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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended 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

 

 

 


Table of Contents

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   

 

2


Table of Contents

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

F.N.B. CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

Dollars in thousands, except par value

 

     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

 

3


Table of Contents

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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Table of Contents

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

 

5


Table of Contents

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

 

6


Table of Contents

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

 

7


Table of Contents

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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Table of Contents

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   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

9


Table of Contents

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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Table of Contents

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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Table of Contents

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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Table of Contents

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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Table of Contents

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.

 

 

14


Table of Contents

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   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

15


Table of Contents
     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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Table of Contents

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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Table of Contents

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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Table of Contents

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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Table of Contents

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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Table of Contents

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   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

21


Table of Contents

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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Table of Contents

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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Table of Contents

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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Table of Contents

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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Table of Contents

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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Table of Contents

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.

 

28


Table of Contents

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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Table of Contents

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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Table of Contents

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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Table of Contents
     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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Table of Contents

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         —     

Short-term borrowings

     2,041,658         2,041,672         2,041,672         —           —     

Long-term borrowings

     541,443         539,007         —           —           539,007   

Derivative liabilities

     46,160         46,160         —           46,160         —     

Accrued interest payable

     6,689         6,689         6,689         —           —     

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s Discussion and Analysis represents an overview of the consolidated results of operations and financial condition of the Corporation and highlights material changes to the financial condition and results of operations at and for the three-month period ended March 31, 2015. This Discussion and Analysis should be read in conjunction with the consolidated financial statements and notes thereto contained herein and the Corporation’s consolidated financial statements and notes thereto and Management’s Discussion and Analysis included in its 2014 Annual Report on Form 10-K filed with the SEC on February 27, 2015. The Corporation’s results of operations for the three months ended March 31, 2015 are not necessarily indicative of results expected for the full ye