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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended June 30, 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 July 31, 2015

Common Stock, $0.01 Par Value   175,288,069 Shares

 

 

 


Table of Contents

F.N.B. CORPORATION

FORM 10-Q

June 30, 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      46   

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk      69   

Item 4.

  Controls and Procedures      69   

PART II – OTHER INFORMATION

  

Item 1.

  Legal Proceedings      70   

Item 1A.

  Risk Factors      70   

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds      70   

Item 3.

  Defaults Upon Senior Securities      70   

Item 4.

  Mine Safety Disclosures      70   

Item 5.

  Other Information      70   

Item 6.

  Exhibits      71   
Signatures      72   

 

2


Table of Contents

PART I – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

F.N.B. CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

Dollars in thousands, except par value

 

     June 30,     December 31,  
     2015     2014  
     (Unaudited)        

Assets

    

Cash and due from banks

   $ 196,189      $ 196,240   

Interest bearing deposits with banks

     41,290        91,153   
  

 

 

   

 

 

 

Cash and Cash Equivalents

     237,479        287,393   

Securities available for sale

     1,618,620        1,534,065   

Securities held to maturity (fair value of $1,526,040 and $1,468,258)

     1,518,060        1,453,355   

Residential mortgage loans held for sale

     6,711        6,180   

Loans and leases, net of unearned income of $49,856 and $56,131

     11,626,787        11,247,038   

Allowance for credit losses

     (131,141     (125,926
  

 

 

   

 

 

 

Net Loans and Leases

     11,495,646        11,121,112   

Premises and equipment, net

     167,010        168,756   

Goodwill

     831,333        832,213   

Core deposit and other intangible assets, net

     45,057        47,504   

Bank owned life insurance

     304,318        301,771   

Other assets

     374,367        374,741   
  

 

 

   

 

 

 

Total Assets

   $ 16,598,601      $ 16,127,090   
  

 

 

   

 

 

 

Liabilities

    

Deposits:

    

Non-interest bearing demand

   $ 2,813,488      $ 2,647,623   

Interest bearing demand

     5,226,703        4,547,628   

Savings

     1,730,359        1,575,922   

Certificates and other time deposits

     2,587,577        2,611,035   
  

 

 

   

 

 

 

Total Deposits

     12,358,127        11,382,208   

Short-term borrowings

     1,507,582        2,041,658   

Long-term borrowings

     542,578        541,443   

Other liabilities

     124,543        140,325   
  

 

 

   

 

 

 

Total Liabilities

     14,532,830        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 – 176,434,735 and 175,450,303 shares

     1,765        1,754   

Additional paid-in capital

     1,803,347        1,798,984   

Retained earnings

     210,422        176,120   

Accumulated other comprehensive loss

     (43,953     (46,003

Treasury stock – 1,147,755 and 1,458,045 shares at cost

     (12,692     (16,281
  

 

 

   

 

 

 

Total Stockholders’ Equity

     2,065,771        2,021,456   
  

 

 

   

 

 

 

Total Liabilities and Stockholders’ Equity

   $ 16,598,601      $ 16,127,090   
  

 

 

   

 

 

 

See accompanying Notes to Consolidated Financial Statements

 

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Table of Contents

F.N.B. CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

In thousands, except per share data

Unaudited

 

     Three Months Ended      Six Months Ended  
     June 30,      June 30,  
     2015      2014      2015      2014  

Interest Income

           

Loans and leases, including fees

   $ 119,460       $ 109,542       $ 237,199       $ 213,639   

Securities:

           

Taxable

     14,467         13,577         28,681         25,864   

Nontaxable

     1,484         1,287         2,857         2,578   

Dividends

     9         13         20         192   

Other

     28         21         60         47   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Interest Income

     135,448         124,440         268,817         242,320   

Interest Expense

           

Deposits

     7,636         7,461         15,085         14,610   

Short-term borrowings

     1,794         1,333         3,562         2,552   

Long-term borrowings

     2,251         1,454         4,482         3,141   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Interest Expense

     11,681         10,248         23,129         20,303   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Interest Income

     123,767         114,192         245,688         222,017   

Provision for credit losses

     8,864         10,405         17,000         17,411   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Interest Income After Provision for Credit Losses

     114,903         103,787         228,688         204,606   

Non-Interest Income

           

Service charges

     17,514         17,441         33,331         32,710   

Trust fees

     5,432         4,862         10,593         9,626   

Insurance commissions and fees

     3,559         3,691         7,928         8,636   

Securities commissions and fees

     3,597         3,002         6,654         5,393   

Net securities gains

     14         776         5         10,237   

Mortgage banking operations

     2,516         928         4,315         1,142   

Bank owned life insurance

     1,838         1,807         3,681         3,992   

Other

     5,282         6,683         11,427         9,524   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Non-Interest Income

     39,752         39,190         77,934         81,260   

Non-Interest Expense

           

Salaries and employee benefits

     50,431         48,465         99,700         97,418   

Net occupancy

     8,472         8,068         17,448         16,550   

Equipment

     7,698         7,177         15,346         14,076   

Amortization of intangibles

     1,999         2,461         4,114         4,744   

Outside services

     9,163         8,233         17,940         15,470   

FDIC insurance

     2,783         3,399         6,472         6,393   

Merger and acquisition related

     371         832         371         6,150   

Other

     15,582         13,949         29,763         25,949   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Non-Interest Expense

     96,499         92,584         191,154         186,750   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income Before Income Taxes

     58,156         50,393         115,468         99,116   

Income taxes

     18,025         15,562         34,994         29,761   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Income

     40,131         34,831         80,474         69,355   

Less: Preferred stock dividends

     2,010         2,010         4,020         4,332   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Income Available to Common Stockholders

   $ 38,121       $ 32,821       $ 76,454       $ 65,023   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Income per Common Share – Basic

   $ 0.22       $ 0.20       $ 0.44       $ 0.40   

Net Income per Common Share – Diluted

     0.22         0.20         0.43         0.39   

Cash Dividends per Common Share

     0.12         0.12         0.24         0.24   

Comprehensive Income

   $ 31,158       $ 42,313       $ 82,524       $ 89,720   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

              80,474        2,050          82,524   

Dividends declared:

                 

Preferred stock

              (4,020         (4,020

Common stock: $0.24/share

              (42,152         (42,152

Issuance of common stock

        11         2,607             3,589        6,207   

Restricted stock compensation

           1,564               1,564   

Tax benefit of stock-based compensation

           192               192   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2015

   $ 106,882       $ 1,765       $ 1,803,347       $ 210,422      $ (43,953   $ (12,692   $ 2,065,771   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at January 1, 2014

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

Comprehensive income

              69,355        20,365          89,720   

Dividends declared:

                 

Preferred stock

              (4,332         (4,332

Common stock: $0.24/share

              (40,123         (40,123

Issuance of common stock

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

Issuance of common stock - acquisitions

        67         81,322               81,389   

Restricted stock compensation

           1,419               1,419   

Tax benefit of stock-based compensation

           1,505               1,505   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2014

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

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying Notes to Consolidated Financial Statements

 

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F.N.B. CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Dollars in thousands

Unaudited

 

     Six Months Ended  
     June 30,  
     2015     2014  

Operating Activities

    

Net income

   $ 80,474      $ 69,355   

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

    

Depreciation, amortization and accretion

     21,871        16,290   

Provision for credit losses

     17,000        17,411   

Deferred tax expense (benefit)

     5,789        (2,454

Net securities gains

     (5     (10,237

Tax benefit of stock-based compensation

     (192     (1,505

Loans originated for sale

     (195,538     (51,761

Loans sold

     198,787        58,659   

Gain on sale of loans

     (3,780     (2,465

Net change in:

    

Interest receivable

     (1,593     40   

Interest payable

     (492     (1,292

Securities classified as trading in business combination and sold

     —          203,178   

Bank owned life insurance

     (2,524     (3,375

Other, net

     (14,562     8,705   
  

 

 

   

 

 

 

Net cash flows provided by operating activities

     105,235        300,549   
  

 

 

   

 

 

 

Investing Activities

    

Net change in loans and leases

     (402,216     (538,144

Securities available for sale:

    

Purchases

     (242,375     (526,470

Sales

     33,228        150,055   

Maturities

     125,270        172,295   

Securities held to maturity:

    

Purchases

     (204,591     (325,989

Maturities

     137,518        95,152   

Purchase of bank owned life insurance

     (24     (4,448

Withdrawal/surrender of bank owned life insurance

     —          715   

Increase in premises and equipment

     (8,651     (8,021

Net cash received in business combinations

     —          27,058   
  

 

 

   

 

 

 

Net cash flows used in investing activities

     (561,841     (957,797
  

 

 

   

 

 

 

Financing Activities

    

Net change in:

    

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

     999,376        451,460   

Time deposits

     (21,510     (122,075

Short-term borrowings

     (534,076     263,271   

Increase in long-term borrowings

     14,654        216,736   

Decrease in long-term borrowings

     (13,544     (58,831

Net proceeds from issuance of common stock

     7,772        6,376   

Tax benefit of stock-based compensation

     192        1,505   

Cash dividends paid:

    

Preferred stock

     (4,020     (4,332

Common stock

     (42,152     (40,123
  

 

 

   

 

 

 

Net cash flows provided by financing activities

     406,692        713,987   
  

 

 

   

 

 

 

Net (Decrease) Increase in Cash and Cash Equivalents

     (49,914     56,739   

Cash and cash equivalents at beginning of period

     287,393        213,981   
  

 

 

   

 

 

 

Cash and Cash Equivalents at End of Period

   $ 237,479      $ 270,720   
  

 

 

   

 

 

 

See accompanying Notes to Consolidated Financial Statements

 

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Table of Contents

F.N.B. CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Dollars in thousands, except share data

(Unaudited)

June 30, 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 June 30, 2015, the Corporation had 284 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 June 30, 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 $390,160 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

 

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of OBA common stock. The Corporation also acquired the outstanding stock options of OBA that became fully vested upon the acquisition. The assets and liabilities of OBA were recorded on the Corporation’s consolidated balance sheet at their 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 the purchase price allocation, the Corporation recorded $20,107 in goodwill and $4,304 in core deposit intangibles as a result of the acquisition. 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.

Pending Acquisition – Metro Bancorp, Inc.

On August 4, 2015, the Corporation entered into a definitive merger agreement to acquire Metro Bancorp, Inc. (METR), a bank holding company based in Harrisburg, Pennsylvania with approximately $3,001,357 in total assets. The transaction is valued at approximately $474,000. Under the terms of the merger agreement, METR shareholders will be entitled to receive 2.373 shares of the Corporation’s common stock for each share of METR common stock. METR’s banking affiliate, Metro Bank, will be merged into FNBPA. The transaction is expected to be completed in the first quarter of 2016, pending regulatory approvals, the approval of shareholders and the satisfaction of other closing conditions.

Pending Branch Purchase – Bank of America

On May 27, 2015, the Corporation announced that it has entered into a purchase and assumption agreement to acquire approximately $280,000 in deposits and five branch-banking locations in southeastern Pennsylvania from Bank of America. The transaction is expected to close during the third quarter of 2015.

NEW ACCOUNTING STANDARDS

Insurance – Disclosures about Short-Duration Contracts

In May 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2015-09, Financial Services – Insurance. ASU 2015-09 requires insurance entities that issue short-duration contracts to provide additional disclosures about the liability for unpaid claims and claim adjustment expenses, including disclosure of information about significant changes in methodologies and assumptions used to calculate the liability, reasons for the change, and the effects on the financial statements. These additional disclosures will increase the transparency of significant estimates made in measuring those liabilities, improve comparability by requiring consistent disclosure of information, and provide financial statement users with information to facilitate analysis. The requirements of ASU 2015-09 should be applied retrospectively and are effective for annual periods beginning after December 15, 2015, and interim periods within annual periods beginning after December 15, 2016, with early adoption permitted. The adoption of this update is not expected to have a material effect on the financial statements, results of operations or liquidity of the Corporation.

