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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 September 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 October 31, 2015

Common Stock, $0.01 Par Value   175,377,201 Shares

 

 

 


Table of Contents

F.N.B. CORPORATION

FORM 10-Q

September 30, 2015

INDEX

 

PART I – FINANCIAL INFORMATION      PAGE   
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

 

     September 30,
2015
    December 31,
2014
 
     (Unaudited)        

Assets

    

Cash and due from banks

   $ 208,560      $ 196,240   

Interest bearing deposits with banks

     50,206        91,153   
  

 

 

   

 

 

 

Cash and Cash Equivalents

     258,766        287,393   

Securities available for sale

     1,578,526        1,534,065   

Securities held to maturity (fair value of $1,546,135 and $1,468,258)

     1,526,290        1,453,355   

Residential mortgage loans held for sale

     3,575        6,180   

Loans and leases, net of unearned income of $48,830 and $56,131

     11,873,645        11,247,038   

Allowance for credit losses

     (136,183     (125,926
  

 

 

   

 

 

 

Net Loans and Leases

     11,737,462        11,121,112   

Premises and equipment, net

     161,689        168,756   

Goodwill

     834,141        832,213   

Core deposit and other intangible assets, net

     46,417        47,504   

Bank owned life insurance

     306,061        301,771   

Other assets

     383,146        374,741   
  

 

 

   

 

 

 

Total Assets

   $ 16,836,073      $ 16,127,090   
  

 

 

   

 

 

 

Liabilities

    

Deposits:

    

Non-interest bearing demand

   $ 2,911,435      $ 2,647,623   

Interest bearing demand

     5,558,322        4,547,628   

Savings

     1,736,350        1,575,922   

Certificates and other time deposits

     2,553,629        2,611,035   
  

 

 

   

 

 

 

Total Deposits

     12,759,736        11,382,208   

Short-term borrowings

     1,287,302        2,041,658   

Long-term borrowings

     542,653        541,443   

Other liabilities

     151,633        140,325   
  

 

 

   

 

 

 

Total Liabilities

     14,741,324        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 – 176,513,189 and 175,450,303 shares

     1,766        1,754   

Additional paid-in capital

     1,805,926        1,798,984   

Retained earnings

     227,287        176,120   

Accumulated other comprehensive loss

     (34,397     (46,003

Treasury stock – 1,149,750 and 1,458,045 shares at cost

     (12,715     (16,281
  

 

 

   

 

 

 

Total Stockholders’ Equity

     2,094,749        2,021,456   
  

 

 

   

 

 

 

Total Liabilities and Stockholders’ Equity

   $ 16,836,073      $ 16,127,090   
  

 

 

   

 

 

 

See accompanying Notes to Consolidated Financial Statements

 

3


Table of Contents

F.N.B. CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

In thousands, except per share data

Unaudited

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2015      2014      2015      2014  

Interest Income

           

Loans and leases, including fees

   $ 120,875       $ 116,468       $ 358,074       $ 330,107   

Securities:

           

Taxable

     14,576         13,693         43,257         39,557   

Nontaxable

     1,707         1,356         4,564         3,934   

Dividends

     9         26         29         218   

Other

     30         23         90         70   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Interest Income

     137,197         131,566         406,014         373,886   

Interest Expense

           

Deposits

     7,948         7,457         23,033         22,067   

Short-term borrowings

     1,786         1,459         5,348         4,011   

Long-term borrowings

     2,262         2,031         6,744         5,172   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Interest Expense

     11,996         10,947         35,125         31,250   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Interest Income

     125,201         120,619         370,889         342,636   

Provision for credit losses

     10,777         11,197         27,777         28,608   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Interest Income After Provision for Credit Losses

     114,424         109,422         343,112         314,028   

Non-Interest Income

           

Service charges

     18,628         17,742         51,959         50,452   

Trust fees

     5,210         4,868         15,803         14,494   

Insurance commissions and fees

     4,423         4,169         12,351         12,805   

Securities commissions and fees

     3,304         3,132         9,958         8,525   

Net securities gains

     314         1,178         319         11,415   

Mortgage banking operations

     2,424         1,078         6,739         2,220   

Bank owned life insurance

     1,846         1,828         5,527         5,820   

Other

     5,210         3,557         16,637         13,081   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Non-Interest Income

     41,359         37,552         119,293         118,812   

Non-Interest Expense

           

Salaries and employee benefits

     51,859         49,590         151,559         147,008   

Net occupancy

     7,957         7,734         25,405         24,284   

Equipment

     8,237         7,625         23,583         21,701   

Amortization of intangibles

     2,034         2,455         6,148         7,199   

Outside services

     7,314         8,183         25,254         23,653   

FDIC insurance

     3,158         3,206         9,630         9,599   

Merger and acquisition related

     1,312         1,904         1,683         8,054   

Other

     16,278         15,150         46,041         41,099   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Non-Interest Expense

     98,149         95,847         289,303         282,597   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income Before Income Taxes

     57,634         51,127         173,102         150,243   

Income taxes

     17,581         15,736         52,575         45,497   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Income

     40,053         35,391         120,527         104,746   

Less: Preferred stock dividends

     2,010         2,010         6,030         6,342   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Income Available to Common Stockholders

   $ 38,043       $ 33,381       $ 114,497       $ 98,404   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Income per Common Share – Basic

   $ 0.22       $ 0.20       $ 0.65       $ 0.60   

Net Income per Common Share – Diluted

     0.22         0.20         0.65         0.59   

Cash Dividends per Common Share

     0.12         0.12         0.36         0.36   

Comprehensive Income

   $ 49,609       $ 31,499       $ 132,133       $ 121,219   
  

 

 

    

 

 

    

 

 

    

 

 

 

See accompanying Notes to Consolidated Financial Statements

 

4


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

              120,527        11,606          132,133   

Dividends declared:

                 

Preferred stock

              (6,030         (6,030

Common stock: $0.36/share

              (63,330         (63,330

Issuance of common stock

        12         3,651             3,566        7,229   

Restricted stock compensation

           3,286               3,286   

Tax benefit of stock-based compensation

           5               5   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2015

   $ 106,882       $ 1,766       $ 1,805,926       $ 227,287      $ (34,397   $ (12,715   $ 2,094,749   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at January 1, 2014

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

Comprehensive income

              104,746        16,473          121,219   

Dividends declared:

                 

Preferred stock

              (6,342         (6,342

Common stock: $0.36/share

              (60,234         (60,234

Issuance of common stock

        16         9,007         (228       (7,377     1,418   

Issuance of common stock - acquisitions

        139         170,024               170,163   

Restricted stock compensation

           2,328               2,328   

Tax benefit of stock-based compensation

           2,198               2,198   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2014

