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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended March 31, 2017

 

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, a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large Accelerated Filer      Accelerated Filer  
Non-accelerated Filer      Smaller reporting company  
     Emerging Growth Company  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

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 April 30, 2017

Common Stock, $0.01 Par Value   323,100,407 Shares

 

 

 


Table of Contents

F.N.B. CORPORATION

FORM 10-Q

March 31, 2017

INDEX

 

     PAGE  
PART I – FINANCIAL INFORMATION       

Item 1.

 

Financial Statements

  
 

Consolidated Balance Sheets

     3  
 

Consolidated Statements of Income

     4  
 

Consolidated Statements of Comprehensive Income

     5  
 

Consolidated Statements of Stockholders’ Equity

     6  
 

Consolidated Statements of Cash Flows

     7  
 

Notes to Consolidated Financial Statements

     8  

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      54  

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

     76  

Item 4.

 

Controls and Procedures

     76  

PART II – OTHER INFORMATION

  

Item 1.

 

Legal Proceedings

     77  

Item 1A.

 

Risk Factors

     77  

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     79  

Item 3.

 

Defaults Upon Senior Securities

     79  

Item 4.

 

Mine Safety Disclosures

     79  

Item 5.

 

Other Information

     79  

Item 6.

 

Exhibits

     79  

Signatures

       80  

 

2


Table of Contents

PART I – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

F.N.B. CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

Dollars in thousands, except share and per share data

 

     March 31,
2017
    December 31,
2016
 
     (Unaudited)        

Assets

    

Cash and due from banks

   $ 381,416     $ 303,526  

Interest bearing deposits with banks

     68,967       67,881  
  

 

 

   

 

 

 

Cash and Cash Equivalents

     450,383       371,407  

Securities available for sale

     2,638,815       2,231,987  

Securities held to maturity (fair value of $2,886,897 and $2,294,777)

     2,922,152       2,337,342  

Loans held for sale (includes $11,121 and $0 measured at fair value) (1)

     75,270       11,908  

Loans and leases, net of unearned income of $58,877 and $52,723

     20,177,650       14,896,943  

Allowance for credit losses

     (160,782     (158,059
  

 

 

   

 

 

 

Net Loans and Leases

     20,016,868       14,738,884  

Premises and equipment, net

     355,436       243,956  

Goodwill

     2,250,305       1,032,129  

Core deposit and other intangible assets, net

     134,699       67,327  

Bank owned life insurance

     467,457       330,152  

Other assets

     879,310       479,725  
  

 

 

   

 

 

 

Total Assets

   $ 30,190,695     $ 21,844,817  
  

 

 

   

 

 

 

Liabilities

    

Deposits:

    

Non-interest-bearing demand

   $ 5,537,679     $ 4,205,337  

Interest-bearing demand

     9,285,393       6,931,381  

Savings

     2,623,531       2,352,434  

Certificates and other time deposits

     3,879,669       2,576,495  
  

 

 

   

 

 

 

Total Deposits

     21,326,272       16,065,647  

Short-term borrowings

     3,585,963       2,503,010  

Long-term borrowings

     696,206       539,494  

Other liabilities

     226,459       165,049  
  

 

 

   

 

 

 

Total Liabilities

     25,834,900       19,273,200  

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 – 324,432,606 and 212,378,494 shares

     3,246       2,125  

Additional paid-in capital

     4,020,527       2,234,366  

Retained earnings

     299,818       304,397  

Accumulated other comprehensive loss

     (56,969     (61,369

Treasury stock – 1,525,843 and 1,318,947 shares at cost

     (17,709     (14,784
  

 

 

   

 

 

 

Total Stockholders’ Equity

     4,355,795       2,571,617  
  

 

 

   

 

 

 

Total Liabilities and Stockholders’ Equity

   $ 30,190,695     $ 21,844,817  
  

 

 

   

 

 

 

 

(1) Amount represents loans for which we have elected the fair value option. See Note 17.

See accompanying Notes to Consolidated Financial Statements

 

3


Table of Contents

F.N.B. CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

Dollars in thousands, except per share data

Unaudited

 

     Three Months Ended
March 31,
 
     2017      2016  

Interest Income

     

Loans and leases, including fees

   $ 168,629      $ 137,121  

Securities:

     

Taxable

     22,466        16,493  

Tax-exempt

     3,401        2,018  

Dividends

     9        5  

Other

     188        117  
  

 

 

    

 

 

 

Total Interest Income

     194,693        155,754  

Interest Expense

     

Deposits

     11,740        9,486  

Short-term borrowings

     6,674        2,361  

Long-term borrowings

     3,527        3,553  
  

 

 

    

 

 

 

Total Interest Expense

     21,941        15,400  
  

 

 

    

 

 

 

Net Interest Income

     172,752        140,354  

Provision for credit losses

     10,850        11,768  
  

 

 

    

 

 

 

Net Interest Income After Provision for Credit Losses

     161,902        128,586  

Non-Interest Income

     

Service charges

     24,807        21,134  

Trust services

     5,747        5,282  

Insurance commissions and fees

     5,141        4,921  

Securities commissions and fees

     3,623        3,374  

Capital markets income

     3,847        2,849  

Mortgage banking operations

     3,790        1,595  

Bank owned life insurance

     2,153        2,095  

Net securities gains

     2,625        71  

Other

     3,383        4,723  
  

 

 

    

 

 

 

Total Non-Interest Income

     55,116        46,044  

Non-Interest Expense

     

Salaries and employee benefits

     73,578        56,425  

Net occupancy

     11,349        9,266  

Equipment

     9,630        8,556  

Amortization of intangibles

     3,098        2,649  

Outside services

     13,043        9,303  

FDIC insurance

     5,387        3,968  

Supplies

     2,196        2,654  

Bank shares and franchise taxes

     2,980        2,617  

Merger-related

     52,724        24,940  

Other

     13,570        16,270  
  

 

 

    

 

 

 

Total Non-Interest Expense

     187,555        136,648  
  

 

 

    

 

 

 

Income Before Income Taxes

     29,463        37,982  

Income taxes

     6,484        11,850  
  

 

 

    

 

 

 

Net Income

     22,979        26,132  

Preferred stock dividends

     2,010        2,010  
  

 

 

    

 

 

 

Net Income Available to Common Stockholders

   $ 20,969      $ 24,122  
  

 

 

    

 

 

 

Earnings per Common Share

     

Basic

   $ 0.09      $ 0.12  
  

 

 

    

 

 

 

Diluted

   $ 0.09      $ 0.12  
  

 

 

    

 

 

 

Cash Dividends per Common Share

   $ 0.12      $ 0.12  
  

 

 

    

 

 

 

See accompanying Notes to Consolidated Financial Statements

 

4


Table of Contents

F.N.B. CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Dollars in thousands, except per share data

Unaudited

 

     Three Months Ended
March 31,
 
(in thousands)    2017     2016  

Net income

   $ 22,979     $ 26,132  

Other comprehensive income (loss):

    

Securities available for sale:

    

Unrealized gains arising during the period, net of tax expense of $3,248 and $7,719

     6,032       14,335  

Reclassification adjustment for gains included in net income, net of tax expense of $424 and $25

     (787     (46

Derivative instruments:

    

Unrealized (losses) gains arising during the period, net of tax (benefit) expense of $(550) and $1,693

     (1,022     3,145  

Reclassification adjustment for gains included in net income, net of tax expense of $125 and $188

     (233     (349

Pension and postretirement benefit obligations:

    

Unrealized gains arising during the period, net of tax expense of $221 and $214

     410       397  
  

 

 

   

 

 

 

Other comprehensive income

     4,400       17,482  
  

 

 

   

 

 

 

Comprehensive income

   $ 27,379     $ 43,614  
  

 

 

   

 

 

 

See accompanying Notes to Consolidated Financial Statements

 

5


Table of Contents

F.N.B. CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Dollars in thousands, except per share data

Unaudited

 

    Preferred
Stock
    Common
Stock
    Additional
Paid-In
Capital
    Retained
Earnings
    Accumulated
Other
Comprehensive
Income (Loss)
    Treasury
Stock
    Total  

Balance at January 1, 2017

  $ 106,882     $ 2,125     $ 2,234,366     $ 304,397     $ (61,369   $ (14,784   $ 2,571,617  

Comprehensive income

          22,979       4,400         27,379  

Dividends declared:

             

Preferred stock

          (2,010         (2,010

Common stock: $0.12/share

          (25,548         (25,548

Issuance of common stock

      5       2,117           (2,925     (803

Issuance of common stock - acquisitions

      1,116       1,780,891             1,782,007  

Assumption of warrant due to acquisition

        1,394             1,394  

Restricted stock compensation

        1,759             1,759  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2017

  $ 106,882     $ 3,246     $ 4,020,527     $ 299,818     $ (56,969   $ (17,709   $ 4,355,795  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at January 1, 2016

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

Comprehensive income

          26,132       17,482         43,614  

Dividends declared:

             

Preferred stock

          (2,010         (2,010

Common stock: $0.12/share

          (25,294         (25,294

Issuance of common stock

      5       1,657           (1,566     96  

Issuance of common stock - acquisitions

      341       403,679             404,020  

Restricted stock compensation

        1,136             1,136  

Tax benefit of stock-based compensation

        277             277  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2016

  $ 106,882     $ 2,112     $ 2,214,959     $ 242,045     $ (33,651   $ (14,326   $ 2,518,021  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying Notes to Consolidated Financial Statements

 

6


Table of Contents

F.N.B. CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Dollars in thousands

Unaudited

 

     Three Months Ended
March 31,
 
     2017     2016  

Operating Activities

    

Net income

   $ 22,979     $ 26,132  

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

    

Depreciation, amortization and accretion

     17,276       11,759  

Provision for credit losses

     10,850       11,768  

Deferred tax expense

     11,224       255  

Net securities gains

     (2,625     (71

Tax benefit of stock-based compensation

     (720     (277

Loans originated for sale

     (182,771     (95,503

Loans sold

     135,405       94,765  

Gain on sale of loans

     (3,344     (2,164

Net change in:

    

Interest receivable

     (1,527     (109

Interest payable

     444       1,301  

Bank owned life insurance

     (1,962     (1,850

Other, net

     13,403       47,865  
  

 

 

   

 

 

 

Net cash flows provided by operating activities

     18,632       93,871  
  

 

 

   

 

 

 

Investing Activities

    

Net change in loans and leases

     (208,958     (122,982

Securities available for sale:

    

Purchases

     (492,227     (510,271

Sales

     549,460       615,199  

Maturities

     119,867       170,266  

Securities held to maturity:

    

