,851
Premises and equipment, net		293,209			319,488			313,819
Goodwill		741,740			741,740			741,740
Intangible assets		56,020			60,628			65,824
Covered other real estate		940			2,134			1,065
Accrued interest receivable and other assets		1,355,256			1,218,071			1,250,705

Total assets	$	26,150,587		$	25,524,604		$	25,297,014

LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Noninterest-bearing	$	6,011,531		$	5,942,248		$	5,725,850
Interest-bearing		3,477,483			3,476,729			3,304,969
Savings and money market accounts		9,354,868			8,450,123			8,418,716
Certificates and other time deposits		2,108,761			2,238,903			2,224,315

Total deposits		20,952,643			20,108,003			19,673,850

Federal funds purchased and securities sold under agreements to repurchase		686,890			1,037,075			1,519,250
Wholesale borrowings		468,447			580,648			366,074
Long-term debt		526,389			505,173			497,393
Accrued taxes, expenses and other liabilities		469,059			353,610			352,490

Total liabilities		23,103,428			22,584,509			22,409,057
Shareholders’ equity:
5.875% Non-Cumulative Perpetual Preferred Stock, Series A, without par value: authorized 115,000 shares; 100,000 issued		100,000			100,000			100,000
Common Stock warrant		—			—			—
Common Stock, without par value; authorized 300,000,000 shares; issued: June 30, 2016, December 31, 2015 and June 30, 2015—170,183,515 shares		127,937			127,937			127,937
Capital surplus		1,383,266			1,386,677			1,379,194
Accumulated other comprehensive loss		(29,473	)		(79,274	)		(67,621	)
Retained earnings		1,572,681			1,519,438			1,462,859
Treasury stock, at cost: June 30, 2016—4,014,513; December 31, 2015—4,425,927; June 30, 2015—4,410,939 shares		(107,252	)		(114,683	)		(114,412	)

Total shareholders’ equity		3,047,159			2,940,095			2,887,957

Total liabilities and shareholders’ equity	$	26,150,587		$	25,524,604		$	25,297,014

See accompanying Notes to the Consolidated Financial Statements

CONSOLIDATED STATEMENTS OF INCOME

FIRSTMERIT CORPORATION AND SUBSIDIARIES


(In thousands, except per share amounts)	Three Months Ended June 30,				Six Months Ended June 30,
(Unaudited)	2016		2015		2016		2015
Interest income:
Loans and loans held for sale	$	162,977	$	161,872	$	325,255	$	323,411
Investment securities:
Taxable		33,350		32,175		66,499		64,125
Tax-exempt		5,013		5,327		10,274		11,353

Total investment securities interest		38,363		37,502		76,773		75,478

Total interest income		201,340		199,374		402,028		398,889
Interest expense:
Deposits:
Interest bearing		1,013		783		1,942		1,550
Savings and money market accounts		5,641		5,588		11,293		11,135
Certificates and other time deposits		3,116		2,510		6,405		4,687
Federal funds purchased and securities sold under agreements to repurchase		109		329		374		572
Wholesale borrowings		1,121		1,129		2,355		2,289
Long-term debt		4,262		3,917		8,425		7,915

Total interest expense		15,262		14,256		30,794		28,148

Net interest income		186,078		185,118		371,234		370,741
Provision for loan losses		6,391		8,966		14,200		17,214

Net interest income after provision for loan losses		179,687		176,152		357,034		353,527
Noninterest income:
Trust department income		11,167		10,820		21,451		20,969
Service charges on deposits		16,263		16,704		31,849		32,372
Credit card fees		14,942		14,124		28,520		26,773
ATM and other service fees		6,427		6,345		12,661		12,444
Bank owned life insurance income		4,186		3,697		7,882		7,289
Investment services and insurance		3,851		3,871		7,756		7,575
Investment securities gains/(losses), net		2,164		567		2,459		921
Loan sales and servicing income		1,995		3,276		3,847		4,876
Other operating income		4,120		7,178		16,084		19,210

Total noninterest income		65,115		66,582		132,509		132,429

Noninterest expense:
Salaries, wages, pension and employee benefits		86,789		86,020		172,669		176,546
Net occupancy expense		13,466		13,727		28,240		29,681
Equipment expense		12,078		12,592		24,486		23,617
Stationery, supplies and postage		2,945		3,370		6,564		6,898
Bankcard, loan processing and other costs		12,269		12,461		23,277		23,600
Professional services		4,467		5,358		12,818		9,368
Amortization of intangibles		2,304		2,598		4,608		5,196
FDIC insurance expense		5,192		5,077		10,637		10,244
Other operating expense		20,810		20,471		43,984		37,176

Total noninterest expense		160,320		161,674		327,283		322,326

Income before income tax expense		84,482		81,060		162,260		163,630
Income tax expense		26,173		24,476		49,815		49,907

Net income		58,309		56,584		112,445		113,723
Less: Net income allocated to participating shareholders		496		467		955		937
Preferred Stock dividends		1,469		1,469		2,938		2,938

Net income attributable to common shareholders	$	56,344	$	54,648	$	108,552	$	109,848

Net income used in diluted EPS calculation	$	56,344	$	54,648	$	108,552	$	109,848

Weighted average number of common shares outstanding—basic		166,188		165,736		165,966		165,574
Weighted average number of common shares outstanding—diluted		166,807		166,277		166,563		166,089
Basic earnings per common share	$	0.34	$	0.33	$	0.65	$	0.66
Diluted earnings per common share		0.34		0.33		0.65		0.66
Cash dividend per common share		0.17		0.16		0.34		0.32

See accompanying Notes to the Consolidated Financial Statements

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FIRSTMERIT CORPORATION AND SUBSIDIARIES


	Three Months Ended									Six Months Ended
(In thousands)	June 30, 2016									June 30, 2016
(Unaudited)	Pretax			Tax			After tax			Pretax			Tax			After tax
Net Income	$	84,482		$	26,173		$	58,309		$	162,260		$	49,815		$	112,445
Other comprehensive income/(loss)
Unrealized gains and losses on securities available for sale:
Changes in unrealized securities’ holding gains/(losses)		31,489			11,431			20,058			79,868			28,994			50,874
Changes in unrealized securities’ holding gains/(losses) that result from securities being transferred from available-for-sale into held-to-maturity		(221	)		(79	)		(142	)		(1,072	)		(14	)		(1,058	)
Net losses/(gains) realized on sale of securities reclassified to noninterest income		(2,164	)		(786	)		(1,378	)		(2,459	)		(892	)		(1,567	)

Net change in unrealized gains/(losses) on securities available for sale		29,104			10,566			18,538			76,337			28,088			48,249
Pension plans and other postretirement benefits:
Amortization of actuarial losses/(gains)		1,076			390			686			3,244			1,163			2,081
Amortization of prior service cost reclassified to other noninterest expense		(560	)		(204	)		(356	)		(820	)		(291	)		(529	)

Net change from defined benefit pension plans		516			186			330			2,424			872			1,552

Total other comprehensive gains/(losses)		29,620			10,752			18,868			78,761			28,960			49,801

Comprehensive income	$	114,102		$	36,925		$	77,177		$	241,021		$	78,775		$	162,246


	Three Months Ended									Six Months Ended
(In thousands)	June 30, 2015									June 30, 2015
(Unaudited)	Pretax			Tax			After tax			Pretax			Tax			After tax
Net Income	$	81,060		$	24,476		$	56,584		$	163,630		$	49,907		$	113,723
Other comprehensive income/(loss)
Unrealized gains and losses on securities available for sale:
Changes in unrealized securities’ holding gains/(losses)		(28,642	)		(10,024	)		(18,618	)		5,475			1,916			3,559
Changes in unrealized securities’ holding gains/(losses) that result from securities being transferred from available-for-sale into held-to-maturity		(575	)		(203	)		(372	)		(1,079	)		(378	)		(701	)
Net losses/(gains) realized on sale of securities reclassified to noninterest income		(567	)		(198	)		(369	)		(921	)		(322	)		(599	)

Net change in unrealized gains/(losses) on securities available for sale		(29,784	)		(10,425	)		(19,359	)		3,475			1,216			2,259
Pension plans and other postretirement benefits:
Amortization of actuarial losses/(gains)		1,138			399			739			2,276			797			1,479
Amortization of prior service cost reclassified to other noninterest expense		410			144			266			820			287			533

Net change from defined benefit pension plans		1,548			543			1,005			3,096			1,084			2,012

Total other comprehensive gains/(losses)		(28,236	)		(9,882	)		(18,354	)		6,571			2,300			4,271

Comprehensive income	$	52,824		$	14,594		$	38,230		$	170,201		$	52,207		$	117,994

See accompanying Notes to the Consolidated Financial Statements


CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY FIRSTMERIT CORPORATION AND SUBSIDIARIES
(In thousands) (Unaudited)	Preferred Stock		Common Stock		Common Stock Warrant			Capital Surplus			Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Treasury Stock			Total Shareholders’ Equity
Balance at December 31, 2014	$	100,000	$	127,937	$	3,000		$	1,393,090		$	(71,892	)	$	1,404,717		$	(122,571	)	$	2,834,281
Net income		—		—		—			—			—			113,723			—			113,723
Other comprehensive income		—		—		—			—			4,271			—			—			4,271

Comprehensive income		—		—		—			—			4,271			113,723			—			117,994
Cash dividends—Preferred Stock		—		—		—			—			—			(2,938	)		—			(2,938	)
Cash dividends—Common Stock ($0.32 per share)		—		—		—			—			—			(52,643	)		—			(52,643	)
Nonvested (restricted) shares granted (659,432 shares)		—		—		—			(14,340	)		—			—			14,340			—
Restricted stock activity (276,805 shares)		—		—		—			1,291			—			—			(5,544	)		(4,253	)
Deferred compensation trust (234,703 increase in shares)		—		—		—			637			—			—			(637	)		—
Share-based compensation		—		—		—			7,666			—			—			—			7,666
Repurchase of a Common Stock warrant to the U.S. Treasury for Citizens TARP warrant (2,571,998 shares)		—		—		(3,000	)		(9,150	)		—			—			—			(12,150	)

Balance at June 30, 2015	$	100,000	$	127,937	$	—		$	1,379,194		$	(67,621	)	$	1,462,859		$	(114,412	)	$	2,887,957

Balance at December 31, 2015	$	100,000	$	127,937	$	—		$	1,386,677		$	(79,274	)	$	1,519,438		$	(114,683	)	$	2,940,095
Net income		—		—		—			—			—			112,445			—			112,445
Other comprehensive income		—		—		—			—			49,801			—			—			49,801

Comprehensive income		—		—		—			—			49,801			112,445			—			162,246
Cash dividends—Preferred Stock		—		—		—			—			—			(2,938	)		—			(2,938	)
Cash dividends—Common Stock ($0.34 per share)		—		—		—			—			—			(56,264	)		—			(56,264	)
Nonvested (restricted) shares granted (633,286 shares)		—		—		—			(12,900	)		—			—			12,900			—
Restricted stock activity (221,872 shares)		—		—		—			701			—			—			(4,878	)		(4,177	)
Deferred compensation trust (109,130 increase in shares)		—		—		—			591			—			—			(591	)		—
Share-based compensation		—		—		—			8,197			—			—			—			8,197

Balance as of June 30, 2016	$	100,000	$	127,937	$	—		$	1,383,266		$	(29,473	)	$	1,572,681		$	(107,252	)	$	3,047,159

See accompanying Notes to the Consolidated Financial Statements

CONSOLIDATED STATEMENTS OF CASH FLOWS

FIRSTMERIT CORPORATION AND SUBSIDIARIES


(In thousands)	Six Months Ended June 30,
(Unaudited)	2016			2015
Operating Activities
Net income	$	112,445		$	113,723
Adjustments to reconcile net income to net cash provided and used by operating activities:
Provision for loan losses		14,200			17,214
Provision/(benefit) for deferred income taxes		22,893			4,162
Depreciation and amortization		32,635			31,274
Benefit attributable to FDIC loss share		257			6,046
Accretion of acquired loans		(33,978	)		(51,170	)
Amortization and accretion of investment securities, net
Available-for-sale		5,062			5,407
Held-to-maturity		1,866			2,110
Losses/(gains) on sales and calls of available-for-sale investment securities, net		(2,756	)		(921	)
Originations of loans held for sale		(14,060	)		(51,673	)
Proceeds from sales of loans, primarily mortgage loans sold in the secondary markets		15,938			60,429
Gains on sales of loans, net		(368	)		(760	)
Amortization of intangible assets		4,608			5,196
Recognition of stock compensation expense		8,197			7,666
Net decrease/(increase) in other assets		(171,074	)		1,442
Net increase/(decrease) in other liabilities		142,897			(1,519	)

NET CASH PROVIDED BY OPERATING ACTIVITIES		138,762			148,626

Investing Activities
Proceeds from sale of investment securities
Available-for-sale		(113	)		171,725
Held-to-maturity		—			668
Other		—			1,015
Proceeds from prepayments, calls, and maturities of investment securities
Available-for-sale		319,566			285,541
Held-to-maturity		214,489			211,636
Other		—			165
Purchases of investment securities
Available-for-sale		(616,645	)		(758,486	)
Held-to-maturity		(57,469	)		(94,756	)
Other		(221	)		(172	)
Net decrease/(increase) in loans and leases		(262,863	)		(356,117	)
Purchases of premises and equipment		(2,412	)		(9,950	)
Sales of premises and equipment		8,501			8,407

NET CASH PROVIDED/(USED) BY INVESTING ACTIVITIES		(397,167	)		(540,324	)

Financing Activities
Net increase in demand accounts		70,037			215,269
Net increase/(decrease) in savings and money market accounts		904,745			19,104
Net decrease in certificates and other time deposits		(130,142	)		(65,188	)
Net increase/(decrease) in securities sold under agreements to repurchase		(350,185	)		246,659
Net increase/(decrease) in wholesale borrowings		(112,201	)		(61,997	)
Repurchase of common stock warrant		—			(12,150	)
Cash dividends—common		(56,264	)		(52,643	)
Cash dividends—preferred		(2,938	)		(2,938	)
Restricted stock activity		(4,177	)		(4,253	)

NET CASH PROVIDED/(USED) BY FINANCING ACTIVITIES		318,875			281,863

Increase/(Decrease) in cash and cash equivalents		60,470			(109,835	)
Cash and cash equivalents at beginning of year		463,817			697,424

Cash and cash equivalents at end of year	$	524,287		$	587,589

SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Cash paid during the year for:
Interest	$	30,920		$	27,970
Federal income taxes		4,859			26,125

See accompanying Notes to the Consolidated Financial Statements

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FIRSTMERIT CORPORATION AND SUBSIDIARIES

FirstMerit Corporation and subsidiaries (the “Corporation” or “we”) is a diversified financial services company headquartered in Akron, Ohio with 359 banking offices in the Ohio, Michigan, Wisconsin, Illinois, and Pennsylvania areas. The Corporation provides a complete range of banking and other financial services to consumers and businesses through its core operations.

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

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

Shareholders of the Corporation will receive 1.72 shares of Huntington common stock, and $5.00 in cash, for each share of the Corporation common stock. The per share consideration is valued at $20.14 per share based on the closing price of Huntington Common Stock on January 25, 2016.

The respective shareholders of Huntington and the Corporation approved the proposed merger of FirstMerit into Huntington during special meetings held on June 13, 2016 in Akron, Ohio by FirstMerit and in Columbus, Ohio by Huntington.

The transaction is expected to be completed in the third quarter of 2016, subject to the satisfaction of customary closing conditions, including regulatory approvals.

1. Summary of Significant Accounting Policies

Unless otherwise indicated, defined terms and abbreviations used herein have the meanings set forth in the accompanying Glossary of Acronyms and Abbreviations.

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

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

The Consolidated Balance Sheet at December 31, 2015 has been derived from the audited consolidated financial statements at that date. The accompanying unaudited interim financial statements reflect all adjustments (consisting only of normally recurring adjustments) that are, in the opinion of Management, necessary for a fair statement of the results for the interim periods presented. Certain reclassifications of prior year’s amounts have been made to conform to the current year presentation. Such reclassifications had no effect on net earnings or equity. Certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been omitted in accordance with the rules of the SEC. The unaudited consolidated financial statements of the Corporation as of June 30, 2016 and 2015 are not necessarily indicative of the results that may be achieved for the full fiscal year or for any future period. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2015 (the “2015 Form 10-K”). There have been no significant changes in the current quarter to the Corporation’s accounting policies as disclosed in the 2015 Form 10-K.

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

Recently Adopted Accounting Standards

FASB ASU 2015-16, Business Combinations (Topic 805), Simplifying the Accounting for Measurement-Period Adjustments. The amendments in ASU 2015-16 require an entity to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. For public business entities, the amendments in this update are effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The amendments in this update will be applied prospectively to adjustments to provisional amounts that occur after the effective date of this update with earlier application permitted for financial statements that have not been issued. The adoption of this guidance did not have a material effect on the Corporation’s financial position or results of operations.

FASB ASU 2015-5, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement. The amendments in ASU 2015-05 provide guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The guidance will not change GAAP for a customer’s accounting for service contracts. In addition, the guidance in this update supersedes 350-40-25-16. Consequently, all software licenses within the

scope of Subtopic 350-40 will be accounted for consistent with other licenses of intangible assets. The amendments are effective for public business entities for annual and interim periods within those annual periods, beginning after December 15, 2015. An entity can elect to adopt the amendments either (1) prospectively to all arrangements entered into or materially modified after the effective date or (2) retrospectively. For prospective transition, the only disclosure requirements at transition are the nature of and reason for the change in accounting principle, the transition method, and a qualitative description of the financial statement line items affected by the change. For retrospective transition, the disclosure requirements at transition include the requirements for prospective transition and quantitative information about the effects of the accounting change. The adoption of this guidance did not have a material effect on the Corporation’s financial position or results of operations.

FASB ASU 2015-2, Amendments to the Consolidation Analysis. The amendments in ASU 2015-02 affect reporting entities that are required to evaluate whether they should consolidate certain legal entities. All legal entities are subject to reevaluation under the revised consolidation model. These amendments modify the current accounting guidance to address limited partnerships and similar entities, certain investments funds, fees paid to a decision maker or service provider, and the impact of fee arrangements and related parties on the primary beneficiary determination. The amendments are effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. A reporting entity may apply the amendments using a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption. A reporting entity also may apply the amendments retrospectively. The adoption of this guidance did not have a material effect on the Corporation’s financial position or results of operations.

FASB ASU 2014–12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved After the Requisite Service Period — a consensus of the FASB Emerging Issues Task Force. The amendments in this update clarify that entities should treat performance targets that can be met after the requisite service period of a share-based payment award as performance conditions that affect vesting. Therefore, an entity would not record compensation expense (measured as of the grant date without taking into account the effect of the performance target) related to an award for which transfer to the employee is contingent on the entity’s satisfaction of a performance target until it becomes probable that the performance target will be met. The ASU does not contain any new disclosure requirements. The ASU is effective for interim and annual reporting periods beginning after December 15, 2015. Early adoption is permitted. In addition, entities will have the option of applying the guidance either prospectively (i.e., only to awards granted or modified on or after the effective date) or retrospectively. Retrospective application would only apply to awards with performance targets outstanding at or after the beginning of the first annual period presented (i.e., the earliest presented comparative period). The adoption of this guidance did not have a material effect on the Corporation’s financial position or results of operations.

Recently Issued Accounting Standards

ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments in this update replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The amendments will require a financial asset (or group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The amendments will also limit the amount of the allowance for credit losses to the amount by which fair value is below amortized cost because the classification as available for sale is premised on an investment strategy that recognizes that the investment could be sold at fair value, if cash collection would result in the realization of an amount less than fair value. The amendments require changes to presentational matters, such as presenting credit losses as an allowance rather than a write-down. The amendments in ASU 2016-13 retain many of the disclosure amendments in Accounting Standards Update No. 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, updated to reflect the change from an incurred loss methodology to an expected credit loss methodology. In addition, disclosures of credit quality indicators in relation to the amortized cost of financing receivables are further disaggregated by year of origination (or vintage). The amendments in this update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years for public business entities. Early adoption is permitted as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years using a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (i.e., a modified-retrospective approach) or a prospective transition approach for debt securities for which an other-than-temporary impairment had been recognized before the effective date. The Corporation is in process of assessing the potential impact the adoption of this guidance will have on its consolidated financial statements and related disclosures.

ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients. This update amends the new revenue recognition guidance on assessing collectability, presentation of sales taxes, noncash consideration, and completed contracts and contract modifications at transition. The amendments in this update clarify that, for a contract to be considered completed at transition, substantially all of the revenue must have been recognized under legacy GAAP. This update also includes a practical expedient to ease transition for contracts that were modified prior to adoption of the revenue standard under both the full and modified retrospective transition approaches. The amendments clarify how an entity should evaluate the collectibility threshold and when an entity can recognize nonrefundable consideration received as revenue if an arrangement does not meet the standard’s contract criteria. They also clarify that the fair value of noncash consideration should be measured at contract inception when determining the transaction price. The amendments also allow an entity to make an accounting policy election to exclude from the transaction price certain types of taxes collected from a customer if it discloses that policy. The effective date and transition requirements for this update are the same as those of the new standard. The Corporation is in process of assessing the potential impact the adoption of this guidance will have on its consolidated financial statements and related disclosures.

