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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended September 30, 2016

 

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)

 

 

 

Pennsylvania   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  ☒    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  ☒    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      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  ☒

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, 2016

Common Stock, $0.01 Par Value   210,454,950 Shares

 

 

 


Table of Contents

F.N.B. CORPORATION

FORM 10-Q

September 30, 2016

INDEX

 

     PAGE  

PART I – FINANCIAL INFORMATION

  
Item 1.  

Financial Statements

  
 

Consolidated Balance Sheets

     3   
 

Consolidated Statements of Comprehensive Income

     4   
 

Consolidated Statements of Stockholders’ Equity

     5   
 

Consolidated Statements of Cash Flows

     6   
 

Notes to Consolidated Financial Statements

     7   
Item 2.  

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

     53   
Item 3.  

Quantitative and Qualitative Disclosures About Market Risk

     79   
Item 4.  

Controls and Procedures

     80   
PART II – OTHER INFORMATION   
Item 1.  

Legal Proceedings

     80   
Item 1A.  

Risk Factors

     80   
Item 2.  

Unregistered Sales of Equity Securities and Use of Proceeds

     82   
Item 3.  

Defaults Upon Senior Securities

     82   
Item 4.  

Mine Safety Disclosures

     82   
Item 5.  

Other Information

     82   
Item 6.  

Exhibits

     83   

Signatures

     84   

 

2


Table of Contents

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

F.N.B. CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

In thousands, except share and per share data

 

     September 30,     December 31,  
     2016     2015  
     (Unaudited)        

Assets

    

Cash and due from banks

   $ 326,599      $ 207,399   

Interest bearing deposits with banks

     118,651        281,720   
  

 

 

   

 

 

 

Cash and Cash Equivalents

     445,250        489,119   

Securities available for sale

     2,077,616        1,630,567   

Securities held to maturity (fair value of $2,278,755 and $1,643,416)

     2,249,245        1,637,061   

Residential mortgage loans held for sale

     17,862        4,781   

Loans and leases, net of unearned income of $53,800 and $51,642

     14,773,446        12,190,440   

Allowance for credit losses

     (156,894     (142,012
  

 

 

   

 

 

 

Net Loans and Leases

     14,616,552        12,048,428   

Premises and equipment, net

     228,622        159,080   

Goodwill

     1,022,006        833,086   

Core deposit and other intangible assets, net

     81,646        45,644   

Bank owned life insurance

     327,874        308,192   

Other assets

     517,241        401,704   
  

 

 

   

 

 

 

Total Assets

   $ 21,583,914      $ 17,557,662   
  

 

 

   

 

 

 

Liabilities

    

Deposits:

    

Non-interest bearing demand

   $ 4,082,145      $ 3,059,949   

Interest bearing demand

     7,032,744        5,311,589   

Savings

     2,299,408        1,786,459   

Certificates and other time deposits

     2,562,587        2,465,466   
  

 

 

   

 

 

 

Total Deposits

     15,976,884        12,623,463   

Short-term borrowings

     2,236,105        2,048,896   

Long-term borrowings

     587,500        641,480   

Other liabilities

     212,845        147,641   
  

 

 

   

 

 

 

Total Liabilities

     19,013,334        15,461,480   

Stockholders’ Equity

    

Preferred stock—$0.01 par value; liquidation preference of $1,000 per share

    

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 – 211,540,856 and 176,595,060 shares

     2,117        1,766   

Additional paid-in capital

     2,223,530        1,808,210   

Retained earnings

     280,654        243,217   

Accumulated other comprehensive loss

     (27,853     (51,133

Treasury stock – 1,316,662 and 1,153,390 shares at cost

     (14,750     (12,760
  

 

 

   

 

 

 

Total Stockholders’ Equity

     2,570,580        2,096,182   
  

 

 

   

 

 

 

Total Liabilities and Stockholders’ Equity

   $ 21,583,914      $ 17,557,662   
  

 

 

   

 

 

 

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      Nine Months Ended  
     September 30,      September 30,  
     2016      2015      2016      2015  

Interest Income

           

Loans and leases, including fees

   $ 154,272       $ 120,875       $ 442,113       $ 358,074   

Securities:

           

Taxable

     18,432         14,576         52,901         43,257   

Nontaxable

     2,254         1,707         6,401         4,564   

Dividends

     9         9         23         29   

Other

     143         30         357         90   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Interest Income

     175,110         137,197         501,795         406,014   

Interest Expense

           

Deposits

     10,477         7,948         30,387         23,033   

Short-term borrowings

     3,607         1,786         8,527         5,348   

Long-term borrowings

     3,520         2,262         10,652         6,744   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Interest Expense

     17,604         11,996         49,566         35,125   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Interest Income

     157,506         125,201         452,229         370,889   

Provision for credit losses

     14,639         10,777         43,047         27,777   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Interest Income After Provision for Credit Losses

     142,867         114,424         409,182         343,112   

Non-Interest Income

           

Service charges

     25,756         18,628         73,428         51,959   

Trust fees

     5,268         5,210         15,955         15,803   

Insurance commissions and fees

     4,866         4,423         13,892         12,351   

Securities commissions and fees

     3,404         3,304         10,400         9,958   

Net securities gains

     299         314         596         319   

Mortgage banking operations

     3,564         2,424         7,912         6,739   

Bank owned life insurance

     3,315         1,846         7,936         5,527   

Other

     6,768         5,210         20,576         16,637   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Non-Interest Income

     53,240         41,359         150,695         119,293   

Non-Interest Expense

           

Salaries and employee benefits

     60,927         51,859         178,681         151,559   

Net occupancy

     10,333         7,957         29,792         25,405   

Equipment

     10,034         8,237         28,604         23,583   

Amortization of intangibles

     3,571         2,034         9,608         6,148   

Outside services

     11,756         7,314         30,884         25,254   

FDIC insurance

     5,274         3,158         14,345         9,630   

Merger and acquisition related

     299         1,312         35,790         1,683   

Other

     18,856         16,278         59,623         46,041   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Non-Interest Expense

     121,050         98,149         387,327         289,303   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income Before Income Taxes

     75,057         57,634         172,550         173,102   

Income taxes

     22,889         17,581         52,950         52,575   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Income

     52,168         40,053         119,600         120,527   

Less: Preferred stock dividends

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

 

 

    

 

 

    

 

 

    

 

 

 

Net Income Available to Common Stockholders

   $ 50,158       $ 38,043       $ 113,570       $ 114,497   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Income per Common Share – Basic

   $ 0.24       $ 0.22       $ 0.55       $ 0.65   

Net Income per Common Share – Diluted

     0.24         0.22         0.55         0.65   

Cash Dividends per Common Share

     0.12         0.12         0.36         0.36   

Comprehensive Income

   $ 49,774       $ 49,609       $ 142,880       $ 132,133   
  

 

 

    

 

 

    

 

 

    

 

 

 

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, 2016

   $ 106,882       $ 1,766       $ 1,808,210       $ 243,217      $ (51,133   $ (12,760   $ 2,096,182   

Comprehensive income

              119,600        23,280          142,880   

Dividends declared:

                 

Preferred stock

              (6,030         (6,030

Common stock: $0.36/share

              (76,133         (76,133

Issuance of common stock

        10         6,694             (1,990     4,714   

Issuance of common stock—acquisitions

        341         403,690               404,031   

Restricted stock compensation

           4,644               4,644   

Tax benefit of stock-based compensation

           292               292   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2016

   $ 106,882       $ 2,117       $ 2,223,530       $ 280,654      $ (27,853   $ (14,750   $ 2,570,580   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

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   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

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,  
     2016     2015  

Operating Activities

    

Net income

   $ 119,600      $ 120,527   

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

    

Depreciation, amortization and accretion

     45,059        31,412   

Provision for credit losses

     43,047        27,777   

Deferred tax expense

     10,390        3,874   

Net securities gains

     (596     (319

Tax benefit of stock-based compensation

     (292     (5

Loans originated for sale

     (484,437     (336,776

Loans sold

     482,161        346,174   

Gain on sale of loans

     (10,806     (6,794

Net change in:

    

Interest receivable

     (1,372     (4,457

Interest payable

     945        (414

Bank owned life insurance

     (3,103     (4,266

Other, net

     (10,708     8,144   
  

 

 

   

 

 

 

Net cash flows provided by operating activities

     189,888        184,877   
  

 

 

   

 

 

 

Investing Activities

    

Net change in loans and leases

     (666,413     (657,586

Securities available for sale:

    

Purchases

     (753,544     (279,636

Sales

     615,199        33,499   

Maturities

     437,406        212,140   

Securities held to maturity:

    

Purchases

     (875,597     (279,998

Maturities

     259,202        203,689   

Purchase of bank owned life insurance

     (16,579     (72,688

Withdrawal/surrender of bank owned life insurance

     —          72,664   

Increase in premises and equipment

     (37,074     (7,304

Net cash received in business combinations

     245,762        148,159   
  

 

 

   

 

 

 

Net cash flows used in investing activities

     (791,638     (627,061
  

 

 

   

 

 

 

Financing Activities

    

Net change in:

    

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

     858,937        1,304,345   

Time deposits

     (134,234     (78,764

Short-term borrowings

     (15,192     (754,356

Increase in long-term borrowings

     39,888        20,976   

Decrease in long-term borrowings

     (119,005     (19,804

Net proceeds from issuance of common stock

     9,358        10,515   

Tax benefit of stock-based compensation

     292        5   

Cash dividends paid:

    

Preferred stock

     (6,030     (6,030

Common stock

     (76,133     (63,330
  

 

 

   

 

 

 

Net cash flows provided by financing activities

     557,881        413,557   
  

 

 

   

 

 

 

Net Decrease in Cash and Cash Equivalents

     (43,869     (28,627

Cash and cash equivalents at beginning of period

     489,119        287,393   
  

 

 

   

 

 

 

Cash and Cash Equivalents at End of Period

   $ 445,250      $ 258,766   
  

 

 

   

 

 

 

See accompanying Notes to Consolidated Financial Statements

 

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Table of Contents

F.N.B. CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

September 30, 2016

NATURE OF OPERATIONS

F.N.B. Corporation (FNB or 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, 2016, the Corporation had 331 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 fiduciary and brokerage services, asset management, private banking and insurance. The Corporation also operates Regency Finance Company (Regency), which had 77 consumer finance offices in Pennsylvania, Ohio, Kentucky and Tennessee as of September 30, 2016.    

Redomestication

The Corporation completed its redomestication from the State of Florida to the Commonwealth of Pennsylvania on August 30, 2016. The redomestication was effected pursuant to a plan of conversion approved by the Board of Directors and shareholders of the Corporation. As a result of the redomestication, the Corporation is organized under and subject to Pennsylvania law, and remains the same entity that existed before the redomestication, with the same legal existence without interruption, and is deemed to have commenced its existence as the time the Corporation was incorporated under Florida law in 2001. The Corporation was originally incorporated in 1974 in Pennsylvania and reincorporated in Florida in 2001 after experiencing substantial growth of its business and operations in Florida in prior years. In 2004, the Corporation spun off its Florida operations in a newly formed public company and refocused on growing its markets in Pennsylvania. Since that time, the majority of the Corporation’s assets, operations and employees have been located in Pennsylvania. Since closing its Florida commercial loan office in 2013 (which had been maintained solely to manage a small portfolio of Florida commercial real estate loans originated from 2004 to 2009), the Corporation has no assets, operations or employees in Florida.

The redomestication did not cause any change in the business, physical location, management, assets, debts or liabilities of the Corporation. All individuals who served as directors, officers and employees of the Corporation prior to the redomestication continued to serve in those capacities after the redomestication. Except for the change in the state law governing the Corporation’s legal existence, the redomestication did not affect the Corporation’s common stock or depositary shares or the trading of those securities on the New York Stock Exchange (NYSE) under the symbols “FNB” and “FNBPrE,” respectively.

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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 September 30, 2016 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).

 

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Table of Contents

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 26, 2016.

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, fair value measurements and income taxes.

Business Combinations

Business combinations are accounted for by applying the acquisition method in accordance with Accounting Standards Codification (ASC) 805, Business Combinations. Under the acquisition method, identifiable assets acquired and liabilities assumed, and any non-controlling interest in the acquiree at the acquisition date are measured at their fair values as of that date, and are recognized separately from goodwill. Results of operations of the acquired entities are included in the consolidated statements of comprehensive income from the date of acquisition. Beginning in 2016, measurement-period adjustments are recorded in the period the adjustment is identified. Prior to this time, measurement-period adjustments were recorded retrospectively.

Cloud Computing Arrangements

Beginning in 2016, for new or materially modified contracts, the Corporation prospectively adopted new accounting principles to evaluate fees paid for cloud computing arrangements to determine if those arrangements include the purchase of or license to software that should be accounted for separately as internal-use software. If a contract includes the purchase or license to software that should be accounted for separately as internal-use software, the contract is amortized over the software’s identified useful life in amortization of intangibles. For contracts that do not include a software license, the contract is accounted for as a service contract with fees paid recorded in other non-interest expense.

Stock Based Compensation

The Corporation accounts for its stock based compensation awards in accordance with ASC 718, Compensation—Stock Compensation, which requires the measurement and recognition of compensation expense, based on estimated fair values, for all stock-based awards, including stock options and restricted stock, made to employees and directors.    

ASC 718 requires companies to estimate the fair value of stock-based awards on the date of grant. The value of the portion of the award that is ultimately expected to vest is recognized as expense in the Corporation’s consolidated statements of comprehensive income over the shorter of requisite service periods or the period through the date that the employee first becomes eligible to retire. Some of the Corporation’s plans contain performance targets that affect vesting and can be achieved after the requisite service period and are accounted for as performance conditions. Beginning in 2016, the performance target is not reflected in the estimation of the award’s grant date fair value and compensation cost is recognized in the period in which it becomes probable that the performance condition will be achieved.

Because stock-based compensation expense is based on awards that are ultimately expected to vest, stock-based compensation expense has been reduced to account for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

 

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Table of Contents

Variable Interest Entities

The Corporation has investments in certain partnerships and limited liability entities that qualify as variable interest entities (VIEs). These entities are evaluated on an on-going basis to determine whether they should be consolidated. Consolidation of a VIE is appropriate if a reporting entity holds a controlling financial interest in the VIE. The Corporation has determined that it does not hold a controlling financial interest in any of the VIEs and, therefore, the assets and liabilities of these entities are not consolidated into its financial statements. Instead, investments in these entities are accounted for under the equity method of accounting and are evaluated periodically for impairment. The recorded investment in these entities is reported in other assets on the consolidated balance sheets.

2. NEW ACCOUNTING STANDARDS

The following paragraphs summarize accounting pronouncements applicable to the Corporation that have been issued by the Financial Accounting Standards Board (FASB) but are not yet effective.

Statement of Cash Flows

Accounting Standards Update (ASU or Update) 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force), adds or clarifies guidance on eight cash flow issues. The Update is effective the first quarter of 2018. Early application is permitted. The Corporation is currently assessing the potential impact to its Consolidated Financial Statements.

Credit Losses

ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, commonly referred to as “CECL,” replaces the current incurred loss impairment methodology with a methodology that reflects expected credit losses for most financial assets measured at amortized cost and certain other instruments, including loans, held-to-maturity debt securities, net investments in leases and off-balance sheet credit exposures. In addition, the Update will require the use of a modified available-for-sale debt security impairment model and eliminate the current accounting for purchased credit impaired loans and debt securities. The Update is effective the first quarter of 2020. Early application is permitted. The Corporation is currently assessing the potential impact to its Consolidated Financial Statements.

Revenue Recognition

ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, addresses certain issues in the guidance on assessing collectability, presentation of sales taxes, noncash consideration, and completed contracts and contract modifications at transition.

ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, clarifies several aspects of identifying performance obligations and licensing implementation guidance including guidance that is expected to reduce the cost and complexity by eliminating the need to assess whether goods and services are performance obligations if they are immaterial in the context of the contract with the customer.

ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), clarifies the guidance on principal versus agent considerations when another party is involved in providing goods and services to a customer. The guidance requires a company to determine whether it is required to provide the specific good or service itself or to arrange for that good or service to be provided by another party.

ASU 2014-09, Revenue from Contracts with Customers (Topic 606), modifies the guidance used to recognize revenue from contracts with customers for transfers of goods and services and transfers of nonfinancial assets, unless those contracts are within the scope of other guidance. The guidance also requires new qualitative and quantitative disclosures about contract balances and performance obligations. The Update can be adopted using either the full retrospective method or modified retrospective method. The Corporation intends to use the modified retrospective approach when adopted.

The guidance for these Revenue Recognition Updates is effective for annual periods beginning in the first quarter of 2018. Early application is permitted beginning in the first quarter of 2017. The Corporation is currently assessing the potential impact to its Consolidated Financial Statements.