Purchases

     (531,560     (217,574

Sales

     1,574    

Maturities

     119,324       77,369  

Purchase of bank owned life insurance

     —         (64

Increase in premises and equipment

     (23,186     (13,878

Net cash received in business combinations

     197,682       46,854  
  

 

 

   

 

 

 

Net cash flows (used in ) provided by investing activities

     (268,024     44,919  
  

 

 

   

 

 

 

Financing Activities

    

Net change in:

    

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

     73,291       411,857  

Time deposits

     11,421       28,558  

Short-term borrowings

     286,765       (687,409

Proceeds from issuance of long-term borrowings

     65,998       42,371  

Repayment of long-term borrowings

     (82,506     (51,546

Net proceeds from issuance of common stock

     957       1,232  

Tax benefit of stock-based compensation

     —         277  

Cash dividends paid:

    

Preferred stock

     (2,010     (2,010

Common stock

     (25,548     (25,294
  

 

 

   

 

 

 

Net cash flows (used in) provided by financing activities

     328,368       (281,964
  

 

 

   

 

 

 

Net Increase (Decrease) in Cash and Cash Equivalents

     78,976       (143,174

Cash and cash equivalents at beginning of period

     371,407       489,119  
  

 

 

   

 

 

 

Cash and Cash Equivalents at End of Period

   $ 450,383     $ 345,945  
  

 

 

   

 

 

 

See accompanying Notes to Consolidated Financial Statements

 

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Table of Contents

F.N.B. CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

March 31, 2017

NATURE OF OPERATIONS

F.N.B. Corporation (FNB), headquartered in Pittsburgh, Pennsylvania, is a diversified financial services company operating in eight states. We hold a significant retail deposit market share in attractive markets including: Pittsburgh, Pennsylvania; Baltimore, Maryland; Cleveland, Ohio; and Charlotte, Raleigh, Durham and the Piedmont Triad (Winston-Salem, Greensboro and High Point) in North Carolina. As of March 31, 2017, we had 422 banking offices throughout Pennsylvania, Ohio, Maryland, West Virginia, North Carolina and South Carolina. We provide a full range of commercial banking, consumer banking and wealth management solutions through our subsidiary network which is led by our 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. We also operate Regency Finance Company (Regency), which had 76 consumer finance offices in Pennsylvania, Ohio, Kentucky and Tennessee as of March 31, 2017.

The terms “FNB,” “the Corporation,” “we,” “us” and “our” throughout this Report mean F.N.B. Corporation and its subsidiaries, when appropriate.

 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

Our accompanying consolidated financial statements and these notes to the financial statements include subsidiaries in which we have a controlling financial interest. We own and operate FNBPA, First National Trust Company, First National Investment Services Company, LLC, F.N.B. Investment Advisors, Inc., First National Insurance Agency, LLC (FNIA), Regency, Bank Capital Services, LLC and F.N.B. Capital Corporation, LLC, and include 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 our 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. Such reclassifications had no impact on our net income and stockholders’ equity. Events occurring subsequent to the date of the March 31, 2017 balance sheet have been evaluated for potential recognition or disclosure in the consolidated financial statements through the date of the filing of the consolidated financial statements with the Securities and Exchange Commission (SEC).

Certain information and note disclosures normally included in consolidated financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC. The interim operating results are not necessarily indicative of operating results FNB 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 FNB’s Annual Report on Form 10-K filed with the SEC on February 23, 2017. The accounting policies presented below have been added or amended for newly material items or the adoption of new accounting standards.

Use of Estimates

Our accounting and reporting policies conform with GAAP. The preparation of financial statements in conformity with GAAP requires us 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, accounting for acquired loans, fair value of financial instruments, goodwill and other intangible assets and income taxes.

 

8


Table of Contents

Loans Held for Sale and Loan Commitments

Certain of our residential mortgage loans are originated for sale in the secondary mortgage loan market. Effective January 1, 2017, we made an automatic election to account for all future residential mortgage loans under the fair value option (FVO). The FVO election is intended to better reflect the underlying economics and better facilitate the economic hedging of the loans. The FVO is applied on an instrument by instrument basis and is an irrevocable election. Additionally, with the election of the FVO, fees and costs associated with the origination and acquisition of residential mortgage loans are expensed as incurred, rather than deferred. Changes in fair value under the FVO are recorded in mortgage banking operations income on the consolidated statements of income. Fair value is determined on the basis of rates obtained in the respective secondary market for the type of loan held for sale. Prior to the FVO election, loans were generally sold at a premium or discount from the carrying amount of the loan which represented the lower of cost or fair value. Gain or loss on the sale of loans is recorded in mortgage banking operations non-interest income. Interest income on loans held for sale is recorded in interest income.

We routinely issue interest rate lock commitments for residential mortgage loans that we intend to sell. These interest rate lock commitments are considered derivatives. We also enter into loan sale commitments to sell these loans when funded to mitigate the risk that the market value of residential mortgage loans may decline between the time the rate commitment is issued to the customer and the time we sell the loan. These loan sale commitments are also derivatives. Both types of derivatives are recorded at fair value on the consolidated balance sheets with changes in fair value recorded in mortgage banking operations income.

We also originate loans guaranteed by the Small Business Administration (SBA) for the purchase of businesses, business startups, business expansion, equipment, and working capital. All SBA loans are underwritten and documented as prescribed by the SBA. The portion of SBA loans originated that are guaranteed and intended for sale on the secondary market are classified as held for sale and are carried at the lower of cost or fair value. At the time of the sale, we allocate the carrying value of the entire loan between the guaranteed portion sold and the unguaranteed portion retained based on their relative fair value which results in a discount recorded on the retained portion of the loan. The guaranteed portion is typically sold at a premium and the gain is recognized in other income for any net premium received in excess of the relative fair value of the portion of the loan transferred. The net carrying value of the retained portion of the loans is included in the appropriate loan classification for disclosure purposes, primarily commercial real estate or commercial and industrial.

Premises and Equipment

Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the asset’s estimated useful life. Leasehold improvements are expensed over the lesser of the asset’s estimated useful life or the term of the lease including renewal periods when reasonably assured. Useful lives are dependent upon the nature and condition of the asset and range from 3 to 40 years. Maintenance and repairs are charged to expense as incurred, while major improvements are capitalized and amortized to expense over the identified useful life.

Premises and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Assets to be disposed of are transferred to other assets and are reported at the lower of the carrying amount or fair value less costs to sell.

Goodwill and Other Intangible Assets

Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. Other intangible assets represent purchased assets that lack physical substance but can be distinguished from goodwill because of contractual or other legal rights. Intangible assets that have finite lives, such as core deposit intangibles, customer relationship intangibles and renewal lists, are amortized over their estimated useful lives and subject to periodic impairment testing. Core deposit intangibles are primarily amortized over ten years using accelerated methods. Customer renewal lists are amortized over their estimated useful lives which range from eight to thirteen years.

Goodwill and other intangibles are subject to impairment testing at the reporting unit level, which must be conducted at least annually. We perform impairment testing during the fourth quarter of each year, or more frequently if impairment indicators exist. We also continue to monitor other intangibles for impairment and to evaluate carrying amounts, as necessary.

 

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We perform a quantitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Prior to 2017, if, after assessing updated quantitative factors, we determined it was not more likely than not that the fair value of a reporting unit is less than its carrying amount, we did not have to perform the two-step goodwill impairment test.

Determining the fair value of a reporting unit under the first step of the goodwill impairment test and determining the fair value of individual assets and liabilities of a reporting unit under the second step of the goodwill impairment test are judgmental and often involve the use of significant estimates and assumptions. Similarly, estimates and assumptions are used in determining the fair value of other intangible assets. Estimates of fair value are primarily determined using discounted cash flows, market comparisons and recent transactions. These approaches use significant estimates and assumptions including projected future cash flows, discount rates reflecting the market rate of return, projected growth rates and determination and evaluation of appropriate market comparables. Based on the results of quantitative assessments of all reporting units, we concluded that no impairment existed at December 31, 2016. However, future events could cause us to conclude that goodwill or other intangibles have become impaired, which would result in recording an impairment loss. Any resulting impairment loss could have a material adverse impact on our financial condition and results of operations.

Beginning in 2017, as permitted under the early adoption provisions of ASU 2017-04, we changed our impairment policy to record an impairment loss, if any, based on the excess of a reporting unit’s carrying amount over its fair value. This change in accounting principle will be applied prospectively. We believe this change in accounting policy is preferable as it reduces the cost and complexity of accounting for goodwill impairment.

Loan Servicing Rights

We have two primary classes of servicing rights, residential mortgage loan servicing and SBA-guaranteed loan servicing. We recognize the right to service residential mortgage loans and SBA-guaranteed loans for others as an asset whether we purchase the servicing rights or as a result from a sale of loans that we originate when the servicing is contractually separated from the underlying loan and retained by us.

We initially record servicing rights at fair value in core deposit and other intangible assets, net on the consolidated balance sheet. Subsequently, servicing rights are measured at the lower of cost or fair value. Servicing rights are amortized in proportion to, and over the period of, estimated net servicing income against servicing income during the period in mortgage banking operations income for residential mortgage loans and other income for SBA-guaranteed loans. The amount and timing of estimated future net cash flows are updated based on actual results and updated projections.

Mortgage servicing rights (MSRs) are separated into pools based on common risk characteristics of the underlying loans and evaluated for impairment at least quarterly. SBA-guaranteed servicing rights are evaluated for impairment at least quarterly on an aggregate basis. Impairment, if any, is recognized when carrying value exceeds the fair value as determined by calculating the present value of expected net future cash flows. If impairment exists at the pool level for residential mortgage loans or on an aggregate basis for SBA-guaranteed loans, the servicing right is written down through a valuation allowance and is charged against mortgage banking operations income or other income, respectively.

Bank-Owned Life Insurance (BOLI)

We have purchased life insurance policies on certain current and former directors, officers and employees for which the Corporation is the owner and beneficiary. These policies are recorded in other assets in the consolidated balance sheet at their cash surrender value, or the amount that could be realized by surrendering the policies. Tax-exempt income from death benefits and changes in the net cash surrender value are recorded in bank owned life insurance income.

Low Income Housing Tax Credit Partnerships

We invest in various affordable housing projects that qualify for low income housing tax credits (LIHTCs). The investments are recorded in other assets on the consolidated balance sheets. These investments generate a return through the realization of federal tax credits. We use the proportional amortization method to account for a majority of our investments in these entities. LIHTCs that do not meet the requirements of the proportional amortization method are recognized using the equity method. Our net investment in LIHTCs was $14.7 million and $14.0 million at March 31, 2017 and December 31, 2016, respectively.

 

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Per Share Amounts

Earnings per common share is computed using net income available to common stockholders, which is net income adjusted for preferred stock dividends.