ASU 2016-11, Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815): Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2006 EITF Meeting (SEC Update). The amendments in this update rescinds the following SEC Staff Observer comments that relate to narrow revenue recognition issues from ASC 605, Revenue Recognition, and ASC 932, Extractive Activities — Oil and Gas, upon an entity’s adoption of ASC 606: Revenue and Expense Recognition for Freight Services in Process, Accounting for Shipping and Handling Fees and Costs, Accounting for Consideration Given by a Vendor to a Customer (including a Reseller of the Vendor’s Products), and Accounting for Gas Balancing Arrangements. The ASU also rescinds the SEC Staff Announcement: Determining the Nature of a Host Contract Related to a Hybrid Instrument Issued in the Form of a Share under Topic 815, issued as EITF Topic D-109 and codified in ASC 815-10-S99-3, as of the effective date of ASU 2014-16, Derivatives and Hedging (Topic 815): Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share is More Akin to Debt or to Equity. The effective date and transition requirements for this update are the same as those of the new standard. The Corporation is in process of assessing the potential impact the adoption of this guidance will have on its consolidated financial statements and related disclosures.

ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. This update amends the new revenue recognition guidance on accounting for licenses of intellectual property and identifying performance obligations. The amendments clarify how an entity should evaluate the nature of its promise in granting a license of intellectual property, which will determine whether it recognizes revenue over time or a point in time. The amendments also clarify when a promised good or service is separately identifiable, that is distinct within the context of the contract, and allow entities to disregard items that are immaterial in the context of a contract. The effective date and transition requirements for this update are the same as those of the new standard. For public business entities, the amendments in this update are effective for annual reporting periods beginning after December 15, 2017, with early adoption permitted, but not before December 15, 2016. The amendments can be adopted using either the full retrospective approach or a modified retrospective approach. The Corporation is in process of assessing the potential impact the adoption of this guidance will have on its consolidated financial statements and related disclosures.

FASB ASU 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The amendments in ASU 2016-09 simplify several aspects of accounting for employee share-based payments including income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Some areas of the simplification apply only to nonpublic entities. The new guidance will require all income tax effects of awards to be recognized as income tax expense or benefit in the income statement when the awards vest or are settled and additional paid in capital pools will be eliminated. The guidance requires companies to present excess tax benefits as an operating activity on the statement of cash flows rather than as a financing activity. Companies will be required to account for forfeitures of share-based payments by recognizing forfeitures of awards as they occur or estimating the number of awards expected to be forfeited and adjusting the estimate when it is likely to change, as

currently required, through an accounting policy election. The guidance will increase the amount an employer can withhold to cover income taxes on awards and still qualify for the exception to liability classification for shares used to satisfy the employer’s income tax withholding obligation. The guidance requires an employer to classify the cash paid to a tax authority when shares are withheld to satisfy its statutory income tax withholding obligation as a financing activity on the statement of cash flows. For public business entities, the amendments in this update are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption will be permitted in any interim or annual period for which financial statements have not yet been issued or have not been made available for issuance, however all of the guidance must be adopted in the same period. If early adoption is elected in an interim period, any adjustments should be reflected as of the beginning of the annual period that includes that interim period. The adoption of this guidance is not expected to have a material effect on the Corporation’s financial position or results of operations.

FASB ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net). The amendments in ASU 2016-08 are intended to improve the operability and understandability of the implementation guidance by clarifying the following: how an entity should identify the unit of accounting for the principal versus agent evaluation; how the control principle applies to transactions, such as service arrangements; reframes the indicators to focus on a principal rather than an agent, removes the credit risk and commission indicators and clarifies the relationship between the control principle and the indicators; and revises the existing illustrative examples and adds new illustrative examples. For public business entities, the amendments in this update are effective for annual reporting periods beginning after December 15, 2017, with early adoption permitted, but not before December 15, 2016. The amendments can be adopted using either the full retrospective approach or a modified retrospective approach. The Corporation is in process of assessing the potential impact the adoption of this guidance will have on its consolidated financial statements and related disclosures.

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

FASB ASU 2016-06, Derivatives and Hedging (Topic 815), Contingent Put and Call Options in Debt Instruments. The amendments in this update clarify the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. An entity performing the assessment under the amendments in this update is required to assess the

embedded call (put) options solely in accordance with the four-step decision sequence. For public business entities, the amendments in this update are effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. An entity should apply the amendments in this update on a modified retrospective basis to existing debt instruments as of the beginning of the fiscal year for which the amendments are effective. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The Corporation is in process of assessing the potential impact the adoption of this guidance will have on its consolidated financial statements and related disclosures.

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

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

FASB ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in this update supersede the guidance to classify equity securities with readily determinable fair values into different categories (that is, trading or available-for-sale) and require equity securities (including other ownership interests, such as partnerships, unincorporated joint ventures, and limited liability companies) to be measured at fair value with changes in the fair value recognized through net income. The amendments allow equity investments that do not have readily determinable fair values to be remeasured at fair value either upon the occurrence of an observable price change or upon identification of an impairment. The amendments also require enhanced disclosures about those investments. The amendments improve financial reporting by providing relevant information about an entity’s equity investments and reducing the number of items that are recognized in other comprehensive income. For public business entities, the amendments in this update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The amendments should be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The adoption of this guidance is not expected to have a material effect on the Corporation’s financial position or results of operations.

FASB ASU 2014-09, Revenue from Contracts with Customers. In May 2014, the FASB issued new accounting guidance that revises the criteria for determining when to recognize revenue from contracts with customers and expands disclosure requirements. The amendments in this update supersede virtually all existing GAAP revenue recognition guidance, including most industry-specific revenue recognition guidance. The core principle requires an entity to recognize revenue in a manner that depicts the transfer of goods or services to customers at an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 applies to contracts with customers to provide goods and services, with certain exclusions such as lease contracts, financing arrangements, and financial instruments. On July 9, 2015, the FASB decided to delay, by one year, the effective dates, permitting public entities to apply this guidance to annual reporting periods beginning after December 15, 2017, with early adoption permitted, but not before December 15, 2016. The amendments can be adopted using either the full retrospective approach or a modified retrospective approach. There are many aspects of this new accounting guidance that are still being interpreted, and the FASB has recently issued updates to certain aspects of the guidance as noted above. The Corporation is in process of assessing the potential impact the adoption of this guidance will have on its consolidated financial statements and related disclosures.

2. Investment Securities

The following tables provide the amortized cost and fair value for the major categories of held-to-maturity and available-for-sale securities. Held-to-maturity securities are carried at amortized cost, which reflects historical cost, adjusted for amortization of premiums and accretion of discounts. Available-for-sale securities are carried at fair value with net unrealized gains or losses reported on an after tax basis as a component of OCI in shareholders’ equity.


	June 30, 2016
(In thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Securities available-for-sale
Debt securities
U.S. treasury notes & bonds	$	4,996	$	1	$	—		$	4,997
U.S. government agency debentures		2,500		28		—			2,528
U.S. states and political subdivisions		147,807		3,742		(2	)		151,547
Residential mortgage-backed securities:
U.S. government agencies		840,250		20,064		(67	)		860,247
Commercial mortgage-backed securities:
U.S. government agencies		198,069		4,095		(116	)		202,048
Residential collateralized mortgage-backed securities:
U.S. government agencies		2,325,707		30,400		(3,089	)		2,353,018
Non-agency		3		—		—			3
Commercial collateralized mortgage-backed securities:
U.S. government agencies		392,205		6,528		(122	)		398,611
Asset-backed securities:
Collateralized loan obligations		297,939		354		(6,499	)		291,794
Corporate debt securities		61,740		—		(10,633	)		51,107

Total debt securities		4,271,216		65,212		(20,528	)		4,315,900
Equity securities
Marketable equity securities		2,788		—		—			2,788

Total equity securities		2,788		—		—			2,788

Total securities available-for-sale	$	4,274,004	$	65,212	$	(20,528	)	$	4,318,688

Securities held-to-maturity
Debt securities
U.S. government agency debentures	$	25,000	$	35	$	—		$	25,035
U.S. states and political subdivisions		540,425		15,713		(265	)		555,873
Residential mortgage-backed securities:
U.S. government agencies		467,462		12,367		—			479,829
Commercial mortgage-backed securities:
U.S. government agencies		87,964		1,991		(42	)		89,913
Residential collateralized mortgage-backed securities:
U.S. government agencies		1,060,496		4,327		(6,670	)		1,058,153
Commercial collateralized mortgage-backed securities:
U.S. government agencies		246,509		3,559		(410	)		249,658
Corporate debt securities		86,305		974		—			87,279

Total securities held-to-maturity	$	2,514,161	$	38,966	$	(7,387	)	$	2,545,740


	December 31, 2015
(In thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Securities available-for-sale
Debt securities
U.S. treasury notes & bonds	$	5,001	$	—	$	(1	)	$	5,000
U.S. government agency debentures		2,500		—		(2	)		2,498
U.S. states and political subdivisions		188,829		4,170		(204	)		192,795
Residential mortgage-backed securities:
U.S. government agencies		900,358		11,325		(5,454	)		906,229
Commercial mortgage-backed securities:
U.S. government agencies		173,912		220		(2,023	)		172,109
Residential collateralized mortgage-backed securities:
U.S. government agencies		2,155,808		2,659		(30,147	)		2,128,320
Non-agency		4		—		—			4
Commercial collateralized mortgage-backed securities:
U.S. government agencies		217,008		580		(1,269	)		216,319
Asset-backed securities:
Collateralized loan obligations		297,831		26		(8,446	)		289,411
Corporate debt securities		61,710		—		(9,481	)		52,229

Total debt securities		4,002,961		18,980		(57,027	)		3,964,914
Equity securities
Marketable equity securities		2,821		—		—			2,821

Total equity securities		2,821		—		—			2,821

Total securities available-for-sale	$	4,005,782	$	18,980	$	(57,027	)	$	3,967,735

Securities held-to-maturity
Debt securities
U.S. government agency debentures		25,000		19		—			25,019
U.S. states and political subdivisions		571,738		22,180		(262	)		593,656
Residential mortgage-backed securities:
U.S. government agencies		507,908		4,767		(2,999	)		509,676
Commercial mortgage-backed securities:
U.S. government agencies		64,951		294		(574	)		64,671
Residential collateralized mortgage-backed securities:
U.S. government agencies		1,161,340		75		(35,881	)		1,125,534
Commercial collateralized mortgage-backed securities:
U.S. government agencies		255,359		676		(3,611	)		252,424
Corporate debt securities		87,797		364		(22	)		88,139

Total securities held-to-maturity	$	2,674,093	$	28,375	$	(43,349	)	$	2,659,119


	June 30, 2015
(In thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Securities available-for-sale
Debt securities
U.S. treasury notes & bonds	$	5,004	$	1	$	—		$	5,005
U.S. government agency debentures		2,500		10		—			2,510
U.S. states and political subdivisions		203,449		5,191		(1,023	)		207,617
Residential mortgage-backed securities:
U.S. government agencies		947,347		18,068		(4,563	)		960,852
Commercial mortgage-backed securities:
U.S. government agencies		171,842		643		(2,147	)		170,338
Residential collateralized mortgage-backed securities:
U.S. government agencies		1,968,918		4,779		(24,308	)		1,949,389
Non-agency		5		—		—			5
Commercial collateralized mortgage-backed securities:
U.S. government agencies		227,889		1,254		(705	)		228,438
Asset-backed securities:
Collateralized loan obligations		259,743		801		(2,463	)		258,081
Corporate debt securities		61,681		—		(8,231	)		53,450

Total debt securities		3,848,378		30,747		(43,440	)		3,835,685
Equity Securities
Marketable equity securities		2,824		—		—			2,824
Non-marketable equity securities		—		—		—			—

Total equity securities		2,824		—		—			2,824

Total securities available-for-sale	$	3,851,202	$	30,747	$	(43,440	)	$	3,838,509

Securities held-to-maturity
Debt securities
U.S. government agency debentures		25,000		—		(323	)		24,677
U.S states and political subdivisions		529,441		8,104		(1,942	)		535,603
Residential mortgage-backed securities:
U.S. government agencies		555,273		6,919		(2,940	)		559,252
Commercial mortgage-backed securities:
U.S. government agencies		57,462		412		(219	)		57,655
Residential collateralized mortgage-backed securities:
U.S. government agencies		1,267,321		445		(35,025	)		1,232,741
Commercial collateralized mortgage-backed securities:
U.S. government agencies		263,741		1,004		(4,523	)		260,222
Corporate debt securities		89,275		695		—			89,970

Total securities held-to-maturity	$	2,787,513	$	17,579	$	(44,972	)	$	2,760,120

The Corporation’s U.S. states and political subdivisions portfolio is composed of general obligation bonds issued by a highly diversified number of states, cities, counties, and school districts. The amortized cost and fair value of the Corporation’s portfolio of general obligation bonds are summarized by U.S. state in the tables below. As illustrated in the tables below, the aggregate fair value of the Corporation’s general obligation bonds was greater than $10.0 million in 11 of the 37 U.S. states in which it holds investments.


(Dollars in thousands)	June 30, 2016
U.S. State	# of Issuers		Average Issue Size, Fair Value		Amortized Cost		Fair Value
Michigan		116	$	1,404	$	157,403	$	162,897
Ohio		108		1,095		115,545		118,300
Wisconsin		54		651		34,046		35,166
Illinois		52		1,783		90,772		92,711
Texas		51		816		40,409		41,629
Pennsylvania		41		1,037		41,674		42,529
New Jersey		31		724		21,928		22,441
Washington		27		968		25,586		26,149
Minnesota		23		699		15,667		16,076
New York		18		575		10,044		10,346
Missouri		10		1,075		10,414		10,754
Other		105		768		79,275		80,688

Total general obligation bonds		636	$	1,037	$	642,763	$	659,686


(Dollars in thousands)	December 31, 2015
U.S. State	# of Issuers		Average Issue Size, Fair Value		Amortized Cost		Fair Value
Michigan		137	$	1,381	$	180,508	$	189,259
Ohio		111		1,091		116,783		121,117
Illinois		55		1,870		99,524		102,867
Texas		58		807		45,818		46,805
Wisconsin		69		673		44,794		46,454
Pennsylvania		42		1,020		42,185		42,835
Washington		29		950		27,080		27,548
New Jersey		35		725		24,810		25,372
Minnesota		33		667		21,679		22,020
Missouri		15		1,078		15,878		16,174
New York		18		635		11,161		11,422
Other		110		759		81,815		83,477

Total general obligation bonds		712	$	1,033	$	712,035	$	735,350


(Dollars in thousands)	June 30, 2015
U.S. State	# of Issuers		Average Issue Size, Fair Value		Amortized Cost		Fair Value
Michigan		153	$	1,018	$	152,499	$	155,712
Ohio		127		964		121,716		122,474
Illinois		60		1,784		105,581		107,033
Wisconsin		70		585		39,774		40,950
Texas		67		759		50,370		50,877
Pennsylvania		46		1,014		46,547		46,666
Washington		30		939		27,783		28,169
New Jersey		34		720		23,916		24,472
Minnesota		34		692		23,267		23,540
Missouri		15		1,084		15,981		16,265
New York		18		633		11,187		11,392
Other		119		639		75,670		76,040

Total general obligation bonds		773	$	910	$	694,291	$	703,590

The Corporation’s investment policy states that municipal securities purchased are to be investment grade and allows for a 20% maximum portfolio concentration in municipal securities with a combined individual state to total municipal outstanding equal to or less than 25%. A municipal security is investment grade if (1) the security has a low risk of default by the obligor and (2) the full and timely payment of principal and interest is expected over the anticipated life of the instrument. The fact that a municipal security is rated by one nationally recognized credit rating agency is indicative, but not sufficient evidence, that a municipal security is investment grade. In all cases, the Corporation considers and documents within a security pre-purchase analysis factors such as capacity to pay, market and economic data, and such other factors as are available and relevant to the security or issuer. Factors to be considered in the ongoing monitoring of municipal securities and in the pre-purchase analysis include soundness of budgetary position and sources of revenue, financial strength, and stability of tax or enterprise revenues. The Corporation also considers spreads to U.S. Treasuries on comparable bonds of similar credit quality, in addition to the above analysis, to assess whether municipal securities are investment grade. The Corporation performs a risk analysis for any security that is downgraded below investment grade to determine if the security should be retained or sold. This risk analysis includes, but is not limited to, discussions with the Corporation’s credit department as well as third-party municipal credit analysts and review of the nationally recognized credit rating agency’s analysis describing the downgrade.

The Corporation’s evaluation of its municipal bond portfolio at June 30, 2016 did not uncover any facts or circumstances resulting in significantly different credit ratings than those assigned by a nationally recognized credit rating agency.

FRB and FHLB stock constitutes the majority of other investments on the Consolidated Balance Sheets.


(In thousands)	June 30, 2016		December 31, 2015		June 30, 2015
FRB stock	$	56,303	$	56,083	$	55,853
FHLB stock		91,714		91,714		91,713
Other		350		375		401

Total other investments	$	148,367	$	148,172	$	147,967

FRB and FHLB stock is classified as a restricted investment, carried at cost and valued based on the ultimate recoverability of par value. Cash and stock dividends received on the stock are reported as interest income. There are no identified events or changes in circumstances that may have a significant adverse effect on these investments carried at cost.

Securities with a carrying value of $3.2 billion, $2.9 billion, and $3.2 billion at June 30, 2016, December 31, 2015, and June 30, 2015, respectively, were pledged to secure trust and public deposits and securities sold under agreements to repurchase and for other purposes required or permitted by law.

Realized Gains and Losses

The following table presents the gross realized gains and losses on the sales of those securities that have been included in earnings as a result of those sales. Gains or losses on the sales of available-for-sale securities are recognized upon sale and are determined using the specific identification method.


	Three Months Ended June 30,					Six Months Ended June 30,
(In thousands)	2016		2015			2016		2015
Realized gains	$	2,164	$	672		$	2,459	$	1,064
Realized losses		—		(105	)		—		(143	)

Net securities (losses)/gains	$	2,164	$	567		$	2,459	$	921

Gross Unrealized Losses and Fair Value

The following table presents the gross unrealized losses and fair value of securities by length of time that individual securities had been in a continuous loss position by major categories of available-for-sale and held-to-maturity securities.


