Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended September 30, 2014

 

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

For the transition period from                     to                     

Commission file number 001-31940

 

 

F.N.B. CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

Florida   25-1255406

(State or other jurisdiction

of incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

One North Shore Center, 12 Federal Street, Pittsburgh, PA   15212
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code: 800-555-5455

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large Accelerated Filer   x    Accelerated Filer   ¨
Non-accelerated Filer   ¨      Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class

 

Outstanding at October 31, 2014

Common Stock, $0.01 Par Value   173,538,511 Shares

 

 

 


Table of Contents

F.N.B. CORPORATION

FORM 10-Q

September 30, 2014

INDEX

 

     PAGE  

PART I – FINANCIAL INFORMATION

  

Item 1.

  Financial Statements   
  Consolidated Balance Sheets      3   
  Consolidated Statements of Comprehensive Income      4   
  Consolidated Statements of Stockholders’ Equity      5   
  Consolidated Statements of Cash Flows      6   
  Notes to Consolidated Financial Statements      7   

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      52   

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk      75   

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      77   

Item 3.

  Defaults Upon Senior Securities      77   

Item 4.

  Mine Safety Disclosures      77   

Item 5.

  Other Information      78   

Item 6.

  Exhibits      78   

Signatures

     79   

 

2


Table of Contents

PART I – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

F.N.B. CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

Dollars in thousands, except par value

 

     September 30,     December 31,  
     2014     2013  
     (Unaudited)        

Assets

    

Cash and due from banks

   $ 205,062      $ 197,534   

Interest bearing deposits with banks

     32,906        16,447   
  

 

 

   

 

 

 

Cash and Cash Equivalents

     237,968        213,981   

Securities available for sale

     1,439,735        1,141,650   

Securities held to maturity (fair value of $1,480,229 and $1,189,563)

     1,475,552        1,199,169   

Residential mortgage loans held for sale

     4,431        7,138   

Loans, net of unearned income of $53,184 and $55,051

     10,967,860        9,506,094   

Allowance for loan losses

     (120,601     (110,784
  

 

 

   

 

 

 

Net Loans

     10,847,259        9,395,310   

Premises and equipment, net

     166,661        154,032   

Goodwill

     829,271        764,248   

Core deposit and other intangible assets, net

     50,017        47,608   

Bank owned life insurance

     299,828        289,402   

Other assets

     406,323        350,867   
  

 

 

   

 

 

 

Total Assets

   $ 15,757,045      $ 13,563,405   
  

 

 

   

 

 

 

Liabilities

    

Deposits:

    

Non-interest bearing demand

   $ 2,647,081      $ 2,200,081   

Interest bearing demand

     4,551,241        3,968,679   

Savings

     1,574,187        1,423,399   

Certificates and other time deposits

     2,679,584        2,606,073   
  

 

 

   

 

 

 

Total Deposits

     11,452,093        10,198,232   

Other liabilities

     157,230        130,418   

Short-term borrowings

     1,601,167        1,241,239   

Long-term debt

     483,189        143,928   

Junior subordinated debt

     58,233        75,205   
  

 

 

   

 

 

 

Total Liabilities

     13,751,912        11,789,022   

Stockholders’ Equity

    

Preferred stock—$0.01 par value Authorized – 20,000,000 shares Issued – 110,877 shares

     106,882        106,882   

Common stock—$0.01 par value Authorized – 500,000,000 shares Issued – 174,818,616 and 159,624,796 shares

     1,747        1,592   

Additional paid-in capital

     1,791,674        1,608,117   

Retained earnings

     159,812        121,870   

Accumulated other comprehensive loss

     (40,451     (56,924

Treasury stock – 1,322,849 and 657,585 shares at cost

     (14,531     (7,154
  

 

 

   

 

 

 

Total Stockholders’ Equity

     2,005,133        1,774,383   
  

 

 

   

 

 

 

Total Liabilities and Stockholders’ Equity

   $ 15,757,045      $ 13,563,405   
  

 

 

   

 

 

 

See accompanying Notes to Consolidated Financial Statements

 

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Table of Contents

F.N.B. CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Dollars in thousands, except per share data

Unaudited

 

     Three Months Ended      Nine Months Ended  
     September 30,      September 30,  
     2014      2013      2014      2013  

Interest Income

           

Loans, including fees

   $ 116,468       $ 97,499       $ 330,107       $ 286,156   

Securities:

           

Taxable

     13,693         10,888         39,557         32,141   

Nontaxable

     1,356         1,377         3,934         4,336   

Dividends

     26         13         218         71   

Other

     23         13         70         45   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Interest Income

     131,566         109,790         373,886         322,749   

Interest Expense

           

Deposits

     7,457         6,895         22,067         22,503   

Short-term borrowings

     1,459         1,122         4,011         3,304   

Long-term debt

     1,692         719         3,850         2,268   

Junior subordinated debt

     339         1,800         1,322         5,578   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Interest Expense

     10,947         10,536         31,250         33,653   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Interest Income

     120,619         99,254         342,636         289,096   

Provision for loan losses

     11,197         7,280         28,608         22,724   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Interest Income After Provision for Loan Losses

     109,422         91,974         314,028         266,372   

Non-Interest Income

           

Service charges

     17,742         16,427         50,452         51,416   

Trust fees

     4,868         4,176         14,494         12,428   

Insurance commissions and fees

     4,169         4,088         12,805         12,619   

Securities commissions and fees

     3,132         2,575         8,525         8,365   

Net securities gains

     1,178         5         11,415         757   

Mortgage banking

     1,078         885         2,220         3,083   

Bank owned life insurance

     1,828         1,635         5,820         5,161   

Other

     3,557         3,019         13,081         9,290   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Non-Interest Income

     37,552         32,810         118,812         103,119   

Non-Interest Expense

           

Salaries and employee benefits

     49,590         45,155         147,008         132,261   

Net occupancy

     7,734         6,132         24,284         19,669   

Equipment

     7,625         6,415         21,701         18,013   

Amortization of intangibles

     2,455         2,067         7,199         6,063   

Outside services

     8,183         7,565         23,653         23,332   

FDIC insurance

     3,206         3,161         9,599         8,197   

Merger related

     1,904         913         8,054         4,211   

Other

     15,150         11,765         41,099         34,356   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Non-Interest Expense

     95,847         83,173         282,597         246,102   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income Before Income Taxes

     51,127         41,611         150,243         123,389   

Income taxes

     15,736         9,977         45,497         34,024   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Income

     35,391         31,634         104,746         89,365   

Less: Preferred stock dividends

     2,010         —           6,342         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Income Available to Common Stockholders

   $ 33,381       $ 31,634       $ 98,404       $ 89,365   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Income per Common Share – Basic

   $ 0.20       $ 0.22       $ 0.60       $ 0.63   

Net Income per Common Share – Diluted

     0.20         0.22         0.59         0.62   

Cash Dividends per Common Share

     0.12         0.12         0.36         0.36   

Comprehensive Income

   $ 31,499       $ 27,540       $ 121,219       $ 69,418   
  

 

 

    

 

 

    

 

 

    

 

 

 

See accompanying Notes to Consolidated Financial Statements

 

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Table of Contents

F.N.B. CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT 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, 2014

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

Net income

              104,746            104,746   

Change in other comprehensive income (loss), net of tax

                16,473          16,473   

Dividends declared:

                 

Preferred stock

              (6,342         (6,342

Common stock: $0.36/share

              (60,234         (60,234

Issuance of common stock

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

Issuance of common stock—acquisitions

        139         170,024               170,163   

Restricted stock compensation

           2,328               2,328   

Tax expense of stock-based compensation

           2,198               2,198   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2014

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

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at January 1, 2013

     —         $ 1,398       $ 1,376,601       $ 75,312      $ (46,224   $ (5,018   $ 1,402,069   

Net income

              89,365            89,365   

Change in other comprehensive income (loss), net of tax

                (19,947       (19,947

Dividends declared:

                 

Common stock: $0.36/share

              (52,028         (52,028

Issuance of common stock

        11         3,318             (2,047     1,282   

Issuance of common stock—acquisitions

        46         56,243               56,289   

Restricted stock compensation

           3,339               3,339   

Tax benefit of stock-based compensation

           1,278               1,278   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2013

     —         $ 1,455       $ 1,440,779       $ 112,649      $ (66,171   $ (7,065   $ 1,481,647   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying Notes to Consolidated Financial Statements

 

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Table of Contents

F.N.B. CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Dollars in thousands

Unaudited

 

     Nine Months Ended  
     September 30,  
     2014     2013  

Operating Activities

    

Net income

   $ 104,746      $ 89,365   

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

    

Depreciation, amortization and accretion

     29,007        21,845   

Provision for loan losses

     28,608        22,724   

Deferred tax (benefit) expenses

     (2,533     12,246   

Net securities gains

     (11,415     (757

Tax benefit of stock-based compensation

     (2,198     (1,278

Loans originated for sale

     (98,741     (190,704

Loans sold

     105,169        213,293   

Gain on sale of loans

     (3,721     (2,942

Net change in:

    

Interest receivable

     (1,590     (1,568

Interest payable

     (1,058     (2,836

Trading securities

     241,595        88,052   

Bank owned life insurance

     (5,205     (1,808

Other, net

     (4,165     18,610   
  

 

 

   

 

 

 

Net cash flows provided by operating activities

     378,499        264,242   
  

 

 

   

 

 

 

Investing Activities

    

Net change in loans

     (888,443     (473,933

Securities available for sale:

    

Purchases

     (686,108     (250,724

Sales

     175,872        21,919   

Maturities

     245,942        269,330   

Securities held to maturity:

    

Purchases

     (436,519     (335,533

Sales

     4,570        17,429   

Maturities

     153,624        239,942   

Purchase of bank owned life insurance

     (16     (10,016

Withdrawal/surrender of bank owned life insurance

     18,715        —     

Increase in premises and equipment

     (12,580     (7,745

Net cash received in business combinations

     60,035        41,986   
  

 

 

   

 

 

 

Net cash flows used in investing activities

     (1,364,908     (487,345
  

 

 

   

 

 

 

Financing Activities

    

Net change in:

    

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

     654,144        536,442   

Time deposits

     (224,733     (240,111

Short-term borrowings

     348,827        68,643   

Increase in long-term debt

     376,418        37,602   

Decrease in long-term debt

     (53,655     (73,867

Decrease in junior subordinated debt

     (34,022     (15,000

Net proceeds from issuance of common stock

     7,795        4,609   

Tax benefit of stock-based compensation

     2,198        1,278   

Cash dividends paid:

    

Preferred stock

     (6,342     —     

Common stock

     (60,234     (52,028
  

 

 

   

 

 

 

Net cash flows provided by financing activities

     1,010,396        267,568   
  

 

 

   

 

 

 

Net Increase (Decrease) in Cash and Cash Equivalents

     23,987        44,465   

Cash and cash equivalents at beginning of period

     213,981        239,044   
  

 

 

   

 

 

 

Cash and Cash Equivalents at End of Period

   $ 237,968      $ 283,509   
  

 

 

   

 

 

 

See accompanying Notes to Consolidated Financial Statements

 

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Table of Contents

F.N.B. CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Dollars in thousands, except share data

(Unaudited)

September 30, 2014

BUSINESS

F.N.B. Corporation (the Corporation), headquartered in Pittsburgh, Pennsylvania, is a diversified financial services company operating in six states and three major metropolitan areas, including Pittsburgh, Baltimore, Maryland and Cleveland, Ohio. As of September 30, 2014, the Corporation had 289 banking offices throughout Pennsylvania, Ohio, Maryland and West Virginia. The Corporation provides a full range of commercial banking, consumer banking and wealth management solutions through its subsidiary network which is led by its largest affiliate, First National Bank of Pennsylvania (FNBPA). Commercial banking solutions include corporate banking, small business banking, investment real estate financing, international banking, business credit, capital markets and lease financing. Consumer banking products and services include deposit products, mortgage lending, consumer lending and a complete suite of mobile and online banking services. Wealth management services include asset management, private banking and insurance. The Corporation also operates Regency Finance Company (Regency), which had 71 consumer finance offices in Pennsylvania, Ohio, Kentucky and Tennessee as of September 30, 2014.

BASIS OF PRESENTATION

The Corporation’s accompanying consolidated financial statements and these notes to the financial statements include subsidiaries in which the Corporation has a controlling financial interest. The Corporation owns and operates FNBPA, First National Trust Company, First National Investment Services Company, LLC, F.N.B. Investment Advisors, Inc., First National Insurance Agency, LLC, Regency and Bank Capital Services, LLC, and includes results for each of these entities in the accompanying consolidated financial statements.

The accompanying consolidated financial statements include all adjustments that are necessary, in the opinion of management, to fairly reflect the Corporation’s financial position and results of operations in accordance with U.S. generally accepted accounting principles (GAAP). All significant intercompany balances and transactions have been eliminated. Certain prior period amounts have been reclassified to conform to the current period presentation. Events occurring subsequent to the date of the balance sheet have been evaluated for potential recognition or disclosure in the consolidated financial statements through the date of the filing of the consolidated financial statements with the Securities and Exchange Commission (SEC).

Certain information and note disclosures normally included in consolidated financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC. The interim operating results are not necessarily indicative of operating results the Corporation expects for the full year. These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Corporation’s Annual Report on Form 10-K filed with the SEC on February 28, 2014.

USE OF ESTIMATES

The accounting and reporting policies of the Corporation conform with GAAP. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could materially differ from those estimates. Material estimates that are particularly susceptible to significant changes include the allowance for loan losses, securities valuations, goodwill and other intangible assets and income taxes.

 

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SECURITIES OFFERINGS

On November 1, 2013, the Corporation completed a public offering of 4,693,876 shares of common stock at a price of $12.25 per share, including 612,244 shares of common stock purchased by the underwriters pursuant to an over-allotment option, which the underwriters exercised in full. On November 1, 2013, the Corporation also completed a public offering of 4,000,000 Depositary Shares, each representing a 1/40th interest in the Non-Cumulative Perpetual Preferred Stock, Series E, of the Corporation, at a price of $25.00 per share. On November 14, 2013, the underwriters exercised their over-allotment option of 435,080 additional Depositary Shares at the same terms. The net proceeds of the common and preferred stock offerings after deducting underwriting discounts and commissions and offering expenses were $54,434 and $106,882, respectively.

MERGERS AND ACQUISITIONS

OBA Financial Services, Inc.

On September 19, 2014, the Corporation completed its acquisition of OBA Financial Services, Inc. (OBA), a bank holding company based in Germantown, Maryland. On the acquisition date, the estimated fair values of OBA included $393,597 in assets, $300,467 in loans and $295,922 in deposits. The acquisition was valued at approximately $85,567 and resulted in the Corporation issuing 7,170,037 shares of its common stock in exchange for 4,025,895 shares of OBA common stock. The Corporation also acquired the outstanding stock options of OBA that became fully vested upon the acquisition. The assets and liabilities of OBA were recorded on the Corporation’s consolidated balance sheet at their preliminary estimated fair values as of September 19, 2014, the acquisition date, and OBA’s results of operations have been included in the Corporation’s consolidated statement of comprehensive income since that date. OBA’s banking affiliate, OBA Bank, was merged into FNBPA on September 19, 2014. Based on a preliminary purchase price allocation, the Corporation recorded $18,238 in goodwill and $4,347 in core deposit intangibles as a result of the acquisition. These fair value estimates are provisional amounts based on third party valuations that are currently under review. None of the goodwill is deductible for income tax purposes.

BCSB Bancorp, Inc.

On February 15, 2014, the Corporation completed its acquisition of BCSB Bancorp, Inc. (BCSB), a bank holding company based in Baltimore, Maryland. On the acquisition date, the estimated fair values of BCSB included $595,263 in assets, $304,932 in loans and $532,197 in deposits. The acquisition was valued at approximately $80,544 and resulted in the Corporation issuing 6,730,597 shares of its common stock in exchange for 3,235,961 shares of BCSB common stock. The Corporation also acquired the outstanding stock options of BCSB that became fully vested upon the acquisition. The assets and liabilities of BCSB were recorded on the Corporation’s consolidated balance sheet at their fair values as of February 15, 2014, the acquisition date, and BCSB’s results of operations have been included in the Corporation’s consolidated statement of comprehensive income since that date. BCSB’s banking affiliate, Baltimore County Savings Bank, was merged into FNBPA on February 15, 2014. Based on the purchase price allocation, the Corporation recorded $43,758 in goodwill and $6,591 in core deposit intangibles as a result of the acquisition. None of the goodwill is deductible for income tax purposes.

PVF Capital Corp.

On October 12, 2013, the Corporation completed its acquisition of PVF Capital Corp. (PVF), a savings and loan holding company based in Solon, Ohio. On the acquisition date, the estimated fair values of PVF included $737,813 in assets, $512,795 in loans and $628,019 in deposits. The acquisition was valued at $109,856 and resulted in the Corporation issuing 8,893,598 shares of its common stock in exchange for 26,119,398 shares of PVF common stock. The Corporation also acquired the outstanding stock options of PVF that became fully vested upon the acquisition. The assets and liabilities of PVF were recorded on the Corporation’s consolidated balance sheets at their fair values as of October 12, 2013, the acquisition date, and PVF’s results of operations have been included in the Corporation’s consolidated statements of comprehensive income since that date. PVF’s banking affiliate, Park View Federal Savings Bank, was merged into FNBPA on October 12, 2013. Based on the purchase price allocation, the Corporation recorded $55,867 in goodwill and $6,867 in core deposit intangibles as a result of the acquisition. None of the goodwill is deductible for income tax purposes.

 

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Annapolis Bancorp, Inc.

On April 6, 2013, the Corporation completed its acquisition of Annapolis Bancorp, Inc. (ANNB), a bank holding company based in Annapolis, Maryland. On the acquisition date, the estimated fair values of ANNB included $430,475 in assets, $256,212 in loans and $349,370 in deposits. The acquisition was valued at $56,300 and resulted in the Corporation issuing 4,641,412 shares of its common stock in exchange for 4,060,802 shares of ANNB common stock. The Corporation also acquired the outstanding stock options of ANNB that became fully vested upon the acquisition. Additionally, the Corporation paid $609, or $0.15 per share, to the holders of ANNB common stock as cash consideration due to the collection of a certain loan, as designated in the merger agreement. The assets and liabilities of ANNB were recorded on the Corporation’s consolidated balance sheets at their fair values as of April 6, 2013, the acquisition date, and ANNB’s results of operations have been included in the Corporation’s consolidated statements of comprehensive income since that date. ANNB’s banking affiliate, BankAnnapolis, was merged into FNBPA on April 6, 2013. In conjunction with the acquisition, a warrant issued by ANNB to the U.S. Department of the Treasury (UST) under the Capital Purchase Program (CPP) was assumed by the Corporation and converted into a warrant to purchase up to 342,564 shares of the Corporation’s common stock. The warrant expires January 30, 2019 and has an exercise price of $3.57 per share. Based on the purchase price allocation, the Corporation recorded $35,854 in goodwill and $3,775 in core deposit intangibles as a result of the acquisition. None of the goodwill is deductible for income tax purposes.

NEW ACCOUNTING STANDARDS

Presentation of Financial Statements

In August 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-15, Presentation of Financial Statements – Going Concern. ASU 2014-15 requires management to evaluate whether there is substantial doubt about the entity’s ability to continue as a going concern, and if so, disclose that fact. ASU 2014-15 defines substantial doubt as when it is probable that the entity will be unable to meet its obligations as they become due within one year of the date the financial statements are issued. The guidance states that when making this assessment, management should consider relevant conditions or events that are known or reasonably knowable on the date the financial statements are issued. The requirements of ASU 2014-15 are effective for reporting periods beginning after December 15, 2016, with early adoption permitted. The adoption of this update is not expected to have an effect on the financial statements, results of operations or liquidity of the Corporation.

Troubled Debt Restructurings

In August 2014, the FASB issued ASU No. 2014-14, Receivables – Troubled Debt Restructurings by Creditors. ASU 2014-14 requires that a mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure if the following conditions are met: (1) the loan has a government guarantee that is not separable from the loan before foreclosure; (2) at the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that claim; and (3) at the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed. Upon foreclosure, the separate other receivable should be measured based on the amount of the loan balance (principal and interest) expected to be recovered from the guarantor. An entity can adopt the amendments in this guidance using either a prospective transition method or a modified retrospective method. For prospective transition, an entity should apply the amendments in this update to foreclosures that occur after the date of adoption. For modified retrospective transition, an entity should apply the amendments in this update by means of a cumulative-effect adjustment as of the beginning of the annual period of adoption. Prior periods should not be adjusted. The requirements of ASU 2014-14 are effective for reporting periods beginning after December 15, 2014, with early adoption permitted. The adoption of this update is not expected to have a material effect on the financial statements, results of operations or liquidity of the Corporation.

In January 2014, the FASB issued ASU No. 2014-04, Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure, to clarify when an in-substance repossession or foreclosure occurs; that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan should be derecognized and other real estate owned (OREO) recognized. ASU 2014-04 requires a creditor to reclassify a collateralized consumer mortgage loan to OREO upon obtaining legal title to the real estate collateral, or the borrower voluntarily conveying all interest in the real estate property to the lender to satisfy the loan through a deed in lieu of foreclosure or similar legal agreement. The requirements of ASU 2014-04 are effective for reporting periods beginning after December 15, 2014. The adoption of this update will not have an impact on the financial statements, results of operations or liquidity of the Corporation since the Corporation already accounts for foreclosures according to the requirements of this update.

 

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Stock Compensation

In June 2014, the FASB issued ASU No. 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. ASU 2014-12 provides guidance relating to the accounting for a performance target that could be achieved after the requisite service period. ASU 2014-12 requires that such performance targets be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the periods for which the requisite service has already been rendered. The requirements of ASU 2014-12 are effective for reporting periods beginning after December 15, 2015, with early adoption permitted. Companies may apply the amendments in this standard either prospectively to all awards granted or modified after the effective date or retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. If retrospective transition is adopted, the cumulative effect of applying ASU 2014-12 should be recognized as an adjustment to the beginning balance of retained earnings. The adoption of this update is not expected to have a material effect on the financial statements, results of operations or liquidity of the Corporation.

Repurchase Agreements

In June 2014, the FASB issued ASU No. 2014-11, Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures, that requires repurchase-to-maturity transactions to be accounted for as secured borrowings, eliminates current guidance on repurchase financings and requires separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty. ASU 2014-11 also requires an entity to disclose information on transfers accounted for as sales in transactions that are economically similar to repurchase agreements and to disclose information about the types of collateral pledged in repurchase agreements and similar transactions accounted for as secured borrowings. The accounting changes in ASU 2014-11 are effective for the first interim or annual reporting period beginning after December 15, 2014. Changes in accounting for transactions outstanding on the effective date must be presented as a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. Early adoption is prohibited. The disclosure for certain transactions accounted for as a sale is required to be presented for interim and annual reporting periods beginning after December 15, 2014. The disclosure for repurchase agreements and repurchase-to-maturity transactions accounted for as secured borrowings is required to be presented for annual periods beginning after December 15, 2014, and for interim periods beginning after March 15, 2015. The Corporation is evaluating this new guidance and has not yet determined the impact that the adoption of this update will have on its financial statements.

Revenue Recognition

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, to clarify the principles for recognizing revenue and to improve financial reporting by creating common revenue recognition guidance for GAAP and International Financial Reporting Standards. The core principle of the new guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. An entity should apply the amendments in this update using either a full retrospective application or a modified retrospective application. Under the full retrospective application, an entity will apply the standard to each prior reporting period presented. Under the modified retrospective application, an entity recognizes the cumulative effect of initially applying the new standard as an adjustment to the opening balance of retained earnings at the date of initial application. Revenue in periods presented before that date will continue to be reported under guidance in effect before the change. The Corporation is evaluating this new guidance and has not yet determined which approach it will adopt to apply the amendments in ASU 2014-09 or the impact that the adoption of this update will have on its financial statements.

 

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Investments in Qualified Affordable Housing Projects

In January 2014, the FASB issued ASU No. 2014-01, Accounting for Investments in Qualified Affordable Housing Projects, to revise the accounting for investments in qualified affordable housing projects. ASU 2014-01 modifies the conditions that must be met to present the pretax effects and related tax benefits of such investments as a component of income taxes (“net” within income tax expense). It is expected that the new guidance will enable more investors to use a “net” presentation for investments in qualified affordable housing projects. Investors that do not qualify for “net” presentation under the new guidance will continue to account for such investments under the equity method or cost method, which results in losses recognized in pretax income and tax benefits recognized in income taxes (“gross” presentation of investment results). For investments that qualify for the “net” presentation of investment performance, the guidance introduces a “proportional amortization method” that can be elected to amortize the investment basis. If elected, the method is required for all eligible investments in qualified affordable housing projects. The requirements of ASU 2014-01 are effective for reporting periods beginning after December 15, 2014, with early adoption permitted. The adoption of this update is not expected to have a material effect on the financial statements, results of operations or liquidity of the Corporation.

Income Taxes

In July 2013, the FASB issued ASU No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists, to provide guidance on the financial statement presentation of certain unrecognized tax benefits. An unrecognized tax benefit or a portion of an unrecognized tax benefit should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward with certain exceptions related to availability. The requirements of ASU 2013-11 are effective prospectively for reporting periods beginning after December 15, 2013, with early adoption permitted. The adoption of this update did not have a material effect on the financial statements, results of operations or liquidity of the Corporation.

 

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SECURITIES

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

 

     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair Value  

Securities Available for Sale:

          

September 30, 2014

          

U.S. Treasury

   $ 29,570       $ —         $ (36   $ 29,534   

U.S. government-sponsored entities

     278,330         162         (2,984     275,508   

Residential mortgage-backed securities:

          

Agency mortgage-backed securities

     492,456         4,798         (771     496,483   

Agency collateralized mortgage obligations

     608,284         645         (11,995     596,934   

Non-agency collateralized mortgage obligations

     1,530         17         —          1,547   

Commercial mortgage-backed securities

     8,062         —           (25     8,037   

States of the U.S. and political subdivisions

     13,413         523         (42     13,894   

Other debt securities

     16,587         473         (582     16,478   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total debt securities

     1,448,232         6,618         (16,435     1,438,415   

Equity securities

     1,031         289         —          1,320   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 1,449,263       $ 6,907       $ (16,435   $ 1,439,735   
  

 

 

    

 

 

    

 

 

   

 

 

 

December 31, 2013

          

U.S. government-sponsored entities

   $ 336,763       $ 126       $ (5,904   $ 330,985   

Residential mortgage-backed securities:

          

Agency mortgage-backed securities

     247,880         4,304         (1,303     250,881   

Agency collateralized mortgage obligations

     511,098         895         (20,794     491,199   

Non-agency collateralized mortgage obligations

     1,747         15         —          1,762   

States of the U.S. and political subdivisions

     16,842         410         (250     17,002   

Collateralized debt obligations

     37,203         4,507         (10,115     31,595   

Other debt securities

     16,505         524         (929     16,100   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total debt securities

     1,168,038         10,781         (39,295     1,139,524   

Equity securities

     1,444         682         —          2,126   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 1,169,482       $ 11,463       $ (39,295   $ 1,141,650   
  

 

 

    

 

 

    

 

 

   

 

 

 

Securities Held to Maturity:

          

September 30, 2014

          

U.S. Treasury

   $ 502       $ 141       $ —        $ 643   

U.S. government-sponsored entities

     101,652         496         (937     101,211   

Residential mortgage-backed securities:

          

Agency mortgage-backed securities

     709,123         13,428         (1,792     720,759   

Agency collateralized mortgage obligations

     494,791         1,061         (10,784     485,068   

Non-agency collateralized mortgage obligations

     4,630         17         (2     4,645   

Commercial mortgage-backed securities

     14,959         122         (99     14,982   

States of the U.S. and political subdivisions

     149,895         3,119         (93     152,921   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 1,475,552       $ 18,384       $ (13,707   $ 1,480,229   
  

 

 

    

 

 

    

 

 

   

 

 

 

December 31, 2013

          

U.S. Treasury

   $ 503       $ 99       $ —        $ 602   

U.S. government-sponsored entities

     43,322         180         (1,151     42,351   

Residential mortgage-backed securities:

          

Agency mortgage-backed securities

     628,681         12,281         (6,032     634,930   

Agency collateralized mortgage obligations

     385,408         764         (15,844     370,328   

Non-agency collateralized mortgage obligations

     6,852         44         (4     6,892   

Commercial mortgage-backed securities

     2,241         124         (37     2,328   

States of the U.S. and political subdivisions

     132,162         1,992         (2,022     132,132   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 1,199,169       $ 15,484       $ (25,090   $ 1,189,563   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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The Corporation classifies securities as trading securities when management intends to sell such securities in the near term. Such securities are carried at fair value, with unrealized gains (losses) reflected through the consolidated statements of comprehensive income. The Corporation classified certain securities acquired in conjunction with its acquisitions as trading securities. The Corporation both acquired and sold these trading securities during the quarterly periods in which each of the acquisitions occurred. As of September 30, 2014 and December 31, 2013, the Corporation did not hold any trading securities.

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

 

     Three Months Ended      Nine Months Ended  
     September 30,      September 30,  
     2014     2013      2014     2013  

Gross gains

   $ 1,191      $ 5       $ 19,939      $ 1,120   

Gross losses

     (13     —           (8,524     (363
  

 

 

   

 

 

    

 

 

   

 

 

 
   $ 1,178      $ 5       $ 11,415      $ 757   
  

 

 

   

 

 

    

 

 

   

 

 

 

During the first quarter of 2014, the Corporation strategically sold its entire portfolio of pooled trust preferred securities (TPS) with net proceeds of $51,540 and a gain of $13,766. These were previously classified as collateralized debt obligations (CDOs) available for sale. Of the 23 pooled securities sold, one was determined to be a disallowed investment under the Volcker Rule (Section 619) of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act), and as such, was required to be disposed of by July 2015. Partially offsetting this gain was a net loss of $2,351 relating to the sale of other securities. By selling these securities, the Corporation strengthened the risk profile of its investment portfolio, improved its capital levels due to lowered risk-weighted assets and generated capital to support future growth.

As of September 30, 2014, the amortized cost and fair value of securities, by contractual maturities, were as follows:

 

     Available for Sale      Held to Maturity  
     Amortized
Cost
     Fair
Value
     Amortized
Cost
     Fair
Value
 

Due in one year or less

   $ —         $ —         $ 3,711       $ 3,741   

Due from one to five years

     283,913         282,767         90,393         89,667   

Due from five to ten years

     47,102         46,344         79,109         80,905   

Due after ten years

     6,885         6,303         78,836         80,462   
  

 

 

    

 

 

    

 

 

    

 

 

 
     337,900         335,414         252,049         254,775   

Residential mortgage-backed securities:

           

Agency mortgage-backed securities

     492,456         496,483         709,123         720,759   

Agency collateralized mortgage obligations

     608,284         596,934         494,791         485,068   

Non-agency collateralized mortgage obligations

     1,530         1,547         4,630         4,645   

Commercial mortgage-backed securities

     8,062         8,037         14,959         14,982   

Equity securities

     1,031         1,320         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 1,449,263       $ 1,439,735       $ 1,475,552       $ 1,480,229   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

At September 30, 2014 and December 31, 2013, securities with a carrying value of $1,114,235 and $909,548, respectively, were pledged to secure public deposits, trust deposits and for other purposes as required by law. Securities with a carrying value of $890,323 and $860,279 at September 30, 2014 and December 31, 2013, respectively, were pledged as collateral for short-term borrowings.

 

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

 

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

Securities Available for Sale:

                        

September 30, 2014

                        

U.S. Treasury

     3       $ 29,534       $ (36     —         $ —         $ —          3       $ 29,534       $ (36

U.S. government-sponsored entities

     9         102,319         (259     8         113,264         (2,725     17         215,583         (2,984

Residential mortgage-backed securities:

                        

Agency mortgage-backed securities

     10         196,423         (771     —           —           —          10         196,423         (771

Agency collateralized mortgage obligations

     14         292,696         (2,225     16         232,824         (9,770     30         525,520         (11,995

Commercial mortgage-backed securities

     1         8,036         (25     —           —           —          1         8,036         (25

States of the U.S. and political subdivisions

     —           —           —          1         1,149         (42     1         1,149         (42

Other debt securities

     —           —           —          4         6,304         (582     4         6,304         (582
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 
     37       $ 629,008       $ (3,316     29       $ 353,541       $ (13,119     66       $ 982,549       $ (16,435
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

December 31, 2013

                        

U.S. government-sponsored entities

     17       $ 232,962       $ (5,904     —         $ —         $ —          17       $ 232,962       $ (5,904

Residential mortgage-backed securities:

                        

Agency mortgage-backed securities

     9         108,284         (1,303     —           —           —          9         108,284         (1,303

Agency collateralized mortgage obligations

     26         389,989         (18,644     2         34,229         (2,150     28         424,218         (20,794

States of the U.S. and political subdivisions

     2         3,022         (250     —           —           —          2         3,022         (250

Collateralized debt obligations

     —           —           —          8         7,965         (10,115     8         7,965         (10,115

Other debt securities

     —           —           —          4         5,950         (929     4         5,950         (929
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 
     54       $ 734,257       $ (26,101     14       $ 48,144       $ (13,194     68       $ 782,401       $ (39,295
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Securities Held to Maturity:

                        

September 30, 2014

                        

U.S. government-sponsored entities

     3       $ 39,956       $ (151     3       $ 39,247       $ (786     6       $ 79,203       $ (937

Residential mortgage-backed securities:

                        

Agency mortgage-backed securities

     12         149,058         (631     8         83,697         (1,161     20         232,755         (1,792

Agency collateralized mortgage obligations

     8         125,974         (1,036     16         216,359         (9,748     24         342,333         (10,784

Non-agency collateralized mortgage obligations

     1         761         (2     —           —           —          1         761         (2

Commercial mortgage-backed securities

     2         13,655         (99     —           —           —          2         13,655         (99

States of the U.S. and political subdivisions

     1         1,726         (13     5         6,606         (80     6         8,332         (93
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 
     27       $ 331,130       $ (1,932     32       $ 345,909       $ (11,775     59       $ 677,039       $ (13,707
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

December 31, 2013

                        

U.S. government-sponsored entities

     2       $ 24,513       $ (530     1       $ 14,378       $ (621     3       $ 38,891       $ (1,151

Residential mortgage-backed securities:

                        

Agency mortgage-backed securities

     24         308,864         (5,942     1         1,296         (90     25         310,160         (6,032

Agency collateralized mortgage obligations

     21         301,312         (15,844     —           —           —          21         301,312         (15,844

Non-agency collateralized mortgage obligations

     3         2,010         (4     —           —           —          3         2,010         (4

Commercial mortgage-backed securities

     1         984         (37     —           —           —          1         984         (37

States of the U.S. and political subdivisions

     27         31,537         (2,022     —           —           —          27         31,537         (2,022
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 
     78       $ 669,220       $ (24,379     2       $ 15,674       $ (711     80       $ 684,894       $ (25,090
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

 

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The Corporation does not intend to sell the debt securities and it is not more likely than not the Corporation will be required to sell the securities before recovery of their amortized cost basis.

The Corporation’s unrealized losses on CDOs as of December 31, 2013 related to investments in pooled TPS, all of which were sold during the first quarter of 2014 as previously noted. The Corporation’s remaining portfolio of TPS consists of four single-issuer securities, which are primarily from money-center and large regional banks and are included in other debt securities. These single-issuer TPS had an amortized cost and estimated fair value of $6,885 and $6,304 at September 30, 2014, respectively. The Corporation has concluded from its analysis performed at September 30, 2014 that it is probable that the Corporation will collect all contractual principal and interest payments related to these securities.

Other-Than-Temporary Impairment

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

 

     Collateralized
Debt
Obligations
    Residential
Non-Agency
CMOs
    Equities      Total  

For the Nine Months Ended September 30, 2014

         

Beginning balance

   $ 17,155      $ —        $ 27       $ 17,182   

Loss where impairment was not previously recognized

     —          —          —           —     

Additional loss where impairment was previously recognized

     —          —          —           —     

Reduction due to credit impaired securities sold

     (17,155     —          —           (17,155
  

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance

   $ —        $ —        $ 27       $ 27   
  

 

 

   

 

 

   

 

 

    

 

 

 

For the Nine Months Ended September 30, 2013

         

Beginning balance

   $ 17,155      $ 212        —         $ 17,367   

Loss where impairment was not previously recognized

     —          —          —           —     

Additional loss where impairment was previously recognized

     —          —          —           —     

Reduction due to credit impaired securities sold

     —          (212     —           (212
  

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance

   $ 17,155      $ —          —         $ 17,155   
  

 

 

   

 

 

   

 

 

    

 

 

 

The Corporation did not recognize any impairment losses on securities for the nine months ended September 30, 2014 or 2013.

States of the U.S. and Political Subdivisions

The Corporation’s municipal bond portfolio of $163,789 as of September 30, 2014 is highly rated with an average entity-specific rating of AA and 99.0% of the portfolio rated A or better. General obligation bonds comprise 99.5% of the portfolio. Geographically, municipal bonds support the Corporation’s primary footprint as 86.8% of the securities are from municipalities located throughout Pennsylvania, Ohio and Maryland. The average holding size of the securities in the municipal bond portfolio is $1,092. In addition to the strong stand-alone ratings, 88.0% of the municipalities have some formal credit enhancement insurance that strengthens the creditworthiness of their issue. Management also reviews the credit profile of each issuer on a quarterly basis.

FEDERAL HOME LOAN BANK STOCK

The Corporation is a member of the Federal Home Loan Bank (FHLB) of Pittsburgh. The FHLB requires members to purchase and hold a specified minimum level of FHLB stock based upon their level of borrowings, collateral balances and participation in other programs offered by the FHLB. Stock in the FHLB is non-marketable and is redeemable at the discretion of the FHLB. Both cash and stock dividends on FHLB stock are reported as income.

Members do not purchase stock in the FHLB for the same reasons that traditional equity investors acquire stock in an investor-owned enterprise. Rather, members purchase stock to obtain access to the low-cost products and services offered by the FHLB. Unlike equity securities of traditional for-profit enterprises, the stock of FHLB does not provide its holders with an opportunity for capital appreciation because, by regulation, FHLB stock can only be purchased, redeemed and transferred at par value.

 

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At September 30, 2014 and December 31, 2013, the Corporation’s FHLB stock totaled $58,372 and $23,636, respectively, and is included in other assets on the balance sheet. The Corporation accounts for the stock in accordance with ASC 325, which requires the investment to be carried at cost and evaluated for impairment based on the ultimate recoverability of the par value. Due to the continued improvement of the FHLB’s financial performance and stability over the past several years, the Corporation believes its holdings in the stock are ultimately recoverable at par value and, therefore, determined that FHLB stock was not other-than-temporarily impaired. In addition, the Corporation has ample liquidity and does not require redemption of its FHLB stock in the foreseeable future.

LOANS AND ALLOWANCE FOR LOAN LOSSES

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

 

     Originated
Loans
     Acquired
Loans
     Total
Loans
 

September 30, 2014

        

Commercial real estate

   $ 2,930,146       $ 860,018       $ 3,790,164   

Commercial and industrial

     2,104,559         143,046         2,247,605   

Commercial leases

     171,615         —           171,615   
  

 

 

    

 

 

    

 

 

 

Total commercial loans and leases

     5,206,320         1,003,064         6,209,384   

Direct installment

     1,509,096         70,216         1,579,312   

Residential mortgages

     762,743         469,053         1,231,796   

Indirect installment

     803,201         2,635         805,836   

Consumer lines of credit

     915,007         172,264         1,087,271   

Other

     54,261         —           54,261   
  

 

 

    

 

 

    

 

 

 
   $ 9,250,628       $ 1,717,232       $ 10,967,860   
  

 

 

    

 

 

    

 

 

 

December 31, 2013

        

Commercial real estate

   $ 2,640,428       $ 604,781       $ 3,245,209   

Commercial and industrial

     1,761,668         119,806         1,881,474   

Commercial leases

     158,895         —           158,895   
  

 

 

    

 

 

    

 

 

 

Total commercial loans and leases

     4,560,991         724,587         5,285,578   

Direct installment

     1,387,995         79,241         1,467,236   

Residential mortgages

     678,227         408,512         1,086,739   

Indirect installment

     649,701         5,886         655,587   

Consumer lines of credit

     832,668         133,103         965,771   

Other

     45,183         —           45,183   
  

 

 

    

 

 

    

 

 

 
   $ 8,154,765       $ 1,351,329       $ 9,506,094   
  

 

 

    

 

 

    

 

 

 

The carrying amount of acquired loans at September 30, 2014 totaled $1,711,200 including purchased credit-impaired (PCI) loans with a carrying amount of $7,512, while the carrying amount of acquired loans at December 31, 2013 totaled $1,345,429, including PCI loans with a carrying amount of $21,192. The outstanding contractual balance receivable of acquired loans at September 30, 2014 totaled $1,805,350, including PCI loans with an outstanding contractual balance receivable of $22,172, while the outstanding contractual balance receivable of acquired loans at December 31, 2013 totaled $1,449,227, including PCI loans with an outstanding contractual balance receivable of $56,500.

Commercial real estate includes both owner-occupied and non-owner-occupied loans secured by commercial properties. Commercial and industrial includes loans to businesses that are not secured by real estate. Commercial leases are made for new or used equipment. Direct installment is comprised of fixed-rate, closed-end consumer loans for personal, family or household use, such as home equity loans and automobile loans. Residential mortgages consist of conventional and jumbo mortgage loans for non-commercial properties. Indirect installment is comprised of loans originated by third parties and underwritten by the Corporation, primarily automobile loans. Consumer lines of credit include home equity lines of credit (HELOC) and consumer lines of credit that are either unsecured or secured by collateral other than home equity. Other is comprised primarily of mezzanine loans and student loans.

The loan portfolio consists principally of loans to individuals and small- and medium-sized businesses within the Corporation’s primary market area of Pennsylvania, eastern Ohio, Maryland and northern West Virginia. The total loan portfolio contains consumer finance loans to individuals in Pennsylvania, Ohio, Tennessee and Kentucky, which totaled $175,460 or 1.6% of total loans at September 30, 2014, compared to $179,970 or 1.9% of total loans at December 31, 2013. Due to the relative size of the consumer finance loan portfolio, they are not segregated from other consumer loans.

 

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As of September 30, 2014, 41.2% of the commercial real estate loans were owner-occupied, while the remaining 58.8% were non-owner-occupied, compared to 43.1% and 56.9%, respectively, as of December 31, 2013. As of September 30, 2014 and December 31, 2013, the Corporation had commercial construction loans of $299,859 and $252,842, respectively, representing 2.7% of total loans for both periods.

ASC 310-30 Loans

All loans acquired in acquisitions since 2009, except for revolving loans, are accounted for in accordance with ASC 310-30. Revolving loans are accounted for under ASC 310-20. The Corporation’s allowance for loan losses for acquired loans reflects only those losses incurred after acquisition.

The following table reflects amounts at acquisition for all purchased loans subject to ASC 310-30 (impaired and non-impaired) acquired from BCSB in 2014 and PVF and ANNB in 2013. ASC 310-30 (impaired and non-impaired) loans acquired from OBA in 2014 are not presented because their values are expected to be immaterial, are preliminary in nature and are subject to refinement as additional information becomes available.

 

     Acquired
Impaired
Loans
    Acquired
Performing
Loans
    Total  

Acquired from BCSB in 2014

      

Contractually required cash flows at acquisition

   $ 10,470      $ 350,243      $ 360,713   

Non-accretable difference (expected losses and foregone interest)

     (5,426     (17,720     (23,146
  

 

 

   

 

 

   

 

 

 

Cash flows expected to be collected at acquisition

     5,044        332,523        337,567   

Accretable yield

     (704     (70,407     (71,111
  

 

 

   

 

 

   

 

 

 

Basis in acquired loans at acquisition

   $ 4,340      $ 262,116      $ 266,456   
  

 

 

   

 

 

   

 

 

 

Acquired from PVF and ANNB in 2013

      

Contractually required cash flows at acquisition

   $ 40,972      $ 796,114      $ 837,086   

Non-accretable difference (expected losses and foregone interest)

     (23,207     (52,992     (76,199
  

 

 

   

 

 

   

 

 

 

Cash flows expected to be collected at acquisition

     17,765        743,122        760,887   

Accretable yield

     (2,505     (112,847     (115,352
  

 

 

   

 

 

   

 

 

 

Basis in acquired loans at acquisition

   $ 15,260      $ 630,275      $ 645,535   
  

 

 

   

 

 

   

 

 

 

The following table provides a summary of change in accretable yield for all acquired loans:

 

     Acquired
Impaired
Loans
    Acquired
Performing
Loans
    Total  

Nine Months Ended September 30, 2014

      

Balance at beginning of period

   $ 7,456      $ 298,190      $ 305,646   

Acquisitions

     704        70,407        71,111   

Reduction due to unexpected early payoffs

     —          (34,747     (34,747

Reclass from non-accretable difference

     2,612        7,313        9,925   

Disposals/transfers

     (2,938     (2,452     (5,390

Accretion

     (4,530     (50,134     (54,664
  

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 3,304      $ 288,577      $ 291,881   
  

 

 

   

 

 

   

 

 

 

Year Ended December 31, 2013

      

Balance at beginning of period

   $ 778      $ 253,375      $ 254,153   

Acquisitions

     2,505        112,847        115,352   

Reduction due to unexpected early payoffs

     —          (42,582     (42,582

Reclass from non-accretable difference

     8,097        8,296        16,393   

Disposals/transfers

     (368     (224     (592

Accretion

     (3,556     (33,522     (37,078
  

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 7,456      $ 298,190      $ 305,646   
  

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Purchased Credit-Impaired (PCI) Loans

The Corporation has acquired loans for which there was evidence of deterioration of credit quality since origination and for which it was probable, at acquisition, that all contractually required payments would not be collected.

Following is information about PCI loans identified in the Corporation’s acquisition of BCSB:

 

     At
Acquisition
     September 30,
2014
 

Outstanding balance

   $ 10,470       $ —     

Carrying amount

     4,340         —     

Allowance for loan losses

     n/a         —     

Impairment recognized since acquisition

     n/a         275   

Allowance reduction recognized since acquisition

     n/a         275   

As of September 30, 2014, all BCSB PCI balances were resolved through loan sale, runoff or charge-off.

Following is information about PCI loans. The table below does not include impaired loans from the OBA acquisition because their values are expected to be immaterial, are preliminary in nature and are subject to refinement as additional information becomes available.

 

     Outstanding
Balance
    Non-Accretable
Difference
    Expected
Cash Flows
    Accretable
Yield
    Recorded
Investment
 

For the Nine Months Ended September 30, 2014

  

     

Balance at beginning of period

   $ 56,500      $ (26,852   $ 29,648      $ (7,456   $ 22,192   

Acquisitions

     10,470        (5,426     5,044        (704     4,340   

Accretion

     —          —          —          4,530        4,530   

Payments received

     (21,000     1,877        (19,123     —          (19,123

Reclass from non-accretable difference

     —          2,612        2,612        (2,612     —     

Disposals/transfers

     (25,900     19,299        (6,601     2,938        (3,663

Contractual interest

     2,102        (2,102     —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 22,172      $ (10,592   $ 11,580      $ (3,304   $ 8,276   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

For the Year Ended December 31, 2013

          

Balance at beginning of period

   $ 41,134      $ (23,733   $ 17,401      $ (778   $ 16,623   

Acquisitions

     42,031        (24,266     17,765        (2,505     15,260   

Accretion

     —          —          —          3,556        3,556   

Payments received

     (10,670     1,345        (9,325     —          (9,325

Reclass from non-accretable difference

     —          8,097        8,097        (8,097     —     

Disposals/transfers

     (18,695     14,405        (4,290     368        (3,922

Contractual interest

     2,700        (2,700     —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 56,500      $ (26,852   $ 29,648      $ (7,456   $ 22,192   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The accretion in the table above includes $1,790 in 2014 and $440 in 2013 that primarily represents amounts received on certain loans in excess of expected cash flows.

Credit Quality

Management monitors the credit quality of the Corporation’s loan portfolio on an ongoing basis. Measurement of delinquency and past due status are based on the contractual terms of each loan.

Non-performing loans include non-accrual loans and non-performing troubled debt restructurings (TDRs). Past due loans are reviewed on a monthly basis to identify loans for non-accrual status. The Corporation places a loan on non-accrual status and discontinues interest accruals on originated loans generally when principal or interest is due and has remained unpaid for a certain number of days unless the loan is both well secured and in the process of collection. Commercial loans are placed on non-accrual at 90 days, installment loans are placed on non-accrual at 120 days and residential mortgages and consumer lines of credit are generally placed on non-accrual at 180 days. When a loan is placed on non-accrual status, all unpaid interest is reversed. Non-accrual loans may not be restored to accrual status until all

 

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Table of Contents

delinquent principal and interest have been paid and the ultimate ability to collect the remaining principal and interest is reasonably assured. TDRs are loans in which the borrower has been granted a concession on the interest rate or the original repayment terms due to financial distress. Non-performing assets also include debt securities on which OTTI has been taken in the current or prior periods that have not been returned to accrual status.

Following is a summary of non-performing assets:

 

     September 30,
2014
    December 31,
2013
 

Non-accrual loans

   $ 55,095      $ 58,755   

Troubled debt restructurings

     21,797        18,698   
  

 

 

   

 

 

 

Total non-performing loans

     76,892        77,453   

Other real estate owned (OREO)

     39,040        40,681   
  

 

 

   

 

 

 

Total non-performing loans and OREO

     115,932        118,134   

Non-performing investments

     —          797   
  

 

 

   

 

 

 

Total non-performing assets

   $ 115,932      $ 118,931   
  

 

 

   

 

 

 

Asset quality ratios:

    

Non-performing loans as a percent of total loans

     0.70     0.81

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

     1.05     1.24

Non-performing assets as a percent of total assets

     0.74     0.88

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

 

     30-89 Days
Past Due
     >90 Days
Past Due and

Still Accruing
     Non-Accrual      Total
Past Due
     Current      Total
Loans
 

Originated loans:

                 

September 30, 2014

                 

Commercial real estate

   $ 3,711       $ 132       $ 33,710       $ 37,553       $ 2,892,593       $ 2,930,146   

Commercial and industrial

     2,478         6         8,439         10,923         2,093,636         2,104,559   

Commercial leases

     985         —           651         1,636         169,979         171,615   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans and leases

     7,174         138         42,800         50,112         5,156,208         5,206,320   

Direct installment

     11,102         3,498         6,761         21,361         1,487,735         1,509,096   

Residential mortgages

     9,646         2,242         3,471         15,359         747,384         762,743   

Indirect installment

     5,255         536         1,190         6,981         796,220         803,201   

Consumer lines of credit

     2,581         646         873         4,100         910,907         915,007   

Other

     141         25         —           166         54,095         54,261   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 35,899       $ 7,085       $ 55,095       $ 98,079       $ 9,152,549       $ 9,250,628   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2013

                 

Commercial real estate

   $ 5,428       $ 252       $ 40,960       $ 46,640       $ 2,593,788       $ 2,640,428   

Commercial and industrial

     2,066         8         6,643         8,717         1,752,951         1,761,668   

Commercial leases

     714         —           734         1,448         157,447         158,895   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans and leases

     8,208         260         48,337         56,805         4,504,186         4,560,991   

Direct installment

     9,038         3,753         4,686         17,477         1,370,518         1,387,995   

Residential mortgages

     12,681         2,401         4,260         19,342         658,885         678,227   

Indirect installment

     5,653         471         1,060         7,184         642,517         649,701   

Consumer lines of credit

     1,737         1,076         412         3,225         829,443         832,668   

Other

     25         10         —           35         45,148         45,183   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 37,342       $ 7,971       $ 58,755       $ 104,068       $ 8,050,697       $ 8,154,765   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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

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

Acquired Loans:

                   

September 30, 2014

                   

Commercial real estate

   $ 14,415       $ 14,019         —         $ 28,434       $ 866,319       $ (34,735   $ 860,018   

Commercial and industrial

     350         2,306         —           2,656         147,605         (7,215     143,046   

Commercial leases

     —           —           —           —           —           —          —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total commercial loans and leases

     14,765         16,325         —           31,090         1,013,924         (41,950     1,003,064   

Direct installment

     1,280         1,399         —           2,679         65,972         1,565        70,216   

Residential mortgages

     11,010         18,573         —           29,583         479,330         (39,860     469,053   

Indirect installment

     45         22         —           67         2,991         (423     2,635   

Consumer lines of credit

     2,091         2,917         —           5,008         174,706         (7,450     172,264   

Other

     —           —           —           —           —           —          —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
   $ 29,191       $ 39,236         —         $ 68,427       $ 1,736,923       $ (88,118   $ 1,717,232   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

December 31, 2013

                   

Commercial real estate

   $ 13,637       $ 20,668         —         $ 34,305       $ 619,197       $ (48,721   $ 604,781   

Commercial and industrial

     1,860         1,899         —           3,759         124,415         (8,368     119,806   

Commercial leases

     —           —           —           —           —           —          —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total commercial loans and leases

     15,497         22,567         —           38,064         743,612         (57,089     724,587   

Direct installment

     1,447         1,178         —           2,625         74,917         1,699        79,241   

Residential mortgages

     11,464         19,298         —           30,762         412,704         (34,954     408,512   

Indirect installment

     205         31         —           236         6,267         (617     5,886   

Consumer lines of credit

     1,592         2,749         —           4,341         135,699         (6,937     133,103   

Other

     —           —           —           —           —           —          —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
   $ 30,205       $ 45,823         —         $ 76,028       $ 1,373,199       $ (97,898   $ 1,351,329   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

(1) Past due information for acquired loans is based on the contractual balance outstanding at September 30, 2014 and December 31, 2013.

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

 

Rating Category

  

Definition

Pass    in general, the condition of the borrower and the performance of the loan 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 of the borrower has significantly deteriorated and the performance of

the loan 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 portfolio permits management’s use of transition matrices to estimate a quantitative portion of credit risk. The Corporation’s internal credit risk grading system is based on past experiences with similarly graded loans and conforms with regulatory categories. In general, loan risk ratings within each category are reviewed on an ongoing basis according to the Corporation’s policy for each class of loans. 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 portfolio. Loans within the Pass credit category or that migrate toward the Pass credit category generally have a lower risk of loss compared to loans 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 the Corporation’s commercial loans by credit quality category, segregated by loans originated and loans acquired:

 

     Commercial Loan Credit Quality Categories  
     Pass      Special
Mention
     Substandard      Doubtful      Total  

Originated Loans:

              

September 30, 2014

              

Commercial real estate

   $ 2,784,908       $ 52,952       $ 91,385       $ 901       $ 2,930,146   

Commercial and industrial

     1,973,472         80,128         50,086         873         2,104,559   

Commercial leases

     170,465         291         859         —           171,615   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 4,928,845       $ 133,371       $ 142,330       $ 1,774       $ 5,206,320   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2013

              

Commercial real estate

   $ 2,476,988       $ 56,140       $ 106,599       $ 701       $ 2,640,428   

Commercial and industrial

     1,611,530         97,675         52,322         141         1,761,668   

Commercial leases

     155,991         1,945         959         —           158,895   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 4,244,509       $ 155,760       $ 159,880       $ 842       $ 4,560,991   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Acquired Loans:

              

September 30, 2014

              

Commercial real estate

   $ 661,300       $ 91,116       $ 107,430       $ 172       $ 860,018   

Commercial and industrial

     119,457         5,447         18,142         —           143,046   

Commercial leases

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 780,757       $ 96,563       $ 125,572       $ 172       $ 1,003,064   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2013

              

Commercial real estate

   $ 442,604       $ 74,315       $ 85,086       $ 2,776       $ 604,781   

Commercial and industrial

     100,743         6,182         12,866         15         119,806   

Commercial leases

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 543,347       $ 80,497       $ 97,952       $ 2,791       $ 724,587   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Credit quality information for acquired loans is based on the contractual balance outstanding at September 30, 2014 and December 31, 2013. The increase in acquired loans in 2014 primarily relates to the OBA and BCSB acquisitions on September 19, 2014 and February 15, 2014, respectively.

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

 

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Table of Contents

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

 

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

September 30, 2014

        

Direct installment

   $ 1,495,276       $ 13,820       $ 1,509,096   

Residential mortgages

     747,276         15,467         762,743   

Indirect installment

     801,862         1,339         803,201   

Consumer lines of credit

     913,224         1,783         915,007   

Other

     53,610         651         54,261   

December 31, 2013

        

Direct installment

   $ 1,377,418       $ 10,577       $ 1,387,995   

Residential mortgages

     664,214         14,013         678,227   

Indirect installment

     648,499         1,202         649,701   

Consumer lines of credit

     832,071         597         832,668   

Other

     45,183         —           45,183   

Loans 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 contract is doubtful. Typically, the Corporation does not consider loans 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 relationships less than $500 based on loan segment loss given default. For commercial loan relationships greater than or equal to $500, a specific valuation allowance is allocated, if necessary, so that the loan is reported net, at the present value of estimated future cash flows using a market interest rate or at the fair value of collateral if repayment is expected solely from the collateral. Consistent with the Corporation’s existing method of income recognition for loans, interest on impaired loans, except those classified as non-accrual, is recognized as income using the accrual method. Impaired loans, or portions thereof, are charged off when deemed uncollectible.

 

22


Table of Contents

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

 

     Recorded
Investment
     Unpaid
Principal
Balance
     Specific
Related

Allowance
     Average
Recorded
Investment
 

At or For the Nine Months Ended September 30, 2014

           

With no specific allowance recorded:

           

Commercial real estate

   $ 24,718       $ 33,948       $ —         $ 31,351   

Commercial and industrial

     7,494         9,191         —           7,455   

Commercial leases

     651         651         —           719   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans and leases

     32,863         43,790         —           39,525   

Direct installment

     13,820         14,189         —           13,226   

Residential mortgages

     15,467         17,397         —           15,662   

Indirect installment

     1,339         1,504         —           1,436   

Consumer lines of credit

     1,783         1,791         —           1,695   

Other

     —           —           —           —     

With a specific allowance recorded:

           

Commercial real estate

     10,571         23,263         901         6,688   

Commercial and industrial

     1,966         1,995         870         2,195   

Commercial leases

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans and leases

     12,537         25,258         1,771         8,883   

Direct installment

     —           —           —           —     

Residential mortgages

     —           —           —           —     

Indirect installment

     —           —           —           —     

Consumer lines of credit

     —           —           —           —     

Other

     —           —           —           —     

Total:

           

Commercial real estate

     35,289         57,211         901         38,039   

Commercial and industrial

     9,460         11,186         870         9,650   

Commercial leases

     651         651         —           719   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans and leases

     45,400         69,048         1,771         48,408   

Direct installment

     13,820         14,189         —           13,226   

Residential mortgages

     15,467         17,397         —           15,662   

Indirect installment

     1,339         1,504         —           1,436   

Consumer lines of credit

     1,783         1,791         —           1,695   

Other

     —           —           —           —     

 

23


Table of Contents
     Recorded
Investment
     Unpaid
Principal
Balance
     Specific
Related

Allowance
     Average
Recorded
Investment
 

At or For the Year Ended December 31, 2013

           

With no specific allowance recorded:

           

Commercial real estate

   $ 40,472       $ 62,034       $ —         $ 37,376   

Commercial and industrial

     7,301         8,669         —           8,304   

Commercial leases

     734         734         —           758   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans and leases

     48,507         71,437         —           46,438   

Direct installment

     10,577         10,830         —           10,557   

Residential mortgages

     14,012         14,560         —           13,565   

Indirect installment

     1,202         2,633         —           1,127   

Consumer lines of credit

     597         668         —           573   

Other

     —           —           —           —     

With a specific allowance recorded:

           

Commercial real estate

     3,603         3,818         701         14,379   

Commercial and industrial

     122         130         123         126   

Commercial leases

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans and leases

     3,725         3,948         824         14,505   

Direct installment

     —           —           —           —     

Residential mortgages

     —           —           —           —     

Indirect installment

     —           —           —           —     

Consumer lines of credit

     —           —           —           —     

Other

     —           —           —           —     

Total:

           

Commercial real estate

     44,075         65,852         701         51,755   

Commercial and industrial

     7,423         8,799         123         8,430   

Commercial leases

     734         734         —           758   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans and leases

     52,232         75,385         824         60,943   

Direct installment

     10,577         10,830         —           10,557   

Residential mortgages

     14,012         14,560         —           13,565   

Indirect installment

     1,202         2,633         —           1,127   

Consumer lines of credit

     597         668         —           573   

Other

     —           —           —           —     

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

The above tables do not include PCI loans with a recorded investment of $8,276 at September 30, 2014 and $22,192 at December 31, 2013. These tables do not reflect the additional allowance for loan losses relating to acquired loans in the following pools and categories: commercial real estate of $3,025; commercial and industrial of $644; direct installment of $1,530; residential mortgages of $326; indirect installment of $243; and consumer lines of credit of $264, totaling $6,032 at September 30, 2014 and commercial real estate of $3,093; commercial and industrial of $786; direct installment of $727; residential mortgages of $970 and indirect installment of $324, totaling $5,900 at December 31, 2013.

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.

 

24


Table of Contents

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

 

     September 30,
2014
     December 31,
2013
 

Accruing:

     

Performing

   $ 9,899       $ 10,220   

Non-performing

     21,797         18,698   

Non-accrual

     9,677         12,705   
  

 

 

    

 

 

 
   $ 41,373       $ 41,623   
  

 

 

    

 

 

 

TDRs that are accruing and performing include loans that met the criteria for non-accrual of interest prior to restructuring for which the Corporation can reasonably estimate the timing and amount of the expected cash flows on such loans and for which the Corporation expects to fully collect the new carrying value of the loans. During the nine months ended September 30, 2014, the Corporation returned to performing status $2,862 in restructured residential mortgage loans that have consistently met their modified obligations for more than six months. TDRs that are accruing and non-performing are comprised of consumer loans that have not demonstrated a consistent repayment pattern on the modified terms for more than six months, however it is expected that the Corporation will collect all future principal and interest payments. TDRs that are on non-accrual are not placed on accruing status until all delinquent principal and interest have been paid and the ultimate collectability of the remaining principal and interest is reasonably assured. Some loan modifications classified as TDRs may not ultimately result in the full collection of principal and interest, as modified, and may result in potential incremental losses which are factored into the allowance for loan losses.

Excluding purchased impaired loans, commercial loans over $500 whose terms have been modified in a TDR are generally placed on non-accrual, individually analyzed and measured for estimated impairment based on the fair value of the underlying collateral. The Corporation’s allowance for loan losses included specific reserves for commercial TDRs of $400 and $561 at September 30, 2014 and December 31, 2013, respectively, and pooled reserves for individual loans under $500 of $1,047 and $193 for those same respective periods, based on loan segment loss given default. Upon default, the amount of the recorded investment in the TDR in excess of the fair value of the collateral, less estimated selling costs, is generally considered a confirmed loss and is charged-off against the allowance for loan losses.

All other classes of loans, which are primarily secured by residential properties, whose terms have been modified in a TDR are pooled and measured for estimated impairment based on the expected net present value of the estimated future cash flows of the pool. The Corporation’s allowance for loan losses included pooled reserves for these classes of loans of $1,098 and $1,005 at September 30, 2014 and December 31, 2013, respectively. Upon default of an individual loan, the Corporation’s charge-off policy is followed accordingly for that class of loan.

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 during the periods indicated:

 

     Three Months Ended September 30, 2014      Nine Months Ended September 30, 2014  
     Number
of
Contracts
     Pre-Modification
Outstanding

Recorded
Investment
     Post-
Modification

Outstanding
Recorded
Investment
     Number
of
Contracts
     Pre-Modification
Outstanding

Recorded
Investment
     Post-
Modification

Outstanding
Recorded
Investment
 

Commercial real estate

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

Commercial and industrial

     2         126         119         3         323         307   

Commercial leases

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans and leases

     3         176         167         13         2,956         2,494   

Direct installment

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

Residential mortgages

     9         480         470         33         1,847         1,784   

Indirect installment

     7         18         15         20         52         48   

Consumer lines of credit

     6         88         56         31         899         857   

Other

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

25


Table of Contents
     Three Months Ended September 30, 2013      Nine Months Ended September 30, 2013  
     Number
of
Contracts
     Pre-Modification
Outstanding

Recorded
Investment
     Post-
Modification

Outstanding
Recorded
Investment
     Number
of
Contracts
     Pre-Modification
Outstanding

Recorded
Investment
     Post-
Modification

Outstanding
Recorded
Investment
 

Commercial real estate

     2       $ 212       $ 207         7       $ 1,252       $ 1,031   

Commercial and industrial

     —           —           —           —           —           —     

Commercial leases

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans and leases

     2         212         207         7         1,252         1,031   

Direct installment

     117         1,199         1,168         300         3,078         2,930   

Residential mortgages

     9         346         348         39         1,809         1,784   

Indirect installment

     5         20         18         20         92         84   

Consumer lines of credit

     1         6         6         14         207         204   

Other

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     134       $ 1,783       $ 1,747         380       $ 6,438       $ 6,033   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Following is a summary of TDRs, by class of loans, for which there was a payment default, excluding loans that were either charged-off or cured by period end. Default occurs when a loan is 90 days or more past due and is within 12 months of restructuring.

 

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

Commercial real estate

     —         $ —           —         $ —     

Commercial and industrial

     —           —           —           —     

Commercial leases

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans and leases

     —           —           —           —     

Direct installment

     41         356         80         732   

Residential mortgages

     2         33         2         33   

Indirect installment

     3         10         4         11   

Consumer lines of credit

     1         50         1         50   

Other

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 
     47       $ 449         87       $ 826   
  

 

 

    

 

 

    

 

 

    

 

 

 
     Three Months Ended
September 30, 2013 (1)
     Nine Months Ended
September 30, 2013 (1)
 
     Number of
Contracts
     Recorded
Investment
     Number of
Contracts
     Recorded
Investment
 

Commercial real estate

     —         $ —           1       $ 751   

Commercial and industrial

     —           —           1         15   

Commercial leases

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans and leases

     —           —           2         766   

Direct installment

     24         254         53         509   

Residential mortgages

     2         99         5         240   

Indirect installment

     —           —           4         37   

Consumer lines of credit

     1         85         1         85   

Other

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 
     27       $ 438         65       $ 1,637   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) The recorded investment is as of period end.

 

26


Table of Contents

Allowance for Loan Losses

The allowance for loan losses is established as losses are estimated to have occurred through a provision charged to earnings. Loan losses are charged against the allowance for loan losses when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance for loan losses. Allowances for impaired commercial loans over $500 are generally determined based on collateral values or the present value of estimated cash flows. All other impaired loans are evaluated in the aggregate based on loan segment loss given default. Changes in the allowance for loan losses related to impaired loans are charged or credited to the provision for loan losses.

The allowance for loan losses is maintained at a level that, in management’s judgment, is believed adequate to absorb probable losses associated with specifically identified loans, as well as estimated probable credit losses inherent in the remainder of the loan portfolio. Adequacy of the allowance for loan losses is based on management’s evaluation of potential loan losses in the loan portfolio, which includes an assessment of past experience, current economic conditions in specific industries and geographic areas, general economic conditions, known and inherent risks in the loan portfolio, the estimated value of underlying collateral and residuals and changes in the composition of the loan portfolio. Determination of the allowance for loan losses is inherently subjective as it requires significant estimates, including the amounts and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on transition matrices with predefined loss emergence periods and consideration of qualitative factors, all of which are susceptible to significant change.

Credit impaired loans obtained through acquisitions are accounted for under the provisions of ASC 310-30. The Corporation also accounts for certain acquired loans considered performing at the time of acquisition by analogy to ASC 310-30. ASC 310-30 requires the initial recognition of acquired loans at the present value of amounts expected to be received. Any deterioration in the credit quality of acquired loans subsequent to acquisition would be considered in the allowance for loan losses.

 

27


Table of Contents

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

 

     Balance at
Beginning
of Period
     Charge-
Offs
    Recoveries     Net
Charge-
Offs
    Provision
for Loan
Losses
    Balance at
End of
Period
 

Three Months Ended September 30, 2014

  

       

Commercial real estate

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

Commercial and industrial

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

Commercial leases

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

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial loans and leases

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

Direct installment

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

Residential mortgages

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

Indirect installment

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

Consumer lines of credit

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

Other

     907         (341     9        (332     (208     367   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total allowance on originated loans

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

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Purchased credit-impaired loans

     448         (712     1        (711     1,026        763   

Other acquired loans

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

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total allowance on acquired loans

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

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total allowance

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

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Nine Months Ended September 30, 2014

             

Commercial real estate

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

Commercial and industrial

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

Commercial leases

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

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial loans and leases

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

Direct installment

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

Residential mortgages

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

Indirect installment

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

Consumer lines of credit

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

Other

     530         (910     19        (891     728        367   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total allowance on originated loans

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

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Purchased credit-impaired loans

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

Other acquired loans

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

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total allowance on acquired loans

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

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total allowance

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

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents
     Balance at
Beginning
of Period
    Charge-
Offs
    Recoveries     Net
Charge-
Offs
    Provision
for Loan
Losses
    Balance at
End of
Period
 

Three Months Ended September 30, 2013

  

       

Commercial real estate

   $ 35,666      $ (365   $ 80      $ (285   $ (538   $ 34,843   

Commercial and industrial

     32,486        (1,529     231        (1,298     1,460        32,648   

Commercial leases

     1,756        (69     59        (10     21        1,767   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial loans and leases

     69,908        (1,963     370        (1,593     943        69,258   

Direct installment

     15,993        (2,183     227        (1,956     3,194        17,231   

Residential mortgages

     5,120        (174     50        (124     437        5,433   

Indirect installment

     5,626        (807     188        (619     1,120        6,127   

Consumer lines of credit

     6,421        (454     660        (394     1,052        7,079   

Other

     (219     (333     —          (333     760        208   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total allowance on originated loans

     102,849        (5,914     895        (5,019     7,506        105,336   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Purchased credit-impaired loans

     325        —          —          —          337        662   

Other acquired loans

     5,106        70        (559     (489     (563     4,054   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total allowance on acquired loans

     5,431        70        (559     (489     (226     4,716   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total allowance

   $ 108,280      $ (5,844   $ 336      $ (5,508   $ 7,280      $ 110,052   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Nine Months Ended September 30, 2013

            

Commercial real estate

   $ 34,810      $ (3,067   $ 1,606      $ (1,461   $ 1,494      $ 34,843   

Commercial and industrial

     31,849        (4,262     734        (3,528     4,327        32,648   

Commercial leases

     1,744        (317     161        (156     179        1,767   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial loans and leases

     68,403        (7,646     2,501        (5,145     6,000        69,258   

Direct installment

     15,130        (6,824     709        (6,115     8,216        17,231   

Residential mortgages

     5,155        (733     90        (643     921        5,433   

Indirect installment

     5,449        (2,349     576        (1,773     2,451        6,127   

Consumer lines of credit

     6,057        (1,183     209        (974     1,996        7,079   

Other

     —          (721     —          (721     929        208   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total allowance on originated loans

     100,194        (19,456     4,085        (15,371     20,513        105,336   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Purchased credit-impaired loans

     759        (156     —          (156     59        662   

Other acquired loans

     3,421        (1,199     (320     (1,519     2,152        4,054   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total allowance on acquired loans

     4,180        (1,355     (320     (1,675     2,211        4,716   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total allowance

   $ 104,374      $ (20,811   $ 3,765      $ (17,046   $ 22,724      $ 110,052   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

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

 

     Allowance      Loans Outstanding  
     Individually
Evaluated for
Impairment
     Collectively
Evaluated for
Impairment
     Loans      Individually
Evaluated for
Impairment
     Collectively
Evaluated for
Impairment
 

September 30, 2014

              

Commercial real estate

   $ 901       $ 36,279       $ 2,930,146       $ 21,619       $ 2,908,527   

Commercial and industrial

     870         33,426         2,104,559         5,966         2,098,593   

Commercial leases

     —           2,205         171,615         —           171,615   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans and leases

     1,771         71,910         5,206,320         27,585         5,178,735   

Direct installment

     —           19,560         1,509,096         —           1,509,096   

Residential mortgages

     —           6,650         762,743         —           762,743   

Indirect installment

     —           6,370         803,201         —           803,201   

Consumer lines of credit

     —           7,941         915,007         —           915,007   

Other

     —           367         54,261         —           54,261   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 1,771       $ 112,798       $ 9,250,628       $ 27,585       $ 9,223,043   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2013

              

Commercial real estate

   $ 701       $ 31,847       $ 2,640,428       $ 30,133       $ 2,610,295   

Commercial and industrial

     123         32,480         1,761,668         4,243         1,757,425   

Commercial leases

     —           1,903         158,895         —           158,895   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans and leases

     824         66,230         4,560,991         34,376         4,526,615   

Direct installment

     —           17,824         1,387,995         —           1,387,995   

Residential mortgages

     —           5,836         678,227         —           678,227   

Indirect installment

     —           6,409         649,701         —           649,701   

Consumer lines of credit

     —           7,231         832,668         —           832,668   

Other

     —           530         45,183         —           45,183   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 824       $ 104,060       $ 8,154,765       $ 34,376       $ 8,120,389   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

BORROWINGS

Following is a summary of short-term borrowings:

 

     September 30,
2014
     December 31,
2013
 

Securities sold under repurchase agreements

   $ 857,217       $ 841,741   

Federal Home Loan Bank advances

     450,000         —     

Federal funds purchased

     165,000         270,000   

Subordinated notes

     128,950         129,498   
  

 

 

    

 

 

 
   $ 1,601,167       $ 1,241,239   
  

 

 

    

 

 

 

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

 

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Table of Contents

Following is a summary of long-term debt:

 

     September 30,
2014
     December 31,
2013
 

Federal Home Loan Bank advances

   $ 400,056       $ 50,076   

Subordinated notes

     83,133         84,637   

Other subordinated debt

     —           8,637   

Convertible debt

     —           578   
  

 

 

    

 

 

 
   $ 483,189       $ 143,928   
  

 

 

    

 

 

 

The Corporation’s banking affiliate has available credit with the FHLB of $3,840,436 of which $850,056 was used as of September 30, 2014. 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 these advances ranged from 0.26% to 4.19% for the nine months ended September 30, 2014 and 1.06% to 4.19% for the year ended December 31, 2013.

JUNIOR SUBORDINATED DEBT

The Corporation has two unconsolidated subsidiary trusts as of September 30, 2014 (collectively, the Trusts): F.N.B. Statutory Trust II and Omega Financial Capital Trust I. One hundred percent of the common equity of each Trust is owned by the Corporation. The Trusts were formed for the purpose of issuing Corporation-obligated mandatorily redeemable capital securities (TPS) to third-party investors. The proceeds from the sale of TPS and the issuance of common equity by the Trusts were invested in junior subordinated debt securities (subordinated debt) issued by the Corporation, which are the sole assets of each Trust. Since third-party investors are the primary beneficiaries, the Trusts are not consolidated in the Corporation’s financial statements. The Trusts pay dividends on the TPS at the same rate as the distributions paid by the Corporation on the junior subordinated debt held by the Trusts. Omega Financial Capital Trust I was assumed as a result of an acquisition.

Distributions on the subordinated debt issued to the Trusts are recorded as interest expense by the Corporation. The TPS are subject to mandatory redemption, in whole or in part, upon repayment of the subordinated debt. The TPS are eligible for redemption, at any time, at the Corporation’s discretion. The subordinated debt, net of the Corporation’s investment in the Trusts, qualifies as tier 1 capital under the Board of Governors of the Federal Reserve System (FRB) guidelines. Under recently issued capital guidelines, these TPS obligations are subject to limitations when total assets of the Corporation exceed $15,000,000. The Corporation has entered into agreements which, when taken collectively, fully and unconditionally guarantee the obligations under the TPS subject to the terms of each of the guarantees.

During the first nine months of 2014, the Corporation redeemed $33,000 of the Corporation-issued TPS, including $16,500 that the Corporation assumed as a result of the BCSB acquisition. During 2013, the Corporation redeemed $130,000 of the Corporation-issued TPS. The Corporation proactively redeemed these Corporation-issued TPS, primarily using proceeds from the November 2013 capital raise, in anticipation of meeting the limitations as described above. Under applicable regulatory capital guidelines issued by the bank regulatory agencies, upon notice of redemption, the redeemed TPS no longer qualify as tier 1 capital for the Corporation.

The following table provides information relating to the Trusts as of September 30, 2014:

 

     Trust
Preferred
Securities
     Common
Securities
     Junior
Subordinated
Debt
     Stated
Maturity
Date
     Interest
Rate
     

F.N.B. Statutory Trust II

   $ 21,500       $ 665       $ 22,165         6/15/36         1.88  

Variable; LIBOR + 165 basis points (bps)

Omega Financial Capital Trust I

     36,000         1,114         36,068         10/18/34         2.42  

Variable; LIBOR + 219 bps

  

 

 

    

 

 

    

 

 

         
   $ 57,500       $ 1,779       $ 58,233           
  

 

 

    

 

 

    

 

 

         

 

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Table of Contents

DERIVATIVE INSTRUMENTS

The Corporation is exposed to certain risks arising from both its business operations and economic conditions. The Corporation principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Corporation manages economic risks, including interest rate risk, primarily by managing the amount, source, and duration of its assets and liabilities, and through the use of derivative instruments. Interest rate swaps are the primary derivative instrument used by the Corporation for interest rate risk management. The Corporation also uses derivative instruments to facilitate transactions on behalf of its customers.

Commercial Borrower Derivatives

The Corporation enters into interest rate swap agreements to meet the financing, interest rate and equity risk management needs of qualifying commercial loan customers. These agreements provide the customer the ability to convert from variable to fixed interest rates. The Corporation then enters into positions with a derivative counterparty in order to offset its exposure on the fixed components of the customer agreements. 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. The Corporation seeks to minimize counterparty credit risk by entering into transactions with only high-quality institutions. Since June 10, 2014, the majority of the Corporation’s derivative transactions are executed through CME Clearing, a SEC registered clearing agency, whose purpose is to ensure safety and soundness in the markets, rather than directly with a counterparty. These arrangements meet the definition of derivatives, but are not designated as hedging instruments under ASC 815, Derivatives and Hedging. The interest rate swap agreement with the loan customer and with the counterparty is reported at fair value in other assets and other liabilities on the consolidated balance sheet with any resulting gain or loss recorded in current period earnings as other income or other expense.

Risk Management Derivatives

The Corporation entered into interest rate derivative agreements in order to manage its net interest income by increasing the stability of the net interest income over a range of potential interest rate scenarios. Interest rate swaps are also used to modify the interest rate characteristics of designated commercial loans from variable rate to fixed rate in order to reduce the impact of changes in future cash flows due to 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. Gains and losses from hedge ineffectiveness recognized in the consolidated statement of comprehensive income were not material for the nine months ended September 30, 2014.

In accordance with the requirements of ASU No. 2011-04, the Corporation made an accounting policy election to use the portfolio exception with respect to measuring derivative instruments, consistent with the guidance in ASC 820. The Corporation further documents that it meets the criteria for this exception as follows:

 

    The Corporation manages credit risk for its derivative positions on a counterparty-by-counterparty basis, consistent with its risk management strategy for such transactions. The Corporation manages credit risk by considering indicators of risk such as credit ratings, and by negotiating terms in its master netting arrangements and credit support annex documentation with each individual counterparty. Review of credit risk plays a central role in the decision of which counterparties to consider for such relationships and when deciding with whom it will enter into derivative transactions.

 

    Since the effective date of ASC 820, the Corporation’s management has monitored and measured credit risk and calculated credit valuation adjustments (CVAs) for its derivative transactions on a counterparty-by-counterparty basis. Management receives reports from an independent third-party valuation specialist on a monthly basis to assist in determining CVAs by counterparty for purposes of reviewing and managing its credit risk exposures. Since the portfolio exception applies only to the fair value measurement and not to the financial statement presentation, the portfolio-level adjustments are then allocated in a reasonable and consistent manner each period to the individual assets or liabilities that make up the counterparty derivative portfolio, in accordance with the Corporation’s accounting policy elections.

 

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Table of Contents

The Corporation notes that key market participants take into account the existence of such arrangements that mitigate credit risk exposure in the event of default. As such, the Corporation formally elects to apply the portfolio exception in ASC 820 with respect to measuring counterparty credit risk for all of its derivative transactions subject to master netting arrangements.

At September 30, 2014, the Corporation was party to 330 swaps with customers with notional amounts totaling $950,427 and 296 swaps with derivative counterparties with notional amounts totaling $1,150,427.

Derivative assets are classified in the balance sheet under “other assets” and derivative liabilities are classified in the balance sheet under “other liabilities.” The following tables present information about derivative assets and derivative liabilities that are subject to enforceable master netting agreements as well as those not subject to enforceable master netting arrangements:

 

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

Offsetting of Derivative Assets:

        

September 30, 2014

        

Derivative assets subject to master netting arrangement:

        

Interest rate contracts

   $ 1,698         —         $ 1,698   

Equity contracts

     50         —           50   

Derivative assets not subject to master netting arrangement:

        

Interest rate contracts

     32,880         —           32,880   
  

 

 

    

 

 

    

 

 

 

Total derivative assets

   $ 34,628         —         $ 34,628   
  

 

 

    

 

 

    

 

 

 

December 31, 2013

        

Derivative assets subject to master netting arrangement:

        

Interest rate contracts

   $ 3,547         —         $ 3,547   

Equity contracts

     32         —           32   

Derivative assets not subject to master netting arrangement:

        

Interest rate contracts

     29,738         —           29,738   
  

 

 

    

 

 

    

 

 

 

Total derivative assets

   $ 33,317         —         $ 33,317   
  

 

 

    

 

 

    

 

 

 

Offsetting of Derivative Liabilities:

        

September 30, 2014

        

Derivative liabilities subject to master netting arrangement:

        

Interest rate contracts

   $ 37,565         —         $ 37,565   

Derivative liabilities not subject to master netting arrangement:

        

Interest rate contracts

     1,040         —           1,040   

Equity contracts

     50         —           50   
  

 

 

    

 

 

    

 

 

 

Total derivative liabilities

   $ 38,655         —         $ 38,655   
  

 

 

    

 

 

    

 

 

 

December 31, 2013

        

Derivative liabilities subject to master netting arrangement:

        

Interest rate contracts

   $ 40,323         —         $ 40,323   

Derivative liabilities not subject to master netting arrangement:

        

Interest rate contracts

     3,014         —           3,014   

Equity contracts

     32         —           32   
  

 

 

    

 

 

    

 

 

 

Total derivative liabilities

   $ 43,369         —         $ 43,369   
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents

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

 

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

Derivative Assets:

           

September 30, 2014

           

Counterparty B

   $ 30       $ 30       $ —           —     

Counterparty D

     67         67         —           —     

Counterparty E

     657         657         —           —     

Counterparty F

     137         137         —           —     

Counterparty G

     71         71         —           —     

Counterparty I

     232         232         —           —     

Counterparty J

     554         —           554         —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 1,748       $ 1,194       $ 554         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2013

           

Counterparty B

   $ 24       $ 24       $ —         $ —     

Counterparty D

     566         566         —           —     

Counterparty E

     1,696         1,696         —           —     

Counterparty F

     355         273         —           82   

Counterparty G

     251         251         —           —     

Counterparty I

     634         634         —           —     

Counterparty J

     53         —           53         —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 3,579       $ 3,444       $ 53       $ 82   
  

 

 

    

 

 

    

 

 

    

 

 

 

Derivative Liabilities:

           

September 30, 2014

           

Counterparty A

   $ 4,033       $ 4,033       $ —         $ —     

Counterparty B

     1,882         1,882         —           —     

Counterparty C

     1,160         1,160         —           —     

Counterparty D

     7,105         7,105         —           —     

Counterparty E

     3,509         3,509         —           —     

Counterparty F

     719         667         —           52   

Counterparty G

     4,146         4,146         —           —     

Counterparty H

     1,761         —           —           1,761   

Counterparty I

     5,399         5,399         —           —     

Counterparty J

     7,851         —           7,851         —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 37,565       $ 27,901       $ 7,851       $ 1,813   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2013

           

Counterparty A

   $ 4,934       $ 4,934       $ —         $ —     

Counterparty B

     3,249         3,249         —           —     

Counterparty C

     1,431         1,431         —           —     

Counterparty D

     9,614         9,614         —           —     

Counterparty E

     6,257         6,257         —           —     

Counterparty F

     13         13         —           —     

Counterparty G

     5,309         5,309         —           —     

Counterparty H

     2,257         125         —           2,132   

Counterparty I

     5,649         5,649         —           —     

Counterparty J

     1,610         —           1,610         —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 40,323       $ 36,581       $ 1,610       $ 2,132   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

The following table presents the effect of the Corporation’s derivative financial instruments on the income statement:

 

     Income      Nine Months Ended  
     Statement      September 30,  
     Location      2014     2013  

Interest Rate Products

     Other income       $ (9   $ 40   

The Corporation has agreements with each of its derivative counterparties that contain a provision where if the Corporation defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Corporation could also be declared in default on its derivative obligations. The Corporation also has agreements with certain of its derivative counterparties that contain a provision that if the Corporation fails to maintain its status as a well-capitalized institution, then the counterparty could terminate the derivative positions and the Corporation would be required to settle its obligations under the agreements. Certain of the Corporation’s agreements with its derivative counterparties contain provisions where if a material or adverse change occurs that materially changes the Corporation’s creditworthiness in an adverse manner, the Corporation may be required to fully collateralize its obligations under the derivative instrument.

Interest rate swap agreements generally require posting of collateral by either party under certain conditions. As of September 30, 2014 and December 31, 2013, the fair value of counterparty derivatives in a net liability position, which includes accrued interest but excludes any adjustment for non-performance risk related to these agreements, was $37,100 and $38,239, respectively. At September 30, 2014, the Corporation has posted collateral with derivative counterparties with a fair value of $29,796 and cash collateral of $10,986. At December 31, 2013, the Corporation had posted collateral with derivative counterparties with a fair value of $37,427 and cash collateral of $1,976. Additionally, if the Corporation had breached its agreements with its derivative counterparties it would be required to settle its obligations under the agreements at the termination value and would be required to pay an additional $1,963 and $2,224 as of September 30, 2014 and December 31, 2013, respectively, in excess of amounts previously posted as collateral with the respective counterparty.

The Corporation has entered into interest rate lock commitments to originate residential mortgage loans held for sale and forward commitments to sell residential mortgage loans to secondary market investors. These arrangements are considered derivative instruments. The fair values of the Corporation’s rate lock commitments to customers and commitments with investors at September 30, 2014 and December 31, 2013 are not material.

COMMITMENTS, CREDIT RISK AND CONTINGENCIES

The Corporation has commitments to extend credit and standby letters of credit that involve certain elements of credit risk in excess of the amount stated in the consolidated balance sheet. The Corporation’s exposure to credit loss in the event of non-performance by the customer is represented by the contractual amount of those instruments. The credit risk associated with loan commitments and standby letters of credit is essentially the same as that involved in extending loans to customers and is subject to normal credit policies. Since many of these commitments expire without being drawn upon, the total commitment amounts do not necessarily represent future cash flow requirements.

Following is a summary of off-balance sheet credit risk information:

 

     September 30,
2014
     December 31,
2013
 

Commitments to extend credit

   $ 3,445,792       $ 2,897,748   

Standby letters of credit

     122,290         114,298   

At September 30, 2014, funding of 74.2% of the commitments to extend credit was dependent on the financial condition of the customer. The Corporation has the ability to withdraw such commitments at its discretion. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Based on management’s credit evaluation of the customer, collateral may be deemed necessary. Collateral requirements vary and may include accounts receivable, inventory, property, plant and equipment and income-producing commercial properties.

 

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Standby letters of credit are conditional commitments issued by the Corporation that may require payment at a future date. The credit risk involved in issuing letters of credit is quantified on a quarterly basis, through the review of historical performance of the Corporation’s portfolios and allocated as a liability on the Corporation’s balance sheet.

Other Legal Proceedings

The Corporation and its subsidiaries are involved in various pending and threatened legal proceedings in which claims for monetary damages and other relief are asserted. These actions include claims brought against the Corporation and its subsidiaries where the Corporation or a subsidiary acted as one or more of the following: a depository bank, lender, underwriter, fiduciary, financial advisor, broker or was engaged in other business activities. Although the ultimate outcome for any asserted claim cannot be predicted with certainty, the Corporation believes that it and its subsidiaries have valid defenses for all asserted claims. Reserves are established for legal claims when losses associated with the claims are judged to be probable and the amount of the loss can be reasonably estimated.

Based on information currently available, advice of counsel, available insurance coverage and established reserves, the Corporation does not anticipate, at the present time, that the aggregate liability, if any, arising out of such legal proceedings will have a material adverse effect on the Corporation’s consolidated financial position. However, the Corporation cannot determine whether or not any claims asserted against it will have a material adverse effect on its consolidated results of operations in any future reporting period.

OBA Financial Services, Inc. Stockholder Litigation

On May 7, 2014, a purported shareholder of OBA filed a putative class action complaint in the Circuit Court for Montgomery County, Maryland, captioned Parshall v. OBA Financial Services, Inc., et al., Case No. 390369V, and naming as defendants OBA, OBA Bank, OBA’s board of directors, the. Corporation and FNBPA. The plaintiff alleged that OBA’s board of directors breached its fiduciary duty to OBA’s shareholders by approving a proposed transaction containing certain so-called “deal protection devices” and, as a result, OBA’s shareholders allegedly would not receive fair value for their stock. The plaintiff further alleged that OBA, OBA Bank, the Corporation and FNBPA aided and abetted the alleged breaches of fiduciary duty by the OBA board. On July 3, 2014, the plaintiff filed an amended complaint with additional allegations regarding certain purported nondisclosures relating to the registration statement for the proposed transaction.

The plaintiff sought an injunction barring the defendants from completing the merger; rescission of the merger agreement to the extent already implemented or, in the alternative, an award of rescissory damages; an accounting to plaintiff for all damages caused by the defendants; and an award of the costs and expenses incurred by the plaintiff in the lawsuit, including a reasonable allowance for counsel fees and expert fees.

On September 15, 2014, the plaintiff voluntarily dismissed his complaint.

STOCK INCENTIVE PLANS

Restricted Stock

The Corporation issues restricted stock awards, consisting of both restricted stock and restricted stock units, to key employees under its Incentive Compensation Plans (Plans). Beginning in 2014, the Corporation issues time-based awards and performance-based awards under these Plans, both of which are based on a three-year vesting period. The grant date fair value of the time-based awards is equal to the price of the Corporation’s common stock on the grant date. The grant date fair value of the performance-based awards is based on total shareholder return compared to peers. The amount of expense for the performance-based awards is fixed, regardless of how much of the awards ultimately vest.

Prior to 2014, the grant date fair value of the restricted stock awards under these Plans was equal to the price of the Corporation’s common stock on the grant date. More than half of the restricted stock awards granted to management were earned if the Corporation met or exceeded certain financial performance results when compared to its peers. These performance-related awards were expensed ratably from the date that the likelihood of meeting the performance measure was probable through the end of a four-year vesting period. The service-based awards were expensed ratably over a three-year vesting period. The Corporation also issued discretionary service-based awards to certain employees that vested over five years.

 

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For the nine months ended September 30, 2014 and 2013, the Corporation issued 364,065 and 344,479 restricted stock awards, respectively, with aggregate weighted average grant date fair values of $4,954 and $3,802, respectively, under these Plans. As of September 30, 2014, the Corporation had available up to 2,419,585 shares of common stock to issue under these Plans.

The unvested restricted stock awards are eligible to receive cash dividends or dividend equivalents which are ultimately used to purchase additional shares of stock. Any additional shares of stock received as a result of cash dividends are subject to forfeiture if the requisite service period is not completed or the specified performance criteria are not met. These awards are subject to certain accelerated vesting provisions upon retirement, death, disability or in the event of a change of control as defined in the award agreements.

Share-based compensation expense related to restricted stock awards was $2,294 and $3,338 for the nine months ended September 30, 2014 and 2013, the tax benefit of which was $803 and $1,186, respectively.

The following table summarizes certain information concerning restricted stock awards:

 

     Nine Months Ended September 30,  
     2014      2013  
     Awards     Weighted
Average
Grant
Price
     Awards     Weighted
Average
Grant
Price
 

Unvested awards outstanding at beginning of period

     1,729,033      $ 10.23         1,913,073      $ 9.17   

Granted

     364,065        13.61         344,479        11.04   

Net adjustment due to performance

     (87,512     11.41         73,835        10.60   

Vested

     (703,428     8.79         (734,129     7.60   

Forfeited

     (50,849     11.47         (37,175     10.40   

Dividend reinvestment

     34,521        12.73         43,934        11.66   
  

 

 

      

 

 

   

Unvested awards outstanding at end of period

     1,285,830        11.90         1,604,017        10.26   
  

 

 

      

 

 

   

The total fair value of awards vested was $10,670 and $8,259 for the nine months ended September 30, 2014 and 2013, respectively.

As of September 30, 2014, there was $5,950 of unrecognized compensation cost related to unvested restricted stock awards, including $71 that is subject to accelerated vesting under the Plan’s immediate vesting upon retirement provision for awards granted prior to the adoption of ASC 718, Compensation – Stock Compensation. The components of the restricted stock awards as of September 30, 2014 are as follows:

 

     Service-
Based

Awards
     Performance-
Based
Awards
     Total  

Unvested awards

     498,890         786,940         1,285,830   

Unrecognized compensation expense

   $ 3,367       $ 2,583       $ 5,950   

Intrinsic value

   $ 5,982       $ 9,435       $ 15,417   

Weighted average remaining life (in years)

     2.26         2.10         2.16   

Stock Options

All outstanding stock options were assumed from acquisitions and are fully vested. The Corporation issues shares of treasury stock or authorized but unissued shares to satisfy stock options exercised. Shares issued upon the exercise of stock options were 135,417 and 36,647 for the nine months ended September 30, 2014 and 2013, respectively.

 

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The following table summarizes certain information concerning stock option awards:

 

     Nine Months Ended September 30,  
     2014      2013  
     Shares     Weighted
Average
Exercise
Price
     Shares     Weighted
Average
Exercise
Price
 

Options outstanding at beginning of period

     533,524      $ 11.50         640,050      $ 13.21   

Assumed from acquisition

     805,507        7.39         19,223        7.92   

Exercised

     (140,817     6.21         (36,647     8.90   

Forfeited

     (54,962     24.41         (298,150     15.10   
  

 

 

      

 

 

   

Options outstanding and exercisable at end of period

     1,143,252        8.64         324,476        11.65   
  

 

 

      

 

 

   

The intrinsic value of outstanding and exercisable stock options at September 30, 2014 was $4,413.

Warrants

In conjunction with its participation in the UST’s CPP, the Corporation issued to the UST a warrant to purchase up to 1,302,083 shares of the Corporation’s common stock. Pursuant to Section 13(H) of the Warrant to Purchase Common Stock, the number of shares of common stock issuable upon exercise of the warrant was reduced in half to 651,042 shares on June 16, 2009, the date the Corporation completed a public offering. The warrant, which expires in 2019, has an exercise price of $11.52 per share.

In conjunction with the Parkvale Financial Corporation (Parkvale) acquisition on January 1, 2012, the warrant issued by Parkvale to the UST under the CPP has been converted into a warrant to purchase up to 819,640 shares of the Corporation’s common stock. This warrant, which was recorded at its fair value on January 1, 2012, expires in 2018 and has an exercise price of $5.81 per share.

In conjunction with the ANNB acquisition, the warrant issued by ANNB to the UST under the CPP has been converted into a warrant to purchase up to 342,564 shares of the Corporation’s common stock. The warrant, which was recorded at its fair value on April 6, 2013, expires in 2019 and has an exercise price of $3.57 per share.

RETIREMENT PLANS

The Corporation sponsors the Retirement Income Plan (RIP), a qualified noncontributory defined benefit pension plan that covered substantially all salaried employees hired prior to January 1, 2008. The RIP covers employees who satisfied minimum age and length of service requirements. During 2006, the Corporation amended the RIP such that effective January 1, 2007 benefits were earned based on the employee’s compensation each year. The Corporation’s funding guideline has been to make annual contributions to the RIP each year, if necessary, such that minimum funding requirements have been met. The RIP was frozen as of December 31, 2010.

The Corporation also sponsors two supplemental non-qualified retirement plans. The ERISA Excess Retirement Plan provides retirement benefits equal to the difference, if any, between the maximum benefit allowable under the Internal Revenue Code and the amount that would be provided under the RIP, if no limits were applied. The Basic Retirement Plan (BRP) is applicable to certain officers whom the Board of Directors designates. Officers participating in the BRP receive a benefit based on a target benefit percentage based on years of service at retirement and a designated tier as determined by the Board of Directors. When a participant retires, the basic benefit under the BRP is a monthly benefit equal to the target benefit percentage times the participant’s highest average monthly cash compensation during five consecutive calendar years within the last ten calendar years of employment. This monthly benefit was reduced by the monthly benefit the participant receives from Social Security, the RIP, the ERISA Excess Retirement Plan and the annuity equivalent of the three percent automatic contributions to the qualified 401(k) defined contribution plan and the ERISA Excess Lost Match Plan. The BRP was frozen as of December 31, 2008. The ERISA Excess Retirement Plan was frozen as of December 31, 2010.

 

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

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  
     2014     2013     2014     2013  

Service cost

   $ 15      $ 15      $ 47      $ 51   

Interest cost

     1,610        1,437        4,802        4,291   

Expected return on plan assets

     (2,486     (2,271     (7,460     (6,811

Amortization:

        

Unrecognized net transition asset

     (6     (24     (16     (70

Unrecognized prior service cost

     2        2        6        6   

Unrecognized loss

     347        575        1,021        1,689   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic pension credit

   $ (518   $ (266   $ (1,600   $ (844
  

 

 

   

 

 

   

 

 

   

 

 

 

The Corporation’s subsidiaries participate in a qualified 401(k) defined contribution plan under which employees may contribute a percentage of their salary. Employees are eligible to participate upon their first day of employment. Under this plan, the Corporation matches 100% of the first four percent that the employee defers. Additionally, substantially all employees receive an automatic contribution of three percent of compensation at the end of the year and the Corporation may make an additional contribution of up to two percent depending on the Corporation achieving its performance goals for the plan year. The Corporation’s contribution expense was $7,595 and $6,975 for the nine months ended September 30, 2014 and 2013, respectively.

The Corporation also sponsors an ERISA Excess Lost Match Plan for certain officers. This plan provides retirement benefits equal to the difference, if any, between the maximum benefit allowable under the Internal Revenue Code and the amount that would have been provided under the qualified 401(k) defined contribution plan, if no limits were applied.

INCOME TAXES

The Corporation bases its provision for income taxes upon income before income taxes, adjusted for the effect of certain tax-exempt income and non-deductible expenses. In addition, the Corporation reports certain items of income and expense in different periods for financial reporting and tax return purposes. The Corporation recognizes the tax effects of these temporary differences currently in the deferred income tax provision or benefit. The Corporation computes deferred tax assets or liabilities based upon the differences between the financial statement and income tax bases of assets and liabilities using the applicable marginal tax rate.

The Corporation must evaluate the probability that it will ultimately realize the full value of its deferred tax assets. Realization of the Corporation’s deferred tax assets is dependent upon a number of factors including the existence of any cumulative losses in prior periods, the amount of taxes paid in available carry-back periods, expectations for future earnings, applicable tax planning strategies and assessment of current and future economic and business conditions. The Corporation establishes a valuation allowance when it is “more likely than not” that the Corporation will not be able to realize a benefit from its deferred tax assets, or when future deductibility is uncertain.

At September 30, 2014, the Corporation anticipates that it will not utilize state net operating loss carryforwards and other net deferred tax assets at certain of its subsidiaries and has recorded a valuation allowance against the state deferred tax assets. The Corporation believes that, except for the portion which is covered by the valuation allowance, it is more likely than not the Corporation will realize the benefits of its deferred tax assets, net of the valuation allowance, at September 30, 2014, based on the level of historical taxable income and taxes paid in available carry-back periods.

 

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Table of Contents

COMPREHENSIVE INCOME

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

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  
     2014     2013     2014     2013  

Net income

   $ 35,391      $ 31,634      $ 104,746      $ 89,365   

Other comprehensive (loss) income:

        

Securities available for sale:

        

Unrealized (losses) gains arising during the period, net of tax (benefit) expense of $(1,551), $(2,635), $7,065 and $(8,835)

     (2,881     (4,894     13,120        (16,408

Reversal of non-credit related losses on debt securities not expected to be sold, net of tax expense of $3,335

     —          —          6,192        —     

Reclassification adjustment for gains included in net income, net of tax expense of $412, $2, $3,995 and $260

     (766     (3     (7,420     (483

Derivative instruments:

        

Unrealized (losses) gains arising during the period, net of tax (benefit) expense of $(253), $239, $2,112 and $(2,215)

     (469     443        3,922        (4,113

Pension and postretirement benefit obligations:

        

Unrealized gains arising during the period, net of tax expense of $121, $194, $355 and $569

     224        360        659        1,057   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive (loss) income

     (3,892     (4,094     16,473        (19,947
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 31,499      $ 27,540      $ 121,219      $ 69,418   
  

 

 

   

 

 

   

 

 

   

 

 

 

The following table presents changes in accumulated other comprehensive income, net of tax, by component:

 

     Unrealized
Net Gains
(Losses) on
Securities
Available
for Sale
    Non-Credit
Related Loss
on Debt
Securities not
Expected to
be Sold
    Unrealized
Losses on
Derivative
Instruments
    Unrecognized
Pension and

Postretirement
Obligations
    Total  

Nine Months Ended September 30, 2014

          

Balance at beginning of period

   $ (11,874   $ (6,192   $ (6,586   $ (32,272   $ (56,924

Other comprehensive income (loss) before reclassifications

     13,120        6,192        3,922        659        23,893   

Amounts reclassified from accumulated other comprehensive income

     (7,420     —          —          —          (7,420
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net current period other comprehensive income (loss)

     5,700        6,192        3,922        659        16,473   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ (6,174   $ —        $ (2,664   $ (31,613   $ (40,451
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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The following table presents a summary of the reclassifications out of accumulated other comprehensive income:

Nine Months Ended September 30, 2014

 

Details About Accumulated Other

Comprehensive Income Component

   Amount
Reclassified from
Other
Comprehensive
Income
    Affected Line Item
in the Statement
where Net Income
is Presented

Unrealized net gains on securities available for sale (1)

   $ (11,415   Net securities gains
     (3,995   Tax expense
  

 

 

   
   $ (7,420  
  

 

 

   

 

(1) For additional detail related to unrealized net gains on securities available for sale and related amounts reclassified from accumulated other comprehensive income see the “Securities” note in this Report.

EARNINGS PER COMMON SHARE

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

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

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

 

     Three Months Ended      Nine Months Ended  
     September 30,      September 30,  
     2014      2013      2014      2013  

Net income

   $ 35,391       $ 31,634       $ 104,746       $ 89,365   

Less: Preferred stock dividends

     2,010         —           6,342         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income available to common stockholders

   $ 33,381       $ 31,634       $ 98,404       $ 89,365   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic weighted average common shares outstanding

     167,260,386         144,759,887         165,229,206         142,949,134   

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

     1,623,741         1,686,555         1,695,637         1,520,683   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted weighted average common shares outstanding

     168,884,127         146,446,442         166,924,843         144,469,817   
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per common share:

           

Basic

   $ 0.20       $ 0.22       $ 0.60       $ 0.63   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted

   $ 0.20       $ 0.22       $ 0.59       $ 0.62   
  

 

 

    

 

 

    

 

 

    

 

 

 

For the three months ended September 30, 2014 and 2013, 32,419 and 17,081 shares of common stock, respectively, related to stock options and warrants were excluded from the computation of diluted earnings per common share because the exercise price of the shares was greater than the average market price of the common shares and, therefore, the effect would be anti-dilutive. For the nine months ended September 30, 2014 and 2013, 38,151 and 41,779 shares of common stock, respectively, related to stock options and warrants were excluded from the computation of diluted earnings per common share because the exercise price of the shares was greater than the average market price of the common shares and, therefore, the effect would be anti-dilutive.

 

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CASH FLOW INFORMATION

Following is a summary of supplemental cash flow information:

 

Nine Months Ended September 30    2014      2013  

Interest paid on deposits and other borrowings

   $ 31,804       $ 36,340   

Income taxes paid

     17,000         18,700   

Transfers of loans to other real estate owned

     7,784         10,856   

Financing of other real estate owned sold

     287         549   

BUSINESS SEGMENTS

The Corporation operates in four reportable segments: Community Banking, Wealth Management, Insurance and Consumer Finance.

 

    The Community Banking segment provides commercial and consumer banking services. Commercial banking solutions include corporate banking, small business banking, investment real estate financing, asset based lending, capital markets and lease financing. Consumer banking products and services include deposit products, mortgage lending, consumer lending and a complete suite of mobile and online banking services.

 

    The Wealth Management segment provides a broad range of personal and corporate fiduciary services including the administration of decedent and trust estates. In addition, it offers various alternative products, including securities brokerage and investment advisory services, mutual funds and annuities.

 

    The Insurance segment includes a full-service insurance agency offering all lines of commercial and personal insurance through major carriers. The Insurance segment also includes a reinsurer.

 

    The Consumer Finance segment primarily makes installment loans to individuals and purchases installment sales finance contracts from retail merchants. The Consumer Finance segment activity is funded through the sale of the Corporation’s subordinated notes at the finance company’s branch offices.

The following tables provide financial information for these segments of the Corporation. The information provided under the caption “Parent and Other” represents operations not considered to be reportable segments and/or general operating expenses of the Corporation, and includes the parent company, other non-bank subsidiaries and eliminations and adjustments which are necessary for purposes of reconciliation to the consolidated amounts.

 

     Community
Banking
     Wealth
Management
     Insurance      Consumer
Finance
     Parent and
Other
    Consolidated  

At or for the Three Months Ended September 30, 2014

                

Interest income

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

Interest expense

     9,435         —           —           826         686        10,947   

Net interest income

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

Provision for loan losses

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

Non-interest income

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

Non-interest expense

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

Intangible amortization

     2,282         72         101         —           —          2,455   

Income tax expense (benefit)

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

Net income (loss)

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

Total assets

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

Total intangibles

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

 

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

At or for the Three Months Ended September 30, 2013

                

Interest income

   $ 98,716       $ —         $ 27       $ 9,600       $ 1,447      $ 109,790   

Interest expense

     7,552         —           —           839         2,145        10,536   

Net interest income

     91,164         —           27         8,761         (698     99,254   

Provision for loan losses

     5,432         —           —           1,725         123        7,280   

Non-interest income

     24,317         6,916         3,222         681         (2,326     32,810   

Non-interest expense

     68,091         5,850         2,799         4,724         (358     81,106   

Intangible amortization

     1,890         76         101         —           —          2,067   

Income tax expense (benefit)

     9,552         366         128         1,145         (1,214     9,977   

Net income (loss)

     30,516         624         221         1,848         (1,575     31,634   

Total assets

     12,610,043         19,614         19,788         182,695         (41,861     12,790,279   

Total intangibles

     725,389         11,084         10,627         1,809         —          748,909   

At or for the Nine Months Ended September 30, 2014

                

Interest income

   $ 339,974       $ —         $ 74       $ 28,716       $ 5,122      $ 373,886   

Interest expense

     26,413         —           —           2,481         2,356        31,250   

Net interest income

     313,561         —           74         26,235         2,766        342,636   

Provision for loan losses

     23,148         —           —           4,754         706        28,608   

Non-interest income

     86,512         23,530         10,582         2,120         (3,932     118,812   

Non-interest expense

     231,390         19,038         8,900         14,800         1,270        275,398   

Intangible amortization

     6,680         216         303         —           —          7,199   

Income tax expense (benefit)

     41,738         1,555         521         3,386         (1,703     45,497   

Net income (loss)

     97,117         2,721         932         5,415         (1,439     104,746   

Total assets

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

Total intangibles

     856,454         10,792         10,223         1,809         —          879,288   

At or for the Nine Months Ended September 30, 2013

                

Interest income

   $ 289,984       $ —         $ 82       $ 27,920       $ 4,763      $ 322,749   

Interest expense

     24,449         —           —           2,533         6,671        33,653   

Net interest income

     265,535         —           82         25,387         (1,908     289,096   

Provision for loan losses

     17,283         —           —           4,930         511        22,724   

Non-interest income

     73,955         21,294         10,024         2,029         (4,183     103,119   

Non-interest expense

     198,395         18,338         8,420         14,063         823        240,039   

Intangible amortization

     5,531         228         304         —           —          6,063   

Income tax expense (benefit)

     32,486         1,009         497         3,234         (3,202     34,024   

Net income (loss)

     85,795         1,719         885         5,189         (4,223     89,365   

Total assets

     12,610,043         19,614         19,788         182,695         (41,861     12,790,279   

Total intangibles

     725,389         11,084         10,627         1,809         —          748,909   

FAIR VALUE MEASUREMENTS

The Corporation uses fair value measurements to record fair value adjustments to certain financial assets and liabilities and to determine fair value disclosures. Securities available for sale and derivatives are recorded at fair value on a recurring basis. Additionally, from time to time, the Corporation may be required to record at fair value other assets on a non-recurring basis, such as mortgage loans held for sale, certain impaired loans, OREO and certain other assets.

Fair value is defined as an exit price, representing the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements are not adjusted for transaction costs. Fair value is a market-based measure considered from the perspective of a market participant who holds the asset or owes the liability rather than an entity-specific measure.

 

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In determining fair value, the Corporation uses various valuation approaches, including market, income and cost approaches. ASC 820, Fair Value Measurements and Disclosures, establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability, which are developed based on market data obtained from sources independent of the Corporation. Unobservable inputs reflect the Corporation’s assumptions about the assumptions that market participants would use in pricing an asset or liability, which are developed based on the best information available in the circumstances.

The fair value hierarchy gives the highest priority to unadjusted quoted market prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). The fair value hierarchy is broken down into three levels based on the reliability of inputs as follows:

 

Measurement

Category

  

Definition

Level 1    valuation is based upon unadjusted quoted market prices for identical instruments traded in active markets.
Level 2    valuation is based upon quoted market prices for similar instruments traded in active markets, quoted market prices for identical or similar instruments traded in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by market data.
Level 3    valuation is derived from other valuation methodologies including discounted cash flow models and similar techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in determining fair value.

A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

Following is a description of the valuation methodologies the Corporation uses for financial instruments recorded at fair value on either a recurring or non-recurring basis:

Securities Available For Sale

Securities available for sale consists of both debt and equity securities. These securities are recorded at fair value on a recurring basis. At September 30, 2014, 99.9% of these securities used valuation methodologies involving market-based or market-derived information, collectively Level 1 and Level 2 measurements, to measure fair value. The remaining 0.1% of these securities used model-based valuation techniques, with primarily unobservable (Level 3) inputs.

The Corporation closely monitors market conditions involving assets that have become less actively traded. If the fair value measurement is based upon recent observable market activity of such assets or comparable assets (other than forced or distressed transactions) that occur in sufficient volume, and do not require significant adjustment using unobservable inputs, those assets are classified as Level 1 or Level 2; if not, they are classified as Level 3. Making this assessment requires significant judgment.

The Corporation uses prices from independent pricing services and, to a lesser extent, indicative (non-binding) quotes from independent brokers, to measure the fair value of investment securities. The Corporation validates prices received from pricing services or brokers using a variety of methods, including, but not limited to, comparison to secondary pricing services, corroboration of pricing by reference to other independent market data such as secondary broker quotes and relevant benchmark indices, and review of pricing by Corporate personnel familiar with market liquidity and other market-related conditions.

Derivative Financial Instruments

The Corporation determines its fair value for derivatives using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects contractual terms of the derivative, including the period to maturity and uses observable market based inputs, including interest rate curves and implied volatilities.

 

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The Corporation incorporates credit valuation adjustments to appropriately reflect both its own non-performance risk and the respective counterparty’s non-performance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of non-performance risk, the Corporation considers the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts and guarantees.

Although the Corporation has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of September 30, 2014, the Corporation has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Corporation has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

Residential Mortgage Loans Held For Sale

These loans are carried at the lower of cost or fair value. Under lower of cost or fair value accounting, periodically, it may be necessary to record non-recurring fair value adjustments. Fair value, when recorded, is based on independent quoted market prices and is classified as Level 2.

Impaired Loans

The Corporation reserves for commercial loan relationships greater than or equal to $500 that the Corporation considers impaired as defined in ASC 310 at the time the Corporation identifies the loan as impaired based upon the present value of expected future cash flows available to pay the loan, or based upon the fair value of the collateral less estimated selling costs where a loan is collateral dependent. Collateral may be real estate and/or business assets including equipment, inventory and accounts receivable.

The Corporation determines the value of real estate based on appraisals by licensed or certified appraisers. The value of business assets is generally based on amounts reported on the business’ financial statements. Management must rely on the financial statements prepared and certified by the borrower or its accountants in determining the value of these business assets on an ongoing basis which may be subject to significant change over time. Based on the quality of information or statements provided, management may require the use of business asset appraisals and site-inspections to better value these assets. The Corporation may discount appraised and reported values based on management’s historical knowledge, changes in market conditions from the time of valuation or management’s knowledge of the borrower and the borrower’s business. Since not all valuation inputs are observable, the Corporation classifies these non-recurring fair value determinations as Level 2 or Level 3 based on the lowest level of input that is significant to the fair value measurement.

The Corporation reviews and evaluates impaired loans no less frequently than quarterly for additional impairment based on the same factors identified above.

Other Real Estate Owned

OREO is comprised of commercial and residential real estate properties obtained in partial or total satisfaction of loan obligations plus some bank owned real estate. OREO acquired in settlement of indebtedness is recorded at the lower of carrying amount of the loan or fair value less costs to sell. Subsequently, these assets are carried at the lower of carrying value or fair value less costs to sell. Accordingly, it may be necessary to record non-recurring fair value adjustments. Fair value is generally based upon appraisals by licensed or certified appraisers and other market information and is classified as Level 2 or Level 3.

 

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The following table presents the balances of assets and liabilities measured at fair value on a recurring basis:

 

     Level 1      Level 2      Level 3      Total  

September 30, 2014

           

Assets measured at fair value

           

Available for sale debt securities:

           

U.S. Treasury

   $ —         $ 29,534       $ —         $ 29,534   

U.S. government-sponsored entities

     —           275,508         —           275,508   

Residential mortgage-backed securities

           

Agency mortgage-backed securities

     —           496,483         —           496,483   

Agency collateralized mortgage obligations

     —           596,935         —           596,935   

Non-agency collateralized mortgage obligations

     —           13         1,534         1,547   

Commercial mortgage-backed securities

     —           8,036         —           8,036   

States of the U.S. and political subdivisions

     —           13,894         —           13,894   

Other debt securities

     —           16,478         —           16,478   
  

 

 

    

 

 

    

 

 

    

 

 

 
     —           1,436,881         1,534         1,438,415   
  

 

 

    

 

 

    

 

 

    

 

 

 

Available for sale equity securities:

           

Financial services industry

     87         677         440         1,204   

Insurance services industry

     116         —           —           116   
  

 

 

    

 

 

    

 

 

    

 

 

 
     203         677         440         1,320   
  

 

 

    

 

 

    

 

 

    

 

 

 
     203         1,437,558         1,974         1,439,735   

Derivative financial instruments:

           

Trading

     —           34,086         —           34,086   

Not for trading

     —           542         —           542   
  

 

 

    

 

 

    

 

 

    

 

 

 
     —           34,628         —           34,628   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 203       $ 1,472,186       $ 1,974       $ 1,474,363   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities measured at fair value

           

Derivative financial instruments:

           

Trading

     —         $ 34,013         —         $ 34,013   

Not for trading

     —           4,642         —           4,642   
  

 

 

    

 

 

    

 

 

    

 

 

 
     —         $ 38,655         —         $ 38,655   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents
     Level 1      Level 2      Level 3      Total  

December 31, 2013

           

Assets measured at fair value

           

Available for sale debt securities:

           

U.S. government-sponsored entities

   $ —         $ 330,985       $ —         $ 330,985   

Residential mortgage-backed securities

           

Agency mortgage-backed securities

     —           250,881         —           250,881   

Agency collateralized mortgage obligations

     —           491,199         —           491,199   

Non-agency collateralized mortgage obligations

     —           18         1,744         1,762   

States of the U.S. and political subdivisions

     —           17,002         —           17,002   

Collateralized debt obligations

     —           —           31,595         31,595   

Other debt securities

     —           16,100         —           16,100   
  

 

 

    

 

 

    

 

 

    

 

 

 
     —           1,106,185         33,339         1,139,524   
  

 

 

    

 

 

    

 

 

    

 

 

 

Available for sale equity securities:

           

Financial services industry

     584         1,067         410         2,061   

Insurance services industry

     65         —           —           65   
  

 

 

    

 

 

    

 

 

    

 

 

 
     649         1,067         410         2,126   
  

 

 

    

 

 

    

 

 

    

 

 

 
     649         1,107,252         33,749         1,141,650   

Derivative financial instruments:

           

Trading

     —           33,317         —           33,317   

Not for trading

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 
     —           33,317         —           33,317   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 649       $ 1,140,569       $ 33,749       $ 1,174,967   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities measured at fair value

           

Derivative financial instruments:

           

Trading

     —         $ 33,236         —         $ 33,236   

Not for trading

     —           10,133         —           10,133   
  

 

 

    

 

 

    

 

 

    

 

 

 
     —         $ 43,369         —         $ 43,369   
  

 

 

    

 

 

    

 

 

    

 

 

 

There were no transfers of assets or liabilities between the hierarchy levels for 2014. During 2013, the Corporation transferred out of Level 2 and Level 3 equity securities that now trade on NASDAQ. At December 31, 2013, the securities are classified as Level 1. Additionally during 2013, the Corporation transferred out of Level 3 and into Level 2 four single name TPS.

 

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The following table presents additional information about assets measured at fair value on a recurring basis and for which the Corporation has utilized Level 3 inputs to determine fair value:

 

     Pooled Trust
Preferred
Collateralized

Debt
Obligations
    Other
Debt
Securities
    Equity
Securities
    Residential
Non-Agency
Collateralized
Mortgage
Obligations
    Total  

Nine Months Ended September 30, 2014

          

Balance at beginning of period

   $ 31,595        —        $ 410      $ 1,744      $ 33,749   

Total gains (losses) – realized/unrealized:

          

Included in earnings

     13,766        —          —          —          13,766   

Included in other comprehensive income

     5,608        —          30        4        5,642   

Accretion included in earnings

     657        —          —          3        660   

Purchases, issuances, sales and settlements:

          

Purchases

     —          —          —          —          —     

Issuances

     —          —          —          —          —     

Sales/redemptions

     (51,527     —          —          —          (51,527

Settlements

     (99     —          —          (217     (316

Transfers from Level 3

     —          —          —          —          —     

Transfers into Level 3

     —          —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ —          —        $ 440      $ 1,534      $ 1,974   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Year Ended December 31, 2013

          

Balance at beginning of period

   $ 22,456      $ 6,892      $ 512      $ 2,705      $ 32,565   

Total gains (losses) – realized/unrealized:

          

Included in earnings

     —          78        —          —          78   

Included in other comprehensive income

     6,701        21        18        (35     6,705   

Accretion included in earnings

     3,160        4        —          12        3,176   

Purchases, issuances, sales and settlements:

          

Purchases

     —          —          —          —          —     

Issuances

     38        —          —          —          38   

Sales/redemptions

     —          (1,033     —          —          (1,033

Settlements

     (760     —          —          (938     (1,698

Transfers from Level 3

     —          (5,962     (120     —          (6,082

Transfers into Level 3

     —          —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 31,595      $ —        $ 410      $ 1,744      $ 33,749   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The Corporation reviews fair value hierarchy classifications on a quarterly basis. Changes in the observability of the valuation attributes may result in reclassification of certain financial assets or liabilities. Such reclassifications are reported as transfers in/out of Level 3 at fair value at the beginning of the period in which the changes occur. See the Securities footnote in the Notes to Consolidated Financial Statements section of this Report for information relating to significant unobservable inputs used in determining Level 3 fair values.

For the nine months ended September 30, 2014 and 2013, there were no gains or losses included in earnings attributable to the change in unrealized gains or losses relating to assets still held as of those dates. The total gains included in earnings are in the net securities gains line item in the Consolidated Statements of Comprehensive Income.

 

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In accordance with GAAP, from time to time, the Corporation measures certain assets at fair value on a non-recurring basis. These adjustments to fair value usually result from the application of the lower of cost or fair value accounting or write-downs of individual assets. Valuation methodologies used to measure these fair value adjustments were previously described. For assets measured at fair value on a non-recurring basis still held at the balance sheet date, the following table provides the hierarchy level and the fair value of the related assets or portfolios:

 

     Level 1      Level 2      Level 3      Total  

September 30, 2014

           

Impaired loans

     —         $ 10,724       $ 1,393       $ 12,117   

Other real estate owned

     —           3,801         2,405         6,206   

December 31, 2013

           

Impaired loans

     —           3,235         59         3,294   

Other real estate owned

     —           4,485         14,957         19,442   

Impaired loans measured or re-measured at fair value on a non-recurring basis during the nine months ended September 30, 2014 had a carrying amount of $12,538 and an allocated allowance for loan losses of $1,771 at September 30, 2014. The allocated allowance is based on fair value of $12,117 less estimated costs to sell of $1,350. The allowance for loan losses includes a provision applicable to the current period fair value measurements of $1,374, which was included in the provision for loan losses for the nine months ended September 30, 2014.

OREO with a carrying amount of $7,164 was written down to $5,476 (fair value of $6,206 less estimated costs to sell of $730), resulting in a loss of $1,688, which was included in earnings for the nine months ended September 30, 2014.

Fair Value of Financial Instruments

The following methods and assumptions were used to estimate the fair value of each financial instrument:

Cash and Cash Equivalents, Accrued Interest Receivable and Accrued Interest Payable. For these short-term instruments, the carrying amount is a reasonable estimate of fair value.

Securities. For both securities available for sale and securities held to maturity, fair value equals the quoted market price from an active market, if available, and is classified within Level 1. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities or pricing models, and is classified as Level 2. Where there is limited market activity or significant valuation inputs are unobservable, securities are classified within Level 3. Under current market conditions, assumptions used to determine the fair value of Level 3 securities have greater subjectivity due to the lack of observable market transactions.

Loans. The fair value of fixed rate loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities less an illiquidity discount. The fair value of variable and adjustable rate loans approximates the carrying amount. Due to the significant judgment involved in evaluating credit quality, loans are classified within Level 3 of the fair value hierarchy.

Bank Owned Life Insurance. The Corporation owns general account, separate account and hybrid account bank owned life insurance (BOLI). The fair value of the general account BOLI is based on the insurance contract cash surrender value. The separate account BOLI has a stable value protection (SVP) component that mitigates the impact of market value fluctuations of the underlying account assets. The SVP component guarantees the book value, which is the insurance contract cash surrender value. The hybrid account BOLI also has a guaranteed book value, except it does not require a stable value protection component. Instead, the insurance carrier incurs the investment return risk, which is imbedded in their fee structure.

If the Corporation’s separate account and hybrid account BOLI book value exceeds the market value of the underlying securities, then the fair value of the separate account and hybrid account BOLI is the cash surrender value. If the Corporation’s separate account and hybrid account BOLI book value is less than the market value of the underlying securities, then the fair value of the separate account and hybrid account BOLI is the quoted market price of the underlying securities.

 

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Derivative Assets and Liabilities. The Corporation determines its fair value for derivatives using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects contractual terms of the derivative, including the period to maturity and uses observable market based inputs, including interest rate curves and implied volatilities.

The Corporation incorporates credit valuation adjustments to appropriately reflect both its own non-performance risk and the respective counterparty’s non-performance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of non-performance risk, the Corporation considers the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts and guarantees.

Although the Corporation has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of September 30, 2014, the Corporation has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Corporation has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

Deposits. The estimated fair value of demand deposits, savings accounts and certain money market deposits is the amount payable on demand at the reporting date because of the customers’ ability to withdraw funds immediately. The fair value of fixed-maturity deposits is estimated by discounting future cash flows using rates currently offered for deposits of similar remaining maturities.

Short-Term Borrowings. The carrying amounts for short-term borrowings approximate fair value for amounts that mature in 90 days or less. The fair value of subordinated notes is estimated by discounting future cash flows using rates currently offered.

Long-Term and Junior Subordinated Debt. The fair value of long-term and junior subordinated debt is estimated by discounting future cash flows based on the market prices for the same or similar issues or on the current rates offered to the Corporation for debt of the same remaining maturities.

Loan Commitments and Standby Letters of Credit. Estimates of the fair value of these off-balance sheet items were not made because of the short-term nature of these arrangements and the credit standing of the counterparties. Also, unfunded loan commitments relate principally to variable rate commercial loans, typically are non-binding, and fees are not normally assessed on these balances.

Nature of Estimates. Many of the estimates presented herein are based upon the use of highly subjective information and assumptions and, accordingly, the results may not be precise. Management believes that fair value estimates may not be comparable to other financial institutions due to the wide range of permitted valuation techniques and numerous estimates which must be made. Further, because the disclosed fair value amounts were estimated as of the balance sheet date, the amounts actually realized or paid upon maturity or settlement of the various financial instruments could be significantly different.

 

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The fair values of the Corporation’s financial instruments are as follows:

 

            Fair Value Measurements  
     Carrying
Amount
     Fair
Value
     Level 1      Level 2      Level 3  

September 30, 2014

              

Financial Assets

              

Cash and cash equivalents

   $ 237,968       $ 237,968       $ 237,968       $ —         $ —     

Securities available for sale

     1,439,735         1,439,735         203         1,437,558         1,974   

Securities held to maturity

     1,475,552         1,480,229         —           1,475,584         4,645   

Net loans, including loans held for sale

     10,851,690         10,709,224         —           —           10,709,224   

Bank owned life insurance

     299,828         305,149         305,149         —           —     

Derivative assets

     34,628         34,628         —           34,628         —     

Accrued interest receivable

     39,609         39,609         39,609         —           —     

Financial Liabilities

              

Deposits

     11,452,093         11,455,085         8,772,509         2,682,576         —     

Short-term borrowings

     1,601,167         1,601,167         1,601,167         —           —     

Long-term debt

     483,189         484,900         —           —           484,900   

Junior subordinated debt

     58,233         58,225         —           —           58,225   

Derivative liabilities

     38,655         38,655         —           38,655         —     

Accrued interest payable

     6,507         6,507         6,507         —           —     

December 31, 2013

              

Financial Assets

              

Cash and cash equivalents

   $ 213,981       $ 213,981       $ 213,981       $ —         $ —     

Securities available for sale

     1,141,650         1,141,650         649         1,107,252         33,749   

Securities held to maturity

     1,199,169         1,189,563         —           1,182,671         6,892   

Net loans, including loans held for sale

     9,402,448         9,243,780         —           —           9,243,780   

Bank owned life insurance

     289,402         292,694         292,694         —           —     

Derivative assets

     33,317         33,317         —           33,317         —     

Accrued interest receivable

     35,520         35,520         35,520         —           —     

Financial Liabilities

              

Deposits

     10,198,232         10,208,268         7,592,159         2,616,109         —     

Short-term borrowings

     1,241,239         1,241,239         1,241,239         —           —     

Long-term debt

     143,928         145,995         —           —           145,995   

Junior subordinated debt

     75,205         70,442         —           —           70,442   

Derivative liabilities

     43,369         43,369         —           43,369         —     

Accrued interest payable

     7,061         7,061         7,061         —           —     

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s Discussion and Analysis represents an overview of the consolidated results of operations and financial condition of the Corporation and highlights material changes to the financial condition and results of operations at and for the three- and nine-month periods ended September 30, 2014. This Discussion and Analysis should be read in conjunction with the consolidated financial statements and notes thereto contained herein and the Corporation’s consolidated financial statements and notes thereto and Management’s Discussion and Analysis included in its 2013 Annual Report on Form 10-K filed with the SEC on February 28, 2014. The Corporation’s results of operations for the nine months ended September 30, 2014 are not necessarily indicative of results expected for the full year ending December 31, 2014.

IMPORTANT CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

The Corporation makes statements in this Report, and may from time to time make other statements, regarding its outlook for earnings, revenues, expenses, capital levels, liquidity levels, asset levels, asset quality and other matters regarding or affecting the Corporation and its future business and operations that are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Forward-looking statements are typically identified by words such as “believe,” “plan,” “expect,” “anticipate,” “see,” “look,” “intend,” “outlook,” “project,” “forecast,” “estimate,” “goal,” “will,” “should” and other similar words and expressions. Forward-looking statements are subject to numerous assumptions, risks and uncertainties, which change over time.

Forward-looking statements speak only as of the date made. The Corporation does not assume any duty and does not undertake to update forward-looking statements. Actual results or future events could differ, possibly materially, from those anticipated in forward-looking statements, as well as from historical performance.

The Corporation’s forward-looking statements are subject to the following principal risks and uncertainties:

 

    The Corporation’s businesses, financial results and balance sheet values are affected by business and economic conditions, including the following:

 

    Changes in interest rates and valuations in debt, equity and other financial markets.

 

    Disruptions in the liquidity and other functioning of U.S. and global financial markets.

 

    The impact of federal regulated agencies that have oversight or review of the Corporation’s business and securities activities.

 

    Actions by the FRB, UST and other government agencies, including those that impact money supply and market interest rates.

 

    Changes in customers,’ suppliers’ and other counterparties’ performance and creditworthiness which adversely affect loan utilization rates, delinquencies, defaults and counterparty ability to meet credit and other obligations.

 

    Slowing or reversal of the current moderate economic recovery.

 

    Changes in customer preferences and behavior, whether due to changing business and economic conditions, legislative and regulatory initiatives, or other factors.

 

    Legal and regulatory developments could affect the Corporation’s ability to operate its businesses, financial condition, results of operations, competitive position, reputation, or pursuit of attractive acquisition opportunities. Reputational impacts could affect matters such as business generation and retention, liquidity, funding, and ability to attract and retain management. These developments could include:

 

    Changes resulting from legislative and regulatory reforms, including broad-based restructuring of financial industry regulation; changes to laws and regulations involving tax, pension, bankruptcy, consumer protection, and other industry aspects; and changes in accounting policies and principles. The Corporation will continue to be impacted by extensive reforms provided for in the Dodd-Frank Act, the precise nature, extent and timing of which, and its impact on the Corporation, remains uncertain.

 

    Changes to regulations governing bank capital and liquidity standards, including due to the Dodd-Frank Act and Basel III initiatives.

 

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    Impact on business and operating results of any costs associated with obtaining rights in intellectual property, the adequacy of the Corporation’s intellectual property protection in general and rapid technological developments and changes.

 

    Business and operating results are affected by the Corporation’s ability to identify and effectively manage risks inherent in its businesses, including, where appropriate, through effective use of third-party insurance, derivatives, swaps, and capital management techniques, and to meet evolving regulatory capital standards.

 

    As demonstrated by recent acquisitions, the Corporation grows its business in part by acquiring, from time to time, other financial services companies, financial services assets and related deposits. These acquisitions often present risks and uncertainties, including, the possibility that the transaction cannot be consummated; regulatory issues; cost or difficulties involved in integration and conversion of the acquired businesses after closing; inability to realize expected cost savings, efficiencies and strategic advantages; the extent of credit losses in acquired loan portfolios and extent of deposit attrition; and the potential dilutive effect to current shareholders.

 

    Competition can have an impact on customer acquisition, growth and retention and on credit spreads and product pricing, which can affect market share, deposits and revenues. Industry restructuring in the current environment could also impact the Corporation’s business and financial performance through changes in counterparty creditworthiness and performance and the competitive and regulatory landscape. The Corporation’s ability to anticipate and respond to technological changes can also impact its ability to respond to customer needs and meet competitive demands.

 

    In addition to recent geopolitical events, customer confidence, business and operating results can also be affected by widespread disasters, dislocations, terrorist activities, data breaches, cyber-attacks or international hostilities through their impacts on the economy and financial markets.

The Corporation provides greater detail regarding some of these factors in the Risk Factors section of the 2013 Annual Report on Form 10-K and subsequent SEC filings. The Corporation’s forward-looking statements may also be subject to other risks and uncertainties, including those that may be discussed elsewhere in this Report or in SEC filings, accessible on the SEC’s website at www.sec.gov and on the Corporation’s website at www.fnbcorporation.com. The Corporation has included these web addresses as inactive textual references only. Information on these websites is not part of this document.

CRITICAL ACCOUNTING POLICIES

A description of the Corporation’s critical accounting policies is included in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of the Corporation’s 2013 Annual Report on Form 10-K filed with the SEC on February 28, 2014 under the heading “Application of Critical Accounting Policies.” There have been no significant changes in critical accounting policies or the assumptions and judgments utilized in applying these policies since the year ended December 31, 2013.

OVERVIEW

The Corporation, headquartered in Pittsburgh, Pennsylvania, is a diversified financial services company operating in six states and three major metropolitan areas, including Pittsburgh, Pennsylvania, Baltimore, Maryland and Cleveland, Ohio. As of September 30, 2014, the Corporation had 289 banking offices throughout Pennsylvania, Ohio, Maryland and West Virginia. The Corporation provides a full range of commercial banking, consumer banking and wealth management solutions through its subsidiary network which is led by its largest affiliate, 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 products and services include deposit products, mortgage lending, consumer lending and a complete suite of mobile and online banking services. Wealth management services include asset management, private banking and insurance. The Corporation also operates Regency, which had 71 consumer finance offices in Pennsylvania, Ohio, Kentucky and Tennessee as of September 30, 2014.

 

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RESULTS OF OPERATIONS

Three Months Ended September 30, 2014 Compared to the Three Months Ended September 30, 2013

Net income available to common stockholders for the three months ended September 30, 2014 was $33.4 million or $0.20 per diluted common share, compared to net income available to common stockholders for the three months ended September 30, 2013 of $31.6 million or $0.22 per diluted common share. The increase in net income available to common stockholders is a result of an increase of $21.4 million in net interest income, combined with an increase of $4.7 million in non-interest income, partially offset by increases of $3.9 million in the provision for loan losses, $12.7 million in non-interest expense and $2.0 million in preferred stock dividends. The results for the third quarter of 2014 reflect the OBA, BCSB and PVF acquisitions that closed on September 19, 2014, February 15, 2014 and October 12, 2013, respectively. Other than merger costs of $1.9 million, the OBA acquisition that closed on September 19, 2014 did not have a material impact on the results of operations for the third quarter of 2014. The results for the third quarter of 2013 included $0.9 million in merger costs, primarily relating to the PVF acquisition. Quarterly average diluted common shares outstanding increased 22.4 million shares or 15.3% to 168.9 million shares for the third quarter of 2014, primarily as a result of the BCSB and PVF acquisitions, combined with the common stock offering completed in November 2013.

For the three months ended September 30, 2014, the Corporation’s return on average equity was 7.28% and its return on average assets was 0.92%, compared to 8.50% and 0.99%, respectively, for the three months ended September 30, 2013. The Corporation’s return on average tangible equity was 13.61% and its return on average tangible assets was 1.02% for the third quarter of 2014, compared to 17.99% and 1.10%, respectively, for the same period of 2013. Average equity was $1.9 billion and $1.5 billion for the third quarter of 2014 and 2013, respectively, while average tangible equity was $1.1 billion and $727.2 million, respectively, for those same periods. Average equity for the third quarter of 2014 reflects the impact of the BCSB and PVF acquisitions, combined with the common and preferred stock offerings completed in November 2013. The OBA acquisition that closed on September 19, 2014 did not have a material impact on average equity for the third quarter of 2014.

In addition to evaluating its results of operations in accordance with GAAP, the Corporation routinely supplements its evaluation with an analysis of certain non-GAAP financial measures, such as return on average tangible equity and return on average tangible assets. The Corporation believes these non-GAAP financial measures provide information useful to investors in understanding the Corporation’s operating performance and trends, and facilitate comparisons with the performance of the Corporation’s peers. The non-GAAP financial measures used by the Corporation may differ from the non-GAAP financial measures other financial institutions use to measure their results of operations. Non-GAAP financial measures should be viewed in addition to, and not as an alternative for, the Corporation’s reported results prepared in accordance with GAAP.

The following tables summarize the Corporation’s non-GAAP financial measures for the periods indicated derived from amounts reported in the Corporation’s financial statements (dollars in thousands):

 

     Three Months Ended
September 30,
 
     2014     2013  

Return on average tangible equity:

    

Net income (annualized)

   $ 140,408      $ 125,505   

Amortization of intangibles, net of tax (annualized)

     6,332        5,331   
  

 

 

   

 

 

 
   $ 146,740      $ 130,836   
  

 

 

   

 

 

 

Average total stockholders’ equity

   $ 1,927,727      $ 1,475,751   

Less: Average intangibles

     (849,902     (748,592
  

 

 

   

 

 

 
   $ 1,077,825      $ 727,159   
  

 

 

   

 

 

 

Return on average tangible equity

     13.61     17.99
  

 

 

   

 

 

 

Return on average tangible assets:

    

Net income (annualized)

   $ 140,408      $ 125,505   

Amortization of intangibles, net of tax (annualized)

     6,332        5,331   
  

 

 

   

 

 

 
   $ 146,740      $ 130,836   
  

 

 

   

 

 

 

Average total assets

   $ 15,217,695      $ 12,615,338   

Less: Average intangibles

     (849,902     (748,592
  

 

 

   

 

 

 
   $ 14,367,793      $ 11,866,746   
  

 

 

   

 

 

 

Return on average tangible assets

     1.02     1.10
  

 

 

   

 

 

 

 

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The following table provides information regarding the average balances and yields earned on interest-earning assets and the average balances and rates paid on interest-bearing liabilities (dollars in thousands):

 

     Three Months Ended September 30,  
     2014     2013  
     Average
Balance
    Interest
Income/
Expense
    Yield/
Rate
    Average
Balance
    Interest
Income/
Expense
    Yield/
Rate
 

Assets

            

Interest-earning assets:

            

Interest bearing deposits with banks

   $ 54,223      $ 23        0.17   $ 39,224      $ 13        0.17

Taxable investment securities (1)

     2,636,572        13,711        2.08        2,117,849        10,889        2.06   

Non-taxable investment securities (2)

     159,797        2,086        5.22        157,624        2,122        5.38   

Residential mortgage loans held for sale

     3,330        62        7.44        12,060        134        4.45   

Loans (2) (3)

     10,544,781        117,474        4.43        8,730,010        98,413        4.48   
  

 

 

   

 

 

     

 

 

   

 

 

   

Total interest-earning assets (2)

     13,398,703        133,356        3.96        11,047,767        111,571        4.01   
  

 

 

   

 

 

     

 

 

   

 

 

   

Cash and due from banks

     199,157            185,419       

Allowance for loan losses

     (120,226         (110,463    

Premises and equipment

     163,368            147,804       

Other assets

     1,576,693            1,344,811       
  

 

 

       

 

 

     

Total Assets

   $ 15,217,695          $ 12,615,338       
  

 

 

       

 

 

     

Liabilities

            

Interest-bearing liabilities:

            

Deposits:

            

Interest bearing demand

   $ 4,398,565        1,752        0.16      $ 3,841,619        1,391        0.14   

Savings

     1,575,775        172        0.04        1,387,869        162        0.05   

Certificates and other time

     2,653,535        5,533        0.83        2,391,828        5,342        0.89   

Customer repurchase agreements

     772,812        413        0.21        748,249        419        0.22   

Other short-term borrowings

     723,049        1,046        0.57        318,024        703        0.87   

Long-term debt

     422,698        1,692        1.59        91,659        719        3.11   

Junior subordinated debt

     58,226        339        2.31        194,206        1,800        3.68   
  

 

 

   

 

 

     

 

 

   

 

 

   

Total interest-bearing liabilities (2)

     10,604,660        10,947        0.41        8,973,454        10,536        0.47   
  

 

 

   

 

 

     

 

 

   

 

 

   

Non-interest bearing demand

     2,524,568            2,033,370       

Other liabilities

     160,740            132,763       
  

 

 

       

 

 

     

Total Liabilities

     13,289,968            11,139,587       

Stockholders’ equity

     1,927,727            1,475,751       
  

 

 

       

 

 

     

Total Liabilities and Stockholders’ Equity

   $ 15,217,695          $ 12,615,338       
  

 

 

       

 

 

     

Excess of interest-earning assets over interest-bearing liabilities

   $ 2,794,043          $ 2,074,313       
  

 

 

       

 

 

     

Fully tax-equivalent net interest income

       122,409            101,035     

Tax-equivalent adjustment

       (1,790         (1,781  
    

 

 

       

 

 

   

Net interest income

     $ 120,619          $ 99,254     
    

 

 

       

 

 

   

Net interest spread

         3.55         3.55
      

 

 

       

 

 

 

Net interest margin (2)

         3.63         3.64
      

 

 

       

 

 

 

 

(1) The average balances and yields earned on taxable investment securities are based on historical cost.
(2) The interest income amounts are reflected on a fully taxable equivalent (FTE) basis, a non-GAAP measure, which adjusts for the tax benefit of income on certain tax-exempt loans and investments using the federal statutory tax rate of 35% for each period presented. The yields on earning assets and the net interest margin are presented on an FTE and annualized basis. The rates paid on interest-bearing liabilities are also presented on an annualized basis. The Corporation believes this measure to be the preferred industry measurement of net interest income and provides relevant comparison between taxable and non-taxable amounts.
(3) Average balances include non-accrual loans. Loans consist of average total loans less average unearned income. The amount of loan fees included in interest income on loans is immaterial.

 

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Net Interest Income

Net interest income, which is the Corporation’s principal source of revenue, is the difference between interest income from earning assets (loans, securities, interest bearing deposits with banks and federal funds sold) and interest expense paid on liabilities (deposits, customer repurchase agreements and short- and long-term borrowings). For the three months ended September 30, 2014, net interest income, which comprised 76.3% of net revenue (net interest income plus non-interest income) compared to 75.2% for the same period in 2013, was affected by the general level of interest rates, changes in interest rates, the shape of the yield curve, the level of non-accrual loans and changes in the amount and mix of interest-earning assets and interest-bearing liabilities.

Net interest income, on an FTE basis, increased $21.4 million or 21.2% from $101.0 million for the third quarter of 2013 to $122.4 million for the third quarter of 2014. Average earning assets increased $2.4 billion or 21.3% and average interest-bearing liabilities increased $1.6 billion or 18.2% from 2013 due to the acquisitions of BCSB and PVF combined with organic growth in loans, deposits and customer repurchase agreements. The Corporation’s net interest margin was 3.63% for the third quarter of 2014, compared to 3.64% for the same period of 2013, as loan yields declined faster than deposit rates primarily as a result of the current low interest rate environment, partially offset by an increase in net interest margin due to higher accretable yield adjustments. Details on changes in tax equivalent net interest income attributed to changes in interest-earning assets, interest-bearing liabilities, yields and cost of funds are set forth in the preceding table.

The following table sets forth certain information regarding changes in net interest income attributable to changes in the volumes of interest-earning assets and interest-bearing liabilities and changes in the rates for the three months ended September 30, 2014, compared to the three months ended September 30, 2013 (in thousands):

 

     Volume     Rate     Net  

Interest Income

      

Interest bearing deposits with banks

   $ 10      $ —        $ 10   

Securities

     2,617        169        2,786   

Residential mortgage loans held for sale

     (131     59        (72

Loans

     20,237        (1,176     19,061   
  

 

 

   

 

 

   

 

 

 
     22,733        (948     21,785   
  

 

 

   

 

 

   

 

 

 

Interest Expense

      

Deposits:

      

Interest bearing demand

     276        85        361   

Savings

     20        (10     10   

Certificates and other time

     550        (359     191   

Customer repurchase agreements

     13        (19     (6

Other short-term borrowings

     655        (312     343   

Long-term debt

     1,477        (504     973   

Junior subordinated debt

     (955     (506     (1,461
  

 

 

   

 

 

   

 

 

 
     2,036        (1,625     411   
  

 

 

   

 

 

   

 

 

 

Net Change

   $ 20,697      $ 677      $ 21,374   
  

 

 

   

 

 

   

 

 

 

 

(1) The amount of change not solely due to rate or volume changes was allocated between the change due to rate and the change due to volume based on the net size of the rate and volume changes.
(2) Interest income amounts are reflected on an FTE basis which adjusts for the tax benefit of income on certain tax-exempt loans and investments using the federal statutory tax rate of 35% for each period presented. The Corporation believes this measure to be the preferred industry measurement of net interest income and provides relevant comparison between taxable and non-taxable amounts.

Interest income, on an FTE basis, of $133.4 million for the third quarter of 2014, increased $21.8 million or 19.5% from the same quarter of 2013, primarily due to increased earning assets combined with accretable yield benefit, partially offset by lower yields. During the third quarter of 2014 and 2013, the Corporation recognized a benefit of $3.9 million and $(0.2) million, respectively, in accretable yield on acquired loans. The increase in earning assets was primarily driven by a $1.8 billion or 20.8% increase in average loans, including $930.6 million or 10.7% of organic growth, which reflects the benefit of the Corporation’s expanded banking footprint and successful sales management. Additionally, average loans added in the OBA, BCSB and PVF acquisitions were $35.9 million, $312.6 million and $535.7 million, respectively. The yield on earning assets decreased 5 basis points from the third quarter of 2013 to 3.96% for the third quarter of 2014, reflecting the decreases in market interest rates and competitive pressures, partially offset by the above-mentioned changes in accretable yield benefit on acquired loans.

 

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Interest expense of $10.9 million for the third quarter of 2014 increased $0.4 million or 3.9% from the same quarter of 2013 due to growth in interest-bearing liabilities, partially offset by lower rates paid. The rate paid on interest-bearing liabilities decreased 6 basis points to 0.41% for the third quarter of 2014, compared to 0.47% for the third quarter of 2013, reflecting changes in interest rates and a favorable shift in deposit mix to lower-cost transaction deposits and customer repurchase agreements. The growth in average interest-bearing liabilities was primarily attributable to growth in average deposits and customer repurchase agreements, which increased by $1.0 billion or 12.3%, including $251.8 million or 2.4% of organic growth, combined with $36.6 million, $526.2 million and $707.6 million in average deposits and customer repurchase agreements added in the OBA, BCSB and PVF acquisitions, respectively.

Provision for Loan Losses

The provision for loan losses is determined based on management’s estimates of the appropriate level of allowance for loan losses needed to absorb probable losses inherent in the existing loan portfolio, after giving consideration to charge-offs and recoveries for the period.

The provision for loan losses of $11.2 million during the third quarter of 2014 increased $3.9 million from the same period of 2013, primarily due to increases of $2.4 million in the provision for the originated portfolio to support loan growth, and $1.6 million in the provision for the acquired portfolio. During the third quarter of 2014, net charge-offs were $7.3 million, or 0.28% (annualized) of average loans, compared to $5.5 million, or 0.25% (annualized) of average loans, for the same period of 2013. The ratio of the allowance for loan losses to total loans equaled 1.10% and 1.25% at September 30, 2014 and 2013, respectively, which reflects the Corporation’s improving credit quality performance along with the addition of loans acquired in the OBA, BCSB and PVF acquisitions without a corresponding allowance for loan losses in accordance with acquired loan accounting rules. For additional information relating to the allowance and provision for loan losses, refer to the Allowance and Provision for Loan Losses section of this Management’s Discussion and Analysis.

Non-Interest Income

Total non-interest income of $37.6 million for the third quarter of 2014 increased $4.7 million or 14.5% from the same period of 2013. The variances in significant individual non-interest income items are further explained in the following paragraphs.

Service charges on loans and deposits of $17.7 million for the third quarter of 2014 increased $1.3 million or 8.0% from the same period of 2013, primarily due to increases in other service charges and overdraft fees of $1.1 million and $0.3 million, respectively, reflecting the impact of organic growth and the expanded customer base due to the recent acquisitions.

Trust fees of $4.9 million for the three months ended September 30, 2014 increased $0.7 million or 16.6% from the same period of 2013, primarily driven by cross-selling efforts collaborating with internal business partners, added sales professionals and improved market conditions. The market value of assets under management increased $436.1 million or 14.7% to $3.4 billion over this same period, with $332.1 million as a result of organic growth and $104.0 million due to improved stock market conditions.

Insurance commissions and fees of $4.2 million for the three months ended September 30, 2014 increased $0.1 million or 2.0% from the same period of 2013, primarily due to increased fee income resulting from the implementation of revenue-enhancing strategies and initiatives, partially offset by a reduction in fee income relating to the sale of a book-of-business to an outside agency for which revenue was received during the third quarter of 2013 that was not received during the third quarter of 2014.

Securities commissions of $3.1 million for the third quarter of 2014 increased $0.6 million or 21.6% from the same period of 2013 primarily due to positive results from new initiatives generating new customer relationships, combined with increased volume and improved market conditions.

Net securities gains were $1.2 million for the third quarter of 2014 due to the opportunistic sale of mortgage-backed securities at a premium.

 

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Mortgage banking revenue, which is primarily derived from the gain on sale of residential mortgage loans, was $1.1 million for the third quarter of 2014 and increased $0.2 million from the same period of 2013, as higher servicing income and gains on sale of loans were partially offset by an increase in the amortization of mortgage servicing rights primarily acquired in the PVF transaction. During the third quarter of 2014, the Corporation sold $45.0 million of residential mortgage loans, compared to $62.3 million for the same period of 2013, as part of its ongoing strategy of generally selling 30-year residential mortgage loans. The volume decrease is an industry-wide trend as refinance activity has greatly diminished.

Income from BOLI of $1.8 million for the three months ended September 30, 2014 increased $0.2 million from $1.6 million for the same period of 2013, primarily as a result of the benefit of more claims during the third quarter of 2014.

Other non-interest income of $3.6 million for the third quarter of 2014 increased $0.5 million from the same period of 2013. During the third quarter of 2014, the Corporation recorded $0.3 million more in fees earned through its commercial loan interest rate swap program and $0.7 million more in dividends on non-marketable equity securities. Additionally during the third quarter of 2014, the Corporation recorded income of $0.1 million related to its equity investment in a small business investment company, compared to a loss of $0.3 million for the same period of 2013. Partially offsetting these increases in other non-interest income was $0.9 million in life insurance proceeds recorded during the third quarter of 2013.

Non-Interest Expense

Total non-interest expense of $95.8 million for the third quarter of 2014 increased $12.7 million or 15.2% from the same period of 2013. The variances in the individual non-interest expense items are further explained in the following paragraphs with an overriding theme of the expense increases primarily related to the expanded operations from acquisitions.

Salaries and employee benefits of $49.6 million for the three months ended September 30, 2014 increased $4.4 million or 9.8% from the same period of 2013. This increase primarily relates to acquisitions, combined with new hires, merit increases and higher medical insurance costs in 2014.

Occupancy and equipment expense of $15.4 million for the third quarter of 2014 increased $2.8 million or 22.4% from the same period of 2013, primarily resulting from acquisitions, combined with an increase in rental expense relating to the Pittsburgh headquarters and regional headquarters in Cleveland, Ohio and Baltimore, Maryland. Additionally, equipment depreciation expense increased during this same period due to upgrades to incorporate new technology, primarily relating to online and mobile banking applications.

Amortization of intangibles expense of $2.5 million for the third quarter of 2014 increased $0.4 million or 18.8% from the same period of 2013, primarily due to core deposit intangibles recorded as a result of acquisitions.

Outside services expense of $8.2 million for the third quarter of 2014 increased $0.6 million or 8.2% from the same period of 2013, primarily due to increases of $0.5 million in licenses, fees and dues, $0.2 million in legal expenses and $0.6 million in other services, partially offset by a decrease of $0.7 million in consulting fees.

Federal Deposit Insurance Corporation (FDIC) insurance was consistent at $3.2 million for the third quarters of 2014 and 2013.

The Corporation recorded $1.9 million in merger-related costs associated with the OBA and BCSB acquisitions during the third quarter of 2014. Merger-related costs recorded during the same period of 2013 in conjunction with the PVF acquisition were $0.9 million.

Other non-interest expense increased $3.4 million to $15.2 million for the third quarter of 2014, compared to $11.8 million for the third quarter of 2013. For the third quarter of 2014, compared to the same quarter of 2013, state taxes increased $0.3 million resulting from a higher assessment base caused by state tax code changes. Additionally during the third quarter of 2014, marketing expense increased $1.0 million, loan-related expenses increased $0.6 million, OREO expenses increased $0.5 million, telephone expense increased $0.3 million and postage expense increased $0.2 million, all primarily due to acquisitions and volume increases related to organic growth.

 

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Income Taxes

The Corporation’s income tax expense of $15.7 million for the third quarter of 2014 increased $5.8 million or 57.7% from the same period of 2013. The effective tax rate of 30.8% for the third quarter of 2014 increased from 24.0% for the same period of 2013, due to higher levels of pre-tax income, which is subject to the marginal tax rate. Both periods’ tax rates are lower than the 35% federal statutory tax rate due to the tax benefits primarily resulting from tax-exempt income on investments, loans and BOLI, as well as tax credits. The 2013 quarterly period reflected the benefit of higher tax credits earned.

Nine Months Ended September 30, 2014 Compared to the Nine Months Ended September 30, 2013

Net income available to common stockholders for the nine months ended September 30, 2014 was $98.4 million or $0.59 per diluted common share, compared to net income available to common stockholders for the nine months ended September 30, 2013 of $89.4 million or $0.62 per diluted common share. The increase in net income available to common stockholders is a result of an increase of $53.5 million in net interest income, combined with an increase of $15.7 million in non-interest income, partially offset by increases of $5.9 million in the provision for loan losses, $36.5 million in non-interest expense and $6.3 million in preferred stock dividends. The results for the first nine months of 2014 reflect the BCSB, PVF and ANNB acquisitions that closed on February 15, 2014, October 12, 2013 and April 6, 2013, respectively, and included $8.1 million in merger costs, primarily relating to the OBA and BCSB acquisitions. Other than the merger costs, the OBA acquisition that closed on September 19, 2014 did not have a material impact on the results of operations for the nine months ended September 30, 2014. The results for the first nine months of 2013 included $4.2 million in merger costs, primarily relating to the PVF acquisition. Average diluted common shares outstanding increased 22.5 million shares or 15.5% to 166.9 million shares for the first nine months of 2014, primarily as a result of the BCSB, PVF and ANNB acquisitions, combined with the common stock offering completed in November 2013.

For the nine months ended September 30, 2014, the Corporation’s return on average equity was 7.42% and its return on average assets was 0.96%, compared to 8.22% and 0.97%, respectively, for the nine months ended September 30, 2013. The Corporation’s return on average tangible equity was 14.01% and its return on average tangible assets was 1.06% for the first nine months of 2014, compared to 17.37% and 1.07%, respectively, for the same period of 2013. Average equity was $1.9 billion and $1.5 billion for the nine months ended September 30, 2014 and 2013, respectively, while average tangible equity was $1.0 billion and $718.1 million, respectively, for those same periods. Average equity for the first nine months of 2014 reflects the impact of the BCSB, PVF and ANNB acquisitions, combined with the common and preferred stock offerings completed in November 2013. The OBA acquisition that closed on September 19, 2014 did not have a material impact on average equity for the nine months ended September 30, 2014.

 

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The following tables summarize the Corporation’s non-GAAP financial measures for the periods indicated derived from amounts reported in the Corporation’s financial statements (dollars in thousands):

 

     Nine Months Ended
September 30,
 
     2014     2013  

Return on average tangible equity:

    

Net income (annualized)

   $ 140,045      $ 119,480   

Amortization of intangibles, net of tax (annualized)

     6,257        5,269   
  

 

 

   

 

 

 
   $ 146,302      $ 124,749   
  

 

 

   

 

 

 

Average total stockholders’ equity

   $ 1,886,386      $ 1,453,746   

Less: Average intangibles

     (841,770     (735,638
  

 

 

   

 

 

 
   $ 1,044,616      $ 718,108   
  

 

 

   

 

 

 

Return on average tangible equity

     14.01     17.37
  

 

 

   

 

 

 

Return on average tangible assets:

    

Net income (annualized)

   $ 140,045      $ 119,480   

Amortization of intangibles, net of tax (annualized)

     6,257        5,269   
  

 

 

   

 

 

 
   $ 146,302      $ 124,749   
  

 

 

   

 

 

 

Average total assets

   $ 14,643,776      $ 12,365,612   

Less: Average intangibles

     (841,770     (735,638
  

 

 

   

 

 

 
   $ 13,802,006      $ 11,629,974   
  

 

 

   

 

 

 

Return on average tangible assets

     1.06     1.07
  

 

 

   

 

 

 

 

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The following table provides information regarding the average balances and yields earned on interest-earning assets and the average balances and rates paid on interest-bearing liabilities (dollars in thousands):

 

     Nine Months Ended September 30,  
     2014     2013  
     Average
Balance
    Interest
Income/
Expense
    Yield/
Rate
    Average
Balance
    Interest
Income/
Expense
    Yield/
Rate
 

Assets

            

Interest-earning assets:

            

Interest bearing deposits with banks

   $ 48,743      $ 70        0.19   $ 33,199      $ 45        0.18

Taxable investment securities (1)

     2,529,140        39,739        2.10        2,112,382        32,170        2.03   

Non-taxable investment securities (2)

     153,456        6,072        5.28        163,045        6,682        5.46   

Residential mortgage loans held for sale

     3,636        287        10.53        21,696        617        3.79   

Loans (2) (3)

     10,119,645        332,921        4.40        8,474,135        288,500        4.55   
  

 

 

   

 

 

     

 

 

   

 

 

   

Total interest-earning assets (2)

     12,854,620        379,089        3.94        10,804,457        328,014        4.06   
  

 

 

   

 

 

     

 

 

   

 

 

   

Cash and due from banks

     184,184            178,154       

Allowance for loan losses

     (114,576         (108,173    

Premises and equipment

     162,526            144,212       

Other assets

     1,547,022            1,346,962       
  

 

 

       

 

 

     

Total Assets

   $ 14,633,776          $ 12,365,612       
  

 

 

       

 

 

     

Liabilities

            

Interest-bearing liabilities:

            

Deposits:

            

Interest bearing demand

   $ 4,267,539        4,932        0.15      $ 3,774,211        4,326        0.15   

Savings

     1,548,791        526        0.05        1,339,723        491        0.05   

Certificates and other time

     2,694,813        16,609        0.82        2,448,634        17,686        0.97   

Customer repurchase agreements

     799,470        1,315        0.22        769,997        1,340        0.23   

Other short-term borrowings

     556,347        2,696        0.65        250,846        1,964        1.04   

Long-term debt

     303,255        3,850        1.70        92,024        2,268        3.30   

Junior subordinated debt

     64,324        1,322        2.75        201,575        5,578        3.70   
  

 

 

   

 

 

     

 

 

   

 

 

   

Total interest-bearing liabilities (2)

     10,234,539        31,250        0.41        8,877,010        33,653        0.51   
  

 

 

   

 

 

     

 

 

   

 

 

   

Non-interest bearing demand

     2,375,062            1,894,206       

Other liabilities

     147,789            140,650       
  

 

 

       

 

 

     

Total Liabilities

     12,757,390            10,911,866       

Stockholders’ equity

     1,886,386            1,453,746       
  

 

 

       

 

 

     

Total Liabilities and Stockholders’ Equity

   $ 14,643,776          $ 12,365,612       
  

 

 

       

 

 

     

Excess of interest-earning assets over interest-bearing liabilities

   $ 2,620,081          $ 1,927,447       
  

 

 

       

 

 

     

Fully tax-equivalent net interest income

       347,839            294,361     

Tax-equivalent adjustment

       (5,203         (5,265  
    

 

 

       

 

 

   

Net interest income

     $ 342,636          $ 289,096     
    

 

 

       

 

 

   

Net interest spread

         3.53         3.55
      

 

 

       

 

 

 

Net interest margin (2)

         3.62         3.64
      

 

 

       

 

 

 

 

(1) The average balances and yields earned on taxable investment securities are based on historical cost.
(2) The interest income amounts are reflected on a fully taxable equivalent (FTE) basis, a non-GAAP measure, which adjusts for the tax benefit of income on certain tax-exempt loans and investments using the federal statutory tax rate of 35% for each period presented. The yields on earning assets and the net interest margin are presented on an FTE and annualized basis. The rates paid on interest-bearing liabilities are also presented on an annualized basis. The Corporation believes this measure to be the preferred industry measurement of net interest income and provides relevant comparison between taxable and non-taxable amounts.
(3) Average balances include non-accrual loans. Loans consist of average total loans less average unearned income. The amount of loan fees included in interest income on loans is immaterial.

 

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Net Interest Income

Net interest income, which is the Corporation’s principal source of revenue, is the difference between interest income from earning assets and interest expense paid on liabilities. For the nine months ended September 30, 2014, net interest income, which comprised 74.3% of net revenue compared to 73.7% for the same period in 2013, was affected by the general level of interest rates, changes in interest rates, the shape of the yield curve, the level of non-accrual loans and changes in the amount and mix of interest-earning assets and interest-bearing liabilities.

Net interest income, on an FTE basis, increased $53.5 million or 18.2% from $294.4 million for the first nine months of 2013 to $347.8 million for the first nine months of 2014. Average earning assets increased $2.1 billion or 19.0% and average interest-bearing liabilities increased $1.4 billion or 15.3% from 2013, due to the acquisitions of BCSB, PVF and ANNB, combined with organic growth in loans, deposits and customer repurchase agreements. The Corporation’s net interest margin was 3.62% for the first nine months of 2014, compared to 3.64% for the same period of 2013, as loan yields declined faster than deposit rates primarily as a result of the current low interest rate environment, partially offset by an increase in net interest margin due to higher accretable yield adjustments. Details on changes in tax equivalent net interest income attributed to changes in interest-earning assets, interest-bearing liabilities, yields and cost of funds are set forth in the preceding table.

The following table sets forth certain information regarding changes in net interest income attributable to changes in the volumes of interest-earning assets and interest-bearing liabilities and changes in the rates for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013 (in thousands):

 

     Volume     Rate     Net  

Interest Income

      

Interest bearing deposits with banks

   $ 24      $ 1      $ 25   

Securities

     5,493        1,466        6,959   

Residential mortgage loans held for sale

     (805     475        (330

Loans

     54,397        (9,976     44,421   
  

 

 

   

 

 

   

 

 

 
     59,109        (8,034     51,075   
  

 

 

   

 

 

   

 

 

 

Interest Expense

      

Deposits:

      

Interest bearing demand

     739        (133     606   

Savings

     75        (40     35   

Certificates and other time

     1,654        (2,731     (1,077

Customer repurchase agreements

     50        (75     (25

Other short-term borrowings

     1,703        (971     732   

Long-term debt

     3,122        (1,540     1,582   

Junior subordinated debt

     (3,089     (1,167     (4,256
  

 

 

   

 

 

   

 

 

 
     4,254        (6,657     (2,403
  

 

 

   

 

 

   

 

 

 

Net Change

   $ 54,855      $ (1,377   $ 53,478   
  

 

 

   

 

 

   

 

 

 

 

(1) The amount of change not solely due to rate or volume changes was allocated between the change due to rate and the change due to volume based on the net size of the rate and volume changes.
(2) Interest income amounts are reflected on an FTE basis which adjusts for the tax benefit of income on certain tax-exempt loans and investments using the federal statutory tax rate of 35% for each period presented. The Corporation believes this measure to be the preferred industry measurement of net interest income and provides relevant comparison between taxable and non-taxable amounts.

Interest income, on an FTE basis, of $379.1 million for the first nine months of 2014, increased $51.1 million or 15.6% from the same period of 2013, primarily due to increased earning assets combined with accretable yield benefit, partially offset by lower yields. During the first nine months of 2014 and 2013, the Corporation recognized a benefit of $4.3 million and $1.6 million, respectively, in accretable yield on acquired loans. The increase in earning assets was primarily driven by a $1.6 billion or 19.4% increase in average loans, including $348.2 million or 3.5% of organic growth, which reflects the benefit of the Corporation’s expanded banking footprint and successful sales management. Additionally, average loans added in the OBA, BCSB, PVF and ANNB acquisitions were $12.1 million, $158.0 million, $535.7 million and $258.9 million, respectively. The yield on earning assets decreased 12 basis points from the first nine months of 2013 to 3.94% for the first nine months of 2014, compared to 4.06% for the first nine months of 2013, reflecting the decreases in market interest rates and competitive pressures and partially offset by the above-mentioned changes in accretable yield benefit on acquired loans.

 

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Interest expense of $31.3 million for the first nine months of 2014 decreased $2.4 million or 7.1% from the same quarter of 2013 due to lower rates paid, partially offset by growth in interest-bearing liabilities. The rate paid on interest-bearing liabilities decreased 10 basis points to 0.41% for the first nine months of 2014, compared to 0.51% for the first nine months of 2013, reflecting changes in interest rates and a favorable shift in deposit mix to lower-cost transaction deposits and customer repurchase agreements. The growth in average interest-bearing liabilities was primarily attributable to growth in average deposits and customer repurchase agreements, which increased by $1.5 billion or 14.3%, including $348.2 million or 3.5% of organic growth, combined with $12.3 million, $266.0 million, $707.6 million and $358.3 million in average deposits and customer repurchase agreements added in the OBA, BCSB, PVF and ANNB acquisitions, respectively.

Provision for Loan Losses

The provision for loan losses of $28.6 million during the first nine months of 2014 increased $5.9 million from the same period of 2013, primarily due to an increase of $6.1 million in the provision for the originated portfolio to support loan growth, partially offset by a decrease of $0.2 million in the provision for the acquired portfolio. During the first nine months of 2014, net charge-offs were $18.8 million, or 0.25% (annualized) of average loans, compared to $17.0 million, or 0.27% (annualized) of average loans, for the same period of 2013, reflecting stable asset quality performance in the Corporation’s loan portfolio. The ratio of the allowance for loan losses to total loans equaled 1.10% and 1.25% at September 30, 2014 and 2013, respectively, which reflects the Corporation’s overall favorable credit quality performance along with the addition of loans acquired in the BCSB, PVF and ANNB acquisitions without a corresponding allowance for loan losses in accordance with acquired loan accounting rules. For additional information relating to the allowance and provision for loan losses, refer to the Allowance and Provision for Loan Losses section of this Management’s Discussion and Analysis.

Non-Interest Income

Total non-interest income of $118.8 million for the first nine months of 2014 increased $15.7 million or 15.2% from the same period of 2013. The variances in significant individual non-interest income items are further explained in the following paragraphs.

Service charges on loans and deposits of $50.5 million for the first nine months of 2014 decreased $1.0 million or 1.9% from the same period of 2013, primarily due to a decrease of $4.9 million in interchange fees as the Corporation became subject to the new rules regarding debit card interchange fees imposed by the Durbin Amendment of the Dodd-Frank Act effective July 1, 2013. Partially offsetting this decrease, other service charges and overdraft fees increased $2.8 million and $1.1 million, respectively, over this same period, reflecting the impact of organic growth and the expanded customer base due to acquisitions. For information relating to the impact of the new regulations on the Corporation’s income from interchange fees, refer to the Dodd-Frank Wall Street Reform and Consumer Protection Act section of this Management’s Discussion and Analysis.

Trust fees of $14.5 million for the nine months ended September 30, 2014 increased $2.1 million or 16.6% from the same period of 2013, primarily driven by cross-selling efforts collaborating with internal business partners, added sales professionals and improved market conditions. The market value of assets under management increased $436.1 million or 14.7% to $3.4 billion over this same period, with $332.1 million as a result of organic growth and $104.0 million due to improved stock market conditions.

Insurance commissions and fees of $12.8 million for the nine months ended September 30, 2014 increased $0.2 million or 1.5% from the same period of 2013. Increased fee income resulting from the implementation of revenue-enhancing strategies and initiatives during the first nine months of 2014 was partially offset by a reduction in fee income relating to the sale of a book-of-business to an outside agency for which revenue was received during the nine months ended September 30, 2013 that was only received for part of that same period in 2014.

Securities commissions of $8.5 million for the first nine months of 2014 decreased $0.2 million or 1.9% from the same period of 2013 primarily due to a system conversion combined with the impact of severe weather conditions throughout the Corporation’s market area in 2014, partially offset by positive results from new initiatives generating new customer relationships, combined with increased volume and improved market conditions.

 

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Net securities gains were $11.4 million for the first nine months of 2014, compared to $0.8 million for the first nine months of 2013. During the first nine months of 2014, the Corporation strategically sold its entire portfolio of pooled TPS for net proceeds of $51.5 million and a gain of $13.8 million. Of the 23 pooled securities sold, one was determined to be a disallowed investment under the Volcker Rule of the Dodd-Frank Act, and as such, was required to be disposed of by July 2015. Partially offsetting this gain was a net loss of $2.4 million relating to the sale of other securities. By selling these securities, the Corporation strengthened the risk profile of its investment portfolio, improved its capital levels due to lowered risk-weighted assets and generated capital to support future growth.

Mortgage banking revenue, which is primarily derived from the gain on sale of residential mortgage loans, was $2.2 million for the first nine months of 2014 and decreased $0.9 million from the same period of 2013, consistent with industry trends. During the first nine months of 2014, the Corporation sold $101.6 million of residential mortgage loans, compared to $210.0 million for the same period of 2013, as part of its ongoing strategy of generally selling 30-year residential mortgage loans. The volume decrease is an industry-wide trend as refinance activity has greatly diminished.

Income from BOLI of $5.8 million for the first nine months of 2014 increased $0.7 million or 12.8% from the first nine months of 2013, primarily as a result of continued management actions designed to improve performance, along with additional policies from acquisitions.

Other non-interest income of $13.1 million for the first nine months of 2014 increased $3.8 million from the same period of 2013. During the first nine months of 2014, the Corporation recorded $2.8 million more in fees earned through its commercial loan interest rate swap program and $1.5 million more in dividends on non-marketable equity securities. Additionally during the first nine months of 2014, the Corporation recorded a gain of $0.9 million related to the sale of impaired commercial loans. Partially offsetting these increases in other non-interest income is a gain of $1.6 million recognized during the first nine months of 2013 related to a debt extinguishment in which $15.0 million of the Corporation-issued TPS was repurchased at a discount, and the related debt extinguished. This $15.0 million was opportunistically purchased at auction and represents a portion of the underlying collateral of a pooled TPS that was liquidated by the trustee.

Non-Interest Expense

Total non-interest expense of $282.6 million for the first nine months of 2014 increased $36.5 million or 14.8% from the same period of 2013. The variances in the individual non-interest expense items are further explained in the following paragraphs with an overriding theme of the expense increases primarily related to the expanded operations from acquisitions.

Salaries and employee benefits of $147.0 million for the nine months ended September 30, 2014 increased $14.7 million or 11.1% from the same period of 2013. This increase primarily relates to acquisitions, combined with new hires, merit increases and higher medical insurance costs in 2014. Additionally, the Corporation recorded a net charge of $1.9 million during the first nine months of 2014 relating to the mutual conclusion of a consulting agreement with a retired executive.

Occupancy and equipment expense of $46.0 million for the first nine months of 2014 increased $8.3 million or 22.0% from the same period of 2013, primarily resulting from acquisitions, combined with an increase in rental expense relating to the Pittsburgh headquarters and regional headquarters in Cleveland, Ohio and Baltimore, Maryland. Additionally, equipment depreciation expense increased during this same period due to upgrades to incorporate new technology, primarily relating to online and mobile banking applications, and snow removal expense increased as a result of severe weather conditions throughout the Corporation’s market area during the first nine months of 2014 compared to the same period of 2013.

Amortization of intangibles expense of $7.2 million for the first nine months of 2014 increased $1.1 million or 18.7% from the same period of 2013, primarily due to core deposit intangibles recorded as a result of acquisitions.

Outside services expense of $23.7 million for the first nine months of 2014 increased $0.3 million or 1.4% from the same period of 2013. For the first nine months of 2014, compared to the same period of 2013, licenses, fees and dues, data processing services and other outside services increased $0.6 million, $0.3 million and $1.0 million, respectively, primarily resulting from acquisitions and costs related to compliance with new regulations, including capital stress testing. These increases were partially offset by a decrease of $1.5 million in consulting fees due to a refund of previously paid fees for system enhancements.

 

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FDIC insurance of $9.6 million for the first nine months of 2014 increased $1.4 million or 17.1% from the same period of 2013, primarily due to an increased asset base resulting from acquisitions.

The Corporation recorded $8.1 million in merger-related costs, primarily associated with the OBA and BCSB acquisitions, during the first nine months of 2014. Merger-related costs recorded during the same period of 2013, primarily in conjunction with the PVF and ANNB acquisitions were $4.2 million.

Other non-interest expense increased $6.7 million to $41.1 million for the first nine months of 2014, compared to $34.4 million for the first nine months of 2013. For the first nine months of 2014 compared to the same period of 2013, OREO expense increased $1.2 million as the 2013 period was low due to gains on sale of OREO properties absent in 2014 and state taxes increased $1.4 million resulting from a higher assessment base caused by state tax code changes. Additionally, loan-related expenses increased $1.0 million, marketing expenses increased $0.6 million, telephone expenses increased $0.5 million, postage expenses increased $0.5 million, business development expenses increased $0.4 million, other taxes increased $0.4 million, supplies increased $0.3 million and fraud losses increased $0.2 million, all primarily due to additional expenses related to acquisitions.

Income Taxes

The Corporation’s income tax expense of $45.5 million for the first nine months of 2014 increased $11.5 million or 33.7% from the same period of 2013. The effective tax rate of 30.3% for the first nine months of 2014 increased from 27.6% for the same period of 2013, due to higher levels of pre-tax income, which is subject to the marginal tax rate. Both periods’ tax rates are lower than the 35% federal statutory tax rate due to the tax benefits primarily resulting from tax-exempt income on investments, loans and BOLI, as well as tax credits.

LIQUIDITY

The Corporation’s goal in liquidity management is to satisfy the cash flow requirements of customers and the operating cash needs of the Corporation with cost-effective funding. The Board of Directors of the Corporation has established an Asset/Liability Management Policy in order to achieve and maintain earnings performance consistent with long-term goals while maintaining acceptable levels of interest rate risk, a “well-capitalized” balance sheet and adequate levels of liquidity. The Board of Directors of the Corporation has also established a Contingency Funding Policy to address liquidity crisis conditions. These policies designate the Corporate Asset/Liability Committee (ALCO) as the body responsible for meeting these objectives. The ALCO, which includes members of executive management, reviews liquidity on a periodic basis and approves significant changes in strategies that affect balance sheet or cash flow positions. Liquidity is centrally managed on a daily basis by the Corporation’s Treasury Department.

FNBPA generates liquidity from its normal business operations. Liquidity sources from assets include payments from loans and investments, as well as the ability to securitize, pledge or sell loans, investment securities and other assets. Liquidity sources from liabilities are generated primarily through the banking offices of FNBPA in the form of deposits and customer repurchase agreements. The Corporation also has access to reliable and cost-effective wholesale sources of liquidity. Short- and long-term funds can be acquired to help fund normal business operations, as well as to serve as contingency funding in the event that the Corporation would be faced with a liquidity crisis.

The principal sources of the parent company’s liquidity are its strong existing cash resources plus dividends it receives from its subsidiaries. These dividends may be impacted by the parent’s or its subsidiaries’ capital needs, statutory laws and regulations, corporate policies, contractual restrictions, profitability and other factors. Cash on hand at the parent has been favorably impacted by management strategies over the last few quarters. These include strong earnings, a consistent dividend and capital actions. The capital actions include the raising of $161.3 million via the issuance of common and preferred equity during the fourth quarter of 2013. These proceeds were utilized to redeem various TPS obligations of the Corporation totaling $148.0 million, with $115.0 million occurring during the fourth quarter of 2013, $23.0 million occurring during the first quarter of 2014 and $10.0 million occurring during the second quarter of 2014. The positive results of these strategies can be seen in the parent’s cash position as it has increased from $103.3 million at September 30, 2013 to $126.7 million at September 30, 2014.

 

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Management believes cash levels for the Corporation are appropriate given the current environment. Two metrics that are used to gauge the adequacy of the parent company’s cash position are the Liquidity Coverage Ratio (LCR) and Months of Cash on Hand (MCH). The LCR is defined as the sum of cash on hand plus projected cash inflows over the next 12 months divided by cash outflows over the next 12 months. The LCR was 2.2 times at September 30, 2014 and 2.2 times at December 31, 2013. The internal limit for LCR is for the ratio to be greater than 1.0 time. The MCH is defined as the number of months of corporate expenses that can be covered by the cash on hand. The MCH was 14.0 months at September 30, 2014 and 15.2 months at December 31, 2013. The internal limit for MCH is for the ratio to be greater than 12 months. In addition, the Corporation issues subordinated notes on a regular basis. Subordinated notes decreased $2.1 million or 1.0% during the first nine months of 2014 to $212.1 million at September 30, 2014.

The liquidity position of the Corporation continues to be strong as evidenced by its ability to generate growth in relationship-based accounts. Average deposits and customer repurchase agreements totaled $11.9 billion and increased $139.0 million, or 4.7% annualized, and included average organic growth of $102.3 million or 3.4% annualized for the quarter ended September 30, 2014. Consistent with prior quarters, growth in transaction deposits and customer repurchase agreements was partially offset by a decline in time deposits. On an organic basis, average total transaction deposits and customer repurchase agreements increased $195.4 million or 8.6% annualized. Organic growth in average non-interest bearing deposits was $143.6 million or 24.0% annualized, primarily reflecting growth in non-interest bearing business accounts and the benefit of seasonally higher balances. Time deposits organically declined $93.0 million or 13.5% over this same period, reflecting the plan to reduce these accounts due to the Corporation’s strong liquidity position and customers shifting to lower cost transactional products.

FNBPA had unused wholesale credit availability of $4.8 billion or 30.5% of bank assets at September 30, 2014 and $4.8 billion or 35.6% of bank assets at December 31, 2013. These sources include the availability to borrow from the FHLB, the FRB, correspondent bank lines and access to brokered certificates of deposit. In addition to credit availability, FNBPA also possesses salable unpledged government and agency securities which could be sold to meet funding needs. These securities totaled $902.9 million, or 5.8% of total assets and $533.1 million, or 4.0% of total assets as of September 30, 2014 and December 31, 2013, respectively. The ALCO Policy minimum level is 3.0%.

Another metric for measuring liquidity risk is the liquidity gap analysis. The following liquidity gap analysis (in thousands) for the Corporation as of September 30, 2014 compares the difference between cash flows from existing assets and liabilities over future time intervals. Management seeks to limit the size of the liquidity gaps so that sources and uses of funds are reasonably matched in the normal course of business. A reasonably matched position lays a better foundation for dealing with additional funding needs during a potential liquidity crisis. The twelve-month cumulative gap to total assets was (0.4)% and (1.1)% as of September 30, 2014 and December 31, 2013, respectively.

 

     Within
1 Month
    2-3
Months
    4-6
Months
    7-12
Months
    Total
1 Year
 

Assets

          

Loans

   $ 283,898      $ 509,959      $ 661,540      $ 1,241,641      $ 2,697,038   

Investments

     90,886        88,312        132,589        216,979        528,766   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     374,784        598,271        794,129        1,458,620        3,225,804   

Liabilities

          

Non-maturity deposits

     80,961        161,923        242,884        485,768        971,536   

Time deposits

     167,024        294,797        426,211        584,732        1,472,764   

Borrowings

     537,709        139,413        56,734        116,189        850,045   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     785,694        596,133        725,829        1,186,689        3,294,345   

Period Gap (Assets - Liabilities)

   $ (410,910   $ 2,138      $ 68,300      $ 271,931      $ (68,541
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cumulative Gap

   $ (410,910   $ (408,772   $ (340,472   $ (68,541  
  

 

 

   

 

 

   

 

 

   

 

 

   

Cumulative Gap to Total Assets

     (-2.6 )%      (-2.6 )%      (-2.2 )%      (-0.4 )%   
  

 

 

   

 

 

   

 

 

   

 

 

   

In addition, the ALCO regularly monitors various liquidity ratios and stress scenarios of the Corporation’s liquidity position. The stress scenarios forecast that adequate funding will be available even under severe conditions. Management believes the Corporation has sufficient liquidity available to meet its normal operating and contingency funding cash needs.

 

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MARKET RISK

Market risk refers to potential losses arising from changes in interest rates, foreign exchange rates, equity prices and commodity prices. The Corporation is primarily exposed to interest rate risk inherent in its lending and deposit-taking activities as a financial intermediary. To succeed in this capacity, the Corporation offers an extensive variety of financial products to meet the diverse needs of its customers. These products sometimes contribute to interest rate risk for the Corporation when product groups do not complement one another. For example, depositors may want short-term deposits while borrowers desire long-term loans.

Changes in market interest rates may result in changes in the fair value of the Corporation’s financial instruments, cash flows and net interest income. The ALCO is responsible for market risk management which involves devising policy guidelines, risk measures and limits, and managing the amount of interest rate risk and its effect on net interest income and capital. The Corporation uses derivative financial instruments for interest rate risk management purposes and not for trading or speculative purposes.

Interest rate risk is comprised of repricing risk, basis risk, yield curve risk and options risk. Repricing risk arises from differences in the cash flow or repricing between asset and liability portfolios. Basis risk arises when asset and liability portfolios are related to different market rate indexes, which do not always change by the same amount. Yield curve risk arises when asset and liability portfolios are related to different maturities on a given yield curve; when the yield curve changes shape, the risk position is altered. Options risk arises from “embedded options” within asset and liability products as certain borrowers have the option to prepay their loans when rates fall, while certain depositors can redeem their certificates of deposit early when rates rise.

The Corporation uses an asset/liability model to measure its interest rate risk. Interest rate risk measures utilized by the Corporation include earnings simulation, economic value of equity (EVE) and gap analysis.

Gap analysis and EVE are static measures that do not incorporate assumptions regarding future business. Gap analysis, while a helpful diagnostic tool, displays cash flows for only a single rate environment. EVE’s long-term horizon helps identify changes in optionality and longer-term positions. However, EVE’s liquidation perspective does not translate into the earnings-based measures that are the focus of managing and valuing a going concern. Net interest income simulations explicitly measure the exposure to earnings from changes in market rates of interest. In these simulations, the Corporation’s current financial position is combined with assumptions regarding future business to calculate net interest income under various hypothetical rate scenarios. The ALCO reviews earnings simulations over multiple years under various interest rate scenarios on a periodic basis. Reviewing these various measures provides the Corporation with a comprehensive view of its interest rate risk profile.

 

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The following repricing gap analysis (in thousands) as of September 30, 2014 compares the difference between the amount of interest-earning assets and interest-bearing liabilities subject to repricing over a period of time. Management utilizes the repricing gap analysis as a diagnostic tool in managing net interest income and EVE risk measures.

 

     Within
1 Month
    2-3
Months
    4-6
Months
    7-12
Months
    Total
1 Year
 

Assets

          

Loans

   $ 3,812,099      $ 1,063,051      $ 533,068      $ 1,015,685      $ 6,423,903   

Investments

     95,605        107,525        162,117        224,107        589,354   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     3,907,704        1,170,576        695,185        1,239,792        7,013,257   

Liabilities

          

Non-maturity deposits

     2,695,188        —          —          —          2,695,188   

Time deposits

     174,694        295,909        427,365        586,389        1,484,357   

Borrowings

     1,347,905        128,497        8,110        18,940        1,503,452   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     4,217,787        424,406        435,475        605,329        5,682,997   

Off-balance sheet

     (200,000     —          —          —          (200,000

Period Gap (assets – liabilities + off-balance sheet)

   $ (510,083   $ 746,170      $ 259,710      $ 634,463      $ 1,130,260   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cumulative Gap

   $ (510,083   $ 236,087      $ 495,797      $ 1,130,260     
  

 

 

   

 

 

   

 

 

   

 

 

   

Cumulative Gap to Assets

     (3.2 )%      1.5     3.1     7.2  
  

 

 

   

 

 

   

 

 

   

 

 

   

The twelve-month cumulative repricing gap to total assets was 7.2% and 5.5% as of September 30, 2014 and December 31, 2013, respectively. The positive cumulative gap positions indicate that the Corporation has a greater amount of repricing earning assets than repricing interest-bearing liabilities over the subsequent twelve months. If interest rates increase then net interest income will increase and, conversely, if interest rates decrease then net interest income will decrease.

The allocation of non-maturity deposits and customer repurchase agreements to the one-month maturity category above is based on the estimated sensitivity of each product to changes in market rates. For example, if a product’s rate is estimated to increase by 50% as much as the market rates, then 50% of the account balance was placed in this category.

The following net interest income metrics were calculated using rate shocks which move market rates in an immediate and parallel fashion. The variance percentages represent the change between the net interest income or EVE calculated under the particular rate scenario versus the net interest income or EVE that was calculated assuming market rates as of September 30, 2014.

The following table presents an analysis of the potential sensitivity of the Corporation’s net interest income and EVE to changes in interest rates:

 

     September 30,
2014
    December 31,
2013
    ALCO
Limits
 

Net interest income change (12 months):

      

+ 300 basis points

     4.3     3.5     n/a   

+ 200 basis points

     3.0     2.5     (5.0 )% 

+ 100 basis points

     1.4     1.1     (5.0 )% 

- 100 basis points

     (1.6 )%      (2.1 )%      (5.0 )% 

Economic value of equity:

      

+ 300 basis points

     0.5     (2.6 )%      (25.0 )% 

+ 200 basis points

     1.3     (1.5 )%      (15.0 )% 

+ 100 basis points

     1.6     (0.5 )%      (10.0 )% 

- 100 basis points

     (4.7 )%      (4.3 )%      (10.0 )% 

 

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The Corporation also models rate scenarios which move all rates gradually over twelve months (Rate Ramps) and also scenarios that gradually change the shape of the yield curve. A +300 basis point Rate Ramp increases net interest income (12 months) by 4.1% at September 30, 2014 and 2.5% December 31, 2013.

The Corporation’s strategy is generally to manage to a neutral interest rate risk position. However, given the current interest rate environment, the interest rate risk position has been managed to an asset-sensitive position. Currently, rising rates are expected to have a modest, positive effect on net interest income versus net interest income if rates remained unchanged. The Corporation has maintained a relatively stable net interest margin over the last five years despite market rate volatility.

The ALCO utilizes several tactics to manage the Corporation’s interest rate risk position. As mentioned earlier, the growth in transaction deposits provides funding that is less interest rate-sensitive than time deposits and wholesale borrowings. On the lending side, the Corporation regularly sells long-term fixed-rate residential mortgages to the secondary market and has been successful in the origination of consumer and commercial loans with short-term repricing characteristics. Total variable and adjustable-rate loans were 58.3% and 59.9% of total loans as of September 30, 2014 and December 31, 2013, respectively. This decrease was mainly due to the acquisition of BCSB in the first quarter of 2014 and OBA at the end of the third quarter of 2014. The investment portfolio is used, in part, to manage the Corporation’s interest rate risk position. The Corporation has managed the duration of its investment portfolio over the last year to be slightly longer given the asset sensitive nature of its balance sheet. At September 30, 2014, the portfolio duration was 3.5 versus a 3.3 level at December 31, 2013. Finally, the Corporation has made use of interest rate swaps to commercial borrowers (commercial swaps) to manage its interest rate risk position as the commercial swaps effectively increase adjustable-rate loans. As of September 30, 2014, the commercial swaps totaled $949.2 million of notional principal, with $226.0 million in notional swap principal originated during 2014. The success of the aforementioned tactics has resulted in an asset-sensitive position. During the three and nine months ended September 30, 2014, long-term interest rates decreased causing cash flows from certain mortgage-related portfolios to shorten, which contributed to an increase in the asset-sensitive interest rate risk position during these periods. The addition of BCSB in the first quarter of 2014 and OBA in the third quarter of 2014 provided less rate sensitive deposits, and the borrowing of $350.0 million in FHLB advances at an average life of 3.5 years also contributed to the change in the interest rate risk position. These increases in the net asset-sensitivity position were slightly offset by an increase in the use of overnight borrowings compared to the prior year end. Overnight borrowings were relatively unchanged for the most recent quarter. In order to manage the interest rate risk position and generate incremental earnings, between December 2012 and August 2013 the Corporation entered into four separate interest rate derivative agreements totaling $200.0 million of notional principal in swaps which pay a variable interest rate and receive a fixed interest rate. For additional information regarding interest rate swaps, see the Derivative Instruments footnote in this Report.

The Corporation recognizes that all asset/liability models have some inherent shortcomings. Asset/liability models require certain assumptions to be made, such as prepayment rates on interest-earning assets and repricing impact on non-maturity deposits, which may differ from actual experience. These business assumptions are based upon the Corporation’s experience, business plans and available industry data. While management believes such assumptions to be reasonable, there can be no assurance that modeled results will be achieved. Furthermore, the metrics are based upon the balance sheet structure as of the valuation date and do not reflect the planned growth or management actions that could be taken.

RISK MANAGEMENT

The Corporation’s Board of Directors recognizes that, as a financial institution, the Corporation takes on a certain amount of risk in every business decision, transaction and activity. The Corporation’s Board of Directors and senior management have identified seven major categories of risk: credit risk, market risk, liquidity risk, reputational risk, operational risk, regulatory compliance risk and strategic risk. In its oversight role of the Corporation’s risk management function, the Board of Directors is mindful that risk management is not about eliminating risk, but rather is about identifying, accepting and managing risks so as to optimize total shareholder value, while balancing prudent business considerations and safety and soundness.

The Corporation supports its risk management process through a governance structure involving its Board of Directors and senior management. The Corporation’s Risk Committee helps ensure that business decisions in the organization are executed within its desired risk profile. The Risk Committee has the following oversight responsibilities:

 

    identification, measurement, assessment and monitoring of enterprise-wide risk across the Corporation and its subsidiaries;

 

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    development of appropriate and meaningful risk metrics to use in connection with the oversight of the Corporation’s businesses and strategies;

 

    review and assessment of the Corporation’s policies and practices to manage the Corporation’s credit, market, liquidity and operating risk (including technology, operational, compliance and fiduciary risks); and

 

    identification and implementation of risk management best practices.

The Risk Committee serves as the primary point of contact between the Corporation’s Board of Directors and the FNBPA Risk Management Council, which is the senior management level committee responsible for FNBPA’s risk management.

As noted above, the Corporation’s principal subsidiary, FNBPA, has a Risk Management Council comprised of senior management. The purpose of this committee is to provide regular oversight of specific areas of risk with respect to the level of risk and risk management structure. Management has also established an Operational Risk Committee that is responsible for identifying, evaluating and monitoring operational risks across the Corporation. The Operational Risk Committee is responsible for evaluating and approving appropriate remediation efforts to address identified operational risks. The Operational Risk Committee provides periodic reports concerning operational risks to the FNBPA Risk Management Council. The FNBPA Risk Management Council reports on a regular basis to the Corporation’s Risk Committee regarding the enterprise-wide risk profile of the Corporation and other significant risk management issues. The Corporation’s Chief Risk Officer is responsible for the design and implementation of the Corporation’s enterprise-wide risk management strategy and framework and ensures the coordinated and consistent implementation of risk management initiatives and strategies on a day-to-day basis. FNBPA’s Compliance Department, which reports to the Chief Risk Officer, is responsible for developing policies and procedures and monitoring FNBPA’s compliance with applicable laws and regulations. Further, the Corporation’s audit function performs an independent assessment of the Corporation’s internal controls environment and plays an integral role in testing the operation of internal controls systems and reporting findings to management and the Corporation’s Audit Committee. Both the Corporation’s Risk Committee and Audit Committee regularly report on risk-related matters to the Corporation’s Board of Directors. In addition, both the Corporation’s Risk Committee and FNBPA’s Risk Management Council regularly assess the Corporation’s enterprise-wide risk profile and provide guidance on actions needed to address key and emerging risk issues.

The Board of Directors believes that the Corporation’s enterprise-wide risk management process is effective since it includes the following material components:

 

    enables the Board of Directors to assess the quality of the information it receives;

 

    enables the Board of Directors to understand the businesses, investments and financial, accounting, regulatory and strategic considerations of the Corporation and its subsidiaries, and the risks that they face;

 

    enables the Board of Directors to oversee and assess how senior management evaluates risk; and

 

    enables the Board of Directors to assess appropriately the quality of the Corporation’s enterprise-wide risk management process.

DEPOSITS AND CUSTOMER REPURCHASE AGREEMENTS

Following is a summary of deposits and customer repurchase agreements (in thousands):

 

     September 30,
2014
     December 31,
2013
 

Non-interest bearing demand

   $ 2,647,081       $ 2,200,081   

Interest bearing demand

     4,551,241         3,968,679   

Savings

     1,574,187         1,423,399   

Certificates of deposit and other time deposits

     2,679,584         2,606,073   
  

 

 

    

 

 

 

Total deposits

     11,452,093         10,198,232   

Customer repurchase agreements

     857,217         841,741   
  

 

 

    

 

 

 

Total deposits and customer repurchase agreements

   $ 12,309,310       $ 11,039,973   
  

 

 

    

 

 

 

 

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Total deposits and customer repurchase agreements increased by $1,269.3 million, or 11.5%, to $12.3 billion at September 30, 2014, compared to December 31, 2013, primarily as a result of the acquisitions of OBA and BCSB combined with organic growth in relationship-based transaction deposits, which are comprised of demand (non-interest bearing and interest bearing) and savings accounts, combined with a slight increase in customer repurchase agreements. Certificates of deposit and other time deposits increased slightly over this same period as the accounts added in the OBA and BCSB acquisitions were partially offset by a reduction in existing accounts as certificates of deposit are not priced for growth at this time. Generating growth in relationship-based transaction deposits and customer repurchase agreements remains a key focus of the Corporation.

NON-PERFORMING ASSETS

During the first nine months of 2014, non-performing loans and OREO decreased $2.2 million or 1.9%, from $118.1 million at December 31, 2013 to $115.9 million at September 30, 2014, primarily the result of decreases of $3.7 million in non-accrual loans and $1.6 million in OREO, partially offset by an increase of $3.1 million in TDRs. The decrease in non-accrual loans was primarily due to loan payoffs and commercial loan exits, while the increase in TDRs was attributed to loans secured by residential mortgages that were restructured in conjunction with government programs.

Following is a summary of non-performing loans, by class (in thousands):

 

     September 30,
2014
     December 31,
2013
 

Commercial real estate

   $ 35,083       $ 43,648   

Commercial and industrial

     8,749         6,683   

Commercial leases

     651         734   
  

 

 

    

 

 

 

Total commercial loans and leases

     44,483         51,065   

Direct installment

     15,029         10,577   

Residential mortgages

     14,258         14,012   

Indirect installment

     1,339         1,202   

Consumer lines of credit

     1,783         597   

Other

     —           —     
  

 

 

    

 

 

 
   $ 76,892       $ 77,453   
  

 

 

    

 

 

 

Following is a summary of performing, non-performing and non-accrual TDRs, by class (in thousands):

 

     Performing      Non-
Performing
     Non-Accrual      Total  

September 30, 2014

           

Commercial real estate

   $ —         $ 1,373       $ 7,046       $ 8,419   

Commercial and industrial

     733         310         136         1,179   

Commercial leases

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans and leases

     733         1,683         7,182         9,598   

Direct installment

     5,263         8,268         1,501         15,032   

Residential mortgages

     3,706         10,787         891         15,384   

Indirect installment

     —           149         53         202   

Consumer lines of credit

     197         910         50         1,157   

Other

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 9,899       $ 21,797       $ 9,677       $ 41,373   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2013

           

Commercial real estate

   $ 24       $ 2,688       $ 10,435       $ 13,147   

Commercial and industrial

     749         40         237         1,026   

Commercial leases

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans and leases

     773         2,728         10,672         14,173   

Direct installment

     5,404         5,891         1,070         12,365   

Residential mortgages

     3,743         9,752         883         14,378   

Indirect installment

     —           142         80         222   

Consumer lines of credit

     300         185         —           485   

Other

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 10,220       $ 18,698       $ 12,705       $ 41,623   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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ALLOWANCE FOR LOAN LOSSES

Commercial loans are individually risk-rated by the loan relationship manager, approved by the appropriate loan authority or committee and reviewed on an ongoing basis by the lending and credit groups, as well as the Loan Review department. In general, commercial loan risk ratings are affirmed at least annually. Troubled, classified and non-performing loans and borrowers are reviewed more frequently by the Special Attention Credit Committee. Impaired commercial relationships with exposures greater than or equal to $500 thousand are subject to specific measurement of impairment and the establishment of an ASC 310 specific reserve, if any. These reserve allocations are generally collateral dependent. All other impaired loans are evaluated in the aggregate based on loan segment loss given default. All ASC 450 reserve allocations are based on transition matrices with predefined loss emergence periods for each homogenous loan segment as well as the qualitative factors described below.

Management evaluates the impact of various qualitative factors which pose additional risks that may not adequately be addressed in the quantitative analyses described above. Expected loss rates for each loan category may be adjusted for levels of and trends in loan volumes, net charge-offs, delinquency and non-performing loans. In addition, management takes into consideration the impact of changes to lending policies; the experience and depth of lending management and staff; the results of internal loan reviews; concentrations of credit; competition, legal and regulatory risk; market uncertainty and collateral illiquidity; national and local economic trends; or any other common risk factor that might affect loss experience across one or more components of the portfolio. The assessment of relevant economic factors indicates that the Corporation’s primary markets historically tend to lag the national economy, with local economies in the Corporation’s primary market areas also improving or weakening, as the case may be, but at a more measured rate than the national trends. Regional economic factors influencing management’s estimate of the allowance for loan losses include, but are not limited to, uncertainty of the labor markets, industrial presence, commercial real estate activity and residential real estate values. The determination of this qualitative component of the allowance for loan losses is particularly dependent on the judgment of management.

The allowance for loan losses of $120.6 million at September 30, 2014 increased $9.8 million or 8.9% from December 31, 2013, primarily due to growth in originated loans and, to a lesser extent, to support the acquired loan portfolio. The provision for loan losses during the nine months ended September 30, 2014 was $28.6 million, covering net charge-offs of $18.8 million with the remainder supporting originated loan growth and the acquired loan portfolios. The allowance for loan losses as a percentage of non-performing loans for the Corporation’s total portfolio increased from 143.03% as of December 31, 2013 to 156.84% as of September 30, 2014.

Following is a summary of supplemental statistical ratios pertaining to the Corporation’s originated loan portfolio. The originated loan portfolio excludes loans acquired at fair value and accounted for in accordance with ASC 805. The decline in each ratio is consistent with generally positive trends in asset quality, particularly in all commercial loan segments.

 

    At or For the Three Months Ended  
    September 30,
2014
    December 31,
2013
    September 30,
2013
 

Non-performing loans/total originated loans

    0.83     0.95     1.05

Non-performing loans + OREO/total originated loans + OREO

    1.25     1.44     1.49

Allowance for loan losses (originated loans)/total originated loans

    1.24     1.29     1.34

Net charge-offs on originated loans (annualized)/total average originated loans

    0.29     0.30     0.26

CAPITAL RESOURCES AND REGULATORY MATTERS

The access to, and cost of, funding for new business initiatives, including acquisitions, the ability to engage in expanded business activities, the ability to pay dividends and the level and nature of regulatory oversight depend, in part, on the Corporation’s capital position.

The assessment of capital adequacy depends on a number of factors such as asset quality, liquidity, earnings performance, changing competitive conditions and economic forces. The Corporation seeks to maintain a strong capital base to support its growth and expansion activities, to provide stability to current operations and to promote public confidence.

 

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The Corporation has an effective shelf registration statement filed with the SEC. Pursuant to this registration statement, the Corporation may, from time to time, issue and sell in one or more offerings any combination of common stock, preferred stock, debt securities or TPS. During November 2013, the Corporation issued 4,693,876 common shares and 4,435,080 Depositary Shares (each representing a 1/40th interest in the Non-Cumulative Perpetual Preferred Stock, Series E) in public equity offerings under this registration statement. These equity offerings increased the Corporation’s capital by $161.3 million.

Capital management is a continuous process with capital plans and stress testing for the Corporation and FNBPA updated annually. These capital plans include assessing the adequacy of expected capital levels assuming various scenarios by projecting capital needs for a forecast period of 2-3 years beyond the current year. Both the Corporation and FNBPA are subject to various regulatory capital requirements administered by federal banking agencies. From time to time, the Corporation issues shares initially acquired by the Corporation as treasury stock under its various benefit plans. The Corporation may continue to grow through acquisitions, which can potentially impact its capital position. The Corporation may issue additional preferred or common stock in order to maintain its well-capitalized status.

The Corporation and FNBPA are subject to various regulatory capital requirements administered by the federal banking agencies. Quantitative measures established by regulators to ensure capital adequacy require the Corporation and FNBPA to maintain minimum amounts and ratios of total and tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) and of leverage ratio (as defined). Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions, by regulators that, if undertaken, could have a direct material effect on the Corporation’s consolidated financial statements and future merger and acquisition activity. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation and FNBPA must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Corporation’s and FNBPA’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

The Corporation’s management believes that, as of September 30, 2014 and December 31, 2013, the Corporation and FNBPA met all “well capitalized” requirements to which each of them was subject.

As of September 30, 2014, the most recent notification from the federal banking agencies categorized the Corporation and FNBPA as “well-capitalized” under the regulatory framework for prompt corrective action. There are no conditions or events since the notification which management believes have changed this categorization.

During June 2013, $15.0 million of the Corporation-issued TPS was repurchased at a discount and the related debt extinguished. This $15.0 million was opportunistically purchased at auction and represents a portion of the underlying collateral of a pooled TPS that was liquidated by the trustee. During the fourth quarter of 2013 and the first six months of 2014, the Corporation redeemed $148.0 million of the Corporation-issued TPS using proceeds raised in conjunction with its capital raise completed in November 2013. The regulatory capital ratios at September 30, 2014 reflect these decreases in TPS, with remaining TPS included in tier 1 capital totaling $57.5 million. Additionally, during the first quarter of 2014, the Corporation strategically sold its entire portfolio of pooled TPS, which strengthened the risk profile of its investment portfolio, improved its capital levels due to lowered risk-weighted assets and generated capital to support future growth.

 

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Following are the capital ratios as of September 30, 2014 and December 31, 2013 for the Corporation and FNBPA (dollars in thousands):

 

     Actual     Well-Capitalized
Requirements
    Minimum Capital
Requirements
 
     Amount      Ratio     Amount      Ratio     Amount      Ratio  

September 30, 2014

               

F.N.B. Corporation

               

Total capital to risk-weighted assets

   $ 1,392,264         12.3   $ 1,129,071         10.0   $ 903,257         8.0

Tier 1 capital to risk-weighted assets

     1,248,358         11.1        677,443         6.0        451,628         4.0   

Leverage ratio

     1,248,358         8.7        718,424         5.0        574,739         4.0   

FNBPA

               

Total capital to risk-weighted assets

     1,301,147         11.7        1,113,292         10.0        890,634         8.0   

Tier 1 capital to risk-weighted assets

     1,185,641         10.7        667,975         6.0        445,317         4.0   

Leverage ratio

     1,185,641         8.4        709,505         5.0        567,604         4.0   

December 31, 2013

               

F.N.B. Corporation

               

Total capital to risk-weighted assets

   $ 1,258,312         12.5   $ 1,009,952         10.0   $ 807,962         8.0

Tier 1 capital to risk-weighted assets

     1,117,956         11.1        605,971         6.0        403,981         4.0   

Leverage ratio

     1,117,956         8.8        634,527         5.0        507,622         4.0   

FNBPA

               

Total capital to risk-weighted assets

     1,144,510         11.5        995,524         10.0        796,419         8.0   

Tier 1 capital to risk-weighted assets

     1,035,659         10.4        597,314         6.0        398,210         4.0   

Leverage ratio

     1,035,659         8.3        623,921         5.0        499,137         4.0   

DODD-FRANK WALL STREET REFORM AND CONSUMER PROTECTION ACT

On July 21, 2010, the Dodd-Frank Act became law. The Dodd-Frank Act broadly affects the financial services industry by establishing a framework for systemic risk oversight, creating a resolution authority for institutions determined to be systemically important, mandating higher capital and liquidity requirements, requiring banks to pay increased fees to regulatory agencies and containing numerous other provisions aimed at strengthening the sound operation of the financial services sector that will fundamentally change the system of regulatory oversight as described in more detail under Part I, Item 1, “Business—Government Supervision and Regulation” included in the Corporation’s 2013 Annual Report on Form 10-K as filed with the SEC on February 28, 2014. Many aspects of the Dodd-Frank Act are subject to further rulemaking and will take effect over several years, making it difficult to anticipate the overall financial impact to the Corporation or across the financial services industry.

On June 29, 2011, the FRB, pursuant to its authority under the Dodd-Frank Act, issued rules regarding interchange fees charged for electronic debit transactions by payment card issuers having assets over $10 billion, adopting a per-transaction interchange cap base of $0.21 plus a 5-basis point fraud loss adjustment per transaction. The FRB deemed such fees reasonable and proportional to the actual cost of a transaction to the issuer. The Corporation’s total assets exceeded $10 billion on December 31, 2012. As a result, the Corporation was subject to the new rules regarding debit card interchange fees as of July 1, 2013. The Corporation’s revenue earned from debit card interchange fees was $8.6 million for the first nine months of 2014, a decrease of $4.9 million from the same period of 2013. The Corporation has deployed various revenue enhancement and expense reduction strategies designed to mitigate this impact on debit card interchange fees.

On June 10, 2013, the Corporation became subject to the clearing requirement under the Dodd-Frank Act whereby it is now required to centrally clear certain interest rate swaps. A cleared swap is subject to continuous collateralization of swap obligations, real-time reporting, additional agreements and other regulatory constraints.

 

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ENHANCED REGULATORY CAPITAL STANDARDS

Regulatory capital reform initiatives continue to be updated and released which may impose additional conditions and restrictions on the Corporation’s current business practices and capital strategies.

In July 2013, the FRB approved a final rule that implements changes to the regulatory capital framework for all banking organizations. The final rule implements the regulatory capital reforms recommended by the Basel III capital framework and the regulatory capital reforms required by the Dodd-Frank Act. These reforms seek to strengthen the components of regulatory capital by increasing the quantity and quality of capital held by banking organizations, increase risk-based capital requirements and make selected changes to the calculation of risk-weighted assets.

Following are some of the key provisions resulting from the final rule:

 

    revises the components of regulatory capital to phase out certain TPS for banking organizations with greater than $15.0 billion in total assets;

 

    adds a new minimum common equity Tier 1 (CET1) ratio of 4.5% of risk-weighted assets;

 

    implements a new capital conservation buffer of CET1 equal to 2.5% of risk-weighted assets, which will be in addition to the 4.5% CET1 ratio and phased in over a three-year period beginning January 1, 2016;

 

    increases the minimum Tier 1 capital ratio requirement from 4.0% to 6.0%:

 

    revises the prompt corrective action thresholds;

 

    retains the existing risk-based capital treatment for 1-4 family residential mortgages;

 

    increases capital requirements for past-due loans, high volatility commercial real estate exposures and certain short-term loan commitments;

 

    expands the recognition of collateral and guarantors in determining risk-weighted assets;

 

    removes references to credit ratings consistent with the Dodd-Frank Act and establishes due diligence requirements for securitization exposures.

The final rule, which becomes effective January 1, 2015 for the Corporation, includes a phase-in period through January 1, 2019 for several provisions of the rule, including the new minimum capital ratio requirements and the capital conservation buffer.

In October 2012, the FRB issued rules requiring companies with total consolidated assets of more than $10 billion to conduct annual company-run stress tests pursuant to the Dodd-Frank Act (DFAST). In July 2013, the FRB issued supervisory guidance for implementing the DFAST rules for banking organizations with total consolidated assets of more than $10 billion but less than $50 billion. The DFAST guidelines and rules build upon the May 2012 stress testing guidance issued by the FRB, Supervisory Guidance on Stress Testing for Banking Organizations with More Than $10 Billion in Total Consolidated Assets (SR Letter 12-7). The Corporation is subject to these supervisory rules and guidelines and conducted its annual company-run stress tests with results reported to the FRB by March 31, 2014. Also, FNBPA is subject to stress testing rules and guidelines under the Office of the Comptroller of the Currency (OCC). The OCC has advised that it will consult closely with the FRB to provide common stress scenarios which can be utilized at both the depository institution and bank holding company levels.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information called for by this item is provided under the caption Market Risk in Part I, Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations and is incorporated herein by reference. There are no material changes in the information provided under Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” included in the Corporation’s 2013 Annual Report on Form 10-K as filed with the SEC on February 28, 2014.

 

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ITEM 4. CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. The Corporation’s management, with the participation of the Corporation’s principal executive and financial officers, evaluated the Corporation’s disclosure controls and procedures (as defined in Rules 13a–15(e) and 15d–15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, the Corporation’s management, including the Chief Executive Officer (CEO) and the Chief Financial Officer (CFO), concluded that, as of the end of the period covered by this quarterly report, the Corporation’s disclosure controls and procedures were effective as of such date at the reasonable assurance level as discussed below to ensure that information required to be disclosed by the Corporation in the reports it files under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to the Corporation’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

LIMITATIONS ON THE EFFECTIVENESS OF CONTROLS. The Corporation’s management, including the CEO and the CFO, does not expect that the Corporation’s disclosure controls and internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Corporation have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. In addition, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls.

CHANGES IN INTERNAL CONTROLS. The CEO and the CFO have evaluated the changes to the Corporation’s internal controls over financial reporting that occurred during the Corporation’s fiscal quarter ended September 30, 2014, as required by paragraph (d) of Rules 13a–15 and 15d–15 under the Securities Exchange Act of 1934, as amended, and have concluded that there were no such changes that materially affected, or are reasonably likely to materially affect, the Corporation’s internal controls over financial reporting.

 

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PART II—OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

OBA Financial Services, Inc. Stockholder Litigation

As previously reported in the Corporation’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2014, on May 7, 2014, a purported shareholder of OBA filed a putative class action complaint in the Circuit Court for Montgomery County, Maryland, captioned Parshall v. OBA Financial Services, Inc., et al., Case No. 390369V, and naming as defendants OBA, OBA Bank, OBA’s board of directors, the Corporation and FNBPA. The plaintiff alleged that OBA’s board of directors breached its fiduciary duty to OBA’s shareholders by approving a proposed transaction containing certain so-called “deal protection devices” and, as a result, OBA’s shareholders allegedly would not receive fair value for their stock. The plaintiff further alleged that OBA, OBA Bank, the Corporation and FNBPA aided and abetted the alleged breaches of fiduciary duty by the OBA board. On July 3, 2014, the plaintiff filed an amended complaint with additional allegations regarding certain purported nondisclosures relating to the registration statement for the proposed transaction.

The plaintiff sought an injunction barring the defendants from completing the merger; rescission of the merger agreement to the extent already implemented or, in the alternative, an award of rescissory damages; an accounting to plaintiff for all damages caused by the defendants; and an award of the costs and expenses incurred by the plaintiff in the lawsuit, including a reasonable allowance for counsel fees and expert fees.

On September 15, 2014, the plaintiff voluntarily dismissed his complaint.

Other Legal Proceedings

The Corporation and its subsidiaries are involved in various other pending and threatened legal proceedings in which claims for monetary damages and other relief are asserted. These actions include claims brought against the Corporation and its subsidiaries where the Corporation or a subsidiary acted as one or more of the following: a depository bank, lender, underwriter, fiduciary, financial advisor, broker or was engaged in other business activities. Although the ultimate outcome for any asserted claim cannot be predicted with certainty, the Corporation believes that it and its subsidiaries have valid defenses for all asserted claims. Reserves are established for legal claims when losses associated with the claims are judged to be probable and the amount of the loss can be reasonably estimated.

Based on information currently available, advice of counsel, available insurance coverage and established reserves, the Corporation does not anticipate, at the present time, that the aggregate liability, if any, arising out of such legal proceedings will have a material adverse effect on the Corporation’s consolidated financial position. However, the Corporation cannot determine whether or not any claims asserted against it will have a material adverse effect on its consolidated results of operations in any future reporting period.

 

ITEM 1A. RISK FACTORS

There are no material changes from any of the risk factors previously disclosed in the Corporation’s 2013 Annual Report on Form 10-K as filed with the SEC on February 28, 2014.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

NONE

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

NONE

 

ITEM 4. MINE SAFETY DISCLOSURES

Not Applicable.

 

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ITEM 5. OTHER INFORMATION

NONE

 

ITEM 6. EXHIBITS

Exhibit Index

 

31.1    Certification of Chief Executive Officer Sarbanes-Oxley Act Section 302. (filed herewith).
31.2    Certification of Chief Financial Officer Sarbanes-Oxley Act Section 302. (filed herewith).
32.1    Certification of Chief Executive Officer Sarbanes-Oxley Act Section 906. (furnished herewith).
32.2    Certification of Chief Financial Officer Sarbanes-Oxley Act Section 906. (furnished herewith).
101    The following materials from F.N.B. Corporation’s Quarterly Report on Form 10-Q for the period ended September 30, 2014, formatted in XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Comprehensive Income, (iii) the Consolidated Statements of Stockholders’ Equity, (iv) the Consolidated Statements of Cash Flows and (v) the Notes to Consolidated Financial Statements.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  F.N.B. Corporation
Dated: November 7, 2014  

/s/ Vincent J. Delie, Jr.

  Vincent J. Delie, Jr.
  President and Chief Executive Officer
  (Principal Executive Officer)
Dated: November 7, 2014  

/s/ Vincent J. Calabrese, Jr.

  Vincent J. Calabrese, Jr.
  Chief Financial Officer
  (Principal Financial Officer)
Dated: November 7, 2014  

/s/ Timothy G. Rubritz

  Timothy G. Rubritz
  Corporate Controller
  (Principal Accounting Officer)

 

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