   $ 106,882       $ 1,747       $ 1,791,674       $ 159,812      $ (40,451   $ (14,531   $ 2,005,133   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying Notes to Consolidated Financial Statements

 

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Table of Contents

F.N.B. CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Dollars in thousands

Unaudited

 

     Nine Months Ended
September 30,
 
     2015     2014  

Operating Activities

    

Net income

   $ 120,527      $ 104,746   

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

    

Depreciation, amortization and accretion

     31,412        29,007   

Provision for credit losses

     27,777        28,608   

Deferred tax expense (benefit)

     3,874        (2,533

Net securities gains

     (319     (11,415

Tax benefit of stock-based compensation

     (5     (2,198

Loans originated for sale

     (336,776     (98,741

Loans sold

     346,174        105,169   

Gain on sale of loans

     (6,794     (3,721

Net change in:

    

Interest receivable

     (4,457     (1,590

Interest payable

     (414     (1,058

Securities classified as trading in business combination and sold

     —          241,595   

Bank owned life insurance

     (4,266     (5,205

Other, net

     8,144        (4,165
  

 

 

   

 

 

 

Net cash flows provided by operating activities

     184,877        378,499   
  

 

 

   

 

 

 

Investing Activities

    

Net change in loans and leases

     (657,586     (888,443

Securities available for sale:

    

Purchases

     (279,636     (686,108

Sales

     33,499        175,872   

Maturities

     212,140        245,942   

Securities held to maturity:

    

Purchases

     (279,998     (436,519

Sales

     —          4,570   

Maturities

     203,689        153,624   

Purchase of bank owned life insurance

     (72,688     (16

Withdrawal/surrender of bank owned life insurance

     72,664        18,715   

Increase in premises and equipment

     (7,304     (12,580

Net cash received in business combinations

     148,159        60,035   
  

 

 

   

 

 

 

Net cash flows used in investing activities

     (627,061     (1,364,908
  

 

 

   

 

 

 

Financing Activities

    

Net change in:

    

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

     1,304,345        654,144   

Time deposits

     (78,764     (224,733

Short-term borrowings

     (754,356     348,827   

Increase in long-term borrowings

     20,976        376,418   

Decrease in long-term borrowings

     (19,804     (87,677

Net proceeds from issuance of common stock

     10,515        7,795   

Tax benefit of stock-based compensation

     5        2,198   

Cash dividends paid:

    

Preferred stock

     (6,030     (6,342

Common stock

     (63,330     (60,234
  

 

 

   

 

 

 

Net cash flows provided by financing activities

     413,557        1,010,396   
  

 

 

   

 

 

 

Net (Decrease) Increase in Cash and Cash Equivalents

     (28,627     23,987   

Cash and cash equivalents at beginning of period

     287,393        213,981   
  

 

 

   

 

 

 

Cash and Cash Equivalents at End of Period

   $ 258,766      $ 237,968   
  

 

 

   

 

 

 

See accompanying Notes to Consolidated Financial Statements

 

6


Table of Contents

F.N.B. CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Dollars in thousands, except share data

(Unaudited)

September 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, Pennsylvania, Baltimore, Maryland and Cleveland, Ohio. As of September 30, 2015, the Corporation had 289 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 September 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.

DEBT OFFERING

On October 2, 2015, the Corporation completed its offering of $100,000 aggregate principal amount of 4.875% subordinated notes due in 2025. The subordinated notes will be treated as tier 2 capital for regulatory capital purposes. The net proceeds of the debt offering after deducting underwriting discounts and commissions and estimated offering expenses were $98,500. The Corporation intends to use the net proceeds from the sale of the subordinated notes for general corporate purposes, which may include investments at the holding company level, providing capital to support the growth of FNBPA and its business, repurchases of its common shares and the payment of the cash consideration components of future acquisitions.

 

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Table of Contents

MERGERS AND ACQUISITIONS

Branch Purchase – Bank of America

On September 18, 2015, the Corporation completed its purchase of five branch-banking locations in southeastern Pennsylvania from Bank of America, in which the Corporation acquired approximately $154,619 in deposits. The assets and liabilities relating to the branches purchased were recorded on the Corporation’s consolidated balance sheet at their preliminary fair values as of September 18, 2015, and the related results of operations for these branches have been included in the Corporation’s consolidated statement of comprehensive income since that date. Based on the preliminary purchase price allocation, the Corporation recorded $2,539 in goodwill and $3,081 in core deposit intangibles. These fair value estimates are provisional amounts based on third party valuations that are currently under review. The goodwill for this transaction is expected to be deductible for income tax purposes.

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 $85,554 and resulted in the Corporation issuing 7,170,037 shares of its common stock in exchange for 4,025,895 shares of OBA common stock. The Corporation also acquired the outstanding stock options of OBA that became fully vested upon the 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. The Corporation expects to issue approximately 33.6 million shares of its common stock in exchange for approximately 14.1 million shares 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 of the Corporation and METR, and the satisfaction of other closing conditions.

Pending Branch Purchase – Fifth Third Bank

On September 3, 2015, the Corporation announced that it entered into a purchase and assumption agreement to acquire approximately $383,000 in retail and private banking deposits, 17 branch-banking locations and related consumer loans in the Pittsburgh, Pennsylvania area from Fifth Third Bank. The transaction is expected to close during the second quarter of 2016, pending regulatory approval.

 

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Table of Contents

NEW ACCOUNTING STANDARDS

Business Combinations – Simplifying the Accounting for Measurement-Period Adjustments

In September 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2015-16, Business Combinations – Simplifying the Accounting for Measurement-Period Adjustments. ASU 2015-16 eliminates the requirement that an acquirer in a business combination account for measurement-period adjustments retrospectively. Instead, an acquirer must recognize measurement-period adjustments in the period in which it determines the amount of the adjustment, including the effect on earnings of any amounts that would have been recorded in previous periods if the accounting had been completed at the acquisition date. The guidance is effective for fiscal periods beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted. The adoption of this update will not have a material effect on the financial statements, results of operations or liquidity of the Corporation.

Insurance – Disclosures about Short-Duration Contracts

In May 2015, the FASB issued ASU 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. ASU 2015-09 should be applied retrospectively and is effective for annual periods beginning after December 15, 2015, and interim 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.

Cloud Computing Arrangements

In April 2015, the FASB issued ASU 2015-05, Intangibles-Goodwill and Other-Internal-Use Software. ASU 2015-05 provides guidance about whether a cloud computing arrangement includes a license for internal use software, and how to account for the software license element of the arrangement. This update eliminates the existing requirement to analogize the guidance on leases in ASC 840 in accounting for some software licenses. ASU 2015-05 is 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 or the impact that the adoption of this update will have on its financial statements.