	June 30, 2016
	Less than 12 months							12 months or longer							Total
(Dollars in thousands)	Fair Value		Unrealized Losses			Number Impaired Securities		Fair Value		Unrealized Losses			Number Impaired Securities		Fair Value		Unrealized Losses
Securities available-for-sale
Debt securities
U.S. states and political subdivisions	$	1,567	$	(2	)		3	$	—	$	—			—	$	1,567	$	(2	)
Residential mortgage-backed securities:
U.S. government agencies		14,275		(67	)		5		—		—			0		14,275		(67	)
Commercial mortgage-backed securities:
U.S. government agencies		23,570		(28	)		1		12,627		(88	)		1		36,197		(116	)
Residential collateralized mortgage-backed securities:
U.S. government agencies		13,182		(271	)		1		332,305		(2,818	)		29		345,487		(3,089	)
Commercial collateralized mortgage-backed securities:
U.S. government agencies		24,401		(38	)		4		19,071		(84	)		1		43,472		(122	)
Asset-backed securities:
Collateralized loan obligations		92,851		(1,795	)		16		161,827		(4,704	)		21		254,678		(6,499	)
Corporate debt securities									51,106		(10,633	)		8		51,106		(10,633	)

Total securities available-for-sale	$	169,846	$	(2,201	)		30	$	576,936	$	(18,327	)		60	$	746,782	$	(20,528	)

Securities held-to-maturity
Debt securities
U.S. states and political subdivisions	$	3,525	$	(19	)	$	7	$	6,569	$	(246	)	$	9	$	10,094	$	(265	)
Residential mortgage-backed securities:
U.S. government agencies		—		—			0		—		—			0		—		—
Commercial mortgage-backed securities:
U.S. government agencies		13,478		(42	)		1		—		—			0		13,478		(42	)
Residential collateralized mortgage-backed securities:
U.S. government agencies		—		—			0		598,383		(6,670	)		37		598,383		(6,670	)
Commercial collateralized mortgage-backed securities:
U.S. government agencies		—		—			0		47,686		(410	)		4		47,686		(410	)
Collateralized loan obligations:
Corporate debt securities		5,002		—			1		—		—			0		5,002		—

Total securities held-to-maturity	$	22,005	$	(61	)		9	$	652,638	$	(7,326	)		50	$	674,643	$	(7,387	)


	December 31, 2015
	Less than 12 months							12 months or longer							Total
(Dollars in thousands)	Fair Value		Unrealized Losses			Number Impaired Securities		Fair Value		Unrealized Losses			Number Impaired Securities		Fair Value		Unrealized Losses
Securities available-for-sale
Debt securities
U.S government agency debentures	$	2,498	$	(2	)		1	$	—	$	—			0	$	2,498	$	(2	)
U.S. treasury notes and bonds		5,000		(1	)		1		—		—			0		5,000		(1	)
U.S. states and political subdivisions		10,178		(37	)		20		5,899		(167	)		9		16,077		(204	)
Residential mortgage-backed securities:
U.S. government agencies		328,156		(3,026	)		27		95,895		(2,428	)		7		424,051		(5,454	)
Commercial mortgage-backed securities:
U.S. government agencies		107,074		(1,447	)		15		12,401		(576	)		1		119,475		(2,023	)
Residential collateralized mortgage-backed securities:
U.S. government agencies		1,130,779		(10,587	)		78		597,403		(19,560	)		49		1,728,182		(30,147	)
Commercial collateralized mortgage-backed securities:
U.S. government agencies		113,825		(893	)		12		23,400		(376	)		2		137,225		(1,269	)
Asset-backed securities:
Collateralized loan obligations		151,810		(3,576	)		26		126,422		(4,870	)		15		278,232		(8,446	)
Corporate debt securities		—		—			0		52,229		(9,481	)		8		52,229		(9,481	)

Total securities available-for-sale	$	1,849,320	$	(19,569	)		180	$	913,649	$	(37,458	)		91	$	2,762,969	$	(57,027	)

Securities held-to-maturity
Debt securities
U.S. states and political subdivisions	$	18,465	$	(224	)		21	$	4,174	$	(38	)		6	$	22,639	$	(262	)
Residential mortgage-backed securities:
U.S. government agencies		85,738		(715	)		6		97,880		(2,284	)		6		183,618		(2,999	)
Commercial mortgage-backed securities:
U.S. government agencies		34,833		(346	)		6		9,269		(228	)		1		44,102		(574	)
Residential collateralized mortgage-backed securities:
U.S. government agencies		140,514		(1,225	)		12		941,982		(34,656	)		55		1,082,496		(35,881	)
Commercial collateralized mortgage-backed securities:
U.S. government agencies		71,812		(384	)		7		117,992		(3,227	)		11		189,804		(3,611	)
Corporate debt securities		19,243		(22	)		6		—		—			0		19,243		(22	)

Total securities held-to-maturity	$	370,605	$	(2,916	)		58	$	1,171,297	$	(40,433	)		79	$	1,541,902	$	(43,349	)


	June 30, 2015
	Less than 12 months							12 months or longer							Total
(Dollars in thousands)	Fair Value		Unrealized Losses			Number Impaired Securities		Fair Value		Unrealized Losses			Number Impaired Securities		Fair Value		Unrealized Losses
Securities available-for-sale
Debt securities
U.S. states and political subdivisions	$	32,237	$	(587	)		52	$	5,642	$	(436	)		9	$	37,879	$	(1,023	)
Residential mortgage-backed securities:
U.S. government agencies		196,219		(2,087	)		15		103,498		(2,476	)		8		299,717		(4,563	)
Commercial mortgage-backed securities:
U.S. government agencies		96,573		(1,457	)		14		17,335		(690	)		2		113,908		(2,147	)
Residential collateralized mortgage-backed securities:
U.S. government agencies		596,646		(4,398	)		42		706,376		(19,910	)		53		1,303,022		(24,308	)
Commercial collateralized mortgage-backed securities:
U.S. government agencies		46,771		(71	)		5		61,120		(634	)		7		107,891		(705	)
Asset-backed securities:
Collateralized loan obligations		84,565		(1,204	)		10		86,082		(1,259	)		11		170,647		(2,463	)
Corporate debt securities		4,225		(765	)		1		49,225		(7,466	)		7		53,450		(8,231	)

Total securities available-for-sale	$	1,057,236	$	(10,569	)		139	$	1,029,278	$	(32,871	)		97	$	2,086,514	$	(43,440	)

Securities held-to-maturity
Debt securities
U.S. government agency debentures		—		—			0		24,677		(323	)		1		24,677		(323	)
U.S. states and political subdivisions		98,867		(1,872	)		112		4,430		(70	)		6		103,297		(1,942	)
Residential mortgage-backed securities:
U.S. government agencies		83,112		(483	)		5		105,289		(2,457	)		6		188,401		(2,940	)
Commercial mortgage-backed securities:
U.S. government agencies		7,263		(41	)		1		9,430		(178	)		1		16,693		(219	)
Residential collateralized mortgage-backed securities:
U.S. government agencies		111,360		(835	)		8		1,042,351		(34,190	)		56		1,153,711		(35,025	)
Commercial collateralized mortgage-backed securities:
U.S. government agencies		5,025		(2	)		1		142,937		(4,521	)		13		147,962		(4,523	)

Total securities held-to-maturity	$	305,627	$	(3,233	)		127	$	1,329,114	$	(41,739	)		83	$	1,634,741	$	(44,972	)

At least quarterly, the Corporation conducts a comprehensive security-level impairment assessment on all securities in an unrealized loss position to determine if OTTI exists. An unrealized loss exists when the current fair value of an individual security is less than its amortized cost basis. An OTTI loss must be recognized for a debt security in an unrealized loss position if the Corporation intends to sell the security or it is more likely than not that the Corporation will be required to sell the security before recovery of its amortized cost basis. In this situation, the amount of loss recognized in income is equal to the difference between the fair value and the amortized cost basis of the security. Even if the Corporation does not expect to sell the security, the Corporation must evaluate the expected cash flows to be received to determine if a credit loss has occurred. In the event of a credit loss, only the amount of impairment associated with the credit loss is recognized in income. The portion of the unrealized loss relating to other factors, such as liquidity conditions in the market or changes in market interest rates, is recorded in OCI. Equity securities are also evaluated to determine whether the unrealized loss is expected to be recoverable based on whether evidence exists to support a realizable value equal to or greater than the amortized cost basis. If it is probable that the Corporation will not recover the amortized cost basis, taking into consideration the estimated recovery period and its ability to hold the equity security until recovery, OTTI is recognized.

The security-level assessment is performed on each security, regardless of the classification of the security as available-for-sale or held-to-maturity. The assessments are based on the nature of the securities, the financial condition of the issuer, the extent and duration of the securities, the extent and duration of the loss and whether Management intends to sell or it is more likely than not that it will be required to sell a security before recovery of its amortized cost basis, which may be maturity. For those securities which the assessment shows the Corporation will recover the entire cost basis, Management does not intend to sell these securities and it is not more likely than not that the Corporation will be required to sell them before the anticipated recovery of the amortized cost basis, the gross unrealized losses are recognized in OCI, net of tax.

The investment securities portfolio was in a net unrealized gain position of $76.3 million at June 30, 2016, compared to a net unrealized loss position of $53.0 million at December 31, 2015 and a net unrealized loss position of $40.1 million at June 30, 2015. Gross unrealized losses were $27.9 million as of June 30, 2016, compared to $100.4 million at December 31, 2015, and $88.4 million at June 30, 2015. As of June 30, 2016, gross unrealized losses are concentrated within CLOs and corporate debt securities. Securities classified as corporate debt would include eight, single issuer, trust preferred securities with stated maturities. Such investments are only 1% of the fair value of the available-for-sale investment portfolio. None of the corporate issuers have deferred paying dividends on their issued trust preferred shares in which the Corporation is invested. The fair values of these investments have been impacted by the market conditions which have caused risk premiums to increase, resulting in the decline in the fair value of the trust preferred securities.

Management believes the Corporation will fully recover the cost of these CLOs and corporate debt securities, and it does not intend to sell these securities and it is not more likely than not that it will be required to sell them before the anticipated recovery of the remaining amortized cost basis, which may be maturity. As a result, Management concluded that these securities were not other-than-temporarily impaired at June 30, 2016 and has recognized the total amount of the impairment in OCI, net of tax.

The new Volcker Rule, as originally adopted, may affect the Corporation’s ability to hold CLOs. As of June 30, 2016, the Corporation holds $291.8 million of CLOs with a gross unrealized loss position of $6.1 million. Management believes that its holdings of CLOs are not ownership interests in covered funds prohibited by the Volcker Rule regulations and, therefore, expects to be able to hold these investments until their stated maturities. Management seeks to maintain a CLO portfolio consistent with the requirements of the Volcker Rule, and new CLO investments are being made in accordance with the strategy.

Contractual Maturity of Debt Securities

The following table shows the remaining contractual maturities and contractual yields of debt securities held-to-maturity and available-for-sale as of June 30, 2016. Estimated lives on MBSs may differ from contractual maturities as issuers may have the right to call or prepay obligations with or without call or prepayment penalties.


(Dollars in thousands)	U.S. Treasury notes & bonds			U.S. Government agency debentures			U.S. States and political subdivisions			Residential mortgage- backed securities - U.S. govt. agencies			Commercial mortgage- backed securities - U.S. govt. agencies			Residential collateralized mortgage obligations - U.S. govt. agencies			Residential collateralized mortgage obligations - non-agency			Commercial collateralized mortgage obligations - U.S. govt. agencies			Asset backed securities - collateralized loan obligations			Corporate debt securities			Total			Weighted Average Yield
Securities Available-for-Sale
Remaining maturity:
One year or less	$	4,997		$	—		$	5,895		$	65		$	—		$	—		$	—		$	—		$	—		$	—		$	10,957			2.32	%
Over one year through five years		—			2,528			75,103			86,480			24,498			13,936			3			22,126			—			—			224,674			3.54	%
Over five years through ten years		—			—			51,441			47,116			123,441			10,705			—			103,837			218,344			—			554,884			2.92	%
Over ten years		—			—			19,108			726,586			54,109			2,328,377			—			272,648			73,450			51,107			3,525,385			2.23	%

Fair Value	$	4,997		$	2,528		$	151,547		$	860,247		$	202,048		$	2,353,018		$	3		$	398,611		$	291,794		$	51,107		$	4,315,900			2.39	%

Amortized Cost	$	4,996		$	2,500		$	147,807		$	840,250		$	198,069		$	2,325,707		$	3		$	392,205		$	297,939		$	61,740		$	4,271,216

Weighted-Average Yield		0.31	%		1.25	%		5.00	%		2.98	%		2.13	%		2.01	%		2.98	%		2.18	%		3.08	%		1.37	%		2.39	%
Weighted-Average Maturity (in years)		0.23			1.92			1.86			3.28			3.60			3.11			0.59			3.90			6.51			11.31			3.55
Securities Held-to-Maturity
Remaining maturity:
One year or less	$	—		$	—		$	64,872		$	—		$	—		$	—		$	—		$	—		$	—		$	22,443		$	87,315			2.36	%
Over one year through five years		—			25,035			157,172			—			36,522			—			—			81,237			—			64,836			364,802			2.47	%
Over five years through ten years		—			—			193,355			21,307			53,391			—			—			40,365			—			—			308,418			3.83	%
Over ten years		—			—			140,474			458,522			—			1,058,153			—			128,056			—			—			1,785,205			2.02	%

Fair Value	$	—		$	25,035		$	555,873		$	479,829		$	89,913		$	1,058,153		$	—		$	249,658		$	—		$	87,279		$	2,545,740			2.31	%

Amortized Cost	$	—		$	25,000		$	540,425		$	467,462		$	87,964		$	1,060,496		$	—		$	246,509		$	—		$	86,305		$	2,514,161

Weighted-Average Yield		—	%		1.43	%		4.21	%		2.13	%		2.14	%		1.59	%		—	%		1.77	%		—	%		2.30	%		2.31	%
Weighted-Average Maturity (in years)		—			0.08			4.50			3.29			2.81			3.25			—			3.56			—			1.52			3.45

3. Loans

Loans outstanding as of June 30, 2016, December 31, 2015, and June 30, 2015, net of unearned income, consisted of the following:


(In thousands)	June 30, 2016			December 31, 2015			June 30, 2015
Originated loans:
Commercial	$	9,132,366		$	9,007,830		$	8,633,332
Residential mortgage		728,534			689,045			653,143
Installment		3,353,084			2,990,349			2,720,059
Home equity		1,276,661			1,248,438			1,180,802
Credit cards		174,986			182,843			168,576

Total originated loans		14,665,631			14,118,505			13,355,912
Allowance for originated loan losses		(105,175	)		(105,135	)		(101,682	)

Net originated loans	$	14,560,456		$	14,013,370		$	13,254,230

Acquired loans:
Commercial	$	554,414		$	677,149		$	877,598
Residential mortgage		292,877			324,008			358,559
Installment		494,429			573,372			659,348
Home equity		146,916			168,542			200,179

Total acquired loans		1,488,636			1,743,071			2,095,684
Allowance for acquired loan losses		(4,256	)		(3,877	)		(4,950	)

Net acquired loans	$	1,484,380		$	1,739,194		$	2,090,734

FDIC acquired loans:
Commercial	$	115,793		$	129,109		$	145,821
Residential mortgage		33,370			35,568			38,029
Installment		1,808			2,077			2,299
Home equity		29,813			38,668			55,545
Loss share receivable		8,555			9,947			11,820

Total FDIC acquired loans		189,339			215,369			253,514
Allowance for FDIC acquired loan losses		(40,218	)		(44,679	)		(41,627	)

Net FDIC acquired loans	$	149,121		$	170,690		$	211,887

Total loans:
Commercial	$	9,802,573		$	9,814,088		$	9,656,751
Residential mortgage		1,054,781			1,048,621			1,049,731
Installment		3,849,321			3,565,798			3,381,706
Home equity		1,453,390			1,455,648			1,436,526
Credit cards		174,986			182,843			168,576
Loss share receivable		8,555			9,947			11,820

Total loans		16,343,606			16,076,945			15,705,110
Total allowance for loan losses		(149,649	)		(153,691	)		(148,259	)

Total Net loans	$	16,193,957		$	15,923,254		$	15,556,851

The following describes the distinction between originated, acquired and FDIC acquired loan portfolios and certain significant accounting policies relevant to each of these portfolios.

Originated Loans

Loans originated for investment are stated at their principal amount outstanding adjusted for partial charge-offs, and net deferred loan fees and costs. Interest income on loans is accrued over the term of the loans primarily using the “simple-interest” method based on the principal balance outstanding. Interest is not accrued on loans where collectability is uncertain. Accrued interest is presented separately in the consolidated balance sheet, except for accrued interest on credit card loans, which is included in the outstanding loan balance. Loan origination fees and certain direct costs incurred to extend credit are deferred and amortized over the term of the loan or loan commitment period as an adjustment to the related loan yield. Net deferred loan origination fees and costs amounted to $3.3 million, $4.1 million, and $5.4 million at June 30, 2016, December 31, 2015, and June 30, 2015, respectively.

Acquired Loans

Acquired loans are those purchased in the Citizens acquisition. These loans were recorded at estimated fair value at the Acquisition Date with no carryover of the related ALL. The acquired loans were segregated as of the Acquisition Date between those considered to be performing (acquired nonimpaired loans) and those with evidence of credit deterioration (acquired impaired loans). Acquired loans are considered impaired if there is evidence of credit deterioration and if it is probable, at acquisition, all contractually required payments will not be collected. Revolving loans, including lines of credit, are excluded from acquired impaired loan accounting.

Total outstanding acquired impaired loans as of June 30, 2016 and 2015 were $340.9 million and $504.7 million, respectively. The outstanding balance of these loans is the undiscounted sum of all amounts, including amounts deemed principal, interest, fees, penalties, and other under the loans, owed at the reporting date, whether or not currently due and whether or not any such amounts have been charged-off. Changes in the carrying amount and accretable yield for acquired impaired loans were as follows for the three and six months ended June 30, 2016 and 2015:


	Three Months Ended June 30,												Six Months Ended June 30,
	2016						2015						2016						2015
Acquired Impaired Loans (In thousands)	Accretable Yield			Carrying Amount of Loans			Accretable Yield			Carrying Amount of Loans			Accretable Yield			Carrying Amount of Loans			Accretable Yield			Carrying Amount of Loans
Balance at beginning of period	$	85,444		$	257,152		$	118,756		$	388,313		$	89,823		$	284,709		$	119,450		$	423,209
Accretion		(7,921	)		7,921			(10,285	)		10,285			(16,823	)		16,823			(21,503	)		21,503
Net reclassifications from nonaccretable to accretable		4,883			—			8,217			—			12,636			—			21,212			—
Payments received, net		—			(25,878	)		—			(42,434	)		—			(62,337	)		—			(88,548	)
Disposals		(3,042	)		—			(4,657	)		—			(6,272	)		—			(7,128	)		—

Balance at end of period	$	79,364		$	239,195		$	112,031		$	356,164		$	79,364		$	239,195		$	112,031		$	356,164

Cash flows expected to be collected on acquired impaired loans are estimated quarterly by incorporating several key assumptions similar to the initial estimate of fair value. These key assumptions include probability of default, and the amount of actual prepayments after the acquisition date. Prepayments affect the estimated life of the loans and could change the amount of interest income, and possibly principal expected to be collected. In reforecasting future estimated cash flows, credit loss expectations are adjusted as necessary.

Improved cash flow expectations for loans or pools that were impaired in prior periods are recorded first as a reversal of previously recorded impairment and then as an increase in prospective yield when all previously recorded impairment has been recaptured. Decreases in expected cash flows are recognized as an impairment through a provision for loan loss and an increase to the allowance for acquired impaired loans.

During the quarter ended June 30, 2016, there was an overall improvement in cash flow expectations, which resulted in the net reclassification of $4.9 million from the nonaccretable difference to accretable yield. This reclassification was $8.2 million for the three months ended June 30, 2015. The reclassification from the nonaccretable difference to the accretable yield results in prospective yield adjustments on the loan pools.

FDIC Acquired Loans and Related Loss Share Receivable

FDIC acquired loans include loans purchased in the 2010 FDIC-assisted acquisitions of George Washington and Midwest. George Washington and Midwest non-single family loss share agreements with the FDIC expired at March 31, 2015 and June 30, 2015, respectively, resulting in $115.8 million of loans no longer being covered as of June 30, 2016. As of June 30, 2016, $65.0 million remained covered by single family loss share agreements.

Changes in the loss share receivable for the three and six months ended June 30, 2016 and 2015 were as follows:


Loss Share Receivable	Three Months Ended June 30,						Six Months Ended June 30,
(In thousands)	2016			2015			2016			2015
Balance at beginning of period	$	9,436		$	20,005		$	9,947		$	22,033
Amortization		(358	)		(1,185	)		(706	)		(3,372	)
Increase/(decrease) due to impairment (recapture) on FDIC acquired loans		(12	)		1,819			257			6,046
FDIC reimbursement		(194	)		(8,713	)		(386	)		(12,726	)
FDIC acquired loans paid in full		(317	)		(106	)		(557	)		(161	)

Balance at end of the period ⁽¹⁾	$	8,555		$	11,820		$	8,555		$	11,820

(1)	As of June 30, 2016, the loss share receivable of $8.6 million was related to single family covered loans.

Total outstanding FDIC acquired impaired loans were $301.2 million and $351.1 million as of June 30, 2016 and 2015, respectively. The outstanding balance of these loans is the undiscounted sum of all amounts, including amounts deemed principal, interest, fees, penalties, and other under the loans, owed at the reporting date, whether or not currently due and whether or not any such amounts have been charged-off. Changes in the carrying amount and accretable yield for FDIC acquired impaired loans were as follows for the three and six months ended June 30, 2016 and 2015:


	Three Months Ended June 30,												Six Months Ended June 30,
	2016						2015						2016						2015
FDIC Acquired Impaired Loans (In thousands)	Accretable Yield			Carrying Amount of Loans			Accretable Yield			Carrying Amount of Loans			Accretable Yield			Carrying Amount of Loans			Accretable Yield			Carrying Amount of Loans
Balance at beginning of period	$	22,126		$	122,134		$	29,867		$	199,225		$	22,908		$	130,648		$	37,511		$	232,452
Accretion		(2,231	)		2,231			(4,100	)		4,100			(4,528	)		4,528			(9,667	)		9,667
Net reclassifications between non-accretable and accretable		699			—			2,136			—			2,372			—			2,080			—
Payments received, net		—			(5,604	)		—			(45,517	)		—			(16,415	)		—			(84,311	)
(Disposals)/Additions		(371	)		—			(1,753	)		—			(529	)		—			(3,774	)		—

Balance at end of period	$	20,223		$	118,761		$	26,150		$	157,808		$	20,223		$	118,761		$	26,150		$	157,808

The cash flows expected to be collected on FDIC acquired impaired loans are estimated quarterly in a similar manner as described above for acquired impaired loans. During the quarter ended June 30, 2016, the re-estimation process resulted in a net reclassification of $0.7 million from the nonaccretable difference to accretable yield. This reclassification was $2.1 million for the three months ended June 30, 2015. The reclassification from the nonaccretable difference to the accretable yield results in prospective yield adjustments on the loan pools.

Credit Quality Disclosures

The credit quality of the Corporation’s loan portfolios is assessed as a function of net credit losses, levels of nonperforming assets and delinquencies, and credit quality ratings as defined by the Corporation. These credit quality ratings are an important part of the Corporation’s overall credit risk management process and evaluation of the allowance for credit losses.

Generally, loans, except for certain commercial, credit card and mortgage loans, and leases on which payments are past due for 90 days are placed on nonaccrual status, unless those loans are in the process of collection and, in Management’s opinion, are fully secured. Credit card loans on which payments are past due for 120 days are placed on nonaccrual status. Acquired and FDIC acquired impaired loans are considered to be accruing and performing even though collection of contractual payments may be in doubt because income continues to be accreted on the loan pool as long as expected cash flows are reasonably estimable.