 

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Stock Based Compensation

ASU 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. The Update is effective in the first quarter of 2017 by an application method determined by the type of transaction impacted by the adoption. Early application is permitted. The Corporation is currently assessing the potential impact to its Consolidated Financial Statements.

Investments

ASU 2016-07, Investments—Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting, eliminates the requirement for an investor to retrospectively apply the equity method when an investment that it had accounted for by another method qualifies for use of the equity method. The Update is effective in the first quarter of 2017 with prospective application. Early application is permitted. This Update is not expected to have a material effect on the Consolidated Financial Statements.

Derivative and Hedging Activities

ASU 2016-06, Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments (a consensus of the Emerging Issues Task Force), provides clarification that determination of whether an embedded contingent put or call option in a financial instrument is clearly and closely related to the debt host requires only an analysis of the four-step decision sequence described in ASC 815-15-25-42. The Update is effective in the first quarter of 2017 with modified retrospective application. Early application is permitted. If an entity is no longer required to bifurcate an embedded derivative as a result of this Update and elects fair value accounting, the effects should be reported as a cumulative-effect adjustment. This Update is not expected to have a material effect on the Consolidated Financial Statements.

ASU 2016-05, Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships (a consensus of the Emerging Issues Task Force), clarifies that a change in counterparty to a derivative instrument that has been designated as a hedging instrument under Topic 815 does not, in and of itself, require dedesignation of that hedging relationship provided all other hedge accounting criteria continue to be met. The Update is effective in the first quarter of 2017 with either prospective or modified retrospective application. Early application is permitted. This Update is not expected to have a material effect on the Consolidated Financial Statements.

Extinguishments of Liabilities

ASU 2016-04, Liabilities—Extinguishments of Liabilities (Subtopic 405-20): Recognition of Breakage for Certain Prepaid Stored-Value Products (a consensus of the Emerging Issues Task Force), requires entities that sell prepaid stored-value products redeemable for goods, services or cash at third-party merchants to recognize breakage. The Update is effective in the first quarter of 2018 with either the modified retrospective method by means of a cumulative-effect adjustment to retained earnings or retrospective application. Early application is permitted. This Update is not expected to have a material effect on the Consolidated Financial Statements.

Leases

ASU 2016-02, Leases (Topic 842), requires lessees to put most leases on their balance sheets but recognize expenses in the income statement similar to current accounting. In addition, the Update changes the guidance for sale-leaseback transactions, initial direct costs and lease executory costs for most entities. All entities will classify leases to determine how to recognize lease related revenue and expense. The Update is effective in the first quarter of 2019 with modified retrospective application including a number of optional practical expedients. Early application is permitted. The Corporation is currently assessing the potential impact to its Consolidated Financial Statements.

Financial Instruments – Recognition and Measurement

ASU 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, amends the presentation and accounting for certain financial instruments, including liabilities measured at fair value under the fair value option, and equity investments. The guidance also updates fair value

 

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presentation and disclosure requirements for financial instruments measured at amortized cost. The Update is effective in the first quarter of 2018 with a cumulative-effect adjustment as of the beginning of the fiscal year of adoption. Early application is prohibited except for the provision requiring the recognition of changes in fair value related to changes in an entity’s own credit risk in other comprehensive income for financial liabilities measured using the fair value option. This Update is not expected to have a material effect on the Consolidated Financial Statements.

3. MERGERS AND ACQUISITIONS

Branch Purchase – Fifth Third Bank

On April 22, 2016, the Corporation completed its purchase of 17 branch-banking locations and certain consumer loans in the Pittsburgh, Pennsylvania metropolitan area from Fifth Third Bank (Fifth Third). The fair value of the acquired assets totaled $316.6 million, including $198.9 million in cash, $97.7 million in loans and $14.1 million in fixed and other assets. The Corporation also assumed $302.5 million in deposits, for which it paid a deposit premium of 1.97%, as part of the transaction. The assets and liabilities relating to these purchased branches were recorded on the Corporation’s balance sheet at their preliminary fair values as of April 22, 2016, 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 $12.3 million in goodwill and $6.0 million 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 deductible for income tax purposes.

Metro Bancorp, Inc.

On February 13, 2016, the Corporation completed its acquisition of Metro Bancorp, Inc. (METR), a bank holding company based in Harrisburg, Pennsylvania. The acquisition enhanced the Corporation’s distribution and scale across Central Pennsylvania, strengthened its position as the largest Pennsylvania-based regional bank and allowed the Corporation to leverage the significant infrastructure investments made in connection with the expansion of its product offerings and risk management systems. On the acquisition date, the estimated fair values of METR included $2.8 billion in assets, $1.9 billion in loans and $2.3 billion in deposits. The acquisition was valued at $404.0 million and resulted in the Corporation issuing 34,041,181 shares of its common stock in exchange for 14,345,319 shares of METR common stock. The Corporation also acquired the fully vested outstanding stock options of METR. The assets and liabilities of METR were recorded on the Corporation’s consolidated balance sheet at their preliminary estimated fair values as of February 13, 2016, the acquisition date, and METR’s results of operations have been included in the Corporation’s consolidated statement of comprehensive income since that date. METR’s banking affiliate, Metro Bank, was merged into FNBPA on February 13, 2016. Based on the preliminary purchase price allocation, the Corporation recorded $176.8 million in goodwill and $36.8 million in core deposit intangibles as a result of the acquisition. These fair value estimates are provisional amounts based on third party valuations that are currently under review. None of the goodwill is deductible for income tax purposes.

The following pro forma financial information for the nine months ended September 30, 2015 reflects the Corporation’s estimated consolidated pro forma results of operations as if the METR acquisition occurred on January 1, 2015, unadjusted for potential cost savings and other business synergies the Corporation expects to receive as a result of the acquisition:

 

(dollars in thousands, except per share data)    FNB      METR      Pro Forma
Adjustments
     Pro
Forma
Combined
 

Revenue (net interest income and non-interest income)

   $ 490,182       $ 101,029       $ (3,183    $ 588,028   

Net income

     120,527         14,714         (6,011      129,230   

Net income available to common stockholders

     114,497         14,654         (5,951      123,200   

Earnings per common share – basic

     0.65         1.04         —           0.59   

Earnings per common share – diluted

     0.65         1.02         —           0.58   

The pro forma adjustments reflect amortization and associated taxes related to the purchase accounting adjustments made to record various acquired items at fair value.

In connection with the METR acquisition, the Corporation incurred expenses related to systems conversions and other costs of integrating and conforming acquired operations with and into the Corporation. These merger-related charges amounted to $30.9 million for the nine months ended September 30, 2016 and were expensed as incurred.

 

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Severance costs comprised 40.8% of the merger-related expenses, with the remainder consisting of other non-interest expenses, including professional services, marketing and advertising, technology and communications, occupancy and equipment, and charitable contributions. The Corporation also incurred issuance costs of $0.7 million which were charged to additional paid-in capital.

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 (BofA). The fair value of the acquired assets totaled $153.1 million, including $148.2 million in cash and $2.0 million in fixed and other assets. The Corporation also assumed $154.6 million in deposits associated with these branches. The Corporation paid a deposit premium of 1.96% and acquired an immaterial amount of loans as part of the transaction. The Corporation’s operating results for 2015 include the impact of branch activity subsequent to the September 18, 2015 closing date. The Corporation recorded $1.5 million in goodwill and $3.0 million in core deposit intangibles. The goodwill for this transaction is deductible for income tax purposes.

The following table summarizes the amounts recorded on the consolidated balance sheets as of each of the acquisition dates in conjunction with the acquisitions discussed above:

 

(in thousands)    Fifth Third
Branches
     METR      BofA
Branches
 

Fair value of consideration paid

   $ —         $ 404,031       $ —     

Fair value of identifiable assets acquired:

        

Cash and cash equivalents

     198,872         46,890         148,159   

Securities

     —           722,980         —     

Loans

     97,740         1,868,873         842   

Core deposit intangibles

     5,952         36,801         3,000   

Other assets

     14,069         123,055         1,133   
  

 

 

    

 

 

    

 

 

 

Total identifiable assets acquired

     316,633         2,798,599         153,134   

Fair value of liabilities assumed:

        

Deposits

     302,529         2,328,238         154,619   

Borrowings

     —           227,539         —     

Other liabilities

     26,427         15,545         —     
  

 

 

    

 

 

    

 

 

 

Total liabilities assumed

     328,956         2,571,322         154,619   

Fair value of net identifiable assets acquired

     (12,323      227,277         (1,485
  

 

 

    

 

 

    

 

 

 

Goodwill recognized (1)

   $ 12,323       $ 176,754       $ 1,485   
  

 

 

    

 

 

    

 

 

 

 

(1) All of the goodwill for these transactions has been recorded by FNBPA.

Pending Acquisition – Yadkin Financial Corporation

On July 20, 2016, the Corporation entered into a definitive merger agreement to acquire Yadkin Financial Corporation (YDKN), a bank holding company based in Raleigh, North Carolina, with approximately $7.5 billion in total assets. The transaction is valued at approximately $1.3 billion. Under the terms of the merger agreement, YDKN voting common shareholders will be entitled to receive 2.16 shares of the Corporation’s common stock for each share of YDKN common stock. The Corporation expects to issue approximately 111.4 million shares of its common stock in exchange for approximately 51.6 million shares of YDKN common stock. YDKN’s banking affiliate, Yadkin Bank, will be merged into FNBPA. The transaction is expected to be completed in the first quarter of 2017, pending regulatory approvals, the approval of shareholders of the Corporation and YDKN, and the satisfaction of other closing conditions.

 

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4. SECURITIES

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

 

(in thousands)    Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair Value  

Securities Available for Sale

           

September 30, 2016

           

U.S. Treasury

   $ 29,839       $ 165       $ —         $ 30,004   

U.S. government-sponsored entities

     382,570         2,106         (39      384,637   

Residential mortgage-backed securities:

           

Agency mortgage-backed securities

     1,039,245         17,406         —           1,056,651   

Agency collateralized mortgage obligations

     552,974         3,517         (1,768      554,723   

Non-agency collateralized mortgage obligations

     934         1         —           935   

Commercial mortgage-backed securities

     2,817         —           (1      2,816   

States of the U.S. and political subdivisions

     36,963         205         (30      37,138   

Other debt securities

     9,803         122         (580      9,345   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total debt securities

     2,055,145         23,522         (2,418      2,076,249   

Equity securities

     975         392         —           1,367   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities available for sale

   $ 2,056,120       $ 23,914       $ (2,418    $ 2,077,616   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2015

           

U.S. Treasury

   $ 29,738       $ 58       $ —         $ 29,796   

U.S. government-sponsored entities

     368,463         856         (1,325      367,994   

Residential mortgage-backed securities:

           

Agency mortgage-backed securities

     703,069         4,594         (2,832      704,831   

Agency collateralized mortgage obligations

     503,328         1,032         (8,530      495,830   

Non-agency collateralized mortgage obligations

     1,177         13         —           1,190   

Commercial mortgage-backed securities

     4,299         —           (12      4,287   

States of the U.S. and political subdivisions

     10,748         309         —           11,057   

Other debt securities

     14,729         208         (651      14,286   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total debt securities

     1,635,551         7,070         (13,350      1,629,271   

Equity securities

     975         324         (3      1,296   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities available for sale

   $ 1,636,526       $ 7,394       $ (13,353    $ 1,630,567   
  

 

 

    

 

 

    

 

 

    

 

 

 

Securities Held to Maturity

           

September 30, 2016

           

U.S. Treasury

   $ 500       $ 192       $ —         $ 692   

U.S. government-sponsored entities

     272,715         1,076         (196      273,595   

Residential mortgage-backed securities:

           

Agency mortgage-backed securities

     830,590         20,337         —           850,927   

Agency collateralized mortgage obligations

     787,120         3,927         (3,054      787,993   

Non-agency collateralized mortgage obligations

     1,877         8         (5      1,880   

Commercial mortgage-backed securities

     50,022         1,478         (120      51,380   

States of the U.S. and political subdivisions

     306,421         6,558         (691      312,288   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities held to maturity

   $ 2,249,245       $ 33,576       $ (4,066    $ 2,278,755   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2015

           

U.S. Treasury

   $ 500       $ 153       $ —         $ 653   

U.S. government-sponsored entities

     137,385         809         (395      137,799   

Residential mortgage-backed securities:

           

Agency mortgage-backed securities

     709,970         9,858         (1,176      718,652   

Agency collateralized mortgage obligations

     499,694         803         (7,657      492,840   

Non-agency collateralized mortgage obligations

     2,681         14         —           2,695   

Commercial mortgage-backed securities

     51,258         115         (259      51,114   

States of the U.S. and political subdivisions

     235,573         4,191         (101      239,663   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities held to maturity

   $ 1,637,061       $ 15,943       $ (9,588    $ 1,643,416   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

 

     Three Months Ended      Nine Months Ended  
     September 30,      September 30,  
(in thousands)    2016      2015      2016      2015  

Gross gains

   $ 299       $ 314       $ 597       $ 328   

Gross losses

     —           —           (1      (9
  

 

 

    

 

 

    

 

 

    

 

 

 

Net gains

   $ 299       $ 314       $ 596       $ 319   
  

 

 

    

 

 

    

 

 

    

 

 

 

As of September 30, 2016, the amortized cost and fair value of securities, by contractual maturities, were as:

 

     Available for Sale      Held to Maturity  
(in thousands)    Amortized
Cost
     Fair
Value
     Amortized
Cost
     Fair
Value
 

Due in one year or less

   $ 50,029       $ 50,221       $ 10,472       $ 10,486   

Due from one to five years

     377,561         379,721         254,105         255,091   

Due from five to ten years

     24,302         24,482         69,863         70,901   

Due after ten years

     7,283         6,700         245,196         250,097   
  

 

 

    

 

 

    

 

 

    

 

 

 
     459,175         461,124         579,636         586,575   

Residential mortgage-backed securities:

           

Agency mortgage-backed securities

     1,039,245         1,056,651         830,590         850,927   

Agency collateralized mortgage obligations

     552,974         554,723         787,120         787,993   

Non-agency collateralized mortgage obligations

     934         935         1,877         1,880   

Commercial mortgage-backed securities

     2,817         2,816         50,022         51,380   

Equity securities

     975         1,367         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities

   $ 2,056,120       $ 2,077,616       $ 2,249,245       $ 2,278,755   
  

 

 

    

 

 

    

 

 

    

 

 

 

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.

Following is information relating to securities pledged:

 

(dollars in thousands)    September 30,
2016
    December 31,
2015
 

Securities pledged (carrying value):

    

Collateral for public deposits, trust deposits and for other purposes as required by law

   $ 2,876,304      $ 1,728,939   

Collateral for short-term borrowings

     332,095        272,629   

Securities pledged as a percent of total securities

     74.2     61.3

 

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

 

    Less than 12 Months     12 Months or More     Total  
(dollars in thousands)   #     Fair
Value
    Unrealized
Losses
    #     Fair
Value
    Unrealized
Losses
    #     Fair
Value
    Unrealized
Losses
 

Securities Available for Sale

                 

September 30, 2016

                 

U.S. government-sponsored entities

    2      $ 39,961      $ (39     —        $ —        $ —          2      $ 39,961      $ (39

Residential mortgage-backed securities:

                 

Agency collateralized mortgage obligations

    9        127,838        (290     9        96,505        (1,478     18        224,343        (1,768

Commercial mortgage-backed securities

    1        2,817        (1     —          —          —          1        2,817        (1

States of the U.S. and political subdivisions

    11        14,304        (30     —          —          —          11        14,304        (30

Other debt securities

    —          —          —          3        4,322        (580     3        4,322        (580
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total impaired securities available for sale

    23      $ 184,920      $ (360     12      $ 100,827      $ (2,058     35      $ 285,747      $ (2,418
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

December 31, 2015

                 

U.S. government-sponsored entities

    6      $ 99,131      $ (814     2      $ 34,487      $ (511     8      $ 133,618      $ (1,325

Residential mortgage-backed securities:

                 

Agency mortgage-backed securities

    19        359,250        (2,832     —          —          —          19        359,250        (2,832

Agency collateralized mortgage obligations

    9        126,309        (1,366     18        215,330        (7,164     27        341,639        (8,530

Commercial mortgage-backed securities

    1        4,287        (12     —          —          —          1        4,287        (12

Other debt securities

    —          —          —          3        4,245        (651     3        4,245        (651

Equity securities

    1        632        (3     —          —          —          1        632        (3
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total impaired securities available for sale

    36      $ 589,609      $ (5,027     23      $ 254,062      $ (8,326     59      $ 843,671      $ (13,353
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Securities Held to Maturity

                 

September 30, 2016

                 

U.S. government-sponsored entities

    2      $ 39,804      $ (196     —        $ —        $ —          2      $ 39,804      $ (196

Residential mortgage-backed securities:

                 

Agency collateralized mortgage obligations

    12        317,349        (1,623     12        121,880        (1,431     24        439,229        (3,054

Non-agency collateralized mortgage obligations

    3        1,239        (5     —          —          —          3        1,239        (5

Commercial mortgage-backed securities

    1        8,415        (120     —          —          —          1        8,415        (120

States of the U.S. and political subdivisions

    12        36,447        (691     —          —          —          12        36,447        (691
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total impaired securities held to maturity

    30      $ 403,254      $ (2,635     12      $ 121,880      $ (1,431     42      $ 525,134      $ (4,066
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

December 31, 2015

                 

U.S. government-sponsored entities

    3      $ 39,843      $ (173     1      $ 14,778      $ (222     4      $ 54,621      $ (395

Residential mortgage-backed securities:

                 

Agency mortgage-backed securities

    17        212,024        (1,159     1        917        (17     18        212,941        (1,176

Agency collateralized mortgage obligations

    11        150,593        (1,434     14        160,716        (6,223     25        311,309        (7,657

Commercial mortgage-backed securities

    3        46,278        (259     —          —          —          3        46,278        (259

States of the U.S. and political subdivisions

    9        17,616        (101     —          —          —          9        17,616        (101
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total impaired securities held to maturity

    43      $ 466,354      $ (3,126     16      $ 176,411      $ (6,462     59      $ 642,765      $ (9,588
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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.

 

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Other-Than-Temporary Impairment

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

 

(in thousands)    Equities      Total  

For the Nine Months Ended September 30, 2016

     

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, 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   
  

 

 

    

 

 

 

The Corporation did not recognize any impairment losses on securities for the nine months ended September 30, 2016 or 2015.

States of the U.S. and Political Subdivisions

The Corporation’s municipal bond portfolio with a carrying amount of $343.6 million as of September 30, 2016 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 99.9% of the portfolio. Geographically, municipal bonds support the Corporation’s primary footprint as 92.6% 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 $1.9 million. In addition to the strong stand-alone ratings, 79.2% 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.

5. LOANS AND LEASES

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

 

(in thousands)    Originated
Loans and
Leases
     Acquired
Loans
     Total
Loans and
Leases
 

September 30, 2016

        

Commercial real estate

   $ 3,918,575       $ 1,448,716       $ 5,367,291   

Commercial and industrial

     2,696,210         392,195         3,088,405   

Commercial leases

     195,271         —           195,271   
  

 

 

    

 

 

    

 

 

 

Total commercial loans and leases

     6,810,056         1,840,911         8,650,967   

Direct installment

     1,750,189         87,206         1,837,395   

Residential mortgages

     1,355,476         424,391         1,779,867   

Indirect installment

     1,150,575         237         1,150,812   

Consumer lines of credit

     1,088,807         214,416         1,303,223   

Other

     51,182         —           51,182   
  

 

 

    

 

 

    

 

 

 

Total loans and leases, net of unearned income

   $ 12,206,285       $ 2,567,161       $ 14,773,446   
  

 

 

    

 

 

    

 

 

 

 

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(in thousands)    Originated
Loans and
Leases
     Acquired
Loans
     Total
Loans and
Leases
 

December 31, 2015

        

Commercial real estate

   $ 3,531,146       $ 577,910       $ 4,109,056   

Commercial and industrial

     2,534,351         67,371         2,601,722   

Commercial leases

     204,553         —           204,553   
  

 

 

    

 

 

    

 

 

 

Total commercial loans and leases

     6,270,050         645,281         6,915,331   

Direct installment

     1,660,717         45,919         1,706,636   

Residential mortgages

     1,044,689         351,282         1,395,971   

Indirect installment

     996,175         554         996,729   

Consumer lines of credit

     1,021,830         115,425         1,137,255   

Other

     38,518         —           38,518   
  

 

 

    

 

 

    

 

 

 

Total loans and leases, net of unearned income

   $ 11,031,979       $ 1,158,461       $ 12,190,440   
  

 

 

    

 

 

    

 

 

 

The loans and leases portfolio categories are comprised of the following:

 

    Commercial real estate includes both owner-occupied and non-owner-occupied loans secured by commercial properties;

 

    Commercial and industrial includes loans to business 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; and

 

    Other is comprised primarily of credit cards, mezzanine loans and student loans.

The loans and leases 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 loans and leases portfolio also contains Regency consumer finance loans to individuals in Pennsylvania, Ohio, Tennessee and Kentucky. Due to the relative size of the Regency consumer finance loan portfolio, these loans are not segregated from other consumer loans. The following table shows certain information relating to the Regency consumer finance loans:

 

     September 30,     December 31,  
(dollars in thousands)    2016     2015  
  

 

 

   

 

 

 

Regency consumer finance loans

   $ 182,527      $ 186,162   

Percent of total loans and leases

     1.2     1.5

The following table shows certain information relating to commercial real estate loans:

 

     September 30,     December 31,  
(dollars in thousands)    2016     2015  
  

 

 

   

 

 

 

Commercial construction loans

   $ 454,239      $ 352,322   

Percent of total loans and leases

     3.1     2.9

Commercial real estate:

    

Percent owner-occupied

     36.3     38.1

Percent non-owner-occupied

     63.7     61.9

 

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Table of Contents

Acquired Loans

All acquired loans were initially recorded at fair value at the acquisition date. Refer to the Acquired Loans section in Note 1 of the Corporation’s 2015 Annual Report on Form 10-K for a discussion of ASC 310-20 and ASC 310-30. The outstanding balance and the carrying amount of acquired loans included in the consolidated balance sheets are as follows:

 

(in thousands)    September 30,
2016
     December 31,
2015
 

Accounted for under ASC 310-30:

     

Outstanding balance

   $ 2,534,180       $ 1,258,418   

Carrying amount

     2,206,380         1,011,139   

Accounted for under ASC 310-20:

     

Outstanding balance

     372,419         146,161   

Carrying amount

     354,400         140,595   

Total acquired loans:

     

Outstanding balance

     2,906,599         1,404,579   

Carrying amount

     2,560,780         1,151,734   

The carrying amount of purchased credit impaired loans included in the table above totaled $2.9 million at September 30, 2016 and $5.9 million at December 31, 2015, 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,  
(in thousands)    2016      2015  

Balance at beginning of period

   $ 256,120       $ 331,899   

Acquisitions

     308,311         —     

Reduction due to unexpected early payoffs

     (60,920      (35,601

Reclass from non-accretable difference

     66,807         24,489   

Disposals/transfers

     (343      (509

Accretion

     (77,180      (46,207
  

 

 

    

 

 

 

Balance at end of period

   $ 492,795       $ 274,071   
  

 

 

    

 

 

 

Cash flows expected to be collected on acquired loans are estimated quarterly by incorporating several key assumptions similar to the initial estimate of fair value. These key assumptions include probability of default and the amount of actual prepayments after the acquisition date. Prepayments affect the estimated life of the loans and could change the amount of interest income, and possibly principal expected to be collected. In reforecasting future estimated cash flows, credit loss expectations are adjusted as necessary. Improved cash flow expectations for loans or pools are recorded first as a reversal of previously recorded impairment, if any, and then as an increase in prospective yield when all previously recorded impairment has been recaptured. Decreases in expected cash flows are recognized as an impairment through a provision for loan loss and an increase to the allowance for acquired loans.

During the nine months ended September 30, 2016, there was an overall improvement in cash flow expectations which resulted in a net reclassification of $66.8 million from the non-accretable difference to accretable yield. This reclassification was $24.5 million for the nine months ended September 30, 2015. The reclassification from the non-accretable difference to the accretable yield results in prospective yield adjustments on the loan pools.

 

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The following table reflects amounts at acquisition for all purchased loans subject to ASC 310-30 (impaired and non-impaired loans with deteriorated credit quality) acquired from METR and Fifth Third.

 

(in thousands)    Acquired
Impaired
Loans
     Acquired
Performing
Loans
     Total  

Contractually required cash flows at acquisition

   $ 99,611       $ 2,191,476       $ 2,291,087   

Non-accretable difference (expected losses and foregone interest)

     (52,995      (264,233      (317,228
  

 

 

    

 

 

    

 

 

 

Cash flows expected to be collected at acquisition

     46,616         1,927,243         1,973,859   

Accretable yield

     (1,063      (307,248      (308,311
  

 

 

    

 

 

    

 

 

 

Basis in acquired loans at acquisition

   $ 45,553       $ 1,619,995       $ 1,665,548   
  

 

 

    

 

 

    

 

 

 

In addition, loans purchased in the METR acquisition and Fifth Third branch purchase that were not subject to ASC 310-30 had the following balances at the date of acquisition: fair value of $292.3 million; unpaid principal balance of $315.1 million; and contractual cash flows not expected to be collected of $103.0 million.

Credit Quality    

Management monitors the credit quality of the Corporation’s loan and lease portfolio. Measurement of delinquency and past due status is based on the contractual terms of each loan.

Non-performing loans include non-accrual loans and non-performing troubled debt restructurings (TDRs). Past due loans are reviewed on a monthly basis to identify loans for non-accrual status. The Corporation places originated loans 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 principal and interest is deemed uncollectible, 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:

 

(dollars in thousands)    September 30,
2016
    December 31,
2015
 

Non-accrual loans

   $ 74,828      $ 49,897   

Troubled debt restructurings

     20,638        22,028   
  

 

 

   

 

 

 

Total non-performing loans

     95,466        71,925   

Other real estate owned (OREO)

     40,523        38,918   
  

 

 

   

 

 

 

Total non-performing assets

   $ 135,989      $ 110,843   
  

 

 

   

 

 

 

Asset quality ratios:

    

Non-performing loans / total loans and leases

     0.65     0.59

Non-performing loans + OREO / total loans and leases + OREO

     0.92     0.91

Non-performing assets / of total assets

     0.63     0.63

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 totaled $5.1 million at September 30, 2016 and $5.2 million at December 31, 2015. The recorded investment of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process at September 30, 2016 and December 31, 2015 totaled $9.5 million and $11.7 million, respectively.

 

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Table of Contents

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:

 

(in thousands)    30-89 Days Past
Due
     ³ 90 Days
Past Due and
Still Accruing
     Non-
Accrual
     Total
Past Due
     Current      Total
Loans and
Leases
 

Originated Loans and Leases

                 

September 30, 2016

                 

Commercial real estate

   $ 7,971       $ 1       $ 18,186       $ 26,158       $ 3,892,417       $ 3,918,575   

Commercial and industrial

     5,479         3         36,174         41,656         2,654,554         2,696,210   

Commercial leases

     1,106         —           3,359         4,465         190,806         195,271   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans and leases

     14,556         4         57,719         72,279         6,737,777         6,810,056   

Direct installment

     9,003         3,502         6,368         18,873         1,731,316         1,750,189   

Residential mortgages

     9,550         2,454         3,106         15,110         1,340,366         1,355,476   

Indirect installment

     6,468         467         1,741         8,676         1,141,899         1,150,575   

Consumer lines of credit

     3,467         408         1,564         5,439         1,083,368         1,088,807   

Other

     27         71         1,000         1,098         50,084         51,182   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total originated loans and leases

   $ 43,071       $ 6,906       $ 71,498       $ 121,475       $ 12,084,810       $ 12,206,285   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2015

                 

Commercial real estate

   $ 11,006       $ 1       $ 23,503       $ 34,510       $ 3,496,636       $ 3,531,146   

Commercial and industrial

     5,409         3         14,382         19,794         2,514,557         2,534,351   

Commercial leases

     924         —           659         1,583         202,970         204,553   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans and leases

     17,339         4         38,544         55,887         6,214,163         6,270,050   

Direct installment

     9,254         3,813         4,806         17,873         1,642,844         1,660,717   

Residential mortgages

     8,135         1,470         2,882         12,487         1,032,202         1,044,689   

Indirect installment

     9,472         379         1,361         11,212         984,963         996,175   

Consumer lines of credit

     2,410         1,189         1,181         4,780         1,017,050         1,021,830   

Other

     73         169         —           242         38,276         38,518   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total originated loans and leases

   $ 46,683       $ 7,024       $ 48,774       $ 102,481       $ 10,929,498       $ 11,031,979   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents
(in thousands)    30-89
Days
Past Due
     ³ 90 Days
Past Due

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

Acquired Loans

                   

September 30, 2016

                   

Commercial real estate

   $ 14,576       $ 25,048       $ 1,754       $ 41,378       $ 1,489,415       $ (82,077   $ 1,448,716   

Commercial and industrial

     1,283         2,941         1,153         5,377         418,122         (31,304     392,195   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total commercial loans

     15,859         27,989         2,907         46,755         1,907,537         (113,381     1,840,911   

Direct installment

     2,712         947         —           3,659         81,332         2,215        87,206   

Residential mortgages

     8,224         12,625         —           20,849         442,023         (38,481     424,391   

Indirect installment

     4         3         —           7         169         61        237   

Consumer lines of credit

     2,288         1,020         423         3,731         215,455         (4,770     214,416   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total acquired loans

   $ 29,087       $ 42,584       $ 3,330       $ 75,001       $ 2,646,516       $ (154,356   $ 2,567,161   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

December 31, 2015

                   

Commercial real estate

   $ 6,399       $ 12,752       $ 931       $ 20,082       $ 593,128       $ (35,300   $ 577,910   

Commercial and industrial

     1,065         616         103         1,784         72,037         (6,450     67,371   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total commercial loans

     7,464         13,368         1,034         21,866         665,165         (41,750     645,281   

Direct installment

     837         659         —           1,496         43,596         827        45,919   

Residential mortgages

     5,871         15,136         —           21,007         366,742         (36,467     351,282   

Indirect installment

     32         9         —           41         571         (58     554   

Consumer lines of credit

     830         546         89         1,465         117,443         (3,483     115,425   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total acquired loans

   $ 15,034       $ 29,718       $ 1,123       $ 45,875       $ 1,193,517       $ (80,931   $ 1,158,461   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

(1) Past due information for acquired loans is based on the contractual balance outstanding at September 30, 2016 and December 31, 2015.
(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.

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

 

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Table of Contents

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  
(in thousands)    Pass      Special
Mention
     Substandard      Doubtful      Total  

Originated Loans and Leases

              

September 30, 2016

              

Commercial real estate

   $ 3,737,877       $ 120,184       $ 59,964       $ 550       $ 3,918,575   

Commercial and industrial

     2,466,207         85,586         135,322         9,095         2,696,210   

Commercial leases

     186,357         4,446         4,468         —           195,271   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total originated commercial loans and leases

   $ 6,390,441       $ 210,216       $ 199,754       $ 9,645       $ 6,810,056   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2015

              

Commercial real estate

   $ 3,416,527       $ 52,887       $ 61,411       $ 321       $ 3,531,146   

Commercial and industrial

     2,335,103         109,539         87,380         2,329         2,534,351   

Commercial leases

     198,207         2,447         3,899         —           204,553   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total originated commercial loans and leases

   $ 5,949,837       $ 164,873       $ 152,690       $ 2,650       $ 6,270,050   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Acquired Loans

              

September 30, 2016

              

Commercial real estate

   $ 1,249,051       $ 75,085       $ 123,560       $ 1,020       $ 1,448,716   

Commercial and industrial

     336,545         13,110         42,024         516         392,195   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total acquired commercial loans

   $ 1,585,596       $ 88,195       $ 165,584       $ 1,536       $ 1,840,911   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2015

              

Commercial real estate

   $ 464,162       $ 47,619       $ 66,129         —         $ 577,910   

Commercial and industrial

     56,446         3,182         7,743         —           67,371   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total acquired commercial loans

   $ 520,608       $ 50,801       $ 73,872         —         $ 645,281   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Credit quality information for acquired loans is based on the contractual balance outstanding at September 30, 2016 and December 31, 2015. The increase in acquired loans in 2016 relates to the METR acquisition completed on February 13, 2016.

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

 

     Originated Consumer Loan Credit Quality
by Payment Status
 
(in thousands)    Performing      Non-Performing      Total  

September 30, 2016

        

Direct installment

   $ 1,735,117       $ 15,072       $ 1,750,189   

Residential mortgages

     1,342,077         13,399         1,355,476   

Indirect installment

     1,148,649         1,926         1,150,575   

Consumer lines of credit

     1,086,167         2,640         1,088,807   

Other

     51,182         —           51,182   
  

 

 

    

 

 

    

 

 

 

Total originated consumer loans

   $ 5,363,192       $ 33,037       $ 5,396,229   
  

 

 

    

 

 

    

 

 

 

December 31, 2015

        

Direct installment

   $ 1,646,925       $ 13,792       $ 1,660,717   

Residential mortgages

     1,031,926         12,763         1,044,689   

Indirect installment

     994,661         1,514         996,175   

Consumer lines of credit

     1,019,783         2,047         1,021,830   

Other

     38,518         —           38,518   
  

 

 

    

 

 

    

 

 

 

Total originated consumer loans

   $ 4,731,813       $ 30,116       $ 4,761,929   
  

 

 

    

 

 

    

 

 

 

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 $500,000 based on loan and lease segment loss given default. For commercial loan relationships greater than or equal to $500,000, 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, except for those loans classified as non-accrual, is recognized as income using the accrual method. Impaired loans, or portions thereof, are charged off when deemed uncollectible.

 

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Table of Contents

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

 

(in thousands)    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, 2016

  

              

Commercial real estate

   $ 20,836       $ 15,057       $ 3,214       $ 18,271       $ 550       $ 21,677   

Commercial and industrial

     41,296         18,654         17,028         35,682         9,095         31,603   

Commercial leases

     3,359         3,359         —           3,359         —           1,514   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans and leases

     65,491         37,070         20,242         57,312         9,645         54,794   

Direct installment

     16,465         15,072         —           15,072         —           14,972   

Residential mortgages

     14,049         13,399         —           13,399         —           13,164   

Indirect installment

     4,668         1,926         —           1,926         —           1,846   

Consumer lines of credit

     3,413         2,640         —           2,640         —           2,825   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 104,086       $ 70,107       $ 20,242       $ 90,349       $ 9,645       $ 87,601   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

At or for the Year Ended December 31, 2015

  

              

Commercial real estate

   $ 33,780       $ 24,423       $ 772       $ 25,195       $ 321       $ 26,143   

Commercial and industrial

     15,860         9,176         5,543         14,719         2,329         12,298   

Commercial leases

     659         659         —           659         —           747   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans and leases

     50,299         34,258         6,315         40,573         2,650         39,188   

Direct installment

     14,679         13,792         —           13,792         —           13,267   

Residential mortgages

     13,394         12,763         —           12,763         —           12,896   

Indirect installment

     3,745         1,514         —           1,514         —           1,401   

Consumer lines of credit

     2,408         2,047         —           2,047         —           2,198   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 84,525       $ 64,374       $ 6,315       $ 70,689       $ 2,650       $ 68,950   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

The above tables do not reflect the additional allowance for credit losses relating to acquired loans in the following pools and categories:

 

(in thousands)    September 30,
2016
     December 31,
2015
 

Commercial real estate

   $ 3,631       $ 3,073   

Commercial and industrial

     493         695   
  

 

 

    

 

 

 

Total commercial loans

     4,124         3,768   

Direct installment

     1,110         1,557   

Residential mortgages

     659         659   

Indirect installment

     221         221   

Consumer lines of credit

     267         522   
  

 

 

    

 

 

 

Total

   $ 6,381       $ 6,727   
  

 

 

    

 

 

 

Troubled Debt Restructurings

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

 

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Table of Contents

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

 

(in thousands)    September 30,
2016
     December 31,
2015
 

Accruing:

     

Performing

   $ 17,030       $ 15,165   

Non-performing

     20,638         22,028   

Non-accrual

     9,307         8,307   
  

 

 

    

 

 

 

Total TDRs

   $ 46,975       $ 45,500   
  

 

 

    

 

 

 

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, 2016, the Corporation returned to performing status $4.9 million in restructured residential mortgage loans that have consistently met their modified obligations for more than nine 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 nine 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 $500,000 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 and pooled reserves for individual loans under $500,000 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. The reserve for commercial TDRs included in the allowance for credit losses are as follows:

 

(in thousands)    September 30,
2016
     December 31,
2015
 

Specific reserves

   $ 608       $ 300   

Pooled reserves for individual loans under $500

     302         929   

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 $3.6 million and $3.5 million at September 30, 2016 and December 31, 2015, 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, 2016      Nine Months Ended September 30, 2016  
(dollars in thousands)    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

     —         $ —         $ —           4       $ 778       $ 737   

Commercial and industrial

     3         1,504         1,504         3         1,727         1,504   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans

     3         1,504         1,504         7         2,505         2,241   

Direct installment

     123         1,029         1,018         388         5,051         4,749   

Residential mortgages

     9         508         532         36         1,946         1,893   

Indirect installment

     9         23         22         14         40         40   

Consumer lines of credit

     20         395         364         56         878         837   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     164       $ 3,459       $ 3,440         501       $ 10,420       $ 9,760   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Three Months Ended September 30, 2015      Nine Months Ended September 30, 2015  
(dollars in thousands)    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   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Following is a summary of originated TDRs, by class, 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, 2016
     Nine Months Ended
September 30, 2016
 
(dollars in thousands)    Number of
Contracts
     Recorded
Investment
     Number of
Contracts
     Recorded
Investment
 

Commercial real estate

     —         $ —           —         $ —     

Commercial and industrial

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans

     —           —           —           —     

Direct installment

     26         408         76         377   

Residential mortgages

     5         189         7         282   

Indirect installment

     6         19         12         19   

Consumer lines of credit

     1         25         3         91   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     38       $ 641         98       $ 769   
  

 

 

    

 

 

    

 

 

    

 

 

 
     Three Months Ended
September 30, 2015
     Nine Months Ended
September 30, 2015
 
(dollars in thousands)    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   

Other

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     25       $ 168         88       $ 657   
  

 

 

    

 

 

    

 

 

    

 

 

 

6. ALLOWANCE FOR CREDIT LOSSES

The allowance for credit losses addresses credit losses inherent in the existing loan and lease portfolio and is presented as a reserve against loans and leases on the consolidated balance sheets. Loan and lease losses are charged off against the allowance for credit losses, with recoveries of amounts previously charged off credited to the allowance for credit losses. Provisions for credit losses are charged to operations based on management’s periodic evaluation of the adequacy of 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:

 

(in thousands)    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, 2016

              

Commercial real estate

   $ 44,428       $ (3,537   $ 1,810       $ (1,727   $ (334   $ 42,367   

Commercial and industrial

     51,475         (6,753     598         (6,155     8,388        53,708   

Commercial leases

     3,047         (100     3         (97     257        3,207   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total commercial loans and leases

     98,950         (10,390     2,411         (7,979     8,311        99,282   

Direct installment

     21,543         (2,464     545         (1,919     1,463        21,087   

Residential mortgages

     8,410         (144     11         (133     969        9,246   

Indirect installment

     9,543         (1,781     617         (1,164     1,983        10,362   

Consumer lines of credit

     9,149         (459     82         (377     499        9,271   

Other

     1,124         (709     3         (706     847        1,265   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total allowance on originated loans and leases

     148,719         (15,947     3,669         (12,278     14,072        150,513   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Purchased credit-impaired loans

     632         —          42         42        (102     572   

Other acquired loans

     5,018         (240     362         122        669        5,809   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total allowance on acquired loans

     5,650         (240     404         164        567        6,381   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total

   $ 154,369       $ (16,187   $ 4,073       $ (12,114   $ 14,639      $ 156,894   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Nine Months Ended September 30, 2016

              

Commercial real estate

   $ 41,741       $ (5,572   $ 3,516       $ (2,056   $ 2,682      $ 42,367   

Commercial and industrial

     41,023         (12,722     978         (11,744     24,429        53,708   

Commercial leases

     2,541         (817     49         (768     1,434        3,207   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total commercial loans and leases

     85,305         (19,111     4,543         (14,568     28,545        99,282   

Direct installment

     21,587         (7,552     1,453         (6,099     5,599        21,087   

Residential mortgages

     7,909         (301     68         (233     1,570        9,246   

Indirect installment

     9,889         (5,486     1,545         (3,941     4,414        10,362   

Consumer lines of credit

     9,582         (1,461     187         (1,274     963        9,271   

Other

     1,013         (1,988     35         (1,953     2,205        1,265   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total allowance on originated loans and leases

     135,285         (35,899     7,831         (28,068     43,296        150,513   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Purchased credit-impaired loans

     834         (399     42         (357     95        572   

Other acquired loans

     5,893         (687     947         260        (344     5,809   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total allowance on acquired loans

     6,727         (1,086     989         (97     (249     6,381   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total

   $ 142,012       $ (36,985   $ 8,820       $ (28,165   $ 43,047      $ 156,894   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

28


Table of Contents
(in thousands)    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

   $ 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

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

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

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

 

     Originated Allowance      Originated Loans and Leases Outstanding  
(in thousands)    Individually
Evaluated for
Impairment
     Collectively
Evaluated for
Impairment
     Loans and
Leases
     Individually
Evaluated for
Impairment
     Collectively
Evaluated for
Impairment
 

September 30, 2016

              

Commercial real estate

   $ 550       $ 41,817       $ 3,918,575       $ 13,736       $ 3,904,839   

Commercial and industrial

     9,095         44,613         2,696,210         33,895         2,662,315   

Commercial leases

     —           3,207         195,271         —           195,271   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans and leases

