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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 March 31, 2015

 

¨	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

(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 April 30, 2015
Common Stock, $0.01 Par Value		174,693,549 Shares

 

 

 

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F.N.B. CORPORATION

FORM 10-Q

March 31, 2015

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			43
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			60
Item 4.		Controls and Procedures			60
PART II – OTHER INFORMATION
Item 1.		Legal Proceedings			61
Item 1A.		Risk Factors			61
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			61
Item 3.		Defaults Upon Senior Securities			61
Item 4.		Mine Safety Disclosures			61
Item 5.		Other Information			61
Item 6.		Exhibits			61
Signatures					62

 

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PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

F.N.B. CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

Dollars in thousands, except par value

 

		March 31,				December 31,
		2015				2014
		(Unaudited)
Assets
Cash and due from banks		$	191,347			$	196,240
Interest bearing deposits with banks			42,899				91,153
Cash and Cash Equivalents			234,246				287,393
Securities available for sale			1,537,080				1,534,065
Securities held to maturity (fair value of $1,536,449 and $1,468,258)			1,513,204				1,453,355
Residential mortgage loans held for sale			4,621				6,180
Loans and leases, net of unearned income of $50,916 and $56,131			11,404,099				11,247,038
Allowance for credit losses			(128,499	)			(125,926	)
Net Loans and Leases			11,275,600				11,121,112
Premises and equipment, net			169,859				168,756
Goodwill			829,726				832,213
Core deposit and other intangible assets, net			45,520				47,504
Bank owned life insurance			303,102				301,771
Other assets			365,890				374,741
Total Assets		$	16,278,848			$	16,127,090
Liabilities
Deposits:
Non-interest bearing demand		$	2,728,599			$	2,647,623
Interest bearing demand			4,724,985				4,547,628
Savings			1,763,275				1,575,922
Certificates and other time deposits			2,589,184				2,611,035
Total Deposits			11,806,043				11,382,208
Short-term borrowings			1,740,500				2,041,658
Long-term borrowings			541,474				541,443
Other liabilities			135,555				140,325
Total Liabilities			14,223,572				14,105,634
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 – 176,305,233 and 175,450,303 shares			1,763				1,754
Additional paid-in capital			1,805,991				1,798,984
Retained earnings			193,461				176,120
Accumulated other comprehensive loss			(34,980	)			(46,003	)
Treasury stock – 1,613,531 and 1,458,045 shares at cost			(17,841	)			(16,281	)
Total Stockholders’ Equity			2,055,276				2,021,456
Total Liabilities and Stockholders’ Equity		$	16,278,848			$	16,127,090

See accompanying Notes to Consolidated Financial Statements

 

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F.N.B. CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

In thousands, except per share data

Unaudited

 

		Three Months Ended
		March 31,
		2015				2014
Interest Income
Loans and leases, including fees		$	117,739			$	104,097
Securities:
Taxable			14,214				12,287
Nontaxable			1,373				1,291
Dividends			11				179
Other			32				26
Total Interest Income			133,369				117,880
Interest Expense
Deposits			7,449				7,149
Short-term borrowings			1,768				1,219
Long-term borrowings			2,231				1,687
Total Interest Expense			11,448				10,055
Net Interest Income			121,921				107,825
Provision for credit losses			8,136				7,006
Net Interest Income After Provision for Credit Losses			113,785				100,819
Non-Interest Income
Service charges			15,817				15,269
Trust fees			5,161				4,764
Insurance commissions and fees			4,369				4,945
Securities commissions and fees			3,057				2,391
Net securities (losses) gains			(9	)			9,461
Mortgage banking operations			1,799				214
Bank owned life insurance			1,843				2,185
Other			6,145				2,841
Total Non-Interest Income			38,182				42,070
Non-Interest Expense
Salaries and employee benefits			49,269				48,953
Net occupancy			8,976				8,482
Equipment			7,648				6,899
Amortization of intangibles			2,115				2,283
Outside services			8,777				7,237
FDIC insurance			3,689				2,994
Merger related			—				5,318
Other			14,181				12,000
Total Non-Interest Expense			94,655				94,166
Income Before Income Taxes			57,312				48,723
Income taxes			16,969				14,199
Net Income			40,343				34,524
Less: Preferred stock dividends			2,010				2,322
Net Income Available to Common Stockholders		$	38,333			$	32,202
Net Income per Common Share – Basic		$	0.22			$	0.20
Net Income per Common Share – Diluted			0.22				0.20
Cash Dividends per Common Share			0.12				0.12
Comprehensive Income		$	51,366			$	47,407

See accompanying Notes to Consolidated Financial Statements

 

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F.N.B. CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS 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, 2015		$	106,882			$	1,754			$	1,798,984			$	176,120			$	(46,003	)		$	(16,281	)		$	2,021,456
Comprehensive income															40,343				11,023								51,366
Dividends declared:
Preferred stock															(2,010	)											(2,010	)
Common stock: $0.12/share															(20,992	)											(20,992	)
Issuance of common stock							9				5,986												(1,560	)			4,435
Restricted stock compensation											340																340
Tax benefit of stock-based compensation											681																681
Balance at March 31, 2015		$	106,882			$	1,763			$	1,805,991			$	193,461			$	(34,980	)		$	(17,841	)		$	2,055,276
Balance at January 1, 2014		$	106,882			$	1,592			$	1,608,117			$	121,870			$	(56,924	)		$	(7,154	)		$	1,774,383
Comprehensive income															34,524				12,883								47,407
Dividends declared:
Preferred stock															(2,322	)											(2,322	)
Common stock: $0.12/share															(20,016	)											(20,016	)
Issuance of common stock							12				5,939				(228	)							(3,376	)			2,347
Issuance of common stock—acquisitions							67				81,330																81,397
Restricted stock compensation											567																567
Tax benefit of stock-based compensation											1,224																1,224
Balance at March 31, 2014		$	106,882			$	1,671			$	1,697,177			$	133,828			$	(44,041	)		$	(10,530	)		$	1,884,987

See accompanying Notes to Consolidated Financial Statements

 

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F.N.B. CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Dollars in thousands

Unaudited

 

		Three Months Ended
		March 31,
		2015				2014
Operating Activities
Net income		$	40,343			$	34,524
Adjustments to reconcile net income to net cash flows provided by operating activities:
Depreciation, amortization and accretion			11,725				8,339
Provision for credit losses			8,136				7,006
Deferred tax (benefit) expenses			3,217				(2,154	)
Net securities losses (gains)			9				(9,461	)
Tax benefit of stock-based compensation			(681	)			(1,224	)
Loans originated for sale			(71,499	)			(18,245	)
Loans sold			74,870				22,635
Gain on sale of loans			(1,813	)			(1,193	)
Net change in:
Interest receivable			(1,704	)			(123	)
Interest payable			(178	)			(750	)
Securities classified as trading in business combination and sold			—				203,178
Bank owned life insurance			(1,323	)			(1,513	)
Other, net			5,187				3,096
Net cash flows provided by operating activities			66,289				244,115
Investing Activities
Net change in loans and leases			(167,685	)			(140,938	)
Securities available for sale:
Purchases			(90,156	)			(318,332	)
Sales			33,228				85,877
Maturities			66,275				130,641
Securities held to maturity:
Purchases			(130,506	)			(266,486	)
Maturities			69,394				44,159
Purchase of bank owned life insurance			(8	)			(4,433	)
Withdrawal/surrender of bank owned life insurance			—				716
Increase in premises and equipment			(6,199	)			(6,042	)
Net cash received in business combinations			—				26,964
Net cash flows used in investing activities			(225,657	)			(447,874	)
Financing Activities
Net change in:
Demand (non-interest bearing and interest bearing) and savings accounts			445,685				253,935
Time deposits			(20,779	)			(44,043	)
Short-term borrowings			(301,158	)			(24,615	)
Increase in long-term borrowings			6,598				108,079
Decrease in long-term borrowings			(6,579	)			(39,966	)
Net proceeds from issuance of common stock			4,775				3,755
Tax benefit of stock-based compensation			681				1,224
Cash dividends paid:
Preferred stock			(2,010	)			(2,322	)
Common stock			(20,992	)			(20,016	)
Net cash flows provided by financing activities			106,221				236,031
Net (Decrease) Increase in Cash and Cash Equivalents			(53,147	)			32,272
Cash and cash equivalents at beginning of period			287,393				213,981
Cash and Cash Equivalents at End of Period		$	234,246			$	246,253

See accompanying Notes to Consolidated Financial Statements

 

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F.N.B. CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Dollars in thousands, except share data

(Unaudited)

March 31, 2015

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 March 31, 2015, the Corporation had 287 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 provides a full line of consumer banking products and services including 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 73 consumer finance offices in Pennsylvania, Ohio, Kentucky and Tennessee as of March 31, 2015.

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, Bank Capital Services, LLC and F.N.B. Capital Corporation, 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 27, 2015.

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 credit losses, securities valuations, goodwill and other intangible assets and income taxes.

MERGERS AND ACQUISITIONS

OBA Financial Services, Inc.

On September 19, 2014, the Corporation completed its acquisition of OBA Financial Services, Inc. (OBA), a bank holding company based in Germantown, Maryland. On the acquisition date, the estimated fair values of OBA included $390,128 in assets, $291,393 in loans and $295,922 in deposits. The acquisition was valued at approximately $85,554 and resulted in the Corporation issuing 7,170,037 shares of its common stock in exchange for 4,025,895 shares of OBA common stock. The Corporation also acquired the outstanding stock options of OBA that became fully vested upon the

 

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acquisition. The assets and liabilities of OBA were recorded on the Corporation’s consolidated balance sheet at their preliminary estimated fair values as of September 19, 2014, the acquisition date, and OBA’s results of operations have been included in the Corporation’s consolidated statement of comprehensive income since that date. OBA’s banking affiliate, OBA Bank, was merged into FNBPA on September 19, 2014. Based on a preliminary purchase price allocation, the Corporation recorded $20,139 in goodwill and $4,304 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.

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 $596,122 in assets, $304,932 in loans and $532,197 in deposits. The acquisition was valued at $80,547 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 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 the purchase price allocation, the Corporation recorded $42,451 in goodwill and $6,591 in core deposit intangibles as a result of the acquisition. None of the goodwill is deductible for income tax purposes.

NEW ACCOUNTING STANDARDS

Cloud Computing Arrangements

In April 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2015-05, Intangibles-Goodwill and Other-Internal-Use Software. ASU 2015-05 provides guidance to help entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement environment. The amendments in this Update provide a basis for evaluating whether a cloud computing arrangement includes a software license to internal-use software, and how to account for the software license element of the arrangement. This update supersedes the existing requirement to analogize to operating lease guidance in accounting for some software licenses. The requirements of ASU 2015-05 are effective for reporting periods beginning after December 15, 2015, with early adoption permitted. A reporting entity may apply ASU 2015-05 either prospectively or retrospectively. The Corporation is evaluating this new guidance and has not yet determined which approach it will adopt to apply the amendments in ASU 2015-05 or the impact that the adoption of this update will have on its financial statements.