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

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

Beginning in 2017, the assumed proceeds from applying the treasury stock method when computing diluted earnings per share excludes the amount of excess tax benefits that would have been recognized in accumulated paid-in capital in accordance with newly adopted accounting guidance.

Stock Based Compensation

We account for our 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 our 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 our 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. Beginning in 2017, with the adoption of ASU 2016-09, we elected to change our accounting policy to account for forfeitures as they occur. The estimate for forfeitures prior to adoption of ASU 2016-09 was immaterial to our consolidated financial statements. We believe this change in accounting policy reduces the cost and complexity of accounting for stock-based compensation and is preferable to estimating forfeitures at the time of grant.

 

2. NEW ACCOUNTING STANDARDS

The following paragraphs summarize accounting pronouncements issued by the Financial Accounting Standards Board (FASB) that we recently adopted or will be adopting in the future.

Securities

Accounting Standards Update (ASU or Update) 2017-08, Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities which shortens the amortization period for the premium on certain purchased callable securities to the earliest call date. The accounting for purchased callable debt securities held at a discount does not change. The Update is effective in the first quarter of 2019. Early adoption is permitted. The Update is to be applied using a modified retrospective transition method and is not expected to have a material effect on our consolidated financial statements.

Retirement Benefits

ASU 2017-07, Compensation—Retirement Benefits: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, requires that an employer disaggregate the service cost component from the other

 

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components of net benefit cost. The amendments also provide explicit guidance on how to present the service cost component and the other components of net benefit cost in the income statement and allows only the service cost component of net benefit cost to be eligible for capitalization. The Update is effective the first quarter of 2018. Early adoption is permitted. The Update is to be applied using a retrospective transition method to adopt the requirement for separate presentation in the income statement of service costs and other components and a prospective transition method to adopt the requirement to limit the capitalization of benefit costs to the service cost component. We are currently assessing the potential impact to our consolidated financial statements.

Goodwill

ASU 2017-04, Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, eliminates the requirement of Step 2 in the current guidance to calculate the implied fair value of goodwill to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value in Step 1 of the current guidance. The Update is effective the first quarter of 2020. Early adoption is permitted for annual or interim goodwill impairment tests with a measurement date after January 1, 2017. We adopted this Update in 2017 for the next goodwill impairment test. This Update is applied prospectively and is not expected to have a material effect on our consolidated financial statements.

Business Combinations

ASU 2017-01, Business Combinations (Topic 850): Clarifying the Definition of a Business, clarifies the definition of a business with the objective of providing guidance to assist in the evaluation of whether transactions should be accounted for as acquisitions (disposals) of assets or businesses. The Update is effective for the first quarter of 2018. Early adoption is permitted for transactions that occurred before the issuance date or effective date of the Update if the transactions were not reported in financial statements that have been issued or made available for issuance. This Update is to be applied prospectively on or after the effective date and is not expected to have a material effect on the consolidated financial statements.

Statement of Cash Flows

ASU 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 adoption is permitted. We are currently assessing the potential impact to our 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 adoption is permitted. We are currently assessing the potential impact to our consolidated financial statements.

Revenue Recognition

ASU 2017-05, Other Income-Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets, clarifies the scope for recognizing gains and losses from the transfer of nonfinancial assets in contracts with noncustomers.

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 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.

 

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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.

We expect to adopt ASU 2014-09 in the first quarter of 2018 under the modified retrospective method where the cumulative effect is recognized at the date of initial application. Our evaluation of ASU 2014-09 is ongoing and not complete. The FASB has issued, and may issue in the future, interpretative guidance which may cause our evaluation to change. Based on our evaluation under the current guidance, we estimate that approximately 80% of our total interest income and non-interest income will be out-of-scope from ASU 2014-09 because the revenue from those contracts with customers is covered by other guidance in U.S. GAAP that was not amended or superseded with the issuance of ASU 2014-09. While we anticipate some changes to revenue recognition within trust, investment management fees and insurance commissions and fees, we have not yet assessed the potential impact to our consolidated financial statements upon adoption.

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 was adopted in the first quarter of 2017 by an application method determined by the type of transaction impacted by the adoption. This Update did not have a material effect on our 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 was adopted in the first quarter of 2017 by prospective application. This Update did not have a material effect on our 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 was adopted in the first quarter of 2017 by modified retrospective application. This Update did not have a material effect on our 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 was adopted in the first quarter of 2017 by prospective application. This Update did not have a material effect on our 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

 

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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 adoption is permitted. This Update is not expected to have a material effect on our 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 adoption is permitted. We are currently assessing the potential impact to our 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 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 adoption 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. We are currently assessing the potential impact to our consolidated financial statements.

 

3. MERGERS AND ACQUISITIONS

Yadkin Financial Corporation

On March 11, 2017, we completed our acquisition of Yadkin Financial Corporation (YDKN), a bank holding company based in Raleigh, North Carolina. YDKN’s banking affiliate, Yadkin Bank, was also merged into FNBPA on March 11, 2017. YDKN’s results of operations have been included in our consolidated statements of income since that date. The acquisition enabled us to enter the attractive North Carolina markets, including Raleigh, Charlotte and the Piedmont Triad, which is comprised of Winston-Salem, Greensboro and High Point. We also completed the core systems conversion activities during the quarter.

On the acquisition date, the preliminary estimated fair values of YDKN included $6.8 billion in assets, $5.1 billion in loans and $5.2 billion in deposits. The acquisition was valued at $1.8 billion based on the acquisition date FNB common stock closing price of $15.97 and resulted in FNB issuing 111,619,975 shares of our common stock in exchange for 51,677,565 shares of YDKN common stock. Under the terms of the merger agreement, shareholders of YDKN received 2.16 shares of FNB common stock for each share of YDKN common stock and cash in lieu of fractional shares. YDKN’s fully vested and outstanding stock options and restricted stock awards were converted into options to purchase and receive FNB common stock. In conjunction with the acquisition, we assumed a warrant that was issued by YDKN to the U.S. Department of the Treasury (UST) under the Capital Purchase Program (CPP). Based on the exchange ratio, this warrant, which expires in 2019, was converted into a warrant to purchase up to 207,320 shares of FNB common stock with an exercise price of $9.63.

The acquisition of YDKN constituted a business combination and has been accounted for using the acquisition method of accounting, and accordingly, assets acquired, liabilities assumed and consideration exchanged were recorded at estimated fair value on the acquisition date. The determination of estimated fair values required management to make certain estimates about discount rates, future expected cash flows, market conditions, and other future events that are highly subjective in nature and may require adjustments, which can be updated for up to a year following the acquisition. As of March 31, 2017, we continue to review information relating to events or circumstances existing at the acquisition date. Management anticipates that this review could result in adjustments to the preliminary acquisition date valuation amounts presented due to the relatively short timeframe between the March 11, 2017 closing date and quarter-end, as well as the complexity and time required by management and third-parties involved in the valuation of loans, core deposit intangibles, premises and equipment, other real estate owned (OREO) and bank owned life insurance (BOLI). Acquired loans and core deposit intangibles were recorded at provisional amounts based on our preliminary third-party valuations. Acquired premises and equipment, OREO and BOLI were recorded at provisional amounts, and are currently being valued in conjunction with third-parties and will be adjusted during the second quarter of 2017.

 

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Based on the preliminary purchase price allocation, we recorded $1.2 billion in goodwill and $55.7 million in core deposit intangibles as a result of the acquisition. The core deposit intangible asset is being amortized over the estimated useful life of approximately ten years utilizing an accelerated method. Goodwill is not amortized, but is periodically evaluated for impairment. None of the goodwill is deductible for income tax purposes.

The following pro forma financial information for the periods presented reflects our estimated consolidated pro forma results of operations as if the YDKN acquisition occurred on January 1, 2016, unadjusted for potential cost savings and other business synergies we expect to receive as a result of the acquisition:

 

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

Three Months Ended March 31, 2017

           

Revenue (net interest income and non-interest income)

   $ 206,969      $ 74,574      $ (781    $ 280,762  

Net income

     51,253        22,435        (1,710      71,978  

Net income available to common stockholders

     49,243        22,435        (1,710      69,968  

Earnings per common share – basic

     0.23        0.43        —          0.22  

Earnings per common share – diluted

     0.23        0.43        —          0.22  

Three Months Ended March 31, 2016

           

Revenue (net interest income and non-interest income)

     186,398        74,709        (1,323      259,784  

Net income

     26,132        15,447        (1,966      39,613  

Net income available to common stockholders

     24,122        15,447        (1,966      37,603  

Earnings per common share – basic

     0.12        0.30        —          0.12  

Earnings per common share – diluted

     0.12        0.30        —          0.12  

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

In connection with the YDKN acquisition, we incurred expenses related to systems conversions and other costs of integrating and conforming acquired operations with and into FNB. These merger-related expenses, that were expensed as incurred, amounted to $52.3 million for the three months ended March 31, 2017. Contract terminations and severance costs comprised 30.8% and 26.6%, respectively, 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. We also incurred issuance costs of $0.5 million which were charged to additional paid-in capital.

Branch Purchase – Fifth Third Bank

On April 22, 2016, we completed our 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 $312.4 million, including $198.9 million in cash, $95.4 million in loans and $14.1 million in fixed and other assets. We also assumed $302.5 million in deposits, for which we paid a deposit premium of 1.97%, as part of the transaction. The assets and liabilities relating to these purchased branches were recorded on our balance sheet at their fair values as of April 22, 2016, and the related results of operations for these branches have been included in our consolidated income statement since that date. We recorded $14.1 million in goodwill and $4.1 million in core deposit intangibles as a result of the purchase transaction. The goodwill for this transaction is deductible for income tax purposes.

Metro Bancorp, Inc.

On February 13, 2016, we completed our acquisition of Metro Bancorp, Inc. (METR), a bank holding company based in Harrisburg, Pennsylvania. The acquisition enhanced our distribution and scale across Central Pennsylvania, strengthened our position as the largest Pennsylvania-based regional bank and allowed us to leverage the significant infrastructure investments made in connection with the expansion of our product offerings and risk management systems. On the acquisition date, the fair values of METR included $2.8 billion in assets, $1.9 billion in loans and $2.3 billion in deposits.

 

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The acquisition was valued at $404.2 million and resulted in FNB issuing 34,041,181 shares of its common stock in exchange for 14,345,319 shares of METR common stock. We also acquired the fully vested outstanding stock options of METR. The assets and liabilities of METR were recorded on our consolidated balance sheet at their fair values as of the acquisition date and METR’s results of operations have been included in our consolidated income statement since that date. METR’s banking affiliate, Metro Bank, was merged into FNBPA on February 13, 2016. Based on the purchase price allocation, we recorded $185.1 million in goodwill and $24.2 million in core deposit intangibles as a result of the acquisition. None of the goodwill is deductible for income tax purposes as the acquisition is accounted for as a tax-free exchange for tax purposes.