     9,645         89,637         6,810,056         47,631         6,762,425   

Direct installment

     —           21,087         1,750,189         —           1,750,189   

Residential mortgages

     —           9,246         1,355,476         —           1,355,476   

Indirect installment

     —           10,362         1,150,575         —           1,150,575   

Consumer lines of credit

     —           9,271         1,088,807         —           1,088,807   

Other

     —           1,265         51,182         —           51,182   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 9,645       $ 140,868       $ 12,206,285       $ 47,631       $ 12,158,654   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2015

              

Commercial real estate

   $ 321       $ 41,420       $ 3,531,146       $ 12,904       $ 3,518,242   

Commercial and industrial

     2,329         38,694         2,534,351         10,802         2,523,549   

Commercial leases

     —           2,541         204,553         —           204,553   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans and leases

     2,650         82,655         6,270,050         23,706         6,246,344   

Direct installment

     —           21,587         1,660,717         —           1,660,717   

Residential mortgages

     —           7,909         1,044,689         —           1,044,689   

Indirect installment

     —           9,889         996,175         —           996,175   

Consumer lines of credit

     —           9,582         1,021,830         —           1,021,830   

Other

     —           1,013         38,518         —           38,518   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,650       $ 132,635       $ 11,031,979       $ 23,706       $ 11,008,273   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

7. BORROWINGS

Following is a summary of short-term borrowings:

 

(in thousands)    September 30,
2016
     December 31,
2015
 

Securities sold under repurchase agreements

   $ 310,787       $ 266,732   

Federal Home Loan Bank advances

     925,000         1,090,000   

Federal funds purchased

     872,000         568,000   

Subordinated notes

     128,318         124,164   
  

 

 

    

 

 

 

Total short-term borrowings

   $ 2,236,105       $ 2,048,896   
  

 

 

    

 

 

 

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

 

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Following is a summary of long-term borrowings:

 

(in thousands)    September 30,
2016
     December 31,
2015
 

Federal Home Loan Bank advances

   $ 355,122       $ 400,017   

Subordinated notes

     85,188         84,668   

Junior subordinated debt

     48,591         58,298   

Other subordinated debt

     98,599         98,497   
  

 

 

    

 

 

 

Total long-term borrowings

   $ 587,500       $ 641,480   
  

 

 

    

 

 

 

The Corporation’s banking affiliate has available credit with the FHLB of $5.7 billion of which $1.3 billion was used as of September 30, 2016. 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 0.95% to 4.19% for the nine months ended September 30, 2016 and 0.76% to 4.19% for the year ended December 31, 2015.

The junior subordinated debt is comprised of debt securities issued by the Corporation in relation to its two unconsolidated subsidiary trusts (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, or trust preferred 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 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 junior 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 junior subordinated debt. The TPS are eligible for redemption, at any time, at the Corporation’s discretion. Under capital guidelines, beginning in 2016, the entire balance of TPS is 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.    

During the first quarter of 2016, the Corporation redeemed $10.0 million of the TPS issued by Omega Financial Capital Trust I.

The following table provides information relating to the Trusts as of September 30, 2016:

 

(dollars in thousands)    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         2.50  

Variable; 3-month LIBOR + 165 basis points (bps)

Omega Financial Capital Trust I

     26,000         1,114         26,426         10/18/34         2.87  

Variable; 3-month LIBOR + 219 bps

  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

Total

   $ 47,500       $ 1,779       $ 48,591           
  

 

 

    

 

 

    

 

 

         

8. 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.

 

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All derivatives are carried on the consolidated balance sheets 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 sheets under other assets and derivative liabilities are classified in the consolidated balance sheets under other liabilities. Changes in fair value are recognized in earnings except for certain changes related to derivative instruments designated as part of a cash flow hedging relationship.

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

 

     September 30, 2016      December 31, 2015  
     Notional      Fair Value      Notional      Fair Value  
(in thousands)    Amount      Asset      Liability      Amount      Asset      Liability  

Gross Derivatives

                 

Subject to master netting arrangements:

                 

Interest rate contracts – designated

   $ 450,000       $ 9,938       $ 1,167       $ 250,000       $ 3,178       $ 962   

Interest rate swaps – not designated

     1,614,449         —           91,949         1,262,964         1         50,491   

Equity contracts – not designated

     1,180         43         —           1,180         18         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total subject to master netting arrangements

     2,065,629         9,981         93,116         1,514,144         3,197         51,453   

Not subject to master netting arrangements:

                 

Interest rate swaps – not designated

     1,614,449         90,989         —           1,262,964         49,998         1   

Credit risk contracts – not designated

     171,072         57         355         114,753         7         133   

Equity contracts – not designated

     1,180         —           43         1,180         —           18   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total not subject to master netting arrangements

     1,786,701         91,046         398         1,378,897         50,005         152   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,852,330       $ 101,027       $ 93,514       $ 2,893,041       $ 53,202       $ 51,605   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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 three 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.

Following is a summary of key data related to interest rate contracts:

 

(in thousands)    September 30,
2016
     December 31,
2015
 

Notional amount

   $ 450,000       $ 250,000   

Fair value included in other assets

     9,938         3,178   

Fair value included in other liabilities

     1,167         962   

The following table shows amounts reclassified from accumulated other comprehensive income (AOCI) for the nine months ended September 30, 2016:

 

(in thousands)    Total      Net of Tax  

Reclassified from AOCI to interest income

   $ 2,030       $ 1,319   

Reclassified from AOCI to interest expense

     554         360   

As of September 30, 2016, the maximum length of time over which forecasted interest cash flows are hedged is seven years. In the twelve months that follow September 30, 2016, the Corporation expects to reclassify from the amount currently reported in AOCI net derivative gains of $1.9 million ($1.2 million net of tax), in association with interest on the hedged loans and FHLB advances. This amount could differ from amounts actually recognized due to changes in

 

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interest rates, hedge de-designations, and the addition of other hedges subsequent to September 30, 2016. 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, 2016 and 2015, there was no hedge ineffectiveness. Also, during the nine months ended September 30, 2016 and 2015, 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.

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.

Following is a summary of key data related to interest rate swaps:

 

(in thousands)    September 30,
2016
     December 31,
2015
 

Notional amount

   $ 1,614,449       $ 1,262,964   

Fair value included in other assets

     90,989         49,999   

Fair value included in other liabilities

     91,949         50,492   

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 sheets 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 $120.5 million as of September 30, 2016 have remaining terms ranging from six months to fourteen years. Under these agreements, the Corporation’s maximum exposure assuming a customer defaults on their obligation to perform under certain derivative swap contracts with third parties would be $0.4 million at September 30, 2016 and $0.1 million at December 31, 2015.

The fair values of risk participation agreements purchased and sold were not material at September 30, 2016 and December 31, 2015.

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.

 

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Table of Contents

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 $1.1 million and $1.3 million as of September 30, 2016 and December 31, 2015, respectively, in excess of amounts previously posted as collateral with the respective counterparty.

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:

 

(in thousands)    Gross Amount      Gross
Amounts
Offset in the
Balance
Sheet
     Net Amount
Presented in
the Balance
Sheet
 

September 30, 2016

        

Derivative Assets

        

Subject to master netting arrangements:

        

Interest rate contracts

        

Designated

   $ 9,938         —         $ 9,938   

Not designated

     —           —           —     

Equity contracts – not designated

     43         —           43   

Not subject to master netting arrangements:

        

Interest rate contracts – not designated

     90,989         —           90,989   

Credit contracts – not designated

     57         —           57   
  

 

 

    

 

 

    

 

 

 

Total derivative assets

   $ 101,027         —         $ 101,027   
  

 

 

    

 

 

    

 

 

 

Derivative Liabilities

        

Subject to master netting arrangements:

        

Interest rate contracts

        

Designated

   $ 1,167         —         $ 1,167   

Not designated

     91,949         —           91,949   

Not subject to master netting arrangements:

        

Interest rate contracts – not designated

     —           —           —     

Credit contracts – not designated

     355         —           355   

Equity contracts – not designated

     43         —           43   
  

 

 

    

 

 

    

 

 

 

Total derivative liabilities

   $ 93,514         —         $ 93,514   
  

 

 

    

 

 

    

 

 

 

December 31, 2015

        

Derivative Assets

        

Subject to master netting arrangements:

        

Interest rate contracts

        

Designated

   $ 3,178         —         $ 3,178   

Not designated

     1         —           1   

Equity contracts – not designated

     18         —           18   

Not subject to master netting arrangements: