Edgar Filing: FNB CORP/FL/

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10-Q

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 June 30, 2013

¨	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):

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 July 31, 2013
Common Stock, $0.01 Par Value		145,165,793 Shares

F.N.B. CORPORATION

FORM 10-Q

June 30, 2013

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		55

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		76

Item 4.	Controls and Procedures		76

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings		77

Item 1A.	Risk Factors		79

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		79

Item 3.	Defaults Upon Senior Securities		79

Item 4.	Mine Safety Disclosures		79

Item 5.	Other Information		79

Item 6.	Exhibits		79

Signatures			80

PART I – FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

F.N.B. CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

Dollars in thousands, except par value


	June 30, 2013			December 31, 2012
	(Unaudited)
Assets
Cash and due from banks	$	197,879		$	216,233
Interest bearing deposits with banks		32,223			22,811

Cash and Cash Equivalents		230,102			239,044
Securities available for sale		1,164,903			1,172,683
Securities held to maturity (fair value of $1,153,077 and $1,143,213)		1,149,481			1,106,563
Residential mortgage loans held for sale		19,614			27,751
Loans, net of unearned income of $49,964 and $51,661		8,637,089			8,137,719
Allowance for loan losses		(108,280	)		(104,374	)

Net Loans		8,528,809			8,033,345
Premises and equipment, net		145,833			140,367
Goodwill		709,477			675,555
Core deposit and other intangible assets, net		37,503			37,851
Bank owned life insurance		262,877			246,088
Other assets		324,792			344,729

Total Assets	$	12,573,391		$	12,023,976

Liabilities
Deposits:
Non-interest bearing demand	$	1,974,415		$	1,738,195
Savings and NOW		5,243,746			4,808,121
Certificates and other time deposits		2,428,037			2,535,858

Total Deposits		9,646,198			9,082,174
Other liabilities		140,958			163,151
Short-term borrowings		1,030,617			1,083,138
Long-term debt		92,420			89,425
Junior subordinated debt		194,200			204,019

Total Liabilities		11,104,393			10,621,907
Stockholders’ Equity
Common stock - $0.01 par value
Authorized – 500,000,000 shares
Issued – 145,792,416 and 140,314,846 shares		1,454			1,398
Additional paid-in capital		1,438,008			1,376,601
Retained earnings		98,575			75,312
Accumulated other comprehensive loss		(62,077	)		(46,224	)
Treasury stock – 641,137 and 385,604 shares at cost		(6,962	)		(5,018	)

Total Stockholders’ Equity		1,468,998			1,402,069

Total Liabilities and Stockholders’ Equity	$	12,573,391		$	12,023,976

See accompanying Notes to Consolidated Financial Statements

F.N.B. CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Dollars in thousands, except per share data

Unaudited


	Three Months Ended June 30,				Six Months Ended June 30,
	2013		2012		2013		2012
Interest Income
Loans, including fees	$	95,682	$	95,037	$	188,657	$	188,175
Securities:
Taxable		10,656		12,515		21,253		24,552
Nontaxable		1,443		1,680		2,959		3,401
Dividends		42		14		58		349
Other		18		39		32		95

Total Interest Income		107,841		109,285		212,959		216,572
Interest Expense
Deposits		7,343		10,613		15,608		22,571
Short-term borrowings		1,075		1,335		2,182		2,779
Long-term debt		775		889		1,549		1,842
Junior subordinated debt		1,902		1,967		3,778		3,978

Total Interest Expense		11,095		14,804		23,117		31,170

Net Interest Income		96,746		94,481		189,842		185,402
Provision for loan losses		7,903		7,027		15,444		13,599

Net Interest Income After Provision for Loan Losses		88,843		87,454		174,398		171,803
Non-Interest Income
Service charges		18,660		17,588		35,191		34,753
Insurance commissions and fees		4,101		3,882		8,531		8,054
Securities commissions and fees		2,867		2,030		5,790		4,041
Trust fees		4,167		3,842		8,252		7,576
Net securities gains		68		260		752		368
Gain on sale of residential mortgage loans		1,022		711		2,043		1,520
Bank owned life insurance		1,890		1,579		3,526		3,138
Other		3,976		2,886		6,339		5,073

Total Non-Interest Income		36,751		32,778		70,424		64,523
Non-Interest Expense
Salaries and employee benefits		43,201		41,070		87,106		85,676
Net occupancy		6,839		6,178		13,537		12,784
Equipment		6,106		5,684		11,598		10,870
Amortization of intangibles		2,125		2,369		4,111		4,650
Outside services		8,562		7,310		15,767		13,677
FDIC insurance		2,672		2,187		5,036		4,158
Merger related		2,946		317		3,298		7,311
Other		11,730		13,367		22,591		26,029

Total Non-Interest Expense		84,181		78,482		163,044		165,155

Income Before Income Taxes		41,413		41,750		81,778		71,171
Income taxes		12,220		12,620		24,047		20,459

Net Income	$	29,193	$	29,130	$	57,731	$	50,712

Net Income per Share – Basic	$	0.20	$	0.21	$	0.41	$	0.36
Net Income per Share – Diluted		0.20		0.21		0.40		0.36
Cash Dividends per Share		0.12		0.12		0.24		0.24
Comprehensive Income	$	14,314	$	31,504	$	41,878	$	54,499