When a loan is placed on nonaccrual status, interest deemed uncollectible which had been accrued in prior years is charged against the ALL and interest deemed uncollectible accrued in the current year is reversed against interest income. Interest on mortgage loans is accrued until Management deems it uncollectible based upon the specific identification method. Payments subsequently received on nonaccrual loans are generally

applied to principal. A loan is returned to accrual status when principal and interest are no longer past due and collectability is probable. This generally requires timely principal and interest payments for a minimum of six consecutive payment cycles. Loans are generally written off when deemed uncollectible or when they reach a predetermined number of days past due depending upon loan product, terms and other factors.

The following tables provide a summary of loans by portfolio type, including the delinquency status of those loans that continue to accrue interest and those loans that are nonaccrual:


As of June 30, 2016
(In thousands)													> 90 Days
Originated Loans	Days Past Due						Total				Total		Past Due and		Nonaccrual
	30-59		60-89		> 90		Past Due		Current		Loans		Accruing ⁽¹⁾		Loans
Commercial
C&I	$	1,677	$	1,465	$	10,864	$	14,006	$	5,868,988	$	5,882,994	$	1,062	$	43,887
CRE		4,506		142		12,176		16,824		2,018,674		2,035,498		166		13,860
Construction		—		709		4,760		5,469		699,871		705,340		—		9,195
Leases		—		—		476		476		508,058		508,534		476		—
Consumer
Installment		15,662		3,496		4,005		23,163		3,329,921		3,353,084		3,453		3,506
Home Equity Lines		1,245		713		2,140		4,098		1,272,563		1,276,661		623		2,390
Credit Cards		811		504		860		2,175		172,811		174,986		789		758
Residential Mortgages		9,564		2,017		4,233		15,814		712,720		728,534		1,439		10,701

Total	$	33,465	$	9,046	$	39,514	$	82,025	$	14,583,606	$	14,665,631	$	8,008	$	84,297


Acquired Loans													> 90 Days
	Days Past Due						Total				Total		Past Due and		Nonaccrual
	30-59		60-89		> 90		Past Due		Current		Loans		Accruing⁽³⁾		Loans ⁽³⁾
Commercial
C&I	$	340	$	121	$	1,168	$	1,629	$	179,874	$	181,503	$	—	$	865
CRE		602		896		9,491		10,989		357,811		368,800		—		4,482
Construction		—		—		413		413		3,698		4,111		—		—
Consumer
Installment		3,623		767		486		4,876		489,553		494,429		224		615
Home Equity Lines		960		503		712		2,175		144,741		146,916		587		235
Residential Mortgages		299		943		3,867		5,109		287,768		292,877		646		924

Total	$	5,824	$	3,230	$	16,137	$	25,191	$	1,463,445	$	1,488,636	$	1,457	$	7,121


FDIC Acquired Loans ⁽²⁾													> 90 Days
	Days Past Due						Total				Total		Past Due and		Nonaccrual
	30-59		60-89		> 90		Past Due		Current		Loans		Accruing ⁽³⁾		Loans ⁽³⁾
Commercial
C&I	$	—	$	—	$	1,326	$	1,326	$	29,948	$	31,274		n/a		n/a
CRE		—		804		24,931		25,735		54,153		79,888		n/a		n/a
Construction		—		—		3,512		3,512		1,119		4,631		n/a		n/a
Consumer
Installment		—		—		—		—		1,808		1,808		n/a		n/a
Home Equity Lines		2,097		354		938		3,389		26,424		29,813		n/a		n/a
Residential Mortgages		4,371		204		1,800		6,375		26,995		33,370		n/a		n/a

Total	$	6,468	$	1,362	$	32,507	$	40,337	$	140,447	$	180,784		n/a		n/a

(1)	Installment loans 90 days or more past due and accruing include $2.3 million of loans guaranteed by the U.S. government as of June 30, 2016.

(2)	Excludes loss share receivable of $8.6 million as of June 30, 2016.

(3)

Acquired and FDIC acquired impaired loans were not classified as nonperforming assets at June 30, 2016 as the loans are considered to be performing under ASC 310-30. As a result, interest income, through the accretion of the difference between the carrying amount of the loans and the expected cash flows, is being recognized on all acquired and FDIC acquired impaired loans. These asset quality disclosures are, therefore, not applicable to acquired and FDIC acquired impaired loans.


As of December 31, 2015
(In thousands)													> 90 Days
Originated Loans	Days Past Due						Total				Total		Past Due and		Nonaccrual
	30-59		60-89		> 90		Past Due		Current		Loans		Accruing ⁽¹⁾		Loans
Commercial
C&I	$	4,684	$	115	$	8,824	$	13,623	$	5,779,785	$	5,793,408	$	236	$	23,123
CRE		12,880		—		2,260		15,140		2,062,204		2,077,344		153		4,503
Construction		1,360		—		486		1,846		643,491		645,337		—		482
Leases		—		—		—		—		491,741		491,741		—		—
Consumer
Installment		17,934		4,828		3,920		26,682		2,963,667		2,990,349		3,519		2,178
Home Equity Lines		1,952		913		1,478		4,343		1,244,095		1,248,438		513		1,674
Credit Cards		1,449		494		632		2,575		180,268		182,843		725		545
Residential Mortgages		11,099		1,519		6,693		19,311		669,734		689,045		2,876		11,600

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


Acquired Loans													> 90 Days
	Days Past Due						Total				Total		Past Due and		Nonaccrual
	30-59		60-89		> 90		Past Due		Current		Loans		Accruing ⁽³⁾		Loans ⁽³⁾
Commercial
C&I	$	311	$	31	$	3,336	$	3,678	$	236,467	$	240,145	$	13	$	782
CRE		3,192		1,681		9,657		14,530		416,361		430,891		522		4,948
Construction		—		—		733		733		5,380		6,113		—		—
Consumer
Installment		5,059		1,329		974		7,362		566,010		573,372		236		835
Home Equity Lines		1,365		660		1,260		3,285		165,257		168,542		644		514
Residential Mortgages		8,760		567		6,792		16,119		307,889		324,008		1,681		1,166

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


FDIC Acquired Loans ⁽²⁾													> 90 Days
	Days Past Due						Total				Total		Past Due and		Nonaccrual
	30-59		60-89		> 90		Past Due		Current		Loans		Accruing⁽³⁾		Loans ⁽³⁾
Commercial
C&I	$	—	$	—	$	1,054	$	1,054	$	34,412	$	35,466		n/a		n/a
CRE		296		354		28,501		29,151		58,623		87,774		n/a		n/a
Construction		—		—		3,761		3,761		2,108		5,869		n/a		n/a
Consumer
Installment		—		—		—		—		2,077		2,077		n/a		n/a
Home Equity Lines		2,230		52		1,917		4,199		34,469		38,668		n/a		n/a
Residential Mortgages		4,616		172		2,655		7,443		28,125		35,568		n/a		n/a

Total	$	7,142	$	578	$	37,888	$	45,608	$	159,814	$	205,422		n/a		n/a

(1)	Installment loans 90 days or more past due and accruing include $2.3 million of loans guaranteed by the U.S. government as of December 31, 2015.

(2)	Excludes loss share receivable of $9.9 million as of December 31, 2015.

(3)

Acquired and FDIC acquired impaired loans were not classified as nonperforming assets at December 31, 2015 as the loans are considered to be performing under ASC 310-30. As a result, interest income, through the accretion of the difference between the carrying amount of the loans and the expected cash flows, is being recognized on all acquired and FDIC acquired impaired loans. These asset quality disclosures are, therefore, not applicable to acquired and FDIC acquired impaired loans.


As of June 30, 2015
(In thousands)													> 90 Days
Originated Loans	Days Past Due						Total				Total		Past Due and		Nonaccrual
	30-59		60-89		> 90		Past Due		Current		Loans		Accruing ⁽¹⁾		Loans
Commercial
C&I	$	5,837	$	1,949	$	3,780	$	11,566	$	5,459,797	$	5,471,363	$	—	$	29,241
CRE		3,758		119		2,780		6,657		2,131,715		2,138,372		418		7,486
Construction		483		—		—		483		586,412		586,895		—		—
Leases		17,862		—		—		17,862		418,840		436,702		—		1,162
Consumer
Installment		11,526		3,010		4,191		18,727		2,701,332		2,720,059		3,386		2,903
Home Equity Lines		2,268		720		1,032		4,020		1,176,782		1,180,802		249		1,591
Credit Cards		679		338		558		1,575		167,001		168,576		337		459
Residential Mortgages		9,792		1,935		7,595		19,322		633,821		653,143		3,619		12,300

Total	$	52,205	$	8,071	$	19,936	$	80,212	$	13,275,700	$	13,355,912	$	8,009	$	55,142


Acquired Loans													> 90 Days
	Days Past Due						Total				Total		Past Due and		Nonaccrual
	30-59		60-89		> 90		Past Due		Current		Loans		Accruing⁽³⁾		Loans ⁽³⁾
Commercial
C&I	$	33	$	99	$	3,279	$	3,411	$	334,012	$	337,423	$	—	$	661
CRE		3,353		3,115		17,473		23,941		510,004		533,945		—		5,545
Construction		—		—		694		694		5,536		6,230		—		—
Consumer
Installment		3,999		1,029		1,083		6,111		653,237		659,348		475		671
Home Equity Lines		2,349		785		1,353		4,487		195,692		200,179		762		246
Residential Mortgages		186		1,173		4,902		6,261		352,298		358,559		411		929

Total	$	9,920	$	6,201	$	28,784	$	44,905	$	2,050,779	$	2,095,684	$	1,648	$	8,052


FDIC Acquired Loans ⁽²⁾													> 90 Days
	Days Past Due						Total				Total		Past Due and		Nonaccrual
	30-59		60-89		> 90		Past Due		Current		Loans		Accruing ⁽³⁾		Loans ⁽³⁾
Commercial
C&I	$	—	$	—	$	2,916	$	2,916	$	35,221	$	38,137		n/a		n/a
CRE		664		1,959		32,076		34,699		67,110		101,809		n/a		n/a
Construction		—		—		3,701		3,701		2,174		5,875		n/a		n/a
Consumer
Installment		—		—		—		—		2,299		2,299		n/a		n/a
Home Equity Lines		1,256		246		3,454		4,956		50,589		55,545		n/a		n/a
Residential Mortgages		5,391		319		2,961		8,671		29,358		38,029		n/a		n/a

Total	$	7,311	$	2,524	$	45,108	$	54,943	$	186,751	$	241,694		n/a		n/a

(1)	Installment loans 90 days or more past due and accruing include $2.7 million of loans guaranteed by the U.S. government as of June 30, 2015.

(2)	Excludes loss share receivable of $11.8 million as of June 30, 2015.

(3)

Acquired and FDIC acquired impaired loans were not classified as nonperforming assets at June 30, 2015 as the loans are considered to be performing under ASC 310-30. As a result interest income, through the accretion of the difference between the carrying amount of the loans and the expected cash flows, is being recognized on all acquired and FDIC acquired impaired loans. These asset quality disclosures are, therefore, not applicable to acquired and FDIC acquired impaired loans.

Individual commercial loans are assigned credit risk grades based on an internal assessment of conditions that affect a borrower’s ability to meet its contractual obligation under the loan agreement. The assessment process includes reviewing a borrower’s current financial information, historical payment experience, credit documentation, public information, and other information specific to each borrower. Commercial loans are reviewed on an annual, quarterly or rotational basis or as Management becomes aware of information about a borrower’s ability to fulfill its obligation. For consumer loans, Management evaluates credit quality based on the aging status of the loan as well as by payment activity, which is presented in the above tables.

The credit-risk grading process for commercial loans is summarized as follows:

“Pass” Loans (Grades 1, 2, 3, 4) are not considered a greater than normal credit risk. Generally, the borrowers have the apparent ability to satisfy obligations to the bank, and the Corporation anticipates insignificant uncollectible amounts based on its individual loan review.

“Special Mention” Loans (Grade 5) are commercial loans that have identified potential weaknesses that deserve Management’s close attention. If left uncorrected, these potential weaknesses may result in noticeable deterioration of the repayment prospects for the asset or in the institution’s credit position.

“Substandard” Loans (Grade 6) are inadequately protected by the current financial condition and paying capacity of the obligor or by any collateral pledged. Loans so classified have a well-defined weakness or weaknesses that may jeopardize the liquidation of the debt pursuant to the contractual principal and interest terms. Such loans are characterized by the distinct possibility that the Corporation may sustain some loss if the deficiencies are not corrected.

“Doubtful” Loans (Grade 7) have all the weaknesses inherent in those classified as substandard, with the added characteristic that existing facts, conditions, and values make collection or liquidation in full highly improbable. Such loans are currently managed separately to determine the highest recovery alternatives.

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


As of June 30, 2016
(In thousands)
Originated Loans	Commercial
	C&I		CRE		Construction		Leases		Total
Grade 1	$	75,818	$	742	$	—	$	12,001	$	88,561
Grade 2		416,677		806		—		49,953		467,436
Grade 3		1,267,423		294,396		46,114		87,346		1,695,279
Grade 4		3,886,039		1,697,194		609,659		325,346		6,518,238
Grade 5		73,989		13,929		31,744		22,830		142,492
Grade 6		154,707		28,431		17,823		11,058		212,019
Grade 7		8,341		—		—		—		8,341

Total	$	5,882,994	$	2,035,498	$	705,340	$	508,534	$	9,132,366


Acquired Loans	Commercial
	C&I		CRE		Construction		Leases		Total
Grade 1	$	—	$	—	$	—	$	—	$	—
Grade 2		—		—		—		—		—
Grade 3		5,994		24,244		—		—		30,238
Grade 4		140,944		303,228		3,698		—		447,870
Grade 5		27,053		11,607		—		—		38,660
Grade 6		7,512		29,721		413		—		37,646
Grade 7		—		—		—		—		—

Total	$	181,503	$	368,800	$	4,111	$	—	$	554,414


FDIC Acquired Loans	Commercial
	C&I		CRE		Construction		Leases		Total
Grade 1	$	—	$	—	$	—	$	—	$	—
Grade 2		—		—		—		—		—
Grade 3		—		7,040		—		—		7,040
Grade 4		27,834		45,520		—		—		73,354
Grade 5		—		—		—		—		—
Grade 6		3,440		27,328		4,631		—		35,399
Grade 7		—		—		—		—		—

Total	$	31,274	$	79,888	$	4,631	$	—	$	115,793


As of December 31, 2015
(In thousands)
Originated Loans	Commercial
	C&I		CRE			Construction		Leases		Total
Grade 1	$	60,440	$	773		$	—	$	12,732	$	73,945
Grade 2		353,581		831			—		69,258		423,670
Grade 3		1,371,850		319,987			59,182		49,956		1,800,975
Grade 4		3,756,333		1,697,261			569,098		344,763		6,367,455
Grade 5		124,140		18,388			7,193		7,858		157,579
Grade 6		124,483		40,105			9,864		7,174		181,626
Grade 7		2,581		(1	)		—		—		2,580

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


Acquired Loans	Commercial
	C&I		CRE			Construction		Leases		Total
Grade 1	$	346	$	—		$	—	$	—	$	346
Grade 2		—		—			—		—		—
Grade 3		15,548		27,387			—		—		42,935
Grade 4		200,736		361,518			5,380		—		567,634
Grade 5		11,735		12,546			—		—		24,281
Grade 6		11,780		29,440			733		—		41,953
Grade 7		—		—			—		—		—

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


FDIC Acquired Loans	Commercial
	C&I		CRE			Construction		Leases		Total
Grade 1	$	—	$	—		$	—	$	—	$	—
Grade 2		1,072		—			—		—		1,072
Grade 3		—		7,004			—		—		7,004
Grade 4		31,637		49,917			819		—		82,373
Grade 5		295		—			—		—		295
Grade 6		2,462		30,853			5,050		—		38,365
Grade 7		—		—			—		—		—

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


As of June 30, 2015
(In thousands)
Originated Loans	Commercial
	C&I		CRE		Construction		Leases		Total
Grade 1	$	65,856	$	807	$	—	$	14,688	$	81,351
Grade 2		206,384		1,166		—		29,564		237,114
Grade 3		1,417,295		367,457		55,889		65,664		1,906,305
Grade 4		3,567,387		1,715,998		529,517		321,268		6,134,170
Grade 5		98,137		25,466		360		2,956		126,919
Grade 6		112,661		27,478		1,129		2,562		143,830
Grade 7		3,643		—		—		—		3,643

Total	$	5,471,363	$	2,138,372	$	586,895	$	436,702	$	8,633,332


Acquired Loans	Commercial
	C&I		CRE		Construction		Leases		Total
Grade 1	$	1,061	$	—	$	—	$	—	$	1,061
Grade 2		—		—		—		—		—
Grade 3		17,338		27,190		—		—		44,528
Grade 4		289,027		453,830		5,536		—		748,393
Grade 5		13,283		16,815		—		—		30,098
Grade 6		16,714		36,110		694		—		53,518
Grade 7		—		—		—		—		—

Total	$	337,423	$	533,945	$	6,230	$	—	$	877,598


FDIC Acquired Loans	Commercial
	C&I		CRE		Construction		Leases		Total
Grade 1	$	—	$	—	$	—	$	—	$	—
Grade 2		1,129		—		—		—		1,129
Grade 3		—		—		—		—		—
Grade 4		33,992		65,906		817		—		100,715
Grade 5		—		625		—		—		625
Grade 6		3,016		35,278		5,058		—		43,352
Grade 7		—		—		—		—		—

Total	$	38,137	$	101,809	$	5,875	$	—	$	145,821

4. Allowance for Loan Losses

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

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

Allowance for Originated Loan Losses

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

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

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

The following tables show activity in the originated ALL, by portfolio segment for the three and six months ended June 30, 2016 and 2015, as well as the corresponding recorded investment in originated loans at the end of the period:


As of June 30, 2016
(In thousands)
Originated Loans	C&I			CRE			Construction		Leases		Installment			Home Equity Lines			Credit Cards			Residential Mortgages			Total
Three Months Ended
Allowance for originated loan losses, beginning balance	$	44,489		$	7,244		$	1,537	$	1,499	$	14,664		$	19,528		$	8,591		$	5,363		$	102,915
Charge-offs		(2,593	)		(111	)		—		—		(5,418	)		(937	)		(1,031	)		(708	)		(10,798	)
Recoveries		1,335			207			2		29		3,573			499			421			45			6,111
Provision for loan losses		1,859			(1,468	)		1,028		822		3,960			698			(831	)		879			6,947

Allowance for originated loan losses, ending balance	$	45,090		$	5,872		$	2,567	$	2,350	$	16,779		$	19,788		$	7,150		$	5,579		$	105,175

Six Months Ended
Allowance for originated loan losses, beginning balance	$	44,760		$	9,631		$	1,594	$	1,313	$	14,183		$	20,094		$	8,831		$	4,729		$	105,135
Charge-offs		(5,803	)		(220	)		—		—		(12,186	)		(1,964	)		(2,484	)		(1,158	)		(23,815	)
Recoveries		1,867			232			4		49		7,379			1,123			778			65			11,497
Provision for loan losses		4,266			(3,771	)		969		988		7,403			535			25			1,942			12,357

Allowance for originated loan losses, ending balance	$	45,090		$	5,872		$	2,567	$	2,350	$	16,779		$	19,788		$	7,150		$	5,579		$	105,175

Ending allowance for originated loan losses balance attributable to loans:
Individually evaluated for impairment	$	10,447		$	507		$	—	$	—	$	1,149		$	169		$	201		$	981		$	13,454
Collectively evaluated for impairment		34,643			5,365			2,567		2,350		15,630			19,619			6,949			4,598			91,721

Total ending allowance for originated loan losses balance	$	45,090		$	5,872		$	2,567	$	2,350	$	16,779		$	19,788		$	7,150		$	5,579		$	105,175

Originated loans:
Originated loans individually evaluated for impairment	$	62,707		$	29,539		$	512	$	—	$	42,272		$	7,874		$	679		$	23,385		$	166,968
Originated loans collectively evaluated for impairment		5,820,287			2,005,959			704,828		508,534		3,310,812			1,268,787			174,307			705,149			14,498,663

Total ending originated loan balance	$	5,882,994		$	2,035,498		$	705,340	$	508,534	$	3,353,084		$	1,276,661		$	174,986		$	728,534		$	14,665,631


As of June 30, 2015
(In thousands)
Originated Loans	C&I			CRE			Construction			Leases			Installment			Home Equity Lines			Credit Cards			Residential Mortgages			Total
Three Months Ended
Allowance for originated loan losses, beginning balance	$	39,838		$	8,813		$	1,752		$	629		$	13,358		$	19,433		$	7,801		$	5,921		$	97,545
Charge-offs		(3,247	)		(408	)		—			—			(5,090	)		(971	)		(1,209	)		(373	)		(11,298	)
Recoveries		453			1			39			3			2,844			839			358			89			4,626
Provision for loan losses		5,832			94			(251	)		(13	)		3,798			738			868			(257	)		10,809

Allowance for originated loan losses, ending balance	$	42,876		$	8,500		$	1,540		$	619		$	14,910		$	20,039		$	7,818		$	5,380		$	101,682

Six Months Ended
Allowance for originated loan losses, beginning balance	$	37,375		$	10,492		$	2,202		$	674		$	12,918		$	19,324		$	7,966		$	4,745		$	95,696
Charge-offs		(3,757	)		(623	)		—			—			(10,145	)		(1,882	)		(2,661	)		(797	)		(19,865	)
Recoveries		794			1			40			7			5,864			1,452			724			124			9,006
Provision for loan losses		8,464			(1,370	)		(702	)		(62	)		6,273			1,145			1,789			1,308			16,845

Allowance for originated loan losses, ending balance	$	42,876		$	8,500		$	1,540		$	619		$	14,910		$	20,039		$	7,818		$	5,380		$	101,682

Ending allowance for originated loan losses balance attributable to loans:
Individually evaluated for impairment	$	9,117		$	151		$	—		$	—		$	1,001		$	217		$	250		$	890		$	11,626
Collectively evaluated for impairment		33,759			8,349			1,540			619			13,909			19,822			7,568			4,490			90,056

Total ending allowance for originated loan losses balance	$	42,876		$	8,500		$	1,540		$	619		$	14,910		$	20,039		$	7,818		$	5,380		$	101,682

Originated loans:
Originated loans individually evaluated for impairment	$	45,969		$	12,072		$	—		$	1,162		$	31,927		$	7,421		$	787		$	24,697		$	124,035
Originated loans collectively evaluated for impairment		5,425,394			2,126,300			586,895			435,540			2,688,132			1,173,381			167,789			628,446			13,231,877

Total ending originated loan balance	$	5,471,363		$	2,138,372		$	586,895		$	436,702		$	2,720,059		$	1,180,802		$	168,576		$	653,143		$	13,355,912

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


As of December 31, 2015
(In thousands)
Originated Loans	C&I		CRE		Construction		Leases		Installment		Home Equity Lines		Credit Cards		Residential Mortgages		Total
Ending allowance for originated loan losses balance attributable to loans:
Individually evaluated for impairment	$	11,837	$	128	$	—	$	—	$	1,009	$	188	$	243	$	944	$	14,349
Collectively evaluated for impairment		32,923		9,503		1,594		1,313		13,174		19,906		8,588		3,785		90,786

Total ending allowance for originated loan losses balance	$	44,760	$	9,631	$	1,594	$	1,313	$	14,183	$	20,094	$	8,831	$	4,729	$	105,135

Originated loans:
Loans individually evaluated for impairment	$	43,818	$	16,614	$	—	$	—	$	36,904	$	7,080	$	717	$	23,905	$	129,038
Loans collectively evaluated for impairment		5,749,590		2,060,730		645,337		491,741		2,953,445		1,241,358		182,126		665,140		13,989,467

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

Allowance for Acquired Loan Losses

The Citizens’ loans were recorded at their fair value as of the Acquisition Date and the prior ALL was eliminated. An ALL for acquired nonimpaired loans is estimated using a methodology similar to that used for originated loans. The allowance determined for each acquired nonimpaired loan is compared to the remaining fair value adjustment for that loan. If the computed allowance is greater, the excess is added to the allowance through a provision for loan losses. If the computed allowance is less, no additional allowance is recognized. As of June 30, 2016, the computed ALL was less than the remaining fair value discount; therefore, no ALL for acquired nonimpaired loans was recorded.

Charge-offs and actual losses on an acquired nonimpaired loan first reduce any remaining fair value discount for that loan. Once a loan’s discount is depleted, charge-offs and actual losses are applied against the acquired ALL. During the three and six months ended June 30, 2016, a net recapture to the provision for loan losses, of $0.2 million was recorded, compared to a provision of loan losses equal to net charge-offs of $1.6 million recorded for the three months ended June 30, 2015. Charge-offs on acquired nonimpaired loans were mainly related to consumer loans that were written off in accordance with the Corporation’s credit policies based on a predetermined number of days past due.

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

The following table presents activity in the allowance for acquired impaired loan losses for the three and six months ended June 30, 2016 and 2015:


Allowance for Acquired Impaired Loan Losses	Three Months Ended June 30,						Six Months Ended June 30,
(In thousands)	2016			2015			2016			2015
Balance at beginning of the period	$	4,423		$	7,493		$	3,877		$	7,457
Charge-offs		(19	)		—			(19	)		—
Recoveries					—			—			—
Provision/(recapture) for loan losses		(148	)		(2,543	)		398			(2,507	)

Balance at end of the period	$	4,256		$	4,950		$	4,256		$	4,950

Allowance for FDIC Acquired Loan Losses

The ALL on FDIC acquired nonimpaired loans is estimated similar to acquired loans as described above except any increase to the ALL and provision for loan losses is partially offset by an increase in the loss share receivable for the portion of the losses recoverable under the loss share agreements with the FDIC. As of June 30, 2016, the computed ALL was less than the remaining fair value discount; therefore, no ALL for FDIC acquired nonimpaired loans was recorded.

The following table presents activity in the allowance for FDIC acquired impaired loan losses for the three and six months ended June 30, 2016 and 2015:


Allowance for FDIC acquired Impaired Loan Losses	Three Months Ended June 30,						Six Months Ended June 30,
(In thousands)	2016			2015			2016			2015
Balance at beginning of the period	$	44,599		$	41,514		$	44,679		$	40,496
Net provision/(recapture) of loan losses before benefit attributable to FDIC loss share agreements		(227	)		928			1,310			5,153
Net (benefit)/recapture attributable to FDIC loss share agreements		12			(1,819	)		(257	)		(6,046	)

Net provision/(recapture) for loan losses		(215	)		(891	)		1,053			(893	)
Increase/(decrease) in loss share receivable		(12	)		1,819			257			6,046
Loans charged-off		(4,154	)		(815	)		(5,771	)		(4,022	)

Balance at end of the period	$	40,218		$	41,627		$	40,218		$	41,627

An acquired or FDIC acquired loan may be resolved either through receipt of payment (in full or in part) from the borrower, the sale of the loan to a third party, or foreclosure of the collateral. In the period of resolution of a nonimpaired loan, any remaining unamortized fair value adjustment is recognized as interest income. In the period of resolution of an impaired loan accounted for on an individual basis, the difference between the carrying amount of the loan and the proceeds received is recognized as a gain or loss within noninterest income. The majority of impaired loans are accounted for within a pool of loans which results in any difference between the proceeds received and the loan carrying amount being deferred as part of the carrying amount of the pool. The accretable amount of the pool remains unaffected from the resolution until the subsequent quarterly cash flow re-estimation. Favorable results from removal of the resolved loan from the pool increase the future accretable yield of the pool, while unfavorable results are recorded as impairment in the quarter of the cash flow re-estimation. Acquired or FDIC acquired impaired loans subject to modification are not removed from a pool even if those loans would otherwise be deemed TDRs as the pool, and not the individual loan, represents the unit of account.

Credit Quality

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

Interest income recognized on impaired loans was $0.4 million and $0.6 million for the three and six months ended June 30, 2016, compared to $0.1 million and $0.2 million for the three and six months ended June 30, 2015. Interest income which would have been earned in accordance with the original terms was $1.4 million and $2.6 million for the three and six months ended June 30, 2016, compared to $0.9 million and $1.8 million for the three and six months ended June 30, 2015.

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

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


As of June 30, 2016
			Unpaid				Average
Originated Loans	Recorded		Principal		Related		Recorded
(In thousands)	Investment		Balance		Allowance		Investment
Impaired loans with no related allowance
Commercial
C&I	$	19,489	$	22,663	$	—	$	29,022
CRE		26,058		24,696		—		17,119
Construction		512		512		—		102
Leases		—		—		—		—
Consumer
Installment		2,366		2,697		—		1,636
Home equity line		695		948		—		694
Credit card		15		15		—		19
Residential mortgages		11,950		14,350		—		11,680

Subtotal		61,085		65,881		—		60,272
Impaired loans with a related allowance
Commercial
C&I		43,218		51,933		10,447		21,305
CRE		3,481		3,563		507		1,999
Construction		—		—		—		—
Leases		—		—		—		—
Consumer
Installment		39,906		40,033		1,149		35,473
Home equity line		7,179		7,180		169		6,803
Credit card		664		664		201		699
Residential mortgages		11,435		11,549		981		12,201

Subtotal		105,883		114,922		13,454		78,480

Total impaired loans	$	166,968	$	180,803	$	13,454	$	138,752

Note 1:

These tables exclude loans fully charged-off.

Note 2:

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


As of December 31, 2015
			Unpaid				Average
Originated Loans	Recorded		Principal		Related		Recorded
(In thousands)	Investment		Balance		Allowance		Investment
Impaired loans with no related allowance
Commercial
C&I	$	21,066	$	23,854	$	—	$	27,215
CRE		15,465		17,456		—		13,031
Construction		—		—		—		—
Consumer
Installment		1,369		1,658		—		1,807
Home equity line		670		919		—		999
Credit card		21		21		—		20
Residential mortgages		11,550		13,901		—		11,979

Subtotal		50,141		57,809		—		55,051
Impaired loans with a related allowance
Commercial
C&I		22,752		28,881		11,837		11,284
CRE		1,149		1,173		128		3,037
Construction		—		—		—		—
Consumer
Installment		35,535		35,592		1,009		28,808
Home equity line		6,410		6,411		188		6,382
Credit card		696		696		243		757
Residential mortgages		12,355		12,458		944		12,619

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

Total impaired loans	$	129,038	$	143,020	$	14,349	$	117,938

Note 1:

These tables exclude loans fully charged-off.

Note 2:

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


As of June 30, 2015
			Unpaid				Average
Originated Loans	Recorded		Principal		Related		Recorded
(In thousands)	Investment		Balance		Allowance		Investment
Impaired loans with no related allowance
Commercial
C&I	$	28,076	$	37,358	$	—	$	27,238
CRE		11,482		17,585		—		12,983
Construction		—		—		—		—
Leases		1,162		1,162		—		598
Consumer
Installment		1,678		2,183		—		1,753
Home equity line		884		1,132		—		906
Credit card		19		19		—		26
Residential mortgages		12,047		14,700		—		12,146

Subtotal		55,348		74,139		—		55,650
Impaired loans with a related allowance
Commercial
C&I		17,893		18,062		9,117		7,199
CRE		590		593		151		600
Construction		—		—		—		—
Consumer
Installment		30,249		30,302		1,001		25,722
Home equity line		6,537		6,537		217		6,684
Credit card		768		768		250		823
Residential mortgages		12,650		12,739		890		12,675

Subtotal		68,687		69,001		11,626		53,703

Total impaired loans	$	124,035	$	143,140	$	11,626	$	109,353

Note 1:

These tables exclude loans fully charged-off.

Note 2:

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

Troubled Debt Restructurings

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

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

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

The following tables provide the number of loans modified in a TDR and the recorded investment and unpaid principal balance by loan portfolio as of June 30, 2016, December 31, 2015, and June 30, 2015.


	As of June 30, 2016
(Dollars in thousands)	Number of Loans		Recorded Investment		Unpaid Principal Balance
Originated loans
Commercial
C&I		27	$	36,650	$	39,985
CRE		26		20,005		22,025
Construction		0		—		—

Total originated commercial		53		56,655		62,010
Consumer
Installment		1,310		42,272		42,730
Home equity lines		260		7,874		8,128
Credit card		197		679		679
Residential mortgages		303		23,385		25,899

Total originated consumer		2,070		74,210		77,436

Total originated loans		2,123	$	130,865	$	139,446

Acquired loans
Commercial
C&I		0	$	—	$	—
CRE		6		4,998		5,453
Construction		0		—		—

Total acquired commercial		6		4,998		5,453
Consumer
Installment		67		1,585		1,661
Home equity lines		173		7,520		7,583
Residential mortgages		32		2,899		3,216

Total acquired consumer		272		12,004		12,460

Total acquired loans		278	$	17,002	$	17,913

FDIC acquired loans
Commercial
C&I		0	$	—	$	—
CRE		3		13,124		11,417
Construction		1		566		672

Total FDIC acquired commercial		4		13,690		12,089
Consumer
Home equity lines		71		8,529		8,544
Residential mortgages		0		—		—

Total FDIC acquired consumer		71		8,529		8,544

Total FDIC acquired loans		75	$	22,219	$	20,633

Total loans
Commercial
C&I		27	$	36,650	$	39,985
CRE		35		38,127		38,895
Construction		1		566		672

Total commercial		63		75,343		79,552
Consumer
Installment		1,377		43,857		44,391
Home equity lines		504		23,923		24,255
Credit card		197		679		679
Residential mortgages		335		26,284		29,115

Total consumer		2,413		94,743		98,440

Total loans		2,476	$	170,086	$	177,992

Note 1:

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

Note 2:

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


	As of December 31, 2015
(Dollars in thousands)	Number of Loans		Recorded Investment		Unpaid Principal Balance
Originated loans
Commercial
C&I		26	$	33,087	$	33,740
CRE		24		14,671		16,648
Construction		0		—		—

Total originated commercial		50		47,758		50,388
Consumer
Installment		1,223		36,904		37,250
Home equity lines		257		7,080		7,330
Credit card		212		717		717
Residential mortgages		312		23,905		26,359

Total originated consumer		2,004		68,606		71,656

Total originated loans		2,054	$	116,364	$	122,044

Acquired loans
Commercial
C&I		1		7,611		7,611
CRE		3		918		1,044

Total acquired commercial		4		8,529		8,655
Consumer
Installment		51		1,117		1,211
Home equity lines		176		7,718		7,778
Residential mortgages		31		2,154		2,382

Total acquired consumer		258		10,989		11,371

Total acquired loans		262	$	19,518	$	20,026

FDIC acquired loans
Commercial
C&I		0	$	—	$	—
CRE		3		14,056		12,479
Construction		1		593		682

Total FDIC acquired commercial		4		14,649		13,161
Consumer
Home equity lines		81		10,215		10,281
Residential Mortgages		1		182		182

Total FDIC acquired consumer		82		10,397		10,463

Total FDIC acquired loans		86	$	25,046	$	23,624

Total loans
Commercial
C&I		27	$	40,698	$	41,351
CRE		30		29,645		30,171
Construction		1		593		682

Total commercial		58		70,936		72,204
Consumer
Installment		1,274		38,021		38,461
Home equity lines		514		25,013		25,389
Credit card		212		717		717
Residential mortgages		344		26,241		28,923

Total consumer		2,344		89,992		93,490

Total loans		2,402	$	160,928	$	165,694

Note 1:

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

Note 2:

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


	As of June 30, 2015
(Dollars in thousands)	Number of Loans		Recorded Investment		Unpaid Principal Balance
Originated loans
Commercial
C&I		56	$	29,454	$	36,538
CRE		69		10,362		15,681
Construction		31		—		—

Total originated commercial		156		39,816		52,219
Consumer
Installment		1,215		31,927		32,485
Home equity lines		271		7,421		7,669
Credit card		231		787		787
Residential mortgages		316		24,697		27,439

Total originated consumer		2,033		64,832		68,380

Total originated loans		2,189	$	104,648	$	120,599

Acquired loans
Commercial
C&I		2		—		55
CRE		3		930		1,018

Total acquired commercial		5		930		1,073
Consumer
Installment		50		1,144		1,227
Home equity lines		174		7,138		7,205
Residential mortgages		31		2,150		2,386

Total acquired consumer		255		10,432		10,818

Total acquired loans		260	$	11,362	$	11,891

FDIC acquired loans
Commercial
C&I		8	$	—	$	1,299
CRE		24		11,704		27,933
Construction		9		525		9,542

Total FDIC acquired commercial		41		12,229		38,774
Consumer
Home equity lines		77		10,563		10,739
Residential mortgages		1		184		184

Total FDIC acquired consumer		78		10,747		10,923

Total FDIC acquired loans		119	$	22,976	$	49,697

Total loans
Commercial
C&I		66	$	29,454	$	37,892
CRE		96		22,996		44,632
Construction		40		525		9,542

Total commercial		202		52,975		92,066
Consumer
Installment		1,265		33,071		33,712
Home equity lines		522		25,122		25,613
Credit card		231		787		787
Residential mortgages		348		27,031		30,009

Total consumer		2,366		86,011		90,121

Total loans		2,568	$	138,986	$	182,187

Note 1:

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

Note 2:

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

The pre-modification and post-modification outstanding recorded investments of loans modified as TDRs during the three and six months ended June 30, 2016 and 2015 were not materially different. Post-modification balances may include capitalization of unpaid accrued interest and fees associated with the modification as well as forgiveness of principal. Loans modified as TDRs during the three and six months ended June 30, 2016 and 2015 did not involve the forgiveness of principal; accordingly, the Corporation did not record a charge-off at the modification date. Additionally, capitalization of any unpaid accrued interest and fees assessed to loans modified in the three and six months ended June 30, 2016 and 2015 were not material to the accompanying consolidated financial statements. Specific allowances for loan losses are established for loans whose terms have been modified in a TDR. Specific reserve allocations are generally assessed prior to loans being modified in a TDR, as most of these loans migrate from the Corporation’s internal watch list and have been specifically allocated for as part of the Corporation’s normal loan loss provisioning methodology. At June 30, 2016, December 31, 2015, and June 30, 2015, the Corporation had $0.2 million, $7.0 million, and $3.7 million, respectively, in commitments to lend additional funds to debtors owing receivables whose terms have been modified in a TDR.

The following tables provide a summary of the delinquency status of TDRs along with the specific allowance for loan loss, by loan type, as of June 30, 2016, December 31, 2015, and June 30, 2015, including TDRs that continue to accrue interest and TDRs included in nonperforming assets.


As of June 30, 2016
	Accruing TDRs						Nonaccruing TDRs						Total		Total
(In thousands)	Current		Delinquent		Total		Current		Delinquent		Total		TDRs		Allowance
Originated loans
Commercial
C&I	$	16,082	$	969	$	17,051	$	13,068	$	6,531	$	19,599	$	36,650	$	4,917
CRE		8,851		93		8,944		111		10,950		11,061		20,005		5
Construction		—		—		—		—		—		—		—		—

Total originated commercial		24,933		1,062		25,995		13,179		17,481		30,660		56,655		4,922
Consumer
Installment		39,255		1,064		40,319		1,718		235		1,953		42,272		1,149
Home equity lines		7,017		79		7,096		778		—		778		7,874		169
Credit card		519		117		636		—		43		43		679		201
Residential mortgages		14,324		524		14,848		5,717		2,820		8,537		23,385		981

Total originated consumer		61,115		1,784		62,899		8,213		3,098		11,311		74,210		2,500

Total originated TDRs	$	86,048	$	2,846	$	88,894	$	21,392	$	20,579	$	41,971	$	130,865	$	7,422

Acquired loans
Commercial
C&I	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
CRE		2,720		—		2,720		2,151		127		2,278		4,998		156
Construction		—		—		—		—		—		—		—		—

Total acquired commercial		2,720		—		2,720		2,151		127		2,278		4,998		156
Consumer
Installment		1,142		223		1,365		220		—		220		1,585		86
Home equity lines		6,820		583		7,403		117		—		117		7,520		115
Residential mortgages		2,259		—		2,259		640		—		640		2,899		176

Total acquired consumer		10,221		806		11,027		977		—		977		12,004		377

Total acquired TDRs	$	12,941	$	806	$	13,747	$	3,128	$	127	$	3,255	$	17,002	$	533

FDIC acquired loans
Commercial
C&I	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
CRE		—		—		—		—		13,124		13,124		13,124		2,236
Construction		—		—		—		566		—		566		566		25

Total FDIC acquired commercial		—		—		—		566		13,124		13,690		13,690		2,261
Consumer
Home equity lines		8,392		87		8,479		50		—		50		8,529		21
Residential mortgages		—		—		—		—		—		—		—		—

Total FDIC acquired consumer		8,392		87		8,479		50		—		50		8,529		21

Total FDIC acquired TDRs	$	8,392	$	87	$	8,479	$	616	$	13,124	$	13,740	$	22,219	$	2,282

Total loans
Commercial
C&I	$	16,082	$	969	$	17,051	$	13,068	$	6,531	$	19,599	$	36,650	$	4,917
CRE		11,571		93		11,664		2,262		24,201		26,463		38,127		2,397
Construction		—		—		—		566		—		566		566		25

Total commercial		27,653		1,062		28,715		15,896		30,732		46,628		75,343		7,339
Consumer
Installment		40,397		1,287		41,684		1,938		235		2,173		43,857		1,235
Home equity lines		22,229		749		22,978		945		—		945		23,923		305
Credit card		519		117		636		—		43		43		679		201
Residential mortgages		16,583		524		17,107		6,357		2,820		9,177		26,284		1,157

Total consumer		79,728		2,677		82,405		9,240		3,098		12,338		94,743		2,898

Total TDRs	$	107,381	$	3,739	$	111,120	$	25,136	$	33,830	$	58,966	$	170,086	$	10,237


As of December 31, 2015
	Accruing TDRs						Nonaccruing TDRs						Total		Total
(In thousands)	Current		Delinquent		Total		Current		Delinquent		Total		TDRs		Allowance
Originated loans
Commercial
C&I	$	22,566	$	107	$	22,673	$	4,229	$	6,185	$	10,414	$	33,087	$	6,052
CRE		10,271		2,247		12,518		746		1,407		2,153		14,671		20
Construction		—		—		—		—		—		—		—		—

Total originated commercial		32,837		2,354		35,191		4,975		7,592		12,567		47,758		6,072
Consumer
Installment		34,902		794		35,696		1,125		83		1,208		36,904		1,009
Home equity lines		6,511		114		6,625		399		56		455		7,080		188
Credit card		575		140		715		—		2		2		717		243
Residential mortgages		12,869		2,896		15,765		4,611		3,529		8,140		23,905		944

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

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

Acquired loans
Commercial
C&I	$	7,611	$	—	$	7,611	$	—	$	—	$	—	$	7,611	$	—
CRE		—		—		—		659		259		918		918		201

Total acquired commercial		7,611		—		7,611		659		259		918		8,529		201
Consumer
Installment		967		126		1,093		14		10		24		1,117		45
Home equity lines		6,941		655		7,596		122		—		122		7,718		70
Residential mortgages		1,096		256		1,352		802		—		802		2,154		—

Total acquired consumer		9,004		1,037		10,041		938		10		948		10,989		115

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

FDIC acquired loans
Commercial
C&I	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
CRE		—		14,056		14,056		—		—		—		14,056		2,333
Construction		593		—		593		—		—		—		593		—

Total FDIC acquired commercial		593		14,056		14,649		—		—		—		14,649		2,333
Consumer
Home equity lines		10,065		70		10,135		6		74		80		10,215		23
Residential mortgages		182		—		182		—		—		—		182		—

Total FDIC acquired consumer		10,247		70		10,317		6		74		80		10,397		23

Total FDIC acquired TDRs	$	10,840	$	14,126	$	24,966	$	6	$	74	$	80	$	25,046	$	2,356

Total Loans
Commercial
C&I	$	30,177	$	107	$	30,284	$	4,229	$	6,185	$	10,414	$	40,698	$	6,052
CRE		10,271		16,303		26,574		1,405		1,666		3,071		29,645		2,554
Construction		593		—		593		—		—		—		593		—

Total commercial		41,041		16,410		57,451		5,634		7,851		13,485		70,936		8,606
Consumer
Installment		35,869		920		36,789		1,139		93		1,232		38,021		1,054
Home equity lines		23,517		839		24,356		527		130		657		25,013		281
Credit card		575		140		715		—		2		2		717		243
Residential mortgages		14,147		3,152		17,299		5,413		3,529		8,942		26,241		944

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

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


As of June 30, 2015
	Accruing TDRs						Nonaccruing TDRs						Total		Total
(In thousands)	Current		Delinquent		Total		Current		Delinquent		Total		TDRs		Allowance
Originated loans
Commercial
C&I	$	17,346	$	—	$	17,346	$	9,260	$	2,848	$	12,108	$	29,454	$	2,893
CRE		5,968		—		5,968		1,598		2,796		4,394		10,362		63
Construction		—		—		—		—		—		—		—		—

Total originated commercial		23,314		—		23,314		10,858		5,644		16,502		39,816		2,956
Consumer
Installment		29,715		603		30,318		1,390		219		1,609		31,927		1,001
Home equity lines		6,611		107		6,718		557		146		703		7,421		217
Credit card		684		100		784		—		3		3		787		250
Residential mortgages		13,925		2,105		16,030		4,957		3,710		8,667		24,697		890

Total originated consumer		50,935		2,915		53,850		6,904		4,078		10,982		64,832		2,358

Total originated TDRs	$	74,249	$	2,915	$	77,164	$	17,762	$	9,722	$	27,484	$	104,648	$	5,314

Acquired loans
Commercial
C&I	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
CRE		—		—		—		930		—		930		930		98

Total acquired commercial		—		—		—		930		—		930		930		98
Consumer
Installment		1,082		47		1,129		15		—		15		1,144		44
Home equity lines		6,387		618		7,005		133		—		133		7,138		—
Residential mortgages		1,313		—		1,313		615		222		837		2,150		—

Total acquired consumer		8,782		665		9,447		763		222		985		10,432		44

Total acquired TDRs	$	8,782	$	665	$	9,447	$	1,693	$	222	$	1,915	$	11,362	$	142

FDIC acquired loans
Commercial
C&I	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
CRE		—		11,704		11,704		—		—		—		11,704		2,393
Construction		525		—		525		—		—		—		525		96

Total FDIC acquired commercial		525		11,704		12,229		—		—		—		12,229		2,489
Consumer
Home equity lines		9,505		89		9,594		143		826		969		10,563		23
Residential mortgages		184		—		184		—		—		—		184		—

Total FDIC acquired consumer		9,689		89		9,778		143		826		969		10,747		23

Total FDIC acquired TDRs	$	10,214	$	11,793	$	22,007	$	143	$	826	$	969	$	22,976	$	2,512

Total loans
Commercial
C&I	$	17,346	$	—	$	17,346	$	9,260	$	2,848	$	12,108	$	29,454	$	2,893
CRE		5,968		11,704		17,672		2,528		2,796		5,324		22,996		2,554
Construction		525		—		525		—		—		—		525		96

Total commercial		23,839		11,704		35,543		11,788		5,644		17,432		52,975		5,543
Consumer
Installment		30,797		650		31,447		1,405		219		1,624		33,071		1,045
Home equity lines		22,503		814		23,317		833		972		1,805		25,122		240
Credit card		684		100		784		—		3		3		787		250
Residential mortgages		15,422		2,105		17,527		5,572		3,932		9,504		27,031		890

Total consumer		69,406		3,669		73,075		7,810		5,126		12,936		86,011		2,425

Total TDRs	$	93,245	$	15,373	$	108,618	$	19,598	$	10,770	$	30,368	$	138,986	$	7,968

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

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

The following tables provide the number of loans modified in a TDR within the previous 12 months that subsequently defaulted during the three months ended June 30, 2016 and June 30, 2015, as well as the amount defaulted in these restructured loans.


	Three Months Ended June 30, 2016
(Dollars in thousands)	Number of Loans		Amount Defaulted
Originated loans
Commercial
C&I		0	$	—
CRE		0		—
Construction		0		—

Total originated commercial		0	$	—

Consumer
Installment		2	$	15
Home equity lines		0		—
Credit card		0		—
Residential mortgages		0		—

Total originated consumer		2	$	15

FDIC acquired loans
Commercial
C&I		0	$	—
CRE		0		—
Construction		0		—

Total FDIC acquired commercial		0	$	—

Acquired loans
Commercial
C&I		0	$	—
CRE		0		—
Construction		0		—

Total acquired commercial		0	$	—

Consumer
Installment		0	$	—
Home equity lines		0		—
Residential mortgages		0		—

Total acquired consumer		—	$	—

Total loans
Commercial
C&I		0	$	—
CRE		0		—
Construction		0		—

Total commercial		0	$	—

Consumer
Installment		2	$	15
Home equity lines		0		—
Credit card		0		—
Residential mortgages		0		—

Total consumer		2	$	15

Total		2	$	15


	Three Months Ended June 30, 2015
(Dollars in thousands)	Number of Loans		Recorded Investment
Originated loans
Commercial
C&I		0	$	—
CRE		0		—
Construction		0		—

Total originated commercial		0	$	—

Consumer
Installment		1	$	6
Home equity lines		0		—
Credit card		1		1
Residential mortgages		1		368

Total originated consumer		3	$	375

FDIC acquired loans
Commercial
C&I		0	$	—
CRE		0		—
Construction		0		—

Total FDIC acquired commercial		0	$	—

Acquired loans
Commercial
C&I		0	$	—
CRE		0		—
Construction		0		—

Total acquired commercial		0	$	—

Consumer
Installment		1	$	33
Home equity lines		0		—
Residential mortgages		0		—

Total acquired consumer		1	$	33

Total loans
Commercial
C&I		0	$	—
CRE		0		—
Construction		0		—

Total commercial		0	$	—

Consumer
Installment		2	$	39
Home equity lines		0		—
Credit card		1		1
Residential mortgages		1		368

Total consumer		4	$	408

Total		4	$	408

.5. Goodwill and Other Intangible Assets

Goodwill

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

Other Intangible Assets

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


	June 30, 2016
(In thousands)	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Core deposit intangibles ⁽¹⁾	$	82,323	$	(32,083	)	$	50,240
Lease intangible		238		(229	)		9
Trust Relationships ⁽²⁾		14,000		(8,229	)		5,771

	$	96,561	$	(40,541	)	$	56,020


	December 31, 2015
(In thousands)	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Core deposit intangibles ⁽¹⁾	$	82,323	$	(28,304	)	$	54,019
Lease intangible		238		(212	)		26
Trust Relationships ⁽²⁾		14,000		(7,417	)		6,583

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


	June 30, 2015
(In thousands)	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Core deposit intangibles⁽¹⁾	$	82,323	$	(24,150	)	$	58,173
Lease intangible		238		(194	)		44
Trust relationships ⁽²⁾		14,000		(6,393	)		7,607

	$	96,561	$	(30,737	)	$	65,824

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

(2)	Trust relationship intangibles are amortized on an accelerated basis on their estimated useful lives of 12 years.

Amortization expense for intangible assets was $4.6 million in the six months ended June 30, 2016, compared to $5.2 million in the six months ended June 30, 2015. Estimated amortization expense for each of the next five years is as follows: remainder of 2016—$4.6 million; 2017—$8.2 million; 2018—$7.3 million; and 2019—$6.5 million; 2020—$5.2 million.

6. Shareholders’ Equity

Common Stock Warrant

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

Preferred Stock

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

Earnings Per Share

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

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

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


	Three Months Ended June 30,				Six Months Ended June 30,
(Dollars in thousands, except per share amounts)	2016		2015		2016		2015
Basic EPS:
Net income	$	58,309	$	56,584	$	112,445	$	113,723
Less:
Cash dividends on 5.875% non-cumulative perpetual series A, Preferred Stock		1,469		1,469		2,938		2,938
Income allocated to participating securities		496		467		955		937

Net income attributable to common shareholders	$	56,344	$	54,648	$	108,552	$	109,848

Weighted average Common Stock outstanding used in basic EPS		166,188		165,736		165,966		165,574

Basic net income per common share	$	0.34	$	0.33	$	0.65	$	0.66

Diluted EPS:
Income used in diluted earnings per common share calculation	$	56,344	$	54,648	$	108,552	$	109,848

Weighted average Common Stock outstanding used in basic EPS		166,188		165,736		165,966		165,574
Add: Common Stock equivalents
Employee stock award plans		619		541		597		515

Weighted average Common and Common Stock equivalent shares outstanding		166,807		166,277		166,563		166,089

Diluted net income per common share	$	0.34	$	0.33	$	0.65	$	0.66

Common Stock equivalents consist of employee stock award plans. These Common Stock equivalents do not enter into the calculation of diluted EPS if the impact would be anti-dilutive, that is, increase EPS or reduce a loss per share. Anti-dilutive potential Common Stock for the six months ended June 30, 2016 and 2015 totaled 0.2 million and 0.8 million, respectively.

7. Segment Information

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

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

•

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

•

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

•

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

•

Other – The other line of business includes activities that are not directly attributable to one of the three principal lines of business. Included in the Other category are the Parent Company, eliminating companies, community development operations, the treasury group, which includes the securities portfolio, wholesale funding and asset liability management activities, and the economic impact of certain assets, capital and support functions not specifically identifiable with the three primary lines of business.

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

Substantially all of the Corporation’s business is conducted in the United States of America. The following tables present a summary of financial results as of and for the three and six months ended June 30, 2016 and June 30, 2015:


(In thousands)	Commercial				Retail				Wealth						Other						FirstMerit Consolidated
June 30, 2016	QTD		YTD		QTD		YTD		QTD			YTD			QTD			YTD			QTD		YTD
OPERATIONS:
Net interest income/(loss)	$	101,313	$	203,932	$	94,369	$	189,096	$	6,314		$	12,867		$	(15,918	)	$	(34,661	)	$	186,078	$	371,234
Provision/ (recapture) for loan losses		1,070		6,842		5,123		9,169		(20	)		(175	)		218			(1,636	)		6,391		14,200
Noninterest income		20,782		41,961		22,079		45,673		15,129			29,437			7,125			15,438			65,115		132,509
Noninterest expense		57,201		118,221		84,880		173,575		13,883			27,236			4,356			8,251			160,320		327,283
Net income/(loss)		41,486		78,539		17,189		33,816		4,927			9,908			(5,293	)		(9,818	)		58,309		112,445
AVERAGES:
Assets	$	9,600,103	$	9,596,152	$	6,370,350	$	6,301,303	$	314,752		$	310,159		$	9,638,361		$	9,639,033		$	25,923,566	$	25,846,647
Loans		9,721,866		9,715,827		6,173,352		6,097,054		306,028			301,586			41,656			46,706			16,242,902		16,161,173
Earning assets		10,081,198		10,077,716		6,178,619		6,103,154		306,028			301,586			6,555,458			6,523,236			23,121,303		23,005,692
Deposits		7,269,121		7,373,805		11,003,769		11,014,512		1,284,516			1,302,113			1,410,044			1,111,129			20,967,450		20,801,559
Economic capital		1,251,845		1,252,069		867,958		870,360		121,824			126,706			770,591			742,055			3,012,218		2,991,190


(In thousands)	Commercial				Retail				Wealth						Other						FirstMerit Consolidated
June 30, 2015	QTD		YTD		QTD		YTD		QTD			YTD			QTD			YTD			QTD		YTD
OPERATIONS:
Net interest income/(loss)	$	101,342	$	202,830	$	92,501	$	184,527	$	5,452		$	10,932		$	(14,177	)	$	(27,548	)	$	185,118	$	370,741
Provision/ (recapture) for loan losses		2,285		1,759		8,447		15,981		(1	)		(171	)		(1,765	)		(355	)		8,966		17,214
Noninterest income		21,918		44,408		23,964		45,701		14,816			28,792			5,884			13,528			66,582		132,429
Noninterest expense		61,032		122,685		87,799		176,070		13,461			27,181			(618	)		(3,610	)		161,674		322,326
Net income/(loss)		38,963		79,816		13,142		24,815		4,425			8,264			54			828			56,584		113,723
AVERAGES:
Assets	$	9,437,824	$	9,445,975	$	5,951,665	$	5,898,835	$	290,798		$	296,461		$	9,449,572		$	9,374,463		$	25,129,859	$	25,015,734
Loans		9,533,843		9,520,262		5,702,015		5,636,666		281,013			286,484			60,490			59,274			15,577,361		15,502,686
Earning assets		9,828,867		9,811,770		5,707,400		5,645,469		281,013			286,484			6,535,441			6,483,544			22,352,721		22,227,267
Deposits		6,777,434		6,831,887		11,105,954		11,115,005		1,188,563			1,214,617			610,711			573,990			19,682,662		19,735,499
Economic capital		1,355,049		1,349,289		767,803		763,446		111,770			109,969			657,810			656,765			2,892,432		2,879,469

8. Derivatives and Hedging Activities

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

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

Derivatives Designated in Hedge Relationships

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

At June 30, 2016, December 31, 2015, and June 30, 2015, the notional values or contractual amounts and fair value of the Corporation’s derivatives designated in hedge relationships were as follows:


	Asset Derivatives												Liability Derivatives
	June 30, 2016				December 31, 2015				June 30, 2015				June 30, 2016				December 31, 2015				June 30, 2015
(In thousands)	Notional/ Contract Amount		Fair Value ⁽¹⁾		Notional/ Contract Amount		Fair Value ⁽¹⁾		Notional/ Contract Amount		Fair Value ⁽¹⁾		Notional/ Contract Amount		Fair Value ⁽²⁾		Notional/ Contract Amount		Fair Value ⁽²⁾		Notional/ Contract Amount		Fair Value ⁽²⁾
Interest rate swaps:
Commercial loan swaps (FRAPS)	$	—	$	—	$	—	$	—	$	—	$	—	$	50,668	$	2,772	$	55,689	$	3,536	$	75,794	$	5,104
Sub debt swap		250,000		29,760		250,000		8,739		250,000		1,153		—		—		—		—		—		—

Fair value hedges	$	250,000	$	29,760	$	250,000	$	8,739	$	250,000	$	1,153	$	50,668	$	2,772	$	55,689	$	3,536	$	75,794	$	5,104

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

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

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

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

Derivatives Not Designated in Hedge Relationships

As of June 30, 2016, December 31, 2015, and June 30, 2015, the notional values or contractual amounts and fair value of the Corporation’s derivatives not designated in hedge relationships were as follows:


	Asset Derivatives												Liability Derivatives
	June 30, 2016				December 31, 2015				June 30, 2015				June 30, 2016				December 31, 2015				June 30, 2015
(In thousands)	Notional/ Contract Amount		Fair Value ⁽¹⁾		Notional/ Contract Amount		Fair Value ⁽¹⁾		Notional/ Contract Amount		Fair Value ⁽¹⁾		Notional/ Contract Amount		Fair Value⁽²⁾		Notional/ Contract Amount		Fair Value ⁽²⁾		Notional/ Contract Amount		Fair Value ⁽²⁾
Interest rate swaps	$	1,904,459	$	87,575	$	1,824,576	$	48,920	$	1,726,600	$	46,216	$	1,904,459	$	87,575	$	1,824,576	$	48,920	$	1,726,600	$	46,216
Mortgage loan commitments		32,802		253		20,635		149		52,024		342		—		—		—		—		—		—
Forward sales contracts		—		—		—		—		15,200		106		8,059		61		9,659		5		—		—
Credit contracts		—		—		—		—		—		—		74,945		7		73,715		—		73,512		—
Foreign exchange		20,180		254		13,671		299		29,687		256		18,571		207		11,706		284		15,823		177
Equity swap		—		—		—		—		—		—		35,034		—		36,631		—		31,718		—

Total	$	1,957,441	$	88,082	$	1,858,882	$	49,368	$	1,823,511	$	46,920	$	2,041,068	$	87,850	$	1,956,287	$	49,209	$	1,847,653	$	46,393

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

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

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

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

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

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

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

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

customer fails to make payment on any amounts due to the Corporation. Swap participations whereby the Corporation has purchased credit protection have maturities that range between less than two to seven years. For swap participations where the Corporation sold credit protection, the Corporation has guaranteed payment in the event that the counterparty experiences a loss on the swap due to a failure to pay by the Corporation’s commercial loan customer. The Corporation simultaneously entered into reimbursement agreements with the commercial loan customers obligating the customers to reimburse the Corporation for any payments it makes under the swap participations. The Corporation monitors its payment risk on its swap participations by monitoring the creditworthiness of its commercial loan customers, which is based on the normal credit review process the Corporation would have performed had it entered into these derivative instruments directly with the commercial loan customers. Credit derivatives whereby the Corporation has sold credit protection have maturities ranging from less than one year to nine years. The Corporation’s maximum estimated exposure to sold swap participations, as measured by projecting a maximum value of the guaranteed derivative instruments based on interest rate curve simulations and assuming 100% default by all obligors on the maximum values, was approximately $7.1 million as of June 30, 2016. The fair values of the written swap participations were not material at June 30, 2016, December 31, 2015, and June 30, 2015.

Gains and losses recognized in income on non-designated hedging instruments for the three and six months ended June 30, 2016 and 2015 are as follows:


Derivatives not designated as hedging instruments	Location of Gain/(Loss) Recognized in Income on Derivative	Amount of Gain / (Loss) Recognized in Income on Derivatives (In thousands)
		Three Months Ended June 30,					Six Months Ended June 30,
		2016		2015			2016			2015
Mortgage loan commitments	Loan sales and servicing income	$	12	$	(46	)	$	105		$	(1,066	)
Forward sales contracts	Loan sales and servicing income		20		175			(56	)		378
Foreign exchange contracts	Other operating income		766		165			1,585			(712	)
Equity swap	Other operating expense		—		—			—			—

Total		$	798	$	294		$	1,634		$	(1,400	)

Counterparty Credit Risk

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

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

The fair value of investment securities posted as collateral against derivative liabilities was $55.9 million, $47.2 million, and $45.6 million as of June 30, 2016, December 31, 2015, and June 30, 2015, respectively.

Derivative assets and liabilities are recorded at fair value on the balance sheet and do not take into account the effects of master netting agreements the Corporation has with its financial institution counterparties. These master netting agreements allow the Corporation to settle all derivative contracts held with a single financial institution counterparty on a net basis, and to offset net derivative positions with related collateral, where applicable. Collateral, usually in the form of investment securities, is posted by the counterparty in the net liability position in accordance with contract thresholds. The following tables illustrate the potential effect of the Corporation’s derivative master netting arrangements, by type of financial instrument, on the Corporation’s statement of financial position as of June 30, 2016, December 31, 2015, and June 30, 2015. The swap agreements the Corporation has in place with its commercial customers are not subject to enforceable master netting arrangements, and, therefore, are excluded from these tables.


	As of June 30, 2016
	Gross amounts recognized		Gross amounts offset in the consolidated balance sheet		Net amounts presented in the consolidated balance sheet		Gross amounts not offset in the consolidated balance sheet						Net amount
(In thousands)	Gross amounts recognized		Gross amounts offset in the consolidated balance sheet		Net amounts presented in the consolidated balance sheet		Financial instruments ⁽¹⁾			Collateral⁽²⁾			Net amount
Derivative Assets
Interest rate swaps—designated	$	29,760	$	—	$	29,760	$	—		$	—		$	29,760
Interest rate swaps—non-designated		3	$	—		3		(3	)		—			—
Foreign exchange		76		—		76		(76	)		—			—

Total derivative assets	$	29,839	$	—	$	29,839	$	(79	)	$	—		$	29,760

Derivative liabilities
Interest rate swaps—designated	$	2,772	$	—	$	2,772	$	—		$	(2,772	)	$	—
Interest rate swaps—non-designated		87,572		—		87,572		(3	)		(87,569	)		—
Foreign exchange		131		—		131		(76	)		(55	)		—

Total derivative liabilities	$	90,475	$	—	$	90,475	$	(79	)	$	(90,396	)	$	—


	As of December 31, 2015
	Gross amounts recognized		Gross amounts offset in the consolidated balance sheet		Net amounts presented in the consolidated balance sheet		Gross amounts not offset in the consolidated balance sheet						Net amount
(In thousands)	Gross amounts recognized		Gross amounts offset in the consolidated balance sheet		Net amounts presented in the consolidated balance sheet		Financial instruments ⁽¹⁾			Collateral⁽²⁾			Net amount
Derivative assets
Interest rate swaps—designated	$	8,739	$	—	$	8,739	$	—		$	—		$	8,739
Interest rate swaps—non-designated		155		—		155		(155	)		—			—
Foreign exchange		270		—		270		(32	)		(238	)		—

Total derivative assets	$	9,164	$	—	$	9,164	$	(187	)	$	(238	)	$	8,739

Derivative liabilities
Interest rate swaps—designated	$	3,536	$	—	$	3,536	$	—		$	(3,536	)	$	—
Interest rate swaps—non-designated		48,765		—		48,765		(155	)		(48,610	)		—
Foreign exchange		32		—		32		(32	)		—			—

Total derivative liabilities	$	52,333	$	—	$	52,333	$	(187	)	$	(52,146	)	$	—


	As of June 30, 2015
	Gross amounts recognized		Gross amounts offset in the consolidated balance sheet		Net amounts presented in the consolidated balance sheet		Gross amounts not offset in the consolidated balance sheet						Net amount
(In thousands)	Gross amounts recognized		Gross amounts offset in the consolidated balance sheet		Net amounts presented in the consolidated balance sheet		Financial instruments ⁽¹⁾			Collateral⁽²⁾			Net amount
Derivative assets
Interest rate swaps—designated		1,153		—		1,153		—			—			1,153
Interest rate swaps—non-designated	$	414	$	—	$	414	$	(414	)	$	—		$	—
Foreign exchange		164		—		164		(49	)		(115	)		—

Total derivative assets	$	1,731	$	—	$	1,731	$	(463	)	$	(115	)	$	1,153

Derivative liabilities
Interest rate swaps—designated	$	5,104	$	—	$	5,104	$	—		$	(5,104	)	$	—
Interest rate swaps—non-designated		45,802		—		45,802		(414	)		(45,388	)		—
Foreign exchange		49		—		49		(49	)		—			—

Total derivative liabilities	$	50,955	$	—	$	50,955	$	(463	)	$	(50,492	)	$	—

(1)	For derivative assets, this includes any derivative liability fair values that could be offset in the event of counterparty default. For derivative liabilities, this includes any derivative asset fair values that could be offset in the event of counterparty default.

(2)

For derivate assets, this includes the fair value of collateral received by the Corporation from the counterparty. Securities received as collateral are not included in the Consolidated Balance Sheets unless the counterparty defaults. For derivative liabilities, this includes the fair value of securities pledged by the Corporation to the counterparty. These securities are included in the Consolidated Balance Sheets unless the Corporation defaults.

9. Benefit Plans

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


	Pension Benefits
	Three Months Ended June 30,						Six Months Ended June 30,
(In thousands)	2016			2015			2016			2015
Service cost	$	198		$	207		$	396		$	415
Interest cost		3,649			3,517			7,298			7,035
Expected return on assets		(3,788	)		(3,902	)		(7,576	)		(7,804	)
Amortization of unrecognized prior service costs		75			570			150			1,140
Amortization of actuarial losses/(gains)		830			1,057			1,660			2,113

Net periodic pension cost	$	964		$	1,449		$	1,928		$	2,899


	Postretirement Benefits
	Three Months Ended June 30,						Six Months Ended June 30,
(In thousands)	2016			2015			2016			2015
Service cost	$	26		$	41		$	52		$	83
Interest cost		64			144			127			288
Amortization of unrecognized prior service costs		(636	)		(160	)		(1,271	)		(319	)
Amortization of actuarial losses/(gains)		245			81			490			163

Net periodic postretirement cost	$	(301	)	$	106		$	(602	)	$	215

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

10. Fair Value Measurement

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

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

•

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

•

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

•

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

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

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

•

the amount of time since the last relevant valuation;

•

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

•

volatility associated with the primary pricing components.

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

•

an independent review and approval of valuation models;

•

recurring detailed reviews of profit and loss; and

•

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

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

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

The following tables present the balance of assets and liabilities measured at fair value on a recurring and nonrecurring basis as of June 30, 2016, December 31, 2015, and June 30, 2015:


			Fair Value by Hierarchy
(In thousands)	June 30, 2016		Level 1		Level 2		Level 3
Recurring fair value measurement
Available-for-sale securities:
Marketable equity securities	$	2,788	$	2,788	$	—	$	—
U.S. treasury notes & bonds		4,997		—		4,997		—
U.S. government agency debentures		2,528		—		2,528		—
U.S. States and political subdivisions		151,547		—		151,547		—
Residential mortgage-backed securities:
U.S. government agencies		860,247		—		860,247		—
Commercial mortgage-backed securities:
U.S. government agencies		202,048		—		202,048		—
Residential collateralized mortgage-backed securities:
U.S. government agencies		2,353,018		—		2,353,018		—
Non-agency		3		—		—		3
Commercial collateralized mortgage-backed securities:
U.S. government agencies		398,611		—		398,611		—
Corporate debt securities		51,107		—		—		51,107
Asset-backed securities:
Collateralized loan obligations		291,794		—		—		291,794

Total available for sale securities		4,318,688		2,788		3,972,996		342,904
Residential loans held for sale		3,962		—		3,962		—
Derivative assets:
Interest rate swaps—fair value hedges		29,760		—		29,760		—
Interest rate swaps—nondesignated		87,575		—		87,575		—
Mortgage loan commitments		253		—		253		—
Foreign exchange		254		—		254		—

Total derivative assets		117,842		—		117,842		—

Total fair value of assets ⁽¹⁾	$	4,440,492	$	2,788	$	4,094,800	$	342,904

Derivative liabilities:
Interest rate swaps—fair value hedges	$	2,772	$	—	$	2,772	$	—
Interest rate swaps—nondesignated		87,575		—		87,575		—
Forward sales contracts		61		—		61		—
Credit contracts		7		—		7		—
Foreign exchange		207		—		207		—

Total derivative liabilities		90,622		—		90,622		—
True-up liability		16,170		—		—		16,170

Total fair value of liabilities ⁽¹⁾	$	106,792	$	—	$	90,622	$	16,170

Nonrecurring fair value measurement
Mortgage servicing rights ⁽²⁾	$	15,954	$	—	$	—	$	15,954
Impaired loans ⁽³⁾		104,208		—		—		104,208
Other property⁽⁴⁾		10,027		—		—		10,027
Other real estate covered by loss share ⁽⁵⁾		4		—		—		4

Total nonrecurring fair value	$	130,193	$	—	$	—	$	130,193

(1)	There were no transfers between levels 1, 2 or 3 of the fair value hierarchy during the three months ended June 30, 2016.

(2)

MSRs with a recorded investment of $17.3 million were reduced by a specific valuation allowance totaling $1.5 million to a reported carrying value of $15.8 million resulting in recognition of $0.7 million in expense included in loan sales and servicing income in the three months ended June 30, 2016.

(3)	At June 30, 2016, collateral dependent impaired loans with a recorded investment of $116.1 million were reduced by specific valuation allowance allocations totaling $11.9 million to a reported net carrying value of $104.2 million.

(4)	Amounts do not include assets held at cost at June 30, 2016. During the three months ended June 30, 2016, the re-measurement of foreclosed assets at fair value subsequent to initial recognition resulted in losses of $0.7 million included in noninterest expense.


			Fair Value by Hierarchy
(In thousands)	December 31, 2015		Level 1		Level 2		Level 3
Recurring fair value measurement
Available-for-sale securities:
Marketable equity securities	$	2,821	$	2,821	$	—	$	—
U.S treasury notes & bonds		5,000		—		5,000		—
U.S. government agency debentures		2,498		—		2,498		—
U.S. States and political subdivisions		192,795		—		192,795		—
Residential mortgage-backed securities:
U.S. government agencies		906,229		—		906,229		—
Commercial mortgage-backed securities:
U.S. government agencies		172,109		—		172,109		—
Residential collateralized mortgage-backed securities:
U.S. government agencies		2,128,320		—		2,128,320		—
Non-agency		4		—		—		4
Commercial collateralized mortgage-backed securities:
U.S. government agencies		216,319		—		216,319		—
Corporate debt securities		52,229		—		—		52,229
Asset-backed securities
Collateralized loan obligations		289,411		—		—		289,411

Total available-for-sale securities		3,967,735		2,821		3,623,270		341,644
Residential loans held for sale		5,472		—		5,472		—
Derivative assets:
Interest rate swaps—fair value hedges		8,739		—		8,739		—
Interest rate swaps—nondesignated		48,920		—		48,920		—
Mortgage loan commitments		149		—		149		—
Foreign exchange		299		—		299		—

Total derivative assets		58,107		—		58,107		—

Total fair value of assets ⁽¹⁾	$	4,031,314	$	2,821	$	3,686,849	$	341,644

Derivative liabilities:
Interest rate swaps—fair value hedges	$	3,536	$	—	$	3,536	$	—
Interest rate swaps—nondesignated		48,920		—		48,920		—
Forward sale contracts		5		—		5		—
Foreign exchange		284		—		284		—

Total derivative liabilities		52,745		—		52,745		—
True-up liability		14,750		—		—		14,750

Total fair value of liabilities ⁽¹⁾	$	67,495	$	—	$	52,745	$	14,750

Nonrecurring fair value measurement
Mortgage servicing rights ⁽²⁾	$	19,149	$	—	$	—	$	19,149
Impaired loans ⁽³⁾		71,428		—		—		71,428
Other property ⁽⁴⁾		18,576		—		—		18,576
Other real estate covered by loss share ⁽⁵⁾		365		—		—		365

Total nonrecurring fair value	$	109,518	$	—	$	—	$	109,518

(1)	There were no transfers between levels 1, 2 or 3 of the fair value hierarchy during the year ended December 31, 2015.

(2)

MSRs with a recorded investment of $18.9 million were reduced by a specific valuation allowance totaling $0.4 million to a reported carrying value of $18.5 million resulting in a recovery of previously recognized expense of $0.6 million in recoveries included in loans sales and servicing income in the year ended December 31, 2015.

(3)	At December 31, 2015, collateral dependent impaired loans with a recorded investment of $84.3 million were reduced by specific valuation allowance allocations totaling $12.9 million to a reported net carrying value of $71.4 million.

(4)	Amounts do not include assets held at cost at December 31, 2015. During the year ended December 31, 2015, the re-measurement of foreclosed assets at fair value subsequent to initial recognition resulted in losses of $4.5 million included in noninterest expense.

(5)	Amounts do not include assets held at cost at December 31, 2015. During the year ended December 31, 2015, the re-measurement of covered foreclosed assets at fair value subsequent to initial recognition resulted in losses of $0.6 million included in noninterest expense.


			Fair Value by Hierarchy
(In thousands)	June 30, 2015		Level 1		Level 2		Level 3
Recurring fair value measurement
Available-for-sale securities:
Marketable equity securities	$	2,824	$	2,824	$	—	$	—
U.S. treasury notes & bonds		5,005		—		5,005		—
U.S. government agency debentures		2,510		—		2,510		—
U.S. States and political subdivisions		207,617		—		207,617		—
Residential mortgage-backed securities:
U.S. government agencies		960,852		—		960,852		—
Commercial mortgage-backed securities:
U.S. government agencies		170,338		—		170,338		—
Residential collateralized mortgage-backed securities:
U.S. government agencies		1,949,389		—		1,949,389		—
Non-agency		5		—		—		5
Commercial collateralized mortgage-backed securities:
U.S. government agencies		228,438		—		228,438		—
Corporate debt securities		53,450		—		—		53,450
Asset-backed securities:
Collateralized loan obligations		258,081		—		—		258,081

Total available-for-sale securities		3,838,509		2,824		3,524,149		311,536
Residential loans held for sale		5,432		—		5,432		—
Derivative assets:
Interest rate swaps—fair value hedges		1,153		—		1,153		—
Interest rate swaps—nondesignated		46,216		—		46,216		—
Mortgage loan commitments		342		—		342		—
Forward sale contracts		106		—		106		—
Foreign exchange		256		—		256		—

Total derivative assets		48,073		—		48,073		—

Total fair value of assets ⁽¹⁾	$	3,892,014	$	2,824	$	3,577,654	$	311,536

Derivative liabilities:
Interest rate swaps—fair value hedges	$	5,104	$	—	$	5,104	$	—
Interest rate swaps—nondesignated		46,216		—		46,216		—
Foreign exchange		177		—		177		—

Total derivative liabilities		51,497		—		51,497		—
True-up liability		13,408		—		—		13,408

Total fair value of liabilities ⁽¹⁾	$	64,905	$	—	$	51,497	$	13,408

Nonrecurring fair value measurement
Mortgage servicing rights ⁽²⁾	$	20,809	$	—	$	—	$	20,809
Impaired loans ⁽³⁾		72,580		—		—		72,580
Other property ⁽⁴⁾		33,078		—		—		33,078
Other real estate covered by loss share ⁽⁵⁾		4		—		—		4

Total nonrecurring fair value	$	126,471	$	—	$	—	$	126,471

(1)	There were no transfers between levels 1, 2 and 3 of the fair value hierarchy during the three months ended June 30, 2015.

(2)	MSRs with a recorded investment of $20.6 million were reduced by a specific valuation allowance totaling $0.5 million to a reported carrying value of $20.1 million resulting in recovery of a previously recognized expense of $0.6 million in the three months ended June 30, 2015.

(3)	At June 30, 2015, collateral dependent impaired loans with a recorded investment of $82.7 million were reduced by specific valuation allowance allocations totaling $10.2 million to a reported net carrying value of $72.6 million.

(4)	Amounts do not include assets held at cost at June 30, 2015. During the three months ended June 30, 2015, the re-measurement of foreclosed assets at fair value subsequent to initial recognition resulted in losses of $2.1 million included in noninterest expense.

(5)	Amounts do not include assets held at cost at June 30, 2015. During the three months ended June 30, 2015, the re-measurement of covered foreclosed assets at fair value subsequent to initial recognition resulted in losses of $0.2 million included in noninterest expense.

The following section describes the valuation methodologies used by the Corporation to measure financial assets and liabilities at fair value. During the three months ended June 30, 2016 and 2015, there were no significant changes to the valuation techniques used by the Corporation to measure fair value.

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

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

Securities are classified as Level 3 when there is limited activity in the market for a particular instrument and fair value is determined by obtaining broker quotes. As of June 30, 2016, 8% of the available-for-sale portfolio is Level 3, which consists of single issuer trust preferred securities and CLOs.

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

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

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

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

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

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

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

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

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

Derivative assets are typically secured through securities with financial counterparties or cross collateralization with a borrowing customer. Derivative liabilities are typically secured through the Corporation pledging securities to financial counterparties or, in the case of a borrowing customer, by the right of setoff. The Corporation considers factors such as the likelihood of default by itself and its counterparties, right of setoff, and remaining maturities in determining the appropriate fair value adjustments. All derivative counterparties approved by the Bank’s Board are regularly reviewed, and appropriate business action is taken to adjust the exposure to certain counterparties, as necessary. Counterparty exposure is evaluated by netting positions that are subject to master netting agreements, as well as considering the amount of marketable collateral securing the position. This approach used to estimate impacted exposures to counterparties is also used by the Corporation to estimate its own credit risk on derivative liability positions. To date, no material losses have been incurred due to a counterparty’s inability to pay any uncollateralized position. There was no significant change in value of derivative assets and liabilities attributed to credit risk for the three months ended June 30, 2016.

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

An expected value methodology is used as a starting point for determining the fair value of the true-up liability based on the contractual terms prescribed in the loss share agreements. The resulting values under both calculations are discounted over 10 years (the period defined in the loss share agreements) to reflect the uncertainty in the timing and payment of the true-up liability by the Bank to arrive at a net present value. The discount rate used to value the true-up liability was 3.08% and 3.58% as of June 30, 2016 and 2015, respectively. Increasing or decreasing the discount rate by one percentage point would change the liability by approximately $0.6 million and $0.6 million, respectively, as of June 30, 2016.

In accordance with the loss share agreements governing the Midwest acquisition, on July 15, 2020 (the “Midwest True-Up Measurement Date”), the Bank has agreed to pay to the FDIC half of the amount, if positive, calculated as: (1) 20% of the intrinsic loss estimate of the FDIC (approximately $152 million); minus (2) the sum of (A) 25% of the asset premium paid in connection with the Midwest acquisition (approximately $21 million); plus (B) 25% of the cumulative shared-loss payments (as defined below) plus (C) the cumulative servicing amount (as defined below). The fair value of the true-up liability associated with the Midwest acquisition was $10.5 million, $9.3 million, and $8.4 million as of June 30, 2016, December 31, 2015, and June 30, 2015, respectively.

In accordance with the loss share agreements governing the George Washington acquisition, on April 14, 2020 (the “George Washington True-Up Measurement Date”), the Bank has agreed to pay to the FDIC 50% of the excess, if any, of (1) 20% of the stated threshold (approximately $34.4 million) less (2) the sum of

(A) 25% of the asset discount (approximately $12 million) received in connection with the George Washington acquisition plus (B) 25% of the cumulative shared-loss payments (as defined below) plus (C) the cumulative servicing amount (as defined below). The fair value of the true-up liability associated with the George Washington acquisition was $5.7 million, $5.5 million, and $5.0 million as of June 30, 2016, December 31, 2015, and June 30, 2015, respectively.

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

The changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the three and six months ended June 30, 2016 and 2015 are summarized as follows:


	Three Months Ended June 30,											Six Months Ended June 30,
	2016					2015						2016					2015
(In thousands)	Available- for-sale securities			True-up liability		Available- for-sale securities			True-up liability			Available- for-sale securities			True-up liability		Available- for-sale securities			True-up liability
Balance at beginning of period	$	334,157		$	15,115	$	346,685		$	13,707		$	341,644		$	14,750	$	339,187		$	13,294
(Gains) losses included in earnings ⁽¹⁾		—			1,055		—			(299	)		—			1,420		—			114
Unrealized gains (losses) ⁽²⁾		8,926			—		4,561			—			1,370			—		11,697			—
Purchases		—			—		41,509			—			—			—		41,509			—
Sales		—			—		(71,832	)		—			—			—		(71,832	)		—
Settlements		(179	)		—		(9,387	)		—			(110	)		—		(9,025	)		—

Balance at ending of period	$	342,904		$	16,170	$	311,536		$	13,408		$	342,904		$	16,170	$	311,536		$	13,408

(1)	Reported in “Other expense”

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

Fair Value Option

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

Interest income on loans held for sale is accrued on the principal outstanding primarily using the “simple-interest” method. None of these loans were 90 days or more past due, nor were any on nonaccrual as of June 30, 2016, December 31, 2015, and June 30, 2015. The aggregate fair value, contractual balance and gain or loss on loans held for sale was as follows:


(In thousands)	June 30, 2016		December 31, 2015		June 30, 2015
Aggregate fair value carrying amount	$	3,962	$	5,472	$	5,432
Aggregate unpaid principal / contractual balance		3,836		5,320		5,285

Carrying amount over aggregate unpaid principal ⁽¹⁾	$	126	$	152	$	147

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

Disclosures about Fair Value of Financial Instruments

The carrying amount and estimated fair value of the Corporation’s financial instruments that are carried at either fair value or cost as of June 30, 2016, December 31, 2015, and June 30, 2015 are shown in the tables below.


	June 30, 2016
	Carrying Amount		Fair Value
(In thousands)	Carrying Amount		Total		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	524,287	$	524,287	$	524,287	$	—	$	—
Available-for-sale securities		4,318,688		4,318,688		2,788		3,972,996		342,904
Held-to-maturity securities		2,514,161		2,545,740		—		2,545,740		—
Other securities		148,367		148,367		—		148,367		—
Loans held for sale		3,962		3,962		—		3,962		—
Net originated loans		14,560,456		14,349,013		—		—		14,349,013
Net acquired loans		1,484,380		1,532,344		—		—		1,532,344
Net FDIC acquired loans and loss share receivable		149,121		149,121		—		—		149,121
Accrued interest receivable		65,666		65,666		—		65,666		—
Derivatives		117,842		117,842		—		117,842		—
Financial liabilities:
Deposits	$	20,952,643	$	20,960,182	$	—	$	20,960,182		—
Federal funds purchased and securities sold under agreements to repurchase		686,890		686,890		—		686,890		—
Wholesale borrowings		468,447		473,187		—		473,187		—
Long-term debt		526,389		522,151		—		522,151		—
Accrued interest payable		10,632		10,632		—		10,632		—
Derivatives		90,622		90,622		—		90,622		—


	December 31, 2015
	Carrying Amount		Fair Value
(In thousands)	Carrying Amount		Total		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	463,817	$	463,817	$	463,817	$	—	$	—
Available-for-sale securities		3,967,735		3,967,735		2,821		3,623,270		341,644
Held-to-maturity securities		2,674,093		2,659,119		—		2,659,119		—
Other securities		148,172		148,172		—		148,172		—
Loans held for sale		5,472		5,472		—		5,472		—
Net originated loans		14,013,370		13,795,058		—		—		13,795,058
Net acquired loans		1,739,194		1,796,314		—		—		1,796,314
Net FDIC acquired loans and loss share receivable		170,690		170,690		—		—		170,690
Accrued interest receivable		67,887		67,887		—		67,887		—
Derivatives		58,107		58,107		—		58,107		—
Financial liabilities:
Deposits	$	20,108,003	$	20,116,298	$	—	$	20,116,298	$	—
Federal funds purchased and securities sold under agreements to repurchase		1,037,075		1,037,075		—		1,037,075		—
Wholesale borrowings		580,648		582,120		—		582,120		—
Long-term debt		505,173		503,675		—		503,675		—
Accrued interest payable		10,758		10,758		—		10,758		—
Derivatives		52,745		52,745		—		52,745		—


	June 30, 2015
	Carrying Amount		Fair Value
(In thousands)	Carrying Amount		Total		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	587,589	$	587,589	$	587,589	$	—	$	—
Available-for-sale securities		3,838,509		3,838,509		2,824		3,524,149		311,536
Held-to-maturity securities		2,787,513		2,760,120		—		2,760,120		—
Other securities		147,967		147,967		—		147,967		—
Loans held for sale		5,432		5,432		—		5,432		—
Net originated loans		13,254,230		13,077,485		—		—		13,077,485
Net acquired loans		2,090,734		2,167,304		—		—		2,167,304
Net FDIC acquired loans and loss share receivable		211,887		211,887		—		—		211,887
Accrued interest receivable		66,501		66,501		—		66,501		—
Derivatives		48,073		48,073		—		48,073		—
Financial liabilities:
Deposits	$	19,673,850	$	19,681,270	$	—	$	19,681,270	$	—
Federal funds purchased and securities sold under agreements to repurchase		1,519,250		1,519,250		—		1,519,250		—
Wholesale borrowings		366,074		369,337		—		369,337		—
Long-term debt		497,393		509,900		—		509,900		—
Accrued interest payable		9,910		9,910		—		9,910		—
Derivatives		51,497		51,497		—		51,497		—

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

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

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

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

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

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

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

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

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

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

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

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

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

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

11. Mortgage Servicing Rights and Mortgage Servicing Activity

In the six months ended June 30, 2016 and 2015, the Corporation sold residential mortgage loans from the held for sale portfolio with unpaid principal balances of $15.6 million and $59.7 million, respectively, and recognized pretax gains of $0.4 million and $0.8 million, respectively, which are included as a component of loan sales and servicing income. As of June 30, 2016 and 2015, the Corporation retained the related MSRs, for which it receives servicing fees, on $6.9 million and $51.1 million, respectively, of the loans sold.

The Corporation serviced for third parties approximately $2.2 billion of residential mortgage loans at June 30, 2016 and $2.5 billion at June 30, 2015. Loan servicing fees, not including valuation changes included in loan sales and servicing income, were $1.4 million and $1.6 million, respectively, for the six months ended June 30, 2016 and 2015.

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

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


	Three Months Ended June 30,						Six Months Ended June 30,
(In thousands)	2016			2015			2016			2015
Carrying amount of MSRs
Beginning balance	$	18,127		$	21,490		$	18,938		$	22,011
Additions		32			63			60			533
Amortization		(849	)		(918	)		(1,688	)		(1,909	)

Ending balance		17,310			20,635			17,310			20,635
Valuation Allowance:
Beginning balance		(868	)		(1,131	)		(399	)		(955	)
Recoveries/(Additions)		(681	)		641			(1,150	)		465

Ending balance		(1,549	)		(490	)		(1,549	)		(490	)

MSRs, net carrying balance	$	15,761		$	20,145		$	15,761		$	20,145

Fair value at end of period	$	15,954		$	20,809		$	15,954		$	20,809

On a quarterly basis, the Corporation assesses its capitalized servicing rights for impairment based on their current fair value. For purposes of the impairment, the servicing rights are disaggregated based on loan type and interest rate which are the predominant risk characteristics of the underlying loans. A valuation allowance is established through a charge to earnings to the extent the amortized cost of the MSRs exceeds the estimated fair value by stratification. If it is later determined that all or a portion of the temporary impairment no longer exists for the stratification, the valuation is reduced through a recovery to earnings. No permanent impairment losses were written off against the allowance during the three and six months ended June 30, 2016 and 2015.

Key economic assumptions and the sensitivity of the current fair value of the MSRs related to immediate 10% and 25% adverse changes in those assumptions at June 30, 2016 are presented in the following table below. These sensitivities are hypothetical and should be used with caution. As the figures indicate, changes in the fair value based on 10% variation in the prepayment speed assumption generally cannot be extrapolated because the relationship of the change in the prepayment speed assumption to the change in fair value may not be linear. Also, in the below table, the effect of a variation in the discount rate assumption on the fair value of the MSRs is calculated independently without changing any other assumption. In reality, changes in one factor may result in changes in another (for example, changes in prepayment speed estimates could result in changes in the discount rates), which might magnify or counteract the sensitivities.


(Dollars in thousands)
Prepayment speed assumption (annual CPR)		13.41	%
Decrease in fair value from 10% adverse change	$	964
Decrease in fair value from 25% adverse change	$	1,242
Discount rate assumption		9.39	%
Decrease in fair value from 100 basis point adverse change	$	463
Decrease in fair value from 200 basis point adverse change	$	898
Expected weighted-average life (in months)		85

12. Commitments and Guarantees

Commitments to Extend Credit

Commitments to extend credit are agreements to lend to a customer provided there is no violation of any condition established in the contract. Loan commitments to originate residential mortgage loans held for sale and forward commitments to sell residential mortgage loans are considered derivative instruments, and the fair value of these commitments is recorded on the consolidated balance sheets. Additional information is provided in Note 10 (Fair Value Measurement). Commitments generally are extended at the then-prevailing interest rates, have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Loan commitments involve credit risk not reflected on the balance sheet. The Corporation mitigates exposure to credit risk with internal controls that guide how applications for credit are reviewed and approved, how credit limits are established and, when necessary, how demands for collateral are made. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties. Management evaluates the creditworthiness of each prospective borrower on a case-by-case basis and, when appropriate, adjusts the allowance for probable credit losses inherent in all commitments. The reserve for unfunded lending commitments at June 30, 2016, December 31, 2015, and June 30, 2015, included in “accrued expenses and other liabilities” on the Consolidated Balance Sheets, was $4.1 million, $4.1 million, and $3.9 million, respectively.

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

Unused commitments to extend credit


(In thousands)	June 30, 2016		December 31, 2015		June 30, 2015
Commercial	$	3,505,383	$	3,992,089	$	3,746,824
Consumer		2,508,315		2,393,058		2,397,353

Total unused commitments to extend credit	$	6,013,698	$	6,385,147	$	6,144,177

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

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

Guarantees

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

Financial guarantees


(In thousands)	June 30, 2016		December 31, 2015		June 30, 2015
Standby letters of credit	$	220,913	$	254,703	$	255,418
Loans sold with recourse		11,543		12,902		28,891

Total financial guarantees	$	232,456	$	267,605	$	284,309

Standby Letters of Credit. Standby letters of credit obligate the Corporation to pay a specified third party when a customer fails to repay an outstanding loan or debt instrument, or fails to perform some contractual nonfinancial obligation. The Corporation has recourse against the customer for any amount required to be paid to a third party under a standby letter of credit. Collateral held varies, but may include marketable securities, equipment, inventory, and real estate. Except for short-term guarantees of $106.8 million at June 30, 2016, the remaining guarantees extend in varying amounts through 2024.

Loans Sold with Recourse. The Corporation regularly sells service retained residential mortgage loans to GSEs as part of its mortgage banking activities. The Corporation provides customary representation and warranties to the GSEs in conjunction with these sales. These representations and warranties generally require the Corporation to repurchase assets if it is subsequently determined that a loan did not meet specified criteria, such as a documentation deficiency or rescission of mortgage insurance. If the Corporation is unable to cure or refute a repurchase request, the Corporation is generally obligated to repurchase the loan or otherwise reimburse the counterparty for losses. The Corporation also sells service released residential mortgage loans to other investors which contain early payment default recourse provisions. As of June 30, 2016, December 31, 2015, and June 30, 2015, the Corporation had sold $9.1 million, $10.1 million, and $22.2 million, respectively, of outstanding residential mortgage loans to GSEs and other investors with recourse provisions. The Corporation had reserved $2.6 million, $2.7 million, and $6.7 million as of June 30, 2016, December 31, 2015, and June 30, 2015, respectively, for estimated losses from representation and warranty obligations and early payment default recourse provisions.

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

Changes in the repurchase reserves for the three and six months ended June 30, 2016 and 2015 are as follows:


	Three Months Ended June 30,					Six Months Ended June 30,
(In thousands)	2016		2015			2016			2015
Balance at beginning of period	$	2,625	$	6,650		$	2,725		$	7,250
Net increase/(decrease) to reserve		—		363			(53	)		(39	)
Net realized (losses)/gains		—		(363	)		(47	)		(561	)

Balance at end of period	$	2,625	$	6,650		$	2,625		$	6,650

Litigation

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

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

Overdraft Litigation

Commencing in December 2010, two separate lawsuits were filed in the Summit County Court of Common Pleas and the Lake County Court of Common Pleas against the Corporation and the Bank. The complaints were brought as putative class actions on behalf of Ohio residents who maintained a checking account at the Bank and who incurred one or more overdraft fees as a result of the alleged re-sequencing of debit transactions. The lawsuit that had been filed in Summit County Court of Common Pleas was dismissed without prejudice on July 11, 2011. The remaining suit in Lake County seeks actual damages, disgorgement of overdraft fees, punitive damages, interest, injunctive relief and attorney fees. In December 2012, the trial court issued an order certifying a proposed class and the Bank and Corporation appealed the order to the Eleventh District Court of Appeals. In September 2013, the Eleventh District Court of Appeals affirmed in part and reversed in part the trial court’s class certification order, and remanded the case back to the trial court for further consideration, in particular with respect to the class definition. On October 9, 2013, the Bank and Corporation filed with the Eleventh District Court of Appeals an application for reconsideration and application for consideration en banc. On November 20, 2013, the Eleventh District denied those applications. On December 4, 2013, the Bank and Corporation filed a notice of appeal with the Ohio Supreme Court, and on January 3, 2014, they filed with the Ohio Supreme Court a memorandum in support of the Court’s exercising its jurisdiction and accepting the appeal. The plaintiffs filed an opposition, and, on April 24, 2014, the Ohio Supreme Court declined to accept jurisdiction. On August 6, 2014, the Bank and Corporation filed a motion asking the trial court to stay the lawsuit pending arbitration of claims subject to an arbitration agreement. That motion has been fully briefed and is awaiting a decision by the court. On August 25, 2014, the parties stipulated to a revised class definition (without affecting the pending motion to stay). An order approving the stipulated revised class was entered on June 3, 2016.

CRBC 401(k) Litigation

Participants in the Citizens Republic Bancorp 401(k) Plan filed a lawsuit in the United States Court for the Eastern District of Michigan in 2011, alleging that Citizens and certain of its officers and directors violated the Employee Retirement Income Security Act by offering Citizens common stock as an investment alternative in the Plan during periods when it was imprudent to do so and by failing to adequately monitor fiduciaries responsible for administering the Plan. The lawsuit, captioned Kidd v. Citizens Republic Bancorp, Inc. et al., Case No. 2:11-cv-11709, asserts claims for monetary and injunctive relief on behalf of a purported class of participants and beneficiaries in the Plan who held Citizens stock in their Plan accounts during the period from April 17, 2008 to “the present.” The plaintiffs filed a third amended complaint in November 2015, and the defendants have filed a motion that the complaint be dismissed. Defendant’s Motion to Dismiss was granted by Court on May 29, 2016. Plaintiffs have filed a Notice of Appeal and the appellate court has scheduled a mediation conference for August 15, 2016.

Merger litigation

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

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

On April 13, 2016, the defendants in the State Court Lawsuits filed a motion to stay the State Court Lawsuits pending the resolution of the parallel Federal Court Lawsuits. The judge in the State Court Lawsuits granted defendant’s motion to stay on May 20, 2016. All further action in the State Court cases is stayed pending resolution of the consolidated Federal Court action.

On or about June 8, 2016 the parties to the Federal Court litigation filed with the court a Memorandum of Understanding notifying it that the parties have agreed to a preliminary settlement in full of the pending litigation. The agreement, in substance, requires defendants to make additional disclosures to SEC filings prior to shareholder votes scheduled for June 13, 2016. In good faith defendants made such agreed upon disclosures prior to the vote. The parties also agreed to conduct confirmatory discovery as part of the overall settlement agreement. The parties are currently finalizing the scope of the discovery and setting dates for limited document production and depositions. The Federal Court has stayed all further action in the case pending submission of a final proposed settlement agreement.

13. Changes and Reclassifications Out of Accumulated Other Comprehensive Income

The following table presents the changes in AOCI by component of comprehensive income for the three and six months ended June 30, 2016 and 2015:


	Three Months Ended June 30, 2016									Six Months Ended June 30, 2016
(In thousands)	Pretax			Tax			After tax			Pretax			Tax			After tax
Unrealized and realized securities gains and losses:
Balance at the beginning of the period	$	14,447		$	1,682		$	12,765		$	(32,786	)	$	(15,840	)	$	(16,946	)
Changes in unrealized securities’ holding gains/(losses)		31,489			11,431			20,058			79,868			28,994			50,874
Changes in unrealized securities’ holding gains/(losses) that result from securities being transferred from available-for-sale into held-to-maturity		(221	)		(79	)		(142	)		(1,072	)		(14	)		(1,058	)
Net losses/(gains) realized on sale of securities reclassified to noninterest income		(2,164	)		(786	)		(1,378	)		(2,459	)		(892	)		(1,567	)

Balance at the end of the period		43,551			12,248			31,303			43,551			12,248			31,303

Pension plans and other postretirement benefits:
Balance at the beginning of the period		(93,852	)		(32,746	)		(61,106	)		(95,760	)		(33,432	)		(62,328	)

Amortization of actuarial losses/(gains)		1,076			390			686			3,244			1,163			2,081
Amortization of prior service cost reclassified to other noninterest expense		(560	)		(204	)		(356	)		(820	)		(291	)		(529	)

Balance at the end of the period		(93,336	)		(32,560	)		(60,776	)		(93,336	)		(32,560	)		(60,776	)

Total Accumulated Other Comprehensive Income	$	(49,785	)	$	(20,312	)	$	(29,473	)	$	(49,785	)	$	(20,312	)	$	(29,473	)


	Three Months Ended June 30, 2015									Six Months Ended June 30, 2015
(In thousands)	Pretax			Tax			After tax			Pretax			Tax			After tax
Unrealized and realized securities gains and losses:
Balance at the beginning of the period	$	24,728		$	8,656		$	16,072		$	(8,531	)	$	(2,985	)	$	(5,546	)
Changes in unrealized securities’ holding gains/(losses)		(28,642	)		(10,024	)		(18,618	)		5,475			1,916			3,559
Changes in unrealized securities’ holding gains/(losses) that result from securities being transferred from available-for-sale into held-to-maturity		(575	)		(203	)		(372	)		(1,079	)		(378	)		(701	)
Net losses/(gains) realized on sale of securities reclassified to noninterest income		(567	)		(198	)		(369	)		(921	)		(322	)		(599	)

Balance at the end of the period		(5,056	)		(1,769	)		(3,287	)		(5,056	)		(1,769	)		(3,287	)

Pension plans and other postretirement benefits:
Balance at the beginning of the period		(100,520	)		(35,181	)		(65,339	)		(102,068	)		(35,722	)		(66,346	)

Amortization of actuarial losses/(gains)		1,138			399			739			2,276			797			1,479
Amortization of prior service cost reclassified to other noninterest expense		410			144			266			820			287			533

Balance at the end of the period		(98,972	)		(34,638	)		(64,334	)		(98,972	)		(34,638	)		(64,334	)

Total Accumulated Other Comprehensive Income	$	(104,028	)	$	(36,407	)	$	(67,621	)	$	(104,028	)	$	(36,407	)	$	(67,621	)

The following table presents current period reclassifications out of AOCI by component of comprehensive income for the three and six months ended June 30, 2016 and 2015:


(In thousands)	Three Months Ended June 30, 2016			Six Months Ended June 30, 2016			Income statement line item presentation
Realized (gains)/losses on sale of securities	$	(2,164	)	$	(2,459	)	Investment securities losses (gains), net
Tax expense (benefit) (36.3%)		(786	)		(892	)	Income tax expense (benefit)

Reclassified amount, net of tax	$	(1,378	)	$	(1,567	)


(In thousands)	Three Months Ended June 30, 2015			Six Months Ended June 30, 2015			Income statement line item presentation
Realized (gains)/losses on sale of securities	$	(567	)	$	(921	)	Investment securities losses (gains), net
Tax expense (benefit) (35%)		(198	)		(322	)	Income tax expense (benefit)

Reclassified amount, net of tax	$	(369	)	$	(599	)

14. Subsequent Events

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

On July 8, 2016, the Corporation consummated the sale of four branches, located in Wisconsin, for a gain of approximately $1.2 million.

As previously disclosed, on July 13, 2016, Huntington and FirstMerit have reached an agreement with the U.S. Department of Justice to divest 13 FirstMerit branches and associated assets, deposits and employees located in Ohio.

The acronyms and abbreviations identified below are used herein.


Acquisition Date	Citizens Republic Bancorp Inc. acquisition date of April 12, 2013	FDIC	The Federal Deposit Insurance Corporation

ALCO	Asset/Liability Management Committee	Federal Reserve	The Board of Governors of the Federal Reserve System

ALL	Allowance for loan losses	FHLB	Federal Home Loan Bank, including the Federal Home Loan

AOCI	Accumulated other comprehensive income (loss)	FHLMC	Federal Home Loan Mortgage Corporation

APBO	Accumulated pension benefit obligation	FICO	Fair Isaac Corporation

ASC	Accounting standards codification	FINRA	Financial Industry Regulatory Authority

ASU	Accounting standards update	FNMA	Federal National Mortgage Association

Bank	FirstMerit Bank N.A.	FRAP	Fixed Rate Advantage Program

Basel I	Basel Committee’s 1988 Capital Accord	FRB	Federal Reserve Bank

Basel III	Basel Committee regulatory capital reforms, Third Basel Accord	FSOC	Financial Stability Oversight Council

Basel Committee	Basel Committee on Banking Supervision	GAAP	United States generally accepted accounting principles

BHC	Bank holding company	GSE	Government sponsored enterprise

BHCA	Bank Holding Company Act of 1956, as amended	G-SIFI	Globally Systematically Important Financial Institution

CCAR	Comprehensive Capital Analysis and Review	ISDA	International Swaps and Derivatives Association

CET1	Common equity tier 1 capital	LIBOR	London Interbank Offered Rate

CFPB	Consumer Financial Protection Bureau	Management	FirstMerit Corporation’s Management

Citizens	Citizens Republic Bancorp Inc.	MBS	Mortgage-backed securities

Citizens TARP Preferred	Citizens TARP Preferred issued to the U.S. Treasury as part of the Troubled Assets Relief Program	MSRs	Mortgage servicing rights

CLO	Collateralized loan obligations	NASDAQ	The NASDAQ Stock Market LLC

CMO	Collateralized mortgage obligations	NPR	Notice of Proposal Rulemaking

Common Stock	Common Shares, without par value	NYSE	New York Stock Exchange

Corporation	FirstMerit Corporation and its Subsidiaries	OCC	Office of the Comptroller of the Currency

CPR	Conditional Prepayment Rate	OCI	Other comprehensive income (loss)

CRA	The Community Reinvestment Act	OREO	Other real estate owned

CRE	Commercial Real Estate	OTTI	Other-than-temporary impairment

C&I	Commercial and Industrial	Parent Company	FirstMerit Corporation

Dodd-Frank Act	Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010	Preferred Stock	5.875% Non-Cumulative Perpetual Preferred Stock, Series A

DIF	Federal Deposit Insurance Fund	RIP	Retirement Investment Plan

DTA	Deferred tax asset	ROA	Return on average assets

DTL	Deferred tax liability	ROE	Return on average equity

EPS	Earnings per share	SEC	United States Securities and Exchange Commission

ERISA	Employee Retirement Income Security Act of 1974	TARP	Troubled Asset Relief Program

ERM	Enterprise risk management	TDR	Troubled debt restructuring

ESOP	Employee stock ownership plan	TE	Fully taxable equivalent

EVE	Economic value of equity	U.S. Treasury	United States Department of the Treasury

FASB	Financial Accounting Standards Board	UTB	Unrecognized tax balance

FDIA	Federal Deposit Insurance Act	VIE	Variable interest entity

HUNTINGTON BANCSHARES INC /MD/ - FORM 8-K - EX-99.2 - August 1, 2016

Attached files

HUNTINGTON BANCSHARES INC /MD/ Reports