In connection with the METR acquisition, we incurred expenses related to systems conversions and other costs of integrating and conforming acquired operations with and into FNB. These merger-related charges, that were expensed as incurred, amounted to $0.4 million for the three months ended March 31, 2017 and $31.0 million for the year ended December 31, 2016. Severance costs comprised 39.9% 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. We also incurred issuance costs of $0.7 million which were charged to additional paid-in capital.

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)    YDKN      Fifth
Third
Branches
     METR  

Fair value of consideration paid

   $ 1,783,366      $ —        $ 404,242  

Fair value of identifiable assets acquired:

        

Cash and cash equivalents

     197,682        198,872        46,890  

Securities

     940,634        —          722,980  

Loans

     5,116,497        95,354        1,862,447  

Core deposit and other intangible assets

     69,555        4,129        24,163  

Fixed and other assets

     460,752        14,069        127,185  
  

 

 

    

 

 

    

 

 

 

Total identifiable assets acquired

     6,785,120        312,424        2,783,665  

Fair value of liabilities assumed:

        

Deposits

     5,176,758        302,529        2,328,238  

Borrowings

     969,385        —          227,539  

Other liabilities

     73,652        24,041        8,700  
  

 

 

    

 

 

    

 

 

 

Total liabilities assumed

     6,219,795        326,570        2,564,477  

Fair value of net identifiable assets acquired

     565,325        (14,146      219,188  
  

 

 

    

 

 

    

 

 

 

Goodwill recognized (1)

   $ 1,218,041      $ 14,146      $ 185,054  
  

 

 

    

 

 

    

 

 

 

 

(1) All of the goodwill for these transactions has been recorded in the Community Banking Segment.

 

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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 (AFS):

           

March 31, 2017

           

U.S. Treasury

   $ 29,908      $ 37      $ —        $ 29,945  

U.S. government-sponsored entities

     397,634        676        (3,104      395,206  

Residential mortgage-backed securities:

           

Agency mortgage-backed securities

     1,650,743        3,024        (10,753      1,643,014  

Agency collateralized mortgage obligations

     514,232        347        (10,616      503,963  

Non-agency collateralized mortgage obligations

     2        —          —          2  

Commercial mortgage-backed securities

     420        —          (1      419  

States of the U.S. and political subdivisions

     34,763        69        (154      34,678  

Other debt securities

     21,899        68        (373      21,594  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total debt securities

     2,649,601        4,221        (25,001      2,628,821  

Equity securities

     9,479        612        (97      9,994  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities available for sale

   $ 2,659,080      $ 4,833      $ (25,098    $ 2,638,815  
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2016

           

U.S. Treasury

   $ 29,874      $ 79      $ —        $ 29,953  

U.S. government-sponsored entities

     367,604        864        (3,370      365,098  

Residential mortgage-backed securities:

           

Agency mortgage-backed securities

     1,267,535        2,257        (16,994      1,252,798  

Agency collateralized mortgage obligations

     546,659        419        (11,104      535,974  

Non-agency collateralized mortgage obligations

     891        6        —          897  

Commercial mortgage-backed securities

     1,292        —          (1      1,291  

States of the U.S. and political subdivisions

     36,065        86        (302      35,849  

Other debt securities

     9,828        94        (435      9,487  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total debt securities

     2,259,748        3,805        (32,206      2,231,347  

Equity securities

     273        367        —          640  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities available for sale

   $ 2,260,021      $ 4,172      $ (32,206    $ 2,231,987  
  

 

 

    

 

 

    

 

 

    

 

 

 

Securities Held to Maturity (HTM):

           

March 31, 2017

           

U.S. Treasury

   $ 500      $ 139      $ —        $ 639  

U.S. government-sponsored entities

     247,580        395        (4,255      243,720  

Residential mortgage-backed securities:

           

Agency mortgage-backed securities

     1,243,947        7,382        (6,795      1,244,534  

Agency collateralized mortgage obligations

     798,506        841        (17,003      782,344  

Commercial mortgage-backed securities

     81,750        508        (302      81,956  

States of the U.S. and political subdivisions

     549,869        2,686        (18,851      533,704  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities held to maturity

   $ 2,922,152      $ 11,951      $ (47,206    $ 2,886,897  
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2016

           

U.S. Treasury

   $ 500      $ 137      $ —        $ 637  

U.S. government-sponsored entities

     272,645        348        (4,475      268,518  

Residential mortgage-backed securities:

           

Agency mortgage-backed securities

     852,215        5,654        (8,645      849,224  

Agency collateralized mortgage obligations

     743,148        447        (17,801      725,794  

Non-agency collateralized mortgage obligations

     1,689        3        (6      1,686  

Commercial mortgage-backed securities

     49,797        181        (226      49,752  

States of the U.S. and political subdivisions

     417,348        1,456        (19,638      399,166  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities held to maturity

   $ 2,337,342      $ 8,226      $ (50,791    $ 2,294,777  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

 

     Three Months Ended  
     March 31,  
(in thousands)    2017      2016  

Gross gains

   $ 3,400      $ 71  

Gross losses

     (775      —    
  

 

 

    

 

 

 

Net gains

   $ 2,625      $ 71  
  

 

 

    

 

 

 

As of March 31, 2017, the amortized cost and fair value of securities, by contractual maturities, were as follows:

 

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

Due in one year or less

   $ 119,899      $ 120,041      $ 390      $ 396  

Due from one to five years

     330,197        327,741        253,707        249,830  

Due from five to ten years

     31,143        30,918        68,397        68,666  

Due after ten years

     2,965        2,723        475,455        459,171  
  

 

 

    

 

 

    

 

 

    

 

 

 
     484,204        481,423        797,949        778,063  

Residential mortgage-backed securities:

           

Agency mortgage-backed securities

     1,650,743        1,643,014        1,243,947        1,244,534  

Agency collateralized mortgage obligations

     514,232        503,963        798,506        782,344  

Non-agency collateralized mortgage obligations

     2        2        —          —    

Commercial mortgage-backed securities

     420        419        81,750        81,956  

Equity securities

     9,479        9,994        —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities

   $ 2,659,080      $ 2,638,815      $ 2,922,152      $ 2,886,897  
  

 

 

    

 

 

    

 

 

    

 

 

 

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:

 

     March 31,     December 31,  
(dollars in thousands)    2017     2016  

Securities pledged (carrying value):

    

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

   $ 3,145,072     $ 2,779,335  

As collateral for short-term borrowings

     323,658       322,038  

Securities pledged as a percent of total securities

     62.4     67.9

 

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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

                 

March 31, 2017

                 

U.S. government-sponsored entities

    13     $ 246,881     $ (3,104     —       $ —       $ —         13     $ 246,881     $ (3,104

Residential mortgage-backed securities:

                 

Agency mortgage-backed securities

    56       1,176,464       (10,753     —         —         —         56       1,176,464       (10,753

Agency collateralized mortgage obligations

    29       364,095       (6,990     9       84,869       (3,626     38       448,964       (10,616

Commercial mortgage-backed securities

    1       419       (1     —         —         —         1       419       (1

States of the U.S. and political subdivisions

    11       17,762       (72     5       5,834       (82     16       23,596       (154

Other debt securities

    —         —         —         3       4,534       (373     3       4,534       (373

Equity securities

    5       703       (97     —         —         —         5       703       (97
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total temporarily impaired securities AFS

    115     $ 1,806,324     $ (21,017     17     $ 95,237     $ (4,081     132     $ 1,901,561     $ (25,098
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

December 31, 2016

                 

U.S. government-sponsored entities

    11     $ 211,636     $ (3,370     —       $ —       $ —         11     $ 211,636     $ (3,370

Residential mortgage-backed securities:

                 

Agency mortgage-backed securities

    55       1,056,731       (16,994     —         —         —         55       1,056,731       (16,994

Agency collateralized mortgage obligations

    26       346,662       (7,261     9       89,040       (3,843     35       435,702       (11,104

Commercial mortgage-backed securities

    1       1,291       (1     —         —         —         1       1,291       (1

States of the U.S. and political subdivisions

    20       28,631       (302     —         —         —         20       28,631       (302

Other debt securities

    —         —         —         3       4,470       (435     3       4,470       (435
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total temporarily impaired securities AFS

    113     $ 1,644,951     $ (27,928     12     $ 93,510     $ (4,278     125     $ 1,738,461     $ (32,206
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Securities Held to Maturity

                 

March 31, 2017

                 

U.S. government-sponsored entities

    11     $ 200,745     $ (4,255     —       $ —       $ —         11     $ 200,745     $ (4,255

Residential mortgage-backed securities:

                 

Agency mortgage-backed securities

    38       695,915       (6,795     —         —         —         38       695,915       (6,795

Agency collateralized mortgage obligations

    29       498,743       (13,236     12       107,546       (3,767     41       606,289       (17,003

Commercial mortgage-backed securities

    3       14,875       (67     1       7,684       (235     4       22,559       (302

States of the U.S. and political subdivisions

    103       279,356       (18,851     —         —         —         103       279,356       (18,851
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total temporarily impaired securities HTM

    184     $ 1,689,634     $ (43,204     13     $ 115,230     $ (4,002     197     $ 1,804,864     $ (47,206
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

December 31, 2016

                 

U.S. government-sponsored entities

    10     $ 185,525     $ (4,475     —       $ —       $ —         10     $ 185,525     $ (4,475

Residential mortgage-backed securities:

                 

Agency mortgage-backed securities

    36       551,404       (8,645     —         —         —         36       551,404       (8,645

Agency collateralized mortgage obligations

    29       516,237       (13,710     12       112,690       (4,091     41       628,927       (17,801

Non-agency collateralized mortgage obligations

    3       1,128       (6     —         —         —         3       1,128       (6

Commercial mortgage-backed securities

    1       12,317       (10     1       8,267       (216     2       20,584       (226

States of the U.S. and political subdivisions

    94       247,301       (19,638     —         —         —         94       247,301       (19,638
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total temporarily impaired securities HTM

    173     $ 1,513,912     $ (46,484     13     $ 120,957     $ (4,307     186     $ 1,634,869     $ (50,791
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

We do not intend to sell the debt securities and it is not more likely than not that we will be required to sell the securities before recovery of their amortized cost basis.

Other-Than-Temporary Impairment

We evaluate our investment securities portfolio for other-than-temporary impairment (OTTI) on a quarterly basis. Impairment is assessed at the individual security level. We consider an investment security impaired if the fair value of the security is less than its cost or amortized cost basis. We did not recognize any OTTI losses on securities for the three months ended March 31, 2017 or 2016.