Consolidation

In February 2015, the FASB issued ASU No. 2015-02, Consolidation. ASU 2015-02 changes the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. This update modifies the evaluation of whether limited partnerships or similar legal entities are variable interest entities (VIEs) or voting interest entities, eliminates the presumption that a general partner should consolidate a limited partnership and affects the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships. The requirements of ASU 2015-02 are effective for reporting periods beginning after December 15, 2015, with early adoption permitted. A reporting entity may apply ASU 2015-02 either retrospectively or by using a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption. 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 Statement

In January 2015, the FASB issued ASU No. 2015-01, Income Statement – Extraordinary and Unusual Items. The FASB issued ASU 2015-01 as part of its Simplification Initiative to reduce complexity in accounting standards. ASU 2015-01 eliminates from GAAP the concept of extraordinary items. The requirements of ASU 2015-01 are effective for reporting periods beginning after December 15, 2015, with early adoption permitted. A reporting entity may apply ASU 2015-01 prospectively, or retrospectively to all prior periods presented in the financial statements. The adoption of this update will not have an effect on the financial statements, results of operations or liquidity of the Corporation, as the Corporation has not reported extraordinary items.

 

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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
March 31, 2015
U.S. Treasury		$	29,637			$	300			$	—			$	29,937
U.S. government-sponsored entities			388,363				2,818				(521	)			390,660
Residential mortgage-backed securities:
Agency mortgage-backed securities			494,497				11,064				—				505,561
Agency collateralized mortgage obligations			573,738				3,646				(5,367	)			572,017
Non-agency collateralized mortgage obligations			1,359				5				—				1,364
Commercial mortgage-backed securities			6,844				—				(1	)			6,843
States of the U.S. and political subdivisions			12,713				476				(14	)			13,175
Other debt securities			16,643				373				(785	)			16,231
Total debt securities			1,523,794				18,682				(6,688	)			1,535,788
Equity securities			1,031				261				—				1,292
		$	1,524,825			$	18,943			$	(6,688	)		$	1,537,080
December 31, 2014
U.S. Treasury		$	29,604			$	78			$	—			$	29,682
U.S. government-sponsored entities			338,330				742				(1,939	)			337,133
Residential mortgage-backed securities:
Agency mortgage-backed securities			546,572				7,548				(35	)			554,085
Agency collateralized mortgage obligations			580,601				1,617				(9,047	)			573,171
Non-agency collateralized mortgage obligations			1,414				17				—				1,431
Commercial mortgage-backed securities			7,891				—				(11	)			7,880
States of the U.S. and political subdivisions			12,713				477				(32	)			13,158
Other debt securities			16,615				420				(857	)			16,178
Total debt securities			1,533,740				10,899				(11,921	)			1,532,718
Equity securities			1,031				316				—				1,347
		$	1,534,771			$	11,215			$	(11,921	)		$	1,534,065
Securities Held to Maturity
March 31, 2015
U.S. Treasury		$	500			$	182			$	—			$	682
U.S. government-sponsored entities			146,578				1,731				(149	)			148,160
Residential mortgage-backed securities:
Agency mortgage-backed securities			674,101				19,130				(20	)			693,211
Agency collateralized mortgage obligations			505,859				3,633				(4,884	)			504,608
Non-agency collateralized mortgage obligations			3,840				21				—				3,861
Commercial mortgage-backed securities			17,484				385				—				17,869
States of the U.S. and political subdivisions			164,842				3,372				(156	)			168,058
		$	1,513,204			$	28,454			$	(5,209	)		$	1,536,449
December 31, 2014
U.S. Treasury		$	502			$	168			$	—			$	670
U.S. government-sponsored entities			101,602				885				(524	)			101,963
Residential mortgage-backed securities:
Agency mortgage-backed securities			677,169				16,712				(346	)			693,535
Agency collateralized mortgage obligations			501,965				1,858				(7,329	)			496,494
Non-agency collateralized mortgage obligations			4,285				28				—				4,313
Commercial mortgage-backed securities			17,560				179				—				17,739
States of the U.S. and political subdivisions			150,272				3,315				(43	)			153,544
		$	1,453,355			$	23,145			$	(8,242	)		$	1,468,258

 

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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 its 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 March 31, 2015 and December 31, 2014, the Corporation did not hold any trading securities.

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

 

		Three Months Ended
		March 31,
		2015				2014
Gross gains		$	—			$	18,009
Gross losses			(9	)			(8,548	)
		$	(9	)		$	9,461

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. These were previously classified as collateralized debt obligations (CDOs) available for sale. 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 (Dodd-Frank Act), and as such, was required to be disposed of by July 2015. Partially offsetting this gain was a net loss of $4,305 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 March 31, 2015, 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		$	4,985			$	5,069			$	1,282			$	1,285
Due from one to five years			423,890				426,811				138,269				139,139
Due from five to ten years			11,591				12,018				72,457				74,672
Due after ten years			6,890				6,105				99,912				101,804
			447,356				450,003				311,920				316,900
Residential mortgage-backed securities:
Agency mortgage-backed securities			494,497				505,561				674,101				693,211
Agency collateralized mortgage obligations			573,738				572,017				505,859				504,608
Non-agency collateralized mortgage obligations			1,359				1,364				3,840				3,861
Commercial mortgage-backed securities			6,844				6,843				17,484				17,869
Equity securities			1,031				1,292				—				—
		$	1,524,825			$	1,537,080			$	1,513,204			$	1,536,449

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 March 31, 2015 and December 31, 2014, securities with a carrying value of $1,315,565 and $1,036,380, respectively, were pledged to secure public deposits, trust deposits and for other purposes as required by law. Securities with a carrying value of $807,261 and $892,647 at March 31, 2015 and December 31, 2014, 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
March 31, 2015
U.S. government-sponsored entities			3			$	59,857			$	(142	)			5			$	55,612			$	(379	)			8			$	115,469			$	(521	)
Residential mortgage-backed securities:
Agency collateralized mortgage obligations			4				61,998				(199	)			17				242,124				(5,168	)			21				304,122				(5,367	)
Commercial mortgage-backed securities			1				6,843				(1	)			—				—				—				1				6,843				(1	)
States of the U.S. and political subdivisions			—				—				—				1				1,177				(14	)			1				1,177				(14	)
Other debt securities			—				—				—				4				6,105				(785	)			4				6,105				(785	)
			8			$	128,698			$	(342	)			27			$	305,018			$	(6,346	)			35			$	433,716			$	(6,688	)
December 31, 2014
U.S. government-sponsored entities			7			$	89,986			$	(275	)			7			$	99,326			$	(1,664	)			14			$	189,312			$	(1,939	)
Residential mortgage-backed securities:
Agency mortgage-backed securities			2				45,145				(35	)			—				—				—				2				45,145				(35	)
Agency collateralized mortgage obligations			9				166,908				(1,238	)			16				225,700				(7,809	)			25				392,608				(9,047	)
Commercial mortgage-backed securities			1				7,880				(11	)			—				—				—				1				7,880				(11	)
States of the U.S. and political subdivisions			—				—				—				1				1,159				(32	)			1				1,159				(32	)
Other debt securities			—				—				—				4				6,030				(857	)			4				6,030				(857	)
			19			$	309,919			$	(1,559	)			28			$	332,215			$	(10,362	)			47			$	642,134			$	(11,921	)
Securities Held to Maturity
March 31, 2015
U.S. government-sponsored entities			1			$	14,970			$	(30	)			1			$	14,881			$	(119	)			2			$	29,851			$	(149	)
Residential mortgage-backed securities:
Agency mortgage-backed securities			—				—				—				1				1,234				(20	)			1				1,234				(20	)
Agency collateralized mortgage obligations			4				69,926				(402	)			14				185,466				(4,482	)			18				255,392				(4,884	)
States of the U.S. and political subdivisions			8				13,418				(156	)			—				—				—				8				13,418				(156	)
			13			$	98,314			$	(588	)			16			$	201,581			$	(4,621	)			29			$	299,895			$	(5,209	)
December 31, 2014
U.S. government-sponsored entities			2			$	24,989			$	(40	)			2			$	29,516			$	(484	)			4			$	54,505			$	(524	)
Residential mortgage-backed securities:
Agency mortgage-backed securities			1				1,099				(1	)			4				45,042				(345	)			5				46,141				(346	)
Agency collateralized mortgage obligations			8				104,071				(630	)			14				189,642				(6,699	)			22				293,713				(7,329	)
States of the U.S. and political subdivisions			1				1,427				(4	)			4				5,453				(39	)			5				6,880				(43	)
			12			$	131,586			$	(675	)			24			$	269,653			$	(7,567	)			36			$	401,239			$	(8,242	)

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.

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 TPS had an amortized cost and estimated fair value of $6,890 and $6,105 at March 31, 2015, respectively. The Corporation has concluded from its analysis performed at March 31, 2015 that it is probable that the Corporation will collect all contractual principal and interest payments related to these securities.

 

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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				Equities				Total
For the Three Months Ended March 31, 2015
Beginning balance			—			$	27			$	27
Loss where impairment was not previously recognized			—				—				—
Additional loss where impairment was previously recognized			—				—				—
Reduction due to credit impaired securities sold			—				—				—
Ending balance			—			$	27			$	27
For the Three Months Ended March 31, 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

The Corporation did not recognize any impairment losses on securities for the three months ended March 31, 2015 or 2014.

States of the U.S. and Political Subdivisions

The Corporation’s municipal bond portfolio of $178,017 as of March 31, 2015 is highly rated with an average entity-specific rating of AA and 99.0% of the portfolio rated A or better. General obligation bonds comprise 99.5% of the portfolio. Geographically, municipal bonds support the Corporation’s primary footprint as 89.9% of the securities are from municipalities located throughout Pennsylvania, Ohio and Maryland. The average holding size of the securities in the municipal bond portfolio is $1,203. In addition to the strong stand-alone ratings, 88.0% 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.

At March 31, 2015 and December 31, 2014, the Corporation’s FHLB stock totaled $42,000 and $54,751, 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, along with a special dividend during the first quarter of 2015 and quarterly cash dividends in 2014 and the first quarter of 2015, 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.

 

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LOANS AND LEASES

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

 

		Originated Loans				Acquired Loans				Total Loans and Leases
March 31, 2015
Commercial real estate		$	3,082,385			$	734,804			$	3,817,189
Commercial and industrial			2,281,075				116,656				2,397,731
Commercial leases			180,207				—				180,207
Total commercial loans and leases			5,543,667				851,460				6,395,127
Direct installment			1,594,846				58,775				1,653,621
Residential mortgages			877,437				421,660				1,299,097
Indirect installment			903,780				1,424				905,204
Consumer lines of credit			953,569				154,849				1,108,418
Other			42,632				—				42,632
		$	9,915,931			$	1,488,168			$	11,404,099
December 31, 2014
Commercial real estate		$	3,031,810			$	783,898			$	3,815,708
Commercial and industrial			2,197,793				120,222				2,318,015
Commercial leases			177,824				—				177,824
Total commercial loans and leases			5,407,427				904,120				6,311,547
Direct installment			1,579,770				64,851				1,644,621
Residential mortgages			817,586				445,467				1,263,053
Indirect installment			873,645				1,906				875,551
Consumer lines of credit			946,427				164,549				1,110,976
Other			41,290				—				41,290
		$	9,666,145			$	1,580,893			$	11,247,038

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 credit cards, mezzanine loans and student loans.

