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

 

 

 

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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

 

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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

 

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F.N.B. CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

In thousands, except per share data

Unaudited

 

		Three Months Ended								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

 

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F.N.B. CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Dollars in thousands, except per share data

Unaudited

 

		Preferred Stock				Common Stock				Additional Paid-In Capital				Retained Earnings				Accumulated Other Comprehensive Income (Loss)				Treasury Stock				Total
Balance at January 1, 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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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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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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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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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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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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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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(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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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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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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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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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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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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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

 

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(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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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