 

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Cloud Computing Arrangements

In April 2015, the FASB issued 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.

SECURITIES

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

 

     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair Value  

Securities Available for Sale

           

June 30, 2015

           

U.S. Treasury

   $ 29,670       $ 258       $ —         $ 29,928   

U.S. government-sponsored entities

     403,396         1,853         (1,173      404,076   

Residential mortgage-backed securities:

           

Agency mortgage-backed securities

     588,103         6,454         (801      593,756   

Agency collateralized mortgage obligations

     561,212         2,324         (7,939      555,597   

Non-agency collateralized mortgage obligations

     1,270         9         —           1,279   

Commercial mortgage-backed securities

     5,004         2         —           5,006   

States of the U.S. and political subdivisions

     11,138         359         (40      11,457   

Other debt securities

     16,671         312         (742      16,241   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total debt securities

     1,616,464         11,571         (10,695      1,617,340   

Equity securities

     975         305         —           1,280   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 1,617,439       $ 11,876       $ (10,695    $ 1,618,620   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair Value  

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

           

June 30, 2015

           

U.S. Treasury

   $ 500       $ 152       $ —         $ 652   

U.S. government-sponsored entities

     146,561         1,054         (379      147,236   

Residential mortgage-backed securities:

           

Agency mortgage-backed securities

     670,817         12,981         (1,006      682,792   

Agency collateralized mortgage obligations

     484,832         2,351         (6,793      480,390   

Non-agency collateralized mortgage obligations

     3,375         14         (3      3,386   

Commercial mortgage-backed securities

     17,410         231         —           17,641   

States of the U.S. and political subdivisions

     194,565         1,936         (2,558      193,943   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 1,518,060       $ 18,719       $ (10,739    $ 1,526,040   
  

 

 

    

 

 

    

 

 

    

 

 

 

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   
  

 

 

    

 

 

    

 

 

    

 

 

 

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 June 30, 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      Six Months Ended  
     June 30,      June 30,  
     2015      2014      2015      2014  

Gross gains

   $ 14       $ 739       $ 14       $ 18,748   

Gross losses

     —           37         (9      (8,511
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 14       $ 776       $ 5       $ 10,237   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

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 2016. Partially offsetting this gain was a net loss of $3,529 relating to the sale of other securities. By selling these securities, the Corporation strengthened the risk profile of its investment portfolio, improved its capital levels due to lowered risk-weighted assets and generated capital to support future growth.

As of June 30, 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

   $ 4,990       $ 5,040       $ 1,010       $ 1,017   

Due from one to five years

     438,979         440,208         140,854         141,072   

Due from five to ten years

     10,014         10,304         72,031         73,550   

Due after ten years

     6,892         6,150         127,731         126,192   
  

 

 

    

 

 

    

 

 

    

 

 

 
     460,875         461,702         341,626         341,831   

Residential mortgage-backed securities:

           

Agency mortgage-backed securities

     588,103         593,756         670,817         682,792   

Agency collateralized mortgage obligations

     561,212         555,597         484,832         480,390   

Non-agency collateralized mortgage obligations

     1,270         1,279         3,375         3,386   

Commercial mortgage-backed securities

     5,004         5,006         17,410         17,641   

Equity securities

     975         1,280         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 1,617,439       $ 1,618,620       $ 1,518,060       $ 1,526,040   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

At June 30, 2015 and December 31, 2014, securities with a carrying value of $1,961,096 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 $240,738 and $892,647 at June 30, 2015 and December 31, 2014, respectively, were pledged as collateral for short-term borrowings.

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

 

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

Securities Available for Sale

                        

June 30, 2015

                        

U.S. government-sponsored entities

     5       $ 84,445       $ (571     5       $ 55,389       $ (602     10       $ 139,834       $ (1,173

Residential mortgage-backed securities:

                        

Agency mortgage-backed securities

     11         186,261         (801     —           —           —          11         186,261         (801

Agency collateralized mortgage obligations

     6         104,538         (563     18         237,775         (7,376     24         342,313         (7,939

States of the U.S. and political subdivisions

     1         2,079         (3     1         1,153         (37     2         3,232         (40

Other debt securities

     —           —           —          4         6,150         (742     4         6,150         (742
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 
     23       $ 377,323       $ (1,938     28       $ 300,467       $ (8,757     51       $ 677,790       $ (10,695
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

 

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

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

                        

June 30, 2015

                        

U.S. government-sponsored entities

     3       $ 44,772       $ (227     1       $ 14,849       $ (152     4       $ 59,621       $ (379

Residential mortgage-backed securities:

                        

Agency mortgage-backed securities

     10         115,966         (974     1         1,127         (32     11         117,093         (1,006

Agency collateralized mortgage obligations

     7         95,239         (884     14         176,572         (5,909     21         271,811         (6,793

Non-agency collateralized mortgage obligations

     2         1,731         (3     —           —           —          2         1,731         (3

States of the U.S. and political subdivisions

     45         83,795         (2,558     —           —           —          45         83,795         (2,558
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 
     67       $ 341,503       $ (4,646     16       $ 192,548       $ (6,093     83       $ 534,051       $ (10,739
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

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, that 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 $6,892 and $6,150 at June 30, 2015, respectively. The Corporation has concluded from its analysis performed at June 30, 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 Six Months Ended June 30, 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 Six Months Ended June 30, 2014

        

Beginning balance

   $ 17,155       $ 27       $ 17,182   

Loss where impairment was not previously recognized

     —           —           —     

Additional loss where impairment was previously recognized

     —           —           —     

Reduction due to credit impaired securities sold

     (17,155      —           (17,155
  

 

 

    

 

 

    

 

 

 

Ending balance

   $ —         $ 27       $ 27   
  

 

 

    

 

 

    

 

 

 

The Corporation did not recognize any impairment losses on securities for the six months ended June 30, 2015 or 2014.