See accompanying Notes to Consolidated Financial Statements

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 Compre- hensive Loss			Treasury Stock			Total
Balance at January 1, 2013	$	1,398	$	1,376,601	$	75,312		$	(46,224	)	$	(5,018	)	$	1,402,069
Net income						57,731									57,731
Change in other comprehensive income, net of tax									(15,853	)					(15,853	)
Common stock dividends ($0.24/share)						(34,468	)								(34,468	)
Issuance of common stock		56		58,066								(1,944	)		56,178
Restricted stock compensation				2,094											2,094
Tax expense of stock-based compensation				1,247											1,247

Balance at June 30, 2013	$	1,454	$	1,438,008	$	98,575		$	(62,077	)	$	(6,962	)	$	1,468,998

Balance at January 1, 2012	$	1,268	$	1,224,572	$	32,925		$	(45,148	)	$	(3,418	)	$	1,210,199
Net income						50,712									50,712
Change in other comprehensive income, net of tax									3,787						3,787
Common stock dividends ($0.24/share)						(33,775	)								(33,775	)
Issuance of common stock		128		140,704		(377	)					(1,461	)		138,994
Restricted stock compensation				2,206											2,206
Tax expense of stock-based compensation				373											373

Balance at June 30, 2012	$	1,396	$	1,367,855	$	49,485		$	(41,361	)	$	(4,879	)	$	1,372,496

See accompanying Notes to Consolidated Financial Statements

F.N.B. CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Dollars in thousands

Unaudited


	Six Months Ended June 30,
	2013			2012
Operating Activities
Net income	$	57,731		$	50,712
Adjustments to reconcile net income to net cash flows provided by operating activities:
Depreciation, amortization and accretion		15,446			13,670
Provision for loan losses		15,444			13,599
Deferred tax expenses		3,936			9,149
Net securities gains		(752	)		(368	)
Tax benefit of stock-based compensation		(1,247	)		(373	)
Net change in:
Interest receivable		(1,207	)		348
Interest payable		(2,160	)		(3,153	)
Trading securities		88,052			331,972
Residential mortgage loans held for sale		8,137			(2,726	)
Bank owned life insurance		(899	)		(2,733	)
Other, net		18,370			15,901

Net cash flows provided by operating activities		200,851			425,998

Investing Activities
Net change in loans		(262,589	)		(107,351	)
Securities available for sale:
Purchases		(211,531	)		(610,783	)
Sales		21,919			63,082
Maturities		188,782			259,981
Securities held to maturity:
Purchases		(235,392	)		(427,756	)
Sales		17,429			2,903
Maturities		172,586			150,069
Purchase of bank owned life insurance		(10,022	)		(20,023	)
Withdrawal/surrender of bank owned life insurance		—			20,701
Increase in premises and equipment		(1,853	)		(8,104	)
Net cash received in business combinations		41,986			203,538

Net cash flows used in investing activities		(278,685	)		(473,743	)

Financing Activities
Net change in:
Non-interest bearing deposits, savings and NOW accounts		390,867			368,857
Time deposits		(173,154	)		(192,535	)
Short-term borrowings		(66,920	)		70,276
Increase in long-term debt		20,826			13,591
Decrease in long-term debt		(56,479	)		(169,618	)
Decrease in junior subordinated debt		(15,000	)		—
Net proceeds from issuance of common stock		1,973			4,381
Tax benefit of stock-based compensation		1,247			373
Cash dividends paid		(34,468	)		(33,775	)

Net cash flows provided by financing activities		68,892			61,550

Net (Decrease) Increase in Cash and Cash Equivalents		(8,942	)		13,805
Cash and cash equivalents at beginning of period		239,044			208,953

Cash and Cash Equivalents at End of Period	$	230,102		$	222,758

See accompanying Notes to Consolidated Financial Statements

F.N.B. CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Dollars in thousands, except share data

(Unaudited)

June 30, 2013

BUSINESS

F.N.B. Corporation (the Corporation), headquartered in Hermitage, Pennsylvania, is a regional diversified financial services company operating in six states and three major metropolitan areas, including Pittsburgh, Pennsylvania, Baltimore, Maryland and Cleveland, Ohio. The Corporation has more than 250 banking offices throughout Pennsylvania, Ohio, West Virginia and Maryland. 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, 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. Wealth management services include asset management, private banking and insurance. The Corporation also operates Regency Finance Company (Regency), which has more than 70 consumer finance offices in Pennsylvania, Ohio, Kentucky and Tennessee.

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, 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, 2013.

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.

MERGERS AND ACQUISITIONS

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, ANNB had $434,729 in assets, which included $273,269 in loans, and $348,343 in deposits. The acquisition, net of equity offering costs, 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. 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 balance sheet at their preliminary estimated 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 income and 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 a preliminary purchase price allocation, the Corporation has recorded $33,922 in goodwill and $3,762 in core deposit intangibles as a result of the acquisition. The Corporation has recorded estimates of the fair values of acquired assets and liabilities. 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.