Interest – Imputation of Interest

In April 2015, the FASB issued ASU 2015-03, Interest – Imputation of Interest. ASU 2015-03 requires debt issuance costs to be presented in the balance sheet as a direct deduction from the corresponding debt liability. The recognition and measurement guidance for debt issuance costs is not affected by the amendments in this update. ASU 2015-03 is effective for reporting periods beginning after December 15, 2015, with early adoption permitted. A reporting entity should apply the new guidance on a retrospective basis, wherein the balance sheet of each individual period presented should be adjusted to reflect the period-specific effects of applying the new guidance. 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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Consolidation

In February 2015, the FASB issued ASU 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 ASU is 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 2015-01, Income Statement – Extraordinary and Unusual Items. ASU 2015-01 simplified income statement presentation by eliminating from GAAP the concept of extraordinary items. The ASU is 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

           

September 30, 2015

           

U.S. Treasury

   $ 29,704       $ 300       $ —         $ 30,004   

U.S. government-sponsored entities

     388,428         2,644         (305      390,767   

Residential mortgage-backed securities:

           

Agency mortgage-backed securities

     587,244         9,958         (82      597,120   

Agency collateralized mortgage obligations

     529,656         3,220         (4,948      527,928   

Non-agency collateralized mortgage obligations

     1,212         15         —           1,227   

Commercial mortgage-backed securities

     4,384         8         —           4,392   

States of the U.S. and political subdivisions

     10,927         345         —           11,272   

Other debt securities

     14,700         267         (414      14,553   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total debt securities

     1,566,255         16,757         (5,749      1,577,263   

Equity securities

     975         288         —           1,263   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 1,567,230       $ 17,045       $ (5,749    $ 1,578,526   
  

 

 

    

 

 

    

 

 

    

 

 

 

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   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair Value  

Securities Held to Maturity

           

September 30, 2015

           

U.S. Treasury

   $ 500       $ 169       $ —         $ 669   

U.S. government-sponsored entities

     146,528         1,964         (79      148,413   

Residential mortgage-backed securities:

           

Agency mortgage-backed securities

     669,221         15,887         (16      685,092   

Agency collateralized mortgage obligations

     462,191         3,556         (4,181      461,566   

Non-agency collateralized mortgage obligations

     3,055         15         —           3,070   

Commercial mortgage-backed securities

     17,334         468         —           17,802   

States of the U.S. and political subdivisions

     227,461         2,888         (826      229,523   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 1,526,290       $ 24,947       $ (5,102    $ 1,546,135   
  

 

 

    

 

 

    

 

 

    

 

 

 

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 September 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      Nine Months Ended  
     September 30,      September 30,  
     2015      2014      2015      2014  

Gross gains

   $ 314       $ 1,191       $ 328       $ 19,939   

Gross losses

     —           (13      (9      (8,524
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 314       $ 1,178       $ 319       $ 11,415   
  

 

 

    

 

 

    

 

 

    

 

 

 

During the first quarter of 2014, the Corporation strategically sold its 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.

 

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As of September 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

   $ 4,994       $ 5,027       $ 1,940       $ 1,951   

Due from one to five years

     423,858         426,751         139,429         140,465   

Due from five to ten years

     10,013         10,338         71,708         73,681   

Due after ten years

     4,894         4,480         161,412         162,508   
  

 

 

    

 

 

    

 

 

    

 

 

 
     443,759         446,596         374,489         378,605   

Residential mortgage-backed securities:

           

Agency mortgage-backed securities

     587,244         597,120         669,221         685,092   

Agency collateralized mortgage obligations

     529,656         527,928         462,191         461,566   

Non-agency collateralized mortgage obligations

     1,212         1,227         3,055         3,070   

Commercial mortgage-backed securities

     4,384         4,392         17,334         17,802   

Equity securities

     975         1,263         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 1,567,230       $ 1,578,526       $ 1,526,290       $ 1,546,135   
  

 

 

    

 

 

    

 

 

    

 

 

 

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 September 30, 2015 and December 31, 2014, securities with a carrying value of $2,062,257 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 $258,428 and $892,647 at September 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

                       

September 30, 2015

                       

U.S. government-sponsored entities

    3       $ 59,823       $ (177     3       $ 37,867       $ (128     6       $ 97,690       $ (305

Residential mortgage-backed securities:

                       

Agency mortgage-backed securities

    1         18,591         (82     —           —           —          1         18,591         (82

Agency collateralized mortgage obligations

    4         63,640         (123     18         228,010         (4,825     22         291,650         (4,948

Other debt securities

    —           —           —          3         4,480         (414     3         4,480         (414
 

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 
    8       $ 142,054       $ (382     24       $ 270,357       $ (5,367     32       $ 412,411       $ (5,749
 

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

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
 

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

 

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

Securities Held to Maturity

                       

September 30, 2015

                       

U.S. government-sponsored entities

    —         $ —         $ —          1       $ 14,921       $ (79     1       $ 14,921       $ (79

Residential mortgage-backed securities:

                       

Agency mortgage-backed securities

    —           —           —          1         924         (16     1         924         (16

Agency collateralized mortgage obligations

    3         46,120         (212     14         170,359         (3,969     17         216,479         (4,181

States of the U.S. and political subdivisions

    24         46,933         (826     —           —           —          24         46,933         (826
 

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 
    27       $ 93,053       $ (1,038     16       $ 186,204       $ (4,064     43       $ 279,257       $ (5,102
 

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

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 three 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 $4,894 and $4,480 at September 30, 2015, respectively. The Corporation has concluded from its analysis performed at September 30, 2015 that it is probable that the Corporation will collect all contractual principal and interest payments related to these securities.

Other-Than-Temporary Impairment

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

 

     Collateralized
Debt
Obligations
     Equities      Total  

For the Nine Months Ended September 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 Nine Months Ended September 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 nine months ended September 30, 2015 or 2014.

States of the U.S. and Political Subdivisions

The Corporation’s municipal bond portfolio of $238,733 as of September 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 99.8% of the portfolio. Geographically, municipal bonds support the Corporation’s primary footprint as 93.6% 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 $1,492. In addition to the strong stand-alone ratings, 83.0% 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.

 

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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 September 30, 2015 and December 31, 2014, the Corporation’s FHLB stock totaled $44,845 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.

LOANS AND LEASES

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

 

     Originated
Loans
     Acquired
Loans
     Total
Loans and
Leases
 

September 30, 2015

        

Commercial real estate

   $ 3,322,669       $ 626,577       $ 3,949,246   

Commercial and industrial

     2,410,186         81,169         2,491,355   

Commercial leases

     199,130         —           199,130   
  

 

 

    

 

 

    

 

 

 

Total commercial loans and leases

     5,931,985         707,746         6,639,731   

Direct installment

     1,643,345         49,293         1,692,638   

Residential mortgages

     1,013,254         373,132         1,386,386   

Indirect installment

     973,216         812         974,028   

Consumer lines of credit

     1,003,278         123,724         1,127,002   

Other

     53,860         —           53,860   
  

 

 

    

 

 

    

 

 

 
   $ 10,618,938       $ 1,254,707       $ 11,873,645   
  

 

 

    

 

 

    

 

 

 

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.