States of the U.S. and Political Subdivisions

The Corporation’s municipal bond portfolio of $206,022 as of June 30, 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 99.6% of the portfolio. Geographically, municipal bonds support the Corporation’s primary footprint as 92.5% 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 $1,355. In addition to the strong stand-alone ratings, 84.0% 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 June 30, 2015 and December 31, 2014, the Corporation’s FHLB stock totaled $58,047 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 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
 

June 30, 2015

        

Commercial real estate

   $ 3,178,219       $ 674,388       $ 3,852,607   

Commercial and industrial

     2,343,213         110,655         2,453,868   

Commercial leases

     190,881         —           190,881   
  

 

 

    

 

 

    

 

 

 

Total commercial loans and leases

     5,712,313         785,043         6,497,356   

Direct installment

     1,623,290         53,059         1,676,349   

Residential mortgages

     953,840         396,662         1,350,502   

Indirect installment

     941,851         950         942,801   

Consumer lines of credit

     972,474         146,496         1,118,970   

Other

     40,809         —           40,809   
  

 

 

    

 

 

    

 

 

 
   $ 10,244,577       $ 1,382,210       $ 11,626,787   
  

 

 

    

 

 

    

 

 

 

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 $178,455 or 1.5% of total loans and leases at June 30, 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 June 30, 2015, 40.4% of the commercial real estate loans were owner-occupied, while the remaining 59.6% were non-owner-occupied, compared to 41.6% and 58.4%, respectively, as of December 31, 2014. As of June 30, 2015 and December 31, 2014, the Corporation had commercial construction loans of $243,382 and $296,156, respectively, representing 2.1% 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:

 

     June 30,
2015
     December 31,
2014
 

Accounted for under ASC 310-30:

     

Outstanding balance

   $ 1,423,534       $ 1,597,558   

Carrying amount

     1,169,717         1,344,171   

Accounted for under ASC 310-20:

     

Outstanding balance

     219,358         242,488   

Carrying amount

     205,548         228,748   

Total acquired loans:

     

Outstanding balance

     1,642,892         1,840,046   

Carrying amount

     1,375,265         1,572,919   

The carrying amount of purchased credit impaired loans included in the table above totaled $8,808 at June 30, 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.

 

     Six Months Ended  
     June 30,  
     2015      2014  

Balance at beginning of period

   $ 331,899       $ 305,646   

Reduction due to unexpected early payoffs

     (25,735      (18,821

Reclass from non-accretable difference

     15,653         2,605   

Disposals/transfers

     (348      (2,130

Accretion

     (31,656      (28,275
  

 

 

    

 

 

 

Balance at end of period

   $ 289,813       $ 259,025   
  

 

 

    

 

 

 

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, or when the full amount of principal and interest due is not expected to be collected in full, unless the loan is both well secured and in the process of collection. Commercial loans are placed on non-accrual at 90 days, installment loans are placed on non-accrual at 120 days and residential mortgages and consumer lines of credit are generally placed on non-accrual at 180 days. When a loan is placed on non-accrual status, all unpaid interest is reversed. Non-accrual loans may not be restored to accrual status until all delinquent principal and interest have been paid and the ultimate ability to collect the remaining principal and interest is reasonably assured. TDRs are loans in which the borrower has been granted a concession on the interest rate or the original repayment terms due to financial distress.

 

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Table of Contents

Following is a summary of non-performing assets:

 

     June 30,
2015
    December 31,
2014
 

Non-accrual loans

   $ 45,396      $ 45,113   

Troubled debt restructurings

     22,916        23,439   
  

 

 

   

 

 

 

Total non-performing loans

     68,312        68,552   

Other real estate owned (OREO)

     40,190        41,466   
  

 

 

   

 

 

 

Total non-performing assets

   $ 108,502      $ 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

     0.93     0.97

Non-performing assets as a percent of total assets

     0.65     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 $5,138 at June 30, 2015. Also, the recorded investment of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process at June 30, 2015 amounted to $13,154.

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
     ³ 90 Days
Past Due and
Still Accruing
     Non-Accrual      Total
Past Due
     Current      Total
Loans and
Leases
 

Originated Loans and Leases

                 

June 30, 2015

                 

Commercial real estate

   $ 6,054       $ 3       $ 24,652       $ 30,709       $ 3,147,510       $ 3,178,219   

Commercial and industrial

     2,800         3         8,966         11,769         2,331,444         2,343,213   

Commercial leases

     818         —           699         1,517         189,364         190,881   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans and leases

     9,672         6         34,317         43,995         5,668,318         5,712,313   

Direct installment

     9,414         2,969         5,656         18,039         1,605,251         1,623,290   

Residential mortgages

     8,198         1,536         3,767         13,501         940,339         953,840   

Indirect installment

     7,040         358         898         8,296         933,555         941,851   

Consumer lines of credit

     2,192         975         694         3,861         968,613         972,474   

Other

     65         73         —           138         40,671         40,809   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 36,581       $ 5,917       $ 45,332       $ 87,830       $ 10,156,747       $ 10,244,577   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

16


Table of Contents
     30-89
Days
Past Due
     ³ 90 Days
Past Due

and Still
Accruing
     Non-
Accrual
     Total
Past
Due (1) (2)
     Current      Discount     Total
Loans
 

Acquired Loans

                   

June 30, 2015

                   

Commercial real estate

   $ 10,618       $ 11,098       $ —         $ 21,716       $ 691,401       $ (38,729   $ 674,388   

Commercial and industrial

     528         756         64         1,348         117,132         (7,825     110,655   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total commercial loans

     11,146         11,854         64         23,064         808,533         (46,554     785,043   

Direct installment

     1,108         1,057         —           2,165         49,963         931        53,059   

Residential mortgages

     7,909         15,688         —           23,597         410,919         (37,854     396,662   

Indirect installment

     21         17         —           38         1,149         (237     950   

Consumer lines of credit

     654         1,474         —           2,128         148,470         (4,102     146,496   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
   $ 20,838       $ 30,090       $ 64       $ 50,992       $ 1,419,034       $ (87,816   $ 1,382,210   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

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 June 30, 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

 

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Table of Contents

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.