The loan and lease 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 total loan portfolio contains consumer finance loans to individuals in Pennsylvania, Ohio, Tennessee and Kentucky, which totaled $174,239 or 1.5% of total loans and leases at March 31, 2015, compared to $180,588 or 1.6% of total loans and leases at December 31, 2014. Due to the relative size of the consumer finance loan portfolio, they are not segregated from other consumer loans.

As of March 31, 2015, 40.8% of the commercial real estate loans were owner-occupied, while the remaining 59.2% were non-owner-occupied, compared to 41.6% and 58.4%, respectively, as of December 31, 2014. As of March 31, 2015 and December 31, 2014, the Corporation had commercial construction loans of $227,179 and $296,156, respectively, representing 2.0% and 2.6% of total loans and leases at those respective dates.

 

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Acquired Loans

All acquired loans were initially recorded at fair value at the acquisition date. The outstanding balance and the carrying amount of acquired loans included in the consolidated balance sheet are as follows:

 

		March 31, 2015				December 31, 2014
Accounted for under ASC 310-30:
Outstanding balance		$	1,513,616			$	1,597,558
Carrying amount			1,259,995				1,344,171
Accounted for under ASC 310-20:
Outstanding balance			232,524				242,488
Carrying amount			220,921				228,748
Total acquired loans:
Outstanding balance			1,746,140				1,840,046
Carrying amount			1,480,916				1,572,919

The carrying amount of purchased credit impaired loans included in the table above totaled $7,100 at March 31, 2015 and $9,556 at December 31, 2014, representing less than 1% of the carrying amount of total acquired loans as of each date.

The following table provides changes in accretable yield for all acquired loans accounted for under ASC 310-30. Loans accounted for under ASC 310-20 are not included in this table.

 

		Three Months Ended
		March 31,
		2015				2014
Balance at beginning of period		$	331,899			$	305,646
Reduction due to unexpected early payoffs			(11,909	)			(12,694	)
Reclass from non-accretable difference			7,676				768
Disposals/transfers			(118	)			(944	)
Accretion			(16,264	)			(15,913	)
Balance at end of period		$	311,284			$	276,863

Credit Quality

Management monitors the credit quality of the Corporation’s loan and lease portfolio on an ongoing basis. Measurement of delinquency and past due status is 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.

 

 

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Following is a summary of non-performing assets:

 

		March 31, 2015				December 31, 2014
Non-accrual loans		$	45,029			$	45,113
Troubled debt restructurings			22,022				23,439
Total non-performing loans			67,051				68,552
Other real estate owned (OREO)			40,796				41,466
Total non-performing assets		$	107,847			$	110,018
Asset quality ratios:
Non-performing loans as a percent of total loans and leases			0.59	%			0.61	%
Non-performing loans + OREO as a percent of total loans and leases + OREO			0.94	%			0.97	%
Non-performing assets as a percent of total assets			0.66	%			0.68	%

The carrying value of residential OREO held as a result of obtaining physical possession upon completion of a foreclosure or through completion of a deed in lieu of foreclosure amounted to $3,541 at March 31, 2015. Also, the recorded investment of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process at March 31, 2015 amounted to $14,186.

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

 

		30-89 Days Past Due				> 90 Days Past Due and Still Accruing				Non-Accrual				Total Past Due				Current				Total Loans and Leases
Originated Loans and Leases
March 31, 2015
Commercial real estate		$	6,655			$	130			$	23,653			$	30,438			$	3,051,947			$	3,082,385
Commercial and industrial			2,939				3				8,846				11,788				2,269,287				2,281,075
Commercial leases			1,097				—				732				1,829				178,378				180,207
Total commercial loans and leases			10,691				133				33,231				44,055				5,499,612				5,543,667
Direct installment			8,748				3,575				6,464				18,787				1,576,059				1,594,846
Residential mortgages			7,040				1,731				3,625				12,396				865,041				877,437
Indirect installment			5,015				409				1,111				6,535				897,245				903,780
Consumer lines of credit			2,501				656				598				3,755				949,814				953,569
Other			47				39				—				86				42,546				42,632
		$	34,042			$	6,543			$	45,029			$	85,614			$	9,830,317			$	9,915,931
December 31, 2014
Commercial real estate		$	9,601			$	313			$	24,132			$	34,046			$	2,997,764			$	3,031,810
Commercial and industrial			2,446				3				8,310				10,759				2,187,034				2,197,793
Commercial leases			961				43				722				1,726				176,098				177,824
Total commercial loans and leases			13,008				359				33,164				46,531				5,360,896				5,407,427
Direct installment			9,333				3,617				7,117				20,067				1,559,703				1,579,770
Residential mortgages			8,709				3,891				2,964				15,564				802,022				817,586
Indirect installment			7,804				684				1,149				9,637				864,008				873,645
Consumer lines of credit			2,408				562				719				3,689				942,738				946,427
Other			13				135				—				148				41,142				41,290
		$	41,275			$	9,248			$	45,113			$	95,636			$	9,570,509			$	9,666,145

 

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		30-89 Days Past Due				> 90 Days Past Due and Still Accruing				Total Past Due (1) (2)				Current				Discount				Total Loans
Acquired Loans
March 31, 2015
Commercial real estate		$	8,813			$	12,445			$	21,258			$	753,073			$	(39,527	)		$	734,804
Commercial and industrial			1,023				1,651				2,674				122,604				(8,622	)			116,656
Total commercial loans			9,836				14,096				23,932				875,677				(48,149	)			851,460
Direct installment			1,199				1,112				2,311				55,476				988				58,775
Residential mortgages			7,695				18,535				26,230				434,061				(38,631	)			421,660
Indirect installment			9				17				26				1,648				(250	)			1,424
Consumer lines of credit			1,115				2,146				3,261				156,676				(5,088	)			154,849
		$	19,854			$	35,906			$	55,760			$	1,523,538			$	(91,130	)		$	1,488,168
December 31, 2014
Commercial real estate		$	12,076			$	12,368			$	24,444			$	799,991			$	(40,537	)		$	783,898
Commercial and industrial			687				1,968				2,655				127,535				(9,968	)			120,222
Total commercial loans			12,763				14,336				27,099				927,526				(50,505	)			904,120
Direct installment			2,670				1,443				4,113				59,532				1,206				64,851
Residential mortgages			8,159				19,936				28,095				456,810				(39,438	)			445,467
Indirect installment			38				30				68				2,179				(341	)			1,906
Consumer lines of credit			1,048				2,279				3,327				166,912				(5,690	)			164,549
		$	24,678			$	38,024			$	62,702			$	1,612,959			$	(94,768	)		$	1,580,893

 

(1)	Past due information for acquired loans is based on the contractual balance outstanding at March 31, 2015 and December 31, 2014.

(2)

Acquired loans are considered performing upon acquisition, regardless of whether the customer is contractually delinquent, if the Corporation can reasonably estimate the timing and amount of expected cash flows on such loans. Accordingly, the Corporation does not consider acquired contractually delinquent loans to be non-accrual or non-performing and continues to recognize interest income on these loans using the accretion method.

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

 

Rating Category		Definition
Pass		in general, the condition and performance of the borrower 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 and performance of the borrower has significantly deteriorated and 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

The use of these internally assigned credit quality categories within the commercial loan and lease portfolio permits management’s use of transition matrices 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 leases and conforms with regulatory categories. In general, loan and lease risk ratings within each category are reviewed on an ongoing basis according to the Corporation’s policy for each class of loans and leases. 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 and lease portfolio. Loans and leases within the Pass credit category or that migrate toward the Pass credit category generally have a lower risk of loss compared to loans and leases that migrate toward the Substandard or Doubtful credit categories. Accordingly, management applies higher risk factors to Substandard and Doubtful credit categories.

 

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

 

		Commercial Loan and Lease Credit Quality Categories
		Pass				Special Mention				Substandard				Doubtful				Total
Originated Loans and Leases
March 31, 2015
Commercial real estate		$	2,960,542			$	52,926			$	68,182			$	735			$	3,082,385
Commercial and industrial			2,190,066				53,482				36,081				1,446				2,281,075
Commercial leases			177,091				2,222				894				—				180,207
		$	5,327,699			$	108,630			$	105,157			$	2,181			$	5,543,667
December 31, 2014
Commercial real estate		$	2,890,830			$	58,630			$	81,951			$	399			$	3,031,810
Commercial and industrial			2,085,893				71,420				39,684				796				2,197,793
Commercial leases			174,677				2,198				949				—				177,824
		$	5,151,400			$	132,248			$	122,584			$	1,195			$	5,407,427
Acquired Loans
March 31, 2015
Commercial real estate		$	579,462			$	64,892			$	90,450				—			$	734,804
Commercial and industrial			102,974				2,411				11,271				—				116,656
		$	682,436			$	67,303			$	101,721				—			$	851,460
December 31, 2014
Commercial real estate		$	610,260			$	73,891			$	99,747				—			$	783,898
Commercial and industrial			103,862				3,506				12,854				—				120,222
		$	714,122			$	77,397			$	112,601				—			$	904,120

Credit quality information for acquired loans is based on the contractual balance outstanding at March 31, 2015 and December 31, 2014.

The Corporation uses delinquency transition matrices 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, FICO scores and other external factors such as unemployment, to determine how consumer loans are performing.

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

 

		Consumer Loan Credit Quality by Payment Status
		Performing				Non-Performing				Total
March 31, 2015
Direct installment		$	1,581,078			$	13,768			$	1,594,846
Residential mortgages			862,965				14,472				877,437
Indirect installment			902,515				1,265				903,780
Consumer lines of credit			951,980				1,589				953,569
Other			42,632				—				42,632
December 31, 2014
Direct installment		$	1,565,090			$	14,680			$	1,579,770
Residential mortgages			802,522				15,064				817,586
Indirect installment			872,340				1,305				873,645
Consumer lines of credit			944,631				1,796				946,427
Other			41,290				—				41,290

 

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Loans and leases 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 and lease contract is doubtful. Typically, the Corporation does not consider loans and leases 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 and commercial loan and lease relationships less than $500 based on loan and lease segment loss given default. 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 and leases, 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.