 

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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 $181,298 or 1.5% of total loans and leases at September 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 September 30, 2015, 38.9% of the commercial real estate loans were owner-occupied, while the remaining 61.1% were non-owner-occupied, compared to 41.6% and 58.4%, respectively, as of December 31, 2014. As of September 30, 2015 and December 31, 2014, the Corporation had commercial construction loans of $294,249 and $296,156, respectively, representing 2.5% and 2.6% of total loans and leases at those respective dates.

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:

 

     September 30,
2015
     December 31,
2014
 

Accounted for under ASC 310-30:

     

Outstanding balance

   $ 1,345,685       $ 1,597,558   

Carrying amount

     1,094,604         1,344,171   

Accounted for under ASC 310-20:

     

Outstanding balance

     159,695         242,488   

Carrying amount

     153,539         228,748   

Total acquired loans:

     

Outstanding balance

     1,505,380         1,840,046   

Carrying amount

     1,248,143         1,572,919   

The carrying amount of purchased credit impaired loans included in the table above totaled $8,766 at September 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.

 

     Nine Months Ended  
     September 30,  
     2015      2014  

Balance at beginning of period

   $ 331,899       $ 305,646   

Acquisitions

     —           71,111   

Reduction due to unexpected early payoffs

     (35,601      (34,747

Reclass from non-accretable difference

     24,489         9,925   

Disposals/transfers

     (509      (5,390

Accretion

     (46,207      (54,664
  

 

 

    

 

 

 

Balance at end of period

   $ 274,071       $ 291,881   
  

 

 

    

 

 

 

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.

 

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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.

Following is a summary of non-performing assets:

 

     September 30,
2015
    December 31,
2014
 

Non-accrual loans

   $ 47,298      $ 45,113   

Troubled debt restructurings

     21,221        23,439   
  

 

 

   

 

 

 

Total non-performing loans

     68,519        68,552   

Other real estate owned (OREO)

     38,931        41,466   
  

 

 

   

 

 

 

Total non-performing assets

   $ 107,450      $ 110,018   
  

 

 

   

 

 

 

Asset quality ratios:

    

Non-performing loans as a percent of total loans and leases

     0.58     0.61

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

     0.90     0.97

Non-performing assets as a percent of total assets

     0.64     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 $4,285 at September 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 September 30, 2015 amounted to $12,786.

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

 

     30-89 Days
Past Due
     > 90 Days
Past Due and
Still Accruing
     Non-Accrual      Total
Past Due
     Current      Total
Loans and
Leases
 

Originated Loans and Leases

                 

September 30, 2015

                 

Commercial real estate

   $ 6,040       $ 3       $ 25,262       $ 31,305       $ 3,291,364       $ 3,322,669   

Commercial and industrial

     3,854         3         9,529         13,386         2,396,800         2,410,186   

Commercial leases

     709         14         835         1,558         197,572         199,130   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans and leases

     10,603         20         35,626         46,249         5,885,736         5,931,985   

Direct installment

     9,874         3,326         4,718         17,918         1,625,427         1,643,345   

Residential mortgages

     11,121         1,334         2,971         15,426         997,828         1,013,254   

Indirect installment

     8,213         522         1,133         9,868         963,348         973,216   

Consumer lines of credit

     3,385         629         988         5,002         998,276         1,003,278   

Other

     134         169         —           303         53,557         53,860   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 43,330       $ 6,000       $ 45,436       $ 94,766       $ 10,524,172       $ 10,618,938   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2014

                 

Commercial real estate

   $ 9,601       $ 313       $ 24,132       $ 34,046       $ 2,997,764       $ 3,031,810   

Commercial and industrial

     2,446         3         8,310         10,759         2,187,034         2,197,793   

Commercial leases

     961         43         722         1,726         176,098         177,824   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans and leases

     13,008         359         33,164         46,531         5,360,896         5,407,427   

Direct installment

     9,333         3,617         7,117         20,067         1,559,703         1,579,770   

Residential mortgages

     8,709         3,891         2,964         15,564         802,022         817,586   

Indirect installment

     7,804         684         1,149         9,637         864,008         873,645   

Consumer lines of credit

     2,408         562         719         3,689         942,738         946,427   

Other

     13         135         —           148         41,142         41,290   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 41,275       $ 9,248       $ 45,113       $ 95,636       $ 9,570,509       $ 9,666,145   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents
     30-89
Days
Past Due
     > 90 Days
Past Due
and Still
Accruing
     Non-Accrual      Total
Past
Due (1) (2)
     Current      Discount     Total
Loans
 

Acquired Loans

                   

September 30, 2015

                   

Commercial real estate

   $ 10,510       $ 11,108       $ 1,303       $ 22,921       $ 641,768       $ (38,112   $ 626,577   

Commercial and industrial

     686         527         107         1,320         87,163         (7,314     81,169   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total commercial loans

     11,196         11,635         1,410         24,241         728,931         (45,426     707,746   

Direct installment

     670         834         —           1,504         46,981         808        49,293   

Residential mortgages

     8,607         15,261         —           23,868         386,425         (37,161     373,132   

Indirect installment

     26         11         —           37         801         (26     812   

Consumer lines of credit

     1,105         810         452         2,367         125,150         (3,793     123,724   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
   $ 21,604       $ 28,551       $ 1,862       $ 52,017       $ 1,288,288       $ (85,598   $ 1,254,707   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

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 September 30, 2015 and December 31, 2014.
(2) Acquired loans are considered performing upon acquisition, regardless of whether the customer is contractually delinquent, as long as the Corporation can reasonably estimate the timing and amount of expected cash flows on such loans. In these instances, 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. Acquired loans are considered non-accrual or non-performing when, due to credit deterioration or other factors, the Corporation determines it is no longer able to reasonably estimate the timing and amount of expected cash flows on such loans. The Corporation does not recognize interest income on acquired loans considered non-accrual or non-performing.

 

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Table of Contents

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

 

Rating
Category
  

Definition

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

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

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

              

September 30, 2015

              

Commercial real estate

   $ 3,195,455       $ 60,727       $ 65,568       $ 919       $ 3,322,669   

Commercial and industrial

     2,259,932         103,650         45,014         1,590         2,410,186   

Commercial leases

     194,783         3,149         1,198         —           199,130   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 5,650,170       $ 167,526       $ 111,780       $ 2,509       $ 5,931,985   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

              

September 30, 2015

              

Commercial real estate

   $ 488,840       $ 49,669       $ 88,068         —         $ 626,577   

Commercial and industrial

     69,036         1,969         10,164         —           81,169   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 557,876       $ 51,638       $ 98,232         —         $ 707,746   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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 September 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.