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

              

June 30, 2015

              

Commercial real estate

   $ 3,056,070       $ 59,893       $ 61,601       $ 655       $ 3,178,219   

Commercial and industrial

     2,244,956         60,547         36,140         1,570         2,343,213   

Commercial leases

     187,988         2,002         891         —           190,881   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 5,489,014       $ 122,442       $ 98,632       $ 2,225       $ 5,712,313   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

              

June 30, 2015

              

Commercial real estate

   $ 533,067       $ 61,595       $ 79,726         —         $ 674,388   

Commercial and industrial

     97,178         4,076         9,401         —           110,655   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 630,245       $ 65,671       $ 89,127         —         $ 785,043   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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 June 30, 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  

June 30, 2015

        

Direct installment

   $ 1,608,934       $ 14,356       $ 1,623,290   

Residential mortgages

     939,368         14,472         953,840   

Indirect installment

     940,799         1,052         941,851   

Consumer lines of credit

     970,554         1,920         972,474   

Other

     40,809         —           40,809   

 

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Table of Contents

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   

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 Six Months Ended June 30, 2015

                 

Commercial real estate

   $ 35,137       $ 25,753       $ 822       $ 26,575       $ 655       $ 26,301   

Commercial and industrial

     10,130         7,325         1,909         9,234         1,570         9,650   

Commercial leases

     699         699         —           699         —           716   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans and leases

     45,966         33,777         2,731         36,508         2,225         36,667   

Direct installment

     15,043         14,356         —           14,356         —           14,322   

Residential mortgages

     14,962         14,472         —           14,472         —           15,076   

Indirect installment

     2,782         1,052         —           1,052         —           1,208   

Consumer lines of credit

     2,079         1,920         —           1,920         —           1,808   

Other

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 80,832       $ 65,577       $ 2,731       $ 68,308       $ 2,225       $ 69,081   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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.

 

 

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Table of Contents

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 $3,454; commercial and industrial of $607; direct installment of $1,562; residential mortgages of $752; indirect installment of $284; and consumer lines of credit of $286, totaling $6,945 at June 30, 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.

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:

 

     June 30,
2015
     December 31,
2014
 

Accruing:

     

Performing

   $ 11,669       $ 9,441   

Non-performing

     22,916         23,439   

Non-accrual

     8,406         8,272   
  

 

 

    

 

 

 
   $ 42,991       $ 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 six months ended June 30, 2015, the Corporation returned to performing status $3,831 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 $510 and $371 at June 30, 2015 and December 31, 2014, respectively, and pooled reserves for individual loans under $500 of $1,086 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 $4,936 and $3,448 at June 30, 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 June 30, 2015      Six Months Ended June 30, 2015  
     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       $ 176   

Commercial and industrial

     1         5         4         1         5         4   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans

     1         5         4         3         317         180   

Direct installment

     110         1,761         1,729         241         3,310         3,201   

Residential mortgages

     7         231         234         21         812         846   

Indirect installment

     5         14         13         10         30         30   

Consumer lines of credit

     14         250         249         30         520         519   

Other

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     137       $ 2,261       $ 2,229         305       $ 4,989       $ 4,776   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

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

Recorded
Investment
     Post-
Modification

Outstanding
Recorded
Investment
     Number
of
Contracts
     Pre-Modification
Outstanding

Recorded
Investment
     Post-
Modification

Outstanding
Recorded
Investment
 

Commercial real estate

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

Commercial and industrial

     —           —           —           1         188         188   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans

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

Direct installment

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

Residential mortgages

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

Indirect installment

     6         18         16         13         34         32   

Consumer lines of credit

     18         555         553         25         812         807   

Other

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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
June 30, 2015 (1)
     Six Months Ended
June 30, 2015 (1)
 
     Number of
Contracts
     Recorded
Investment
     Number of
Contracts
     Recorded
Investment
 

Commercial real estate

     —         $ —           —         $ —     

Commercial and industrial

     1         229         1         229   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans

     1         229         1         229   

Direct installment

     27         96         58         182   

Residential mortgages

     3         114         4         171   

Indirect installment

     3         7         5         7   

Consumer lines of credit

     —           —           1         92   

Other

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 
     34       $ 446         69       $ 681   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

Commercial real estate

     —         $ —           —         $ —     

Commercial and industrial

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans

     —           —           —           —     

Direct installment

     33         240         47         392   

Residential mortgages

     —           —           —           —     

Indirect installment

     1         —           1         —     

Consumer lines of credit

     —           —           —           —     

Other

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Direct installment

     34       $ 240         48       $ 392   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(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.

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.

 

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Table of Contents

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 June 30, 2015

  

        

Commercial real estate

   $ 38,792       $ (977   $ 200       $ (777   $ 1,857      $ 39,872   

Commercial and industrial

     32,803         (1,416     976         (440     (58     32,305   

Commercial leases

     2,576         (111     35         (76     (277     2,223   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total commercial loans and leases

     74,171         (2,504     1,211         (1,293     1,522        74,400   

Direct installment

     21,204         (2,953     297         (2,656     3,731        22,279   

Residential mortgages

     8,471         (112     24         (88     196        8,579   

Indirect installment

     7,657         (1,503     332         (1,171     2,423        8,909   

Consumer lines of credit

     8,890         (323     36         (287     515        9,118   

Other

     854         (325     25         (300     357        911   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total allowance on originated loans and leases

     121,247         (7,720     1,925         (5,795     8,744        124,196   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Purchased credit-impaired loans

     621         —          —           —          37        658   

Other acquired loans

     6,631         (468     41         (427     83        6,287   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total allowance on acquired loans

     7,252         (468     41         (427     120        6,945   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total allowance

   $ 128,499       $ (8,188   $ 1,966       $ (6,222   $ 8,864      $ 131,141   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Six Months Ended June 30, 2015

              

Commercial real estate

   $ 37,588       $ (1,978   $ 409       $ (1,569   $ 3,853      $ 39,872   

Commercial and industrial

     32,645         (2,100     1,096         (1,004     664        32,305   

Commercial leases

     2,398         (204     45         (159     (16     2,223   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total commercial loans and leases

     72,631         (4,282     1,550         (2,732     4,501        74,400   

Direct installment

     20,538         (5,386     566         (4,820     6,561        22,279   

Residential mortgages

     8,024         (623     39         (584     1,139        8,579   

Indirect installment

     7,504         (2,783     634         (2,149     3,554        8,909   

Consumer lines of credit

     8,496         (733     76         (657     1,279        9,118   

Other

     759         (660     36         (624     776        911   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total allowance on originated loans and leases

     117,952         (14,467     2,901         (11,566     17,810        124,196   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Purchased credit-impaired loans

     660         (64     19         (45     43        658   

Other acquired loans

     7,314         (545     371         (174     (853     6,287   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total allowance on acquired loans

     7,974         (609     390         (219     (810     6,945   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total allowance

   $ 125,926       $ (15,076   $ 3,291       $ (11,785   $ 17,000      $ 131,141   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

23


Table of Contents
     Balance at
Beginning
of Period
     Charge-
Offs
    Recoveries      Net
Charge-
Offs
    Provision
for credit
losses
    Balance at
End of
Period
 

Three Months Ended June 30, 2014

  

        

Commercial real estate

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

Commercial and industrial

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

Commercial leases

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

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total commercial loans and leases

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

Direct installment

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

Residential mortgages

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

Indirect installment

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

Consumer lines of credit

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

Other

     579         (307     5         (302     630        907   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total allowance on originated loans and leases

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

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Purchased credit-impaired loans

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

Other acquired loans

     4,388         (126     738         612        112        5,112   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total allowance on acquired loans

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

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total allowance

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

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Six Months Ended June 30, 2014

              

Commercial real estate

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

Commercial and industrial

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

Commercial leases

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

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total commercial loans and leases

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

Direct installment

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

Residential mortgages

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

Indirect installment

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

Consumer lines of credit

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

Other

     530         (569     10         (559     936        907   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total allowance on originated loans and leases

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

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Purchased credit-impaired loans

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

Other acquired loans

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

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total allowance on acquired loans

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

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total allowance

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

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

24


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
 

June 30, 2015

              

Commercial real estate

   $ 655       $ 39,217       $ 3,178,219       $ 13,713       $ 3,164,506   

Commercial and industrial

     1,570         30,735         2,343,213         5,585         2,337,628   

Commercial leases

     —           2,223         190,881         —           190,881   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans and leases

     2,225         72,175         5,712,313         19,298         5,693,015   

Direct installment

     —           22,279         1,623,290         —           1,623,290   

Residential mortgages

     —           8,579         953,840         —           953,840   

Indirect installment

     —           8,909         941,851         —           941,851   

Consumer lines of credit

     —           9,118         972,474         —           972,474   

Other

     —           911         40,809         —           40,809   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 2,225       $ 121,971       $ 10,244,577       $ 19,298       $ 10,225,279   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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:

 

     June 30,
2015
     December 31,
2014
 

Securities sold under repurchase agreements

   $ 212,380       $ 882,696   

Federal Home Loan Bank advances

     840,000         820,000   

Federal funds purchased

     330,000         210,000   

Subordinated notes

     125,202         128,962   
  

 

 

    

 

 

 
   $ 1,507,582       $ 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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Table of Contents

Following is a summary of long-term borrowings:

 

     June 30,
2015
     December 31,
2014
 

Federal Home Loan Bank advances

   $ 400,017       $ 400,042   

Subordinated notes

     84,289         83,155   

Junior subordinated debt

     58,272         58,246   
  

 

 

    

 

 

 
   $ 542,578       $ 541,443   
  

 

 

    

 

 

 

The Corporation’s banking affiliate has available credit with the FHLB of $4,393,116 of which $1,240,018 was used as of June 30, 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 six months ended June 30, 2015 and the year ended December 31, 2014.

The Corporation had two unconsolidated subsidiary trusts as of June 30, 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 June 30, 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 June 30, 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         1.94  

Variable; 3-month LIBOR +

165 basis points (bps)

Omega Financial Capital Trust I

     36,000         1,114         36,107         10/18/34         2.47  

Variable; 3-month LIBOR +

219 bps

  

 

 

    

 

 

    

 

 

         
   $ 57,500       $ 1,779       $ 58,272           
  

 

 

    

 

 

    

 

 

         

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.

 

26


Table of Contents

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.

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

 

     June 30, 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       $ 1,867       $ 1,869       $ 200,000       $ 2,109       $ 2,330   

Interest rate swaps – not designated

     1,080,889         491         40,943         972,002         140         43,655   

Equity contracts – not designated

     1,210         17         —           1,210         47         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total subject to master netting arrangements

     1,282,099         2,375         42,812         1,173,212         2,296         45,985   

Not subject to master netting arrangements:

                 

Interest rate swaps – not designated

     1,080,889         40,664         377         972,002         43,602         128   

Credit risk contracts – not designated

     102,700         10         114         68,632         —           —     

Equity contracts – not designated

     1,210         —           16         1,210         —           47   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total not subject to master netting arrangements

     1,184,799         40,674         507         1,041,844         43,602         175   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 2,466,898       $ 43,049       $ 43,319       $ 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 June 30, 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 $1,867 and $1,869, respectively, at June 30, 2015, and $2,109 and $2,330, respectively, at December 31, 2014. For the six months ended June 30, 2015, the amount reclassified from accumulated other comprehensive income (AOCI) to interest income on loans and leases totaled $1,623 ($1,055 net of tax).

As of June 30, 2015, the maximum length of time over which forecasted interest cash flows are hedged is eight years. In the twelve months that follow June 30, 2015, the Corporation expects to reclassify from the amount currently reported in AOCI net derivative gains of $2,817 ($1,831 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 June 30, 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 six months ended June 30, 2015 and 2014, there was no hedge ineffectiveness. Also, during the six months ended June 30, 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 only with 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 $1,080,889 at June 30, 2015. Fair values included in other assets and other liabilities on the consolidated balance sheet applicable to these agreements amounted to $41,155 and $41,320, respectively, at June 30, 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 $74,010 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 $114 at June 30, 2015 and $25 at December 31, 2014.

The fair values of risk participation agreements purchased and sold were not material at June 30, 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 $1,974 and $1,862 as of June 30, 2015 and December 31, 2014, respectively, in excess of amounts previously posted as collateral with the respective counterparty.

 

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The following table presents information about derivative assets and derivative liabilities that are subject to enforceable master netting arrangements as well as those not subject to enforceable master netting arrangements:

 

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

the Balance
Sheet
 

June 30, 2015

        

Derivative Assets

        

Subject to master netting arrangements:

        

Interest rate contracts

        

Designated

   $ 1,867         —         $ 1,867   

Not designated

     491         —           491   

Equity contracts – not designated

     17         —           17   

Not subject to master netting arrangements:

        

Interest rate contracts – not designated

     40,664         —           40,664   

Credit contracts – not designated

     10         —           10   
  

 

 

    

 

 

    

 

 

 
   $ 43,049         —         $ 43,049   
  

 

 

    

 

 

    

 

 

 

Derivative Liabilities

        

Subject to master netting arrangements:

        

Interest rate contracts

        

Designated

   $ 1,869         —         $ 1,869   

Not designated

     40,943         —           40,943   

Not subject to master netting arrangements:

        

Interest rate contracts – not designated

     377         —           377   

Credit contracts – not designated

     114         —           114   

Equity contracts – not designated

     16         —           16   
  

 

 

    

 

 

    

 

 

 
   $ 43,319         —         $ 43,319   
  

 

 

    

 

 

    

 

 

 

December 31, 2014

        

Derivative Assets

        

Subject to master netting arrangements:

        

Interest rate contracts

        

Designated

   $ 2,109         —         $ 2,109   

Not designated

     140         —           140   

Equity contracts – not designated

     47         —           47   

Not subject to master netting arrangements:

        

Interest rate contracts – not designated

     43,602         —           43,602   
  

 

 

    

 

 

    

 

 

 
   $ 45,898         —         $ 45,898   
  

 

 

    

 

 

    

 

 

 

Derivative Liabilities

        

Subject to master netting arrangements:

        

Interest rate contracts

        

Designated

   $ 2,330         —         $ 2,330   

Not designated

     43,655         —           43,655   

Not subject to master netting arrangements:

        

Interest rate contracts – not designated

     128         —           128   

Equity contracts – not designated

     47         —           47   
  

 

 

    

 

 

    

 

 

 
   $ 46,160         —         $ 46,160   
  

 

 

    

 

 

    

 

 

 

 

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

 

            Amount Not Offset in the
Balance Sheet
 
     Net Amount
Presented in

the Balance
Sheet
     Financial
Instruments
     Cash
Collateral
     Net
Amount
 

June 30, 2015

           

Derivative Assets

           

Interest rate contracts:

           

Designated

   $ 1,867       $ 519       $ 1,348         —     

Not designated

     491         105         386         —     

Equity contracts – not designated

     17         17         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 2,375       $ 641       $ 1,734         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Derivative Liabilities

           

Interest rate contracts:

           

Designated

   $ 1,869       $ 1,869       $ —         $ —     

Not designated

     40,943         24,793         14,388         1,762   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 42,812       $ 26,662       $ 14,388       $ 1,762   
  

 

 

    

 

 

    

 

 

    

 

 

 

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 certain of the Corporation’s derivative financial instruments on the income statement:

 

     Income      Six Months Ended  
     Statement      June 30,  
     Location      2015      2014  

Interest Rate Swaps

     Other income       $ (123    $ 1   

Credit Risk Contracts

     Other income         (105      —     

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 June 30, 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:

 

     June 30,
2015
     December 31,
2014
 

Commitments to extend credit

   $ 3,921,382       $ 3,665,481   

Standby letters of credit

     108,436         121,186   

At June 30, 2015, funding of 69.1% 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.

For the six months ended June 30, 2015 and 2014, the Corporation issued 401,510 and 357,341 restricted stock awards, respectively, with aggregated grant date fair values of $5,284 and $4,871 under these plans. For performance-based restricted stock awards granted, 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 June 30, 2015, the Corporation had available up to 2,077,572 shares of common stock to issue under the Plans.

 

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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 $1,564 and $1,385 for the six months ended June 30, 2015 and 2014, the tax benefit of which was $548 and $485, respectively.

The following table summarizes certain information concerning restricted stock awards:

 

     Six Months Ended June 30,  
     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   

Granted

     401,510         13.16         357,341         13.63   

Net adjustment due to performance

     (46,956      10.25         (87,512      11.41   

Vested

     (460,606      10.61         (698,121      8.77   

Forfeited

     (2,774      17.24         (32,909      10.99   

Dividend reinvestment

     18,359         14.13         22,501         12.74   
  

 

 

       

 

 

    

Unvested awards outstanding at end of period

     1,263,626         12.82         1,290,333         11.90   
  

 

 

       

 

 

    

The total fair value of awards vested was $5,770 and $8,641 for the six months ended June 30, 2015 and 2014, respectively.

As of June 30, 2015, there was $8,141 of unrecognized compensation cost related to unvested restricted stock awards, including $65 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 June 30, 2015 are as follows:

 

     Service-
Based

Awards
     Performance-
Based
Awards
     Total  

Unvested awards

     663,106         600,520         1,263,626   

Unrecognized compensation expense

   $ 5,165       $ 2,976       $ 8,141   

Intrinsic value

   $ 9,496       $ 8,599       $ 18,095   

Weighted average remaining life (in years)

     2.31         2.20         2.26   

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 82,810 and 93,154 for the six months ended June 30, 2015 and 2014, respectively.

 

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Table of Contents

The following table summarizes certain information concerning stock option awards:

 

     Six Months Ended June 30,  
     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 acquisitions

     —           —           304,785         5.77   

Exercised

     (82,810      5.57         (134,687      6.24   

Forfeited

     (2,182      4.34         (52,262      25.03   
  

 

 

       

 

 

    

Options outstanding and exercisable at end of period

     483,842         9.44         651,360         8.82   
  

 

 

       

 

 

    

The intrinsic value of outstanding and exercisable stock options at June 30, 2015 was $2,255.

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, was sold at auction by the UST and was exercised at $5.81 per share during the second quarter of 2015.