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 fair values as of January 1, 2012, the acquisition date, and Parkvale’s results of operations have been included in the Corporation’s consolidated statements of income and comprehensive income since that date. Parkvale’s banking affiliate, Parkvale Bank, was merged into FNBPA on January 1, 2012. The warrant issued by Parkvale to the UST under the CPP was assumed by the Corporation and 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 the purchase price allocation, which was completed in the fourth quarter of 2012, the Corporation recorded $106,602 in goodwill and $16,033 in core deposit intangibles as a result of the acquisition. None of the goodwill is deductible for income tax purposes.

Pending Acquisitions

On June 14, 2013, the Corporation announced the signing of a definitive merger agreement to acquire BCSB Bancorp, Inc. (BCSB), a bank holding company with approximately $640,000 in total assets based in Baltimore, Maryland. The transaction is valued at approximately $79,000. Under the terms of the merger agreement, BCSB shareholders will be entitled to receive 2.08 shares of the Corporation’s common stock for each share of BCSB common stock. BCSB’s banking affiliate, Baltimore County Savings Bank, will be merged into FNBPA. The transaction is expected to be completed in the first quarter of 2014, pending regulatory approvals, the approval of shareholders of BCSB and the satisfaction of other closing conditions.

On February 19, 2013, the Corporation announced the signing of a definitive merger agreement to acquire PVF Capital Corp. (PVF), a savings and loan holding company with approximately $782,000 in total assets based in Solon, Ohio. The transaction is valued at approximately $106,300. Under the terms of the merger agreement, PVF shareholders will be entitled to receive 0.3405 shares of the Corporation’s common stock for each share of PVF common stock. PVF’s banking affiliate, Park View Federal Savings Bank, will be merged into FNBPA. The Corporation has received regulatory approvals. The transaction is expected to be completed in the fourth quarter of 2013, pending the approval of shareholders of PVF and the satisfaction of other closing conditions.

NEW ACCOUNTING STANDARDS

Comprehensive Income

In February 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, that requires an entity to report the effects of significant reclassifications out of each component of accumulated other comprehensive income on the respective line item in net income if the amount being reclassified is required under GAAP to be reclassified to net income in its entirety in the same reporting period. For amounts not required to be reclassified in their entirety in the same reporting period, an entity shall add a cross reference to the related footnote where additional information about the effect of the reclassification is disclosed. The requirements of ASU 2013-02 are effective prospectively for reporting periods beginning after December 15, 2012. The adoption of this update did not have a material effect on the financial statements, results of operations or liquidity of the Corporation.

Disclosures about Offsetting Assets and Liabilities

In January 2013, the FASB issued ASU No. 2013-01, Scope Clarification of Disclosures about Offsetting Assets and Liabilities, that clarifies the scope of its previously issued guidance, limiting the disclosure requirements to derivative instruments, repurchase agreements and reverse repurchase agreements and securities borrowing and lending transactions to the extent that they are offset in the financial statements or subject to an enforceable master netting arrangement or similar agreement. The requirements of ASU 2013-01 are effective on January 1, 2013. The adoption of this update did not have a material effect on the financial statements, results of operations or liquidity of the Corporation.

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:
June 30, 2013
U.S. government-sponsored entities	$	361,157	$	354	$	(5,291	)	$	356,220
Residential mortgage-backed securities:
Agency mortgage-backed securities		213,222		4,593		(517	)		217,298
Agency collateralized mortgage obligations		532,962		1,602		(9,357	)		525,207
Non-agency collateralized mortgage obligations		2,075		22		—			2,097
States of the U.S. and political subdivisions		18,315		646		(144	)		18,817
Collateralized debt obligations		35,775		2,260		(10,958	)		27,077
Other debt securities		16,452		529		(913	)		16,068

Total debt securities		1,179,958		10,006		(27,180	)		1,162,784
Equity securities		1,554		584		(19	)		2,119

	$	1,181,512	$	10,590	$	(27,199	)	$	1,164,903

December 31, 2012
U.S. government-sponsored entities	$	352,910	$	1,676	$	(129	)	$	354,457
Residential mortgage-backed securities:
Agency mortgage-backed securities		267,575		7,575		—			275,150
Agency collateralized mortgage obligations		465,574		4,201		(228	)		469,547
Non-agency collateralized mortgage obligations		2,679		50		—			2,729
States of the U.S. and political subdivisions		23,592		1,232		—			24,824
Collateralized debt obligations		34,765		967		(13,276	)		22,456
Other debt securities		21,790		695		(972	)		21,513

Total debt securities		1,168,885		16,396		(14,605	)		1,170,676
Equity securities		1,554		462		(9	)		2,007

	$	1,170,439	$	16,858	$	(14,614	)	$	1,172,683


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Securities Held to Maturity:
June 30, 2013
U.S. Treasury	$	503	$	133	$	—		$	636
U.S. government-sponsored entities		43,525		273		(1,192	)		42,606
Residential mortgage-backed securities:
Agency mortgage-backed securities		646,060		13,317		(3,641	)		655,736
Agency collateralized mortgage obligations		308,893		322		(7,238	)		301,977
Non-agency collateralized mortgage obligations		8,012		74		(3	)		8,083
Commercial mortgage-backed securities		2,253		146		(25	)		2,374
States of the U.S. and political subdivisions		140,235		3,082		(1,652	)		141,665