 

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Table of Contents

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

 

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

September 30, 2015

        

Direct installment

   $ 1,630,566       $ 12,779       $ 1,643,345   

Residential mortgages

     1,000,774         12,480         1,013,254   

Indirect installment

     971,936         1,280         973,216   

Consumer lines of credit

     1,000,929         2,349         1,003,278   

Other

     53,860         —           53,860   

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 Nine Months Ended September 30, 2015

                 

Commercial real estate

   $ 35,733       $ 25,035       $ 2,057       $ 27,092       $ 919       $ 26,928   

Commercial and industrial

     10,981         4,770         5,107         9,877         1,590         9,565   

Commercial leases

     835         835         —           835         —           767   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans and leases

     47,549         30,640         7,164         37,804         2,509         37,260   

Direct installment

     13,569         12,779         —           12,779         —           13,538   

Residential mortgages

     12,971         12,480         —           12,480         —           13,744   

Indirect installment

     3,220         1,280         —           1,280         —           1,168   

Consumer lines of credit

     2,565         2,349         —           2,349         —           2,134   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 79,874       $ 59,528       $ 7,164       $ 66,692       $ 2,509       $ 67,844   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 81,765       $ 66,619       $ 2,831       $ 69,450       $ 1,179       $ 75,367   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

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

These tables do not reflect the additional allowance for credit losses relating to acquired loans in the following pools and categories: commercial real estate of $3,056; commercial and industrial of $579; direct installment of $1,427; residential mortgages of $558; indirect installment of $302; and consumer lines of credit of $642, totaling $6,564 at September 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 originated TDRs:

 

     September 30,
2015
     December 31,
2014
 

Accruing:

     

Performing

   $ 14,692       $ 9,441   

Non-performing

     21,221         23,439   

Non-accrual

     7,800         8,272   
  

 

 

    

 

 

 
   $ 43,713       $ 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 nine months ended September 30, 2015, the Corporation returned to performing status $7,577 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 $438 and $371 at September 30, 2015 and December 31, 2014, respectively, and pooled reserves for individual loans under $500 of $1,146 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 $3,350 and $3,448 at September 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 originated loans, by class, that have been restructured:

 

     Three Months Ended September 30, 2015      Nine Months Ended September 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       $ 168   

Commercial and industrial

     —           —           —           1         5         4   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans

     —           —           —           3         317         172   

Direct installment

     121         1,757         1,726         361         5,064         4,835   

Residential mortgages

     10         232         233         31         1,048         1,074   

Indirect installment

     3         13         10         13         43         40   

Consumer lines of credit

     10         146         143         40         666         610   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     144       $ 2,148       $ 2,112         448       $ 7,138       $ 6,731   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Three Months Ended September 30, 2014      Nine Months Ended September 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

     1       $ 50       $ 48         10       $ 2,633       $ 2,187   

Commercial and industrial

     2         126         119         3         323         307   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans

     3         176         167         13         2,956         2,494   

Direct installment

     116         1,323         1,240         378         4,922         4,693   

Residential mortgages

     9         480         470         33         1,847         1,784   

Indirect installment

     7         18         15         20         52         48   

Consumer lines of credit

     6         88         56         31         899         857   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     141       $ 2,085       $ 1,948         475       $ 10,676       $ 9,876   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Following is a summary of originated 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
September 30, 2015 (1)
     Nine Months Ended
September 30, 2015 (1)
 
     Number of
Contracts
     Recorded
Investment
     Number of
Contracts
     Recorded
Investment
 

Commercial real estate

     —         $ —           —         $ —     

Commercial and industrial

     —           —           1         204   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans

     —           —           1         204   

Direct installment

     22         87         75         254   

Residential mortgages

     2         75         5         179   

Indirect installment

     1         6         6         12   

Consumer lines of credit

     —           —           1         8   
  

 

 

    

 

 

    

 

 

    

 

 

 
     25       $ 168         88       $ 657   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

21


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

Direct installment

     41       $ 356         80       $ 732   

Residential mortgages

     2         33         2         33   

Indirect installment

     3         10         4         11   

Consumer lines of credit

     1         50         1         50   
  

 

 

    

 

 

    

 

 

    

 

 

 
     47       $ 449         87       $ 826   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(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 September 30, 2015

  

        

Commercial real estate

   $ 39,872       $ (1,259   $ 370       $ (889   $ 2,870      $ 41,853   

Commercial and industrial

     32,305         (584     290         (294     3,223        35,234   

Commercial leases

     2,223         (124     50         (74     265        2,414   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total commercial loans and leases

     74,400         (1,967     710         (1,257     6,358        79,501   

Direct installment

     22,279         (2,722     565         (2,157     1,214        21,336   

Residential mortgages

     8,579         (268     14         (254     341        8,666   

Indirect installment

     8,909         (1,650     264         (1,386     2,090        9,613   

Consumer lines of credit

     9,118         (472     56         (416     871        9,573   

Other

     911         (402     8         (394     413        930   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total allowance on originated loans

and leases

     124,196         (7,481     1,617         (5,864     11,287        129,619   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Purchased credit-impaired loans

     658         —          —           —          36        695   

Other acquired loans

     6,287         (153     282         129        (546     5,869   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total allowance on acquired loans

     6,945         (153     282         129        (510     6,564   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total allowance

   $ 131,141       $ (7,634   $ 1,899       $ (5,735   $ 10,777      $ 136,183   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Nine Months Ended September 30, 2015

              

Commercial real estate

   $ 37,588       $ (3,237   $ 779       $ (2,458   $ 6,723      $ 41,853   

Commercial and industrial

     32,645         (2,684     1,386         (1,298     3,887        35,234   

Commercial leases

     2,398         (328     95         (233     249        2,414   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total commercial loans and leases

     72,631         (6,249     2,260         (3,989     10,859        79,501   

Direct installment

     20,538         (8,108     1,131         (6,977     7,775        21,336   

Residential mortgages

     8,024         (891     53         (838     1,480        8,666   

Indirect installment

     7,504         (4,433     898         (3,535     5,644        9,613   

Consumer lines of credit

     8,496         (1,205     132         (1,073     2,150        9,573   

Other

     759         (1,062     44         (1,018     1,189        930   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total allowance on originated loans and leases

     117,952         (21,948     4,518         (17,430     29,097        129,619   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Purchased credit-impaired loans

     660         (64     19         (45     80        695   

Other acquired loans

     7,314         (698     653         (45     (1,400     5,869   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total allowance on acquired loans

     7,974         (762     672         (90     (1,320     6,564   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total allowance

   $ 125,926       $ (22,710   $ 5,190       $ (17,520   $ 27,777      $ 136,183   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

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 September 30, 2014

  

       

Commercial real estate

   $ 38,478       $ (1,724   $ 506      $ (1,218   $ (80   $ 37,180   

Commercial and industrial

     33,017         (1,796     192        (1,604     2,883        34,296   

Commercial leases

     2,079         (167     11        (156     282        2,205   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial loans and leases

     73,574         (3,687     709        (2,978     3,085        73,681   

Direct installment

     16,844         (2,369     271        (2,098     4,814        19,560   

Residential mortgages

     5,506         (87     13        (74     1,218        6,650   

Indirect installment

     6,693         (898     211        (687     364        6,370   

Consumer lines of credit

     7,664         (360     50        (310     587        7,941   

Other

     907         (341     9        (332     (208     367   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total allowance on originated loans and leases

     111,188         (7,742     1,263        (6,479     9,860        114,569   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Purchased credit-impaired loans

     448         (712     1        (711     1,026        763   

Other acquired loans

     5,112         (113     (41     (154     311        5,269   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total allowance on acquired loans

     5,560         (825     (40     (865     1,337        6,032   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total allowance

   $ 116,748       $ (8,567   $ 1,223      $ (7,344   $ 11,197      $ 120,601   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Nine Months Ended September 30, 2014

             

Commercial real estate

   $ 32,548       $ (5,519   $ 1,068      $ (4,451   $ 9,083      $ 37,180   

Commercial and industrial

     32,603         (2,849     730        (2,119     3,812        34,296   

Commercial leases

     1,903         (317     93        (224     526        2,205   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial loans and leases

     67,054         (8,685     1,891        (6,794     13,421        73,681   

Direct installment

     17,824         (7,154     821        (6,333     8,069        19,560   

Residential mortgages

     5,836         (356     61        (295     1,109        6,650   

Indirect installment

     6,409         (2,396     658        (1,738     1,699        6,370   

Consumer lines of credit

     7,231         (1,023     143        (880     1,590        7,941   

Other

     530         (910     19        (891     728        367   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total allowance on originated loans and leases

     104,884         (20,524     3,593        (16,931     26,616        114,569   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Purchased credit-impaired loans

     1,000         (2,614     1        (2,613     2,376        763   

Other acquired loans

     4,900         (230     983        753        (384     5,269   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total allowance on acquired loans

     5,900         (2,844     984        (1,860     1,992        6,032   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total allowance

   $ 110,784       $ (23,368   $ 4,577      $ (18,791   $ 28,608      $ 120,601   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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
 

September 30, 2015

              

Commercial real estate

   $ 919       $ 40,934       $ 3,322,669       $ 14,182       $ 3,308,487   

Commercial and industrial

     1,590         33,644         2,410,186         6,186         2,404,000   

Commercial leases

     —           2,414         199,130         —           199,130   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans and leases

     2,509         76,992         5,931,985         20,368         5,911,617   

Direct installment

     —           21,336         1,643,345         —           1,643,345   

Residential mortgages

     —           8,666         1,013,254         —           1,013,254   

Indirect installment

     —           9,613         973,216         —           973,216   

Consumer lines of credit

     —           9,573         1,003,278         —           1,003,278   

Other

     —           930         53,860         —           53,860   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 2,509       $ 127,110       $ 10,618,938       $ 20,368       $ 10,598,570   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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:

 

     September 30,
2015
     December 31,
2014
 

Securities sold under repurchase agreements

   $ 256,320       $ 882,696   

Federal Home Loan Bank advances

     450,000         820,000   

Federal funds purchased

     456,000         210,000   

Subordinated notes

     124,982         128,962   
  

 

 

    

 

 

 
   $ 1,287,302       $ 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:

 

     September 30,
2015
     December 31,
2014
 

Federal Home Loan Bank advances

   $ 400,017       $ 400,042   

Subordinated notes

     84,351         83,155   

Junior subordinated debt

     58,285         58,246   
  

 

 

    

 

 

 
   $ 542,653       $ 541,443   
  

 

 

    

 

 

 

The Corporation’s banking affiliate has available credit with the FHLB of $4,467,170 of which $850,017 was used as of September 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 nine months ended September 30, 2015 and the year ended December 31, 2014.

The Corporation had two unconsolidated subsidiary trusts as of September 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 September 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 September 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         1.99   Variable; 3-month LIBOR + 165 basis points (bps)

Omega Financial Capital Trust I

     36,000         1,114         36,120         10/18/34         2.48   Variable; 3-month LIBOR + 219 bps
  

 

 

    

 

 

    

 

 

         
   $ 57,500       $ 1,779       $ 58,285           
  

 

 

    

 

 

    

 

 

         

DERIVATIVE AND HEDGING ACTIVITIES

The Corporation is exposed to certain risks arising from both its business operations and economic conditions. The Corporation principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Corporation manages economic risks, including interest rate risk, primarily by managing the amount, source, and duration of its assets and liabilities, and through the use of derivative instruments. Derivative instruments are used to reduce the effects that changes in interest rates may have on net income and cash flows. The Corporation also uses derivative instruments to facilitate transactions on behalf of its customers.

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

 

26


Table of Contents

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

 

     September 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

   $ 250,000       $ 4,918       $ 855       $ 200,000       $ 2,109       $ 2,330   

Interest rate swaps – not designated

     1,193,598         1         61,753         972,002         140         43,655   

Equity contracts – not designated

     1,180         12         —           1,210         47         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total subject to master netting arrangements

     1,444,778         4,931         62,608         1,173,212         2,296         45,985   

Not subject to master netting arrangements:

                 

Interest rate swaps – not designated

     1,193,598         61,348         1         972,002         43,602         128   

Credit risk contracts – not designated

     111,976         14         185         68,632         —           —     

Equity contracts – not designated

     1,180         —           12         1,210         —           47   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total not subject to master netting arrangements

     1,306,754         61,362         198         1,041,844         43,602         175   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 2,751,532       $ 66,293       $ 62,806       $ 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 certain commercial loans and one of its FHLB advances 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 September 30, 2015 and December 31, 2014, the notional amount of these interest rate derivative agreements totaled $250,000 and $200,000, respectively. Fair values included in other assets and other liabilities on the consolidated balance sheet applicable to these agreements amounted to $4,918 and $855, respectively, at September 30, 2015, and $2,109 and $2,330, respectively, at December 31, 2014. For the nine months ended September 30, 2015, the amount reclassified from accumulated other comprehensive income (AOCI) to interest income and interest expense totaled $2,440 ($1,586 net of tax) and $115 ($75 net of tax), respectively.

As of September 30, 2015, the maximum length of time over which forecasted interest cash flows are hedged is eight years. In the twelve months that follow September 30, 2015, the Corporation expects to reclassify from the amount currently reported in AOCI net derivative gains of $2,219 ($1,443 net of tax), in association with interest on the hedged loans and FHLB advance. 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 September 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 nine months ended September 30, 2015 and 2014, there was no hedge ineffectiveness. Also, during the nine months ended September 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.

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.

 

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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 $1,193,598 at September 30, 2015. Fair values included in other assets and other liabilities on the consolidated balance sheet applicable to these agreements amounted to $61,349 and $61,754, respectively, at September 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 as of September 30, 2015 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 $185 at September 30, 2015 and $25 at December 31, 2014.

The fair values of risk participation agreements purchased and sold were not material at September 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 $1,816 and $1,862 as of September 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
 

September 30, 2015

        

Derivative Assets

        

Subject to master netting arrangements:

        

Interest rate contracts

        

Designated

   $ 4,918         —         $ 4,918   

Not designated

     1         —           1   

Equity contracts – not designated

     12         —           12   

Not subject to master netting arrangements:

        

Interest rate contracts – not designated

     61,348         —           61,348   

Credit contracts – not designated

     14         —           14   
  

 

 

    

 

 

    

 

 

 
   $ 66,293         —         $ 66,293   
  

 

 

    

 

 

    

 

 

 

Derivative Liabilities

        

Subject to master netting arrangements:

        

Interest rate contracts

        

Designated

   $ 855         —         $ 855   

Not designated

     61,753         —           61,753   

Not subject to master netting arrangements:

        

Interest rate contracts – not designated

     1         —           1   

Credit contracts – not designated

     185         —           185   

Equity contracts – not designated

     12         —           12   
  

 

 

    

 

 

    

 

 

 
   $ 62,806         —         $ 62,806   
  

 

 

    

 

 

    

 

 

 

December 31, 2014

        

Derivative Assets

        

Subject to master netting arrangements:

        

Interest rate contracts

        

Designated

   $ 2,109         —         $ 2,109   

Not designated

     140         —           140   

Equity contracts – not designated

     47         —           47   

Not subject to master netting arrangements:

        

Interest rate contracts – not designated

     43,602         —           43,602   
  

 

 

    

 

 

    

 

 

 
   $ 45,898         —         $ 45,898   
  

 

 

    

 

 

    

 

 

 

Derivative Liabilities

        

Subject to master netting arrangements:

        

Interest rate contracts

        

Designated

   $ 2,330         —         $ 2,330   

Not designated

     43,655         —           43,655   

Not subject to master netting arrangements:

        

Interest rate contracts – not designated

     128         —           128   

Equity contracts – not designated

     47         —           47   
  

 

 

    

 

 

    

 

 

 
   $ 46,160         —         $ 46,160   
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents

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

 

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

September 30, 2015

           

Derivative Assets

           

Interest rate contracts:

           

Designated

   $ 4,918       $ 2,557       $ 2,361         —     

Not designated

     1         1         —           —     

Equity contracts – not designated

     12         12         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 4,931       $ 2,570       $ 2,361         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Derivative Liabilities

           

Interest rate contracts:

           

Designated

   $ 855       $ —         $ —         $ 855   

Not designated

     61,753         31,827         28,290         1,636   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 62,608       $ 31,827       $ 28,290       $ 2,491   
  

 

 

    

 

 

    

 

 

    

 

 

 

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    Nine Months Ended  
     Statement    September 30,  
    

Location

   2015      2014  

Interest Rate Contracts

   Interest income - loans and leases    $ 2,440       $ 2,479   

Interest Rate Contracts

   Interest expense – short-term borrowings      115         —     

Interest Rate Swaps

   Other income      (364      (9

Credit Risk Contracts

   Other income      (170      —     

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 September 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:

 

     September 30,
2015
     December 31,
2014
 

Commitments to extend credit

   $ 3,527,479       $ 3,665,481   

Standby letters of credit

     97,875         121,186   

At September 30, 2015, funding of 75.3% 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.

In addition, debt issued by FNB Financial Services, LP, a wholly-owned finance subsidiary, is fully and unconditionally guaranteed by the Corporation.

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 nine months ended September 30, 2015 and 2014, the Corporation issued 402,947 and 364,065 restricted stock awards, respectively, with aggregated grant date fair values of $5,302 and $4,954 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.

 

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Table of Contents

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 September 30, 2015, the Corporation had available up to 2,072,110 shares of common stock to issue under the Plans.

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 $3,287 and $2,294 for the nine months ended September 30, 2015 and 2014, the tax benefit of which was $1,150 and $803, respectively.

The following table summarizes certain information concerning restricted stock awards:

 

     Nine Months Ended September 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

     402,947         13.16         364,065         13.61   

Net adjustment due to performance

     8,884         22.73         (87,512      11.41   

Vested

     (471,997      10.66         (703,428      8.79   

Forfeited

     (29,428      13.46         (50,849      11.47   

Dividend reinvestment

     30,551         11.32         34,521         12.73   
  

 

 

       

 

 

    

Unvested awards outstanding at end of period

     1,295,050         12.73         1,285,830         11.90   
  

 

 

       

 

 

    

The total fair value of awards vested was $5,912 and $10,670 for the nine months ended September 30, 2015 and 2014, respectively.

As of September 30, 2015, there was $6,993 of unrecognized compensation cost related to unvested restricted stock awards, including $70 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 September 30, 2015 are as follows:

 

     Service-
Based

Awards
     Performance-
Based
Awards
     Total  

Unvested awards

     648,154         646,896         1,295,050   

Unrecognized compensation expense

   $ 4,458       $ 2,535       $ 6,993   

Intrinsic value

   $ 8,394       $ 8,377       $ 16,771   

Weighted average remaining life (in years)

     2.11         1.99         2.05   

Stock Options

All outstanding stock options were assumed in connection with certain of the Corporation’s completed acquisitions and are fully vested. Upon consummation of those 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 88,899 and 99,284 for the nine months ended September 30, 2015 and 2014, respectively.

 

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Table of Contents

The following table summarizes certain information concerning stock option awards:

 

     Nine Months Ended September 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

     —           —           805,507         7.39   

Exercised

     (88,899      5.61         (140,817      6.21   

Forfeited

     (2,182      4.34         (54,962      24.41   
  

 

 

       

 

 

    

Options outstanding and exercisable at end of period

     477,753         9.48         1,143,252         8.64   
  

 

 

       

 

 

    

The intrinsic value of outstanding and exercisable stock options at September 30, 2015 was $1,522.