 

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Table of Contents

States of the U.S. and Political Subdivisions

Our municipal bond portfolio with a carrying amount of $584.5 million as of March 31, 2017 is highly rated with an average entity-specific rating of AA and 99.0% of the portfolio rated A or better. All of the securities in the municipal portfolio are general obligation bonds. Geographically, municipal bonds support our primary footprint as 69.7% of the securities are from municipalities located throughout Pennsylvania, Ohio, Maryland, North Carolina and South Carolina. The average holding size of the securities in the municipal bond portfolio is $2.3 million. In addition to the strong stand-alone ratings, 66.0% of the municipalities have some formal credit enhancement insurance that strengthens the creditworthiness of their issue. Management 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
 

March 31, 2017

        

Commercial real estate

   $ 4,262,270      $ 4,506,087      $ 8,768,357  

Commercial and industrial

     2,857,584        935,095        3,792,679  

Commercial leases

     197,071        —          197,071  
  

 

 

    

 

 

    

 

 

 

Total commercial loans and leases

     7,316,925        5,441,182        12,758,107  

Direct installment

     1,758,895        206,223        1,965,118  

Residential mortgages

     1,551,928        790,239        2,342,167  

Indirect installment

     1,259,770        177        1,259,947  

Consumer lines of credit

     1,100,695        705,301        1,805,996  

Other

     46,315        —          46,315  
  

 

 

    

 

 

    

 

 

 

Total loans and leases, net of unearned income

   $ 13,034,528      $ 7,143,122      $ 20,177,650  
  

 

 

    

 

 

    

 

 

 

December 31, 2016

        

Commercial real estate

   $ 4,095,817      $ 1,339,345      $ 5,435,162  

Commercial and industrial

     2,711,886        330,895        3,042,781  

Commercial leases

     196,636        —          196,636  
  

 

 

    

 

 

    

 

 

 

Total commercial loans and leases

     7,004,339        1,670,240        8,674,579  

Direct installment

     1,765,257        79,142        1,844,399  

Residential mortgages

     1,446,776        397,798        1,844,574  

Indirect installment

     1,196,110        203        1,196,313  

Consumer lines of credit

     1,099,627        201,573        1,301,200  

Other

     35,878        —          35,878  
  

 

 

    

 

 

    

 

 

 

Total loans and leases, net of unearned income

   $ 12,547,987      $ 2,348,956      $ 14,896,943  
  

 

 

    

 

 

    

 

 

 

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 businesses that are not secured by real estate;

 

    Commercial leases consist of leases 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 1-4 family properties;

 

    Indirect installment is comprised of loans originated by approved third parties and underwritten by us, 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.

 

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The loans and leases portfolio consists principally of loans to individuals and small- and medium-sized businesses within our primary market areas of Pennsylvania, eastern Ohio, Maryland, North Carolina, South Carolina 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:

 

     March 31,     December 31,  
(dollars in thousands)    2017     2016  

Regency consumer finance loans

   $ 173,786     $ 184,687  

Percent of total loans and leases

     0.9     1.2

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

 

     March 31,     December 31,  
(dollars in thousands)    2017     2016  

Commercial construction loans

   $ 1,050,129     $ 459,995  

Percent of total loans and leases

     5.2     3.1

Commercial real estate:

    

Percent owner-occupied

     37.4     36.2

Percent non-owner-occupied

     62.6     63.8

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 our 2016 Annual Report on Form 10-K for a discussion of ASC 310-20 and ASC 310-30 loans. The outstanding balance and the carrying amount of acquired loans included in the consolidated balance sheets are as follows:

 

(in thousands)    March 31,
2017
     December 31,
2016
 

Accounted for under ASC 310-30:

     

Outstanding balance

   $ 7,205,696      $ 2,346,687  

Carrying amount

     6,644,633        2,015,904  

Accounted for under ASC 310-20:

     

Outstanding balance

     502,001        342,015  

Carrying amount

     491,921        325,784  

Total acquired loans:

     

Outstanding balance

     7,707,697        2,688,702  

Carrying amount

     7,136,554        2,341,688  

The outstanding balance is the undiscounted sum of all amounts owed under the loan, including amounts deemed principal, interest, fees, penalties and other, whether or not currently due and whether or not any such amounts have been written or charged-off.

The carrying amount of purchased credit impaired loans included in the table above totaled $11.8 million at March 31, 2017 and $2.8 million at December 31, 2016, representing less than 1% of the carrying amount of total acquired loans as of each date.

 

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The following table provides changes in accretable yield for all acquired loans accounted for under ASC 310-30. Loans accounted for under ASC 310-20 are not included in this table.

 

     Three Months Ended  
     March 31,  
(in thousands)    2017      2016  

Balance at beginning of period

   $ 467,070      $ 256,120  

Acquisitions

     443,261        284,092  

Reduction due to unexpected early payoffs

     (20,560      (9,375

Reclass from non-accretable difference

     23,106        10,494  

Disposals/transfers

     (36      (260

Accretion

     (25,241      (13,204
  

 

 

    

 

 

 

Balance at end of period

   $ 887,600      $ 527,867  
  

 

 

    

 

 

 

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 impairment through a charge to the provision for credit losses and credit to the allowance for credit losses.

During the three months ended March 31, 2017, there was an overall improvement in cash flow expectations which resulted in a net reclassification of $23.1 million from the non-accretable difference to accretable yield. This reclassification was $10.5 million for the three months ended March 31, 2016. The reclassification from the non-accretable difference to the accretable yield results in prospective yield adjustments on the loan pools.

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 YDKN in 2017 based on the preliminary estimate of fair value as described in Note 3.

 

(in thousands)    Acquired
Impaired
Loans
     Acquired
Performing
Loans
     Total  

Contractually required cash flows at acquisition

   $ 48,941      $ 5,084,475      $ 5,133,416  

Non-accretable difference (expected losses and foregone interest)

     (25,673      (406,802      (432,475
  

 

 

    

 

 

    

 

 

 

Cash flows expected to be collected at acquisition

     23,268        4,677,673        4,700,941  

Accretable yield

     (3,323      (439,938      (443,261
  

 

 

    

 

 

    

 

 

 

Fair value of acquired loans at acquisition

   $ 19,945      $ 4,237,735      $ 4,257,680  
  

 

 

    

 

 

    

 

 

 

In addition, loans purchased in the YDKN acquisition that were not subject to ASC 310-30 had the following balances at the date of acquisition: fair value of $5.0 million; unpaid principal balance of $5.2 million; and contractual cash flows not expected to be collected of $6.2 million.

Credit Quality

Management monitors the credit quality of our loan and lease portfolio using several performance measures to do so based on payment activity and borrower performance.

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. We place originated loans on non-accrual status and discontinue 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, though we may place a loan on non-accrual prior to these past due thresholds as warranted. When a loan is placed on non-accrual status, all unpaid interest is reversed. Non-accrual loans may not be restored to accrual

 

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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 we have granted a concession on the interest rate or the original repayment terms due to the borrower’s financial distress.

Following is a summary of non-performing assets:

 

(dollars in thousands)    March 31,
2017
    December 31,
2016
 

Non-accrual loans

   $ 81,390     $ 65,479  

Troubled debt restructurings

     23,988       20,428  
  

 

 

   

 

 

 

Total non-performing loans

     105,378       85,907  

Other real estate owned (OREO)

     50,088       32,490  
  

 

 

   

 

 

 

Total non-performing assets

   $ 155,466     $ 118,397  
  

 

 

   

 

 

 

Asset quality ratios:

    

Non-performing loans / total loans and leases

     0.52     0.58

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

     0.77     0.79

Non-performing assets / of total assets

     0.51     0.54

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 $5.9 million at March 31, 2017 and $5.3 million at December 31, 2016. The recorded investment of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process at March 31, 2017 and December 31, 2016 totaled $11.9 million and $12.0 million, respectively.

 

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Table of Contents

The following tables provide an analysis of the aging of 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

 

              

March 31, 2017

                 

Commercial real estate

   $ 5,923      $ 1      $ 23,040      $ 28,964      $ 4,233,306      $ 4,262,270  

Commercial and industrial

     5,007        3        34,826        39,836        2,817,748        2,857,584  

Commercial leases

     1,039        —          2,017        3,056        194,015        197,071  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans and leases

     11,969        4        59,883        71,856        7,245,069        7,316,925  

Direct installment

     7,973        4,092        7,675        19,740        1,739,155        1,758,895  

Residential mortgages

     9,797        1,966        4,466        16,229        1,535,699        1,551,928  

Indirect installment

     5,678        374        1,488        7,540        1,252,230        1,259,770  

Consumer lines of credit

     2,739        375        1,782        4,896        1,095,799        1,100,695  

Other

     242        121        1,000        1,363        44,952        46,315  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total originated loans and leases

   $ 38,398      $ 6,932      $ 76,294      $ 121,624      $ 12,912,904      $ 13,034,528  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2016

                 

Commercial real estate

   $ 8,452      $ 1      $ 20,114      $ 28,567      $ 4,067,250      $ 4,095,817  

Commercial and industrial

     16,019        3        24,141        40,163        2,671,723        2,711,886  

Commercial leases

     973        1        3,429        4,403        192,233        196,636  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans and leases

     25,444        5        47,684        73,133        6,931,206        7,004,339  

Direct installment

     10,573        4,386        6,484        21,443        1,743,814        1,765,257  

Residential mortgages

     10,594        3,014        3,316        16,924        1,429,852        1,446,776  

Indirect installment

     9,312        513        1,983        11,808        1,184,302        1,196,110  

Consumer lines of credit

     3,529        1,112        1,616        6,257        1,093,370        1,099,627  

Other

     398        83        1,000        1,481        34,397        35,878  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total originated loans and leases

   $ 59,850      $ 9,113      $ 62,083      $ 131,046      $ 12,416,941      $ 12,547,987  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

24


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

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

Acquired Loans

                   

March 31, 2017

                   

Commercial real estate

   $ 41,450      $ 39,243      $ 1,414      $ 82,107      $ 4,630,159      $ (206,179   $ 4,506,087  

Commercial and industrial

     7,587        7,736        2,854        18,177        977,012        (60,094     935,095  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total commercial loans

     49,037        46,979        4,268        100,284        5,607,171        (266,273     5,441,182  

Direct installment

     5,669        2,183        81        7,933        196,563        1,727       206,223  

Residential mortgages

     19,069        14,075        —          33,144        800,460        (43,365     790,239  

Indirect installment

     —          2        —          2        75        100       177  

Consumer lines of credit

     11,395        5,974        747        18,116        703,422        (16,237     705,301  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total acquired loans

   $ 85,170      $ 69,213      $ 5,096      $ 159,479      $ 7,307,691      $ (324,048   $ 7,143,122  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

December 31, 2016

                   

Commercial real estate

   $ 9,501      $ 23,890      $ 949      $ 34,340      $ 1,384,752      $ (79,747   $ 1,339,345  

Commercial and industrial

     1,789        2,942        2,111        6,842        353,494        (29,441     330,895  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total commercial loans

     11,290        26,832        3,060        41,182        1,738,246        (109,188     1,670,240  

Direct installment

     2,317        1,344        —          3,661        73,479        2,002       79,142  

Residential mortgages

     8,428        10,816        —          19,244        416,561        (38,007     397,798  

Indirect installment

     19        4        —          23        96        84       203  

Consumer lines of credit

     2,156        1,528        336        4,020        201,958        (4,405     201,573  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total acquired loans

   $ 24,210      $ 40,524      $ 3,396      $ 68,130      $ 2,430,340      $ (149,514   $ 2,348,956  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

(1) Past due information for acquired loans is based on the contractual balance outstanding at March 31, 2017 and December 31, 2016.
(2) Acquired loans are considered performing upon acquisition, regardless of whether the customer is contractually delinquent, as long as we can reasonably estimate the timing and amount of expected cash flows on such loans. In these instances, we do not consider acquired contractually delinquent loans to be non-accrual or non-performing and continue 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, we determine we are no longer able to reasonably estimate the timing and amount of expected cash flows on such loans. We do not recognize interest income on acquired loans considered non-accrual or non-performing.

We utilize the following categories to monitor credit quality within our 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. Our internal credit risk grading system is based on past experiences with similarly graded loans and leases and conforms with regulatory categories. In general, loan and lease risk ratings within each category are reviewed on an ongoing basis according to our policy for each class of loans and leases. Each quarter, management analyzes the resulting ratings, as well as other external statistics and factors such as delinquency, to track the migration performance of the commercial loan and lease portfolio. Loans and leases within the Pass credit category or that migrate toward the Pass credit category generally have a lower risk of loss compared to loans and leases that migrate toward the Substandard or Doubtful credit categories. Accordingly, management applies higher risk factors to Substandard and Doubtful credit categories.

 

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Table of Contents

The following tables present a summary of our 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

              

March 31, 2017

              

Commercial real estate

   $ 4,068,403      $ 132,700      $ 60,958      $ 209      $ 4,262,270  

Commercial and industrial

     2,616,144        122,892        109,515        9,033        2,857,584  

Commercial leases

     190,641        3,711        2,719        —          197,071  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total originated commercial loans and leases

   $ 6,875,188      $ 259,303      $ 173,192      $ 9,242      $ 7,316,925  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2016

              

Commercial real estate

   $ 3,895,764      $ 130,452      $ 69,588      $ 13      $ 4,095,817  

Commercial and industrial

     2,475,955        104,652        128,089        3,190        2,711,886  

Commercial leases

     188,662        3,789        4,185        —          196,636  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total originated commercial loans and leases

   $ 6,560,381      $ 238,893      $ 201,862      $ 3,203      $ 7,004,339  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Acquired Loans

              

March 31, 2017

              

Commercial real estate

   $ 3,699,904      $ 531,316      $ 274,506      $ 361      $ 4,506,087  

Commercial and industrial

     786,808        77,961        70,171        155        935,095  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total acquired commercial loans

   $ 4,486,712      $ 609,277      $ 344,677      $ 516      $ 5,441,182  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2016

              

Commercial real estate

   $ 1,144,676      $ 85,894      $ 108,128      $ 647      $ 1,339,345  

Commercial and industrial

     274,819        20,593        34,967        516        330,895  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total acquired commercial loans

   $ 1,419,495      $ 106,487      $ 143,095      $ 1,163      $ 1,670,240  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Credit quality information for acquired loans is based on the contractual balance outstanding at March 31, 2017 and December 31, 2016.

We use delinquency transition matrices within the consumer and other loan classes to enable management to estimate a quantitative portion of credit risk. Each month, management analyzes payment and volume activity, FICO scores and other external factors such as unemployment, to determine how consumer loans are performing.

 

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Table of Contents

Following is a table showing consumer loans by payment status:

 

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

Originated loans

        

March 31, 2017

        

Direct installment

   $ 1,742,702      $ 16,193      $ 1,758,895  

Residential mortgages

     1,537,779        14,149        1,551,928  

Indirect installment

     1,258,084        1,686        1,259,770  

Consumer lines of credit

     1,097,781        2,914        1,100,695  
  

 

 

    

 

 

    

 

 

 

Total originated consumer loans

   $ 5,636,346      $ 34,942      $ 5,671,288  
  

 

 

    

 

 

    

 

 

 

December 31, 2016

        

Direct installment

   $ 1,750,305      $ 14,952      $ 1,765,257  

Residential mortgages

     1,433,409        13,367        1,446,776  

Indirect installment

     1,193,930        2,180        1,196,110  

Consumer lines of credit

     1,096,642        2,985        1,099,627  
  

 

 

    

 

 

    

 

 

 

Total originated consumer loans

   $ 5,474,286      $ 33,484      $ 5,507,770  
  

 

 

    

 

 

    

 

 

 

Acquired loans

        

March 31, 2017

        

Direct installment

   $ 206,138      $ 85      $ 206,223  

Residential mortgages

     788,656        1,583        790,239  

Indirect installment

     177        —          177  

Consumer lines of credit

     703,972        1,329        705,301  
  

 

 

    

 

 

    

 

 

 

Total acquired consumer loans

   $ 1,698,943      $ 2,997      $ 1,701,940  
  

 

 

    

 

 

    

 

 

 

December 31, 2016

        

Direct installment

   $ 79,142      $ —        $ 79,142  

Residential mortgages

     397,798        —          397,798  

Indirect installment

     203        —          203  

Consumer lines of credit

     201,061        512        201,573  
  

 

 

    

 

 

    

 

 

 

Total acquired consumer loans

   $ 678,204      $ 512      $ 678,716  
  

 

 

    

 

 

    

 

 

 

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, we do 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 our existing method of income recognition for loans and leases, interest income on impaired loans, except for those loans classified as non-accrual, is recognized using the accrual method. Impaired loans, or portions thereof, are charged off when deemed uncollectible.

 

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Table of Contents

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

 

(in thousands)    Unpaid
Contractual
Principal
Balance
     Recorded
Investment
With No
Specific
Reserve
     Recorded
Investment
With

Specific
Reserve
     Total
Recorded
Investment
     Specific
Reserve
     Average
Recorded
Investment
 

At or for the Three Months Ended March 31, 2017

 

              

Commercial real estate

   $ 27,470      $ 21,266      $ 1,795      $ 23,061      $ 209      $ 21,612  

Commercial and industrial

     36,889        12,055        22,299        34,354        9,038        29,065  

Commercial leases

     2,017        2,017        —          2,017        —          2,723  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans and leases

     66,376        35,338        24,094        59,432        9,247        53,400  

Direct installment

     18,062        16,193        —          16,193        —          15,572  

Residential mortgages

     15,151        14,149        —          14,149        —          13,758  

Indirect installment

     4,168        1,686        —          1,686        —          1,933  

Consumer lines of credit

     3,831        2,914        —          2,914        —          2,950  

Other

     1,000        1,000        —          1,000        —          1,000  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 108,588      $ 71,280      $ 24,094      $ 95,374      $ 9,247      $ 88,613  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

At or for the Year Ended December 31, 2016

 

              

Commercial real estate

   $ 23,771      $ 19,699      $ 464      $ 20,163      $ 13      $ 19,217  

Commercial and industrial

     25,719        14,781        8,996        23,777        3,190        29,730  

Commercial leases

     3,429        3,429        —          3,429        —          3,394  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans and leases

     52,919        37,909        9,460        47,369        3,203        52,341  

Direct installment

     16,440        14,952        —          14,952        —          14,997  

Residential mortgages

     14,090        13,367        —          13,367        —          13,200  

Indirect installment

     5,172        2,180        —          2,180        —          2,037  

Consumer lines of credit

     3,858        2,985        —          2,985        —          2,813  

Other

     1,000        1,000        —          1,000        —          1,000  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 93,479      $ 72,393      $ 9,460      $ 81,853      $ 3,203      $ 86,388  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Interest income continued to accrue on certain impaired loans and totaled approximately $1.9 million and $1.2 million for the three months ended March 31, 2017 and 2016, respectively.

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

 

(in thousands)    March 31,
2017
     December 31,
2016
 

Commercial real estate

   $ 3,734      $ 4,538  

Commercial and industrial

     127        500  
  

 

 

    

 

 

 

Total commercial loans

     3,861        5,038  

Direct installment

     994        1,005  

Residential mortgages

     795        632  

Indirect installment

     221        221  

Consumer lines of credit

     697        372  
  

 

 

    

 

 

 

Total allowance on acquired loans

   $ 6,568      $ 7,268  
  

 

 

    

 

 

 

Troubled Debt Restructurings

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

 

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Table of Contents

Following is a summary of the payment status of TDRs:

 

(in thousands)    Originated      Acquired      Total  

March 31, 2017

        

Accruing:

        

Performing

   $ 17,552      $ 272      $ 17,824  

Non-performing

     19,659        4,329        23,988  

Non-accrual

     8,862        562        9,424  
  

 

 

    

 

 

    

 

 

 

Total TDRs

   $ 46,073      $ 5,163      $ 51,236  
  

 

 

    

 

 

    

 

 

 

December 31, 2016

        

Accruing:

        

Performing

   $ 17,105      $ 365      $ 17,470  

Non-performing

     20,252        176        20,428  

Non-accrual

     9,035        —          9,035  
  

 

 

    

 

 

    

 

 

 

Total TDRs

   $ 46,392      $ 541      $ 46,933  
  

 

 

    

 

 

    

 

 

 

TDRs that are accruing and performing include loans that met the criteria for non-accrual of interest prior to restructuring for which we can reasonably estimate the timing and amount of the expected cash flows on such loans and for which we expect to fully collect the new carrying value of the loans. During the three months ended March 31, 2017, we returned to performing status $1.8 million in restructured residential mortgage loans that have consistently met their modified obligations for more than six months. TDRs that are accruing and non-performing are comprised of consumer loans that have not demonstrated a consistent repayment pattern on the modified terms for more than nine months, however it is expected that we 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. Our 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 is presented in the following table:

 

(in thousands)    March 31,
2017
     December 31,
2016
 

Specific reserves for commercial TDRs

   $ 253      $ 291  

Pooled reserves for individual loans under $500

     234        276  

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. Our allowance for credit losses included pooled reserves for these classes of loans of $3.7 million at both March 31, 2017 and December 31, 2016. Upon default of an individual loan, our charge-off policy is followed accordingly for that class of loan.