	$	1,149,481	$	17,347	$	(13,751	)	$	1,153,077

December 31, 2012
U.S. Treasury	$	503	$	188	$	—		$	691
U.S. government-sponsored entities		28,731		280		(99	)		28,912
Residential mortgage-backed securities:
Agency mortgage-backed securities		780,022		28,783		(1	)		808,804
Agency collateralized mortgage obligations		133,976		1,266		—			135,242
Non-agency collateralized mortgage obligations		14,082		130		—			14,212
Commercial mortgage-backed securities		1,024		39		—			1,063
States of the U.S. and political subdivisions		147,713		6,099		—			153,812
Collateralized debt obligations		512		—		(35	)		477

	$	1,106,563	$	36,785	$	(135	)	$	1,143,213

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 ANNB and Parkvale acquisitions as trading securities. The Corporation both acquired and sold these trading securities during the quarters in which the acquisitions occurred. As of June 30, 2013 and December 31, 2012, the Corporation did not hold any trading securities.

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


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2013			2012			2013			2012
Gross gains	$	83		$	447		$	1,115		$	796
Gross losses		(15	)		(187	)		(363	)		(428	)

	$	68		$	260		$	752		$	368

As of June 30, 2013, 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	$	—	$	—	$	2,462	$	2,502
Due from one to five years		229,449		229,414		18,159		18,260
Due from five to ten years		154,725		150,731		84,930		84,944
Due after ten years		47,525		38,037		78,712		79,201

		431,699		418,182		184,263		184,907
Residential mortgage-backed securities:
Agency mortgage-backed securities		213,222		217,298		646,060		655,736
Agency collateralized mortgage obligations		532,962		525,207		308,893		301,977
Non-agency collateralized mortgage obligations		2,075		2,097		8,012		8,083
Commercial mortgage-backed securities		—		—		2,253		2,374
Equity securities		1,554		2,119		—		—

	$	1,181,512	$	1,164,903	$	1,149,481	$	1,153,077

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 June 30, 2013 and December 31, 2012, securities with a carrying value of $917,619 and $725,450, respectively, were pledged to secure public deposits, trust deposits and for other purposes as required by law. Securities with a carrying value of $737,968 and $795,812 at June 30, 2013 and December 31, 2012, 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:


	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:
June 30, 2013
U.S. government-sponsored entities		14	$	207,922	$	(5,291	)		—	$	—	$	—			14	$	207,922	$	(5,291	)
Residential mortgage-backed securities:
Agency mortgage-backed securities		4		73,957		(517	)		—		—		—			4		73,957		(517	)
Agency collateralized mortgage obligations		20		355,673		(9,357	)		—		—		—			20		355,673		(9,357	)
States of the U.S. and political subdivisions		2		3,128		(144	)		—		—		—			2		3,128		(144	)
Collateralized debt obligations		—		—		—			12		9,984		(10,958	)		12		9,984		(10,958	)
Other debt securities		—		—		—			4		5,962		(913	)		4		5,962		(913	)
Equity securities		—		—		—			1		645		(19	)		1		645		(19	)

		40	$	640,680	$	(15,309	)		17	$	16,591	$	(11,890	)		57	$	657,271	$	(27,199	)

December 31, 2012
U.S. government-sponsored entities		3	$	44,868	$	(129	)		—	$	—	$	—			3	$	44,868	$	(129	)
Residential mortgage-backed securities:
Agency collateralized mortgage obligations		3		47,174		(228	)		—		—		—			3		47,174		(228	)
Collateralized debt obligations		7		8,708		(909	)		9		5,532		(12,367	)		16		14,240		(13,276	)
Other debt securities		—		—		—			4		5,899		(972	)		4		5,899		(972	)
Equity securities		1		654		(9	)		—		—		—			1		654		(9	)

		14	$	101,404	$	(1,275	)		13	$	11,431	$	(13,339	)		27	$	112,835	$	(14,614	)


	Less than 12 Months							12 Months or More							Total
	#		Fair Value		Unrealized Losses			#		Fair Value		Unrealized Losses			#		Fair Value		Unrealized Losses
Securities Held to Maturity:
June 30, 2013
U.S. government-sponsored entities		3	$	38,857	$	(1,192	)		—		—		—			3	$	38,857	$	(1,192	)
Residential mortgage-backed securities:
Agency mortgage-backed securities		23		306,082		(3,641	)		—		—		—			23		306,082		(3,641	)
Agency collateralized mortgage obligations		17		260,532		(7,238	)		—		—		—			17		260,532		(7,238	)
Non-agency collateralized mortgage obligations		1		2,004		(3	)		—		—		—			1		2,004		(3	)
Commercial mortgage-backed securities		1		997		(25	)		—		—		—			1		997		(25	)
States of the U.S. and political Subdivisions		26		29,347		(1,652	)		—		—		—			26		29,347		(1,652	)

		71	$	637,819	$	(13,751	)		—		—		—			71	$	637,819	$	(13,751	)

December 31, 2012
U.S. government-sponsored entities		1	$	14,901	$	(99	)		—	$	—	$	—			1	$	14,901	$	(99	)
Residential mortgage-backed securities:
Agency mortgage-backed securities		1		1,424		(1	)		—		—		—			1		1,424		(1	)
Collateralized debt obligations		—		—		—			1		477		(35	)		1		477		(35	)

		2	$	16,325	$	(100	)		1	$	477	$	(35	)		3	$	16,802	$	(135	)

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 collateralized debt obligations (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 and are included in other debt securities. 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 two investments in senior tranches, 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 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 23 pooled issues, primarily obtained through acquisitions, and four single-issuer securities. Two of the pooled issues are senior tranches; the remaining 21 are mezzanine tranches. At June 30, 2013, the pooled TPS had an estimated fair value of $27,077 while the single-issuer TPS had an estimated fair value of $5,962. The Corporation has concluded from the analysis performed at June 30, 2013 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.

At June 30, 2013, all four single-issuer TPS are current in regards to their principal and interest payments. Of the 23 pooled TPS, three are accruing interest based on the coupon rate, 18 are accreting income based on future expected cash flows and the remaining two are on non-accrual status. Income of $1,629 and $1,544 was recognized on pooled TPS for the six months ended June 30, 2013 and 2012, respectively. Included in the amount for the six months ended June 30, 2012 was $34 recognized on two pooled TPS which were sold in the second quarter of 2012.

The Corporation did not recognize any impairment losses on securities for the six months ended June 30, 2013 and 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 Six Months Ended June 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

For the Six Months Ended June 30, 2012
Beginning balance	$	18,369		$	29		$	18,398
Loss where impairment was not previously recognized		—			—			—
Additional loss where impairment was previously recognized		—			—			—
Reduction due to credit impaired securities sold		(1,056	)		(29	)		(1,085	)

Ending balance	$	17,313		$	—		$	17,313

The secondary market for pooled TPS 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.

The following table provides information relating to the Corporation’s TPS as of June 30, 2013:


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	$	2,540	$	1,311	$	(1,229	)	C		41		22		10		44		17		0.00
P2	C1		4,889		3,021		1,126		(1,895	)	C		41		16		15		40		15		0.00
P3	C1		5,561		4,307		1,469		(2,838	)	C		47		13		9		34		16		0.00
P4	C1		3,994		3,077		1,046		(2,031	)	C		52		16		6		42		16		0.00
P5	B3		2,000		752		349		(403	)	C		15		29		10		48		11		0.00
P6	B1		3,028		2,456		1,035		(1,421	)	C		50		14		19		34		10		0.18
P7	C		5,048		800		566		(234	)	C		35		14		26		40		13		0.00
P8	C		2,011		788		295		(493	)	C		44		16		11		35		17		0.52
P9	A4L		2,000		645		315		(330	)	C		24		16		14		41		11		0.00

Total OTTI			34,031		18,386		7,512		(10,874	)			349		17		13		39		15

P10	C1		5,220		1,053		1,244		191		C		41		22		10		44		17		0.00
P11	A2A		5,000		2,158		2,195		37		B+		41		16		15		40		15		47.85
P12	C1		4,781		1,269		1,263		(6	)	C		47		13		9		34		16		0.00
P13	C1		5,260		1,226		1,377		151		C		52		16		6		42		16		0.00
P14	C1		5,190		1,019		1,166		147		C		58		15		12		36		17		0.00
P15	C1		3,206		388		639		251		C		43		19		7		28		16		0.00
P16	C		3,339		625		673		48		C		36		15		12		28		15		0.00
P17	B		2,069		651		674		23		Ca		32		13		21		40		12		18.75
P18	B2		5,000		2,213		2,905		692		CCC		20		0		8		10		15		37.52
P19	B		4,061		951		1,337		386		C		44		16		11		35		17		0.52
P20	A1		3,331		1,989		2,053		64		BB-		46		21		6		35		15		54.24
P21	B		5,000		1,287		1,209		(78	)	C		15		18		6		49		11		0.00
P22	C1		5,531		1,335		1,399		64		C		23		15		12		42		11		0.00
P23	C1		5,606		1,225		1,431		206		C		23		16		10		44		11		0.00

Total Not OTTI			62,594		17,389		19,565		2,176				521		16		10		36		15

Total Pooled TPS		$	96,625	$	35,775	$	27,077	$	(8,698	)			870		16		11		38		15


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	$	1,954	$	1,582	$	(372	)	BB		1
S2			2,000		1,922		1,610		(312	)	BBB		1
S3			2,000		2,000		1,976		(24	)	B+		1
S4			1,000		999		794		(205	)	BB		1

Total Single Issuer TPS		$	7,000	$	6,875	$	5,962	$	(913	)			4

Total TPS		$	103,625	$	42,650	$	33,039	$	(9,611	)			874

(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.

States of the U.S. and Political Subdivisions

The Corporation’s municipal bond portfolio of $159,052 as of June 30, 2013 is highly rated with an average entity-specific rating of AA and 98.7% of the portfolio rated A or better. General obligation bonds comprise 99.0% of the portfolio. Geographically, municipal bonds support the Corporation’s footprint as 78.5% of the securities are from municipalities located throughout Pennsylvania. The average holding size of the securities in the municipal bond portfolio is $994. In addition to the strong stand-alone ratings, 69.0% 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.

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 June 30, 2013 and December 31, 2012, the Corporation’s FHLB stock totaled $19,786 and $24,560, 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
June 30, 2013
Commercial real estate	$	2,483,062	$	383,474	$	2,866,536
Commercial and industrial		1,663,065		87,805		1,750,870
Commercial leases		136,268		—		136,268

Total commercial loans and leases		4,282,395		471,279		4,753,674
Direct installment		1,236,888		65,003		1,301,891
Residential mortgages		662,208		397,436		1,059,644
Indirect installment		598,771		9,187		607,958
Consumer lines of credit		779,047		89,945		868,992
Other		44,930		—		44,930

	$	7,604,239	$	1,032,850	$	8,637,089


	Originated Loans		Acquired Loans		Total Loans
December 31, 2012
Commercial real estate	$	2,448,471	$	258,575	$	2,707,046
Commercial and industrial		1,555,301		47,013		1,602,314
Commercial leases		130,133		—		130,133

Total commercial loans and leases		4,133,905		305,588		4,439,493
Direct installment		1,108,865		69,665		1,178,530
Residential mortgages		653,826		438,402		1,092,228
Indirect installment		568,324		13,713		582,037
Consumer lines of credit		732,534		72,960		805,494
Other		39,937		—		39,937

	$	7,237,391	$	900,328	$	8,137,719

The carrying amount of acquired loans at June 30, 2013 totaled $1,032,850, including purchased credit-impaired (PCI) loans with a carrying amount of $17,181, while the carrying amount of acquired loans at December 31, 2012 totaled $900,328, including PCI loans with a carrying amount of $16,623. The outstanding contractual balance receivable of acquired loans at June 30, 2013 totaled $1,090,855, including PCI loans with an outstanding contractual balance receivable of $44,474, while the outstanding contractual balance receivable of acquired loans at December 31, 2012 totaled $949,862, including PCI loans with an outstanding contractual balance receivable of $41,134.

Commercial real estate includes both owner-occupied and non-owner-occupied loans secured by commercial properties. Commercial and industrial includes loans to businesses that are not secured by real estate. Commercial leases consist of 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 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, northeastern Ohio, northern West Virginia and central Maryland. The commercial real estate portfolio also includes loans in Florida, which totaled $49,795 or 0.6% of total loans at June 30, 2013, compared to $68,627 or 0.8% of total loans at December 31, 2012. Additionally, the total loan portfolio contains consumer finance loans to individuals in Pennsylvania, Ohio, Tennessee and Kentucky, which equaled $172,314 or 2.0% of total loans at June 30, 2013, compared to $170,999 or 2.1% of total loans at December 31, 2012. Due to the relative size of the consumer finance loan portfolio, they are not segregated from other consumer loans.

As of June 30, 2013, 47.1% of the commercial real estate loans were owner-occupied, while the remaining 52.9% were non-owner-occupied, compared to 46.5% and 53.5%, respectively, as of December 31, 2012. As of June 30, 2013 and December 31, 2012, the Corporation had commercial construction loans of $218,486 and $190,206, respectively, representing 2.5% and 2.3% of total loans, respectively.

ASC 310-30 Loans

All loans acquired in the ANNB and Parkvale acquisitions, 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 ASC310-30 (impaired and non-impaired) acquired from ANNB in 2013 and Parkvale in 2012:


	Acquired Impaired Loans			Acquired Performing Loans			Total
Acquired from ANNB in 2013
Contractually required cash flows at acquisition	$	12,200		$	349,903		$	362,103
Non-accretable difference (expected losses and foregone interest)		(7,829	)		(45,105	)		(52,934	)

Cash flows expected to be collected at acquisition		4,371			304,798			309,169
Accretable yield		(523	)		(53,136	)		(53,659	)

Basis in acquired loans at acquisition	$	3,848		$	251,662		$	255,510

Acquired from Parkvale in 2012
Contractually required cash flows at acquisition	$	12,224		$	1,327,342		$	1,339,566
Non-accretable difference (expected losses and foregone interest)		(6,070	)		(214,541	)		(220,611	)

Cash flows expected to be collected at acquisition		6,154			1,112,801			1,118,955
Accretable yield		(589	)		(293,594	)		(294,183	)

Basis in acquired loans at acquisition	$	5,565		$	819,207		$	824,772

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


	Acquired Impaired Loans			Acquired Performing Loans			Total
Six Months Ended June 30, 2013
Balance at beginning of period	$	778		$	253,375		$	254,153
Acquisitions		523			53,136			53,659
Reduction due to unexpected early payoffs		—			(20,908	)		(20,908	)
Reclass from non-accretable difference		6,055			3,851			9,906
Disposals/transfers		(96	)		(146	)		(242	)
Accretion		(1,628	)		(15,803	)		(17,431	)

Balance at end of period	$	5,632		$	273,505		$	279,137

Year Ended December 31, 2012
Balance at beginning of period	$	2,477		$	49,229		$	51,706
Acquisitions		589			293,594			294,183
Reduction due to unexpected early payoffs		—			(57,840	)		(57,840	)
Reclass from non-accretable difference		3,539			10,915			14,454
Disposals/transfers		(49	)		(615	)		(664	)
Accretion		(5,778	)		(41,908	)		(47,686	)

Balance at end of period	$	778		$	253,375		$	254,153

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 ANNB:


	At Acquisition		June 30, 2013
Outstanding balance	$	12,785	$	12,433
Carrying amount		3,848		3,377
Allowance for loan losses		n/a		—
Impairment recognized since acquisition		n/a		—
Allowance reduction recognized since acquisition		n/a		—

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


	At Acquisition		December 31, 2012
Outstanding balance	$	9,135	$	3,704
Carrying amount		5,565		2,552
Allowance for loan losses		n/a		103
Impairment recognized since acquisition		n/a		103
Allowance reduction recognized since acquisition		n/a		—

Following is information about the Corporation’s PCI loans:


	Contractual Receivable			Non- Accretable Difference			Expected Cash Flows			Accretable Yield			Carrying Amount
For the Six Months Ended June 30, 2013
Balance at beginning of period	$	41,134		$	(23,733	)	$	17,401		$	(778	)	$	16,623
Acquisitions		12,785			(8,414	)		4,371			(523	)		3,848
Accretion		—			—			—			1,628			1,628
Payments received		(2,536	)		—			(2,536	)		—			(2,536	)
Reclass from non-accretable difference		—			6,055			6,055			(6,055	)		—
Disposals/transfers		(8,332	)		5,854			(2,478	)		96			(2,382	)
Contractual interest		1,423			(1,423	)		—			—			—

Balance at end of period	$	44,474		$	(21,661	)	$	22,813		$	(5,632	)	$	17,181

For the Year Ended December 31, 2012
Balance at beginning of period	$	51,693		$	(33,377	)	$	18,316		$	(2,477	)	$	15,839
Acquisitions		9,135			(2,981	)		6,154			(589	)		5,565
Accretion		—			—			—			5,778			5,778
Payments received		(9,556	)		—			(9,556	)		—			(9,556	)
Reclass from non-accretable difference		—			3,539			3,539			(3,539	)		—
Disposals/transfers		(12,494	)		11,442			(1,052	)		49			(1,003	)
Contractual interest		2,356			(2,356	)		—			—			—

Balance at end of period	$	41,134		$	(23,733	)	$	17,401		$	(778	)	$	16,623

The accretion in the table above includes $6,055 in 2013 and $3,539 in 2012 that primarily represents payoffs 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 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:


	June 30, 2013			December 31, 2012
Non-accrual loans	$	67,034		$	66,004
Troubled debt restructurings		17,488			14,876

Total non-performing loans		84,522			80,880
Other real estate owned (OREO)		37,370			35,257

Total non-performing loans and OREO		121,892			116,137
Non-performing investments		610			2,809

Total non-performing assets	$	122,502		$	118,946

Asset quality ratios:
Non-performing loans as a percent of total loans		0.98	%		0.99	%
Non-performing loans + OREO as a percent of total loans + OREO		1.40	%		1.42	%
Non-performing assets as a percent of total assets		0.97	%		0.99	%

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:
June 30, 2013
Commercial real estate	$	5,786	$	515	$	47,953	$	54,254	$	2,428,808	$	2,483,062
Commercial and industrial		3,669		465		8,343		12,477		1,650,588		1,663,065
Commercial leases		1,177		—		676		1,853		134,415		136,268

Total commercial loans and leases		10,632		980		56,972		68,584		4,213,811		4,282,395
Direct installment		7,905		2,515		4,191		14,611		1,222,277		1,236,888
Residential mortgages		12,343		1,062		4,551		17,956		644,252		662,208
Indirect installment		4,421		289		1,167		5,877		592,894		598,771
Consumer lines of credit		2,136		521		153		2,810		776,237		779,047
Other		41		10		—		51		44,879		44,930

	$	37,478	$	5,377	$	67,034	$	109,889	$	7,494,350	$	7,604,239

December 31, 2012
Commercial real estate	$	5,786	$	533	$	47,895	$	54,214	$	2,394,257	$	2,448,471
Commercial and industrial		7,310		456		6,017		13,783		1,541,518		1,555,301
Commercial leases		1,671		—		965		2,636		127,497		130,133

Total commercial loans and leases		14,767		989		54,877		70,633		4,063,272		4,133,905
Direct installment		8,834		2,717		3,342		14,893		1,093,972		1,108,865
Residential mortgages		15,821		2,365		2,891		21,077		632,749		653,826
Indirect installment		5,114		374		1,039		6,527		561,797		568,324
Consumer lines of credit		1,633		247		355		2,235		730,299		732,534
Other		36		15		3,500		3,551		36,386		39,937

	$	46,205	$	6,707	$	66,004	$	118,916	$	7,118,475	$	7,237,391


	30-89 Days Past Due		> 90 Days Past Due and Still Accruing		Non-Accrual		Total Past Due (1)		Current		Discount			Total Loans
Acquired Loans:
June 30, 2013
Commercial real estate	$	10,056	$	17,809		—	$	27,865	$	373,126	$	(17,517	)	$	383,474
Commercial and industrial		3,122		5,264		—		8,386		81,402		(1,983	)		87,805
Commercial leases		—		—		—		—		—		—			—

Total commercial loans and leases		13,178		23,073		—		36,251		454,528		(19,500	)		471,279
Direct installment		1,839		910		—		2,749		59,419		2,835			65,003
Residential mortgages		8,962		21,122		—		30,084		403,058		(35,706	)		397,436
Indirect installment		264		48		—		312		9,604		(729	)		9,187
Consumer lines of credit		975		500		—		1,475		93,375		(4,905	)		89,945
Other		—		—		—		—		—		—			—

	$	25,218	$	45,653		—	$	70,871	$	1,019,984	$	(58,005	)	$	1,032,850

December 31, 2012
Commercial real estate	$	6,829	$	13,597		—	$	20,426	$	250,116	$	(11,967	)	$	258,575
Commercial and industrial		1,653		138		—		1,791		47,351		(2,129	)		47,013
Commercial leases		—		—		—		—		—		—			—

Total commercial loans and leases		8,482		13,735		—		22,217		297,467		(14,096	)		305,588
Direct installment		1,454		947		—		2,401		63,502		3,762			69,665
Residential mortgages		12,137		21,069		—		33,206		439,620		(34,424	)		438,402
Indirect installment		347		56		—		403		14,089		(779	)		13,713
Consumer lines of credit		379		778		—		1,157		75,800		(3,997	)		72,960
Other		—		—		—		—		—		—			—

	$	22,799	$	36,585		—	$	59,384	$	890,478	$	(49,534	)	$	900,328

(1)	Past due information for loans acquired is based on the contractual balance outstanding at June 30, 2013 and December 31, 2012.

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 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 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.

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:
June 30, 2013
Commercial real estate	$	2,322,000	$	47,001	$	111,250	$	2,811	$	2,483,062
Commercial and industrial		1,555,170		47,786		59,952		157		1,663,065
Commercial leases		135,059		320		889		—		136,268

	$	4,012,229	$	95,107	$	172,091	$	2,968	$	4,282,395

December 31, 2012
Commercial real estate	$	2,282,139	$	57,938	$	106,258	$	2,136	$	2,448,471
Commercial and industrial		1,472,598		32,227		49,814		662		1,555,301
Commercial leases		126,283		243		3,607		—		130,133

	$	3,881,020	$	90,408	$	159,679	$	2,798	$	4,133,905

Acquired Loans:
June 30, 2013
Commercial real estate	$	282,317	$	46,703	$	49,796	$	4,658	$	383,474
Commercial and industrial		65,698		6,717		14,689		701		87,805
Commercial leases		—		—		—		—		—

	$	348,015	$	53,420	$	64,485	$	5,359	$	471,279

December 31, 2012
Commercial real estate	$	204,300	$	14,713	$	39,093	$	469	$	258,575
Commercial and industrial		39,596		3,611		3,804		2		47,013
Commercial leases		—		—		—		—		—

	$	243,896	$	18,324	$	42,897	$	471	$	305,588

Credit quality information for acquired loans is based on the contractual balance outstanding at June 30, 2013 and December 31, 2012. The increase in acquired loans in 2013 primarily relates to the ANNB acquisition on April 6, 2013.

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 originated consumer loans by payment status:


	Consumer Loan Credit Quality by Payment Status
	Performing		Non- Performing		Total
June 30, 2013
Direct installment	$	1,226,619	$	10,269	$	1,236,888
Residential mortgages		647,797		14,411		662,208
Indirect installment		597,490		1,281		598,771
Consumer lines of credit		778,333		714		779,047
Other		44,930		—		44,930
December 31, 2012
Direct installment	$	1,100,324	$	8,541	$	1,108,865
Residential mortgages		642,406		11,420		653,826
Indirect installment		567,192		1,132		568,324
Consumer lines of credit		731,788		746		732,534
Other		36,437		3,500		39,937

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

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 Six Months Ended June 30, 2013
With no specific allowance recorded:
Commercial real estate	$	34,050	$	46,816	$	—	$	34,419
Commercial and industrial		9,588		12,103		—		10,249
Commercial leases		676		676		—		667

Total commercial loans and leases		44,314		59,595		—		45,335
Direct installment		10,269		10,495		—		10,087
Residential mortgages		14,408		14,629		—		13,696
Indirect installment		1,281		2,604		—		1,184
Consumer lines of credit		714		763		—		761
Other		—		—		—		875
With a specific allowance recorded:
Commercial real estate		14,458		23,831		2,811		13,813
Commercial and industrial		127		131		127		421
Commercial leases		—		—		—		—

Total commercial loans and leases		14,585		23,962		2,938		14,234
Direct installment		—		—		—		—
Residential mortgages		—		—		—		—
Indirect installment		—		—		—		—
Consumer lines of credit		—		—		—		—
Other		—

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