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, 2012

 

¨	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 F.N.B. Boulevard, Hermitage, PA		16148
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: 724-981-6000

(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, 2012
Common Stock, $0.01 Par Value		139,795,027 Shares

 

 

 

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Table of Contents

F.N.B. CORPORATION

FORM 10-Q

September 30, 2012

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			72
Item 4. Controls and Procedures			73
PART II – OTHER INFORMATION
Item 1. Legal Proceedings			74
Item 1A. Risk Factors			74
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			74
Item 3. Defaults Upon Senior Securities			75
Item 4. Mine Safety Disclosures			75
Item 5. Other Information			75
Item 6. Exhibits			75
Signatures			76

 

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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,
		2012				2011
		(Unaudited)
Assets
Cash and due from banks		$	203,503			$	197,349
Interest bearing deposits with banks			164,091				11,604
Cash and Cash Equivalents			367,594				208,953
Securities available for sale			1,112,839				640,571
Securities held to maturity (fair value of $1,196,359 and $952,033)			1,151,743				917,212
Residential mortgage loans held for sale			21,575				14,275
Loans, net of unearned income of $50,246 and $47,110			7,979,450				6,856,667
Allowance for loan losses			(102,714	)			(100,662	)
Net Loans			7,876,736				6,756,005
Premises and equipment, net			145,043				130,043
Goodwill			677,168				568,462
Core deposit and other intangible assets, net			40,095				30,953
Bank owned life insurance			239,615				208,927
Other assets			352,483				311,082
Total Assets		$	11,984,891			$	9,786,483
Liabilities
Deposits:
Non-interest bearing demand		$	1,735,857			$	1,340,465
Savings and NOW			4,764,148				3,790,863
Certificates and other time deposits			2,625,818				2,158,440
Total Deposits			9,125,823				7,289,768
Other liabilities			150,152				143,239
Short-term borrowings			1,019,411				851,294
Long-term debt			90,501				88,016
Junior subordinated debt			204,006				203,967
Total Liabilities			10,589,893				8,576,284
Stockholders’ Equity
Common stock—$0.01 par value Authorized – 500,000,000 shares Issued – 140,173,022 and 127,436,261 shares			1,397				1,268
Additional paid-in capital			1,374,241				1,224,572
Retained earnings			63,298				32,925
Accumulated other comprehensive loss			(38,972	)			(45,148	)
Treasury stock – 380,295 and 215,502 shares at cost			(4,966	)			(3,418	)
Total Stockholders’ Equity			1,394,998				1,210,199
Total Liabilities and Stockholders’ Equity		$	11,984,891			$	9,786,483

 

See accompanying Notes to Consolidated Financial Statements

 

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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,
		2012				2011				2012				2011
Interest Income
Loans, including fees		$	94,545			$	86,038			$	282,720			$	255,937
Securities:
Taxable			11,470				10,744				36,022				32,233
Nontaxable			1,682				1,847				5,083				5,676
Dividends			12				13				361				144
Other			47				60				142				238
Total Interest Income			107,756				98,702				324,328				294,228
Interest Expense
Deposits			10,205				13,078				32,776				41,727
Short-term borrowings			1,182				1,644				3,961				5,111
Long-term debt			860				1,698				2,702				4,981
Junior subordinated debt			1,978				1,880				5,956				6,030
Total Interest Expense			14,225				18,300				45,395				57,849
Net Interest Income			93,531				80,402				278,933				236,379
Provision for loan losses			8,429				8,573				22,028				25,352
Net Interest Income After Provision for Loan Losses			85,102				71,829				256,905				211,027
Non-Interest Income
Impairment losses on securities			(440	)			(473	)			(440	)			(473	)
Non-credit related losses on securities not expected to be sold (recognized in other comprehensive income)			321				436				321				436
Net impairment losses on securities			(119	)			(37	)			(119	)			(37	)
Service charges			17,666				16,057				52,419				46,058
Insurance commissions and fees			4,578				4,002				12,632				11,812
Securities commissions and fees			2,102				1,858				6,143				5,960
Trust fees			3,783				3,565				11,359				11,222
Net securities (losses) gains			(66	)			49				302				141
Gain on sale of residential mortgage loans			1,176				657				2,696				1,800
Bank owned life insurance			1,671				1,309				4,809				3,913
Other			4,022				2,170				9,095				6,451
Total Non-Interest Income			34,813				29,630				99,336				87,320
Non-Interest Expense
Salaries and employee benefits			41,579				37,149				127,255				112,059
Net occupancy			5,840				5,514				18,624				16,484
Equipment			5,728				4,749				16,598				14,149
Amortization of intangibles			2,242				1,808				6,892				5,409
Outside services			7,048				5,447				20,725				16,024
FDIC insurance			2,014				1,699				6,172				6,288
State taxes			1,347				2,023				4,800				5,978
Merger related			88				282				7,399				4,589
Other			11,196				10,546				33,772				31,163
Total Non-Interest Expense			77,082				69,217				242,237				212,143
Income Before Income Taxes			42,833				32,242				114,004				86,204
Income taxes			12,090				8,469				32,549				22,894
Net Income		$	30,743			$	23,773			$	81,455			$	63,310
Net Income per Share – Basic		$	0.22			$	0.19			$	0.59			$	0.51
Net Income per Share – Diluted			0.22				0.19				0.58				0.51
Cash Dividends per Share			0.12				0.12				0.36				0.36
Comprehensive Income		$	33,132			$	24,241			$	87,631			$	66,794

See accompanying Notes to Consolidated Financial Statements

 

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F.N.B. CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Dollars in thousands, except per share data

Unaudited

 

		Common Stock				Additional Paid-In Capital				Retained Earnings				Accumulated Other Comprehensive Loss				Treasury Stock				Total
Balance at January 1, 2012		$	1,268			$	1,224,572			$	32,925			$	(45,148	)		$	(3,418	)		$	1,210,199
Net income											81,455												81,455
Change in other comprehensive income, net of tax															6,176								6,176
Common stock dividends ($0.36/share)											(50,705	)											(50,705	)
Issuance of common stock			129				145,833				(377	)							(1,548	)			144,037
Restricted stock compensation							3,451																3,451
Tax expense of stock-based compensation							385																385
Balance at September 30, 2012		$	1,397			$	1,374,241			$	63,298			$	(38,972	)		$	(4,966	)		$	1,394,998
Balance at January 1, 2011		$	1,143			$	1,094,713			$	6,564			$	(33,732	)		$	(2,564	)		$	1,066,124
Net income											63,310												63,310
Change in other comprehensive income, net of tax															3,484								3,484
Common stock dividends ($0.36/share)											(45,114	)											(45,114	)
Issuance of common stock			125				124,100												(848	)			123,377
Restricted stock compensation							3,371																3,371
Tax expense of stock-based compensation							(61	)															(61	)
Balance at September 30, 2011		$	1,268			$	1,222,123			$	24,760			$	(30,248	)		$	(3,412	)		$	1,214,491

See accompanying Notes to Consolidated Financial Statements

 

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F.N.B. CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Dollars in thousands

Unaudited

 

		Nine Months Ended
		September 30,
		2012				2011
Operating Activities
Net income		$	81,455			$	63,310
Adjustments to reconcile net income to net cash flows provided by operating activities:
Depreciation, amortization and accretion			21,989				16,908
Provision for loan losses			22,028				25,352
Deferred taxes			29,549				6,892
Net securities gains			(302	)			(141	)
Other-than-temporary impairment losses on securities			119				37
Tax (benefit) expense of stock-based compensation			(385	)			61
Net change in:
Interest receivable			(3,248	)			883
Interest payable			(3,506	)			(1,519	)
Trading securities			331,972				110,490
Residential mortgage loans held for sale			(7,300	)			2,393
Bank owned life insurance			(4,475	)			476
Other, net			12,036				26,806
Net cash flows provided by operating activities			479,932				251,948
Investing Activities
Net change in loans			(238,978	)			(323,897	)
Securities available for sale:
Purchases			(780,185	)			(250,558	)
Sales			87,101				10,883
Maturities			367,025				292,247
Securities held to maturity:
Purchases			(468,780	)			(332,870	)
Sales			2,903				—
Maturities			240,059				176,009
Purchase of bank owned life insurance			(20,024	)			(26	)
Withdrawal/surrender of bank owned life insurance			20,701				—
Increase in premises and equipment			(7,940	)			(9,648	)
Net cash received in business combinations			203,538				23,374
Net cash flows used in investing activities			(594,580	)			(414,486	)
Financing Activities
Net change in:
Non-interest bearing deposits, savings and NOW accounts			567,788				297,049
Time deposits			(249,764	)			(116,864	)
Short-term borrowings			155,177				38,629
Increase in long-term debt			26,961				46,569
Decrease in long-term debt			(183,139	)			(25,114	)
Net proceeds from issuance of common stock			6,586				68,608
Tax benefit (expense) of stock-based compensation			385				(61	)
Cash dividends paid			(50,705	)			(45,114	)
Net cash flows provided by financing activities			273,289				263,702
Net Increase in Cash and Cash Equivalents			158,641				101,164
Cash and cash equivalents at beginning of period			208,953				131,571
Cash and Cash Equivalents at End of Period		$	367,594			$	232,735

See accompanying Notes to Consolidated Financial Statements

 

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F.N.B. CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Dollars in thousands, except share data

(Unaudited)

September 30, 2012

BUSINESS

F.N.B. Corporation (the Corporation) is a diversified financial services company headquartered in Hermitage, Pennsylvania. Its primary businesses include community banking, consumer finance, wealth management and insurance. The Corporation also conducts commercial leasing and merchant banking activities. The Corporation operates its community banking business through a full service branch network in Pennsylvania, Ohio and West Virginia. The Corporation operates its wealth management and insurance businesses within the existing branch network. It also conducts selected consumer finance business in Pennsylvania, Ohio, Tennessee and Kentucky.

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 First National Bank of Pennsylvania (FNBPA), First National Trust Company, First National Investment Services Company, LLC, F.N.B. Investment Advisors, Inc., First National Insurance Agency, LLC, Regency Finance Company (Regency), F.N.B. Capital Corporation, LLC 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, 2012.

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.

COMMON STOCK

On May 18, 2011, the Corporation completed a public offering of 6,037,500 shares of common stock at a price of $10.70 per share, including 787,500 shares of common stock purchased by the underwriters pursuant to an over-allotment option, which the underwriters exercised in full. The net proceeds of the offering after deducting underwriting discounts and commissions and offering expenses were $62,803.

 

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MERGERS AND ACQUISITIONS

On January 1, 2012, the Corporation completed its acquisition of Parkvale Financial Corporation (Parkvale), a unitary savings and loan holding company based in Monroeville, Pennsylvania. On the acquisition date, Parkvale had $1,815,663 in assets, which included $937,350 in loans, and $1,505,671 in deposits. The acquisition, net of equity offering costs, was valued at $140,900 and resulted in the Corporation issuing 12,159,312 shares of its common stock in exchange for 5,582,846 shares of Parkvale common stock. The assets and liabilities of Parkvale were recorded on the Corporation’s balance sheet at their preliminary estimated fair values as of January 1, 2012, the acquisition date, and Parkvale’s results of operations have been included in the Corporation’s consolidated statement of comprehensive income since that date. Parkvale’s banking affiliate, Parkvale Bank, was merged into FNBPA on January 1, 2012. In conjunction with the completion of this acquisition, the Corporation fully repaid the $31,762 of Parkvale preferred stock previously issued to the U.S. Department of the Treasury (UST) under the Capital Purchase Program (CPP). The warrant issued by Parkvale to the UST has been converted into a warrant to purchase up to 819,640 shares of the Corporation’s common stock. The warrant expires December 23, 2018 and has an exercise price of $5.81. Based on a preliminary purchase price allocation, the Corporation recorded $108,216 in goodwill and $16,033 in core deposit intangible as a result of the acquisition. The Corporation has recorded estimates of the fair values of acquired assets and liabilities. The fair values for loans, goodwill and other assets are provisional amounts based on third party valuations that are currently under review. Management expects to finalize the valuation and purchase price allocation in the fourth quarter. None of the goodwill is deductible for income tax purposes.

During the first nine months of 2012, the Corporation recorded merger and integration charges of $7,399 associated with the Parkvale acquisition.

The following table summarizes the amounts recorded on the consolidated balance sheet in conjunction with the Parkvale acquisition:

 

Fair value of consideration paid:
Common stock issued, net of offering costs		$	136,441
Warrant assumed			4,459
Total consideration paid			140,900
Fair value of identifiable assets acquired:
Cash and cash equivalents			203,538
Securities			486,186
Loans			919,479
Other intangible assets			16,033
Accrued income and other assets			116,992
Total identifiable assets acquired			1,742,228
Fair value of liabilities assumed:
Deposits			1,525,253
Borrowings			171,606
Accrued expenses and other liabilities			12,685
Total liabilities assumed			1,709,544
Fair value of net identifiable assets acquired			32,684
Goodwill recognized		$	108,216

On January 1, 2011, the Corporation completed its acquisition of Comm Bancorp, Inc. (CBI), a bank holding company based in Clarks Summit, Pennsylvania. On the acquisition date, CBI had $625,570 in assets, which included $445,271 in loans, and $561,775 in deposits. The transaction, valued at $75,547, resulted in the Corporation paying $17,203 in cash and issuing 5,941,287 shares of its common stock in exchange for 1,719,978 shares of CBI common stock. The assets and liabilities of CBI were recorded on the Corporation’s balance sheet at their fair values as of January 1, 2011, the acquisition date, and CBI’s results of operations have been included in the Corporation’s consolidated statement of comprehensive income since that date. CBI’s banking affiliate, Community Bank and Trust Company, was merged into FNBPA on January 1, 2011. Based on the purchase price allocation, the Corporation recorded $40,232 in goodwill and $4,785 in core deposit intangible as a result of the acquisition. None of the goodwill is deductible for income tax purposes.

 

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Pending Acquisition

On October 22, 2012, the Corporation announced the signing of a definitive merger agreement to acquire Annapolis Bancorp, Inc. (ANNB), a bank holding company with approximately $437,000 in total assets based in Annapolis, Maryland. The transaction is valued at approximately $51,000. Under the terms of the merger agreement, ANNB shareholders will be entitled to receive 1.143 shares of F.N.B. Corporation common stock for each share of ANNB common stock. In addition to the stock consideration, ANNB shareholders may receive up to $0.36 per share in cash for each share of ANNB common stock they own, dependent upon ANNB’s ability to resolve a credit-related matter. ANNB’s banking affiliate, BankAnnapolis, will be merged into FNBPA. The transaction is expected to be completed in the second quarter of 2013, pending regulatory approvals, the approval of shareholders of ANNB and the satisfaction of other closing conditions.

NEW ACCOUNTING STANDARDS

Comprehensive Income

In June 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-05, Comprehensive Income, with the intention of increasing the prominence of other comprehensive income in the financial statements. The FASB has eliminated the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity. Instead, in annual periods, companies are required to present components of net income and other comprehensive income and a total for comprehensive income in a single continuous statement of comprehensive income or two separate but consecutive statements. In interim periods, companies are required to present a total for comprehensive income in a single continuous statement of comprehensive income or two separate but consecutive statements. These requirements, which were applied retrospectively, were effective January 1, 2012. For interim periods, the Corporation has adopted the single continuous statement of comprehensive income approach. Adoption of this standard did not have a material effect on the financial statements, results of operations or liquidity of the Corporation.

Amendments to Fair Value Measurements

In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurements, to improve the comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with GAAP and International Financial Reporting Standards (IFRS). The amendments explain how to measure fair value. They do not require additional fair value measurements and are not intended to establish valuation standards or affect valuation practices. The amendments result in common fair value measurement and disclosure requirements in GAAP and IFRS. Some of the amendments clarify the application of existing fair value measurement requirements and others change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements, including quantitative information about significant unobservable inputs and a description of the sensitivity of fair value measurements to changes in significant observable inputs. Many of the previous fair value requirements are not changed by this standard. The amendments in this standard, which were applied prospectively, were effective January 1, 2012. Adoption of this standard 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:

Securities Available For Sale:

 

		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
September 30, 2012
U.S. Treasury and other U.S. government agencies and corporations		$	325,453			$	1,852			$	—			$	327,305
Residential mortgage-backed securities:
Agency mortgage-backed securities			287,926				9,255				—				297,181
Agency collateralized mortgage obligations			406,741				4,248				(114	)			410,875
Non-agency collateralized mortgage obligations			2,950				41				—				2,991
States of the U.S. and political subdivisions			27,091				1,463				—				28,554
Collateralized debt obligations			34,264				156				(13,720	)			20,700
Other debt securities			23,799				756				(1,295	)			23,260
Total debt securities			1,108,224				17,771				(15,129	)			1,110,866
Equity securities			1,555				442				(24	)			1,973
		$	1,109,779			$	18,213			$	(15,153	)		$	1,112,839
December 31, 2011
U.S. Treasury and other U.S. government agencies and corporations		$	231,187			$	642			$	—			$	231,829
Residential mortgage-backed securities:
Agency mortgage-backed securities			166,758				4,853				—				171,611
Agency collateralized mortgage obligations			181,493				2,236				—				183,729
Non-agency collateralized mortgage obligations			31				—				(1	)			30
States of the U.S. and political subdivisions			38,509				1,841				—				40,350
Collateralized debt obligations			19,224				—				(13,226	)			5,998
Other debt securities			6,863				—				(1,666	)			5,197
Total debt securities			644,065				9,572				(14,893	)			638,744
Equity securities			1,593				257				(23	)			1,827
		$	645,658			$	9,829			$	(14,916	)		$	640,571
Securities Held To Maturity:
		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
September 30, 2012
U.S. Treasury and other U.S. government agencies and corporations		$	14,336			$	450			$	(10	)		$	14,776
Residential mortgage-backed securities:
Agency mortgage-backed securities			862,530				36,082				—				898,612
Agency collateralized mortgage obligations			101,770				1,238				—				103,008
Non-agency collateralized mortgage obligations			15,603				136				(13	)			15,726
Commercial mortgage-backed securities			1,024				45				—				1,069
States of the U.S. and political subdivisions			154,372				6,793				(7	)			161,158
Collateralized debt obligations			787				—				(87	)			700
Other debt securities			1,321				—				(11	)			1,310
		$	1,151,743			$	44,744			$	(128	)		$	1,196,359

 

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		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
December 31, 2011
U.S. Treasury and other U.S. government agencies and corporations		$	4,523			$	360			$	—			$	4,883
Residential mortgage-backed securities:
Agency mortgage-backed securities			683,100				28,722				—				711,822
Agency collateralized mortgage obligations			54,319				573				(11	)			54,881
Non-agency collateralized mortgage obligations			24,348				143				(1,373	)			23,118
States of the U.S. and political subdivisions			147,748				6,877				—				154,625
Collateralized debt obligations			1,592				—				(314	)			1,278
Other debt securities			1,582				25				(181	)			1,426
		$	917,212			$	36,700			$	(1,879	)		$	952,033

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 the Parkvale and CBI acquisitions as trading securities. The Corporation both acquired and sold these trading securities during the quarters in which each of these acquisitions occurred. As of September 30, 2012 and December 31, 2011, 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,
		2012				2011				2012				2011
Gross gains		$	355			$	49			$	1,151			$	337
Gross losses			(421	)			—				(849	)			(196	)
		$	(66	)		$	49			$	302			$	141

As of September 30, 2012, 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		$	19,504			$	19,538			$	6,446			$	6,516
Due from one to five years			298,511				300,621				20,784				21,190
Due from five to ten years			35,763				36,905				53,728				56,127
Due after ten years			56,829				42,755				89,858				94,111
			410,607				399,819				170,816				177,944
Residential mortgage-backed securities:
Agency mortgage-backed securities			287,926				297,181				862,530				898,612
Agency collateralized mortgage obligations			406,741				410,875				101,770				103,008
Non-agency collateralized mortgage obligations			2,950				2,991				15,603				15,726
Commercial mortgage-backed securities			—				—				1,024				1,069
Equity securities			1,555				1,973				—				—
		$	1,109,779			$	1,112,839			$	1,151,743			$	1,196,359

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, 2012 and December 31, 2011, securities with a carrying value of $689,533 and $547,727, respectively, were pledged to secure public deposits, trust deposits and for other purposes as required by law. Securities

 

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with a carrying value of $871,839 and $680,212 at September 30, 2012 and December 31, 2011, respectively, were pledged as collateral for short-term borrowings.

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

Securities available for sale:

 

		Less than 12 Months								12 Months or More								Total
		Fair Value				Unrealized Losses				Fair Value				Unrealized Losses				Fair Value				Unrealized Losses
September 30, 2012
Residential mortgage-backed securities:
Agency mortgage-backed securities		$	63,593			$	(114	)		$	—			$	—			$	63,593			$	(114	)
Collateralized debt obligations			11,338				(1,340	)			5,392				(12,380	)			16,730				(13,720	)
Other debt securities			2,003				—				5,574				(1,295	)			7,577				(1,295	)
Equity securities			640				(24	)			—				—				640				(24	)
		$	77,574			$	(1,478	)		$	10,966			$	(13,675	)		$	88,540			$	(15,153	)
December 31, 2011
Residential mortgage-backed securities:
Non-agency collateralized mortgage obligations		$	30			$	(1	)		$	—			$	—			$	30			$	(1	)
Collateralized debt obligations			—				—				5,998				(13,226	)			5,998				(13,226	)
Other debt securities			—				—				5,197				(1,666	)			5,197				(1,666	)
Equity securities			100				(9	)			659				(14	)			759				(23	)
		$	130			$	(10	)		$	11,854			$	(14,906	)		$	11,984			$	(14,916	)
Securities held to maturity:
		Less than 12 Months								12 Months or More								Total
		Fair Value				Unrealized Losses				Fair Value				Unrealized Losses				Fair Value				Unrealized Losses
September 30, 2012
U.S. Treasury and other U.S. government agencies and corporations		$	10,049			$	(10	)		$	—			$	—			$	10,049			$	(10	)
Residential mortgage-backed securities:
Non-agency collateralized mortgage obligations			—				—				2,709				(13	)			2,709				(13	)
States of the U.S. and political subdivisions			3,298				(7	)			—				—				3,298				(7	)
Collateralized debt obligations			—				—				700				(87	)			700				(87	)
Other debt securities			—				—				1,310				(11	)			1,310				(11	)
		$	13,347			$	(17	)		$	4,719			$	(111	)		$	18,066			$	(128	)
December 31, 2011
Residential mortgage-backed securities:
Agency collateralized mortgage obligations		$	12,911			$	(11	)		$	—			$	—			$	12,911			$	(11	)
Non-agency collateralized mortgage obligations			5,374				(64	)			4,351				(1,309	)			9,725				(1,373	)
Collateralized debt obligations			—				—				1,278				(314	)			1,278				(314	)
Other debt securities			—				—				1,144				(181	)			1,144				(181	)
		$	18,285			$	(75	)		$	6,773			$	(1,804	)		$	25,058			$	(1,879	)

 

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As of September 30, 2012, securities with unrealized losses for less than 12 months included 1 investment in U.S. Treasury and other U.S. government agencies and corporations, 4 investments in residential mortgage-backed agency collateralized mortgage obligations (CMOs), 3 investments in states of the U.S. and political subdivisions, 11 investments in collateralized debt obligations (CDOs), 1 investment in other debt securities and 1 investment in equity securities. Securities with unrealized losses of 12 months or more included 1 investment in a residential mortgage-backed security (non-agency CMO), 10 investments in CDOs and 5 investments in other debt securities as of September 30, 2012. 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 relate to investments in trust preferred securities (TPS). The Corporation’s portfolio of TPS consists of single-issuer and pooled securities. The single-issuer securities are primarily from money-center and large regional banks. The pooled securities consist of securities issued primarily by banks and thrifts, with some of the pools including a limited number of insurance companies. Investments in pooled securities are all in mezzanine tranches except for one investment in a senior tranche, and are secured by over-collateralization or default protection provided by subordinated tranches. The non-credit portion of unrealized losses on investments in TPS is attributable to temporary illiquidity and the uncertainty affecting these markets, as well as changes in interest rates.

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.

When impairment of an equity security is considered to be other-than-temporary, the security is written down to its fair value and an impairment loss is recorded as a loss within non-interest income in the consolidated statement of comprehensive income. When impairment of a debt security is considered to be other-than-temporary, the amount of the OTTI recorded as a loss within non-interest income and thereby recognized in earnings depends on whether the Corporation intends to sell the security or whether it is more likely than not that the Corporation will be required to sell the security before recovery of its amortized cost basis.

If the Corporation intends to sell the debt security or more likely than not will be required to sell the security before recovery of its amortized cost basis, OTTI shall be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value.

If the Corporation does not intend to sell the debt security and it is not more likely than not the Corporation will be required to sell the security before recovery of its amortized cost basis, OTTI shall be separated into the amount representing credit loss and the amount related to all other market factors. The amount related to credit loss shall be recognized in earnings. The amount related to other market factors shall be recognized in other comprehensive income, net of applicable taxes.

The Corporation performs its OTTI evaluation process in a consistent and systematic manner and includes an evaluation of all available evidence. Documentation of the process is as extensive as necessary to support a conclusion as to whether a decline in fair value below cost or amortized cost is temporary or other-than-temporary and includes documentation supporting both observable and unobservable inputs and a rationale for conclusions reached. In making these determinations for pooled TPS, the Corporation consults with third-party advisory firms to provide additional valuation assistance.

This process considers factors such as the severity, length of time and anticipated recovery period of the impairment, recoveries or additional declines in fair value subsequent to the balance sheet date, recent events specific to the issuer, including investment downgrades by rating agencies and economic conditions in its industry, and the issuer’s financial condition, repayment capacity, capital strength and near-term prospects.

For debt securities, the Corporation also considers the payment structure of the debt security, the likelihood of the issuer being able to make future payments, failure of the issuer of the security to make scheduled interest and principal payments, whether the Corporation has made a decision to sell the security and whether the Corporation’s cash or working capital requirements or contractual or regulatory obligations indicate that the debt security will be required to be sold before a forecasted recovery occurs. For equity securities, the Corporation also considers its intent and ability to retain the security for a period of time sufficient to allow for a recovery in fair value. Among the factors that the

 

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Corporation considers in determining its intent and ability to retain the security is a review of its capital adequacy, interest rate risk position and liquidity. The assessment of a security’s ability to recover any decline in fair value, the ability of the issuer to meet contractual obligations, the Corporation’s intent and ability to retain the security, and whether it is more likely than not the Corporation will be required to sell the security before recovery of its amortized cost basis require considerable judgment.

Debt securities with credit ratings below AA at the time of purchase that are repayment-sensitive securities are evaluated using the guidance of ASC 325, Investments—Other. All other securities are required to be evaluated under ASC 320, Investments – Debt Securities.

The Corporation invested in TPS issued by special purpose vehicles (SPVs) that hold pools of collateral consisting of trust preferred and subordinated debt securities issued by banks, bank holding companies, thrifts and insurance companies. The securities issued by the SPVs are generally segregated into several classes known as tranches. Typically, the structure includes senior, mezzanine and equity tranches. The equity tranche represents the first loss position. The Corporation generally holds interests in mezzanine tranches. Interest and principal collected from the collateral held by the SPVs are distributed with a priority that provides the highest level of protection to the senior-most tranches. In order to provide a high level of protection to the senior tranches, cash flows are diverted to higher-level tranches if the principal and interest coverage tests are not met.

The Corporation prices its holdings of TPS using Level 3 inputs in accordance with ASC 820, Fair Value Measurements and Disclosures, and guidance issued by the SEC. In this regard, the Corporation evaluates current available information in estimating the future cash flows of these securities and determines whether there have been favorable or adverse changes in estimated cash flows from the cash flows previously projected. The Corporation considers the structure and term of the pool and the financial condition of the underlying issuers. Specifically, the evaluation incorporates factors such as over-collateralization and interest coverage tests, interest rates and appropriate risk premiums, the timing and amount of interest and principal payments and the allocation of payments to the various tranches. Current estimates of cash flows are based on the most recent trustee reports, announcements of deferrals or defaults, and assumptions regarding expected future default rates, prepayment and recovery rates and other relevant information. In constructing these assumptions, the Corporation considers the following:

 

•

that current defaults would have no recovery;

 

•

that some individually analyzed deferrals will cure at rates varying from 10% to 90% after the deferral period ends;

 

•

recent historical performance metrics, including profitability, capital ratios, loan charge-offs and loan reserve ratios, for the underlying institutions that would indicate a higher probability of default by the institution;

 

•

that institutions identified as possessing a higher probability of default would recover at a rate of 10% for banks and 15% for insurance companies;

 

•

that financial performance of the financial sector continues to be affected by the economic environment resulting in an expectation of additional deferrals and defaults in the future;

 

•

whether the security is currently deferring interest; and

 

•

the external rating of the security and recent changes to its external rating.

The primary evidence utilized by the Corporation is the level of current deferrals and defaults, the level of excess subordination that allows for receipt of full principal and interest, the credit rating for each security and the likelihood that future deferrals and defaults will occur at a level that will fully erode the excess subordination based on an assessment of the underlying collateral. The Corporation combines the results of these factors considered in estimating the future cash flows of these securities to determine whether there has been an adverse change in estimated cash flows from the cash flows previously projected.

The Corporation’s portfolio of TPS consists of 24 pooled issues and six single-issuer securities. Three of the pooled issues are senior tranches; the remaining 21 are mezzanine tranches. At September 30, 2012, the 24 pooled TPS had an estimated fair value of $21,400 while the single-issuer TPS had an estimated fair value of $7,893. The Corporation has concluded from the analysis performed at September 30, 2012 that it is probable that the Corporation will collect all contractual principal and interest payments on all of its single-issuer and pooled TPS sufficient to recover the amortized cost basis of the securities.

 

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The Corporation recognized net impairment losses on securities of $119 for the nine months ended September 30, 2012, compared to $37 for the nine months ended September 30, 2011, due to the write-down of securities that the Corporation deemed to be other-than-temporarily impaired.

At September 30, 2012, all six single-issuer TPS are current in regards to their principal and interest payments. Of the 24 pooled TPS, four are accruing interest based on the coupon rate, fourteen are accreting income based on future expected cash flows and the remaining six are on nonaccrual status. Income of $2,138 was recognized on pooled TPS for the first nine months of 2012. Included in this amount was $34 recognized on pooled TPS which were sold during the first nine months of 2012.

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				Total
For the Nine Months Ended September 30, 2012
Beginning balance		$	18,369			$	29			$	18,398
Loss where impairment was not previously recognized			119				—				119
Additional loss where impairment was previously recognized			—				—				—
Reduction due to credit impaired securities sold			(1,214	)			(29	)			(1,243	)
Ending balance		$	17,274			$	—			$	17,274
For the Nine Months Ended September 30, 2011
Beginning balance		$	18,332			$	—			$	18,332
Loss where impairment was not previously recognized			—				—				—
Additional loss where impairment was previously recognized			37				—				37
Reduction due to credit impaired securities sold			—				—				—
Ending balance		$	18,369			$	—			$	18,369

TPS continue to experience price volatility as the secondary market for such securities remains limited. Write-downs, when required, are based on an individual security’s credit performance and its ability to make its contractual principal and interest payments. Should credit quality deteriorate to a greater extent than projected, it is possible that additional write-downs may be required. The Corporation monitors actual deferrals and defaults as well as expected future deferrals and defaults to determine if there is a high probability for expected losses and contractual shortfalls of interest or principal, which could warrant further impairment. The Corporation evaluates its entire TPS portfolio each quarter to determine if additional write-downs are warranted.

 

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The following table provides information relating to the Corporation’s TPS as of September 30, 2012:

 

Deal Name		Class		Current Par Value				Amortized Cost				Fair Value				Unrealized Gain (Loss)				Lowest Credit Ratings		Number of Issuers Currently Performing				Actual Defaults (as a percent of original collateral)				Actual Deferrals (as a percent of original collateral)				Projected Recovery Rates on Current Deferrals (1)				Expected Defaults (%) (2)				Excess Subordination (as a percent of current collateral) (3)
Pooled TPS:
P1		C1		$	5,500			$	2,402			$	985			$	(1,417	)		C			42				21				13				41				11				0.00
P2		C1			4,889				2,885				863				(2,022	)		C			44				17				14				38				11				0.00
P3		C1			5,561				4,218				1,162				(3,056	)		C			48				13				9				27				12				0.00
P4		C1			3,994				2,967				790				(2,177	)		C			51				16				8				51				12				0.00
P5		B3			2,000				726				335				(391	)		C			18				29				10				54				9				0.00
P6		B1			3,028				2,386				727				(1,659	)		C			49				12				18				43				11				0.00
P7		C			5,048				756				281				(475	)		C			33				14				32				43				11				0.00
P8		C			2,010				787				96				(691	)		C			39				16				16				38				12				0.00
P9		A4L			2,000				645				153				(492	)		C			24				16				20				47				11				0.00
Total OTTI					34,030				17,772				5,392				(12,380	)					348				17				15				42				11
P10		SNR			760				787				700				(87	)		BBB			11				15				14				43				10				77.27
P11		C1			5,220				938				935				(3	)		C			42				21				13				41				11				0.00
P12		A2A			5,000				2,057				1,871				(186	)		B			44				17				14				38				11				44.14
P13		C1			4,781				1,144				999				(145	)		C			48				13				9				27				12				0.00
P14		C1			5,260				1,093				1,040				(53	)		C			51				16				8				51				12				0.00
P15		C1			5,190				903				706				(197	)		C			56				14				18				33				14				0.00
P16		C1			3,206				341				173				(168	)		C			42				19				12				22				13				0.00
P17		C			3,339				551				618				67			C			35				15				16				24				14				0.00
P18		B			2,069				596				549				(47	)		C			34				12				25				33				16				20.04
P19		B2			5,000				2,171				2,176				5			CCC			21				0				8				10				10				41.76
P20		B			4,031				916				834				(82	)		C			39				16				16				38				12				10.42
P21		A1			3,831				2,256				2,083				(173	)		BB-			47				21				7				41				12				51.97
P22		B			5,000				1,228				1,140				(88	)		C			17				18				6				44				11				0.00
P23		C1			5,531				1,206				1,008				(198	)		C			26				15				12				36				11				0.00
P24		C1			5,606				1,092				1,176				84			C			27				16				10				44				10				0.00
Total Not OTTI					63,824				17,279				16,008				(1,271	)					540				16				12				35				12
Total Pooled TPS				$	97,854			$	35,051			$	21,400			$	(13,651	)					888				16				13				38				12

 

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Deal Name		Class		Current Par Value				Amortized Cost				Fair Value				Unrealized Gain (Loss)				Lowest Credit Ratings		Number of Issuers Currently Performing				Actual Defaults (as a percent of original collateral)		Actual Deferrals (as a percent of original collateral)		Projected Recovery Rates on Current Deferrals (1)		Expected Defaults (%) (2)		Excess Subordination (as a percent of current collateral) (3)
Single Issuer TPS:
S1				$	2,000			$	1,952			$	1,445			$	(507	)		BB			1
S2					2,000				1,918				1,513				(405	)		BBB			1
S3					1,000				955				1,009				54			BB-			1
S4					2,000				2,000				1,886				(114	)		BB-			1
S5					1,000				999				730				(269	)		BB			1
S6					1,300				1,321				1,310				(11	)		BB			1
Total Single Issuer TPS				$	9,300			$	9,145			$	7,893			$	(1,252	)					6
Total TPS				$	107,154			$	44,196			$	29,293			$	(14,903	)					894

 

(1)	Some current deferrals are expected to cure at rates varying from 10% to 90% after five years.

(2)	Expected future defaults as a percent of remaining performing collateral.

(3)	Excess subordination represents the additional defaults in excess of both current and projected defaults that the CDO can absorb before the bond experiences any credit impairment.

 

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States of the U.S. and Political Subdivisions

The Corporation’s municipal bond portfolio of $182,926 as of September 30, 2012 is highly rated with an average entity specific rating of AA and 100.0% of the portfolio rated A or better. General obligation bonds comprise 99.5% of the portfolio. Geographically, the municipal bonds support the Corporation’s footprint as 77.9% of the securities are from municipalities located throughout Pennsylvania. The average holding size of the securities in the municipal bond portfolio is $1,011. In addition to the strong stand-alone ratings, 74.7% of the municipalities have purchased credit enhancement insurance to strengthen the creditworthiness of their issue. Management also reviews the credit profile of each issuer on a quarterly basis.

Non-Agency CMOs

The Corporation purchased $161,151 of non-agency CMOs from 2003 through 2005. At the time of purchase, these securities were all rated AAA, with an original average loan-to-value (LTV) ratio of 66.1% and original average credit score of 724. At origination, the credit support, or the amount of loss the collateral pool could absorb before the AAA securities would incur a credit loss, ranged from 2.0% to 7.0%. Since the time of these original purchases, all of which are classified as held to maturity, two holdings have been sold and one holding has been paid off. The Corporation acquired and retained $60 of non-agency CMOs from the acquisition of Omega Financial Corporation in 2008 and acquired $42,810 and retained $4,238 of non-agency CMOs from the Parkvale acquisition. These acquired and retained securities are classified as available for sale. Non-agency CMOs have a book value of $18,553 at September 30, 2012. Paydowns during the first nine months of 2012 amounted to $7,183, an annualized paydown rate of 33.4%. The credit support range at September 30, 2012 was 2.3% to 21.0%, due to paydowns, continued good credit performance and the sale of one non-agency CMO having a book value of $2,848 during the first quarter of 2012. National delinquencies, an early warning sign of potential default, have been increasing for the past five years. Overall, the rate of delinquencies on the Corporation’s holdings continued to increase modestly during 2012, but at a slower pace. All non-agency CMO holdings are current with regards to principal and interest.

The rating agencies monitor the underlying collateral performance of these non-agency CMOs for delinquencies, foreclosures and defaults. They also factor in trends in bankruptcies and housing values to ultimately arrive at an expected loss for a given piece of defaulted collateral. Since 2008, the collateral performance on many of these types of securities has deteriorated, resulting in downgrades by the rating agencies. For the Corporation’s portfolio, six of the eleven non-agency CMOs have been downgraded since their original purchase date.

The Corporation determines its credit-related losses by running scenario analysis on the underlying collateral. This analysis applies default assumptions to delinquencies already in the pipeline, projects future defaults based in part on the historical trends for the collateral, applies a rate of severity and estimates prepayment rates. Because of the limited historical trends for the collateral, multiple default scenarios were analyzed including scenarios that significantly elevate defaults over the next 12—18 months. Based on the results of the analysis, the Corporation’s management has concluded that one non-agency CMO incurred a credit-related loss of $119, which was recognized as an OTTI charge in the third quarter of 2012. The one non-agency CMO that incurred a credit-related loss in 2011 was sold in March 2012 and resulted in a net loss on sale of $226, which was recognized in the first quarter of 2012.

 

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The following table provides information relating to the Corporation’s non-agency CMOs as of September 30, 2012:

 

																						Subordination Data
										Credit Rating				Credit Support %								Delinquency %																								%				Original				Original
Security		Original Year				Book Value (1)				S&P		Moody’s		Original				Current				30 Day				60 Day				90 Day				% Foreclosure				% OREO				% Bankruptcy				Total Delinquency				% LTV				Credit Score
1			2003			$	1,815			AAA		n/a			2.5				6.6				0.9				0.3				1.5				1.0				0.2				0.9				4.8				51.1				736
2			2003				1,503			AAA		n/a			4.3				17.4				3.1				0.6				2.0				5.4				0.8				1.3				13.2				55.1				709
3			2003				869			AAA		n/a			2.0				7.4				1.1				0.0				1.2				3.7				0.0				0.2				6.2				46.8				740
4			2003				890			AAA		n/a			2.7				20.1				1.2				0.0				1.2				2.3				1.6				2.0				8.3				48.3				n/a
5			2003				2,925			BBB+		n/a			2.5				5.4				0.6				0.2				0.3				1.6				0.0				1.7				4.4				50.5				731
6			2004				2,722			AAA		Ba3			7.0				21.0				2.4				1.1				1.7				11.7				0.2				3.5				20.5				54.9				690
7			2004				1,762			AA+		n/a			5.3				10.4				0.3				1.1				3.1				4.0				0.0				0.8				9.3				45.6				732
8			2004				831			n/a		A1			2.5				10.0				0.0				0.0				0.0				5.2				0.0				0.0				5.2				54.3				733
9			2004				1,277			AAA		Baa2			4.4				9.6				1.3				0.1				0.7				3.5				0.4				1.0				6.9				54.2				733
10			2005				3,934			CCC		Caa1			5.1				2.3				4.3				1.5				8.8				9.6				0.7				3.0				27.9				65.1				705
						$	18,528								4.0				9.9																																54.6				718

 

(1)	One acquired available for sale non-agency CMO with a September 30, 2012 book value of $25 is not included in the above table. The bond rating at acquisition was AAA and is now Baa2. This non-agency CMO is current with regards to principal and interest.

 

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FEDERAL HOME LOAN BANK STOCK

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

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

At September 30, 2012 and December 31, 2011, the Corporation’s FHLB stock totaled $28,260 and $23,516, respectively, and is included in other assets on the balance sheet. The increase is a result of the Parkvale acquisition. 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.

The Corporation periodically evaluates its FHLB investment for possible impairment based on, among other things, the capital adequacy of the FHLB and its overall financial condition. The Federal Housing Finance Agency, the regulator of the FHLB, requires it to maintain a total capital-to-assets ratio of at least 4.0%. At June 30, 2012, the FHLB’s capital ratio of 6.8% exceeded the regulatory requirement. Failure by the FHLB to meet this regulatory capital requirement would require an in-depth analysis of other factors including:

 

•

the member’s ability to access liquidity from the FHLB;

 

•

the member’s funding cost advantage with the FHLB compared to alternative sources of funds;

 

•

a decline in the market value of FHLB's net assets relative to book value which may or may not affect future financial performance or cash flow;

 

•

the FHLB’s ability to obtain credit and source liquidity, for which one indicator is the credit rating of the FHLB;

 

•

the FHLB’s commitment to make payments taking into account its ability to meet statutory and regulatory payment obligations and the level of such payments in relation to the FHLB's operating performance; and

 

•

the prospects of amendments to laws that affect the rights and obligations of the FHLB.

At September 30, 2012, 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:

 

		September 30, 2012				December 31, 2011
Commercial real estate		$	2,597,029			$	2,341,646
Commercial real estate – FL			71,887				154,081
Commercial and industrial			1,532,366				1,363,692
Commercial leases			127,065				110,795
Total commercial loans and leases			4,328,347				3,970,214
Direct installment			1,128,310				1,029,187
Residential mortgages			1,121,237				670,936
Indirect installment			583,939				540,789
Consumer lines of credit			780,155				607,280
Other			37,462				38,261
		$	7,979,450			$	6,856,667

 

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Commercial loans include both owner occupied and non-owner occupied loans secured by commercial properties, as well as commercial and industrial loans. Commercial leases consist of loans 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 written by third parties, 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 and northeastern Ohio. The portfolio also includes commercial real estate loans in Florida, of which 24.8% were land-related as of September 30, 2012. Additionally, the portfolio contains consumer finance loans to individuals in Pennsylvania, Ohio, Tennessee and Kentucky, which totaled $163,954 or 2.1% of total loans as of September 30, 2012, compared to $163,856 or 2.4% of total loans as of December 31, 2011. Due to the relative size of the consumer finance loan portfolio and the lower risk profile relative to the Florida loans, they are not segregated from other consumer loans.

As of September 30, 2012, approximately 46% of the commercial real estate loans, including those in Florida, were owner-occupied, while the remaining 54% were non-owner-occupied. As of September 30, 2012 and December 31, 2011, the Corporation had commercial construction loans of $190,309 and $210,098, respectively, representing 2.4% and 3.1% of total loans, respectively.

For each reporting period, total cash flows (both principal and interest) expected to be collected over the remaining life of the loan incorporate assumptions regarding default rates, loss severities, the amounts and timing of prepayments, the value of underlying collateral based on independent appraisals that the Corporation reviews for acceptability and considering the time and costs of foreclosure and disposition of the collateral and other factors that reflect then-current market conditions. The Corporation modifies, updates and refines assumptions as circumstances change. Contractual cash flows at each reporting period are determined utilizing the amortized cost method of loan accounting after recognition of contractual interest.

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 are provisional amounts recognized for PCI loans identified in the Corporation’s acquisition of Parkvale:

 

		At Acquisition
Contractually required principal and interest		$	8,989
Contractual cash flows not expected to be collected (non-accretable difference)			2,835
Expected cash flows			6,154
Interest component of expected cash flows (accretable difference)			589
Fair value		$	5,565

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

 

		At Acquisition				September 30, 2012
Outstanding balance		$	8,989			$	9,191
Carrying amount			5,565				5,344
Allowance for loan losses			n/a				—
Impairment recognized since acquisition			n/a				—
Allowance reduction recognized since acquisition			n/a				—

 

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Following is information about the Corporation’s PCI loans:

 

		Contractual Receivable				Non-Accretable Difference				Expected Cash Flows				Accretable Yield				Carrying Amount
For the Nine Months Ended September 30, 2012
Balance at beginning of period		$	51,693			$	(33,377	)		$	18,316			$	(2,477	)		$	15,839
Acquisitions			8,989				(2,835	)			6,154				(589	)			5,565
Accretion			—				—				—				3,320				3,320
Payments received			(4,095	)			—				(4,095	)			—				(4,095	)
Reclass from non-accretable difference			—				1,476				1,476				(1,476	)			—
Disposals/transfers			(3,543	)			2,798				(745	)			31				(714	)
Contractual interest			2,368				(2,368	)			—				—				—
Balance at end of period		$	55,412			$	(34,306	)		$	21,106			$	(1,191	)		$	19,915
For the Year Ended December 31, 2011
Balance at beginning of period		$	20,356			$	(15,589	)		$	4,767			$	(791	)		$	3,976
Acquisitions			38,890				(19,401	)			19,489				(2,025	)			17,464
Accretion			—				—				—				903				194
Payments received			(4,784	)			—				(4,784	)			—				(4,075	)
Reclass from non-accretable difference			—				709				709				(709	)			—
Disposals/transfers			(6,128	)			4,263				(1,865	)			145				(1,720	)
Contractual interest			3,359				(3,359	)			—				—				—
Balance at end of period		$	51,693			$	(33,377	)		$	18,316			$	(2,477	)		$	15,839

The accretion in the table above includes $1,476 in 2012 and $709 in 2011 that primarily represents payoffs received on certain loans in excess of expected cash flows. This accretion was recorded as interest income in the Consolidated Statements of Comprehensive Income.

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 generally when principal or interest is due and has remained unpaid for 90 to 180 days depending on the loan type. When a loan is placed on non-accrual status, all unpaid interest is reversed. Non-accrual loans may not be restored to accrual status until all delinquent principal and interest have been paid and the ultimate collectability of 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, 2012				December 31, 2011
Non-accrual loans		$	69,986			$	94,335
Troubled debt restructurings			12,957				11,893
Total non-performing loans			82,943				106,228
Other real estate owned (OREO)			35,613				34,719
Total non-performing loans and OREO			118,556				140,947
Non-performing investments			2,754				8,972
Total non-performing assets		$	121,310			$	149,919

 

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		September 30, 2012				December 31, 2011
Asset quality ratios:
Non-performing loans as a percent of total loans			1.04	%			1.55	%
Non-performing loans + OREO as a percent of total loans + OREO			1.48	%			2.05	%
Non-performing assets as a percent of total assets			1.01	%			1.53	%

Following is an age analysis of the Corporation’s past due loans, by class:

 

		30-89 Days Past Due				>90 Days Past Due and Still Accruing				Non- Accrual				Total Past Due				Current				Total Loans
September 30, 2012
Commercial real estate		$	17,757			$	11,443			$	37,644			$	66,844			$	2,530,185			$	2,597,029
Commercial real estate – FL			—				—				13,974				13,974				57,913				71,887
Commercial and industrial			2,852				1,069				6,564				10,485				1,521,881				1,532,366
Commercial leases			1,032				44				1,141				2,217				124,848				127,065
Total commercial loans and leases			21,641				12,556				59,323				93,520				4,234,827				4,328,347
Direct installment			9,932				3,175				3,087				16,194				1,112,116				1,128,310
Residential mortgages			20,235				24,824				2,587				47,646				1,073,591				1,121,237
Indirect installment			4,495				374				1,054				5,923				578,016				583,939
Consumer lines of credit			2,027				831				435				3,293				776,862				780,155
Other			11				12				3,500				3,523				33,939				37,462
		$	58,341			$	41,772			$	69,986			$	170,099			$	7,809,351			$	7,979,450
December 31, 2011
Commercial real estate		$	13,868			$	9,612			$	37,134			$	60,614			$	2,281,032			$	2,341,646
Commercial real estate – FL			—				—				39,122				39,122				114,959				154,081
Commercial and industrial			2,164				690				6,956				9,810				1,353,882				1,363,692
Commercial leases			1,102				5				1,084				2,191				108,604				110,795
Total commercial loans and leases			17,134				10,307				84,296				111,737				3,858,477				3,970,214
Direct installment			8,228				3,614				2,525				14,367				1,014,820				1,029,187
Residential mortgages			14,492				3,342				2,443				20,277				650,659				670,936
Indirect installment			5,031				282				918				6,231				534,558				540,789
Consumer lines of credit			1,253				586				653				2,492				604,788				607,280
Other			36				—				3,500				3,536				34,725				38,261
		$	46,174			$	18,131			$	94,335			$	158,640			$	6,698,027			$	6,856,667

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

 

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The use of these internally assigned credit quality categories within the commercial loan portfolio permits management's use of migration and roll rate analysis 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 that migrate toward the Pass credit category or within the Pass credit category generally have a lower risk of loss and; therefore, a lower risk factor compared to loans that migrate toward the Substandard or Doubtful credit categories, which generally have a higher risk of loss and; therefore, a higher risk factor is applied to those related loan balances.

Following is a table showing commercial loans by credit quality category:

 

		Commercial Loan Credit Quality Categories
		Pass				Special Mention				Substandard				Doubtful				Total
September 30, 2012
Commercial real estate		$	2,397,479			$	62,324			$	134,300			$	2,926			$	2,597,029
Commercial real estate – FL			41,826				12,078				15,593				2,390				71,887
Commercial and industrial			1,456,976				16,579				58,407				404				1,532,366
Commercial leases			122,672				328				4,065				—				127,065
		$	4,018,953			$	91,309			$	212,365			$	5,720			$	4,328,347
December 31, 2011
Commercial real estate		$	2,127,334			$	73,701			$	139,578			$	1,033			$	2,341,646
Commercial real estate – FL			70,802				16,002				67,277				—				154,081
Commercial and industrial			1,275,230				49,282				38,171				1,009				1,363,692
Commercial leases			105,631				3,362				1,802				—				110,795
		$	3,578,997			$	142,347			$	246,828			$	2,042			$	3,970,214

The Corporation uses payment status and delinquency migration analysis 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, as well as other external statistics and factors such as unemployment, to determine how consumer loans are performing.

Following is a table showing consumer and other loans by payment status:

 

		Consumer and Other Loan Credit Quality by Payment Status
		Performing				Non-Performing				Total
September 30, 2012
Direct installment		$	1,121,496			$	6,814			$	1,128,310
Residential mortgages			1,110,302				10,935				1,121,237
Indirect installment			582,817				1,122				583,939
Consumer lines of credit			779,628				527				780,155
Other			33,962				3,500				37,462
December 31, 2011
Direct installment		$	1,022,025			$	7,162			$	1,029,187
Residential mortgages			661,392				9,544				670,936
Indirect installment			539,810				979				540,789
Consumer lines of credit			606,533				747				607,280
Other			34,761				3,500				38,261

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

 

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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, commercial leases and commercial loan relationships less than $500. For 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.

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

 

		Recorded Investment				Unpaid Principal Balance				Specific Related Allowance				Average Recorded Investment				Interest Income Recognized
At or For the Nine Months Ended September 30, 2012
With no specific allowance recorded:
Commercial real estate		$	31,310			$	39,078			$	—			$	30,879			$	175
Commercial real estate – FL			4,422				8,798				—				8,844				—
Commercial and industrial			6,910				10,399				—				6,657				47
Commercial leases			1,141				1,141				—				1,201				—
Total commercial loans and leases			43,783				59,416				—				47,581				222
Direct installment			4,316				4,500				—				5,744				104
Residential mortgages			6,908				7,017				—				8,388				156
Indirect installment			1,116				2,366				—				1,126				14
Consumer lines of credit			435				460				—				433				4
Other			3,500				3,500				—				3,500				—
With a specific allowance recorded:
Commercial real estate			6,869				6,869				2,001				7,404				107
Commercial real estate – FL			9,553				17,347				2,389				9,977				—
Commercial and industrial			593				593				327				1,910				4
Commercial leases			—				—				—				—				—
Total commercial loans and leases			17,015				24,809				4,717				19,291				111
Direct installment			—				—				—				—				—
Residential mortgages			—				—				—				—				—
Indirect installment			—				—				—				—				—
Consumer lines of credit			—				—				—				—				—
Other			—				—				—				—				—
Total:
Commercial real estate			38,179				45,947				2,001				38,283				282
Commercial real estate – FL			13,975				26,145				2,389				18,821				—
Commercial and industrial			7,503				10,992				327				8,567				51
Commercial leases			1,141				1,141				—				1,201				—
Total commercial loans and leases			60,798				84,225				4,717				66,872				333
Direct installment			4,316				4,500				—				5,744				104
Residential mortgages			6,908				7,017				—				8,388				156
Indirect installment			1,116				2,366				—				1,126				14
Consumer lines of credit			435				460				—				433				4
Other			3,500				3,500				—				3,500				—

 

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		Recorded Investment				Unpaid Principal Balance				Specific Related Allowance				Average Recorded Investment				Interest Income Recognized
At or For the Year Ended December 31, 2011
With no specific allowance recorded:
Commercial real estate		$	28,163			$	32,476			$	—			$	31,432			$	151
Commercial real estate – FL			28,721				46,162				—				29,630				33
Commercial and industrial			4,228				4,971				—				4,610				17
Commercial leases			1,084				1,084				—				1,217				—
Total commercial loans and leases			62,196				84,693				—				66,889				201
Direct installment			7,162				7,522				—				7,530				207
Residential mortgages			9,544				9,839				—				10,278				175
Indirect installment			979				1,071				—				973				24
Consumer lines of credit			747				761				—				947				8
Other			3,500				3,500				—				1,750				—
With a specific allowance recorded:
Commercial real estate			8,403				8,423				2,482				8,875				32
Commercial real estate – FL			10,401				18,195				2,389				16,559				21
Commercial and industrial			3,588				3,750				2,276				3,603				20
Commercial leases			—				—				—				—				—
Total commercial loans and leases			22,392				30,368				7,147				29,037				73
Direct installment			—				—				—				—				—
Residential mortgages			—				—				—				—				—
Indirect installment			—				—				—				—				—
Consumer lines of credit			—				—				—				—				—
Other			—				—				—				—				—
Total:
Commercial real estate			36,566				40,899				2,482				40,307				183
Commercial real estate – FL			39,122				64,357				2,389				46,189				54
Commercial and industrial			7,816				8,721				2,276				8,213				37
Commercial leases			1,084				1,084				—				1,217				—
Total commercial loans and leases			84,588				115,061				7,147				95,926				274
Direct installment			7,162				7,522				—				7,530				207
Residential mortgages			9,544				9,839				—				10,278				175
Indirect installment			979