 

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Table of Contents

The majority of TDRs are the result of interest rate concessions for a limited period of time. Following is a summary of loans, by class, that have been restructured:                

 

     Three Months Ended March 31, 2017      Three Months Ended March 31, 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

     1      $ 114      $ 109        4      $ 778      $ 760  

Commercial and industrial

     —          —          —          2        5,565        3,279  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans

     1        114        109        6        6,343        4,039  

Direct installment

     171        1,488        1,412        145        1,991        1,961  

Residential mortgages

     8        163        176        18        968        951  

Indirect installment

     5        17        14        3        11        12  

Consumer lines of credit

     22        742        729        20        243        238  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     207      $ 2,524      $ 2,440        192      $ 9,556      $ 7,201  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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
March 31, 2017
     Three Months Ended
March 31, 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

     29        82        28        175  

Residential mortgages

     2        224        1        50  

Indirect installment

     6        10        4        5  

Consumer lines of credit

     1        34        1        10  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     38      $ 350        34      $ 240  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

6. ALLOWANCE FOR CREDIT LOSSES

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

 

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Table of Contents

Following is a summary of changes in the allowance for credit losses, by loan and lease class:

 

(in thousands)    Balance at
Beginning of
Period
     Charge-
Offs
    Recoveries      Net
Charge-
Offs
    Provision
for Credit
Losses
    Balance at
End of
Period
 

Three Months Ended March 31, 2017

 

           

Commercial real estate

   $ 46,635      $ (988   $ 361      $ (627   $ 381     $ 46,389  

Commercial and industrial

     47,991        (2,463     474        (1,989     7,568       53,570  

Commercial leases

     3,280        (506     1        (505     738       3,513  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total commercial loans and leases

     97,906        (3,957     836        (3,121     8,687       103,472  

Direct installment

     21,391        (2,874     628        (2,246     1,065       20,210  

Residential mortgages

     10,082        (180     161        (19     147       10,210  

Indirect installment

     10,564        (2,370     781        (1,589     655       9,630  

Consumer lines of credit

     9,456        (458     165        (293     (280     8,883  

Other

     1,392        (973     327        (646     1,063       1,809  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total allowance on originated loans

and leases

     150,791        (10,812     2,898        (7,914     11,337       154,214  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Purchased credit-impaired loans

     572        —         —          —         88       660  

Other acquired loans

     6,696        (482     269        (213     (575     5,908  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total allowance on acquired loans

     7,268        (482     269        (213     (487     6,568  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total allowance

   $ 158,059      $ (11,294   $ 3,167      $ (8,127   $ 10,850     $ 160,782  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Three Months Ended March 31, 2016

 

           

Commercial real estate

   $ 41,741      $ (1,369   $ 597      $ (772   $ 2,929     $ 43,898  

Commercial and industrial

     41,023        (298     190        (108     6,948       47,863  

Commercial leases

     2,541        (114     14        (100     377       2,818  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total commercial loans and leases

     85,305        (1,781     801        (980     10,254       94,579  

Direct installment

     21,587        (2,667     454        (2,213     1,351       20,725  

Residential mortgages

     7,909        (85     19        (66     (33     7,810  

Indirect installment

     9,889        (1,942     262        (1,680     856       9,065  

Consumer lines of credit

     9,582        (474     56        (418     (197     8,967  

Other

     1,013        (554     6        (548     609       1,074  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total allowance on originated loans and leases

     135,285        (7,503     1,598        (5,905     12,840       142,220  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Purchased credit-impaired loans

     834        (160     —          (160     30       704  

Other acquired loans

     5,893        (221     306        85       (1,102     4,876  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total allowance on acquired loans

     6,727        (381     306        (75     (1,072     5,580  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total allowance

   $ 142,012      $ (7,884   $ 1,904      $ (5,980   $ 11,768     $ 147,800  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

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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
 

March 31, 2017

              

Commercial real estate

   $ 209      $ 46,180      $ 4,262,270      $ 14,989      $ 4,247,281  

Commercial and industrial

     9,038        44,532        2,857,584        32,157        2,825,427  

Commercial leases

     —          3,513        197,071        —          197,071  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans and leases

     9,247        94,225        7,316,925        47,146        7,269,779  

Direct installment

     —          20,210        1,758,895        —          1,758,895  

Residential mortgages

     —          10,210        1,551,928        —          1,551,928  

Indirect installment

     —          9,630        1,259,770        —          1,259,770  

Consumer lines of credit

     —          8,883        1,100,695        —          1,100,695  

Other

     —          1,809        46,315        —          46,315  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 9,247      $ 144,967      $ 13,034,528      $ 47,146      $ 12,987,382  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2016

              

Commercial real estate

   $ 13      $ 46,622      $ 4,095,817      $ 12,973      $ 4,082,844  

Commercial and industrial

     3,190        44,801        2,711,886        21,746        2,690,140  

Commercial leases

     —          3,280        196,636        —          196,636  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans and leases

     3,203        94,703        7,004,339        34,719        6,969,620  

Direct installment

     —          21,391        1,765,257        —          1,765,257  

Residential mortgages

     —          10,082        1,446,776        —          1,446,776  

Indirect installment

     —          10,564        1,196,110        —          1,196,110  

Consumer lines of credit

     —          9,456        1,099,627        —          1,099,627  

Other

     —          1,392        35,878        —          35,878  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,203      $ 147,588      $ 12,547,987      $ 34,719      $ 12,513,268  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

7. LOAN SERVICING

Mortgage Loan Servicing

We retain the servicing rights on certain mortgage loans sold. The unpaid principal balance of mortgage loans serviced for others was $2.7 billion and $1.8 billion as of March 31, 2017 and December 31, 2016, respectively.

Mortgage servicing fees, which include late fees and ancillary fees, are recorded in mortgage banking operations income in the consolidated statements of income, and totaled $1.6 million and $0.9 million, respectively, in the three months ended March 31, 2017 and 2016.

Following is a summary of the MSR activity:

 

     Three Months Ended  
     March 31,  
(in thousands)    2017      2016  

Balance at beginning of period

   $ 13,521      $ 8,921  

Fair value of MSRs acquired

     8,553        —    

Additions

     1,454        884  

Payoffs and curtailments

     (139      (98

Amortization

     (523      (467
  

 

 

    

 

 

 

Balance at end of period

   $ 22,866      $ 9,240  
  

 

 

    

 

 

 

Fair value, beginning of period

   $ 17,546      $ 11,503  

Fair value, end of period

     26,962        11,538  

 

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We did not have a valuation allowance for MSRs for either period presented in the table above.

The fair value of MSRs is highly sensitive to changes in assumptions and is determined by estimating the present value of the asset’s future cash flows utilizing market-based prepayment rates, discount rates and other assumptions validated through comparison to trade information, industry surveys and with the use of independent third party appraisals. Changes in prepayment speed assumptions have the most significant impact on the fair value of MSRs. Generally, as interest rates decline, mortgage loan prepayments accelerate due to increased refinance activity, which results in a decrease in the fair value of the MSR. Measurement of fair value is limited to the conditions existing and the assumptions utilized as of a particular point in time, and those assumptions may not be appropriate if they are applied at a different time.

Following is a summary of the sensitivity of the fair value of MSRs to changes in key assumptions:

 

(dollars in thousands)    March 31,
2017
    December 31,
2016
 

Weighted average life (months)

     82.2       79.0  

Constant prepayment rate (annualized)

     9.4     9.9

Discount rate

     9.7     9.8

Effect on fair value due to change in interest rates:

    

+ 0.25%

   $ 1,229     $ 692  

+ 0.50%

     2,298       1,288  

- 0.25%

     (1,370     (789

- 0.50%

     (2,839     (1,680

The sensitivity calculations above are hypothetical and should not be considered to be predictive of future performance. Changes in fair value based on adverse changes in assumptions generally cannot be extrapolated because the relationship of the changes in assumptions to fair value may not be linear. Also, in this table, the effects of an adverse variation in a particular assumption on the fair value of the MSRs is calculated without changing any other assumptions, while in reality, changes in one factor may result in changing another, which may magnify or contract the effect of the change.

SBA-Guaranteed Loan Servicing

Beginning in March 2017, as a result of the YDKN acquisition, we retain the servicing rights on SBA-guaranteed loans sold to investors. The standard sale structure under the SBA Secondary Participation Guaranty Agreement provides for us to retain a portion of the cash flow from the interest payment received on the loan, which is commonly known as a servicing spread. The unpaid principal balance of SBA-guaranteed loans serviced for investors was $255.2 million as of March 31, 2017. Servicing fees, which are recorded in service charges in the consolidated statements of income, totaled $0.3 million for the three months ended March 31, 2017.

Following is a summary of the activity in SBA servicing assets:

 

Three Months ended March 31, 2017       
(in thousands)       

Balance at beginning of period

   $ —    

Fair value of servicing rights acquired

     5,399  

Additions

     —    

Amortization

     (60
  

 

 

 

Balance at end of period

   $ 5,339  
  

 

 

 

The fair value of the SBA servicing assets is compared to the amortized basis when certain triggering events occur. If the amortized basis exceeds the fair value, the asset is considered impaired and is written down to fair value through a valuation allowance on the asset and a charge against SBA income. We did not have a valuation allowance for SBA servicing assets as of March 31, 2017.

 

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8. BORROWINGS

Following is a summary of short-term borrowings:

 

(in thousands)    March 31,
2017
     December 31,
2016
 

Securities sold under repurchase agreements

   $ 310,751      $ 313,062  

Federal Home Loan Bank advances

     1,960,000        1,025,000  

Federal funds purchased

     1,185,000        1,037,000  

Subordinated notes

     130,212        127,948  
  

 

 

    

 

 

 

Total short-term borrowings

   $ 3,585,963      $ 2,503,010  
  

 

 

    

 

 

 

Borrowings with original maturities of one year or less are classified as short-term. 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.

Following is a summary of long-term borrowings:

 

(in thousands)    March 31,
2017
     December 31,
2016
 

Federal Home Loan Bank advances

   $ 330,098      $ 305,110  

Subordinated notes

     87,558        87,147  

Junior subordinated debt

     109,987        48,600  

Other subordinated debt

     168,563        98,637  
  

 

 

    

 

 

 

Total long-term borrowings

   $ 696,206      $ 539,494  
  

 

 

    

 

 

 

Our banking affiliate has available credit with the FHLB of $6.9 billion of which $2.3 billion was utilized as of March 31, 2017. 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 1.03% to 4.19% for the three months ended March 31, 2017 and 0.95% to 4.19% for the year ended December 31, 2016.

