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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x Quarterly Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934

For the quarterly period ended June 30, 2014

 

¨ Transition Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934

For the transition period from                      to                     

Commission file number 001-31940

 

 

F.N.B. CORPORATION

(Exact name of registrant as specified in its charter)

 

Florida   25-1255406
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
One North Shore Center, 12 Federal Street, Pittsburgh, PA   15212
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code: 800-555-5455

One F.N.B. Boulevard, Hermitage, PA 16148

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large Accelerated Filer   x    Accelerated Filer   ¨
Non-accelerated Filer   ¨    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class

  

Outstanding at July 31, 2014

Common Stock, $0.01 Par Value

   166,557,534 Shares

 

 

 


Table of Contents

F.N.B. CORPORATION

FORM 10-Q

June 30, 2014

INDEX

 

          PAGE  
PART I – FINANCIAL INFORMATION   

Item 1.

  

Financial Statements

  
  

Consolidated Balance Sheets

     3   
  

Consolidated Statements of Comprehensive Income

     4   
  

Consolidated Statements of Stockholders’ Equity

     5   
  

Consolidated Statements of Cash Flows

     6   
  

Notes to Consolidated Financial Statements

     7   

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     51   

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

     75   

Item 4.

  

Controls and Procedures

     76   

PART II – OTHER INFORMATION

  

Item 1.

  

Legal Proceedings

     77   

Item 1A.

  

Risk Factors

     77   

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

     77   

Item 3.

  

Defaults Upon Senior Securities

     77   

Item 4.

  

Mine Safety Disclosures

     77   

Item 5.

  

Other Information

     78   

Item 6.

  

Exhibits

     78   

Signatures

     79   

 

2


Table of Contents

PART I – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

F.N.B. CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

Dollars in thousands, except par value

 

     June 30,     December 31,  
     2014     2013  
     (Unaudited)        

Assets

    

Cash and due from banks

   $ 250,954      $ 197,534   

Interest bearing deposits with banks

     19,766        16,447   
  

 

 

   

 

 

 

Cash and Cash Equivalents

     270,720        213,981   

Securities available for sale

     1,384,273        1,141,650   

Securities held to maturity (fair value of $1,439,241 and $1,189,563)

     1,427,852        1,199,169   

Residential mortgage loans held for sale

     2,705        7,138   

Loans, net of unearned income of $54,009 and $55,051

     10,333,873        9,506,094   

Allowance for loan losses

     (116,748     (110,784
  

 

 

   

 

 

 

Net Loans

     10,217,125        9,395,310   

Premises and equipment, net

     162,383        154,032   

Goodwill

     805,514        764,248   

Core deposit and other intangible assets, net

     48,292        47,608   

Bank owned life insurance

     309,750        289,402   

Other assets

     390,633        350,867   
  

 

 

   

 

 

 

Total Assets

   $ 15,019,247      $ 13,563,405   
  

 

 

   

 

 

 

Liabilities

    

Deposits:

    

Non-interest bearing demand

   $ 2,429,120      $ 2,200,081   

Interest bearing demand

     4,354,333        3,968,679   

Savings

     1,576,480        1,423,399   

Certificates and other time deposits

     2,697,837        2,606,073   
  

 

 

   

 

 

 

Total Deposits

     11,057,770        10,198,232   

Other liabilities

     154,816        130,418   

Short-term borrowings

     1,504,510        1,241,239   

Long-term debt

     335,854        143,928   

Junior subordinated debt

     58,220        75,205   
  

 

 

   

 

 

 

Total Liabilities

     13,111,170        11,789,022   

Stockholders’ Equity

    

Preferred stock—$0.01 par value

    

Authorized—20,000,000 shares

    

Issued—110,877 shares

     106,882        106,882   

Common stock—$0.01 par value

    

Authorized—500,000,000 shares

    

Issued—167,571,661 and 159,624,796 shares

     1,673        1,592   

Additional paid-in capital

     1,700,220        1,608,117   

Retained earnings

     146,542        121,870   

Accumulated other comprehensive loss

     (36,559     (56,924

Treasury stock—1,012,403 and 657,585 shares at cost

     (10,681     (7,154
  

 

 

   

 

 

 

Total Stockholders’ Equity

     1,908,077        1,774,383   
  

 

 

   

 

 

 

Total Liabilities and Stockholders’ Equity

   $ 15,019,247      $ 13,563,405   
  

 

 

   

 

 

 

See accompanying Notes to Consolidated Financial Statements

 

3


Table of Contents

F.N.B. CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Dollars in thousands, except per share data

Unaudited

 

     Three Months Ended      Six Months Ended  
     June 30,      June 30,  
     2014      2013      2014      2013  

Interest Income

           

Loans, including fees

   $ 109,542       $ 95,682       $ 213,639       $ 188,657   

Securities:

           

Taxable

     13,577         10,656         25,864         21,253   

Nontaxable

     1,287         1,443         2,578         2,959   

Dividends

     13         42         192         58   

Other

     21         18         47         32   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Interest Income

     124,440         107,841         242,320         212,959   

Interest Expense

           

Deposits

     7,461         7,343         14,610         15,608   

Short-term borrowings

     1,333         1,075         2,552         2,182   

Long-term debt

     1,112         775         2,158         1,549   

Junior subordinated debt

     342         1,902         983         3,778   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Interest Expense

     10,248         11,095         20,303         23,117   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Interest Income

     114,192         96,746         222,017         189,842   

Provision for loan losses

     10,405         7,903         17,411         15,444   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Interest Income After Provision for Loan Losses

     103,787         88,843         204,606         174,398   

Non-Interest Income

           

Service charges

     17,441         18,564         32,710         34,989   

Trust fees

     4,862         4,167         9,626         8,252   

Insurance commissions and fees

     3,691         4,101         8,636         8,531   

Securities commissions and fees

     3,002         2,867         5,393         5,790   

Net securities gains

     776         68         10,237         752   

Mortgage banking

     928         1,114         1,142         2,198   

Bank owned life insurance

     1,807         1,890         3,992         3,526   

Other

     6,683         3,926         9,524         6,271   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Non-Interest Income

     39,190         36,697         81,260         70,309   

Non-Interest Expense

           

Salaries and employee benefits

     48,465         43,201         97,418         87,106   

Net occupancy

     8,068         6,839         16,550         13,537   

Equipment

     7,177         6,106         14,076         11,598   

Amortization of intangibles

     2,461         2,071         4,744         3,996   

Outside services

     8,233         8,562         15,470         15,767   

FDIC insurance

     3,399         2,672         6,393         5,036   

Merger related

     832         2,946         6,150         3,298   

Other

     13,949         11,730         25,949         22,591   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Non-Interest Expense

     92,584         84,127         186,750         162,929   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income Before Income Taxes

     50,393         41,413         99,116         81,778   

Income taxes

     15,562         12,220         29,761         24,047   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Income

     34,831         29,193         69,355         57,731   

Preferred stock dividends

     2,010         —           4,332         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Income Available to Common Stockholders

   $ 32,821       $ 29,193       $ 65,023       $ 57,731   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Income per Common Share – Basic

   $ 0.20       $ 0.20       $ 0.40       $ 0.41   

Net Income per Common Share – Diluted

     0.20         0.20         0.39         0.40   

Cash Dividends per Common Share

     0.12         0.12         0.24         0.24   

Comprehensive Income

   $ 42,313       $ 14,314       $ 89,720       $ 41,878   
  

 

 

    

 

 

    

 

 

    

 

 

 

See accompanying Notes to Consolidated Financial Statements

 

4


Table of Contents

F.N.B. CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

Dollars in thousands, except per share data

Unaudited

 

     Preferred
Stock
     Common
Stock
     Additional
Paid-In
Capital
     Retained
Earnings
    Accumulated
Other
Comprehensive
Income (Loss)
    Treasury
Stock
    Total  

Balance at January 1, 2014

   $ 106,882       $ 1,592       $ 1,608,117       $ 121,870      $ (56,924   $ (7,154   $ 1,774,383   

Net income

              69,355            69,355   

Change in other comprehensive income (loss), net of tax

                20,365          20,365   

Dividends declared:

                 

Preferred stock

              (4,332         (4,332

Common stock: $0.24/share

              (40,123         (40,123

Issuance of common stock

        14         7,857         (228       (3,527     4,116   

Issuance of common stock—acquisitions

        67         81,322               81,389   

Restricted stock compensation

           1,419               1,419   

Tax expense of stock-based compensation

           1,505               1,505   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2014

   $ 106,882       $ 1,673       $ 1,700,220       $ 146,542      $ (36,559   $ (10,681   $ 1,908,077   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at January 1, 2013

     —         $ 1,398       $ 1,376,601       $ 75,312      $ (46,224   $ (5,018   $ 1,402,069   

Net income

              57,731            57,731   

Change in other comprehensive income (loss), net of tax

                (15,853       (15,853

Dividends declared:

                 

Common stock: $0.24/share

              (34,468         (34,468

Issuance of common stock

        56         58,066             (1,944     56,178   

Restricted stock compensation

           2,094               2,094   

Tax benefit of stock-based compensation

           1,247               1,247   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2013

     —         $ 1,454       $ 1,438,008       $ 98,575      $ (62,077   $ (6,962   $ 1,468,998   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying Notes to Consolidated Financial Statements

 

5


Table of Contents

F.N.B. CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Dollars in thousands

Unaudited

 

     Six Months Ended  
     June 30,  
     2014     2013  

Operating Activities

    

Net income

   $ 69,355      $ 57,731   

Adjustments to reconcile net income to net cash flows provided by operating activities:

    

Depreciation, amortization and accretion

     16,290        15,446   

Provision for loan losses

     17,411        15,444   

Deferred tax (benefit) expenses

     (2,454     3,936   

Net securities gains

     (10,237     (752

Tax benefit of stock-based compensation

     (1,505     (1,247

Loans originated for sale

     (51,761     (139,894

Loans sold

     58,659        150,074   

Gain on sale of loans

     (2,465     (2,043

Net change in:

    

Interest receivable

     40        (1,207

Interest payable

     (1,292     (2,160

Trading securities

     203,178        88,052   

Bank owned life insurance

     (3,375     (899

Other, net

     8,705        18,370   
  

 

 

   

 

 

 

Net cash flows provided by operating activities

     300,549        200,851   
  

 

 

   

 

 

 

Investing Activities

    

Net change in loans

     (538,144     (262,589

Securities available for sale:

    

Purchases

     (526,470     (211,531

Sales

     150,055        21,919   

Maturities

     172,295        188,782   

Securities held to maturity:

    

Purchases

     (325,989     (235,392

Sales

     —          17,429   

Maturities

     95,152        172,586   

Purchase of bank owned life insurance

     (4,448     (10,022

Withdrawal/surrender of bank owned life insurance

     715        —     

Increase in premises and equipment

     (8,021     (1,853

Net cash received in business combinations

     27,058        41,986   
  

 

 

   

 

 

 

Net cash flows used in investing activities

     (957,797     (278,685
  

 

 

   

 

 

 

Financing Activities

    

Net change in:

    

Demand (non-interest bearing and interest bearing) and savings accounts

     451,460        390,867   

Time deposits

     (122,075     (173,154

Short-term borrowings

     263,271        (66,920

Increase in long-term debt

     216,736        20,826   

Decrease in long-term debt

     (24,809     (56,479

Decrease in junior subordinated debt

     (34,022     (15,000

Net proceeds from issuance of common stock

     6,376        1,973   

Tax benefit of stock-based compensation

     1,505        1,247   

Cash dividends paid:

    

Preferred stock

     (4,332     —     

Common stock

     (40,123     (34,468
  

 

 

   

 

 

 

Net cash flows provided by financing activities

     713,987        68,892   
  

 

 

   

 

 

 

Net Increase (Decrease) in Cash and Cash Equivalents

     56,739        (8,942

Cash and cash equivalents at beginning of period

     213,981        239,044   
  

 

 

   

 

 

 

Cash and Cash Equivalents at End of Period

   $ 270,720      $ 230,102   
  

 

 

   

 

 

 

See accompanying Notes to Consolidated Financial Statements

 

6


Table of Contents

F.N.B. CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Dollars in thousands, except share data

(Unaudited)

June 30, 2014

BUSINESS

F.N.B. Corporation (the Corporation), headquartered in Pittsburgh, Pennsylvania, is a diversified financial services company operating in six states and three major metropolitan areas, including Pittsburgh, Baltimore, Maryland and Cleveland, Ohio. As of June 30, 2014, the Corporation had 283 banking offices throughout Pennsylvania, Ohio, Maryland and West Virginia. The Corporation provides a full range of commercial banking, consumer banking and wealth management solutions through its subsidiary network which is led by its largest affiliate, First National Bank of Pennsylvania (FNBPA). Commercial banking solutions include corporate banking, small business banking, investment real estate financing, international banking, business credit, capital markets and lease financing. Consumer banking products and services include deposit products, mortgage lending, consumer lending and a complete suite of mobile and online banking services. Wealth management services include asset management, private banking and insurance. The Corporation also operates Regency Finance Company (Regency), which had 71 consumer finance offices in Pennsylvania, Ohio, Kentucky and Tennessee as of June 30, 2014.

On July 9, 2014, the Corporation announced that it has formally named its largest market, Pittsburgh, Pennsylvania, as its corporate headquarters, an action that is reflective of the Corporation’s strong position in that market, elevates the Corporation’s presence nationally and leverages the significant investments in infrastructure and personnel made in Pittsburgh since 2004. Given its close proximity and existing facilities, the Corporation will continue to maintain its operations centers and support areas in Hermitage, Pennsylvania.

BASIS OF PRESENTATION

The Corporation’s accompanying consolidated financial statements and these notes to the financial statements include subsidiaries in which the Corporation has a controlling financial interest. The Corporation owns and operates FNBPA, First National Trust Company, First National Investment Services Company, LLC, F.N.B. Investment Advisors, Inc., First National Insurance Agency, LLC, Regency and Bank Capital Services, LLC, and includes results for each of these entities in the accompanying consolidated financial statements.

The accompanying consolidated financial statements include all adjustments that are necessary, in the opinion of management, to fairly reflect the Corporation’s financial position and results of operations in accordance with U.S. generally accepted accounting principles (GAAP). All significant intercompany balances and transactions have been eliminated. Certain prior period amounts have been reclassified to conform to the current period presentation. Events occurring subsequent to the date of the balance sheet have been evaluated for potential recognition or disclosure in the consolidated financial statements through the date of the filing of the consolidated financial statements with the Securities and Exchange Commission (SEC).

Certain information and note disclosures normally included in consolidated financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC. The interim operating results are not necessarily indicative of operating results the Corporation expects for the full year. These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Corporation’s Annual Report on Form 10-K filed with the SEC on February 28, 2014.

USE OF ESTIMATES

The accounting and reporting policies of the Corporation conform with GAAP. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could materially differ from those estimates. Material estimates that are particularly susceptible to significant changes include the allowance for loan losses, securities valuations, goodwill and other intangible assets and income taxes.

 

7


Table of Contents

SECURITIES OFFERINGS

On November 1, 2013, the Corporation completed a public offering of 4,693,876 shares of common stock at a price of $12.25 per share, including 612,244 shares of common stock purchased by the underwriters pursuant to an over-allotment option, which the underwriters exercised in full. On November 1, 2013, the Corporation also completed a public offering of 4,000,000 Depositary Shares, each representing a 1/40th interest in the Non-Cumulative Perpetual Preferred Stock, Series E, of the Corporation, at a price of $25.00 per share. On November 14, 2013, the underwriters exercised their over-allotment option of 435,080 additional Depositary Shares at the same terms. The net proceeds of the common and preferred stock offerings after deducting underwriting discounts and commissions and offering expenses were $54,434 and $106,882, respectively.

MERGERS AND ACQUISITIONS

OBA Financial Services, Inc.

On April 8, 2014, the Corporation announced the signing of a definitive merger agreement to acquire OBA Financial Services, Inc. (OBA), a bank holding company with approximately $390,000 in total assets based in Germantown, Maryland. The transaction is valued at approximately $94,000. Under the terms of the merger agreement, OBA shareholders will be entitled to receive 1.781 shares of the Corporation’s common stock for each share of OBA common stock. OBA’s banking affiliate, OBA Bank, will be merged into FNBPA. The transaction is expected to be completed in the third quarter of 2014, pending the approval of shareholders of OBA and the satisfaction of other closing conditions. Regulatory approvals for the transaction were obtained in July 2014.

BCSB Bancorp, Inc.

On February 15, 2014, the Corporation completed its acquisition of BCSB Bancorp, Inc. (BCSB), a bank holding company based in Baltimore, Maryland. On the acquisition date, the estimated fair values of BCSB included $597,522 in assets, $308,389 in loans and $532,197 in deposits. The acquisition was valued at approximately $80,544 and resulted in the Corporation issuing 6,730,597 shares of its common stock in exchange for 3,235,961 shares of BCSB common stock. The Corporation also acquired the outstanding stock options of BCSB that became fully vested upon the acquisition. The assets and liabilities of BCSB were recorded on the Corporation’s consolidated balance sheet at their preliminary estimated fair values as of February 15, 2014, the acquisition date, and BCSB’s results of operations have been included in the Corporation’s consolidated statement of comprehensive income since that date. BCSB’s banking affiliate, Baltimore County Savings Bank, was merged into FNBPA on February 15, 2014. Based on a preliminary purchase price allocation, the Corporation recorded $41,500 in goodwill and $6,591 in core deposit intangibles as a result of the acquisition. These fair value estimates are provisional amounts based on third party valuations that are currently under review. None of the goodwill is deductible for income tax purposes.

PVF Capital Corp.

On October 12, 2013, the Corporation completed its acquisition of PVF Capital Corp. (PVF), a savings and loan holding company based in Solon, Ohio. On the acquisition date, the estimated fair values of PVF included $741,058 in assets, $512,795 in loans and $628,205 in deposits. The acquisition was valued at $109,856 and resulted in the Corporation issuing 8,893,598 shares of its common stock in exchange for 26,119,398 shares of PVF common stock. The Corporation also acquired the outstanding stock options of PVF that became fully vested upon the acquisition. The assets and liabilities of PVF were recorded on the Corporation’s consolidated balance sheets at their preliminary estimated fair values as of October 12, 2013, the acquisition date, and PVF’s results of operations have been included in the Corporation’s consolidated statements of comprehensive income since that date. PVF’s banking affiliate, Park View Federal Savings Bank, was merged into FNBPA on October 12, 2013. Based on a preliminary purchase price allocation, the Corporation recorded $52,605 in goodwill and $6,867 in core deposit intangibles as a result of the acquisition. These fair value estimates are provisional amounts based on third party valuations that are currently under review. None of the goodwill is deductible for income tax purposes.

 

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Annapolis Bancorp, Inc.

On April 6, 2013, the Corporation completed its acquisition of Annapolis Bancorp, Inc. (ANNB), a bank holding company based in Annapolis, Maryland. On the acquisition date, the estimated fair values of ANNB included $430,475 in assets, $256,212 in loans and $349,370 in deposits. The acquisition was valued at $56,300 and resulted in the Corporation issuing 4,641,412 shares of its common stock in exchange for 4,060,802 shares of ANNB common stock. The Corporation also acquired the outstanding stock options of ANNB that became fully vested upon the acquisition. Additionally, the Corporation paid $609, or $0.15 per share, to the holders of ANNB common stock as cash consideration due to the collection of a certain loan, as designated in the merger agreement. The assets and liabilities of ANNB were recorded on the Corporation’s consolidated balance sheets at their fair values as of April 6, 2013, the acquisition date, and ANNB’s results of operations have been included in the Corporation’s consolidated statements of comprehensive income since that date. ANNB’s banking affiliate, BankAnnapolis, was merged into FNBPA on April 6, 2013. In conjunction with the acquisition, a warrant issued by ANNB to the U.S. Department of the Treasury (UST) under the Capital Purchase Program (CPP) was assumed by the Corporation and converted into a warrant to purchase up to 342,564 shares of the Corporation’s common stock. The warrant expires January 30, 2019 and has an exercise price of $3.57 per share. Based on the purchase price allocation, the Corporation recorded $35,854 in goodwill and $3,775 in core deposit intangibles as a result of the acquisition. None of the goodwill is deductible for income tax purposes.

NEW ACCOUNTING STANDARDS

Stock Compensation

In June 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 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. ASU 2014-12 provides guidance relating to the accounting for a performance target that could be achieved after the requisite service period. ASU 2014-12 requires that such performance targets be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the periods for which the requisite service has already been rendered. The requirements of ASU 2014-12 are effective for reporting periods beginning after December 15, 2015, with early adoption permitted. Companies may apply the amendments in this standard either prospectively to all awards granted or modified after the effective date or retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. If retrospective transition is adopted, the cumulative effect of applying ASU 2014-12 should be recognized as an adjustment to the beginning balance of retained earnings. The Corporation is evaluating this new guidance and has not yet determined the impact that the adoption of this update will have on its financial statements.

Repurchase Agreements

In June 2014, the FASB issued ASU No. 2014-11, Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures, that requires repurchase-to-maturity transactions to be accounted for as secured borrowings, eliminates current guidance on repurchase financings and requires separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty. ASU 2014-11 also requires an entity to disclose information on transfers accounted for as sales in transactions that are economically similar to repurchase agreements and to disclose information about the types of collateral pledged in repurchase agreements and similar transactions accounted for as secured borrowings. The accounting changes in ASU 2014-11 are effective for the first interim or annual reporting period beginning after December 15, 2014. Changes in accounting for transactions outstanding on the effective date must be presented as a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. Early adoption is prohibited. The disclosure for certain transactions accounted for as a sale is required to be presented for interim and annual reporting periods beginning after December 15, 2014. The disclosure for repurchase agreements and repurchase-to-maturity transactions accounted for as secured borrowings is required to be presented for annual periods beginning after December 15, 2014, and for interim periods beginning after March 15, 2015. The Corporation is evaluating this new guidance and has not yet determined the impact that the adoption of this update will have on its financial statements.

 

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Revenue Recognition

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, to clarify the principles for recognizing revenue and to improve financial reporting by creating common revenue recognition guidance for GAAP and International Financial Reporting Standards. The core principle of the new guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. An entity should apply the amendments in this update using either a full retrospective application or a modified retrospective application. Under the full retrospective application, an entity will apply the standard to each prior reporting period presented. Under the modified retrospective application, an entity recognizes the cumulative effect of initially applying the new standard as an adjustment to the opening balance of retained earnings at the date of initial application. Revenue in periods presented before that date will continue to be reported under guidance in effect before the change. The Corporation is evaluating this new guidance and has not yet determined which approach it will adopt to apply the amendments in ASU 2014-09 or the impact that the adoption of this update will have on its financial statements.