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, was sold at auction by the UST and 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 374,221, with a resulting lower exercise price of $3.27 per share as of September 30, 2015. The warrant, which was recorded at its fair value on April 6, 2013, was sold at auction by the UST and 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 automatic contributions to the qualified 401(k) defined contribution plan and the ERISA Excess Lost Match Plan. The BRP was frozen as of December 31, 2008. The ERISA Excess Retirement Plan was frozen as of December 31, 2010.

 

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

 

     Three Months Ended      Nine Months Ended  
     September 30,      September 30,  
     2015      2014      2015      2014  

Service cost

   $ 18       $ 15       $ 52       $ 47   

Interest cost

     1,470         1,610         4,424         4,802   

Expected return on plan assets

     (2,491      (2,486      (7,473      (7,460

Amortization:

           

Unrecognized net transition asset

     —           (6      —           (16

Unrecognized prior service cost

     2         2         6         6   

Unrecognized loss

     518         347         1,590         1,021   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic pension credit

   $ (483    $ (518    $ (1,401    $ (1,600
  

 

 

    

 

 

    

 

 

    

 

 

 

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 $5,794 and $7,595 for the nine months ended September 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 September 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 September 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      Nine Months Ended  
     September 30,      September 30,  
     2015      2014      2015      2014  

Net income

   $ 40,053       $ 35,391       $ 120,527       $ 104,746   

Other comprehensive income (loss):

           

Securities available for sale:

           

Unrealized gains (losses) arising during the period, net of tax expense (benefit) of $3,649, $(1,551), $4,302 and $10,399

     6,777         (2,881      7,989         19,312   

Reclassification adjustment for gains included in net income, net of tax expense of $110, $412, $112 and $3,995

     (204      (766      (207      (7,420

Derivative instruments:

           

Unrealized gains arising during the period, net of tax expense of $1,709, $40, $2,353 and $2,979

     3,174         74         4,370         5,532   

Reclassification adjustment for gains included in net income, net of tax expense of $286, $293, $854 and $867

     (531      (543      (1,586      (1,610

Pension and postretirement benefit obligations:

           

Unrealized gains arising during the period, net of tax expense of $183, $121, $560 and $355

     340         224         1,040         659   
  

 

 

    

 

 

    

 

 

    

 

 

 

Other comprehensive income (loss)

     9,556         (3,892      11,606         16,473   
  

 

 

    

 

 

    

 

 

    

 

 

 

Comprehensive income

   $ 49,609       $ 31,499       $ 132,133       $ 121,219   
  

 

 

    

 

 

    

 

 

    

 

 

 

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  

Nine Months Ended September 30, 2015

           

Balance at beginning of period

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

Other comprehensive income before reclassifications

     7,989         4,370         1,040         13,399   

Amounts reclassified from AOCI

     (207      (1,586      —           (1,793
  

 

 

    

 

 

    

 

 

    

 

 

 

Net current period other comprehensive income

     7,782         2,784         1,040         11,606   
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance at end of period

   $ 7,342       $ 2,641       $ (44,380    $ (34,397
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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EARNINGS PER COMMON SHARE

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

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

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

 

     Three Months Ended      Nine Months Ended  
     September 30,      September 30,  
     2015      2014      2015      2014  

Net income

   $ 40,053       $ 35,391       $ 120,527       $ 104,746   

Less: Preferred stock dividends

     2,010         2,010         6,030         6,342   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income available to common stockholders

   $ 38,043       $ 33,381       $ 114,497       $ 98,404   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic weighted average common shares outstanding

     175,343,789         167,260,386         174,816,692         165,229,206   

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

     1,169,043         1,623,741         1,383,450         1,695,637   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted weighted average common shares outstanding

     176,512,832         168,884,127         176,200,142         166,924,843   
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per common share:

           

Basic

   $ 0.22       $ 0.20       $ 0.65       $ 0.60   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted

   $ 0.22       $ 0.20       $ 0.65       $ 0.59   
  

 

 

    

 

 

    

 

 

    

 

 

 

For the three months ended September 30, 2015 and 2014, 19,385 and 32,419 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 nine months ended September 30, 2015 and 2014, 20,440 and 38,151 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:

 

Nine Months Ended September 30    2015      2014  

Interest paid on deposits and other borrowings

   $ 35,531       $ 31,804   

Income taxes paid

     41,000         17,000   

Transfers of loans to other real estate owned

     6,901         7,784   

Financing of other real estate owned sold

     372         287   

 

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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 September 30, 2015

                

Interest income

   $ 125,281       $ —         $ 22       $ 10,096       $ 1,798      $ 137,197   

Interest expense

     10,473         —           —           878         645        11,996   

Net interest income

     114,808         —           22         9,218         1,153        125,201   

Provision for credit losses

     8,702         —           —           1,750         325        10,777   

Non-interest income

     29,667         8,682         3,602         716         (1,308     41,359   

Non-interest expense

     80,906         6,703         3,201         4,983         322        96,115   

Intangible amortization

     1,824         69         141         —           —          2,034   

Income tax expense (benefit)

     15,804         696         105         1,473         (497     17,581   

Net income (loss)

     37,239         1,214         177         1,728         (305     40,053   

Total assets

     16,658,489         21,099         22,201         187,721         (53,437     16,836,073   

Total intangibles

     855,164         10,516         13,069         1,809         —          880,558   

At or for the Three Months Ended September 30, 2014

                

Interest income

   $ 120,122       $ —         $ 24       $ 9,773       $ 1,647      $ 131,566   

Interest expense

     9,435         —           —           826         686        10,947   

Net interest income

     110,687         —           24         8,947         961        120,619   

Provision for credit losses

     9,427         —           —           1,519         251        11,197   

Non-interest income

     27,179         8,174         3,373         719         (1,893     37,552   

Non-interest expense

     79,243         6,294         2,943         4,983         (71     93,392   

Intangible amortization

     2,282         72         101         —           —          2,455   

Income tax expense (benefit)

     14,347         656         128         1,216         (611     15,736   

Net income (loss)

     32,567         1,152         225         1,948         (501     35,391   

Total assets

     15,584,832         21,892         19,148         182,301         (51,128     15,757,045   

Total intangibles

     856,464         10,792         10,223         1,809         —          879,288   

 

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Table of Contents
     Community
Banking
     Wealth
Management
     Insurance     Consumer
Finance
     Parent and
Other
    Consolidated  

At or for the Nine Months Ended September 30, 2015

               

Interest income

   $ 371,366       $ —         $ 67      $ 29,467       $ 5,114      $ 406,014   

Interest expense

     30,580         —           —          2,593         1,952        35,125   

Net interest income

     340,786         —