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

 

		Unpaid Contractual Principal Balance				Recorded Investment With No Specific Reserve				Recorded Investment With Specific Reserve				Total Recorded Investment				Specific Reserve				Average Recorded Investment
At or for the Three Months Ended March 31, 2015
Commercial real estate		$	34,483			$	25,015			$	1,012			$	26,027			$	735			$	26,176
Commercial and industrial			11,251				8,138				1,928				10,066				1,446				9,811
Commercial leases			732				732				—				732				—				727
Total commercial loans and leases			46,466				33,885				2,940				36,825				2,181				36,714
Direct installment			13,977				13,768				—				13,768				—				14,343
Residential mortgages			15,718				14,472				—				14,472				—				15,547
Indirect installment			1,425				1,265				—				1,265				—				1,363
Consumer lines of credit			1,600				1,589				—				1,589				—				1,696
Other			—				—				—				—				—				—
		$	79,186			$	64,979			$	2,940			$	67,919			$	2,181			$	69,663
At or for the Year Ended December 31, 2014
Commercial real estate		$	34,583			$	25,443			$	883			$	26,326			$	399			$	30,807
Commercial and industrial			11,412				7,609				1,948				9,557				780				9,510
Commercial leases			722				722				—				722				—				686
Total commercial loans and leases			46,717				33,774				2,831				36,605				1,179				41,003
Direct installment			14,987				14,680				—				14,680				—				14,248
Residential mortgages			16,791				15,064				—				15,064				—				16,924
Indirect installment			1,467				1,305				—				1,305				—				1,399
Consumer lines of credit			1,803				1,796				—				1,796				—				1,793
Other			—				—				—				—				—				—
		$	81,765			$	66,619			$	2,831			$	69,450			$	1,179			$	75,367

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

These tables do not reflect the additional allowance for credit losses relating to acquired loans in the following pools and categories: commercial real estate of $3,327; commercial and industrial of $712; direct installment of $1,477; residential mortgages of $1,193; indirect installment of $229; and consumer lines of credit of $314, totaling $7,252 at March 31, 2015 and commercial real estate of $3,286; commercial and industrial of $1,484; direct installment of $1,847; residential mortgages of $858; indirect installment of $232; and consumer lines of credit of $267, totaling $7,974 at December 31, 2014.

 

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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.

Following is a summary of the payment status of total TDRs:

 

		March 31, 2015				December 31, 2014
Accruing:
Performing		$	12,793			$	9,441
Non-performing			22,022				23,439
Non-accrual			8,040				8,272
		$	42,855			$	41,152

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 three months ended March 31, 2015, the Corporation returned to performing status $3,975 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 may result in potential incremental losses which are factored into the allowance for credit 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 credit losses included specific reserves for commercial TDRs of $646 and $371 at March 31, 2015 and December 31, 2014, respectively, and pooled reserves for individual loans under $500 of $1,203 and $1,215 for those same respective periods, based on loan segment loss given default. 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 credit 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 credit losses included pooled reserves for these classes of loans of $4,146 and $3,448 at March 31, 2015 and December 31, 2014, respectively. Upon default of an individual loan, the Corporation’s charge-off policy is followed accordingly for that class of loan.

 

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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:

 

		Three Months Ended March 31, 2015												Three Months Ended March 31, 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			2			$	312			$	196				1			$	188			$	188
Commercial and industrial			—				—				—				1				52				50
Total commercial loans			2				312				196				2				240				238
Direct installment			131				1,526				1,484				126				1,678				1,647
Residential mortgages			14				581				631				9				281				280
Indirect installment			5				16				16				7				17				16
Consumer lines of credit			16				270				270				7				255				255
Other			—				—				—				—				—				—
			168			$	2,705			$	2,597				151			$	2,471			$	2,436

Following is a summary of TDRs, by class of loans and leases, 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 March 31, 2015 (1)								Three Months Ended March 31, 2014 (1)
		Number of Contracts				Recorded Investment				Number of Contracts				Recorded Investment
Direct installment			37			$	105				18			$	171
Residential mortgages			2				102				—				—
Indirect installment			3				4				1				—
Consumer lines of credit			1				92				—				—
Other			—				—				—				—
			43			$	303				19			$	171

 

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

ALLOWANCE FOR CREDIT LOSSES

The allowance for credit losses is established as losses are estimated to have occurred through a provision charged to earnings. Losses are charged against the allowance for credit losses when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance for credit losses. Allowances for impaired commercial loans over $500 are generally determined based on collateral values or the present value of estimated cash flows. All other impaired loans and leases are evaluated in the aggregate based on loan segment loss given default. Changes in the allowance for credit losses related to impaired loans and leases are charged or credited to the provision for credit losses.

The allowance for credit losses is maintained at a level that, in management’s judgment, is believed adequate to absorb probable losses associated with specifically identified loans and leases, as well as estimated probable credit losses inherent in the remainder of the portfolio. Adequacy of the allowance for credit losses is based on management’s evaluation of potential losses in the 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 portfolio, the estimated value of underlying collateral and residuals and changes in the composition of the portfolio. Determination of the allowance for credit losses is inherently subjective as it requires significant estimates, including the amounts and timing of expected future cash flows on impaired loans and leases, estimated losses on pools of homogeneous loans and leases based on transition matrices with predefined loss emergence periods and consideration of qualitative factors, all of which are susceptible to significant change.

 

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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 credit losses.

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

 

		Balance at Beginning of Period				Charge- Offs				Recoveries				Net Charge- Offs				Provision for credit losses				Balance at End of Period
Three Months Ended March 31, 2015
Commercial real estate		$	37,588			$	(1,001	)		$	209			$	(792	)		$	1,996			$	38,792
Commercial and industrial			32,645				(684	)			120				(564	)			722				32,803
Commercial leases			2,398				(93	)			10				(83	)			261				2,576
Total commercial loans and leases			72,631				(1,778	)			339				(1,439	)			2,979				74,171
Direct installment			20,538				(2,433	)			269				(2,164	)			2,830				21,204
Residential mortgages			8,024				(511	)			15				(496	)			943				8,471
Indirect installment			7,504				(1,280	)			302				(978	)			1,131				7,657
Consumer lines of credit			8,496				(410	)			40				(370	)			764				8,890
Other			759				(335	)			11				(324	)			419				854
Total allowance on originated loans and leases			117,952				(6,747	)			976				(5,771	)			9,066				121,247
Purchased credit-impaired loans			660				(64	)			19				(45	)			6				621
Other acquired loans			7,314				(77	)			330				253				(936	)			6,631
Total allowance on acquired loans			7,974				(141	)			349				208				(930	)			7,252
Total allowance		$	125,926			$	(6,888	)		$	1,325			$	(5,563	)		$	8,136			$	128,499
Three Months Ended March 31, 2014
Commercial real estate		$	32,548			$	(2,223	)		$	299			$	(1,924	)		$	7,910			$	38,534
Commercial and industrial			32,603				(513	)			370				(143	)			(2,489	)			29,971
Commercial leases			1,903				(87	)			29				(58	)			99				1,944
Total commercial loans and leases			67,054				(2,823	)			698				(2,125	)			5,520				70,449
Direct installment			17,824				(2,521	)			267				(2,254	)			1,060				16,630
Residential mortgages			5,836				(132	)			4				(128	)			(401	)			5,307
Indirect installment			6,409				(802	)			217				(585	)			676				6,500
Consumer lines of credit			7,231				(323	)			55				(268	)			695				7,658
Other			530				(262	)			5				(257	)			306				579
Total allowance on originated loans and leases			104,884				(6,863	)			1,246				(5,617	)			7,856				107,123
Purchased credit-impaired loans			1,000				(249	)			—				(249	)			(43	)			708
Other acquired loans			4,900				9				286				295				(807	)			4,388
Total allowance on acquired loans			5,900				(240	)			286				46				(850	)			5,096
Total allowance		$	110,784			$	(7,103	)		$	1,532			$	(5,571	)		$	7,006			$	112,219

 

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

 

		Allowance								Loans and Leases Outstanding
		Individually Evaluated for Impairment				Collectively Evaluated for Impairment				Loans and Leases				Individually Evaluated for Impairment				Collectively Evaluated for Impairment
March 31, 2015
Commercial real estate		$	735			$	38,057			$	3,082,385			$	12,865			$	3,069,520
Commercial and industrial			1,446				31,357				2,281,075				5,711				2,275,364
Commercial leases			—				2,576				180,207				—				180,207
Total commercial loans and leases			2,181				71,990				5,543,667				18,576				5,525,091
Direct installment			—				21,204				1,594,846				—				1,594,846
Residential mortgages			—				8,471				877,437				—				877,437
Indirect installment			—				7,657				903,780				—				903,780
Consumer lines of credit			—				8,890				953,569				—				953,569
Other			—				854				42,632				—				42,632
		$	2,181			$	119,066			$	9,915,931			$	18,576			$	9,897,355
December 31, 2014
Commercial real estate		$	399			$	37,189			$	3,031,810			$	13,952			$	3,017,858
Commercial and industrial			780				31,865				2,197,793				5,837				2,191,956
Commercial leases			—				2,398				177,824				—				177,824
Total commercial loans and leases			1,179				71,452				5,407,427				19,789				5,387,638
Direct installment			—				20,538				1,579,770				—				1,579,770
Residential mortgages			—				8,024				817,586				—				817,586
Indirect installment			—				7,504				873,645				—				873,645
Consumer lines of credit			—				8,496				946,427				—				946,427
Other			—				759				41,290				—				41,290
		$	1,179			$	116,773			$	9,666,145			$	19,789			$	9,646,356

BORROWINGS

Following is a summary of short-term borrowings:

 

		March 31, 2015				December 31, 2014
Securities sold under repurchase agreements		$	757,279			$	882,696
Federal Home Loan Bank advances			500,000				820,000
Federal funds purchased			355,000				210,000
Subordinated notes			128,221				128,962
		$	1,740,500			$	2,041,658

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.

 

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Following is a summary of long-term borrowings:

 

		March 31, 2015				December 31, 2014
Federal Home Loan Bank advances		$	400,018			$	400,042
Subordinated notes			83,197				83,155
Junior subordinated debt			58,259				58,246
		$	541,474			$	541,443

The Corporation’s banking affiliate has available credit with the FHLB of $4,213,966 of which $900,018 was used as of March 31, 2015. 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 2021. Effective interest rates paid on the long-term advances ranged from 0.76% to 4.19% for both the three months ended March 31, 2015 and the year ended December 31, 2014.

The Corporation had two unconsolidated subsidiary trusts as of March 31, 2015 (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. Under recently issued capital guidelines, effective January 1, 2015, the portion of the subordinated debt, net of the Corporation’s investments in the Trusts, that qualifies as tier 1 capital is limited to 25% of the total $57,500 outstanding at March 31, 2015, with the remaining 75% moving to tier 2 capital. In 2016, the entire balance of the subordinated debt will be included in tier 2 capital. 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.

The following table provides information relating to the Trusts as of March 31, 2015:

 

		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				1.92	%		Variable; LIBOR + 165 basis points (bps)
Omega Financial Capital Trust I			36,000				1,114				36,094				10/18/34				2.44	%		Variable; LIBOR + 219 bps
		$	57,500			$	1,779			$	58,259

DERIVATIVE AND HEDGING ACTIVITIES

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. Derivative instruments are used to reduce the effects that changes in interest rates may have on net income and cash flows. The Corporation also uses derivative instruments to facilitate transactions on behalf of its customers.

All derivatives are carried on the consolidated balance sheet at fair value and do not take into account the effects of master netting arrangements the Corporation has with other financial institutions. Credit risk is included in the determination of the estimated fair value of derivatives. Derivative assets are classified in the consolidated balance sheet under other assets and derivative liabilities are classified in the consolidated balance sheet under other liabilities. Changes in fair value are recognized in earnings except for certain changes related to derivative instruments designated as part of a cash flow hedging relationship.

 

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The following table presents notional amounts and gross fair values of all derivative assets and derivative liabilities held by the Corporation:

 

		March 31, 2015												December 31, 2014
		Notional				Fair Value								Notional				Fair Value
		Amount				Asset				Liability				Amount				Asset				Liability
Gross Derivatives
Subject to master netting arrangements:
Interest rate contracts – designated		$	200,000			$	3,937			$	669			$	200,000			$	2,109			$	2,330
Interest rate swaps – not designated			1,020,957				6				53,718				972,002				140				43,655
Equity contracts – not designated			1,210				39				—				1,210				47				—
Total subject to master netting arrangements			1,222,167				3,982				54,387				1,173,212				2,296				45,985
Not subject to master netting arrangements:
Interest rate swaps – not designated			1,020,957				53,569				5				972,002				43,602				128
Credit risk contracts – not designated			76,416				—				—				68,632				—				—
Equity contracts – not designated			1,210				—				39				1,210				—				47
Total not subject to master netting arrangements			1,098,583				53,569				44				1,041,844				43,602				175
		$	2,320,750			$	57,551			$	54,431			$	2,215,056			$	45,898			$	46,160

Derivatives Designated as Hedging Instruments under GAAP

Interest Rate Contracts. The Corporation entered into interest rate derivative agreements to modify the interest rate characteristics of designated commercial loans from variable rate to fixed rate in order to reduce the impact of changes in future cash flows due to market 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.

At March 31, 2015 and December 31, 2014, the notional amount of these interest rate derivative agreements totaled $200,000. Fair values included in other assets and other liabilities on the consolidated balance sheet applicable to these agreements amounted to $3,937 and $669, respectively, at March 31, 2015, and $2,109 and $2,330, respectively, at December 31, 2014. For the three months ended March 31, 2015, the amount reclassified from accumulated other comprehensive income (AOCI) to interest income on loans and leases totaled $810 ($526 net of tax).

As of March 31, 2015, the maximum length of time over which forecasted interest cash flows are hedged is nine years. In the twelve months that follow March 31, 2015, the Corporation expects to reclassify from the amount currently reported in AOCI net derivative gains of $2,929 ($1,904 net of tax), in association with interest received on the hedged loans. This amount could differ from amounts actually recognized due to changes in interest rates, hedge de-designations, and the addition of other hedges subsequent to March 31, 2015.

There were no components of derivative gains or losses excluded from the assessment of hedge effectiveness related to these cash flow hedges. For the three months ended March 31, 2015 and 2014, there was no hedge ineffectiveness. Also, during the three months ended March 31, 2015 and 2014, there were no gains or losses from cash flow hedge derivatives reclassified to earnings because it became probable that the original forecasted transactions would not occur.

 

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Derivatives Not Designated as Hedging Instruments under GAAP

Interest Rate Swaps. 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 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. Swap derivative transactions with customers are not subject to enforceable master netting arrangements and are generally secured by rights to non-financial collateral, such as real and personal property.

The Corporation enters into positions with a derivative counterparty in order to offset its exposure on the fixed components of the customer interest rate swap agreements. The Corporation seeks to minimize counterparty credit risk by entering into transactions with only high-quality financial dealer institutions. These arrangements meet the definition of derivatives, but are not designated as hedging instruments under ASC 815, Derivatives and Hedging. Substantially all contracts with dealers that require central clearing (generally, transactions since June 10, 2014) are novated to a SEC registered clearing agency who becomes the Corporation’s counterparty.

The notional amount of these customer derivative agreements and the offsetting derivative counterparty positions each totaled $1,020,957 at March 31, 2015. Fair values included in other assets and other liabilities on the consolidated balance sheet applicable to these agreements amounted to $53,575 and $53,723, respectively, at March 31, 2015. At December 31, 2014, the notional amount of these customer derivative agreements and the offsetting derivative counterparty positions each totaled $972,002. At December 31, 2014, fair values included in other assets and other liabilities on the consolidated balance sheet amounted to $43,742 and $43,783, respectively.

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.

Credit Risk Contracts. The Corporation purchases and sells credit protection under risk participation agreements to share with other counterparties some of the credit exposure related to interest rate derivative contracts or to take on credit exposure to generate revenue. The Corporation will make/receive payments under these agreements if a customer defaults on its obligation to perform under certain derivative swap contracts.

Risk participation agreements sold with notional amounts totaling $50,061 have remaining terms ranging from two to nine years. Under these agreements, the Corporation’s maximum exposure assuming a customer defaults on its obligation to perform under certain derivative swap contracts with third parties would be $70 at March 31, 2015 and $21 at December 31, 2014.

The fair values of risk participation agreements purchased and sold were not material at March 31, 2015 and December 31, 2014.

Counterparty Credit Risk

The Corporation is party to master netting arrangements with most of its swap derivative counterparties. Collateral, usually marketable securities and/or cash, is exchanged between the Corporation and its counterparties, and is generally subject to thresholds and transfer minimums. For swap transactions that require central clearing, the Corporation posts cash to its clearing agency. Collateral positions are valued daily, and adjustments to amounts received and pledged by the Corporation are made as appropriate to maintain proper collateralization for these transactions.

Certain master netting agreements contain provisions that, if violated, could cause the counterparties to request immediate settlement or demand full collateralization under the derivative instrument. If the Corporation had breached its agreements with its derivative counterparties it would be required to settle its obligations under the agreements at the termination value and would be required to pay an additional $2,071 and $1,862 as of March 31, 2015 and December 31, 2014, respectively, in excess of amounts previously posted as collateral with the respective counterparty.

 

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The following table presents information about derivative assets and derivative liabilities that are subject to enforceable master netting arrangements 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
March 31, 2015
Derivative Assets
Subject to master netting arrangements:
Interest rate contracts
Designated		$	3,937				—			$	3,937
Not designated			6				—				6
Equity contracts – not designated			39				—				39
Not subject to master netting arrangements:
Interest rate contracts – not designated			53,569				—				53,569
		$	57,551				—			$	57,551
Derivative Liabilities
Subject to master netting arrangements:
Interest rate contracts
Designated		$	669				—			$	669
Not designated			53,718				—				53,718
Not subject to master netting arrangements:
Interest rate contracts – not designated			5				—				5
Equity contracts – not designated			39				—				39
		$	54,431				—			$	54,431
December 31, 2014
Derivative Assets
Subject to master netting arrangements:
Interest rate contracts
Designated		$	2,109				—			$	2,109
Not designated			140				—				140
Equity contracts – not designated			47				—				47
Not subject to master netting arrangements:
Interest rate contracts – not designated			43,602				—				43,602
		$	45,898				—			$	45,898
Derivative Liabilities
Subject to master netting arrangements:
Interest rate contracts
Designated		$	2,330				—			$	2,330
Not designated			43,655				—				43,655
Not subject to master netting arrangements:
Interest rate contracts – not designated			128				—				128
Equity contracts – not designated			47				—				47
		$	46,160				—			$	46,160

 

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The following table presents 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:

 

		Net Amount Presented in				Amount Not Offset in the Balance Sheet
		the Balance Sheet				Financial Instruments				Cash Collateral				Net Amount
March 31, 2015
Derivative Assets
Interest rate contracts:
Designated		$	3,937			$	1,902			$	2,035				—
Not designated			6				6				—				—
Equity contracts – not designated			39				39				—				—
		$	3,982			$	1,947			$	2,035				—
Derivative Liabilities
Interest rate contracts:
Designated		$	669			$	669			$	—			$	—
Not designated			53,718				30,626				21,346				1,746
		$	54,387			$	31,295			$	21,346			$	1,746
December 31, 2014
Derivative Assets
Interest rate contracts:
Designated		$	2,109			$	810			$	1,299				—
Not designated			140				138				2				—
Equity contracts – not designated			47				47				—				—
		$	2,296			$	995			$	1,301				—
Derivative Liabilities
Interest rate contracts:
Designated		$	2,330			$	2,330			$	—			$	—
Not designated			43,655				28,646				13,243				1,766
		$	45,985			$	30,976			$	13,243			$	1,766

The following table presents the effect of the Corporation’s derivative financial instruments on the income statement:

 

		Income				Three Months Ended
		Statement				March 31,
		Location				2015				2014
Interest Rate Products			Other income			$	(107	)		$	(14	)

Other

The Corporation has entered into interest rate lock commitments to originate residential mortgage loans held for sale and forward commitments to sell residential mortgage loans to secondary market investors. These arrangements are considered derivative instruments. The fair values of the Corporation’s rate lock commitments to customers and commitments with investors at March 31, 2015 and December 31, 2014 are not material.

 

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COMMITMENTS, CREDIT RISK AND CONTINGENCIES

The Corporation has commitments to extend credit and standby letters of credit that involve certain elements of credit risk in excess of the amount stated in the consolidated balance sheet. The Corporation’s exposure to credit loss in the event of non-performance by the customer is represented by the contractual amount of those instruments. The credit risk associated with loan commitments and standby letters of credit is essentially the same as that involved in extending loans and leases to customers and is subject to normal credit policies. Since many of these commitments expire without being drawn upon, the total commitment amounts do not necessarily represent future cash flow requirements.

Following is a summary of off-balance sheet credit risk information:

 

		March 31, 2015				December 31, 2014
Commitments to extend credit		$	3,969,614			$	3,665,481
Standby letters of credit			109,355				121,186

At March 31, 2015, funding of 68.2% of the commitments to extend credit was dependent on the financial condition of the customer. The Corporation has the ability to withdraw such commitments at its discretion. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Based on management’s credit evaluation of the customer, collateral may be deemed necessary. Collateral requirements vary and may include accounts receivable, inventory, property, plant and equipment and income-producing commercial properties.

Standby letters of credit are conditional commitments issued by the Corporation that may require payment at a future date. The credit risk involved in issuing letters of credit is quantified on a quarterly basis, through the review of historical performance of the Corporation’s portfolios and allocated as a liability on the Corporation’s balance sheet.

Other Legal Proceedings

The Corporation and its subsidiaries are involved in various pending legal proceedings in which claims for monetary damages and other relief are asserted. These actions include claims brought against the Corporation and its subsidiaries where the Corporation or a subsidiary acted as one or more of the following: a depository bank, lender, underwriter, fiduciary, financial advisor, broker, agent, acquiror or was engaged in other business activities. Although the ultimate outcome for any asserted claim cannot be predicted with certainty, the Corporation believes that it and its subsidiaries have valid defenses for all asserted claims. Reserves are established for legal claims when losses associated with the claims are judged to be probable and the amount of the loss can be reasonably estimated.

Based on information currently available, advice of counsel, available insurance coverage and established reserves, the Corporation does not anticipate, at the present time, that the aggregate liability, if any, arising out of such legal proceedings will have a material adverse effect on the Corporation’s consolidated financial position. However, the Corporation cannot determine whether or not any claims asserted against it will have a material adverse effect on its consolidated results of operations in any future reporting period.

STOCK INCENTIVE PLANS

Restricted Stock

The Corporation issues restricted stock awards, consisting of both restricted stock and restricted stock units, to key employees under its Incentive Compensation Plans (Plans). The Corporation issues time-based awards and performance-based awards under these Plans, both of which are based on a three-year vesting period. The grant date fair value of the time-based awards is equal to the price of the Corporation’s common stock on the grant date. The fair value of the performance-based awards is based on a Monte-Carlo Simulation valuation of the Corporation’s common stock as of the grant date.

The Corporation did not issue any restricted stock awards during the three months ended March 31, 2015 or 2014. For performance-based restricted stock awards granted since 2014, the amount of shares recipients will earn is variable based on the Corporation’s total stockholder return relative to a specified peer group of financial institutions over the three-year period. These market-based restricted stock units are included in the table below as if the recipients earned shares equal to 100% of the units issued. As of March 31, 2015, the Corporation had available up to 2,122,522 shares of common stock to issue under the Plans.

 

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The unvested restricted stock awards are eligible to receive cash dividends or dividend equivalents which are ultimately used to purchase additional shares of stock and are subject to forfeiture if the requisite service period is not completed or the specified performance criteria are not met. These awards are subject to certain accelerated vesting provisions upon retirement, death, disability or in the event of a change of control as defined in the award agreements.

Share-based compensation expense related to restricted stock awards was $340 and $532 for the three months ended March 31, 2015 and 2014, the tax benefit of which was $119 and $186, respectively.

The following table summarizes certain information concerning restricted stock awards:

 

		Three Months Ended March 31,
		2015								2014
		Awards				Weighted Average Grant Price				Awards				Weighted Average Grant Price
Unvested awards outstanding at beginning of period			1,354,093			$	11.86				1,729,033			$	10.23
Net adjustment due to performance			(46,956	)			10.25				(19,002	)			8.48
Vested			(458,450	)			10.60				(667,956	)			9.01
Forfeited			(2,357	)			17.93				(430	)			10.69
Dividend reinvestment			7,656				14.24				9,612				13.01
Unvested awards outstanding at end of period			853,986				12.63				1,051,257				11.06

The total fair value of awards vested was $5,740 and $8,631 for the three months ended March 31, 2015 and 2014, respectively.

As of March 31, 2015, there was $4,509 of unrecognized compensation cost related to unvested restricted stock awards, including $20 that is subject to accelerated vesting under the Plan’s immediate vesting upon retirement provision for awards granted prior to the adoption of ASC 718, Compensation – Stock Compensation. The components of the restricted stock awards as of March 31, 2015 are as follows:

 

		Service- Based Awards				Performance- Based Awards				Total
Unvested awards			397,593				456,393				853,986
Unrecognized compensation expense		$	2,659			$	1,850			$	4,509
Intrinsic value		$	5,224			$	5,997			$	11,221
Weighted average remaining life (in years)			1.91				1.73				1.81

Stock Options

All outstanding stock options were assumed from acquisitions and are fully vested. Upon consummation of the Corporation’s acquisitions, all outstanding stock options issued by the acquired companies were converted into equivalent Corporation stock options. The Corporation issues shares of treasury stock or authorized but unissued shares to satisfy stock options exercised. Shares issued upon the exercise of stock options were 60,094 and 59,217 for the three months ended March 31, 2015 and 2014, respectively.

 

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The following table summarizes certain information concerning stock option awards:

 

		Three Months Ended March 31,
		2015								2014
		Shares				Weighted Average Exercise Price				Shares				Weighted Average Exercise Price
Options outstanding at beginning of period			568,834			$	8.86				533,524			$	11.50
Assumed from acquisition			—				—				304,785				5.77
Exercised			(60,094	)			5.04				(87,332	)			6.05
Forfeited			(2,182	)			4.34				(48,172	)			25.79
Options outstanding and exercisable at end of period			506,558				9.33				702,805				8.71

The intrinsic value of outstanding and exercisable stock options at March 31, 2015 was $1,890.

Warrants

In conjunction with its participation in the U.S. Department of the Treasury’s (UST) Capital Purchase Program (CPP), the Corporation issued to the UST a warrant to purchase up to 1,302,083 shares of the Corporation’s common stock. Pursuant to Section 13(H) of the Warrant to Purchase Common Stock, the number of shares of common stock issuable upon exercise of the warrant was reduced in half to 651,042 shares on June 16, 2009, the date the Corporation completed a public offering. The warrant, which expires in 2019, has an exercise price of $11.52 per share.

In conjunction with the Parkvale Financial Corporation (Parkvale) acquisition on January 1, 2012, the warrant issued by Parkvale to the UST under the CPP has been converted into a warrant to purchase up to 819,640 shares of the Corporation’s common stock. This warrant, which was recorded at its fair value on January 1, 2012, expires in 2018 and has an exercise price of $5.81 per share.

In conjunction with the Annapolis Bancorp, Inc. (ANNB) acquisition on April 6, 2013, the warrant issued by ANNB to the UST under the CPP has been converted into a warrant to purchase up to 342,564 shares of the Corporation’s common stock at an exercise price of $3.57 per share. Subsequent adjustments related to actual dividends paid by the Corporation have increased the share amount of these warrants to 367,916, with a resulting lower exercise price of $3.32 per share as of March 31, 2015. The warrant, which was recorded at its fair value on April 6, 2013, expires in 2019.

RETIREMENT PLANS

The Corporation sponsors the Retirement Income Plan (RIP), a qualified noncontributory defined benefit pension plan that covered substantially all salaried employees hired prior to January 1, 2008. The RIP covers employees who satisfied minimum age and length of service requirements. The Corporation’s funding guideline has been to make annual contributions to the RIP each year, if necessary, such that minimum funding requirements have been met. The RIP was frozen as of December 31, 2010.

The Corporation also sponsors two supplemental non-qualified retirement plans. The ERISA Excess Retirement Plan provides retirement benefits equal to the difference, if any, between the maximum benefit allowable under the Internal Revenue Code and the amount that would be provided under the RIP, if no limits were applied. The Basic Retirement Plan (BRP) is applicable to certain officers whom the Board of Directors designates. Officers participating in the BRP receive a benefit based on a target benefit percentage based on years of service at retirement and a designated tier as determined by the Board of Directors. When a participant retires, the basic benefit under the BRP is a monthly benefit equal to the target benefit percentage times the participant’s highest average monthly cash compensation during five consecutive calendar years within the last ten calendar years of employment. This monthly benefit is reduced by the monthly benefit the participant receives from Social Security, the RIP, the ERISA Excess Retirement Plan and the annuity equivalent of the three percent automatic contributions to the qualified 401(k) defined contribution plan and the ERISA Excess Lost Match Plan. The BRP was frozen as of December 31, 2008. The ERISA Excess Retirement Plan was frozen as of December 31, 2010.

 

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The net periodic benefit credit for the defined benefit plans includes the following components:

 

		Three Months Ended
		March 31,
		2015				2014
Service cost		$	17			$	16
Interest cost			1,477				1,596
Expected return on plan assets			(2,491	)			(2,487	)
Amortization:
Unrecognized net transition asset			—				(5	)
Unrecognized prior service cost			2				2
Unrecognized loss			536				337
Net periodic pension credit		$	(459	)		$	(541	)

The Corporation’s subsidiaries participate in a qualified 401(k) defined contribution plan under which employees may contribute a percentage of their salary. Employees are eligible to participate upon their first day of employment. Under this plan, the Corporation matches 100% of the first six percent that the employee defers. Additionally, the Corporation may provide a performance-based company contribution of up to three percent if the Corporation exceeds annual financial goals. Prior to January 1, 2015, the Corporation matched 100% of the first four percent that the employee deferred, provided an automatic contribution of three percent of compensation at the end of the year and could make an additional performance-based company contribution of up to two percent if the Corporation achieved its performance goals for the plan year. The Corporation’s contribution expense was $2,167 and $2,570 for the three months ended March 31, 2015 and 2014, respectively.

The Corporation also sponsors an ERISA Excess Lost Match Plan for certain officers. This plan provides retirement benefits equal to the difference, if any, between the maximum benefit allowable under the Internal Revenue Code and the amount that would have been provided under the qualified 401(k) defined contribution plan, if no limits were applied.

INCOME TAXES

The Corporation bases its provision for income taxes upon income before income taxes, adjusted for the effect of certain tax-exempt income and non-deductible expenses. In addition, the Corporation reports certain items of income and expense in different periods for financial reporting and tax return purposes. The Corporation recognizes the tax effects of these temporary differences currently in the deferred income tax provision or benefit. The Corporation computes deferred tax assets or liabilities based upon the differences between the financial statement and income tax bases of assets and liabilities using the applicable marginal tax rate.

The Corporation evaluates the probability that it will ultimately realize the full value of its deferred tax assets. Realization of the Corporation’s deferred tax assets is dependent upon a number of factors including the existence of any cumulative losses in prior periods, the amount of taxes paid in available carry-back periods, expectations for future earnings, applicable tax planning strategies and assessment of current and future economic and business conditions. The Corporation establishes a valuation allowance when it is “more likely than not” that the Corporation will not be able to realize a benefit from its deferred tax assets, or when future deductibility is uncertain.

At March 31, 2015, the Corporation anticipates that it will not utilize some of its state net operating loss carryforwards and other net deferred tax assets at certain of its subsidiaries and has recorded a valuation allowance against these deferred tax assets. The Corporation believes that, except for the portion which is covered by a valuation allowance, it is more likely than not the Corporation will realize the benefits of its deferred tax assets, net of the valuation allowance, at March 31, 2015, based on the levels of projected taxable income of some of its entities.

 

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COMPREHENSIVE INCOME

The components of comprehensive income, net of related tax, are as follows:

 

		Three Months Ended
		March 31,
		2015				2014
Net income		$	40,343			$	34,524
Other comprehensive income:
Securities available for sale:
Unrealized gains arising during the period, net of tax expense of $4,523 and $9,016			8,400				16,742
Reclassification adjustment for losses (gains) included in net income, net of tax (benefit) expense of $(3) and $3,311			6				(6,150	)
Derivative instruments:
Unrealized gains arising during the period, net of tax expense of $1,504 and $1,402			2,793				2,603
Reclassification adjustment for gains included in net income, net of tax expense of $283 and $285			(526	)			(529	)
Pension and postretirement benefit obligations:
Unrealized gains arising during the period, net of tax expense of $189 and $117			350				217
Other comprehensive income			11,023				12,883
Comprehensive income		$	51,366			$	47,407

The amounts reclassified from AOCI related to securities available for sale are included in net securities (losses) gains on the Consolidated Statements of Comprehensive Income, while the amounts reclassified from AOCI related to derivative instruments are included in interest income on loans and leases on the Consolidated Statements of Comprehensive Income.

The tax (benefit) expense amounts reclassified from AOCI in connection with the securities available for sale and derivative instruments reclassifications are included in income tax provision on the Consolidated Statements of Comprehensive Income.

The following table presents changes in AOCI, net of tax, by component:

 

		Unrealized Net Gains (Losses) on Securities Available for Sale				Unrealized Net Gains (Losses) on Derivative Instruments				Unrecognized Pension and Postretirement Obligations				Total
Three Months Ended March 31, 2015
Balance at beginning of period		$	(440	)		$	(143	)		$	(45,420	)		$	(46,003	)
Other comprehensive income before reclassifications			8,400				2,793				350				11,543
Amounts reclassified from AOCI			6				(526	)			—				(520	)
Net current period other comprehensive income			8,406				2,267				350				11,023
Balance at end of period		$	7,966			$	2,124			$	(45,070	)		$	(34,980	)

 

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EARNINGS PER COMMON SHARE

Basic earnings per common share is calculated by dividing net income available to common stockholders by the weighted average number of shares of common stock outstanding net of unvested shares of restricted stock.

Diluted earnings per common share is calculated by dividing net income available to common stockholders by the weighted average number of shares of common stock outstanding, adjusted for the dilutive effect of potential common shares issuable for stock options, warrants and restricted shares, as calculated using the treasury stock method. Adjustments to the weighted average number of shares of common stock outstanding are made only when such adjustments dilute earnings per common share.

The following table sets forth the computation of basic and diluted earnings per common share:

 

		Three Months Ended
		March 31,
		2015				2014
Net income		$	40,343			$	34,524
Less: Preferred stock dividends			2,010				2,322
Net income available to common stockholders		$	38,333			$	32,202
Basic weighted average common shares outstanding			174,152,283				162,186,395
Net effect of dilutive stock options, warrants, restricted stock and convertible debt			1,673,693				1,780,851
Diluted weighted average common shares outstanding			175,825,976				163,967,246
Earnings per common share:
Basic		$	0.22			$	0.20
Diluted		$	0.22			$	0.20

For the three months ended March 31, 2015 and 2014, 24,272 and 51,641 shares of common stock, respectively, related to stock options and warrants were excluded from the computation of diluted earnings per common share because the exercise price of the shares was greater than the average market price of the common shares and, therefore, the effect would be anti-dilutive.

CASH FLOW INFORMATION

Following is a summary of supplemental cash flow information:

 

Three Months Ended March 31		2015				2014
Interest paid on deposits and other borrowings		$	11,626			$	10,576
Income taxes paid			—				—
Transfers of loans to other real estate owned			1,965				4,849
Financing of other real estate owned sold			166				—

BUSINESS SEGMENTS

The Corporation operates in four reportable segments: Community Banking, Wealth Management, Insurance and Consumer Finance.

 

•

The Community Banking segment provides commercial and consumer banking services. Commercial banking solutions include corporate banking, small business banking, investment real estate financing, asset based lending, 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.

 

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•

The Wealth Management segment provides a broad range of personal and corporate fiduciary services including the administration of decedent and trust estates. In addition, it offers various alternative products, including securities brokerage and investment advisory services, mutual funds and annuities.

 

•

The Insurance segment includes a full-service insurance agency offering all lines of commercial and personal insurance through major carriers. The Insurance segment also includes a reinsurer.

 

•

The Consumer Finance segment primarily makes installment loans to individuals and purchases installment sales finance contracts from retail merchants. The Consumer Finance segment activity is funded through the sale of the Corporation’s subordinated notes at the finance company’s branch offices.

The following tables provide financial information for these segments of the Corporation. The information provided under the caption “Parent and Other” represents operations not considered to be reportable segments and/or general operating expenses of the Corporation, and includes the parent company, other non-bank subsidiaries and eliminations and adjustments which are necessary for purposes of reconciliation to the consolidated amounts.

 

		Community Banking				Wealth Management				Insurance				Consumer Finance				Parent and Other				Consolidated
At or for the Three Months Ended March 31, 2015
Interest income		$	122,118			$	—			$	23			$	9,593			$	1,635			$	133,369
Interest expense			9,941				—				—				860				647				11,448
Net interest income			112,177				—				23				8,733				988				121,921
Provision for credit losses			6,327				—				—				1,574				235				8,136
Non-interest income			27,301				8,387				3,593				676				(1,775	)			38,182
Non-interest expense			77,079				6,493				4,170				4,808				(10	)			92,540
Intangible amortization			1,947				68				100				—				—				2,115
Income tax expense (benefit)			15,931				658				(226	)			1,149				(543	)			16,969
Net income (loss)			38,194				1,168				(428	)			1,878				(469	)			40,343
Total assets			16,100,851				21,125				18,464				182,662				(44,254	)			16,278,848
Total intangibles			852,764				10,652				10,021				1,809				—				875,246
At or for the Three Months Ended March 31, 2014
Interest income		$	106,691			$	—			$	25			$	9,365			$	1,799			$	117,880
Interest expense			8,248				—				—				846				961				10,055
Net interest income			98,443				—				25				8,519				838				107,825
Provision for credit losses			5,296				—				—				1,457				253				7,006
Non-interest income			31,913				7,323				4,210				660				(2,036	)			42,070
Non-interest expense			76,866				6,292				3,046				4,937				742				91,883
Intangible amortization			2,110				72				101				—				—				2,283
Income tax expense (benefit)			13,343				351				385				1,073				(953	)			14,199
Net income (loss)			32,741				608				703				1,712				(1,240	)			34,524
Total assets			14,299,543				19,542				19,954				182,018				(44,547	)			14,476,510
Total intangibles			833,642				10,936				10,425				1,809				—				856,812

FAIR VALUE MEASUREMENTS

The Corporation uses fair value measurements to record fair value adjustments to certain financial assets and liabilities and to determine fair value disclosures. Securities available for sale and derivatives are recorded at fair value on a recurring basis. Additionally, from time to time, the Corporation may be required to record at fair value other assets on a non-recurring basis, such as mortgage loans held for sale, certain impaired loans, OREO and certain other assets.

Fair value is defined as an exit price, representing the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements are not adjusted for transaction costs. Fair value is a market-based measure considered from the perspective of a market participant who holds the asset or owes the liability rather than an entity-specific measure.

 

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In determining fair value, the Corporation uses various valuation approaches, including market, income and cost approaches. ASC 820, Fair Value Measurements and Disclosures, establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability, which are developed based on market data obtained from sources independent of the Corporation. Unobservable inputs reflect the Corporation’s assumptions about the assumptions that market participants would use in pricing an asset or liability, which are developed based on the best information available in the circumstances.

The fair value hierarchy gives the highest priority to unadjusted quoted market prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). The fair value hierarchy is broken down into three levels based on the reliability of inputs as follows:

 

Measurement Category		Definition
Level 1		valuation is based upon unadjusted quoted market prices for identical instruments traded in active markets.
Level 2		valuation is based upon quoted market prices for similar instruments traded in active markets, quoted market prices for identical or similar instruments traded in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by market data.
Level 3		valuation is derived from other valuation methodologies including discounted cash flow models and similar techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in determining fair value.

A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

Following is a description of the valuation methodologies the Corporation uses for financial instruments recorded at fair value on either a recurring or non-recurring basis:

Securities Available For Sale

Securities available for sale consists of both debt and equity securities. These securities are recorded at fair value on a recurring basis. At March 31, 2015, 99.9% of these securities used valuation methodologies involving market-based or market-derived information, collectively Level 1 and Level 2 measurements, to measure fair value. The remaining 0.1% of these securities was measured using model-based techniques, with primarily unobservable (Level 3) inputs.

The Corporation closely monitors market conditions involving assets that have become less actively traded. If the fair value measurement is based upon recent observable market activity of such assets or comparable assets (other than forced or distressed transactions) that occur in sufficient volume, and do not require significant adjustment using unobservable inputs, those assets are classified as Level 1 or Level 2; if not, they are classified as Level 3. Making this assessment requires significant judgment.

The Corporation uses prices from independent pricing services and, to a lesser extent, indicative (non-binding) quotes from independent brokers, to measure the fair value of investment securities. The Corporation validates prices received from pricing services or brokers using a variety of methods, including, but not limited to, comparison to secondary pricing services, corroboration of pricing by reference to other independent market data such as secondary broker quotes and relevant benchmark indices, and review of pricing information by Corporate personnel familiar with market liquidity and other market-related conditions.

Derivative Financial Instruments

The Corporation determines its fair value for derivatives using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects contractual terms of the derivative, including the period to maturity and uses observable market based inputs, including interest rate curves and implied volatilities.

 

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The Corporation incorporates credit valuation adjustments to appropriately reflect both its own non-performance risk and the respective counterparty’s non-performance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of non-performance risk, the Corporation considers the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts and guarantees.

Although the Corporation has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of March 31, 2015, the Corporation has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Corporation has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

Residential Mortgage Loans Held For Sale

These loans are carried at the lower of cost or fair value. Under lower of cost or fair value accounting, periodically, it may be necessary to record non-recurring fair value adjustments. Fair value, when recorded, is based on independent quoted market prices and is classified as Level 2.

Impaired Loans

The Corporation reserves for commercial loan relationships greater than or equal to $500 that the Corporation considers impaired as defined in ASC 310 at the time the Corporation identifies the loan as impaired based upon the present value of expected future cash flows available to pay the loan, or based upon the fair value of the collateral less estimated selling costs where a loan is collateral dependent. Collateral may be real estate and/or business assets including equipment, inventory and accounts receivable.

The Corporation determines the fair value of real estate based on appraisals by licensed or certified appraisers. The value of business assets is generally based on amounts reported on the business’ financial statements. Management must rely on the financial statements prepared and certified by the borrower or its accountants in determining the value of these business assets on an ongoing basis, which may be subject to significant change over time. Based on the quality of information or statements provided, management may require the use of business asset appraisals and site-inspections to better value these assets. The Corporation may discount appraised and reported values based on management’s historical knowledge, changes in market conditions from the time of valuation or management’s knowledge of the borrower and the borrower’s business. Since not all valuation inputs are observable, the Corporation classifies these non-recurring fair value determinations as Level 2 or Level 3 based on the lowest level of input that is significant to the fair value measurement.

The Corporation reviews and evaluates impaired loans no less frequently than quarterly for additional impairment based on the same factors identified above.

Other Real Estate Owned

OREO is comprised of commercial and residential real estate properties obtained in partial or total satisfaction of loan obligations plus some bank owned real estate. OREO acquired in settlement of indebtedness is recorded at the lower of carrying amount of the loan or fair value less costs to sell. Subsequently, these assets are carried at the lower of carrying value or fair value less costs to sell. Accordingly, it may be necessary to record non-recurring fair value adjustments. Fair value is generally based upon appraisals by licensed or certified appraisers and other market information and is classified as Level 2 or Level 3.

 

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The following table presents the balances of assets and liabilities measured at fair value on a recurring basis:

 

		Level 1				Level 2				Level 3				Total
March 31, 2015
Assets Measured at Fair Value
Available for sale debt securities:
U.S. Treasury		$	—			$	29,937			$	—			$	29,937
U.S. government-sponsored entities			—				390,660				—				390,660
Residential mortgage-backed securities:
Agency mortgage-backed securities			—				505,561				—				505,561
Agency collateralized mortgage obligations			—				572,017				—				572,017
Non-agency collateralized mortgage obligations			—				10				1,354				1,364
Commercial mortgage-backed securities			—				6,843				—				6,843
States of the U.S. and political subdivisions			—				13,175				—				13,175
Other debt securities			—				16,231				—				16,231
			—				1,534,434				1,354				1,535,788
Available for sale equity securities:
Financial services industry			91				645				435				1,171
Insurance services industry			121				—				—				121
			212				645				435				1,292
			212				1,535,079				1,789				1,537,080
Derivative financial instruments:
Trading			—				53,614				—				53,614
Not for trading			—				3,937				—				3,937
			—				57,551				—				57,551
		$	212			$	1,592,630			$	1,789			$	1,594,631
Liabilities Measured at Fair Value
Derivative financial instruments:
Trading			—			$	53,762				—			$	53,762
Not for trading			—				669				—				669
			—			$	54,431				—			$	54,431

 

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		Level 1				Level 2				Level 3				Total
December 31, 2014
Assets Measured at Fair Value
Available for sale debt securities:
U.S. Treasury		$	—			$	29,682			$	—			$	29,682
U.S. government-sponsored entities			—				337,133				—				337,133
Residential mortgage-backed securities:
Agency mortgage-backed securities			—				554,085				—				554,085
Agency collateralized mortgage obligations			—				573,171				—				573,171
Non-agency collateralized mortgage obligations			—				11				1,420				1,431
Commercial mortgage-backed securities			—				7,880				—				7,880
States of the U.S. and political subdivisions			—				13,158				—				13,158
Other debt securities			—				16,178				—				16,178
			—				1,531,298				1,420				1,532,718
Available for sale equity securities:
Financial services industry			99				654				475				1,228
Insurance services industry			119				—				—				119
			218				654				475				1,347
			218				1,531,952				1,895				1,534,065
Derivative financial instruments:
Trading			—				43,789				—				43,789
Not for trading			—				2,109				—				2,109
			—				45,898				—				45,898
		$	218			$	1,577,850			$	1,895			$	1,579,963
Liabilities Measured at Fair Value
Derivative financial instruments:
Trading			—			$	43,830				—			$	43,830
Not for trading			—				2,330				—				2,330
			—			$	46,160				—			$	46,160

There were no transfers of assets or liabilities between the hierarchy levels for 2015 or 2014.

 

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The following table presents additional information about assets measured at fair value on a recurring basis and for which the Corporation has utilized Level 3 inputs to determine fair value:

 

		Pooled Trust Preferred Collateralized Debt Obligations				Equity Securities				Residential Non-Agency Collateralized Mortgage Obligations				Total
Three Months Ended March 31, 2015
Balance at beginning of period			—			$	475			$	1,420			$	1,895
Total gains (losses) – realized/unrealized:
Included in earnings			—				—				—				—
Included in other comprehensive income			—				(40	)			(12	)			(52	)
Accretion included in earnings			—				—				1				1
Purchases, issuances, sales and settlements:
Purchases			—				—				—				—
Issuances			—				—				—				—
Sales/redemptions			—				—				—				—
Settlements			—				—				(55	)			(55	)
Transfers from Level 3			—				—				—				—
Transfers into Level 3			—				—				—				—
Balance at end of period			—			$	435			$	1,354			$	1,789
Year Ended December 31, 2014
Balance at beginning of period		$	31,595			$	410			$	1,744			$	33,749
Total gains (losses) – realized/unrealized:
Included in earnings			13,766				—				—				13,766
Included in other comprehensive income			5,608				65				3				5,676
Accretion included in earnings			657				—				5				662
Purchases, issuances, sales and settlements:
Purchases			—				—				—				—
Issuances			—				—				—				—
Sales/redemptions			(51,527	)			—				—				(51,527	)
Settlements			(99	)			—				(332	)			(431	)
Transfers from Level 3			—				—				—				—
Transfers into Level 3			—				—				—				—
Balance at end of period		$	—			$	475			$	1,420			$	1,895

The Corporation reviews fair value hierarchy classifications on a quarterly basis. Changes in the observability of the valuation attributes may result in reclassification of certain financial assets or liabilities. Such reclassifications are reported as transfers in/out of Level 3 at fair value at the beginning of the period in which the changes occur. See the Securities footnote in the Notes to Consolidated Financial Statements section of this Report for information relating to significant unobservable inputs used in determining Level 3 fair values.

For the three months ended March 31, 2015 and 2014, there were no gains or losses included in earnings attributable to the change in unrealized gains or losses relating to assets still held as of those dates. The total (losses) gains included in earnings are in the net securities (losses) gains line item in the Consolidated Statements of Comprehensive Income.

 

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In accordance with GAAP, from time to time, the Corporation measures certain assets at fair value on a non-recurring basis. These adjustments to fair value usually result from the application of the lower of cost or fair value accounting or write-downs of individual assets. Valuation methodologies used to measure these fair value adjustments were previously described. For assets measured at fair value on a non-recurring basis still held at the balance sheet date, the following table provides the hierarchy level and the fair value of the related assets or portfolios:

 

		Level 1				Level 2				Level 3				Total
March 31, 2015
Impaired loans			—			$	190			$	693			$	883
Other real estate owned			—				977				1,433				2,410
December 31, 2014
Impaired loans			—				177				1,528				1,705
Other real estate owned			—				5,695				2,365				8,060

Impaired loans measured or re-measured at fair value on a non-recurring basis during the three months ended March 31, 2015 had a carrying amount of $2,940 and an allocated allowance for credit losses of $2,181. The allocated allowance is based on fair value of $883 less estimated costs to sell of $124. The allowance for credit losses includes a provision applicable to the current period fair value measurements of $1,002, which was included in the provision for credit losses for the three months ended March 31, 2015.

OREO with a carrying amount of $2,501 was written down to $2,140 (fair value of $2,410 less estimated costs to sell of $270), resulting in a loss of $361, which was included in earnings for the three months ended March 31, 2015.

Fair Value of Financial Instruments

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

Cash and Cash Equivalents, Accrued Interest Receivable and Accrued Interest Payable. For these short-term instruments, the carrying amount is a reasonable estimate of fair value.

Securities. For both securities available for sale and securities held to maturity, fair value equals the quoted market price from an active market, if available, and is classified within Level 1. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities or pricing models, and is classified as Level 2. Where there is limited market activity or significant valuation inputs are unobservable, securities are classified within Level 3. Under current market conditions, assumptions used to determine the fair value of Level 3 securities have greater subjectivity due to the lack of observable market transactions.

Loans and Leases. The fair value of fixed rate loans and leases is estimated by discounting the future cash flows using the current rates at which similar loans and leases would be made to borrowers with similar credit ratings and for the same remaining maturities less an illiquidity discount. The fair value of variable and adjustable rate loans and leases approximates the carrying amount. Due to the significant judgment involved in evaluating credit quality, loans and leases are classified within Level 3 of the fair value hierarchy.

Derivative Assets and Liabilities. The Corporation determines its fair value for derivatives using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects contractual terms of the derivative, including the period to maturity and uses observable market based inputs, including interest rate curves and implied volatilities.

The Corporation incorporates credit valuation adjustments to appropriately reflect both its own non-performance risk and the respective counterparty’s non-performance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of non-performance risk, the Corporation considers the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts and guarantees.

 

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Although the Corporation has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of March 31, 2015, the Corporation has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Corporation has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

Deposits. The estimated fair value of demand deposits, savings accounts and certain money market deposits is the amount payable on demand at the reporting date because of the customers’ ability to withdraw funds immediately. The fair value of fixed-maturity deposits is estimated by discounting future cash flows using rates currently offered for deposits of similar remaining maturities.

Short-Term Borrowings. The carrying amounts for short-term borrowings approximate fair value for amounts that mature in 90 days or less. The fair value of subordinated notes is estimated by discounting future cash flows using rates currently offered.

Long-Term Borrowings. The fair value of long-term borrowings is estimated by discounting future cash flows based on the market prices for the same or similar issues or on the current rates offered to the Corporation for debt of the same remaining maturities.

Loan Commitments and Standby Letters of Credit. Estimates of the fair value of these off-balance sheet items were not made because of the short-term nature of these arrangements and the credit standing of the counterparties. Also, unfunded loan commitments relate principally to variable rate commercial loans, typically are non-binding, and fees are not normally assessed on these balances.

Nature of Estimates. Many of the estimates presented herein are based upon the use of highly subjective information and assumptions and, accordingly, the results may not be precise. Management believes that fair value estimates may not be comparable to other financial institutions due to the wide range of permitted valuation techniques and numerous estimates which must be made. Further, because the disclosed fair value amounts were estimated as of the balance sheet date, the amounts actually realized or paid upon maturity or settlement of the various financial instruments could be significantly different.

 

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The fair values of the Corporation’s financial instruments are as follows:

 

										Fair Value Measurements
		Carrying Amount				Fair Value				Level 1				Level 2				Level 3
March 31, 2015
Financial Assets
Cash and cash equivalents		$	234,246			$	234,246			$	234,246			$	—			$	—
Securities available for sale			1,537,080				1,537,080				212				1,535,079				1,789
Securities held to maturity			1,513,204				1,536,449				—				1,532,588				3,861
Net loans and leases, including loans held for sale			11,280,221				11,119,711				—				—				11,119,711
Derivative assets			57,551				57,551				—				57,551				—
Accrued interest receivable			41,935				41,935				41,935				—				—
Financial Liabilities
Deposits			11,806,043				11,812,401				9,217,159				2,595,242				—
Short-term borrowings			1,740,500				1,740,499				1,740,499				—				—
Long-term borrowings			541,474				541,955				—				—				541,955
Derivative liabilities			54,431				54,431				—				54,431				—
Accrued interest payable			6,511				6,511				6,511				—				—
December 31, 2014
Financial Assets
Cash and cash equivalents		$	287,393			$	287,393			$	287,393			$	—			$	—
Securities available for sale			1,534,065				1,534,065				218				1,531,952				1,895
Securities held to maturity			1,453,355				1,468,258				—				1,463,945				4,313
Net loans and leases, including loans held for sale			11,127,292				10,956,544				—				—				10,956,544
Derivative assets			45,898				45,898				—				45,898				—
Accrued interest receivable			40,231				40,231				40,231				—				—
Financial Liabilities
Deposits			11,382,208				11,382,402				8,771,173				2,611,229				—