Troubled Debt Restructurings

In January 2014, the FASB issued ASU No. 2014-04, Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure, to clarify when an in-substance repossession or foreclosure occurs; that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan should be derecognized and other real estate owned (OREO) recognized. ASU 2014-04 requires a creditor to reclassify a collateralized consumer mortgage loan to OREO upon obtaining legal title to the real estate collateral, or the borrower voluntarily conveying all interest in the real estate property to the lender to satisfy the loan through a deed in lieu of foreclosure or similar legal agreement. The requirements of ASU 2014-04 are effective for reporting periods beginning after December 15, 2014. The adoption of this update will not have an impact on the financial statements, results of operations or liquidity of the Corporation since the Corporation already accounts for foreclosures according to the requirements of this update.

Investments in Qualified Affordable Housing Projects

In January 2014, the FASB issued ASU No. 2014-01, Accounting for Investments in Qualified Affordable Housing Projects, to revise the accounting for investments in qualified affordable housing projects. ASU 2014-01 modifies the conditions that must be met to present the pretax effects and related tax benefits of such investments as a component of income taxes (“net” within income tax expense). It is expected that the new guidance will enable more investors to use a “net” presentation for investments in qualified affordable housing projects. Investors that do not qualify for “net” presentation under the new guidance will continue to account for such investments under the equity method or cost method, which results in losses recognized in pretax income and tax benefits recognized in income taxes (“gross” presentation of investment results). For investments that qualify for the “net” presentation of investment performance, the guidance introduces a “proportional amortization method” that can be elected to amortize the investment basis. If elected, the method is required for all eligible investments in qualified affordable housing projects. The requirements of ASU 2014-01 are effective for reporting periods beginning after December 15, 2014, with early adoption permitted. The adoption of this update is not expected to have a material effect on the financial statements, results of operations or liquidity of the Corporation.

Income Taxes

In July 2013, the FASB issued ASU No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists, to provide guidance on the financial statement presentation of certain unrecognized tax benefits. An unrecognized tax benefit or a portion of an unrecognized tax benefit should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward with certain exceptions related to availability. The requirements of ASU 2013-11 are effective prospectively for reporting periods beginning after December 15, 2013, with early adoption permitted. The adoption of this update did not have a material effect on the financial statements, results of operations or liquidity of the Corporation.

 

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SECURITIES

The amortized cost and fair value of securities are as follows:

 

     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair Value  

Securities Available for Sale:

          

June 30, 2014

          

U.S. Treasury

   $ 9,858       $ 18       $ —        $ 9,876   

U.S. government-sponsored entities

     293,306         784         (2,135     291,955   

Residential mortgage-backed securities:

          

Agency mortgage-backed securities

     427,873         7,230         (28     435,075   

Agency collateralized mortgage obligations

     614,983         1,130         (11,600     604,513   

Non-agency collateralized mortgage obligations

     1,612         13         —          1,625   

Commercial mortgage-backed securities

     9,059         2         —          9,061   

States of the U.S. and political subdivisions

     13,913         572         (74     14,411   

Other debt securities

     16,559         534         (620     16,473   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total debt securities

     1,387,163         10,283         (14,457     1,382,989   

Equity securities

     1,031         253         —          1,284   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 1,388,194       $ 10,536       $ (14,457   $ 1,384,273   
  

 

 

    

 

 

    

 

 

   

 

 

 

December 31, 2013

          

U.S. government-sponsored entities

   $ 336,763       $ 126       $ (5,904   $ 330,985   

Residential mortgage-backed securities:

          

Agency mortgage-backed securities

     247,880         4,304         (1,303     250,881   

Agency collateralized mortgage obligations

     511,098         895         (20,794     491,199   

Non-agency collateralized mortgage obligations

     1,747         15         —          1,762   

States of the U.S. and political subdivisions

     16,842         410         (250     17,002   

Collateralized debt obligations

     37,203         4,507         (10,115     31,595   

Other debt securities

     16,505         524         (929     16,100   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total debt securities

     1,168,038         10,781         (39,295     1,139,524   

Equity securities

     1,444         682         —          2,126   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 1,169,482       $ 11,463       $ (39,295   $ 1,141,650   
  

 

 

    

 

 

    

 

 

   

 

 

 

Securities Held to Maturity:

          

June 30, 2014

          

U.S. Treasury

   $ 502       $ 138       $ —        $ 640   

U.S. government-sponsored entities

     101,691         536         (720     101,507   

Residential mortgage-backed securities:

          

Agency mortgage-backed securities

     715,611         17,309         (698     732,222   

Agency collateralized mortgage obligations

     458,232         2,054         (9,778     450,508   

Non-agency collateralized mortgage obligations

     5,823         21         (7     5,837   

Commercial mortgage-backed securities

     2,227         147         —          2,374   

States of the U.S. and political subdivisions

     143,766         2,796         (409     146,153   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 1,427,852       $ 23,001       $ (11,612   $ 1,439,241   
  

 

 

    

 

 

    

 

 

   

 

 

 

December 31, 2013

          

U.S. Treasury

   $ 503       $ 99       $ —        $ 602   

U.S. government-sponsored entities

     43,322         180         (1,151     42,351   

Residential mortgage-backed securities:

          

Agency mortgage-backed securities

     628,681         12,281         (6,032     634,930   

Agency collateralized mortgage obligations

     385,408         764         (15,844     370,328   

Non-agency collateralized mortgage obligations

     6,852         44         (4     6,892   

Commercial mortgage-backed securities

     2,241         124         (37     2,328   

States of the U.S. and political subdivisions

     132,162         1,992         (2,022     132,132   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 1,199,169       $ 15,484       $ (25,090   $ 1,189,563   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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The Corporation classifies securities as trading securities when management intends to sell such securities in the near term. Such securities are carried at fair value, with unrealized gains (losses) reflected through the consolidated statements of comprehensive income. The Corporation classified certain securities acquired in conjunction with the BCSB, PVF and ANNB acquisitions as trading securities. The Corporation both acquired and sold these trading securities during the quarterly periods in which each of the acquisitions occurred. As of June 30, 2014 and December 31, 2013, the Corporation did not hold any trading securities.

Gross gains and gross losses were realized on securities as follows:

 

     Three Months Ended     Six Months Ended  
     June 30,     June 30,  
           2014                  2013                 2014                 2013        

Gross gains

   $ 739       $ 83      $ 18,748      $ 1,115   

Gross losses

     37         (15     (8,511     (363
  

 

 

    

 

 

   

 

 

   

 

 

 
   $ 776       $ 68      $ 10,237      $ 752   
  

 

 

    

 

 

   

 

 

   

 

 

 

During the first quarter of 2014, the Corporation strategically sold its entire portfolio of pooled trust preferred securities (TPS) with net proceeds of $51,540 and a gain of $13,766. Of the 23 pooled securities sold, one was determined to be a disallowed investment under the Volcker Rule (Section 619) of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act), and as such, was required to be disposed of by July 2015. Partially offsetting this gain was a net loss of $3,529 relating to the sale of other securities. By selling these securities, the Corporation strengthened the risk profile of its investment portfolio, improved its capital levels due to lowered risk-weighted assets and generated capital to support future growth.

As of June 30, 2014, the amortized cost and fair value of securities, by contractual maturities, were as follows:

 

     Available for Sale      Held to Maturity  
     Amortized
Cost
     Fair
Value
     Amortized
Cost
     Fair
Value
 

Due in one year or less

   $ —         $ —         $ 3,435       $ 3,487   

Due from one to five years

     243,965         243,570         90,689         90,216   

Due from five to ten years

     82,788         82,882         76,059         77,683   

Due after ten years

     6,883         6,263         75,776         76,914   
  

 

 

    

 

 

    

 

 

    

 

 

 
     333,636         332,715         245,959         248,300   

Residential mortgage-backed securities:

           

Agency mortgage-backed securities

     427,873         435,075         715,611         732,222   

Agency collateralized mortgage obligations

     614,983         604,513         458,232         450,508   

Non-agency collateralized mortgage obligations

     1,612         1,625         5,823         5,837   

Commercial mortgage-backed securities

     9,059         9,061         2,227         2,374   

Equity securities

     1,031         1,284         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 1,388,194       $ 1,384,273       $ 1,427,852       $ 1,439,241   
  

 

 

    

 

 

    

 

 

    

 

 

 

Maturities may differ from contractual terms because borrowers may have the right to call or prepay obligations with or without penalties. Periodic payments are received on mortgage-backed securities based on the payment patterns of the underlying collateral.

At June 30, 2014 and December 31, 2013, securities with a carrying value of $1,047,174 and $909,548, respectively, were pledged to secure public deposits, trust deposits and for other purposes as required by law. Securities with a carrying value of $758,343 and $860,279 at June 30, 2014 and December 31, 2013, respectively, were pledged as collateral for short-term borrowings.

 

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Following are summaries of the fair values and unrealized losses of securities, segregated by length of impairment:

 

     Less than 12 Months     12 Months or More     Total  
     #      Fair
Value
     Unrealized
Losses
    #      Fair
Value
     Unrealized
Losses
    #      Fair
Value
     Unrealized
Losses
 

Securities Available for Sale:

                        

June 30, 2014

                        

U.S. government-sponsored entities

     2       $ 25,647       $ (38     8       $ 113,891       $ (2,097     10       $ 139,538       $ (2,135

Residential mortgage-backed securities:

                        

Agency mortgage-backed securities

     2         29,988         (28     —           —           —          2         29,988         (28

Agency collateralized mortgage obligations

     10         178,355         (1,187     16         243,377         (10,413     26         421,732         (11,600

States of the U.S. and political subdivisions

     1         2,070         (10     1         1,128         (64     2         3,198         (74

Other debt securities

     —           —           —          4         6,263         (620     4         6,263         (620
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 
     15       $ 236,060       $ (1,263     29       $ 364,659       $ (13,194     44       $ 600,719       $ (14,457
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

December 31, 2013

                        

U.S. government-sponsored entities

     17       $ 232,962       $ (5,904     —         $ —         $ —          17       $ 232,962       $ (5,904

Residential mortgage-backed securities:

                        

Agency mortgage-backed securities

     9         108,284         (1,303     —           —           —          9         108,284         (1,303

Agency collateralized mortgage obligations

     26         389,989         (18,644     2         34,229         (2,150     28         424,218         (20,794

States of the U.S. and political subdivisions

     2         3,022         (250     —           —           —          2         3,022         (250

Collateralized debt obligations

     —           —           —          8         7,965         (10,115     8         7,965         (10,115

Other debt securities

     —           —           —          4         5,950         (929     4         5,950         (929
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 
     54       $ 734,257       $ (26,101     14       $ 48,144       $ (13,194     68       $ 782,401       $ (39,295
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Securities Held to Maturity:

                        

June 30, 2014

                        

U.S. government-sponsored entities

     2       $ 30,103       $ (14     3       $ 39,330       $ (706     5       $ 69,433       $ (720

Residential mortgage-backed securities:

                        

Agency mortgage-backed securities

     1         13,788         (8     8         87,376         (690     9         101,164         (698

Agency collateralized mortgage obligations

     4         50,237         (281     16         224,392         (9,497     20         274,629         (9,778

Non-agency collateralized mortgage obligations

     3         2,805         (7     —           —           —          3         2,805         (7

States of the U.S. and political subdivisions

     13         18,846         (93     10         14,193         (316     23         33,039         (409
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 
     23       $ 115,779       $ (403     37       $ 365,291       $ (11,209     60       $ 481,070       $ (11,612
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

December 31, 2013

                        

U.S. government-sponsored entities

     2       $ 24,513       $ (530     1       $ 14,378       $ (621     3       $ 38,891       $ (1,151

Residential mortgage-backed securities:

                        

Agency mortgage-backed securities

     24         308,864         (5,942     1         1,296         (90     25         310,160         (6,032

Agency collateralized mortgage obligations

     21         301,312         (15,844     —           —           —          21         301,312         (15,844

Non-agency collateralized mortgage obligations

     3         2,010         (4     —           —           —          3         2,010         (4

Commercial mortgage-backed securities

     1         984         (37     —           —           —          1         984         (37

States of the U.S. and political subdivisions

     27         31,537         (2,022     —           —           —          27         31,537         (2,022
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 
     78       $ 669,220       $ (24,379     2       $ 15,674       $ (711     80       $ 684,894       $ (25,090
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

The Corporation does not intend to sell the debt securities and it is not more likely than not the Corporation will be required to sell the securities before recovery of their amortized cost basis.

 

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The Corporation’s unrealized losses on collateralized debt obligations (CDOs) as of December 31, 2013 related to investments in pooled TPS, all of which were sold during the first quarter of 2014 as previously noted. The Corporation’s remaining portfolio of TPS consists of four single-issuer securities, which are primarily from money-center and large regional banks and are included in other debt securities. These single-issuer TPS had an amortized cost and estimated fair value of $6,883 and $6,263 at June 30, 2014, respectively. The Corporation has concluded from its analysis performed at June 30, 2014 that it is probable that the Corporation will collect all contractual principal and interest payments related to these securities.

Other-Than-Temporary Impairment

The Corporation evaluates its investment securities portfolio for other-than-temporary impairment (OTTI) on a quarterly basis. Impairment is assessed at the individual security level. The Corporation considers an investment security impaired if the fair value of the security is less than its cost or amortized cost basis. The following table presents a summary of the cumulative credit-related OTTI charges recognized as components of earnings for securities for which a portion of an OTTI is recognized in other comprehensive income:

 

     Collateralized
Debt
Obligations
    Residential
Non-Agency
CMOs
    Equities      Total  

For the Six Months Ended June 30, 2014

         

Beginning balance

   $ 17,155      $ —        $ 27       $ 17,182   

Loss where impairment was not previously recognized

     —          —          —           —     

Additional loss where impairment was previously recognized

     —          —          —           —     

Reduction due to credit impaired securities sold

     (17,155     —          —           (17,155
  

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance

   $ —        $ —        $ 27       $ 27   
  

 

 

   

 

 

   

 

 

    

 

 

 

For the Six Months Ended June 30, 2013

         

Beginning balance

   $ 17,155      $ 212        —         $ 17,367   

Loss where impairment was not previously recognized

     —          —          —           —     

Additional loss where impairment was previously recognized

     —          —          —           —     

Reduction due to credit impaired securities sold

     —          (212     —           (212
  

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance

   $ 17,155      $ —          —         $ 17,155   
  

 

 

   

 

 

   

 

 

    

 

 

 

The Corporation did not recognize any impairment losses on securities for the six months ended June 30, 2014 or 2013.

States of the U.S. and Political Subdivisions

The Corporation’s municipal bond portfolio of $158,177 as of June 30, 2014 is highly rated with an average entity-specific rating of AA and 99.2% of the portfolio rated A or better. General obligation bonds comprise 99.0% of the portfolio. Geographically, municipal bonds support the Corporation’s footprint as 82.3% of the securities are from municipalities located throughout Pennsylvania. The average holding size of the securities in the municipal bond portfolio is $1,069. In addition to the strong stand-alone ratings, 89.3% of the municipalities have some formal credit enhancement insurance that strengthens the creditworthiness of their issue. Management also reviews the credit profile of each issuer on a quarterly basis.

FEDERAL HOME LOAN BANK STOCK

The Corporation is a member of the Federal Home Loan Bank (FHLB) of Pittsburgh. The FHLB requires members to purchase and hold a specified minimum level of FHLB stock based upon their level of borrowings, collateral balances and participation in other programs offered by the FHLB. Stock in the FHLB is non-marketable and is redeemable at the discretion of the FHLB. Both cash and stock dividends on FHLB stock are reported as income.

Members do not purchase stock in the FHLB for the same reasons that traditional equity investors acquire stock in an investor-owned enterprise. Rather, members purchase stock to obtain access to the low-cost products and services offered by the FHLB. Unlike equity securities of traditional for-profit enterprises, the stock of FHLB does not provide its holders with an opportunity for capital appreciation because, by regulation, FHLB stock can only be purchased, redeemed and transferred at par value.

 

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At June 30, 2014 and December 31, 2013, the Corporation’s FHLB stock totaled $48,425 and $23,636, respectively, and is included in other assets on the balance sheet. The Corporation accounts for the stock in accordance with ASC 325, which requires the investment to be carried at cost and evaluated for impairment based on the ultimate recoverability of the par value. Due to the continued improvement of the FHLB’s financial performance and stability over the past several years, the Corporation believes its holdings in the stock are ultimately recoverable at par value and, therefore, determined that FHLB stock was not other-than-temporarily impaired. In addition, the Corporation has ample liquidity and does not require redemption of its FHLB stock in the foreseeable future.

LOANS AND ALLOWANCE FOR LOAN LOSSES

Following is a summary of loans, net of unearned income:

 

     Originated
Loans
     Acquired
Loans
     Total
Loans
 

June 30, 2014

        

Commercial real estate

   $ 2,840,836       $ 737,097       $ 3,577,933   

Commercial and industrial

     1,997,008         106,888         2,103,896   

Commercial leases

     164,676         —           164,676   
  

 

 

    

 

 

    

 

 

 

Total commercial loans and leases

     5,002,520         843,985         5,846,505   

Direct installment

     1,438,347         73,802         1,512,149   

Residential mortgages

     718,332         426,954         1,145,286   

Indirect installment

     726,066         3,447         729,513   

Consumer lines of credit

     881,913         155,606         1,037,519   

Other

     62,901         —           62,901   
  

 

 

    

 

 

    

 

 

 
   $ 8,830,079       $ 1,503,794       $ 10,333,873   
  

 

 

    

 

 

    

 

 

 

December 31, 2013

        

Commercial real estate

   $ 2,640,428       $ 604,781       $ 3,245,209   

Commercial and industrial

     1,761,668         119,806         1,881,474   

Commercial leases

     158,895         —           158,895   
  

 

 

    

 

 

    

 

 

 

Total commercial loans and leases

     4,560,991         724,587         5,285,578   

Direct installment

     1,387,995         79,241         1,467,236   

Residential mortgages

     678,227         408,512         1,086,739   

Indirect installment

     649,701         5,886         655,587   

Consumer lines of credit

     832,668         133,103         965,771   

Other

     45,183         —           45,183   
  

 

 

    

 

 

    

 

 

 
   $ 8,154,765       $ 1,351,329       $ 9,506,094   
  

 

 

    

 

 

    

 

 

 

The carrying amount of acquired loans at June 30, 2014 totaled $1,498,234, including purchased credit-impaired (PCI) loans with a carrying amount of $12,953, while the carrying amount of acquired loans at December 31, 2013 totaled $1,345,429, including PCI loans with a carrying amount of $21,192. The outstanding contractual balance receivable of acquired loans at June 30, 2014 totaled $1,601,476, including PCI loans with an outstanding contractual balance receivable of $35,352, while the outstanding contractual balance receivable of acquired loans at December 31, 2013 totaled $1,449,227, including PCI loans with an outstanding contractual balance receivable of $56,500.

Commercial real estate includes both owner-occupied and non-owner-occupied loans secured by commercial properties. Commercial and industrial includes loans to businesses that are not secured by real estate. Commercial leases are made for new or used equipment. Direct installment is comprised of fixed-rate, closed-end consumer loans for personal, family or household use, such as home equity loans and automobile loans. Residential mortgages consist of conventional and jumbo mortgage loans for non-commercial properties. Indirect installment is comprised of loans originated by third parties and underwritten by the Corporation, primarily automobile loans. Consumer lines of credit include home equity lines of credit (HELOC) and consumer lines of credit that are either unsecured or secured by collateral other than home equity. Other is comprised primarily of mezzanine loans and student loans.

The loan portfolio consists principally of loans to individuals and small- and medium-sized businesses within the Corporation’s primary market area of Pennsylvania, eastern Ohio, Maryland and northern West Virginia. The commercial real estate portfolio also includes run-off loans in Florida, which totaled $32,935 or 0.3% of total loans at June 30, 2014, compared to $39,379 or 0.4% of total loans at December 31, 2013. Additionally, the total loan portfolio contains consumer finance loans to individuals in Pennsylvania, Ohio, Tennessee and Kentucky, which totaled $175,802 or 1.7% of total loans at June 30, 2014, compared to $179,970 or 1.9% of total loans at December 31, 2013. Due to the relative size of the consumer finance loan portfolio, they are not segregated from other consumer loans.

 

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As of June 30, 2014, 41.1% of the commercial real estate loans were owner-occupied, while the remaining 58.9% were non-owner-occupied, compared to 43.1% and 56.9%, respectively, as of December 31, 2013. As of June 30, 2014 and December 31, 2013, the Corporation had commercial construction loans of $274,489 and $252,842, respectively, representing 2.7% of total loans.

ASC 310-30 Loans

All loans acquired in the BCSB, PVF and ANNB acquisitions, except for revolving loans, are accounted for in accordance with ASC 310-30. Revolving loans are accounted for under ASC 310-20. The Corporation’s allowance for loan losses for acquired loans reflects only those losses incurred after acquisition.

The following table reflects amounts at acquisition for all purchased loans subject to ASC 310-30 (impaired and non-impaired) acquired from PVF and ANNB in 2013. ASC 310-30 (impaired and non-impaired) loans acquired from BSCB in 2014 are not presented because their values are expected to be immaterial, are preliminary in nature and are subject to refinement as additional information becomes available.

 

     Acquired
Impaired
Loans
    Acquired
Performing
Loans
    Total  

Acquired from PVF and ANNB in 2013

      

Contractually required cash flows at acquisition

   $ 40,972      $ 796,114      $ 837,086   

Non-accretable difference (expected losses and foregone interest)

     (23,207     (52,992     (76,199
  

 

 

   

 

 

   

 

 

 

Cash flows expected to be collected at acquisition

     17,765        743,122        760,887   

Accretable yield

     (2,505     (112,847     (115,352
  

 

 

   

 

 

   

 

 

 

Basis in acquired loans at acquisition

   $ 15,260      $ 630,275      $ 645,535   
  

 

 

   

 

 

   

 

 

 

The following table provides a summary of change in accretable yield for all acquired loans:

 

     Acquired
Impaired
Loans
    Acquired
Performing
Loans
    Total  

Six Months Ended June 30, 2014

      

Balance at beginning of period

   $     7,456      $  298,190      $   305,646   

Acquisitions

     —          —          —     

Reduction due to unexpected early payoffs

     —          (18,821     (18,821

Reclass from non-accretable difference

     1,710        895        2,605   

Disposals/transfers

     (1,821     (309     (2,130

Accretion

     (1,746     (26,529     (28,275
  

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 5,599      $ 253,426      $ 259,025   
  

 

 

   

 

 

   

 

 

 

Year Ended December 31, 2013

      

Balance at beginning of period

   $ 778      $ 253,375      $ 254,153   

Acquisitions

     2,505        112,847        115,352   

Reduction due to unexpected early payoffs

     —          (42,582     (42,582

Reclass from non-accretable difference

     8,097        8,296        16,393   

Disposals/transfers

     (368     (224     (592

Accretion

     (3,556     (33,522     (37,078
  

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 7,456      $ 298,190      $ 305,646   
  

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Purchased Credit-Impaired (PCI) Loans

The Corporation has acquired loans for which there was evidence of deterioration of credit quality since origination and for which it was probable, at acquisition, that all contractually required payments would not be collected.

Following is information about PCI loans. The table below does not include impaired loans from the BCSB acquisition because their values are expected to be immaterial, are preliminary in nature and are subject to refinement as additional information becomes available.

 

     Outstanding
Balance
    Non-
Accretable
Difference
    Expected
Cash Flows
    Accretable
Yield
    Recorded
Investment
 

For the Six Months Ended June 30, 2014

          

Balance at beginning of period

   $ 56,500      $ (26,852   $ 29,648      $ (7,456   $ 22,192   

Acquisitions

     —          —          —          —          —     

Accretion

     —          —          —          1,746        1,746   

Payments received

     (10,105     2,306        (7,799     —          (7,799

Reclass from non-accretable difference

     —          1,710        1,710        (1,710     —     

Disposals/transfers

     (12,230     7,671        (4,559     1,821        (2,738

Contractual interest

     1,187        (1,187     —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 35,352      $ (16,352   $ 19,000      $ (5,599   $ 13,401   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

For the Year Ended December 31, 2013

          

Balance at beginning of period

   $ 41,134      $ (23,733   $ 17,401      $ (778   $ 16,623   

Acquisitions

     42,031        (24,266     17,765        (2,505     15,260   

Accretion

     —          —          —          3,556        3,556   

Payments received

     (10,670     1,345        (9,325     —          (9,325

Reclass from non-accretable difference

     —          8,097        8,097        (8,097     —     

Disposals/transfers

     (18,695     14,405        (4,290     368        (3,922

Contractual interest

     2,700        (2,700     —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 56,500      $ (26,852   $ 29,648      $ (7,456   $ 22,192   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The accretion in the table above includes $242 in 2014 and $440 in 2013 that primarily represents payoffs received on certain loans in excess of expected cash flows.

Credit Quality

Management monitors the credit quality of the Corporation’s loan portfolio on an ongoing basis. Measurement of delinquency and past due status are based on the contractual terms of each loan.

Non-performing loans include non-accrual loans and non-performing troubled debt restructurings (TDRs). Past due loans are reviewed on a monthly basis to identify loans for non-accrual status. The Corporation places a loan on non-accrual status and discontinues interest accruals on originated loans generally when principal or interest is due and has remained unpaid for a certain number of days unless the loan is both well secured and in the process of collection. Commercial loans are placed on non-accrual at 90 days, installment loans are placed on non-accrual at 120 days and residential mortgages and consumer lines of credit are generally placed on non-accrual at 180 days. When a loan is placed on non-accrual status, all unpaid interest is reversed. Non-accrual loans may not be restored to accrual status until all delinquent principal and interest have been paid and the ultimate ability to collect the remaining principal and interest is reasonably assured. TDRs are loans in which the borrower has been granted a concession on the interest rate or the original repayment terms due to financial distress. Non-performing assets also include debt securities on which OTTI has been taken in the current or prior periods that have not been returned to accrual status.

 

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Table of Contents

Following is a summary of non-performing assets:

 

     June 30,
2014
    December 31,
2013
 

Non-accrual loans

   $ 59,549      $ 58,755   

Troubled debt restructurings

     20,485        18,698   
  

 

 

   

 

 

 

Total non-performing loans

     80,034        77,453   

Other real estate owned (OREO)

     40,268        40,681   
  

 

 

   

 

 

 

Total non-performing loans and OREO

     120,302        118,134   

Non-performing investments

     —          797   
  

 

 

   

 

 

 

Total non-performing assets

   $ 120,302      $ 118,931   
  

 

 

   

 

 

 

Asset quality ratios:

    

Non-performing loans as a percent of total loans

     0.77     0.81

Non-performing loans + OREO as a percent of total loans + OREO

     1.16     1.24

Non-performing assets as a percent of total assets

     0.80     0.88

The following tables provide an analysis of the aging of the Corporation’s past due loans by class, segregated by loans originated and loans acquired:

 

     30-89 Days
Past Due
     >90 Days
Past Due and

Still Accruing
     Non-
Accrual
     Total
Past Due
     Current      Total
Loans
 

Originated loans:

                 

June 30, 2014

                 

Commercial real estate

   $ 5,313       $ 157       $ 39,300       $ 44,770       $ 2,796,066       $ 2,840,836   

Commercial and industrial

     2,444         4         8,890         11,338         1,985,670         1,997,008   

Commercial leases

     802         —           788         1,590         163,086         164,676   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans and leases

     8,559         161         48,978         57,698         4,944,822         5,002,520   

Direct installment

     9,158         3,118         4,846         17,122         1,421,225         1,438,347   

Residential mortgages

     9,053         2,098         3,829         14,980         703,352         718,332   

Indirect installment

     4,734         235         1,229         6,198         719,868         726,066   

Consumer lines of credit

     2,293         662         667         3,622         878,291         881,913   

Other

     25         7         —           32         62,869         62,901   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 33,822       $ 6,281       $ 59,549       $ 99,652       $ 8,730,427       $ 8,830,079   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2013

                 

Commercial real estate

   $ 5,428       $ 252       $ 40,960       $ 46,640       $ 2,593,788       $ 2,640,428   

Commercial and industrial

     2,066         8         6,643         8,717         1,752,951         1,761,668   

Commercial leases

     714         —           734         1,448         157,447         158,895   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans and leases

     8,208         260         48,337         56,805         4,504,186         4,560,991   

Direct installment

     9,038         3,753         4,686         17,477         1,370,518         1,387,995   

Residential mortgages

     12,681         2,401         4,260         19,342         658,885         678,227   

Indirect installment

     5,653         471         1,060         7,184         642,517         649,701   

Consumer lines of credit

     1,737         1,076         412         3,225         829,443         832,668   

Other

     25         10         —           35         45,148         45,183   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 37,342       $ 7,971       $ 58,755       $ 104,068       $ 8,050,697       $ 8,154,765   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents
     30-89
Days
Past Due
     > 90 Days
Past Due
and Still
Accruing
     Non-
Accrual
     Total
Past
Due (1)
     Current      Discount     Total
Loans
 

Acquired Loans:

                   

June 30, 2014

                   

Commercial real estate

   $ 15,322       $ 30,769         —         $ 46,091       $ 740,533       $ (49,527   $ 737,097   

Commercial and industrial

     1,068         5,373         —           6,441         108,955         (8,508     106,888   

Commercial leases

     —           —           —           —           —           —          —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total commercial loans and leases

     16,390         36,142         —           52,532         849,488         (58,035     843,985   

Direct installment

     2,063         1,177         —           3,240         68,762         1,800        73,802   

Residential mortgages

     11,502         18,239         —           29,741         430,993         (33,780     426,954   

Indirect installment

     54         39         —           93         3,874         (520     3,447   

Consumer lines of credit

     647         3,039         —           3,686         159,067         (7,147     155,606   

Other

     —           —           —           —           —           —          —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
   $ 30,656       $ 58,636         —         $ 89,292       $ 1,512,184       $ (97,682   $ 1,503,794   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

December 31, 2013

                   

Commercial real estate

   $ 13,637       $ 20,668         —         $ 34,305       $ 619,197       $ (48,721   $ 604,781   

Commercial and industrial

     1,860         1,899         —           3,759         124,415         (8,368     119,806   

Commercial leases

     —           —           —           —           —           —          —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total commercial loans and leases

     15,497         22,567         —           38,064         743,612         (57,089     724,587   

Direct installment

     1,447         1,178         —           2,625         74,917         1,699        79,241   

Residential mortgages

     11,464         19,298         —           30,762         412,704         (34,954     408,512   

Indirect installment

     205         31         —           236         6,267         (617     5,886   

Consumer lines of credit

     1,592         2,749         —           4,341         135,699         (6,937     133,103   

Other

     —           —           —           —           —           —          —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
   $ 30,205       $ 45,823         —         $ 76,028       $ 1,373,199       $ (97,898   $ 1,351,329   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

(1) Past due information for loans acquired is based on the contractual balance outstanding at June 30, 2014 and December 31, 2013.

The Corporation utilizes the following categories to monitor credit quality within its commercial loan portfolio:

 

Rating

Category

  

Definition

Pass    in general, the condition of the borrower and the performance of the loan is satisfactory or better
Special Mention    in general, the condition of the borrower has deteriorated, requiring an increased level of monitoring
Substandard    in general, the condition of the borrower has significantly deteriorated and the performance of the loan could further deteriorate if deficiencies are not corrected
Doubtful    in general, the condition of the borrower has significantly deteriorated and the collection in full of both principal and interest is highly questionable or improbable

 

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Table of Contents

The use of these internally assigned credit quality categories within the commercial loan portfolio permits management’s use of migration and roll rate analysis to estimate a quantitative portion of credit risk. The Corporation’s internal credit risk grading system is based on past experiences with similarly graded loans and conforms with regulatory categories. In general, loan risk ratings within each category are reviewed on an ongoing basis according to the Corporation’s policy for each class of loans. Each quarter, management analyzes the resulting ratings, as well as other external statistics and factors such as delinquency, to track the migration performance of the commercial loan portfolio. Loans within the Pass credit category or that migrate toward the Pass credit category generally have a lower risk of loss compared to loans that migrate toward the Substandard or Doubtful credit categories. Accordingly, management applies higher risk factors to Substandard and Doubtful credit categories.

The following tables present a summary of the Corporation’s commercial loans by credit quality category, segregated by loans originated and loans acquired:

 

     Commercial Loan Credit Quality Categories  
     Pass      Special
Mention
     Substandard      Doubtful      Total  

Originated Loans:

              

June 30, 2014

              

Commercial real estate

   $ 2,673,272       $ 59,271       $ 107,633       $ 660       $ 2,840,836   

Commercial and industrial

     1,851,533         66,776         77,812         887         1,997,008   

Commercial leases

     163,224         434         1,018         —           164,676   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 4,688,029       $ 126,481       $ 186,463       $ 1,547       $ 5,002,520   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2013

              

Commercial real estate

   $ 2,476,988       $ 56,140       $ 106,599       $ 701       $ 2,640,428   

Commercial and industrial

     1,611,530         97,675         52,322         141         1,761,668   

Commercial leases

     155,991         1,945         959         —           158,895   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 4,244,509       $ 155,760       $ 159,880       $ 842       $ 4,560,991   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Acquired Loans:

              

June 30, 2014

              

Commercial real estate

   $ 552,495       $ 73,245       $ 103,238       $ 8,119       $ 737,097   

Commercial and industrial

     87,406         5,987         13,449         46         106,888   

Commercial leases

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 639,901       $ 79,232       $ 116,687       $ 8,165       $ 843,985   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2013

              

Commercial real estate

   $ 442,604       $ 74,315       $ 85,086       $ 2,776       $ 604,781   

Commercial and industrial

     100,743         6,182         12,866         15         119,806   

Commercial leases

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 543,347       $ 80,497       $ 97,952       $ 2,791       $ 724,587   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Credit quality information for acquired loans is based on the contractual balance outstanding at June 30, 2014 and December 31, 2013. The increase in acquired loans in 2014 primarily relates to the BCSB acquisition on February 15, 2014.

The Corporation uses payment status and delinquency migration analysis within the consumer and other loan classes to enable management to estimate a quantitative portion of credit risk. Each month, management analyzes payment and volume activity, as well as other external statistics and factors such as unemployment, to determine how consumer loans are performing.

 

20


Table of Contents

Following is a table showing originated consumer loans by payment status:

 

     Consumer Loan Credit Quality
by Payment Status
 
     Performing      Non-Performing      Total  

June 30, 2014

        

Direct installment

   $ 1,425,827       $ 12,520       $ 1,438,347   

Residential mortgages

     704,210         14,122         718,332   

Indirect installment

     724,698         1,368         726,066   

Consumer lines of credit

     880,309         1,604         881,913   

Other

     62,901         —           62,901   

December 31, 2013

        

Direct installment

   $ 1,377,418       $ 10,577       $ 1,387,995   

Residential mortgages

     664,214         14,013         678,227   

Indirect installment

     648,499         1,202         649,701   

Consumer lines of credit

     832,071         597         832,668   

Other

     45,183         —           45,183   

Loans are designated as impaired when, in the opinion of management, based on current information and events, the collection of principal and interest in accordance with the loan contract is doubtful. Typically, the Corporation does not consider loans for impairment unless a sustained period of delinquency (i.e., 90-plus days) is noted or there are subsequent events that impact repayment probability (i.e., negative financial trends, bankruptcy filings, imminent foreclosure proceedings, etc.). Impairment is evaluated in the aggregate for consumer installment loans, residential mortgages, consumer lines of credit, commercial leases and commercial loan relationships less than $500. For commercial loan relationships greater than or equal to $500, a specific valuation allowance is allocated, if necessary, so that the loan is reported net, at the present value of estimated future cash flows using a market interest rate or at the fair value of collateral if repayment is expected solely from the collateral. Consistent with the Corporation’s existing method of income recognition for loans, interest on impaired loans, except those classified as non-accrual, is recognized as income using the accrual method. Impaired loans, or portions thereof, are charged off when deemed uncollectible.

 

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Table of Contents

Following is a summary of information pertaining to originated loans considered to be impaired, by class of loans:

 

     Recorded
Investment
     Unpaid
Principal
Balance
     Specific
Related

Allowance
     Average
Recorded
Investment
 

At or For the Six Months Ended June 30, 2014

           

With no specific allowance recorded:

           

Commercial real estate

   $ 37,984       $ 58,513       $ —         $ 37,486   

Commercial and industrial

     7,413         9,038         —           6,192   

Commercial leases

     788         788         —           766   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans and leases

     46,185         68,339         —           44,444   

Direct installment

     12,520         12,920         —           12,222   

Residential mortgages

     14,122         16,220         —           13,840   

Indirect installment

     1,368         1,536         —           1,390   

Consumer lines of credit

     1,604         1,607         —           1,263   

Other

     —           —           —           —     

With a specific allowance recorded:

           

Commercial real estate

     2,804         4,930         660         6,074   

Commercial and industrial

     2,424         2,486         809         1,302   

Commercial leases

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans and leases

     5,228         7,416         1,469         7,376   

Direct installment

     —           —           —           —     

Residential mortgages

     —           —           —           —     

Indirect installment

     —           —           —           —     

Consumer lines of credit

     —           —           —           —     

Other

     —           —           —           —     

Total:

           

Commercial real estate

     40,788         63,443         660         43,560   

Commercial and industrial

     9,837         11,524         809         7,494   

Commercial leases

     788         788         —           766   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans and leases

     51,413         75,755         1,469         51,820   

Direct installment

     12,520         12,920         —           12,222   

Residential mortgages

     14,122         16,220         —           13,840   

Indirect installment

     1,368         1,536         —           1,390   

Consumer lines of credit

     1,604         1,607         —           1,263   

Other

     —           —           —           —     

 

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Table of Contents
     Recorded
Investment
     Unpaid
Principal
Balance
     Specific
Related

Allowance
     Average
Recorded
Investment
 

At or For the Year Ended December 31, 2013

           

With no specific allowance recorded:

           

Commercial real estate

   $ 40,472       $ 62,034       $ —         $ 37,376   

Commercial and industrial

     7,301         8,669         —           8,304   

Commercial leases

     734         734         —           758   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans and leases

     48,507         71,437         —           46,438   

Direct installment

     10,577         10,830         —           10,557   

Residential mortgages

     14,012         14,560         —           13,565   

Indirect installment

     1,202         2,633         —           1,127   

Consumer lines of credit

     597         668         —           573   

Other

     —           —           —           —     

With a specific allowance recorded:

           

Commercial real estate

     3,603         3,818         701         14,379   

Commercial and industrial

     122         130         123         126   

Commercial leases

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans and leases

     3,725         3,948         824         14,505   

Direct installment

     —           —           —           —     

Residential mortgages

     —           —           —           —     

Indirect installment

     —           —           —           —     

Consumer lines of credit

     —           —           —           —     

Other

     —           —           —           —     

Total:

           

Commercial real estate

     44,075         65,852         701         51,755   

Commercial and industrial

     7,423         8,799         123         8,430   

Commercial leases

     734         734         —           758   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans and leases

     52,232         75,385         824         60,943   

Direct installment

     10,577         10,830         —           10,557   

Residential mortgages

     14,012         14,560         —           13,565   

Indirect installment

     1,202         2,633         —           1,127   

Consumer lines of credit

     597         668         —           573   

Other

     —           —           —           —     

Interest income is generally no longer recognized once a loan becomes impaired.

The above tables do not include PCI loans with a recorded investment of $13,401 at June 30, 2014 and $22,192 at December 31, 2013. These tables do not reflect the additional allowance for loan losses relating to acquired loans in the following pools and categories: commercial real estate of $2,911; commercial and industrial of $674; direct installment of $1,405; residential mortgages of $207; indirect installment of $248; and consumer lines of credit of $115, totaling $5,560 at June 30, 2014 and commercial real estate of $3,093; commercial and industrial of $786; direct installment of $727; residential mortgages of $970 and indirect installment of $324, totaling $5,900 at December 31, 2013.

Troubled Debt Restructurings

TDRs are loans whose contractual terms have been modified in a manner that grants a concession to a borrower experiencing financial difficulties. TDRs typically result from loss mitigation activities and could include the extension of a maturity date, interest rate reduction, principal forgiveness, deferral or decrease in payments for a period of time and other actions intended to minimize the economic loss and to avoid foreclosure or repossession of collateral.

 

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Table of Contents

Following is a summary of the composition of total TDRs:

 

     June 30,
2014
     December 31,
2013
 

Accruing:

     

Performing

   $ 10,614       $ 10,220   

Non-performing

     20,485         18,698   

Non-accrual

     13,415         12,705   
  

 

 

    

 

 

 
   $ 44,514       $ 41,623   
  

 

 

    

 

 

 

TDRs that are accruing and performing include loans that met the criteria for non-accrual of interest prior to restructuring for which the Corporation can reasonably estimate the timing and amount of the expected cash flows on such loans and for which the Corporation expects to fully collect the new carrying value of the loans. During the six months ended June 30, 2014, the Corporation returned to performing status $2,915 in restructured residential mortgage loans that have consistently met their modified obligations for more than six months. TDRs that are accruing and non-performing are comprised of consumer loans that have not demonstrated a consistent repayment pattern on the modified terms for more than six months, however it is expected that the Corporation will collect all future principal and interest payments. TDRs that are on non-accrual are not placed on accruing status until all delinquent principal and interest have been paid and the ultimate collectability of the remaining principal and interest is reasonably assured. Some loan modifications classified as TDRs may not ultimately result in the full collection of principal and interest, as modified, and result in potential incremental losses which are factored into the allowance for loan losses.

Excluding purchased impaired loans, commercial loans over $500 whose terms have been modified in a TDR are generally placed on non-accrual, individually analyzed and measured for estimated impairment based on the fair value of the underlying collateral. The Corporation’s allowance for loan losses included specific reserves for commercial TDRs of $446 and $561 at June 30, 2014 and December 31, 2013, respectively, and pooled reserves for individual loans under $500 of $212 and $193 for those same respective periods, based on historical loss experience. Upon default, the amount of the recorded investment in the TDR in excess of the fair value of the collateral less estimated selling costs is generally considered a confirmed loss and is charged-off against the allowance for loan losses.

All other classes of loans, which are primarily secured by residential properties, whose terms have been modified in a TDR are pooled and measured for estimated impairment based on the expected net present value of the estimated future cash flows of the pool. The Corporation’s allowance for loan losses included pooled reserves for these classes of loans of $1,062 and $1,005 at June 30, 2014 and December 31, 2013, respectively. Upon default of an individual loan, the Corporation’s charge-off policy is followed accordingly for that class of loan.

The majority of TDRs are the result of interest rate concessions for a limited period of time. Following is a summary of loans, by class, that have been restructured during the periods indicated:

 

     Three Months Ended June 30, 2014      Six Months Ended June 30, 2014  
     Number
of
Contracts
     Pre-
Modification
Outstanding

Recorded
Investment
     Post-
Modification

Outstanding
Recorded
Investment
     Number
of
Contracts
     Pre-
Modification
Outstanding

Recorded
Investment
     Post-
Modification

Outstanding
Recorded
Investment
 

Commercial real estate

     8       $ 2,508       $ 2,496         9       $ 2,581       $ 2,553   

Commercial and industrial

     —           —           —           1         188         188   

Commercial leases

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans and leases

     8         2,508         2,496         10         2,769         2,741   

Direct installment

     136         1,873         1,843         262         3,573         3,479   

Residential mortgages

     15         1,070         1,045         24         1,359         1,324   

Indirect installment

     6         18         16         13         34         32   

Consumer lines of credit

     18         555         553         25         812         807   

Other

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     183       $ 6,024       $ 5,953         334       $ 8,547       $ 8,383   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

24


Table of Contents
     Three Months Ended June 30, 2013      Six Months Ended June 30, 2013  
     Number
of
Contracts
     Pre-
Modification
Outstanding

Recorded
Investment
     Post-
Modification

Outstanding
Recorded
Investment
     Number
of
Contracts
     Pre-
Modification
Outstanding

Recorded
Investment
     Post-
Modification

Outstanding
Recorded
Investment
 

Commercial real estate

     —         $ —         $ —           5       $ 1,029       $ 882   

Commercial and industrial

     —           —           —           —           —           —     

Commercial leases

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans and leases

     —           —           —           5         1,029         882   

Direct installment

     75         743         715         184         1,904         1,833   

Residential mortgages

     17         804         804         31         1,519         1,507   

Indirect installment

     5         15         14         15         71         70   

Consumer lines of credit

     4         28         28         13         201         199   

Other

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     101       $ 1,590       $ 1,561         248       $ 4,724       $ 4,491   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Following is a summary of TDRs, by class of loans, for which there was a payment default, excluding loans that were either charged-off or cured by period end. Default occurs when a loan is 90 days or more past due and is within 12 months of restructuring.

 

     Three Months Ended
June 30, 2014 (1)
     Six Months Ended
June 30, 2014 (1)
 
     Number of
Contracts
     Recorded
Investment
     Number of
Contracts
     Recorded
Investment
 

Commercial real estate

     —         $ —           —         $ —     

Commercial and industrial

     —           —           —           —     

Commercial leases

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans and leases

     —           —           —           —     

Direct installment

     33         240         47         392   

Residential mortgages

     —           —           —           —     

Indirect installment

     1         —           1         —     

Consumer lines of credit

     —           —           —           —     

Other

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 
     34       $ 240         48       $ 392   
  

 

 

    

 

 

    

 

 

    

 

 

 
     Three Months Ended
June 30, 2013 (1)
     Six Months Ended
June 30, 2013 (1)
 
     Number of
Contracts
     Recorded
Investment
     Number of
Contracts
     Recorded
Investment
 

Commercial real estate

     1       $ 764         1       $ 764   

Commercial and industrial

     —           —           1         32   

Commercial leases

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans and leases

     1         764         2         796   

Direct installment

     24         276         32         375   

Residential mortgages

     2         114         4         232   

Indirect installment

     3         35         4         45   

Consumer lines of credit

     —           —           —           —     

Other

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 
     30       $ 1,189         42       $ 1,448   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) The recorded investment is as of period end.

 

25


Table of Contents

Allowance for Loan Losses

The allowance for loan losses is established as losses are estimated to have occurred through a provision charged to earnings. Loan losses are charged against the allowance for loan losses when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance for loan losses. Allowances for impaired loans are generally determined based on collateral values or the present value of estimated cash flows. Changes in the allowance for loan losses related to impaired loans are charged or credited to the provision for loan losses.

The allowance for loan losses is maintained at a level that, in management’s judgment, is believed adequate to absorb probable losses associated with specifically identified loans, as well as estimated probable credit losses inherent in the remainder of the loan portfolio. Adequacy of the allowance for loan losses is based on management’s evaluation of potential loan losses in the loan portfolio, which includes an assessment of past experience, current economic conditions in specific industries and geographic areas, general economic conditions, known and inherent risks in the loan portfolio, the estimated value of underlying collateral and residuals and changes in the composition of the loan portfolio. Determination of the allowance for loan losses is inherently subjective as it requires significant estimates, including the amounts and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience and consideration of current environmental factors and economic trends, all of which are susceptible to significant change.

Credit impaired loans obtained through acquisitions are accounted for under the provisions of ASC 310-30. The Corporation also accounts for certain acquired loans considered performing at the time of acquisition by analogy to ASC 310-30. ASC 310-30 requires the initial recognition of acquired loans at the present value of amounts expected to be received. Any deterioration in the credit quality of acquired loans subsequent to acquisition would be considered in the allowance for loan losses.

 

26


Table of Contents

Following is a summary of changes in the allowance for loan losses, by loan class:

 

     Balance at
Beginning of
Period
     Charge-
Offs
    Recoveries      Net
Charge-
Offs
    Provision
for Loan
Losses
    Balance at
End of
Period
 

Three Months Ended June 30, 2014

  

        

Commercial real estate

   $ 38,534       $ (1,572   $ 263       $ (1,309   $ 1,253      $ 38,478   

Commercial and industrial

     29,971         (540     168         (372     3,418        33,017   

Commercial leases

     1,944         (63     53         (10     145        2,079   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total commercial loans and leases

     70,449         (2,175     484         (1,691     4,816        73,574   

Direct installment

     16,630         (2,264     283         (1,981     2,195        16,844   

Residential mortgages

     5,307         (137     44         (93     292        5,506   

Indirect installment

     6,500         (696     230         (466     659        6,693   

Consumer lines of credit

     7,658         (340     38         (302     308        7,664   

Other

     579         (307     5         (302     630        907   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total allowance on originated loans

     107,123         (5,919     1,084         (4,835     8,900        111,188   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Purchased credit-impaired loans

     708         (1,653     —           (1,653     1,393        448   

Other acquired loans

     4,388         (126     738         612        112        5,112   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total allowance on acquired loans

     5,096         (1,779     738         (1,041     1,505        5,560   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total allowance

   $ 112,219       $ (7,698   $ 1,822       $ (5,876   $ 10,405      $ 116,748   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Six Months Ended June 30, 2014

              

Commercial real estate

   $ 32,548       $ (3,795   $ 562       $ (3,233   $ 9,163      $ 38,478   

Commercial and industrial

     32,603         (1,053     538         (515     929        33,017   

Commercial leases

     1,903         (150     82         (68     244        2,079   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total commercial loans and leases

     67,054         (4,998     1,182         (3,816     10,336        73,574   

Direct installment

     17,824         (4,785     550         (4,235     3,255        16,844   

Residential mortgages

     5,836         (269     48         (221     (109     5,506   

Indirect installment

     6,409         (1,498     447         (1,051     1,335        6,693   

Consumer lines of credit

     7,231         (663     93         (570     1,003        7,664   

Other

     530         (569     10         (559     936        907   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total allowance on originated loans

     104,884         (12,782     2,330         (10,452     16,756        111,188   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Purchased credit-impaired loans

     1,000         (1,902     —           (1,902     1,350        448   

Other acquired loans

     4,900         (117     1,024         907        (695     5,112   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total allowance on acquired loans

     5,900         (2,019     1,024         (995     655        5,560   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total allowance

   $ 110,784       $ (14,801   $ 3,354       $ (11,447   $ 17,411      $ 116,748   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

27


Table of Contents
     Balance at
Beginning of
Period
     Charge-
Offs
    Recoveries      Net
Charge-
Offs
    Provision
for Loan
Losses
    Balance at
End of
Period
 

Three Months Ended June 30, 2013

              

Commercial real estate

   $ 40,012       $ (415   $ 99       $ (316   $ (4,030   $ 35,666   

Commercial and industrial

     28,838         (2,525     147         (2,378     6,026        32,486   

Commercial leases

     1,696         (191     40         (151     211        1,756   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total commercial loans and leases

     70,546         (3,131     286         (2,845     2,207        69,908   

Direct installment

     15,100         (2,296     249         (2,047     2,940        15,993   

Residential mortgages

     4,978         (350     11         (339     481        5,120   

Indirect installment

     5,152         (732     195         (537     1,011        5,626   

Consumer lines of credit

     6,045         (387     62         (325     701        6,421   

Other

     683         (211     —           (211     (691     (219
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total allowance on originated loans

     102,504         (7,107     803         (6,304     6,649        102,849   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Purchased credit-impaired loans

     583         —          —           —          (258     325   

Other acquired loans

     4,615         (1,056     35         (1,021     1,512        5,106   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total allowance on acquired loans

     5,198         (1,056     35         (1,021     1,254        5,431   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total allowance

   $ 107,702       $ (8,163   $ 838       $ (7,325   $ 7,903      $ 108,280   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Six Months Ended June 30, 2013

              

Commercial real estate

   $ 34,810       $ (2,702   $ 1,526       $ (1,176   $ 2,032      $ 35,666   

Commercial and industrial

     31,849         (2,733     503         (2,230     2,867        32,486   

Commercial leases

     1,744         (248     102         (146     158        1,756   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total commercial loans and leases

     68,403         (5,683     2,131         (3,552     5,057        69,908   

Direct installment

     15,130         (4,641     482         (4,159     5,022        15,993   

Residential mortgages

     5,155         (559     40         (519     484        5,120   

Indirect installment

     5,449         (1,542     388         (1,154     1,331        5,626   

Consumer lines of credit

     6,057         (729     149         (580     944        6,421   

Other

     —           (388     —           (388     169        (219
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total allowance on originated loans

     100,194         (13,542     3,190         (10,352     13,007        102,849   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Purchased credit-impaired loans

     759         (156     —           (156     (278     325   

Other acquired loans

     3,421         (1,269     239         (1,030     2,715        5,106   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total allowance on acquired loans

     4,180         (1,425     239         (1,186     2,437        5,431   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total allowance

   $ 104,374       $ (14,967   $ 3,429       $ (11,538   $ 15,444      $ 108,280   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Following is a summary of the individual and collective originated allowance for loan losses and corresponding loan balances by class:

 

     Allowance      Loans Outstanding  
     Individually
Evaluated for
Impairment
     Collectively
Evaluated for
Impairment
     Loans      Individually
Evaluated for
Impairment
     Collectively
Evaluated for
Impairment
 

June 30, 2014

              

Commercial real estate

   $ 660       $ 37,818       $ 2,840,836       $ 27,909       $ 2,812,927   

Commercial and industrial

     809         32,208         1,997,008         6,694         1,990,314   

Commercial leases

     —           2,079         164,676         —           164,676   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans and leases

     1,469         72,105         5,002,520         34,603         4,967,917   

Direct installment

     —           16,844         1,438,347         —           1,438,347   

Residential mortgages

     —           5,506         718,332         —           718,332   

Indirect installment

     —           6,693         726,066         —           726,066   

Consumer lines of credit

     —           7,664         881,913         —           881,913   

Other

     —           907         62,901         —           62,901   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 1,469       $ 109,719       $ 8,830,079       $ 34,603       $ 8,795,476   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2013

              

Commercial real estate

   $ 701       $ 31,847       $ 2,640,428       $ 30,133       $ 2,610,295   

Commercial and industrial

     123         32,480         1,761,668         4,243         1,757,425   

Commercial leases

     —           1,903         158,895         —           158,895   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans and leases

     824         66,230         4,560,991         34,376         4,526,615   

Direct installment

     —           17,824         1,387,995         —           1,387,995   

Residential mortgages

     —           5,836         678,227         —           678,227   

Indirect installment

     —           6,409         649,701         —           649,701   

Consumer lines of credit

     —           7,231         832,668         —           832,668   

Other

     —           530         45,183         —           45,183   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 824       $ 104,060       $ 8,154,765       $ 34,376       $ 8,120,389   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

BORROWINGS

Following is a summary of short-term borrowings:

 

     June 30,
2014
     December 31,
2013
 

Securities sold under repurchase agreements

   $ 751,066       $ 841,741   

Federal funds purchased

     624,000         270,000   

Subordinated notes

     129,444         129,498   
  

 

 

    

 

 

 
   $ 1,504,510       $ 1,241,239   
  

 

 

    

 

 

 

Securities sold under repurchase agreements is comprised of customer repurchase agreements, which are sweep accounts with next day maturities utilized by larger commercial customers to earn interest on their funds. Securities are pledged to these customers in an amount equal to the outstanding balance.

Following is a summary of long-term debt:

 

     June 30,
2014
     December 31,
2013
 

Federal Home Loan Bank advances

   $ 250,070       $ 50,076   

Subordinated notes

     85,784         84,637   

Other subordinated debt

     —           8,637   

Convertible debt

     —           578   
  

 

 

    

 

 

 
   $ 335,854       $ 143,928   
  

 

 

    

 

 

 

 

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Table of Contents

The Corporation’s banking affiliate has available credit with the FHLB of $3,695,372 of which $690,070 was used as of June 30, 2014. These advances are secured by loans collateralized by residential mortgages, HELOCs, commercial real estate and FHLB stock and are scheduled to mature in various amounts periodically through the year 2019. Effective interest rates paid on these advances ranged from 0.95% to 4.19% for the six months ended June 30, 2014 and 1.06% to 4.19% for the year ended December 31, 2013.

JUNIOR SUBORDINATED DEBT

The Corporation has two unconsolidated subsidiary trusts as of June 30, 2014 (collectively, the Trusts): F.N.B. Statutory Trust II and Omega Financial Capital Trust I. One hundred percent of the common equity of each Trust is owned by the Corporation. The Trusts were formed for the purpose of issuing Corporation-obligated mandatorily redeemable capital securities (TPS) to third-party investors. The proceeds from the sale of TPS and the issuance of common equity by the Trusts were invested in junior subordinated debt securities (subordinated debt) issued by the Corporation, which are the sole assets of each Trust. Since third-party investors are the primary beneficiaries, the Trusts are not consolidated in the Corporation’s financial statements. The Trusts pay dividends on the TPS at the same rate as the distributions paid by the Corporation on the junior subordinated debt held by the Trusts. Omega Financial Capital Trust I was assumed as a result of an acquisition.

Distributions on the subordinated debt issued to the Trusts are recorded as interest expense by the Corporation. The TPS are subject to mandatory redemption, in whole or in part, upon repayment of the subordinated debt. The TPS are eligible for redemption, at any time, at the Corporation’s discretion. The subordinated debt, net of the Corporation’s investment in the Trusts, qualifies as tier 1 capital under the Board of Governors of the Federal Reserve System (FRB) guidelines. Under recently issued capital guidelines, these TPS obligations are subject to limitations when total assets of the Corporation exceed $15,000,000. The Corporation has entered into agreements which, when taken collectively, fully and unconditionally guarantee the obligations under the TPS subject to the terms of each of the guarantees.

During the first six months of 2014, the Corporation redeemed $33,000 of the Corporation-issued TPS, including $16,500 that the Corporation assumed as a result of the BCSB acquisition. During 2013, the Corporation redeemed $130,000 of the Corporation-issued TPS. The Corporation proactively redeemed these Corporation-issued TPS, primarily using proceeds from the November 2013 capital raise, in anticipation of meeting the limitations as described above. Under applicable regulatory capital guidelines issued by the bank regulatory agencies, upon notice of redemption, the redeemed TPS no longer qualify as tier 1 capital for the Corporation.

The following table provides information relating to the Trusts as of June 30, 2014:

 

     Trust
Preferred
Securities
     Common
Securities
     Junior
Subordinated
Debt
     Stated
Maturity
Date
     Interest
Rate
     

F.N.B. Statutory Trust II

   $ 21,500       $ 665       $ 22,165         6/15/36         1.88  

Variable; LIBOR + 165

basis points (bps)

Omega Financial Capital Trust I

     36,000         1,114         36,055         10/18/34         2.42   Variable; LIBOR + 219 bps
  

 

 

    

 

 

    

 

 

         
   $ 57,500       $ 1,779       $ 58,220           
  

 

 

    

 

 

    

 

 

         

DERIVATIVE INSTRUMENTS

The Corporation is exposed to certain risks arising from both its business operations and economic conditions. The Corporation principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Corporation manages economic risks, including interest rate risk, primarily by managing the amount, source, and duration of its assets and liabilities, and through the use of derivative instruments. Interest rate swaps are the primary derivative instrument used by the Corporation for interest rate management. The Corporation also uses derivative instruments to facilitate transactions on behalf of its customers.

 

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Table of Contents

Commercial Borrower Derivatives

The Corporation enters into interest rate swap agreements to meet the financing, interest rate and equity risk management needs of qualifying commercial loan customers. These agreements provide the customer the ability to convert from variable to fixed interest rates. The Corporation then enters into positions with a derivative counterparty in order to offset its exposure on the fixed components of the customer agreements. The credit risk associated with derivatives executed with customers is essentially the same as that involved in extending loans and is subject to normal credit policies and monitoring. The Corporation seeks to minimize counterparty credit risk by entering into transactions with only high-quality institutions. Since June 10, 2014, the majority of the Corporation’s derivative transactions are executed through CME Clearing, a SEC registered clearing agency, whose purpose is to ensure safety and soundness in the markets, rather than directly with a counterparty. These arrangements meet the definition of derivatives, but are not designated as hedging instruments under ASC 815, Derivatives and Hedging. The interest rate swap agreement with the loan customer and with the counterparty is reported at fair value in other assets and other liabilities on the consolidated balance sheet with any resulting gain or loss recorded in current period earnings as other income or other expense.

Risk Management Derivatives

The Corporation entered into interest rate derivative agreements in order to manage its net interest income by increasing the stability of the net interest income over a range of potential interest rate scenarios. Interest rate swaps are also used to modify the interest rate characteristics of designated commercial loans from variable to fixed in order to reduce the impact of changes in future cash flows due to interest rate changes. These agreements are designated as cash flow hedges (i.e., hedging the exposure to variability in expected future cash flows). The effective portion of the derivative’s gain or loss is initially reported as a component of other comprehensive income and subsequently reclassified into earnings in the same line item associated with the forecasted transaction when the forecasted transaction affects earnings. The ineffective portion of the gain or loss is reported in earnings immediately. Gains and losses from hedge ineffectiveness recognized in the consolidated statement of comprehensive income were not material for the six months ended June 30, 2014.

In accordance with the requirements of ASU No. 2011-04, the Corporation made an accounting policy election to use the portfolio exception with respect to measuring derivative instruments, consistent with the guidance in ASC 820. The Corporation further documents that it meets the criteria for this exception as follows:

 

    The Corporation manages credit risk for its derivative positions on a counterparty-by-counterparty basis, consistent with its risk management strategy for such transactions. The Corporation manages credit risk by considering indicators of risk such as credit ratings, and by negotiating terms in its master netting arrangements and credit support annex documentation with each individual counterparty. Review of credit risk plays a central role in the decision of which counterparties to consider for such relationships and when deciding with whom it will enter into derivative transactions.

 

    Since the effective date of ASC 820, the Corporation’s management has monitored and measured credit risk and calculated credit valuation adjustments (CVAs) for its derivative transactions on a counterparty-by-counterparty basis. Management receives reports from an independent third-party valuation specialist on a monthly basis to assist in determining CVAs by counterparty for purposes of reviewing and managing its credit risk exposures. Since the portfolio exception applies only to the fair value measurement and not to the financial statement presentation, the portfolio-level adjustments are then allocated in a reasonable and consistent manner each period to the individual assets or liabilities that make up the counterparty derivative portfolio, in accordance with the Corporation’s accounting policy elections.

The Corporation notes that key market participants take into account the existence of such arrangements that mitigate credit risk exposure in the event of default. As such, the Corporation formally elects to apply the portfolio exception in ASC 820 with respect to measuring counterparty credit risk for all of its derivative transactions subject to master netting arrangements.

At June 30, 2014, the Corporation was party to 325 swaps with customers with notional amounts totaling $915,432 and 291 swaps with derivative counterparties with notional amounts totaling $1,115,432.

 

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Table of Contents

Derivative assets are classified in the balance sheet under “other assets” and derivative liabilities are classified in the balance sheet under “other liabilities.” The following tables present information about derivative assets and derivative liabilities that are subject to enforceable master netting agreements as well as those not subject to enforceable master netting arrangements:

 

     Gross
Amount
     Gross
Amounts
Offset in
the Balance
Sheet
     Net Amount
Presented in
the Balance
Sheet
 

Offsetting of Derivative Assets:

        

June 30, 2014

        

Derivative assets subject to master netting arrangement:

        

Interest rate contracts

   $ 1,675         —         $ 1,675   

Equity contracts

     61         —           61   

Derivative assets not subject to master netting arrangement:

        

Interest rate contracts

     37,502         —           37,502   
  

 

 

    

 

 

    

 

 

 

Total derivative assets

   $ 39,238         —         $ 39,238   
  

 

 

    

 

 

    

 

 

 

December 31, 2013

        

Derivative assets subject to master netting arrangement:

        

Interest rate contracts

   $ 3,547         —         $ 3,547   

Equity contracts

     32         —           32   

Derivative assets not subject to master netting arrangement:

        

Interest rate contracts

     29,738         —           29,738   
  

 

 

    

 

 

    

 

 

 

Total derivative assets

   $ 33,317         —         $ 33,317   
  

 

 

    

 

 

    

 

 

 

Offsetting of Derivative Liabilities:

        

June 30, 2014

        

Derivative liabilities subject to master netting arrangement:

        

Interest rate contracts

   $ 41,768         —         $ 41,768   

Derivative liabilities not subject to master netting arrangement:

        

Interest rate contracts

     704         —           704   

Equity contracts

     61         —           61   
  

 

 

    

 

 

    

 

 

 

Total derivative liabilities

   $ 42,533         —         $ 42,533   
  

 

 

    

 

 

    

 

 

 

December 31, 2013

        

Derivative liabilities subject to master netting arrangement:

        

Interest rate contracts

   $ 40,323         —         $ 40,323   

Derivative liabilities not subject to master netting arrangement:

        

Interest rate contracts

     3,014         —           3,014   

Equity contracts

     32         —           32   
  

 

 

    

 

 

    

 

 

 

Total derivative liabilities

   $ 43,369         —         $ 43,369   
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents

The following tables present a reconciliation of the net amounts of derivative assets and derivative liabilities presented in the balance sheet to the net amounts that would result in the event of offset:

 

            Gross Amounts Not Offset
in the Balance Sheet
        
     Net Amount
Presented in the
Balance Sheet
     Financial
Instruments
     Cash
Collateral
Received
     Net Amount  

Derivative Assets:

           

June 30, 2014

           

Counterparty D

   $ 56       $ 56       $ —         $ —     

Counterparty E

     476         476         —           —     

Counterparty F

     94         —           —           94   

Counterparty G

     50         50         —           —     

Counterparty I

     198         198         —           —     

Counterparty J

     862         —           862         —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 1,736       $ 780       $ 862       $ 94   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2013

           

Counterparty B

   $ 24       $ 24       $ —         $ —     

Counterparty D

     566         566         —           —     

Counterparty E

     1,696         1,696         —           —     

Counterparty F

     355         273         —           82   

Counterparty G

     251         251         —           —     

Counterparty I

     634         634         —           —     

Counterparty J

     53         —           53         —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 3,579       $ 3,444       $ 53       $ 82   
  

 

 

    

 

 

    

 

 

    

 

 

 

Derivative Liabilities:

           

June 30, 2014

           

Counterparty A

   $ 4,567       $ 4,567       $ —         $ —     

Counterparty B

     2,889         2,889         —           —     

Counterparty C

     1,333         1,333