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 370,929, with a resulting lower exercise price of $3.30 per share as of June 30, 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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Table of Contents

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

 

     Three Months Ended      Six Months Ended  
     June 30,      June 30,  
     2015      2014      2015      2014  

Service cost

   $ 17       $ 16       $ 34       $ 32   

Interest cost

     1,477         1,596         2,954         3,192   

Expected return on plan assets

     (2,491      (2,487      (4,982      (4,974

Amortization:

           

Unrecognized net transition asset

     —           (5      —           (10

Unrecognized prior service cost

     2         2         4         4   

Unrecognized loss

     536         337         1,072         674   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic pension credit

   $ (459    $ (541    $ (918    $ (1,082
  

 

 

    

 

 

    

 

 

    

 

 

 

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 $3,961 and $4,962 for the six months ended June 30, 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 June 30, 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 June 30, 2015, based on the levels of projected taxable income of some of its entities.

 

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Table of Contents

COMPREHENSIVE INCOME

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

 

     Three Months Ended      Six Months Ended  
     June 30,      June 30,  
     2015      2014      2015      2014  

Net income

   $ 40,131       $ 34,831       $ 80,474       $ 69,355   

Other comprehensive (loss) income:

           

Securities available for sale:

           

Unrealized (losses) gains arising during the period, net of tax (benefit) expense of $(3,870), $2,935, $652 and $11,950

     (7,188      5,451         1,212         22,193   

Reclassification adjustment for gains included in net income, net of tax expense of $5, $272, $2 and $3,583

     (9      (504      (3      (6,654

Derivative instruments:

           

Unrealized (losses) gains arising during the period, net of tax (benefit) expense of $(860), $1,537, $645 and $2,939

     (1,597      2,855         1,196         5,458   

Reclassification adjustment for gains included in net income, net of tax expense of $285, $290, $568 and $575

     (529      (538      (1,055      (1,067

Pension and postretirement benefit obligations:

           

Unrealized gains arising during the period, net of tax expense of $189, $117, $377 and $234

     350         218         700         435   
  

 

 

    

 

 

    

 

 

    

 

 

 

Other comprehensive (loss) income

     (8,973      7,482         2,050         20,365   
  

 

 

    

 

 

    

 

 

    

 

 

 

Comprehensive income

   $ 31,158       $ 42,313       $ 82,524       $ 89,720   
  

 

 

    

 

 

    

 

 

    

 

 

 

The amounts reclassified from AOCI related to securities available for sale are included in net securities 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 taxes 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  

Six Months Ended June 30, 2015

           

Balance at beginning of period

   $ (440    $ (143    $ (45,420    $ (46,003

Other comprehensive income before reclassifications

     1,212         1,196         700         3,108   

Amounts reclassified from AOCI

     (3      (1,055      —           (1,058
  

 

 

    

 

 

    

 

 

    

 

 

 

Net current period other comprehensive income

     1,209         141         700         2,050   
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance at end of period

   $ 769       $ (2    $ (44,720    $ (43,953
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

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      Six Months Ended  
     June 30,      June 30,  
     2015      2014      2015      2014  

Net income

   $ 40,131       $ 34,831       $ 80,474       $ 69,355   

Less: Preferred stock dividends

     2,010         2,010         4,020         4,332   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income available to common stockholders

   $ 38,121       $ 32,821       $ 76,454       $ 65,023   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic weighted average common shares outstanding

     174,940,911         166,185,080         174,548,775         164,196,783   

Net effect of dilutive stock options, warrants, restricted stock and convertible debt

     1,420,929         1,682,528         1,547,420         1,731,577   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted weighted average common shares outstanding

     176,361,840         167,867,608         176,096,195         165,928,360   
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per common share:

           

Basic

   $ 0.22       $ 0.20       $ 0.44       $ 0.40   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted

   $ 0.22       $ 0.20       $ 0.43       $ 0.39   
  

 

 

    

 

 

    

 

 

    

 

 

 

For the three months ended June 30, 2015 and 2014, 17,918 and 30,649 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. For the six months ended June 30, 2015 and 2014, 20,984 and 41,023 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:

 

     2015      2014  

Six Months Ended June 30

     

Interest paid on deposits and other borrowings

   $ 23,621       $ 21,366   

Income taxes paid

     21,000         1,000   

Transfers of loans to other real estate owned

     4,744         6,660   

Financing of other real estate owned sold

     222         259   

 

36


Table of Contents

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, international banking, business credit, capital markets and lease financing. Consumer banking products and services include deposit products, mortgage lending, consumer lending and a complete suite of mobile and online banking services.

 

    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 June 30, 2015

               

Interest income

   $ 123,967       $ —         $ 22      $ 9,778       $ 1,681      $ 135,448   

Interest expense

     10,166         —           —          855         660        11,681   

Net interest income

     113,801         —           22        8,923         1,021        123,767   

Provision for credit losses

     6,945         —           —          1,964         (45     8,864   

Non-interest income

     28,313         9,199         2,753        732         (1,245     39,752   

Non-interest expense

     78,339         6,931         3,581        4,994         655        94,500   

Intangible amortization

     1,830         68         101        —           —          1,999   

Income tax expense (benefit)

     17,009         789         (312     1,038         (499     18,025   

Net income (loss)

     37,991         1,411         (595     1,659         (335     40,131   

Total assets

     16,412,240         21,255         22,523        186,134         (43,551     16,598,601   

Total intangibles

     851,250         10,584         12,747        1,809         —          876,390   

At or for the Three Months Ended June 30, 2014

               

Interest income

   $ 113,161       $ —         $ 25      $ 9,578       $ 1,676      $ 124,440   

Interest expense

     8,730         —           —          809         709        10,248   

Net interest income

     104,431         —           25        8,769         967        114,192   

Provision for credit losses

     8,425         —           —          1,778         202        10,405   

Non-interest income

     27,420         8,033         2,999        741         (3     39,190   

Non-interest expense

     75,281         6,452         2,911        4,880         599        90,123   

Intangible amortization

     2,288         72         101        —           —          2,461