On May 1, 2017, we repaid $7.5 million in other subordinated debt that we acquired from YDKN.

The junior subordinated debt is comprised of debt securities issued by FNB in relation to our six unconsolidated subsidiary trusts (collectively, the Trusts), which are unconsolidated variable interest entities. One hundred percent of the common equity of each Trust is owned by FNB. The Trusts were formed for the purpose of issuing FNB-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 FNB, which are the sole assets of each Trust. Since third-party investors are the primary beneficiaries, the Trusts are not consolidated in our financial statements. The Trusts pay dividends on the TPS at the same rate as the distributions paid by us on the junior subordinated debt held by the Trusts. F.N.B. Statutory Trust II was formed by us, and the other five statutory trusts were assumed through acquisitions. The acquired statutory trusts were adjusted to fair value in conjunction with the various acquisitions. During 2016, we redeemed $10.0 million of the TPS issued by Omega Financial Capital Trust I.

We record the distributions on the junior subordinated debt issued to the Trusts as interest expense. 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 our discretion. Under capital guidelines effective January 1, 2016, the junior subordinated debt, net of our investments in the Trusts, is included in tier 2 capital. We have 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.

 

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Table of Contents

The following table provides information relating to the Trusts as of March 31, 2017:

 

(dollars in thousands)    Trust
Preferred
Securities
     Common
Securities
     Junior
Subordinated
Debt
     Stated
Maturity
Date
     Interest Rate and
Rate Reset Factor

F.N.B. Statutory Trust II

   $ 21,500      $ 665      $ 22,165        6/15/36        2.78   LIBOR + 165 basis points (bps)

Omega Financial Capital Trust I

     26,000        1,114        26,445        10/18/34        3.21   LIBOR + 219 bps

Yadkin Valley Statutory Trust I

     25,000        774        20,677        12/15/37        2.45   LIBOR + 132 bps

FNB Financial Services Capital Trust I

     25,000        774        21,635        9/30/35        2.59   LIBOR + 146 bps

American Community Capital Trust II

     10,000        310        10,455        12/15/33        3.80   LIBOR + 280 bps

Crescent Financial Capital Trust I

     8,000        248        8,610        10/07/33        4.12   LIBOR + 310 bps
  

 

 

    

 

 

    

 

 

         

Total

   $ 115,500      $ 3,885      $ 109,987          
  

 

 

    

 

 

    

 

 

         

 

9. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

We are exposed to certain risks arising from both our business operations and economic conditions. We principally manage our exposures to a wide variety of business and operational risks through management of our core business activities. We manage economic risks, including interest rate risk, primarily by managing the amount, source, and duration of our 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. We also use derivative instruments to facilitate transactions on behalf of our customers.

All derivatives are carried on the consolidated balance sheets at fair value and do not take into account the effects of master netting arrangements we have with other financial institutions. Credit risk is included in the determination of the estimated fair value of derivatives. Derivative assets are reported in the consolidated balance sheets in other assets and derivative liabilities are reported in the consolidated balance sheets in 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 our derivative assets and derivative liabilities:

 

     March 31, 2017      December 31, 2016  
     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

   $ 655,000      $ 603      $ 1,494      $ 450,000      $ 9,256      $ 1,171  

Interest rate swaps – not designated

     1,825,706        792        13,966        1,689,157        12,720        34,046  

Equity contracts – not designated

     1,180        46        —          1,180        61        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total subject to master netting arrangements

     2,481,886        1,441        15,460        2,140,337        22,037        35,217  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Not subject to master netting arrangements:

                 

Interest rate swaps – not designated

     1,825,706        30,263        13,820        1,689,157        32,170        11,866  

Interest rate lock commitments – not designated

     76,087        1,252        26        —          —          —    

Forward delivery commitments – not designated

     85,065        20        376        —          —          —    

Credit risk contracts – not designated

     186,037        15        106        174,538        13        123  

Equity contracts – not designated

     1,180        —          46        1,180        —          61  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total not subject to master netting arrangements

     2,174,075        31,550        14,374        1,864,875        32,183        12,050  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 4,655,961      $ 32,991      $ 29,834      $ 4,005,212      $ 54,220      $ 47,267  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

On January 3, 2017, the Chicago Mercantile Exchange (CME) enacted a rule-change which in effect results in the legal characterization of variation margin payments for certain derivative contracts as settlement of the derivatives mark-to-market exposure and not collateral. This rule-change became effective for us in the first quarter of 2017. Accordingly, we have changed our reporting of certain derivatives to record variation margin on trades cleared through CME as settled where we had previously recorded cash collateral. The daily settlement of the derivative exposure does not change or reset the contractual terms of the instrument.

 

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Table of Contents

Derivatives Designated as Hedging Instruments under GAAP

Interest Rate Contracts. We entered into interest rate derivative agreements to modify the interest rate characteristics of certain commercial loans and five of our 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)    March 31,
2017
     December 31,
2016
 

Notional amount

   $ 655,000      $ 450,000  

Fair value included in other assets

     603        9,256  

Fair value included in other liabilities

     1,494        1,171  

The following table shows amounts reclassified from accumulated other comprehensive income (AOCI) for the three months ended March 31, 2017:

 

(in thousands)    Total      Net of Tax  

Reclassified from AOCI to interest income

   $ 506      $ 329  

Reclassified from AOCI to interest expense

     148        96  

As of March 31, 2017, the maximum length of time over which forecasted interest cash flows are hedged is six years. In the twelve months that follow March 31, 2017, we expect to reclassify from the amount currently reported in AOCI net derivative gains of $128,000 ($82,000 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 interest rates, hedge de-designations, and the addition of other hedges subsequent to March 31, 2017.

There were no components of derivative gains or losses excluded from the assessment of hedge effectiveness related to these cash flow hedges. For the three months ended March 31, 2017 and 2016, there was no hedge ineffectiveness. Also, during the three months ended March 31, 2017 and 2016, 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. We enter 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.

We enter into positions with a derivative counterparty in order to offset our exposure on the fixed components of the customer interest rate swap agreements. We seek 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 our counterparty.

 

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Table of Contents

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

 

(in thousands)    March 31,
2017
     December 31,
2016
 

Notional amount

   $ 3,651,412      $ 3,378,314  

Fair value included in other assets

     31,055        44,890  

Fair value included in other liabilities

     27,786        45,912  

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.

Interest Rate Lock Commitments. Interest rate lock commitments (IRLCs) represent an agreement to extend credit to a mortgage loan borrower, or an agreement to purchase a loan from a third-party originator, whereby the interest rate on the loan is set prior to funding. We are bound to fund the loan at a specified rate, regardless of whether interest rates have changed between the commitment date and the loan funding date, subject to the loan approval process. The borrower is not obligated to perform under the commitment. As such, outstanding IRLCs subject us to interest rate risk and related price risk during the period from the commitment to the borrower through the loan funding date, or commitment expiration. The IRLCs generally range between 30 to 90 days. The IRLCs are 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 mortgage banking operations income.

Forward Delivery Commitments. Forward delivery commitments on mortgage-backed securities are used to manage the interest rate and price risk of our IRLCs and mortgage loan held for sale inventory by fixing the forward sale price that will be realized upon sale of the mortgage loans into the secondary market. Historical commitment-to-closing ratios are considered to estimate the quantity of mortgage loans that will fund within the terms of the IRLCs. The forward delivery contracts are 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 mortgage banking operations income.

Credit Risk Contracts. We purchase and sell 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. We will make/receive payments under these agreements if a customer defaults on our obligation to perform under certain derivative swap contracts.

Risk participation agreements sold with notional amounts totaling $133.9 million as of March 31, 2017 have remaining terms ranging from eight months to thirteen years. Under these agreements, our maximum exposure assuming a customer defaults on their obligation to perform under certain derivative swap contracts with third parties would be $105,000 and $123,000 at March 31, 2017 and December 31, 2016, respectively. The fair values of risk participation agreements purchased and sold were not material at March 31, 2017 and December 31, 2016.

Counterparty Credit Risk

We are party to master netting arrangements with most of our swap derivative counterparties. Collateral, usually marketable securities and/or cash, is exchanged between FNB and our counterparties, and is generally subject to thresholds and transfer minimums. For swap transactions that require central clearing, we post cash to our clearing agency. Collateral positions are valued daily, and adjustments to amounts received and pledged by us are made as appropriate to maintain proper collateralization for these transactions.

Certain master netting agreements contain provisions that, if violated, could cause the counterparties to request immediate settlement or demand full collateralization under the derivative instrument. If we had breached our agreements with our derivative counterparties we would be required to settle our obligations under the agreements at the termination value and would be required to pay an additional $0.8 million and $1.1 million as of March 31, 2017 and December 31, 2016, respectively, in excess of amounts previously posted as collateral with the respective counterparty.

 

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

 

(in thousands)    Gross Amount      Gross
Amounts

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

March 31, 2017

        

Derivative Assets

        

Subject to master netting arrangements:

        

Interest rate contracts

        

Designated

   $ 603        —        $ 603  

Not designated

     792        —          792  

Equity contracts – not designated

     46        —          46  

Not subject to master netting arrangements:

        

Interest rate contracts – not designated

     30,263        —          30,263  

Interest rate lock commitments – not designated

     1,252        —          1,252  

Forward delivery commitments – not designated

     20        —          20  

Credit risk contracts – not designated

     15        —          15  
  

 

 

    

 

 

    

 

 

 

Total derivative assets

   $ 32,991        —        $ 32,991  
  

 

 

    

 

 

    

 

 

 

Derivative Liabilities

        

Subject to master netting arrangements:

        

Interest rate contracts

        

Designated

   $ 1,494        —        $ 1,494  

Not designated

     13,966        —          13,966  

Not subject to master netting arrangements:

        

Interest rate contracts – not designated

     13,820        —          13,820  

Interest rate lock commitments – not designated

     26        —          26  

Forward delivery commitments – not designated

     376        —          376  

Credit risk contracts – not designated

     106        —          106  

Equity contracts – not designated

     46        —          46  
  

 

 

    

 

 

    

 

 

 

Total derivative liabilities

   $ 29,834        —        $ 29,834  
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents
(in thousands)    Gross
Amount
     Gross
Amounts
Offset in the
Balance

Sheet
     Net Amount
Presented in
the Balance
Sheet
 

December 31, 2016

        

Derivative Assets

        

Subject to master netting arrangements:

        

Interest rate contracts

        

Designated

   $ 9,256        —        $ 9,256  

Not designated

     12,720        —          12,720  

Equity contracts – not designated

     61        —          61  

Not subject to master netting arrangements: