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, 2015
¨ | Transition Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 |
For the transition period from to
Commission file number 001-31940
F.N.B. CORPORATION
(Exact name of registrant as specified in its charter)
Florida | 25-1255406 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
One North Shore Center, 12 Federal Street, Pittsburgh, PA | 15212 | |
(Address of principal executive offices) | (Zip Code) |
Registrants telephone number, including area code: 800-555-5455
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer | x | Accelerated Filer | ¨ | |||
Non-accelerated Filer | ¨ | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.
Class |
Outstanding at October 31, 2015 | |
Common Stock, $0.01 Par Value | 175,377,201 Shares |
F.N.B. CORPORATION
FORM 10-Q
September 30, 2015
PART I FINANCIAL INFORMATION | PAGE | |||||
Item 1. | ||||||
3 | ||||||
4 | ||||||
5 | ||||||
6 | ||||||
7 | ||||||
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
46 | ||||
Item 3. | 69 | |||||
Item 4. | 69 | |||||
PART II OTHER INFORMATION | ||||||
Item 1. | 70 | |||||
Item 1A. | 70 | |||||
Item 2. | 70 | |||||
Item 3. | 70 | |||||
Item 4. | 70 | |||||
Item 5. | 70 | |||||
Item 6. | 71 | |||||
Signatures | 72 |
2
PART I FINANCIAL INFORMATION
ITEM 1. | FINANCIAL STATEMENTS |
F.N.B. CORPORATION AND SUBSIDIARIES
Dollars in thousands, except par value
September 30, 2015 |
December 31, 2014 |
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(Unaudited) | ||||||||
Assets |
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Cash and due from banks |
$ | 208,560 | $ | 196,240 | ||||
Interest bearing deposits with banks |
50,206 | 91,153 | ||||||
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Cash and Cash Equivalents |
258,766 | 287,393 | ||||||
Securities available for sale |
1,578,526 | 1,534,065 | ||||||
Securities held to maturity (fair value of $1,546,135 and $1,468,258) |
1,526,290 | 1,453,355 | ||||||
Residential mortgage loans held for sale |
3,575 | 6,180 | ||||||
Loans and leases, net of unearned income of $48,830 and $56,131 |
11,873,645 | 11,247,038 | ||||||
Allowance for credit losses |
(136,183 | ) | (125,926 | ) | ||||
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Net Loans and Leases |
11,737,462 | 11,121,112 | ||||||
Premises and equipment, net |
161,689 | 168,756 | ||||||
Goodwill |
834,141 | 832,213 | ||||||
Core deposit and other intangible assets, net |
46,417 | 47,504 | ||||||
Bank owned life insurance |
306,061 | 301,771 | ||||||
Other assets |
383,146 | 374,741 | ||||||
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Total Assets |
$ | 16,836,073 | $ | 16,127,090 | ||||
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Liabilities |
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Deposits: |
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Non-interest bearing demand |
$ | 2,911,435 | $ | 2,647,623 | ||||
Interest bearing demand |
5,558,322 | 4,547,628 | ||||||
Savings |
1,736,350 | 1,575,922 | ||||||
Certificates and other time deposits |
2,553,629 | 2,611,035 | ||||||
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Total Deposits |
12,759,736 | 11,382,208 | ||||||
Short-term borrowings |
1,287,302 | 2,041,658 | ||||||
Long-term borrowings |
542,653 | 541,443 | ||||||
Other liabilities |
151,633 | 140,325 | ||||||
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Total Liabilities |
14,741,324 | 14,105,634 | ||||||
Stockholders Equity |
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Preferred stock - $0.01 par value |
106,882 | 106,882 | ||||||
Common stock - $0.01 par value |
1,766 | 1,754 | ||||||
Additional paid-in capital |
1,805,926 | 1,798,984 | ||||||
Retained earnings |
227,287 | 176,120 | ||||||
Accumulated other comprehensive loss |
(34,397 | ) | (46,003 | ) | ||||
Treasury stock 1,149,750 and 1,458,045 shares at cost |
(12,715 | ) | (16,281 | ) | ||||
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Total Stockholders Equity |
2,094,749 | 2,021,456 | ||||||
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Total Liabilities and Stockholders Equity |
$ | 16,836,073 | $ | 16,127,090 | ||||
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See accompanying Notes to Consolidated Financial Statements
3
F.N.B. CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
In thousands, except per share data
Unaudited
Three Months Ended September 30, |
Nine Months Ended September 30, |
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2015 | 2014 | 2015 | 2014 | |||||||||||||
Interest Income |
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Loans and leases, including fees |
$ | 120,875 | $ | 116,468 | $ | 358,074 | $ | 330,107 | ||||||||
Securities: |
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Taxable |
14,576 | 13,693 | 43,257 | 39,557 | ||||||||||||
Nontaxable |
1,707 | 1,356 | 4,564 | 3,934 | ||||||||||||
Dividends |
9 | 26 | 29 | 218 | ||||||||||||
Other |
30 | 23 | 90 | 70 | ||||||||||||
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Total Interest Income |
137,197 | 131,566 | 406,014 | 373,886 | ||||||||||||
Interest Expense |
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Deposits |
7,948 | 7,457 | 23,033 | 22,067 | ||||||||||||
Short-term borrowings |
1,786 | 1,459 | 5,348 | 4,011 | ||||||||||||
Long-term borrowings |
2,262 | 2,031 | 6,744 | 5,172 | ||||||||||||
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Total Interest Expense |
11,996 | 10,947 | 35,125 | 31,250 | ||||||||||||
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Net Interest Income |
125,201 | 120,619 | 370,889 | 342,636 | ||||||||||||
Provision for credit losses |
10,777 | 11,197 | 27,777 | 28,608 | ||||||||||||
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Net Interest Income After Provision for Credit Losses |
114,424 | 109,422 | 343,112 | 314,028 | ||||||||||||
Non-Interest Income |
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Service charges |
18,628 | 17,742 | 51,959 | 50,452 | ||||||||||||
Trust fees |
5,210 | 4,868 | 15,803 | 14,494 | ||||||||||||
Insurance commissions and fees |
4,423 | 4,169 | 12,351 | 12,805 | ||||||||||||
Securities commissions and fees |
3,304 | 3,132 | 9,958 | 8,525 | ||||||||||||
Net securities gains |
314 | 1,178 | 319 | 11,415 | ||||||||||||
Mortgage banking operations |
2,424 | 1,078 | 6,739 | 2,220 | ||||||||||||
Bank owned life insurance |
1,846 | 1,828 | 5,527 | 5,820 | ||||||||||||
Other |
5,210 | 3,557 | 16,637 | 13,081 | ||||||||||||
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Total Non-Interest Income |
41,359 | 37,552 | 119,293 | 118,812 | ||||||||||||
Non-Interest Expense |
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Salaries and employee benefits |
51,859 | 49,590 | 151,559 | 147,008 | ||||||||||||
Net occupancy |
7,957 | 7,734 | 25,405 | 24,284 | ||||||||||||
Equipment |
8,237 | 7,625 | 23,583 | 21,701 | ||||||||||||
Amortization of intangibles |
2,034 | 2,455 | 6,148 | 7,199 | ||||||||||||
Outside services |
7,314 | 8,183 | 25,254 | 23,653 | ||||||||||||
FDIC insurance |
3,158 | 3,206 | 9,630 | 9,599 | ||||||||||||
Merger and acquisition related |
1,312 | 1,904 | 1,683 | 8,054 | ||||||||||||
Other |
16,278 | 15,150 | 46,041 | 41,099 | ||||||||||||
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Total Non-Interest Expense |
98,149 | 95,847 | 289,303 | 282,597 | ||||||||||||
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Income Before Income Taxes |
57,634 | 51,127 | 173,102 | 150,243 | ||||||||||||
Income taxes |
17,581 | 15,736 | 52,575 | 45,497 | ||||||||||||
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Net Income |
40,053 | 35,391 | 120,527 | 104,746 | ||||||||||||
Less: Preferred stock dividends |
2,010 | 2,010 | 6,030 | 6,342 | ||||||||||||
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Net Income Available to Common Stockholders |
$ | 38,043 | $ | 33,381 | $ | 114,497 | $ | 98,404 | ||||||||
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Net Income per Common Share Basic |
$ | 0.22 | $ | 0.20 | $ | 0.65 | $ | 0.60 | ||||||||
Net Income per Common Share Diluted |
0.22 | 0.20 | 0.65 | 0.59 | ||||||||||||
Cash Dividends per Common Share |
0.12 | 0.12 | 0.36 | 0.36 | ||||||||||||
Comprehensive Income |
$ | 49,609 | $ | 31,499 | $ | 132,133 | $ | 121,219 | ||||||||
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See accompanying Notes to Consolidated Financial Statements
4
F.N.B. CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
Dollars in thousands, except per share data
Unaudited
Preferred Stock |
Common Stock |
Additional Paid-In Capital |
Retained Earnings |
Accumulated Other Comprehensive Income (Loss) |
Treasury Stock |
Total | ||||||||||||||||||||||
Balance at January 1, 2015 |
$ | 106,882 | $ | 1,754 | $ | 1,798,984 | $ | 176,120 | $ | (46,003 | ) | $ | (16,281 | ) | $ | 2,021,456 | ||||||||||||
Comprehensive income |
120,527 | 11,606 | 132,133 | |||||||||||||||||||||||||
Dividends declared: |
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Preferred stock |
(6,030 | ) | (6,030 | ) | ||||||||||||||||||||||||
Common stock: $0.36/share |
(63,330 | ) | (63,330 | ) | ||||||||||||||||||||||||
Issuance of common stock |
12 | 3,651 | 3,566 | 7,229 | ||||||||||||||||||||||||
Restricted stock compensation |
3,286 | 3,286 | ||||||||||||||||||||||||||
Tax benefit of stock-based compensation |
5 | 5 | ||||||||||||||||||||||||||
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Balance at September 30, 2015 |
$ | 106,882 | $ | 1,766 | $ | 1,805,926 | $ | 227,287 | $ | (34,397 | ) | $ | (12,715 | ) | $ | 2,094,749 | ||||||||||||
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Balance at January 1, 2014 |
$ | 106,882 | $ | 1,592 | $ | 1,608,117 | $ | 121,870 | $ | (56,924 | ) | $ | (7,154 | ) | $ | 1,774,383 | ||||||||||||
Comprehensive income |
104,746 | 16,473 | 121,219 | |||||||||||||||||||||||||
Dividends declared: |
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Preferred stock |
(6,342 | ) | (6,342 | ) | ||||||||||||||||||||||||
Common stock: $0.36/share |
(60,234 | ) | (60,234 | ) | ||||||||||||||||||||||||
Issuance of common stock |
16 | 9,007 | (228 | ) | (7,377 | ) | 1,418 | |||||||||||||||||||||
Issuance of common stock - acquisitions |
139 | 170,024 | 170,163 | |||||||||||||||||||||||||
Restricted stock compensation |
2,328 | 2,328 | ||||||||||||||||||||||||||
Tax benefit of stock-based compensation |
2,198 | 2,198 | ||||||||||||||||||||||||||
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Balance at September 30, 2014 |
$ | 106,882 | $ | 1,747 | $ | 1,791,674 | $ | 159,812 | $ | (40,451 | ) | $ | (14,531 | ) | $ | 2,005,133 | ||||||||||||
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See accompanying Notes to Consolidated Financial Statements
5
F.N.B. CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Dollars in thousands
Unaudited
Nine Months Ended September 30, |
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2015 | 2014 | |||||||
Operating Activities |
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Net income |
$ | 120,527 | $ | 104,746 | ||||
Adjustments to reconcile net income to net cash flows provided by operating activities: |
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Depreciation, amortization and accretion |
31,412 | 29,007 | ||||||
Provision for credit losses |
27,777 | 28,608 | ||||||
Deferred tax expense (benefit) |
3,874 | (2,533 | ) | |||||
Net securities gains |
(319 | ) | (11,415 | ) | ||||
Tax benefit of stock-based compensation |
(5 | ) | (2,198 | ) | ||||
Loans originated for sale |
(336,776 | ) | (98,741 | ) | ||||
Loans sold |
346,174 | 105,169 | ||||||
Gain on sale of loans |
(6,794 | ) | (3,721 | ) | ||||
Net change in: |
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Interest receivable |
(4,457 | ) | (1,590 | ) | ||||
Interest payable |
(414 | ) | (1,058 | ) | ||||
Securities classified as trading in business combination and sold |
| 241,595 | ||||||
Bank owned life insurance |
(4,266 | ) | (5,205 | ) | ||||
Other, net |
8,144 | (4,165 | ) | |||||
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Net cash flows provided by operating activities |
184,877 | 378,499 | ||||||
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Investing Activities |
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Net change in loans and leases |
(657,586 | ) | (888,443 | ) | ||||
Securities available for sale: |
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Purchases |
(279,636 | ) | (686,108 | ) | ||||
Sales |
33,499 | 175,872 | ||||||
Maturities |
212,140 | 245,942 | ||||||
Securities held to maturity: |
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Purchases |
(279,998 | ) | (436,519 | ) | ||||
Sales |
| 4,570 | ||||||
Maturities |
203,689 | 153,624 | ||||||
Purchase of bank owned life insurance |
(72,688 | ) | (16 | ) | ||||
Withdrawal/surrender of bank owned life insurance |
72,664 | 18,715 | ||||||
Increase in premises and equipment |
(7,304 | ) | (12,580 | ) | ||||
Net cash received in business combinations |
148,159 | 60,035 | ||||||
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Net cash flows used in investing activities |
(627,061 | ) | (1,364,908 | ) | ||||
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Financing Activities |
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Net change in: |
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Demand (non-interest bearing and interest bearing) and savings accounts |
1,304,345 | 654,144 | ||||||
Time deposits |
(78,764 | ) | (224,733 | ) | ||||
Short-term borrowings |
(754,356 | ) | 348,827 | |||||
Increase in long-term borrowings |
20,976 | 376,418 | ||||||
Decrease in long-term borrowings |
(19,804 | ) | (87,677 | ) | ||||
Net proceeds from issuance of common stock |
10,515 | 7,795 | ||||||
Tax benefit of stock-based compensation |
5 | 2,198 | ||||||
Cash dividends paid: |
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Preferred stock |
(6,030 | ) | (6,342 | ) | ||||
Common stock |
(63,330 | ) | (60,234 | ) | ||||
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Net cash flows provided by financing activities |
413,557 | 1,010,396 | ||||||
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Net (Decrease) Increase in Cash and Cash Equivalents |
(28,627 | ) | 23,987 | |||||
Cash and cash equivalents at beginning of period |
287,393 | 213,981 | ||||||
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Cash and Cash Equivalents at End of Period |
$ | 258,766 | $ | 237,968 | ||||
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See accompanying Notes to Consolidated Financial Statements
6
F.N.B. CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dollars in thousands, except share data
(Unaudited)
September 30, 2015
BUSINESS
F.N.B. Corporation (the Corporation), headquartered in Pittsburgh, Pennsylvania, is a diversified financial services company operating in six states and three major metropolitan areas, including Pittsburgh, Pennsylvania, Baltimore, Maryland and Cleveland, Ohio. As of September 30, 2015, the Corporation had 289 banking offices throughout Pennsylvania, Ohio, Maryland and West Virginia. The Corporation provides a full range of commercial banking, consumer banking and wealth management solutions through its subsidiary network which is led by its largest affiliate, First National Bank of Pennsylvania (FNBPA). Commercial banking solutions include corporate banking, small business banking, investment real estate financing, international banking, business credit, capital markets and lease financing. Consumer banking provides a full line of consumer banking products and services including deposit products, mortgage lending, consumer lending and a complete suite of mobile and online banking services. Wealth management services include asset management, private banking and insurance. The Corporation also operates Regency Finance Company (Regency), which had 73 consumer finance offices in Pennsylvania, Ohio, Kentucky and Tennessee as of September 30, 2015.
BASIS OF PRESENTATION
The Corporations accompanying consolidated financial statements and these notes to the financial statements include subsidiaries in which the Corporation has a controlling financial interest. The Corporation owns and operates FNBPA, First National Trust Company, First National Investment Services Company, LLC, F.N.B. Investment Advisors, Inc., First National Insurance Agency, LLC, Regency, Bank Capital Services, LLC and F.N.B. Capital Corporation, LLC, and includes results for each of these entities in the accompanying consolidated financial statements.
The accompanying consolidated financial statements include all adjustments that are necessary, in the opinion of management, to fairly reflect the Corporations 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 Corporations Annual Report on Form 10-K filed with the SEC on February 27, 2015.
USE OF ESTIMATES
The accounting and reporting policies of the Corporation conform with GAAP. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could materially differ from those estimates. Material estimates that are particularly susceptible to significant changes include the allowance for credit losses, securities valuations, goodwill and other intangible assets and income taxes.
DEBT OFFERING
On October 2, 2015, the Corporation completed its offering of $100,000 aggregate principal amount of 4.875% subordinated notes due in 2025. The subordinated notes will be treated as tier 2 capital for regulatory capital purposes. The net proceeds of the debt offering after deducting underwriting discounts and commissions and estimated offering expenses were $98,500. The Corporation intends to use the net proceeds from the sale of the subordinated notes for general corporate purposes, which may include investments at the holding company level, providing capital to support the growth of FNBPA and its business, repurchases of its common shares and the payment of the cash consideration components of future acquisitions.
7
MERGERS AND ACQUISITIONS
Branch Purchase Bank of America
On September 18, 2015, the Corporation completed its purchase of five branch-banking locations in southeastern Pennsylvania from Bank of America, in which the Corporation acquired approximately $154,619 in deposits. The assets and liabilities relating to the branches purchased were recorded on the Corporations consolidated balance sheet at their preliminary fair values as of September 18, 2015, and the related results of operations for these branches have been included in the Corporations consolidated statement of comprehensive income since that date. Based on the preliminary purchase price allocation, the Corporation recorded $2,539 in goodwill and $3,081 in core deposit intangibles. These fair value estimates are provisional amounts based on third party valuations that are currently under review. The goodwill for this transaction is expected to be deductible for income tax purposes.
OBA Financial Services, Inc.
On September 19, 2014, the Corporation completed its acquisition of OBA Financial Services, Inc. (OBA), a bank holding company based in Germantown, Maryland. On the acquisition date, the estimated fair values of OBA included $390,160 in assets, $291,393 in loans and $295,922 in deposits. The acquisition was valued at $85,554 and resulted in the Corporation issuing 7,170,037 shares of its common stock in exchange for 4,025,895 shares of OBA common stock. The Corporation also acquired the outstanding stock options of OBA that became fully vested upon the acquisition. The assets and liabilities of OBA were recorded on the Corporations consolidated balance sheet at their fair values as of September 19, 2014, the acquisition date, and OBAs results of operations have been included in the Corporations consolidated statement of comprehensive income since that date. OBAs banking affiliate, OBA Bank, was merged into FNBPA on September 19, 2014. Based on the purchase price allocation, the Corporation recorded $20,107 in goodwill and $4,304 in core deposit intangibles as a result of the acquisition. None of the goodwill is deductible for income tax purposes.
BCSB Bancorp, Inc.
On February 15, 2014, the Corporation completed its acquisition of BCSB Bancorp, Inc. (BCSB), a bank holding company based in Baltimore, Maryland. On the acquisition date, the estimated fair values of BCSB included $596,122 in assets, $304,932 in loans and $532,197 in deposits. The acquisition was valued at $80,547 and resulted in the Corporation issuing 6,730,597 shares of its common stock in exchange for 3,235,961 shares of BCSB common stock. The Corporation also acquired the outstanding stock options of BCSB that became fully vested upon the acquisition. The assets and liabilities of BCSB were recorded on the Corporations consolidated balance sheet at their fair values as of February 15, 2014, the acquisition date, and BCSBs results of operations have been included in the Corporations consolidated statement of comprehensive income since that date. BCSBs banking affiliate, Baltimore County Savings Bank, was merged into FNBPA on February 15, 2014. Based on the purchase price allocation, the Corporation recorded $42,451 in goodwill and $6,591 in core deposit intangibles as a result of the acquisition. None of the goodwill is deductible for income tax purposes.
Pending Acquisition Metro Bancorp, Inc.
On August 4, 2015, the Corporation entered into a definitive merger agreement to acquire Metro Bancorp, Inc. (METR), a bank holding company based in Harrisburg, Pennsylvania with approximately $3,001,357 in total assets. The transaction is valued at approximately $474,000. Under the terms of the merger agreement, METR shareholders will be entitled to receive 2.373 shares of the Corporations common stock for each share of METR common stock. The Corporation expects to issue approximately 33.6 million shares of its common stock in exchange for approximately 14.1 million shares of METR common stock. METRs banking affiliate, Metro Bank, will be merged into FNBPA. The transaction is expected to be completed in the first quarter of 2016, pending regulatory approvals, the approval of shareholders of the Corporation and METR, and the satisfaction of other closing conditions.
Pending Branch Purchase Fifth Third Bank
On September 3, 2015, the Corporation announced that it entered into a purchase and assumption agreement to acquire approximately $383,000 in retail and private banking deposits, 17 branch-banking locations and related consumer loans in the Pittsburgh, Pennsylvania area from Fifth Third Bank. The transaction is expected to close during the second quarter of 2016, pending regulatory approval.
8
NEW ACCOUNTING STANDARDS
Business Combinations Simplifying the Accounting for Measurement-Period Adjustments
In September 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2015-16, Business Combinations Simplifying the Accounting for Measurement-Period Adjustments. ASU 2015-16 eliminates the requirement that an acquirer in a business combination account for measurement-period adjustments retrospectively. Instead, an acquirer must recognize measurement-period adjustments in the period in which it determines the amount of the adjustment, including the effect on earnings of any amounts that would have been recorded in previous periods if the accounting had been completed at the acquisition date. The guidance is effective for fiscal periods beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted. The adoption of this update will not have a material effect on the financial statements, results of operations or liquidity of the Corporation.
Insurance Disclosures about Short-Duration Contracts
In May 2015, the FASB issued ASU 2015-09, Financial Services Insurance. ASU 2015-09 requires insurance entities that issue short-duration contracts to provide additional disclosures about the liability for unpaid claims and claim adjustment expenses, including disclosure of information about significant changes in methodologies and assumptions used to calculate the liability, reasons for the change, and the effects on the financial statements. These additional disclosures will increase the transparency of significant estimates made in measuring those liabilities, improve comparability by requiring consistent disclosure of information, and provide financial statement users with information to facilitate analysis. ASU 2015-09 should be applied retrospectively and is effective for annual periods beginning after December 15, 2015, and interim periods beginning after December 15, 2016, with early adoption permitted. The adoption of this update is not expected to have a material effect on the financial statements, results of operations or liquidity of the Corporation.
Cloud Computing Arrangements
In April 2015, the FASB issued ASU 2015-05, Intangibles-Goodwill and Other-Internal-Use Software. ASU 2015-05 provides guidance about whether a cloud computing arrangement includes a license for internal use software, and how to account for the software license element of the arrangement. This update eliminates the existing requirement to analogize the guidance on leases in ASC 840 in accounting for some software licenses. ASU 2015-05 is effective for reporting periods beginning after December 15, 2015, with early adoption permitted. A reporting entity may apply ASU 2015-05 either prospectively or retrospectively. The Corporation is evaluating this new guidance and has not yet determined which approach it will adopt or the impact that the adoption of this update will have on its financial statements.
Interest Imputation of Interest
In April 2015, the FASB issued ASU 2015-03, Interest Imputation of Interest. ASU 2015-03 requires debt issuance costs to be presented in the balance sheet as a direct deduction from the corresponding debt liability. The recognition and measurement guidance for debt issuance costs is not affected by the amendments in this update. ASU 2015-03 is effective for reporting periods beginning after December 15, 2015, with early adoption permitted. A reporting entity should apply the new guidance on a retrospective basis, wherein the balance sheet of each individual period presented should be adjusted to reflect the period-specific effects of applying the new guidance. The adoption of this update is not expected to have a material effect on the financial statements, results of operations or liquidity of the Corporation.
9
Consolidation
In February 2015, the FASB issued ASU 2015-02, Consolidation. ASU 2015-02 changes the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. This update modifies the evaluation of whether limited partnerships or similar legal entities are variable interest entities (VIEs) or voting interest entities, eliminates the presumption that a general partner should consolidate a limited partnership and affects the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships. The ASU is effective for reporting periods beginning after December 15, 2015, with early adoption permitted. A reporting entity may apply ASU 2015-02 either retrospectively or by using a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption. The adoption of this update is not expected to have a material effect on the financial statements, results of operations or liquidity of the Corporation.
Income Statement
In January 2015, the FASB issued ASU 2015-01, Income Statement Extraordinary and Unusual Items. ASU 2015-01 simplified income statement presentation by eliminating from GAAP the concept of extraordinary items. The ASU is effective for reporting periods beginning after December 15, 2015, with early adoption permitted. A reporting entity may apply ASU 2015-01 prospectively, or retrospectively to all prior periods presented in the financial statements. The adoption of this update will not have an effect on the financial statements, results of operations or liquidity of the Corporation, as the Corporation has not reported extraordinary items.
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 |
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September 30, 2015 |
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U.S. Treasury |
$ | 29,704 | $ | 300 | $ | | $ | 30,004 | ||||||||
U.S. government-sponsored entities |
388,428 | 2,644 | (305 | ) | 390,767 | |||||||||||
Residential mortgage-backed securities: |
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Agency mortgage-backed securities |
587,244 | 9,958 | (82 | ) | 597,120 | |||||||||||
Agency collateralized mortgage obligations |
529,656 | 3,220 | (4,948 | ) | 527,928 | |||||||||||
Non-agency collateralized mortgage obligations |
1,212 | 15 | | 1,227 | ||||||||||||
Commercial mortgage-backed securities |
4,384 | 8 | | 4,392 | ||||||||||||
States of the U.S. and political subdivisions |
10,927 | 345 | | 11,272 | ||||||||||||
Other debt securities |
14,700 | 267 | (414 | ) | 14,553 | |||||||||||
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Total debt securities |
1,566,255 | 16,757 | (5,749 | ) | 1,577,263 | |||||||||||
Equity securities |
975 | 288 | | 1,263 | ||||||||||||
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$ | 1,567,230 | $ | 17,045 | $ | (5,749 | ) | $ | 1,578,526 | ||||||||
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December 31, 2014 |
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U.S. Treasury |
$ | 29,604 | $ | 78 | $ | | $ | 29,682 | ||||||||
U.S. government-sponsored entities |
338,330 | 742 | (1,939 | ) | 337,133 | |||||||||||
Residential mortgage-backed securities: |
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Agency mortgage-backed securities |
546,572 | 7,548 | (35 | ) | 554,085 | |||||||||||
Agency collateralized mortgage obligations |
580,601 | 1,617 | (9,047 | ) | 573,171 | |||||||||||
Non-agency collateralized mortgage obligations |
1,414 | 17 | | 1,431 | ||||||||||||
Commercial mortgage-backed securities |
7,891 | | (11 | ) | 7,880 | |||||||||||
States of the U.S. and political subdivisions |
12,713 | 477 | (32 | ) | 13,158 | |||||||||||
Other debt securities |
16,615 | 420 | (857 | ) | 16,178 | |||||||||||
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Total debt securities |
1,533,740 | 10,899 | (11,921 | ) | 1,532,718 | |||||||||||
Equity securities |
1,031 | 316 | | 1,347 | ||||||||||||
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$ | 1,534,771 | $ | 11,215 | $ | (11,921 | ) | $ | 1,534,065 | ||||||||
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10
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value | |||||||||||||
Securities Held to Maturity |
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September 30, 2015 |
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U.S. Treasury |
$ | 500 | $ | 169 | $ | | $ | 669 | ||||||||
U.S. government-sponsored entities |
146,528 | 1,964 | (79 | ) | 148,413 | |||||||||||
Residential mortgage-backed securities: |
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Agency mortgage-backed securities |
669,221 | 15,887 | (16 | ) | 685,092 | |||||||||||
Agency collateralized mortgage obligations |
462,191 | 3,556 | (4,181 | ) | 461,566 | |||||||||||
Non-agency collateralized mortgage obligations |
3,055 | 15 | | 3,070 | ||||||||||||
Commercial mortgage-backed securities |
17,334 | 468 | | 17,802 | ||||||||||||
States of the U.S. and political subdivisions |
227,461 | 2,888 | (826 | ) | 229,523 | |||||||||||
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$ | 1,526,290 | $ | 24,947 | $ | (5,102 | ) | $ | 1,546,135 | ||||||||
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December 31, 2014 |
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U.S. Treasury |
$ | 502 | $ | 168 | $ | | $ | 670 | ||||||||
U.S. government-sponsored entities |
101,602 | 885 | (524 | ) | 101,963 | |||||||||||
Residential mortgage-backed securities: |
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Agency mortgage-backed securities |
677,169 | 16,712 | (346 | ) | 693,535 | |||||||||||
Agency collateralized mortgage obligations |
501,965 | 1,858 | (7,329 | ) | 496,494 | |||||||||||
Non-agency collateralized mortgage obligations |
4,285 | 28 | | 4,313 | ||||||||||||
Commercial mortgage-backed securities |
17,560 | 179 | | 17,739 | ||||||||||||
States of the U.S. and political subdivisions |
150,272 | 3,315 | (43 | ) | 153,544 | |||||||||||
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$ | 1,453,355 | $ | 23,145 | $ | (8,242 | ) | $ | 1,468,258 | ||||||||
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The Corporation classifies securities as trading securities when management intends to sell such securities in the near term. Such securities are carried at fair value, with unrealized gains (losses) reflected through the consolidated statements of comprehensive income. The Corporation classified certain securities acquired in conjunction with its acquisitions as trading securities. The Corporation both acquired and sold these trading securities during the quarterly periods in which each of the acquisitions occurred. As of September 30, 2015 and December 31, 2014, 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, | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Gross gains |
$ | 314 | $ | 1,191 | $ | 328 | $ | 19,939 | ||||||||
Gross losses |
| (13 | ) | (9 | ) | (8,524 | ) | |||||||||
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$ | 314 | $ | 1,178 | $ | 319 | $ | 11,415 | |||||||||
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During the first quarter of 2014, the Corporation strategically sold its portfolio of pooled trust preferred securities (TPS) with net proceeds of $51,540 and a gain of $13,766. These were previously classified as collateralized debt obligations (CDOs) available for sale. Of the 23 pooled securities sold, one was determined to be a disallowed investment under the Volcker Rule (Section 619) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), and as such, was required to be disposed of by July 2016. Partially offsetting this gain was a net loss of $3,529 relating to the sale of other securities. By selling these securities, the Corporation strengthened the risk profile of its investment portfolio, improved its capital levels due to lowered risk-weighted assets and generated capital to support future growth.
11
As of September 30, 2015, 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 |
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Due in one year or less |
$ | 4,994 | $ | 5,027 | $ | 1,940 | $ | 1,951 | ||||||||
Due from one to five years |
423,858 | 426,751 | 139,429 | 140,465 | ||||||||||||
Due from five to ten years |
10,013 | 10,338 | 71,708 | 73,681 | ||||||||||||
Due after ten years |
4,894 | 4,480 | 161,412 | 162,508 | ||||||||||||
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443,759 | 446,596 | 374,489 | 378,605 | |||||||||||||
Residential mortgage-backed securities: |
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Agency mortgage-backed securities |
587,244 | 597,120 | 669,221 | 685,092 | ||||||||||||
Agency collateralized mortgage obligations |
529,656 | 527,928 | 462,191 | 461,566 | ||||||||||||
Non-agency collateralized mortgage obligations |
1,212 | 1,227 | 3,055 | 3,070 | ||||||||||||
Commercial mortgage-backed securities |
4,384 | 4,392 | 17,334 | 17,802 | ||||||||||||
Equity securities |
975 | 1,263 | | | ||||||||||||
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$ | 1,567,230 | $ | 1,578,526 | $ | 1,526,290 | $ | 1,546,135 | |||||||||
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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, 2015 and December 31, 2014, securities with a carrying value of $2,062,257 and $1,036,380, respectively, were pledged to secure public deposits, trust deposits and for other purposes as required by law. Securities with a carrying value of $258,428 and $892,647 at September 30, 2015 and December 31, 2014, 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 |
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Securities Available for Sale |
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September 30, 2015 |
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U.S. government-sponsored entities |
3 | $ | 59,823 | $ | (177 | ) | 3 | $ | 37,867 | $ | (128 | ) | 6 | $ | 97,690 | $ | (305 | ) | ||||||||||||||||||
Residential mortgage-backed securities: |
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Agency mortgage-backed securities |
1 | 18,591 | (82 | ) | | | | 1 | 18,591 | (82 | ) | |||||||||||||||||||||||||
Agency collateralized mortgage obligations |
4 | 63,640 | (123 | ) | 18 | 228,010 | (4,825 | ) | 22 | 291,650 | (4,948 | ) | ||||||||||||||||||||||||
Other debt securities |
| | | 3 | 4,480 | (414 | ) | 3 | 4,480 | (414 | ) | |||||||||||||||||||||||||
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8 | $ | 142,054 | $ | (382 | ) | 24 | $ | 270,357 | $ | (5,367 | ) | 32 | $ | 412,411 | $ | (5,749 | ) | |||||||||||||||||||
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December 31, 2014 |
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U.S. government-sponsored entities |
7 | $ | 89,986 | $ | (275 | ) | 7 | $ | 99,326 | $ | (1,664 | ) | 14 | $ | 189,312 | $ | (1,939 | ) | ||||||||||||||||||
Residential mortgage-backed securities: |
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Agency mortgage-backed securities |
2 | 45,145 | (35 | ) | | | | 2 | 45,145 | (35 | ) | |||||||||||||||||||||||||
Agency collateralized mortgage obligations |
9 | 166,908 | (1,238 | ) | 16 | 225,700 | (7,809 | ) | 25 | 392,608 | (9,047 | ) | ||||||||||||||||||||||||
Commercial mortgage-backed securities |
1 | 7,880 | (11 | ) | | | | 1 | 7,880 | (11 | ) | |||||||||||||||||||||||||
States of the U.S. and political subdivisions |
| | | 1 | 1,159 | (32 | ) | 1 | 1,159 | (32 | ) | |||||||||||||||||||||||||
Other debt securities |
| | | 4 | 6,030 | (857 | ) | 4 | 6,030 | (857 | ) | |||||||||||||||||||||||||
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19 | $ | 309,919 | $ | (1,559 | ) | 28 | $ | 332,215 | $ | (10,362 | ) | 47 | $ | 642,134 | $ | (11,921 | ) | |||||||||||||||||||
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12
Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||||||||||||||
# | Fair Value |
Unrealized Losses |
# | Fair Value |
Unrealized Losses |
# | Fair Value |
Unrealized Losses |
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Securities Held to Maturity |
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September 30, 2015 |
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U.S. government-sponsored entities |
| $ | | $ | | 1 | $ | 14,921 | $ | (79 | ) | 1 | $ | 14,921 | $ | (79 | ) | |||||||||||||||||||
Residential mortgage-backed securities: |
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Agency mortgage-backed securities |
| | | 1 | 924 | (16 | ) | 1 | 924 | (16 | ) | |||||||||||||||||||||||||
Agency collateralized mortgage obligations |
3 | 46,120 | (212 | ) | 14 | 170,359 | (3,969 | ) | 17 | 216,479 | (4,181 | ) | ||||||||||||||||||||||||
States of the U.S. and political subdivisions |
24 | 46,933 | (826 | ) | | | | 24 | 46,933 | (826 | ) | |||||||||||||||||||||||||
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27 | $ | 93,053 | $ | (1,038 | ) | 16 | $ | 186,204 | $ | (4,064 | ) | 43 | $ | 279,257 | $ | (5,102 | ) | |||||||||||||||||||
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December 31, 2014 |
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U.S. government-sponsored entities |
2 | $ | 24,989 | $ | (40 | ) | 2 | $ | 29,516 | $ | (484 | ) | 4 | $ | 54,505 | $ | (524 | ) | ||||||||||||||||||
Residential mortgage-backed securities: |
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Agency mortgage-backed securities |
1 | 1,099 | (1 | ) | 4 | 45,042 | (345 | ) | 5 | 46,141 | (346 | ) | ||||||||||||||||||||||||
Agency collateralized mortgage obligations |
8 | 104,071 | (630 | ) | 14 | 189,642 | (6,699 | ) | 22 | 293,713 | (7,329 | ) | ||||||||||||||||||||||||
States of the U.S. and political subdivisions |
1 | 1,427 | (4 | ) | 4 | 5,453 | (39 | ) | 5 | 6,880 | (43 | ) | ||||||||||||||||||||||||
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12 | $ | 131,586 | $ | (675 | ) | 24 | $ | 269,653 | $ | (7,567 | ) | 36 | $ | 401,239 | $ | (8,242 | ) | |||||||||||||||||||
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The Corporation does not intend to sell the debt securities and it is not more likely than not that the Corporation will be required to sell the securities before recovery of their amortized cost basis.
The Corporations remaining portfolio of TPS consists of three single-issuer securities, which are primarily from money-center and large regional banks and are included in other debt securities. These TPS had an amortized cost and estimated fair value of $4,894 and $4,480 at September 30, 2015, respectively. The Corporation has concluded from its analysis performed at September 30, 2015 that it is probable that the Corporation will collect all contractual principal and interest payments related to these securities.
Other-Than-Temporary Impairment
The Corporation evaluates its investment securities portfolio for other-than-temporary impairment (OTTI) on a quarterly basis. Impairment is assessed at the individual security level. The Corporation considers an investment security impaired if the fair value of the security is less than its cost or amortized cost basis. The following table presents a summary of the cumulative credit-related OTTI charges recognized as components of earnings for securities for which a portion of an OTTI is recognized in other comprehensive income:
Collateralized Debt Obligations |
Equities | Total | ||||||||||
For the Nine Months Ended September 30, 2015 |
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Beginning balance |
| $ | 27 | $ | 27 | |||||||
Loss where impairment was not previously recognized |
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Additional loss where impairment was previously recognized |
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Reduction due to credit impaired securities sold |
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Ending balance |
| $ | 27 | $ | 27 | |||||||
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For the Nine Months Ended September 30, 2014 |
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Beginning balance |
$ | 17,155 | $ | 27 | $ | 17,182 | ||||||
Loss where impairment was not previously recognized |
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Additional loss where impairment was previously recognized |
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Reduction due to credit impaired securities sold |
(17,155 | ) | | (17,155 | ) | |||||||
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Ending balance |
$ | | $ | 27 | $ | 27 | ||||||
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The Corporation did not recognize any impairment losses on securities for the nine months ended September 30, 2015 or 2014.
States of the U.S. and Political Subdivisions
The Corporations municipal bond portfolio of $238,733 as of September 30, 2015 is highly rated with an average entity-specific rating of AA and 99.0% of the portfolio rated A or better. General obligation bonds comprise 99.8% of the portfolio. Geographically, municipal bonds support the Corporations primary footprint as 93.6% of the securities are from municipalities located throughout Pennsylvania, Ohio and Maryland. The average holding size of the securities in the municipal bond portfolio is $1,492. In addition to the strong stand-alone ratings, 83.0% of the municipalities have some formal credit enhancement insurance that strengthens the creditworthiness of their issue. Management also reviews the credit profile of each issuer on a quarterly basis.
13
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, 2015 and December 31, 2014, the Corporations FHLB stock totaled $44,845 and $54,751, 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 FHLBs financial performance and stability over the past several years, along with a special dividend during the first quarter of 2015 and quarterly cash dividends in 2014 and 2015, 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 LEASES
Following is a summary of loans and leases, net of unearned income:
Originated Loans |
Acquired Loans |
Total Loans and Leases |
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September 30, 2015 |
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Commercial real estate |
$ | 3,322,669 | $ | 626,577 | $ | 3,949,246 | ||||||
Commercial and industrial |
2,410,186 | 81,169 | 2,491,355 | |||||||||
Commercial leases |
199,130 | | 199,130 | |||||||||
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Total commercial loans and leases |
5,931,985 | 707,746 | 6,639,731 | |||||||||
Direct installment |
1,643,345 | 49,293 | 1,692,638 | |||||||||
Residential mortgages |
1,013,254 | 373,132 | 1,386,386 | |||||||||
Indirect installment |
973,216 | 812 | 974,028 | |||||||||
Consumer lines of credit |
1,003,278 | 123,724 | 1,127,002 | |||||||||
Other |
53,860 | | 53,860 | |||||||||
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$ | 10,618,938 | $ | 1,254,707 | $ | 11,873,645 | |||||||
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December 31, 2014 |
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Commercial real estate |
$ | 3,031,810 | $ | 783,898 | $ | 3,815,708 | ||||||
Commercial and industrial |
2,197,793 | 120,222 | 2,318,015 | |||||||||
Commercial leases |
177,824 | | 177,824 | |||||||||
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|||||||
Total commercial loans and leases |
5,407,427 | 904,120 | 6,311,547 | |||||||||
Direct installment |
1,579,770 | 64,851 | 1,644,621 | |||||||||
Residential mortgages |
817,586 | 445,467 | 1,263,053 | |||||||||
Indirect installment |
873,645 | 1,906 | 875,551 | |||||||||
Consumer lines of credit |
946,427 | 164,549 | 1,110,976 | |||||||||
Other |
41,290 | | 41,290 | |||||||||
|
|
|
|
|
|
|||||||
$ | 9,666,145 | $ | 1,580,893 | $ | 11,247,038 | |||||||
|
|
|
|
|
|
Commercial real estate includes both owner-occupied and non-owner-occupied loans secured by commercial properties. Commercial and industrial includes loans to businesses that are not secured by real estate. Commercial leases are made for new or used equipment. Direct installment is comprised of fixed-rate, closed-end consumer loans for personal, family or household use, such as home equity loans and automobile loans. Residential mortgages consist of conventional and jumbo mortgage loans for non-commercial properties. Indirect installment is comprised of loans originated by third parties and underwritten by the Corporation, primarily automobile loans. Consumer lines of credit include home equity lines of credit (HELOC) and consumer lines of credit that are either unsecured or secured by collateral other than home equity. Other is comprised primarily of credit cards, mezzanine loans and student loans.
14
The loan and lease portfolio consists principally of loans to individuals and small- and medium-sized businesses within the Corporations primary market area of Pennsylvania, eastern Ohio, Maryland and northern West Virginia. The total loan portfolio contains consumer finance loans to individuals in Pennsylvania, Ohio, Tennessee and Kentucky, which totaled $181,298 or 1.5% of total loans and leases at September 30, 2015, compared to $180,588 or 1.6% of total loans and leases at December 31, 2014. Due to the relative size of the consumer finance loan portfolio, they are not segregated from other consumer loans.
As of September 30, 2015, 38.9% of the commercial real estate loans were owner-occupied, while the remaining 61.1% were non-owner-occupied, compared to 41.6% and 58.4%, respectively, as of December 31, 2014. As of September 30, 2015 and December 31, 2014, the Corporation had commercial construction loans of $294,249 and $296,156, respectively, representing 2.5% and 2.6% of total loans and leases at those respective dates.
Acquired Loans
All acquired loans were initially recorded at fair value at the acquisition date. The outstanding balance and the carrying amount of acquired loans included in the consolidated balance sheet are as follows:
September 30, 2015 |
December 31, 2014 |
|||||||
Accounted for under ASC 310-30: |
||||||||
Outstanding balance |
$ | 1,345,685 | $ | 1,597,558 | ||||
Carrying amount |
1,094,604 | 1,344,171 | ||||||
Accounted for under ASC 310-20: |
||||||||
Outstanding balance |
159,695 | 242,488 | ||||||
Carrying amount |
153,539 | 228,748 | ||||||
Total acquired loans: |
||||||||
Outstanding balance |
1,505,380 | 1,840,046 | ||||||
Carrying amount |
1,248,143 | 1,572,919 |
The carrying amount of purchased credit impaired loans included in the table above totaled $8,766 at September 30, 2015 and $9,556 at December 31, 2014, representing less than 1% of the carrying amount of total acquired loans as of each date.
The following table provides changes in accretable yield for all acquired loans accounted for under ASC 310-30. Loans accounted for under ASC 310-20 are not included in this table.
Nine Months Ended | ||||||||
September 30, | ||||||||
2015 | 2014 | |||||||
Balance at beginning of period |
$ | 331,899 | $ | 305,646 | ||||
Acquisitions |
| 71,111 | ||||||
Reduction due to unexpected early payoffs |
(35,601 | ) | (34,747 | ) | ||||
Reclass from non-accretable difference |
24,489 | 9,925 | ||||||
Disposals/transfers |
(509 | ) | (5,390 | ) | ||||
Accretion |
(46,207 | ) | (54,664 | ) | ||||
|
|
|
|
|||||
Balance at end of period |
$ | 274,071 | $ | 291,881 | ||||
|
|
|
|
Credit Quality
Management monitors the credit quality of the Corporations loan and lease portfolio on an ongoing basis. Measurement of delinquency and past due status is based on the contractual terms of each loan.
15
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, or when the full amount of principal and interest due is not expected to be collected in full, unless the loan is both well secured and in the process of collection. Commercial loans are placed on non-accrual at 90 days, installment loans are placed on non-accrual at 120 days and residential mortgages and consumer lines of credit are generally placed on non-accrual at 180 days. When a loan is placed on non-accrual status, all unpaid interest is reversed. Non-accrual loans may not be restored to accrual status until all delinquent principal and interest have been paid and the ultimate ability to collect the remaining principal and interest is reasonably assured. TDRs are loans in which the borrower has been granted a concession on the interest rate or the original repayment terms due to financial distress.
Following is a summary of non-performing assets:
September 30, 2015 |
December 31, 2014 |
|||||||
Non-accrual loans |
$ | 47,298 | $ | 45,113 | ||||
Troubled debt restructurings |
21,221 | 23,439 | ||||||
|
|
|
|
|||||
Total non-performing loans |
68,519 | 68,552 | ||||||
Other real estate owned (OREO) |
38,931 | 41,466 | ||||||
|
|
|
|
|||||
Total non-performing assets |
$ | 107,450 | $ | 110,018 | ||||
|
|
|
|
|||||
Asset quality ratios: |
||||||||
Non-performing loans as a percent of total loans and leases |
0.58 | % | 0.61 | % | ||||
Non-performing loans + OREO as a percent of total loans and leases + OREO |
0.90 | % | 0.97 | % | ||||
Non-performing assets as a percent of total assets |
0.64 | % | 0.68 | % |
The carrying value of residential OREO held as a result of obtaining physical possession upon completion of a foreclosure or through completion of a deed in lieu of foreclosure amounted to $4,285 at September 30, 2015. Also, the recorded investment of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process at September 30, 2015 amounted to $12,786.
The following tables provide an analysis of the aging of the Corporations past due loans by class, segregated by loans and leases originated and loans acquired:
30-89 Days Past Due |
> 90 Days Past Due and Still Accruing |
Non-Accrual | Total Past Due |
Current | Total Loans and Leases |
|||||||||||||||||||
Originated Loans and Leases |
||||||||||||||||||||||||
September 30, 2015 |
||||||||||||||||||||||||
Commercial real estate |
$ | 6,040 | $ | 3 | $ | 25,262 | $ | 31,305 | $ | 3,291,364 | $ | 3,322,669 | ||||||||||||
Commercial and industrial |
3,854 | 3 | 9,529 | 13,386 | 2,396,800 | 2,410,186 | ||||||||||||||||||
Commercial leases |
709 | 14 | 835 | 1,558 | 197,572 | 199,130 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total commercial loans and leases |
10,603 | 20 | 35,626 | 46,249 | 5,885,736 | 5,931,985 | ||||||||||||||||||
Direct installment |
9,874 | 3,326 | 4,718 | 17,918 | 1,625,427 | 1,643,345 | ||||||||||||||||||
Residential mortgages |
11,121 | 1,334 | 2,971 | 15,426 | 997,828 | 1,013,254 | ||||||||||||||||||
Indirect installment |
8,213 | 522 | 1,133 | 9,868 | 963,348 | 973,216 | ||||||||||||||||||
Consumer lines of credit |
3,385 | 629 | 988 | 5,002 | 998,276 | 1,003,278 | ||||||||||||||||||
Other |
134 | 169 | | 303 | 53,557 | 53,860 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
$ | 43,330 | $ | 6,000 | $ | 45,436 | $ | 94,766 | $ | 10,524,172 | $ | 10,618,938 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
December 31, 2014 |
||||||||||||||||||||||||
Commercial real estate |
$ | 9,601 | $ | 313 | $ | 24,132 | $ | 34,046 | $ | 2,997,764 | $ | 3,031,810 | ||||||||||||
Commercial and industrial |
2,446 | 3 | 8,310 | 10,759 | 2,187,034 | 2,197,793 | ||||||||||||||||||
Commercial leases |
961 | 43 | 722 | 1,726 | 176,098 | 177,824 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total commercial loans and leases |
13,008 | 359 | 33,164 | 46,531 | 5,360,896 | 5,407,427 | ||||||||||||||||||
Direct installment |
9,333 | 3,617 | 7,117 | 20,067 | 1,559,703 | 1,579,770 | ||||||||||||||||||
Residential mortgages |
8,709 | 3,891 | 2,964 | 15,564 | 802,022 | 817,586 | ||||||||||||||||||
Indirect installment |
7,804 | 684 | 1,149 | 9,637 | 864,008 | 873,645 | ||||||||||||||||||
Consumer lines of credit |
2,408 | 562 | 719 | 3,689 | 942,738 | 946,427 | ||||||||||||||||||
Other |
13 | 135 | | 148 | 41,142 | 41,290 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
$ | 41,275 | $ | 9,248 | $ | 45,113 | $ | 95,636 | $ | 9,570,509 | $ | 9,666,145 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
16
30-89 Days Past Due |
> 90 Days Past Due and Still Accruing |
Non-Accrual | Total Past Due (1) (2) |
Current | Discount | Total Loans |
||||||||||||||||||||||
Acquired Loans |
||||||||||||||||||||||||||||
September 30, 2015 |
||||||||||||||||||||||||||||
Commercial real estate |
$ | 10,510 | $ | 11,108 | $ | 1,303 | $ | 22,921 | $ | 641,768 | $ | (38,112 | ) | $ | 626,577 | |||||||||||||
Commercial and industrial |
686 | 527 | 107 | 1,320 | 87,163 | (7,314 | ) | 81,169 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total commercial loans |
11,196 | 11,635 | 1,410 | 24,241 | 728,931 | (45,426 | ) | 707,746 | ||||||||||||||||||||
Direct installment |
670 | 834 | | 1,504 | 46,981 | 808 | 49,293 | |||||||||||||||||||||
Residential mortgages |
8,607 | 15,261 | | 23,868 | 386,425 | (37,161 | ) | 373,132 | ||||||||||||||||||||
Indirect installment |
26 | 11 | | 37 | 801 | (26 | ) | 812 | ||||||||||||||||||||
Consumer lines of credit |
1,105 | 810 | 452 | 2,367 | 125,150 | (3,793 | ) | 123,724 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
$ | 21,604 | $ | 28,551 | $ | 1,862 | $ | 52,017 | $ | 1,288,288 | $ | (85,598 | ) | $ | 1,254,707 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
December 31, 2014 |
||||||||||||||||||||||||||||
Commercial real estate |
$ | 12,076 | $ | 12,368 | | $ | 24,444 | $ | 799,991 | $ | (40,537 | ) | $ | 783,898 | ||||||||||||||
Commercial and industrial |
687 | 1,968 | | 2,655 | 127,535 | (9,968 | ) | 120,222 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total commercial loans |
12,763 | 14,336 | | 27,099 | 927,526 | (50,505 | ) | 904,120 | ||||||||||||||||||||
Direct installment |
2,670 | 1,443 | | 4,113 | 59,532 | 1,206 | 64,851 | |||||||||||||||||||||
Residential mortgages |
8,159 | 19,936 | | 28,095 | 456,810 | (39,438 | ) | 445,467 | ||||||||||||||||||||
Indirect installment |
38 | 30 | | 68 | 2,179 | (341 | ) | 1,906 | ||||||||||||||||||||
Consumer lines of credit |
1,048 | 2,279 | | 3,327 | 166,912 | (5,690 | ) | 164,549 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
$ | 24,678 | $ | 38,024 | | $ | 62,702 | $ | 1,612,959 | $ | (94,768 | ) | $ | 1,580,893 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) | Past due information for acquired loans is based on the contractual balance outstanding at September 30, 2015 and December 31, 2014. |
(2) | Acquired loans are considered performing upon acquisition, regardless of whether the customer is contractually delinquent, as long as the Corporation can reasonably estimate the timing and amount of expected cash flows on such loans. In these instances, the Corporation does not consider acquired contractually delinquent loans to be non-accrual or non-performing and continues to recognize interest income on these loans using the accretion method. Acquired loans are considered non-accrual or non-performing when, due to credit deterioration or other factors, the Corporation determines it is no longer able to reasonably estimate the timing and amount of expected cash flows on such loans. The Corporation does not recognize interest income on acquired loans considered non-accrual or non-performing. |
17
The Corporation utilizes the following categories to monitor credit quality within its commercial loan and lease portfolio:
Rating Category |
Definition | |
Pass | in general, the condition and performance of the borrower is satisfactory or better | |
Special Mention | in general, the condition of the borrower has deteriorated, requiring an increased level of monitoring | |
Substandard | in general, the condition and performance of the borrower has significantly deteriorated and could further deteriorate if deficiencies are not corrected | |
Doubtful | in general, the condition of the borrower has significantly deteriorated and the collection in full of both principal and interest is highly questionable or improbable |
The use of these internally assigned credit quality categories within the commercial loan and lease portfolio permits managements use of transition matrices to estimate a quantitative portion of credit risk. The Corporations internal credit risk grading system is based on past experiences with similarly graded loans and leases and conforms with regulatory categories. In general, loan and lease risk ratings within each category are reviewed on an ongoing basis according to the Corporations policy for each class of loans and leases. Each quarter, management analyzes the resulting ratings, as well as other external statistics and factors such as delinquency, to track the migration performance of the commercial loan and lease portfolio. Loans and leases within the Pass credit category or that migrate toward the Pass credit category generally have a lower risk of loss compared to loans and leases that migrate toward the Substandard or Doubtful credit categories. Accordingly, management applies higher risk factors to Substandard and Doubtful credit categories.
The following tables present a summary of the Corporations commercial loans and leases by credit quality category, segregated by loans and leases originated and loans acquired:
Commercial Loan and Lease Credit Quality Categories | ||||||||||||||||||||
Pass | Special Mention |
Substandard | Doubtful | Total | ||||||||||||||||
Originated Loans and Leases |
||||||||||||||||||||
September 30, 2015 |
||||||||||||||||||||
Commercial real estate |
$ | 3,195,455 | $ | 60,727 | $ | 65,568 | $ | 919 | $ | 3,322,669 | ||||||||||
Commercial and industrial |
2,259,932 | 103,650 | 45,014 | 1,590 | 2,410,186 | |||||||||||||||
Commercial leases |
194,783 | 3,149 | 1,198 | | 199,130 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
$ | 5,650,170 | $ | 167,526 | $ | 111,780 | $ | 2,509 | $ | 5,931,985 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
December 31, 2014 |
||||||||||||||||||||
Commercial real estate |
$ | 2,890,830 | $ | 58,630 | $ | 81,951 | $ | 399 | $ | 3,031,810 | ||||||||||
Commercial and industrial |
2,085,893 | 71,420 | 39,684 | 796 | 2,197,793 | |||||||||||||||
Commercial leases |
174,677 | 2,198 | 949 | | 177,824 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
$ | 5,151,400 | $ | 132,248 | $ | 122,584 | $ | 1,195 | $ | 5,407,427 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Acquired Loans |
||||||||||||||||||||
September 30, 2015 |
||||||||||||||||||||
Commercial real estate |
$ | 488,840 | $ | 49,669 | $ | 88,068 | | $ | 626,577 | |||||||||||
Commercial and industrial |
69,036 | 1,969 | 10,164 | | 81,169 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
$ | 557,876 | $ | 51,638 | $ | 98,232 | | $ | 707,746 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
December 31, 2014 |
||||||||||||||||||||
Commercial real estate |
$ | 610,260 | $ | 73,891 | $ | 99,747 | | $ | 783,898 | |||||||||||
Commercial and industrial |
103,862 | 3,506 | 12,854 | | 120,222 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
$ | 714,122 | $ | 77,397 | $ | 112,601 | | $ | 904,120 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
Credit quality information for acquired loans is based on the contractual balance outstanding at September 30, 2015 and December 31, 2014.
The Corporation uses delinquency transition matrices within the consumer and other loan classes to enable management to estimate a quantitative portion of credit risk. Each month, management analyzes payment and volume activity, FICO scores and other external factors such as unemployment, to determine how consumer loans are performing.
18
Following is a table showing originated consumer loans by payment status:
Consumer Loan Credit Quality by Payment Status |
||||||||||||
Performing | Non-Performing | Total | ||||||||||
September 30, 2015 |
||||||||||||
Direct installment |
$ | 1,630,566 | $ | 12,779 | $ | 1,643,345 | ||||||
Residential mortgages |
1,000,774 | 12,480 | 1,013,254 | |||||||||
Indirect installment |
971,936 | 1,280 | 973,216 | |||||||||
Consumer lines of credit |
1,000,929 | 2,349 | 1,003,278 | |||||||||
Other |
53,860 | | 53,860 | |||||||||
December 31, 2014 |
||||||||||||
Direct installment |
$ | 1,565,090 | $ | 14,680 | $ | 1,579,770 | ||||||
Residential mortgages |
802,522 | 15,064 | 817,586 | |||||||||
Indirect installment |
872,340 | 1,305 | 873,645 | |||||||||
Consumer lines of credit |
944,631 | 1,796 | 946,427 | |||||||||
Other |
41,290 | | 41,290 |
Loans and leases are designated as impaired when, in the opinion of management, based on current information and events, the collection of principal and interest in accordance with the loan and lease contract is doubtful. Typically, the Corporation does not consider loans and leases for impairment unless a sustained period of delinquency (i.e., 90-plus days) is noted or there are subsequent events that impact repayment probability (i.e., negative financial trends, bankruptcy filings, imminent foreclosure proceedings, etc.). Impairment is evaluated in the aggregate for consumer installment loans, residential mortgages, consumer lines of credit and commercial loan and lease relationships less than $500 based on loan and lease segment loss given default. For commercial loan relationships greater than or equal to $500, a specific valuation allowance is allocated, if necessary, so that the loan is reported net, at the present value of estimated future cash flows using a market interest rate or at the fair value of collateral if repayment is expected solely from the collateral. Consistent with the Corporations existing method of income recognition for loans and leases, 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 and leases considered to be impaired, by class of loan and lease:
Unpaid Contractual Principal Balance |
Recorded Investment With No Specific Reserve |
Recorded Investment With Specific Reserve |
Total Recorded Investment |
Specific Reserve |
Average Recorded Investment |
|||||||||||||||||||
At or for the Nine Months Ended September 30, 2015 |
||||||||||||||||||||||||
Commercial real estate |
$ | 35,733 | $ | 25,035 | $ | 2,057 | $ | 27,092 | $ | 919 | $ | 26,928 | ||||||||||||
Commercial and industrial |
10,981 | 4,770 | 5,107 | 9,877 | 1,590 | 9,565 | ||||||||||||||||||
Commercial leases |
835 | 835 | | 835 | | 767 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total commercial loans and leases |
47,549 | 30,640 | 7,164 | 37,804 | 2,509 | 37,260 | ||||||||||||||||||
Direct installment |
13,569 | 12,779 | | 12,779 | | 13,538 | ||||||||||||||||||
Residential mortgages |
12,971 | 12,480 | | 12,480 | | 13,744 | ||||||||||||||||||
Indirect installment |
3,220 | 1,280 | | 1,280 | | 1,168 | ||||||||||||||||||
Consumer lines of credit |
2,565 | 2,349 | | 2,349 | | 2,134 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
$ | 79,874 | $ | 59,528 | $ | 7,164 | $ | 66,692 | $ | 2,509 | $ | 67,844 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
At or for the Year Ended December 31, 2014 |
||||||||||||||||||||||||
Commercial real estate |
$ | 34,583 | $ | 25,443 | $ | 883 | $ | 26,326 | $ | 399 | $ | 30,807 | ||||||||||||
Commercial and industrial |
11,412 | 7,609 | 1,948 | 9,557 | 780 | 9,510 | ||||||||||||||||||
Commercial leases |
722 | 722 | | 722 | | 686 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total commercial loans and leases |
46,717 | 33,774 | 2,831 | 36,605 | 1,179 | 41,003 | ||||||||||||||||||
Direct installment |
14,987 | 14,680 | | 14,680 | | 14,248 | ||||||||||||||||||
Residential mortgages |
16,791 | 15,064 | | 15,064 | | 16,924 | ||||||||||||||||||
Indirect installment |
1,467 | 1,305 | | 1,305 | | 1,399 | ||||||||||||||||||
Consumer lines of credit |
1,803 | 1,796 | | 1,796 | | 1,793 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
$ | 81,765 | $ | 66,619 | $ | 2,831 | $ | 69,450 | $ | 1,179 | $ | 75,367 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
19
Interest income is generally no longer recognized once a loan becomes impaired.
These tables do not reflect the additional allowance for credit losses relating to acquired loans in the following pools and categories: commercial real estate of $3,056; commercial and industrial of $579; direct installment of $1,427; residential mortgages of $558; indirect installment of $302; and consumer lines of credit of $642, totaling $6,564 at September 30, 2015 and commercial real estate of $3,286; commercial and industrial of $1,484; direct installment of $1,847; residential mortgages of $858; indirect installment of $232; and consumer lines of credit of $267, totaling $7,974 at December 31, 2014.
Troubled Debt Restructurings
TDRs are loans whose contractual terms have been modified in a manner that grants a concession to a borrower experiencing financial difficulties. TDRs typically result from loss mitigation activities and could include the extension of a maturity date, interest rate reduction, principal forgiveness, deferral or decrease in payments for a period of time and other actions intended to minimize the economic loss and to avoid foreclosure or repossession of collateral.
Following is a summary of the payment status of originated TDRs:
September 30, 2015 |
December 31, 2014 |
|||||||
Accruing: |
||||||||
Performing |
$ | 14,692 | $ | 9,441 | ||||
Non-performing |
21,221 | 23,439 | ||||||
Non-accrual |
7,800 | 8,272 | ||||||
|
|
|
|
|||||
$ | 43,713 | $ | 41,152 | |||||
|
|
|
|
TDRs that are accruing and performing include loans that met the criteria for non-accrual of interest prior to restructuring for which the Corporation can reasonably estimate the timing and amount of the expected cash flows on such loans and for which the Corporation expects to fully collect the new carrying value of the loans. During the nine months ended September 30, 2015, the Corporation returned to performing status $7,577 in restructured residential mortgage loans that have consistently met their modified obligations for more than six months. TDRs that are accruing and non-performing are comprised of consumer loans that have not demonstrated a consistent repayment pattern on the modified terms for more than six months, however it is expected that the Corporation will collect all future principal and interest payments. TDRs that are on non-accrual are not placed on accruing status until all delinquent principal and interest have been paid and the ultimate collectability of the remaining principal and interest is reasonably assured. Some loan modifications classified as TDRs may not ultimately result in the full collection of principal and interest, as modified, and may result in potential incremental losses which are factored into the allowance for credit losses.
Excluding purchased impaired loans, commercial loans over $500 whose terms have been modified in a TDR are generally placed on non-accrual, individually analyzed and measured for estimated impairment based on the fair value of the underlying collateral. The Corporations allowance for credit losses included specific reserves for commercial TDRs of $438 and $371 at September 30, 2015 and December 31, 2014, respectively, and pooled reserves for individual loans under $500 of $1,146 and $1,215 for those same respective periods, based on loan segment loss given default. Upon default, the amount of the recorded investment in the TDR in excess of the fair value of the collateral, less estimated selling costs, is generally considered a confirmed loss and is charged-off against the allowance for credit losses.
All other classes of loans, which are primarily secured by residential properties, whose terms have been modified in a TDR are pooled and measured for estimated impairment based on the expected net present value of the estimated future cash flows of the pool. The Corporations allowance for credit losses included pooled reserves for these classes of loans of $3,350 and $3,448 at September 30, 2015 and December 31, 2014, respectively. Upon default of an individual loan, the Corporations charge-off policy is followed accordingly for that class of loan.
20
The majority of TDRs are the result of interest rate concessions for a limited period of time. Following is a summary of originated loans, by class, that have been restructured:
Three Months Ended September 30, 2015 | Nine Months Ended September 30, 2015 | |||||||||||||||||||||||
Number of Contracts |
Pre- Modification Outstanding Recorded Investment |
Post- Modification Outstanding Recorded Investment |
Number of Contracts |
Pre- Modification Outstanding Recorded Investment |
Post- Modification Outstanding Recorded Investment |
|||||||||||||||||||
Commercial real estate |
| $ | | $ | | 2 | $ | 312 | $ | 168 | ||||||||||||||
Commercial and industrial |
| | | 1 | 5 | 4 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total commercial loans |
| | | 3 | 317 | 172 | ||||||||||||||||||
Direct installment |
121 | 1,757 | 1,726 | 361 | 5,064 | 4,835 | ||||||||||||||||||
Residential mortgages |
10 | 232 | 233 | 31 | 1,048 | 1,074 | ||||||||||||||||||
Indirect installment |
3 | 13 | 10 | 13 | 43 | 40 | ||||||||||||||||||
Consumer lines of credit |
10 | 146 | 143 | 40 | 666 | 610 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
144 | $ | 2,148 | $ | 2,112 | 448 | $ | 7,138 | $ | 6,731 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Three Months Ended September 30, 2014 | Nine Months Ended September 30, 2014 | |||||||||||||||||||||||
Number of Contracts |
Pre- Modification Outstanding Recorded Investment |
Post- Modification Outstanding Recorded Investment |
Number of Contracts |
Pre- Modification Outstanding Recorded Investment |
Post- Modification Outstanding Recorded Investment |
|||||||||||||||||||
Commercial real estate |
1 | $ | 50 | $ | 48 | 10 | $ | 2,633 | $ | 2,187 | ||||||||||||||
Commercial and industrial |
2 | 126 | 119 | 3 | 323 | 307 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total commercial loans |
3 | 176 | 167 | 13 | 2,956 | 2,494 | ||||||||||||||||||
Direct installment |
116 | 1,323 | 1,240 | 378 | 4,922 | 4,693 | ||||||||||||||||||
Residential mortgages |
9 | 480 | 470 | 33 | 1,847 | 1,784 | ||||||||||||||||||
Indirect installment |
7 | 18 | 15 | 20 | 52 | 48 | ||||||||||||||||||
Consumer lines of credit |
6 | 88 | 56 | 31 | 899 | 857 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
141 | $ | 2,085 | $ | 1,948 | 475 | $ | 10,676 | $ | 9,876 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Following is a summary of originated TDRs, by class of loans and leases, for which there was a payment default, excluding loans that were either charged-off or cured by period end. Default occurs when a loan is 90 days or more past due and is within 12 months of restructuring.
Three Months Ended September 30, 2015 (1) |
Nine Months Ended September 30, 2015 (1) |
|||||||||||||||
Number of Contracts |
Recorded Investment |
Number of Contracts |
Recorded Investment |
|||||||||||||
Commercial real estate |
| $ | | | $ | | ||||||||||
Commercial and industrial |
| | 1 | 204 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total commercial loans |
| | 1 | 204 | ||||||||||||
Direct installment |
22 | 87 | 75 | 254 | ||||||||||||
Residential mortgages |
2 | 75 | 5 | 179 | ||||||||||||
Indirect installment |
1 | 6 | 6 | 12 | ||||||||||||
Consumer lines of credit |
| | 1 | 8 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
25 | $ | 168 | 88 | $ | 657 | |||||||||||
|
|
|
|
|
|
|
|
21
Three Months Ended September 30, 2014 (1) |
Nine Months Ended September 30, 2014 (1) |
|||||||||||||||
Number of Contracts |
Recorded Investment |
Number of Contracts |
Recorded Investment |
|||||||||||||
Direct installment |
41 | $ | 356 | 80 | $ | 732 | ||||||||||
Residential mortgages |
2 | 33 | 2 | 33 | ||||||||||||
Indirect installment |
3 | 10 | 4 | 11 | ||||||||||||
Consumer lines of credit |
1 | 50 | 1 | 50 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
47 | $ | 449 | 87 | $ | 826 | |||||||||||
|
|
|
|
|
|
|
|
(1) | The recorded investment is as of period end. |
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses is established as losses are estimated to have occurred through a provision charged to earnings. Losses are charged against the allowance for credit losses when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance for credit losses. Allowances for impaired commercial loans over $500 are generally determined based on collateral values or the present value of estimated cash flows. All other impaired loans and leases are evaluated in the aggregate based on loan segment loss given default. Changes in the allowance for credit losses related to impaired loans and leases are charged or credited to the provision for credit losses.
The allowance for credit losses is maintained at a level that, in managements judgment, is believed adequate to absorb probable losses associated with specifically identified loans and leases, as well as estimated probable credit losses inherent in the remainder of the portfolio. Adequacy of the allowance for credit losses is based on managements evaluation of potential losses in the portfolio, which includes an assessment of past experience, current economic conditions in specific industries and geographic areas, general economic conditions, known and inherent risks in the portfolio, the estimated value of underlying collateral and residuals and changes in the composition of the portfolio. Determination of the allowance for credit losses is inherently subjective as it requires significant estimates, including the amounts and timing of expected future cash flows on impaired loans and leases, estimated losses on pools of homogeneous loans and leases based on transition matrices with predefined loss emergence periods and consideration of qualitative factors, all of which are susceptible to significant change.
Credit impaired loans obtained through acquisitions are accounted for under the provisions of ASC 310-30. The Corporation also accounts for certain acquired loans considered performing at the time of acquisition by analogy to ASC 310-30. ASC 310-30 requires the initial recognition of acquired loans at the present value of amounts expected to be received. Any deterioration in the credit quality of acquired loans subsequent to acquisition would be considered in the allowance for credit losses.
22
Following is a summary of changes in the allowance for credit losses, by loan and lease class:
Balance at Beginning of Period |
Charge- Offs |
Recoveries | Net Charge- Offs |
Provision for credit losses |
Balance at End of Period |
|||||||||||||||||||
Three Months Ended September 30, 2015 |
|
|||||||||||||||||||||||
Commercial real estate |
$ | 39,872 | $ | (1,259 | ) | $ | 370 | $ | (889 | ) | $ | 2,870 | $ | 41,853 | ||||||||||
Commercial and industrial |
32,305 | (584 | ) | 290 | (294 | ) | 3,223 | 35,234 | ||||||||||||||||
Commercial leases |
2,223 | (124 | ) | 50 | (74 | ) | 265 | 2,414 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total commercial loans and leases |
74,400 | (1,967 | ) | 710 | (1,257 | ) | 6,358 | 79,501 | ||||||||||||||||
Direct installment |
22,279 | (2,722 | ) | 565 | (2,157 | ) | 1,214 | 21,336 | ||||||||||||||||
Residential mortgages |
8,579 | (268 | ) | 14 | (254 | ) | 341 | 8,666 | ||||||||||||||||
Indirect installment |
8,909 | (1,650 | ) | 264 | (1,386 | ) | 2,090 | 9,613 | ||||||||||||||||
Consumer lines of credit |
9,118 | (472 | ) | 56 | (416 | ) | 871 | 9,573 | ||||||||||||||||
Other |
911 | (402 | ) | 8 | (394 | ) | 413 | 930 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total allowance on originated loans and leases |
124,196 | (7,481 | ) | 1,617 | (5,864 | ) | 11,287 | 129,619 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Purchased credit-impaired loans |
658 | | | | 36 | 695 | ||||||||||||||||||
Other acquired loans |
6,287 | (153 | ) | 282 | 129 | (546 | ) | 5,869 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total allowance on acquired loans |
6,945 | (153 | ) | 282 | 129 | (510 | ) | 6,564 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total allowance |
$ | 131,141 | $ | (7,634 | ) | $ | 1,899 | $ | (5,735 | ) | $ | 10,777 | $ | 136,183 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Nine Months Ended September 30, 2015 |
||||||||||||||||||||||||
Commercial real estate |
$ | 37,588 | $ | (3,237 | ) | $ | 779 | $ | (2,458 | ) | $ | 6,723 | $ | 41,853 | ||||||||||
Commercial and industrial |
32,645 | (2,684 | ) | 1,386 | (1,298 | ) | 3,887 | 35,234 | ||||||||||||||||
Commercial leases |
2,398 | (328 | ) | 95 | (233 | ) | 249 | 2,414 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total commercial loans and leases |
72,631 | (6,249 | ) | 2,260 | (3,989 | ) | 10,859 | 79,501 | ||||||||||||||||
Direct installment |
20,538 | (8,108 | ) | 1,131 | (6,977 | ) | 7,775 | 21,336 | ||||||||||||||||
Residential mortgages |
8,024 | (891 | ) | 53 | (838 | ) | 1,480 | 8,666 | ||||||||||||||||
Indirect installment |
7,504 | (4,433 | ) | 898 | (3,535 | ) | 5,644 | 9,613 | ||||||||||||||||
Consumer lines of credit |
8,496 | (1,205 | ) | 132 | (1,073 | ) | 2,150 | 9,573 | ||||||||||||||||
Other |
759 | (1,062 | ) | 44 | (1,018 | ) | 1,189 | 930 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total allowance on originated loans and leases |
117,952 | (21,948 | ) | 4,518 | (17,430 | ) | 29,097 | 129,619 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Purchased credit-impaired loans |
660 | (64 | ) | 19 | (45 | ) | 80 | 695 | ||||||||||||||||
Other acquired loans |
7,314 | (698 | ) | 653 | (45 | ) | (1,400 | ) | 5,869 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total allowance on acquired loans |
7,974 | (762 | ) | 672 | (90 | ) | (1,320 | ) | 6,564 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total allowance |
$ | 125,926 | $ | (22,710 | ) | $ | 5,190 | $ | (17,520 | ) | $ | 27,777 | $ | 136,183 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
23
Balance at Beginning of Period |
Charge- Offs |
Recoveries | Net Charge- Offs |
Provision for credit losses |
Balance at End of Period |
|||||||||||||||||||
Three Months Ended September 30, 2014 |
|
|||||||||||||||||||||||
Commercial real estate |
$ | 38,478 | $ | (1,724 | ) | $ | 506 | $ | (1,218 | ) | $ | (80 | ) | $ | 37,180 | |||||||||
Commercial and industrial |
33,017 | (1,796 | ) | 192 | (1,604 | ) | 2,883 | 34,296 | ||||||||||||||||
Commercial leases |
2,079 | (167 | ) | 11 | (156 | ) | 282 | 2,205 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total commercial loans and leases |
73,574 | (3,687 | ) | 709 | (2,978 | ) | 3,085 | 73,681 | ||||||||||||||||
Direct installment |
16,844 | (2,369 | ) | 271 | (2,098 | ) | 4,814 | 19,560 | ||||||||||||||||
Residential mortgages |
5,506 | (87 | ) | 13 | (74 | ) | 1,218 | 6,650 | ||||||||||||||||
Indirect installment |
6,693 | (898 | ) | 211 | (687 | ) | 364 | 6,370 | ||||||||||||||||
Consumer lines of credit |
7,664 | (360 | ) | 50 | (310 | ) | 587 | 7,941 | ||||||||||||||||
Other |
907 | (341 | ) | 9 | (332 | ) | (208 | ) | 367 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total allowance on originated loans and leases |
111,188 | (7,742 | ) | 1,263 | (6,479 | ) | 9,860 | 114,569 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Purchased credit-impaired loans |
448 | (712 | ) | 1 | (711 | ) | 1,026 | 763 | ||||||||||||||||
Other acquired loans |
5,112 | (113 | ) | (41 | ) | (154 | ) | 311 | 5,269 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total allowance on acquired loans |
5,560 | (825 | ) | (40 | ) | (865 | ) | 1,337 | 6,032 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total allowance |
$ | 116,748 | $ | (8,567 | ) | $ | 1,223 | $ | (7,344 | ) | $ | 11,197 | $ | 120,601 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Nine Months Ended September 30, 2014 |
||||||||||||||||||||||||
Commercial real estate |
$ | 32,548 | $ | (5,519 | ) | $ | 1,068 | $ | (4,451 | ) | $ | 9,083 | $ | 37,180 | ||||||||||
Commercial and industrial |
32,603 | (2,849 | ) | 730 | (2,119 | ) | 3,812 | 34,296 | ||||||||||||||||
Commercial leases |
1,903 | (317 | ) | 93 | (224 | ) | 526 | 2,205 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total commercial loans and leases |
67,054 | (8,685 | ) | 1,891 | (6,794 | ) | 13,421 | 73,681 | ||||||||||||||||
Direct installment |
17,824 | (7,154 | ) | 821 | (6,333 | ) | 8,069 | 19,560 | ||||||||||||||||
Residential mortgages |
5,836 | (356 | ) | 61 | (295 | ) | 1,109 | 6,650 | ||||||||||||||||
Indirect installment |
6,409 | (2,396 | ) | 658 | (1,738 | ) | 1,699 | 6,370 | ||||||||||||||||
Consumer lines of credit |
7,231 | (1,023 | ) | 143 | (880 | ) | 1,590 | 7,941 | ||||||||||||||||
Other |
530 | (910 | ) | 19 | (891 | ) | 728 | 367 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total allowance on originated loans and leases |
104,884 | (20,524 | ) | 3,593 | (16,931 | ) | 26,616 | 114,569 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Purchased credit-impaired loans |
1,000 | (2,614 | ) | 1 | (2,613 | ) | 2,376 | 763 | ||||||||||||||||
Other acquired loans |
4,900 | (230 | ) | 983 | 753 | (384 | ) | 5,269 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total allowance on acquired loans |
5,900 | (2,844 | ) | 984 | (1,860 | ) | 1,992 | 6,032 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total allowance |
$ | 110,784 | $ | (23,368 | ) | $ | 4,577 | $ | (18,791 | ) | $ | 28,608 | $ | 120,601 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
24
Following is a summary of the individual and collective originated allowance for credit losses and corresponding loan and lease balances by class:
Allowance | Loans and Leases Outstanding | |||||||||||||||||||
Individually Evaluated for Impairment |
Collectively Evaluated for Impairment |
Loans and Leases |
Individually Evaluated for Impairment |
Collectively Evaluated for Impairment |
||||||||||||||||
September 30, 2015 |
||||||||||||||||||||
Commercial real estate |
$ | 919 | $ | 40,934 | $ | 3,322,669 | $ | 14,182 | $ | 3,308,487 | ||||||||||
Commercial and industrial |
1,590 | 33,644 | 2,410,186 | 6,186 | 2,404,000 | |||||||||||||||
Commercial leases |
| 2,414 | 199,130 | | 199,130 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total commercial loans and leases |
2,509 | 76,992 | 5,931,985 | 20,368 | 5,911,617 | |||||||||||||||
Direct installment |
| 21,336 | 1,643,345 | | 1,643,345 | |||||||||||||||
Residential mortgages |
| 8,666 | 1,013,254 | | 1,013,254 | |||||||||||||||
Indirect installment |
| 9,613 | 973,216 | | 973,216 | |||||||||||||||
Consumer lines of credit |
| 9,573 | 1,003,278 | | 1,003,278 | |||||||||||||||
Other |
| 930 | 53,860 | | 53,860 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
$ | 2,509 | $ | 127,110 | $ | 10,618,938 | $ | 20,368 | $ | 10,598,570 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
December 31, 2014 |
||||||||||||||||||||
Commercial real estate |
$ | 399 | $ | 37,189 | $ | 3,031,810 | $ | 13,952 | $ | 3,017,858 | ||||||||||
Commercial and industrial |
780 | 31,865 | 2,197,793 | 5,837 | 2,191,956 | |||||||||||||||
Commercial leases |
| 2,398 | 177,824 | | 177,824 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total commercial loans and leases |
1,179 | 71,452 | 5,407,427 | 19,789 | 5,387,638 | |||||||||||||||
Direct installment |
| 20,538 | 1,579,770 | | 1,579,770 | |||||||||||||||
Residential mortgages |
| 8,024 | 817,586 | | 817,586 | |||||||||||||||
Indirect installment |
| 7,504 | 873,645 | | 873,645 | |||||||||||||||
Consumer lines of credit |
| 8,496 | 946,427 | | 946,427 | |||||||||||||||
Other |
| 759 | 41,290 | | 41,290 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
$ | 1,179 | $ | 116,773 | $ | 9,666,145 | $ | 19,789 | $ | 9,646,356 | |||||||||||
|
|
|
|
|
|
|
|
|
|
BORROWINGS
Following is a summary of short-term borrowings:
September 30, 2015 |
December 31, 2014 |
|||||||
Securities sold under repurchase agreements |
$ | 256,320 | $ | 882,696 | ||||
Federal Home Loan Bank advances |
450,000 | 820,000 | ||||||
Federal funds purchased |
456,000 | 210,000 | ||||||
Subordinated notes |
124,982 | 128,962 | ||||||
|
|
|
|
|||||
$ | 1,287,302 | $ | 2,041,658 | |||||
|
|
|
|
Securities sold under repurchase agreements is comprised of customer repurchase agreements, which are sweep accounts with next day maturities utilized by larger commercial customers to earn interest on their funds. Securities are pledged to these customers in an amount equal to the outstanding balance.
25
Following is a summary of long-term borrowings:
September 30, 2015 |
December 31, 2014 |
|||||||
Federal Home Loan Bank advances |
$ | 400,017 | $ | 400,042 | ||||
Subordinated notes |
84,351 | 83,155 | ||||||
Junior subordinated debt |
58,285 | 58,246 | ||||||
|
|
|
|
|||||
$ | 542,653 | $ | 541,443 | |||||
|
|
|
|
The Corporations banking affiliate has available credit with the FHLB of $4,467,170 of which $850,017 was used as of September 30, 2015. These advances are secured by loans collateralized by residential mortgages, HELOCs, commercial real estate and FHLB stock and are scheduled to mature in various amounts periodically through the year 2021. Effective interest rates paid on the long-term advances ranged from 0.76% to 4.19% for both the nine months ended September 30, 2015 and the year ended December 31, 2014.
The Corporation had two unconsolidated subsidiary trusts as of September 30, 2015 (collectively, the Trusts): F.N.B. Statutory Trust II and Omega Financial Capital Trust I. One hundred percent of the common equity of each Trust is owned by the Corporation. The Trusts were formed for the purpose of issuing Corporation-obligated mandatorily redeemable capital securities (TPS) to third-party investors. The proceeds from the sale of TPS and the issuance of common equity by the Trusts were invested in junior subordinated debt securities (subordinated debt) issued by the Corporation, which are the sole assets of each Trust. Since third-party investors are the primary beneficiaries, the Trusts are not consolidated in the Corporations financial statements. The Trusts pay dividends on the TPS at the same rate as the distributions paid by the Corporation on the junior subordinated debt held by the Trusts. Omega Financial Capital Trust I was assumed as a result of an acquisition.
Distributions on the subordinated debt issued to the Trusts are recorded as interest expense by the Corporation. The TPS are subject to mandatory redemption, in whole or in part, upon repayment of the subordinated debt. The TPS are eligible for redemption, at any time, at the Corporations discretion. Under recently issued capital guidelines, effective January 1, 2015, the portion of the subordinated debt, net of the Corporations investments in the Trusts, that qualifies as tier 1 capital is limited to 25% of the total $57,500 outstanding at September 30, 2015, with the remaining 75% moving to tier 2 capital. In 2016, the entire balance of the subordinated debt will be included in tier 2 capital. The Corporation has entered into agreements which, when taken collectively, fully and unconditionally guarantee the obligations under the TPS subject to the terms of each of the guarantees.
The following table provides information relating to the Trusts as of September 30, 2015:
Trust Preferred Securities |
Common Securities |
Junior Subordinated Debt |
Stated Maturity Date |
Interest Rate |
||||||||||||||||||
F.N.B. Statutory Trust II |
$ | 21,500 | $ | 665 | $ | 22,165 | 6/15/36 | 1.99 | % | Variable; 3-month LIBOR + 165 basis points (bps) | ||||||||||||
Omega Financial Capital Trust I |
36,000 | 1,114 | 36,120 | 10/18/34 | 2.48 | % | Variable; 3-month LIBOR + 219 bps | |||||||||||||||
|
|
|
|
|
|
|||||||||||||||||
$ | 57,500 | $ | 1,779 | $ | 58,285 | |||||||||||||||||
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|
DERIVATIVE AND HEDGING ACTIVITIES
The Corporation is exposed to certain risks arising from both its business operations and economic conditions. The Corporation principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Corporation manages economic risks, including interest rate risk, primarily by managing the amount, source, and duration of its assets and liabilities, and through the use of derivative instruments. Derivative instruments are used to reduce the effects that changes in interest rates may have on net income and cash flows. The Corporation also uses derivative instruments to facilitate transactions on behalf of its customers.
All derivatives are carried on the consolidated balance sheet at fair value and do not take into account the effects of master netting arrangements the Corporation has with other financial institutions. Credit risk is included in the determination of the estimated fair value of derivatives. Derivative assets are classified in the consolidated balance sheet under other assets and derivative liabilities are classified in the consolidated balance sheet under other liabilities. Changes in fair value are recognized in earnings except for certain changes related to derivative instruments designated as part of a cash flow hedging relationship.
26
The following table presents notional amounts and gross fair values of all derivative assets and derivative liabilities held by the Corporation:
September 30, 2015 | December 31, 2014 | |||||||||||||||||||||||
Notional | Fair Value | Notional | Fair Value | |||||||||||||||||||||
Amount | Asset | Liability | Amount | Asset | Liability | |||||||||||||||||||
Gross Derivatives |
||||||||||||||||||||||||
Subject to master netting arrangements: |
||||||||||||||||||||||||
Interest rate contracts designated |
$ | 250,000 | $ | 4,918 | $ | 855 | $ | 200,000 | $ | 2,109 | $ | 2,330 | ||||||||||||
Interest rate swaps not designated |
1,193,598 | 1 | 61,753 | 972,002 | 140 | 43,655 | ||||||||||||||||||
Equity contracts not designated |
1,180 | 12 | | 1,210 | 47 | | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total subject to master netting arrangements |
1,444,778 | 4,931 | 62,608 | 1,173,212 | 2,296 | 45,985 | ||||||||||||||||||
Not subject to master netting arrangements: |
||||||||||||||||||||||||
Interest rate swaps not designated |
1,193,598 | 61,348 | 1 | 972,002 | 43,602 | 128 | ||||||||||||||||||
Credit risk contracts not designated |
111,976 | 14 | 185 | 68,632 | | | ||||||||||||||||||
Equity contracts not designated |
1,180 | | 12 | 1,210 | | 47 | ||||||||||||||||||
|
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|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total not subject to master netting arrangements |
1,306,754 | 61,362 | 198 | 1,041,844 | 43,602 | 175 | ||||||||||||||||||
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|
|
|
|
|
|
|
|
|||||||||||||
$ | 2,751,532 | $ | 66,293 | $ | 62,806 | $ | 2,215,056 | $ | 45,898 | $ | 46,160 | |||||||||||||
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|
Derivatives Designated as Hedging Instruments under GAAP
Interest Rate Contracts. The Corporation entered into interest rate derivative agreements to modify the interest rate characteristics of certain commercial loans and one of its FHLB advances from variable rate to fixed rate in order to reduce the impact of changes in future cash flows due to market interest rate changes. These agreements are designated as cash flow hedges (i.e., hedging the exposure to variability in expected future cash flows). The effective portion of the derivatives gain or loss is initially reported as a component of other comprehensive income and subsequently reclassified into earnings in the same line item associated with the forecasted transaction when the forecasted transaction affects earnings. The ineffective portion of the gain or loss is reported in earnings immediately.
At September 30, 2015 and December 31, 2014, the notional amount of these interest rate derivative agreements totaled $250,000 and $200,000, respectively. Fair values included in other assets and other liabilities on the consolidated balance sheet applicable to these agreements amounted to $4,918 and $855, respectively, at September 30, 2015, and $2,109 and $2,330, respectively, at December 31, 2014. For the nine months ended September 30, 2015, the amount reclassified from accumulated other comprehensive income (AOCI) to interest income and interest expense totaled $2,440 ($1,586 net of tax) and $115 ($75 net of tax), respectively.
As of September 30, 2015, the maximum length of time over which forecasted interest cash flows are hedged is eight years. In the twelve months that follow September 30, 2015, the Corporation expects to reclassify from the amount currently reported in AOCI net derivative gains of $2,219 ($1,443 net of tax), in association with interest on the hedged loans and FHLB advance. This amount could differ from amounts actually recognized due to changes in interest rates, hedge de-designations, and the addition of other hedges subsequent to September 30, 2015.
There were no components of derivative gains or losses excluded from the assessment of hedge effectiveness related to these cash flow hedges. For the nine months ended September 30, 2015 and 2014, there was no hedge ineffectiveness. Also, during the nine months ended September 30, 2015 and 2014, there were no gains or losses from cash flow hedge derivatives reclassified to earnings because it became probable that the original forecasted transactions would not occur.
Derivatives Not Designated as Hedging Instruments under GAAP
Interest Rate Swaps. The Corporation enters into interest rate swap agreements to meet the financing, interest rate and equity risk management needs of qualifying commercial loan customers. These agreements provide the customer the ability to convert from variable to fixed interest rates. The credit risk associated with derivatives executed with customers is essentially the same as that involved in extending loans and is subject to normal credit policies and monitoring. Swap derivative transactions with customers are not subject to enforceable master netting arrangements and are generally secured by rights to non-financial collateral, such as real and personal property.
27
The Corporation enters into positions with a derivative counterparty in order to offset its exposure on the fixed components of the customer interest rate swap agreements. The Corporation seeks to minimize counterparty credit risk by entering into transactions only with high-quality financial dealer institutions. These arrangements meet the definition of derivatives, but are not designated as hedging instruments under ASC 815, Derivatives and Hedging. Substantially all contracts with dealers that require central clearing (generally, transactions since June 10, 2014) are novated to a SEC registered clearing agency who becomes the Corporations counterparty.
The notional amount of these customer derivative agreements and the offsetting derivative counterparty positions each totaled $1,193,598 at September 30, 2015. Fair values included in other assets and other liabilities on the consolidated balance sheet applicable to these agreements amounted to $61,349 and $61,754, respectively, at September 30, 2015. At December 31, 2014, the notional amount of these customer derivative agreements and the offsetting derivative counterparty positions each totaled $972,002. At December 31, 2014, fair values included in other assets and other liabilities on the consolidated balance sheet amounted to $43,742 and $43,783, respectively.
The interest rate swap agreement with the loan customer and with the counterparty is reported at fair value in other assets and other liabilities on the consolidated balance sheet with any resulting gain or loss recorded in current period earnings as other income or other expense.
Credit Risk Contracts. The Corporation purchases and sells credit protection under risk participation agreements to share with other counterparties some of the credit exposure related to interest rate derivative contracts or to take on credit exposure to generate revenue. The Corporation will make/receive payments under these agreements if a customer defaults on its obligation to perform under certain derivative swap contracts.
Risk participation agreements sold with notional amounts totaling $74,010 as of September 30, 2015 have remaining terms ranging from two to nine years. Under these agreements, the Corporations maximum exposure assuming a customer defaults on its obligation to perform under certain derivative swap contracts with third parties would be $185 at September 30, 2015 and $25 at December 31, 2014.
The fair values of risk participation agreements purchased and sold were not material at September 30, 2015 and December 31, 2014.
Counterparty Credit Risk
The Corporation is party to master netting arrangements with most of its swap derivative counterparties. Collateral, usually marketable securities and/or cash, is exchanged between the Corporation and its counterparties, and is generally subject to thresholds and transfer minimums. For swap transactions that require central clearing, the Corporation posts cash to its clearing agency. Collateral positions are valued daily, and adjustments to amounts received and pledged by the Corporation are made as appropriate to maintain proper collateralization for these transactions.
Certain master netting agreements contain provisions that, if violated, could cause the counterparties to request immediate settlement or demand full collateralization under the derivative instrument. If the Corporation had breached its agreements with its derivative counterparties it would be required to settle its obligations under the agreements at the termination value and would be required to pay an additional $1,816 and $1,862 as of September 30, 2015 and December 31, 2014, respectively, in excess of amounts previously posted as collateral with the respective counterparty.
28
The following table presents information about derivative assets and derivative liabilities that are subject to enforceable master netting arrangements as well as those not subject to enforceable master netting arrangements:
Gross Amount |
Gross Amounts Offset in the Balance Sheet |
Net Amount Presented in the Balance Sheet |
||||||||||
September 30, 2015 |
||||||||||||
Derivative Assets |
||||||||||||
Subject to master netting arrangements: |
||||||||||||
Interest rate contracts |
||||||||||||
Designated |
$ | 4,918 | | $ | 4,918 | |||||||
Not designated |
1 | | 1 | |||||||||
Equity contracts not designated |
12 | | 12 | |||||||||
Not subject to master netting arrangements: |
||||||||||||
Interest rate contracts not designated |
61,348 | | 61,348 | |||||||||
Credit contracts not designated |
14 | | 14 | |||||||||
|
|
|
|
|
|
|||||||
$ | 66,293 | | $ | 66,293 | ||||||||
|
|
|
|
|
|
|||||||
Derivative Liabilities |
||||||||||||
Subject to master netting arrangements: |
||||||||||||
Interest rate contracts |
||||||||||||
Designated |
$ | 855 | | $ | 855 | |||||||
Not designated |
61,753 | | 61,753 | |||||||||
Not subject to master netting arrangements: |
||||||||||||
Interest rate contracts not designated |
1 | | 1 | |||||||||
Credit contracts not designated |
185 | | 185 | |||||||||
Equity contracts not designated |
12 | | 12 | |||||||||
|
|
|
|
|
|
|||||||
$ | 62,806 | | $ | 62,806 | ||||||||
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|
|
|
|
|
|||||||
December 31, 2014 |
||||||||||||
Derivative Assets |
||||||||||||
Subject to master netting arrangements: |
||||||||||||
Interest rate contracts |
||||||||||||
Designated |
$ | 2,109 | | $ | 2,109 | |||||||
Not designated |
140 | | 140 | |||||||||
Equity contracts not designated |
47 | | 47 | |||||||||
Not subject to master netting arrangements: |
||||||||||||
Interest rate contracts not designated |
43,602 | | 43,602 | |||||||||
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|
|
|
|
|
|||||||
$ | 45,898 | | $ | 45,898 | ||||||||
|
|
|
|
|
|
|||||||
Derivative Liabilities |
||||||||||||
Subject to master netting arrangements: |
||||||||||||
Interest rate contracts |
||||||||||||
Designated |
$ | 2,330 | | $ | 2,330 | |||||||
Not designated |
43,655 | | 43,655 | |||||||||
Not subject to master netting arrangements: |
||||||||||||
Interest rate contracts not designated |
128 | | 128 | |||||||||
Equity contracts not designated |
47 | | 47 | |||||||||
|
|
|
|
|
|
|||||||
$ | 46,160 | | $ | 46,160 | ||||||||
|
|
|
|
|
|
29
The following table presents a reconciliation of the net amounts of derivative assets and derivative liabilities presented in the balance sheet to the net amounts that would result in the event of offset:
Net Amount Presented in the Balance Sheet |
Amount Not Offset in the Balance Sheet |
|||||||||||||||
Financial Instruments |
Cash Collateral |
Net Amount |
||||||||||||||
September 30, 2015 |
||||||||||||||||
Derivative Assets |
||||||||||||||||
Interest rate contracts: |
||||||||||||||||
Designated |
$ | 4,918 | $ | 2,557 | $ | 2,361 | | |||||||||
Not designated |
1 | 1 | | | ||||||||||||
Equity contracts not designated |
12 | 12 | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 4,931 | $ | 2,570 | $ | 2,361 | | ||||||||||
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|
|
|
|
|
|
|
|||||||||
Derivative Liabilities |
||||||||||||||||
Interest rate contracts: |
||||||||||||||||
Designated |
$ | 855 | $ | | $ | | $ | 855 | ||||||||
Not designated |
61,753 | 31,827 | 28,290 | 1,636 | ||||||||||||
|
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|
|
|
|
|
|
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$ | 62,608 | $ | 31,827 | $ | 28,290 | $ | 2,491 | |||||||||
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|
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|
|
|||||||||
December 31, 2014 |
||||||||||||||||
Derivative Assets |
||||||||||||||||
Interest rate contracts: |
||||||||||||||||
Designated |
$ | 2,109 | $ | 810 | $ | 1,299 | | |||||||||
Not designated |
140 | 138 | 2 | | ||||||||||||
Equity contracts not designated |
47 | 47 | | | ||||||||||||
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|
|
|
|||||||||
$ | 2,296 | $ | 995 | $ | 1,301 | | ||||||||||
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|
|
|
|||||||||
Derivative Liabilities |
||||||||||||||||
Interest rate contracts: |
||||||||||||||||
Designated |
$ | 2,330 | $ | 2,330 | $ | | $ | | ||||||||
Not designated |
43,655 | 28,646 | 13,243 | 1,766 | ||||||||||||
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|
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|
|||||||||
$ | 45,985 | $ | 30,976 | $ | 13,243 | $ | 1,766 | |||||||||
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The following table presents the effect of certain of the Corporations derivative financial instruments on the income statement:
Income | Nine Months Ended | |||||||||
Statement | September 30, | |||||||||
Location |
2015 | 2014 | ||||||||
Interest Rate Contracts |
Interest income - loans and leases | $ | 2,440 | $ | 2,479 | |||||
Interest Rate Contracts |
Interest expense short-term borrowings | 115 | | |||||||
Interest Rate Swaps |
Other income | (364 | ) | (9 | ) | |||||
Credit Risk Contracts |
Other income | (170 | ) | |
Other
The Corporation has entered into interest rate lock commitments to originate residential mortgage loans held for sale and forward commitments to sell residential mortgage loans to secondary market investors. These arrangements are considered derivative instruments. The fair values of the Corporations rate lock commitments to customers and commitments with investors at September 30, 2015 and December 31, 2014 are not material.
30
COMMITMENTS, CREDIT RISK AND CONTINGENCIES
The Corporation has commitments to extend credit and standby letters of credit that involve certain elements of credit risk in excess of the amount stated in the consolidated balance sheet. The Corporations exposure to credit loss in the event of non-performance by the customer is represented by the contractual amount of those instruments. The credit risk associated with loan commitments and standby letters of credit is essentially the same as that involved in extending loans and leases to customers and is subject to normal credit policies. Since many of these commitments expire without being drawn upon, the total commitment amounts do not necessarily represent future cash flow requirements.
Following is a summary of off-balance sheet credit risk information:
September 30, 2015 |
December 31, 2014 |
|||||||
Commitments to extend credit |
$ | 3,527,479 | $ | 3,665,481 | ||||
Standby letters of credit |
97,875 | 121,186 |
At September 30, 2015, funding of 75.3% of the commitments to extend credit was dependent on the financial condition of the customer. The Corporation has the ability to withdraw such commitments at its discretion. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Based on managements credit evaluation of the customer, collateral may be deemed necessary. Collateral requirements vary and may include accounts receivable, inventory, property, plant and equipment and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Corporation that may require payment at a future date. The credit risk involved in issuing letters of credit is quantified on a quarterly basis, through the review of historical performance of the Corporations portfolios and allocated as a liability on the Corporations balance sheet.
In addition, debt issued by FNB Financial Services, LP, a wholly-owned finance subsidiary, is fully and unconditionally guaranteed by the Corporation.
Other Legal Proceedings
The Corporation and its subsidiaries are involved in various pending legal proceedings in which claims for monetary damages and other relief are asserted. These actions include claims brought against the Corporation and its subsidiaries where the Corporation or a subsidiary acted as one or more of the following: a depository bank, lender, underwriter, fiduciary, financial advisor, broker, agent, acquiror or was engaged in other business activities. Although the ultimate outcome for any asserted claim cannot be predicted with certainty, the Corporation believes that it and its subsidiaries have valid defenses for all asserted claims. Reserves are established for legal claims when losses associated with the claims are judged to be probable and the amount of the loss can be reasonably estimated.
Based on information currently available, advice of counsel, available insurance coverage and established reserves, the Corporation does not anticipate, at the present time, that the aggregate liability, if any, arising out of such legal proceedings will have a material adverse effect on the Corporations consolidated financial position. However, the Corporation cannot determine whether or not any claims asserted against it will have a material adverse effect on its consolidated results of operations in any future reporting period.
STOCK INCENTIVE PLANS
Restricted Stock
The Corporation issues restricted stock awards, consisting of both restricted stock and restricted stock units, to key employees under its Incentive Compensation Plans (Plans). The Corporation issues time-based awards and performance-based awards under these Plans, both of which are based on a three-year vesting period. The grant date fair value of the time-based awards is equal to the price of the Corporations common stock on the grant date. The fair value of the performance-based awards is based on a Monte-Carlo Simulation valuation of the Corporations common stock as of the grant date.
For the nine months ended September 30, 2015 and 2014, the Corporation issued 402,947 and 364,065 restricted stock awards, respectively, with aggregated grant date fair values of $5,302 and $4,954 under these plans. For performance-based restricted stock awards granted, the amount of shares recipients will earn is variable based on the Corporations total stockholder return relative to a specified peer group of financial institutions over the three-year period.
31
These market-based restricted stock units are included in the table below as if the recipients earned shares equal to 100% of the units issued. As of September 30, 2015, the Corporation had available up to 2,072,110 shares of common stock to issue under the Plans.
The unvested restricted stock awards are eligible to receive cash dividends or dividend equivalents which are ultimately used to purchase additional shares of stock and are subject to forfeiture if the requisite service period is not completed or the specified performance criteria are not met. These awards are subject to certain accelerated vesting provisions upon retirement, death, disability or in the event of a change of control as defined in the award agreements.
Share-based compensation expense related to restricted stock awards was $3,287 and $2,294 for the nine months ended September 30, 2015 and 2014, the tax benefit of which was $1,150 and $803, respectively.
The following table summarizes certain information concerning restricted stock awards:
Nine Months Ended September 30, | ||||||||||||||||
2015 | 2014 | |||||||||||||||
Awards | Weighted Average Grant Price |
Awards | Weighted Average Grant Price |
|||||||||||||
Unvested awards outstanding at beginning of period |
1,354,093 | $ | 11.86 | 1,729,033 | $ | 10.23 | ||||||||||
Granted |
402,947 | 13.16 | 364,065 | 13.61 | ||||||||||||
Net adjustment due to performance |
8,884 | 22.73 | (87,512 | ) | 11.41 | |||||||||||
Vested |
(471,997 | ) | 10.66 | (703,428 | ) | 8.79 | ||||||||||
Forfeited |
(29,428 | ) | 13.46 | (50,849 | ) | 11.47 | ||||||||||
Dividend reinvestment |
30,551 | 11.32 | 34,521 | 12.73 | ||||||||||||
|
|
|
|
|||||||||||||
Unvested awards outstanding at end of period |
1,295,050 | 12.73 | 1,285,830 | 11.90 | ||||||||||||
|
|
|
|
The total fair value of awards vested was $5,912 and $10,670 for the nine months ended September 30, 2015 and 2014, respectively.
As of September 30, 2015, there was $6,993 of unrecognized compensation cost related to unvested restricted stock awards, including $70 that is subject to accelerated vesting under the Plans immediate vesting upon retirement provision for awards granted prior to the adoption of ASC 718, Compensation Stock Compensation. The components of the restricted stock awards as of September 30, 2015 are as follows:
Service- Based Awards |
Performance- Based Awards |
Total | ||||||||||
Unvested awards |
648,154 | 646,896 | 1,295,050 | |||||||||
Unrecognized compensation expense |
$ | 4,458 | $ | 2,535 | $ | 6,993 | ||||||
Intrinsic value |
$ | 8,394 | $ | 8,377 | $ | 16,771 | ||||||
Weighted average remaining life (in years) |
2.11 | 1.99 | 2.05 |
Stock Options
All outstanding stock options were assumed in connection with certain of the Corporations completed acquisitions and are fully vested. Upon consummation of those acquisitions, all outstanding stock options issued by the acquired companies were converted into equivalent Corporation stock options. The Corporation issues shares of treasury stock or authorized but unissued shares to satisfy stock options exercised. Shares issued upon the exercise of stock options were 88,899 and 99,284 for the nine months ended September 30, 2015 and 2014, respectively.
32
The following table summarizes certain information concerning stock option awards:
Nine Months Ended September 30, | ||||||||||||||||
2015 | 2014 | |||||||||||||||
Shares | Weighted Average Exercise Price |
Shares | Weighted Average Exercise Price |
|||||||||||||
Options outstanding at beginning of period |
568,834 | $ | 8.86 | 533,524 | $ | 11.50 | ||||||||||
Assumed from acquisitions |
| | 805,507 | 7.39 | ||||||||||||
Exercised |
(88,899 | ) | 5.61 | (140,817 | ) | 6.21 | ||||||||||
Forfeited |
(2,182 | ) | 4.34 | (54,962 | ) | 24.41 | ||||||||||
|
|
|
|
|||||||||||||
Options outstanding and exercisable at end of period |
477,753 | 9.48 | 1,143,252 | 8.64 | ||||||||||||
|
|
|
|
The intrinsic value of outstanding and exercisable stock options at September 30, 2015 was $1,522.
Warrants
In conjunction with its participation in the U.S. Department of the Treasurys (UST) Capital Purchase Program (CPP), the Corporation issued to the UST a warrant to purchase up to 1,302,083 shares of the Corporations common stock. Pursuant to Section 13(H) of the Warrant to Purchase Common Stock, the number of shares of common stock issuable upon exercise of the warrant was reduced in half to 651,042 shares on June 16, 2009, the date the Corporation completed a public offering. The warrant, which expires in 2019, was sold at auction by the UST and has an exercise price of $11.52 per share.
In conjunction with the Parkvale Financial Corporation (Parkvale) acquisition on January 1, 2012, the warrant issued by Parkvale to the UST under the CPP has been converted into a warrant to purchase up to 819,640 shares of the Corporations common stock. This warrant, which was recorded at its fair value on January 1, 2012, was sold at auction by the UST and was exercised at $5.81 per share during the second quarter of 2015.
In conjunction with the Annapolis Bancorp, Inc. (ANNB) acquisition on April 6, 2013, the warrant issued by ANNB to the UST under the CPP has been converted into a warrant to purchase up to 342,564 shares of the Corporations common stock at an exercise price of $3.57 per share. Subsequent adjustments related to actual dividends paid by the Corporation have increased the share amount of these warrants to 374,221, with a resulting lower exercise price of $3.27 per share as of September 30, 2015. The warrant, which was recorded at its fair value on April 6, 2013, was sold at auction by the UST and expires in 2019.
RETIREMENT PLANS
The Corporation sponsors the Retirement Income Plan (RIP), a qualified noncontributory defined benefit pension plan that covered substantially all salaried employees hired prior to January 1, 2008. The RIP covers employees who satisfied minimum age and length of service requirements. The Corporations funding guideline has been to make annual contributions to the RIP each year, if necessary, such that minimum funding requirements have been met. The RIP was frozen as of December 31, 2010.
The Corporation also sponsors two supplemental non-qualified retirement plans. The ERISA Excess Retirement Plan provides retirement benefits equal to the difference, if any, between the maximum benefit allowable under the Internal Revenue Code and the amount that would be provided under the RIP, if no limits were applied. The Basic Retirement Plan (BRP) is applicable to certain officers whom the Board of Directors designates. Officers participating in the BRP receive a benefit based on a target benefit percentage based on years of service at retirement and a designated tier as determined by the Board of Directors. When a participant retires, the basic benefit under the BRP is a monthly benefit equal to the target benefit percentage times the participants highest average monthly cash compensation during five consecutive calendar years within the last ten calendar years of employment. This monthly benefit is reduced by the monthly benefit the participant receives from Social Security, the RIP, the ERISA Excess Retirement Plan and the annuity equivalent of the automatic contributions to the qualified 401(k) defined contribution plan and the ERISA Excess Lost Match Plan. The BRP was frozen as of December 31, 2008. The ERISA Excess Retirement Plan was frozen as of December 31, 2010.
33
The net periodic benefit credit for the defined benefit plans includes the following components:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Service cost |
$ | 18 | $ | 15 | $ | 52 | $ | 47 | ||||||||
Interest cost |
1,470 | 1,610 | 4,424 | 4,802 | ||||||||||||
Expected return on plan assets |
(2,491 | ) | (2,486 | ) | (7,473 | ) | (7,460 | ) | ||||||||
Amortization: |
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Unrecognized net transition asset |
| (6 | ) | | (16 | ) | ||||||||||
Unrecognized prior service cost |
2 | 2 | 6 | 6 | ||||||||||||
Unrecognized loss |
518 | 347 | 1,590 | 1,021 | ||||||||||||
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Net periodic pension credit |
$ | (483 | ) | $ | (518 | ) | $ | (1,401 | ) | $ | (1,600 | ) | ||||
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The Corporations subsidiaries participate in a qualified 401(k) defined contribution plan under which employees may contribute a percentage of their salary. Employees are eligible to participate upon their first day of employment. Under this plan, the Corporation matches 100% of the first six percent that the employee defers. Additionally, the Corporation may provide a performance-based company contribution of up to three percent if the Corporation exceeds annual financial goals. Prior to January 1, 2015, the Corporation matched 100% of the first four percent that the employee deferred, provided an automatic contribution of three percent of compensation at the end of the year and could make an additional performance-based company contribution of up to two percent if the Corporation achieved its performance goals for the plan year. The Corporations contribution expense was $5,794 and $7,595 for the nine months ended September 30, 2015 and 2014, respectively.
The Corporation also sponsors an ERISA Excess Lost Match Plan for certain officers. This plan provides retirement benefits equal to the difference, if any, between the maximum benefit allowable under the Internal Revenue Code and the amount that would have been provided under the qualified 401(k) defined contribution plan, if no limits were applied.
INCOME TAXES
The Corporation bases its provision for income taxes upon income before income taxes, adjusted for the effect of certain tax-exempt income and non-deductible expenses. In addition, the Corporation reports certain items of income and expense in different periods for financial reporting and tax return purposes. The Corporation recognizes the tax effects of these temporary differences currently in the deferred income tax provision or benefit. The Corporation computes deferred tax assets or liabilities based upon the differences between the financial statement and income tax bases of assets and liabilities using the applicable marginal tax rate.
The Corporation evaluates the probability that it will ultimately realize the full value of its deferred tax assets. Realization of the Corporations deferred tax assets is dependent upon a number of factors including the existence of any cumulative losses in prior periods, the amount of taxes paid in available carry-back periods, expectations for future earnings, applicable tax planning strategies and assessment of current and future economic and business conditions. The Corporation establishes a valuation allowance when it is more likely than not that the Corporation will not be able to realize a benefit from its deferred tax assets, or when future deductibility is uncertain.
At September 30, 2015, the Corporation anticipates that it will not utilize some of its state net operating loss carryforwards and other net deferred tax assets at certain of its subsidiaries and has recorded a valuation allowance against these deferred tax assets. The Corporation believes that, except for the portion which is covered by a valuation allowance, it is more likely than not the Corporation will realize the benefits of its deferred tax assets, net of the valuation allowance, at September 30, 2015, based on the levels of projected taxable income of some of its entities.
34
COMPREHENSIVE INCOME
The components of comprehensive income, net of related tax, are as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Net income |
$ | 40,053 | $ | 35,391 | $ | 120,527 | $ | 104,746 | ||||||||
Other comprehensive income (loss): |
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Securities available for sale: |
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Unrealized gains (losses) arising during the period, net of tax expense (benefit) of $3,649, $(1,551), $4,302 and $10,399 |
6,777 | (2,881 | ) | 7,989 | 19,312 | |||||||||||
Reclassification adjustment for gains included in net income, net of tax expense of $110, $412, $112 and $3,995 |
(204 | ) | (766 | ) | (207 | ) | (7,420 | ) | ||||||||
Derivative instruments: |
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Unrealized gains arising during the period, net of tax expense of $1,709, $40, $2,353 and $2,979 |
3,174 | 74 | 4,370 | 5,532 | ||||||||||||
Reclassification adjustment for gains included in net income, net of tax expense of $286, $293, $854 and $867 |
(531 | ) | (543 | ) | (1,586 | ) | (1,610 | ) | ||||||||
Pension and postretirement benefit obligations: |
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Unrealized gains arising during the period, net of tax expense of $183, $121, $560 and $355 |
340 | 224 | 1,040 | 659 | ||||||||||||
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Other comprehensive income (loss) |
9,556 | (3,892 | ) | 11,606 | 16,473 | |||||||||||
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Comprehensive income |
$ | 49,609 | $ | 31,499 | $ | 132,133 | $ | 121,219 | ||||||||
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The amounts reclassified from AOCI related to securities available for sale are included in net securities gains on the Consolidated Statements of Comprehensive Income, while the amounts reclassified from AOCI related to derivative instruments are included in interest income on loans and leases on the Consolidated Statements of Comprehensive Income.
The tax (benefit) expense amounts reclassified from AOCI in connection with the securities available for sale and derivative instruments reclassifications are included in income taxes on the Consolidated Statements of Comprehensive Income.
The following table presents changes in AOCI, net of tax, by component:
Unrealized Net Gains (Losses) on Securities Available for Sale |
Unrealized Net Gains (Losses) on Derivative Instruments |
Unrecognized Pension and Postretirement Obligations |
Total | |||||||||||||
Nine Months Ended September 30, 2015 |
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Balance at beginning of period |
$ | (440 | ) | $ | (143 | ) | $ | (45,420 | ) | $ | (46,003 | ) | ||||
Other comprehensive income before reclassifications |
7,989 | 4,370 | 1,040 | 13,399 | ||||||||||||
Amounts reclassified from AOCI |
(207 | ) | (1,586 | ) | | (1,793 | ) | |||||||||
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Net current period other comprehensive income |
7,782 | 2,784 | 1,040 | 11,606 | ||||||||||||
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Balance at end of period |
$ | 7,342 | $ | 2,641 | $ | (44,380 | ) | $ | (34,397 | ) | ||||||
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35
EARNINGS PER COMMON SHARE
Basic earnings per common share is calculated by dividing net income available to common stockholders by the weighted average number of shares of common stock outstanding net of unvested shares of restricted stock.
Diluted earnings per common share is calculated by dividing net income available to common stockholders by the weighted average number of shares of common stock outstanding, adjusted for the dilutive effect of potential common shares issuable for stock options, warrants and restricted shares, as calculated using the treasury stock method. Adjustments to the weighted average number of shares of common stock outstanding are made only when such adjustments dilute earnings per common share.
The following table sets forth the computation of basic and diluted earnings per common share:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Net income |
$ | 40,053 | $ | 35,391 | $ | 120,527 | $ | 104,746 | ||||||||
Less: Preferred stock dividends |
2,010 | 2,010 | 6,030 | 6,342 | ||||||||||||
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Net income available to common stockholders |
$ | 38,043 | $ | 33,381 | $ | 114,497 | $ | 98,404 | ||||||||
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Basic weighted average common shares outstanding |
175,343,789 | 167,260,386 | 174,816,692 | 165,229,206 | ||||||||||||
Net effect of dilutive stock options, warrants, restricted stock and convertible debt |
1,169,043 | 1,623,741 | 1,383,450 | 1,695,637 | ||||||||||||
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Diluted weighted average common shares outstanding |
176,512,832 | 168,884,127 | 176,200,142 | 166,924,843 | ||||||||||||
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Earnings per common share: |
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Basic |
$ | 0.22 | $ | 0.20 | $ | 0.65 | $ | 0.60 | ||||||||
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Diluted |
$ | 0.22 | $ | 0.20 | $ | 0.65 | $ | 0.59 | ||||||||
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For the three months ended September 30, 2015 and 2014, 19,385 and 32,419 shares of common stock, respectively, related to stock options and warrants were excluded from the computation of diluted earnings per common share because the exercise price of the shares was greater than the average market price of the common shares and, therefore, the effect would be anti-dilutive. For the nine months ended September 30, 2015 and 2014, 20,440 and 38,151 shares of common stock, respectively, related to stock options and warrants were excluded from the computation of diluted earnings per common share because the exercise price of the shares was greater than the average market price of the common shares and, therefore, the effect would be anti-dilutive.
CASH FLOW INFORMATION
Following is a summary of supplemental cash flow information:
Nine Months Ended September 30 | 2015 | 2014 | ||||||
Interest paid on deposits and other borrowings |
$ | 35,531 | $ | 31,804 | ||||
Income taxes paid |
41,000 | 17,000 | ||||||
Transfers of loans to other real estate owned |
6,901 | 7,784 | ||||||
Financing of other real estate owned sold |
372 | 287 |
36
BUSINESS SEGMENTS
The Corporation operates in four reportable segments: Community Banking, Wealth Management, Insurance and Consumer Finance.
| The Community Banking segment provides commercial and consumer banking services. Commercial banking solutions include corporate banking, small business banking, investment real estate financing, international banking, business credit, capital markets and lease financing. Consumer banking products and services include deposit products, mortgage lending, consumer lending and a complete suite of mobile and online banking services. |
| The Wealth Management segment provides a broad range of personal and corporate fiduciary services including the administration of decedent and trust estates. In addition, it offers various alternative products, including securities brokerage and investment advisory services, mutual funds and annuities. |
| The Insurance segment includes a full-service insurance agency offering all lines of commercial and personal insurance through major carriers. The Insurance segment also includes a reinsurer. |
| The Consumer Finance segment primarily makes installment loans to individuals and purchases installment sales finance contracts from retail merchants. The Consumer Finance segment activity is funded through the sale of the Corporations subordinated notes at the finance companys branch offices. |
The following tables provide financial information for these segments of the Corporation. The information provided under the caption Parent and Other represents operations not considered to be reportable segments and/or general operating expenses of the Corporation, and includes the parent company, other non-bank subsidiaries and eliminations and adjustments which are necessary for purposes of reconciliation to the consolidated amounts.
Community Banking |
Wealth Management |
Insurance | Consumer Finance |
Parent and Other |
Consolidated | |||||||||||||||||||
At or for the Three Months Ended September 30, 2015 |
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Interest income |
$ | 125,281 | $ | | $ | 22 | $ | 10,096 | $ | 1,798 | $ | 137,197 | ||||||||||||
Interest expense |
10,473 | | | 878 | 645 | 11,996 | ||||||||||||||||||
Net interest income |
114,808 | | 22 | 9,218 | 1,153 | 125,201 | ||||||||||||||||||
Provision for credit losses |
8,702 | | | 1,750 | 325 | 10,777 | ||||||||||||||||||
Non-interest income |
29,667 | 8,682 | 3,602 | 716 | (1,308 | ) | 41,359 | |||||||||||||||||
Non-interest expense |
80,906 | 6,703 | 3,201 | 4,983 | 322 | 96,115 | ||||||||||||||||||
Intangible amortization |
1,824 | 69 | 141 | | | 2,034 | ||||||||||||||||||
Income tax expense (benefit) |
15,804 | 696 | 105 | 1,473 | (497 | ) | 17,581 | |||||||||||||||||
Net income (loss) |
37,239 | 1,214 | 177 | 1,728 | (305 | ) | 40,053 | |||||||||||||||||
Total assets |
16,658,489 | 21,099 | 22,201 | 187,721 | (53,437 | ) | 16,836,073 | |||||||||||||||||
Total intangibles |
855,164 | 10,516 | 13,069 | 1,809 | | 880,558 | ||||||||||||||||||
At or for the Three Months Ended September 30, 2014 |
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Interest income |
$ | 120,122 | $ | | $ | 24 | $ | 9,773 | $ | 1,647 | $ | 131,566 | ||||||||||||
Interest expense |
9,435 | | | 826 | 686 | 10,947 | ||||||||||||||||||
Net interest income |
110,687 | | 24 | 8,947 | 961 | 120,619 | ||||||||||||||||||
Provision for credit losses |
9,427 | | | 1,519 | 251 | 11,197 | ||||||||||||||||||
Non-interest income |
27,179 | 8,174 | 3,373 | 719 | (1,893 | ) | 37,552 | |||||||||||||||||
Non-interest expense |
79,243 | 6,294 | 2,943 | 4,983 | (71 | ) | 93,392 | |||||||||||||||||
Intangible amortization |
2,282 | 72 | 101 | | | 2,455 | ||||||||||||||||||
Income tax expense (benefit) |
14,347 | 656 | 128 | 1,216 | (611 | ) | 15,736 | |||||||||||||||||
Net income (loss) |
32,567 | 1,152 | 225 | 1,948 | (501 | ) | 35,391 | |||||||||||||||||
Total assets |
15,584,832 | 21,892 | 19,148 | 182,301 | (51,128 | ) | 15,757,045 | |||||||||||||||||
Total intangibles |
856,464 | 10,792 | 10,223 | 1,809 | | 879,288 |
37
Community Banking |
Wealth Management |
Insurance | Consumer Finance |
Parent and Other |
Consolidated | |||||||||||||||||||
At or for the Nine Months Ended September 30, 2015 |
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Interest income |
$ | 371,366 | $ | | $ | 67 | $ | 29,467 | $ | 5,114 | $ | 406,014 | ||||||||||||
Interest expense |
30,580 | | | 2,593 | 1,952 | 35,125 | ||||||||||||||||||
Net interest income |
340,786 | | 67 | 26,874 | 3,162 | 370,889 | ||||||||||||||||||
Provision for credit losses |
21,974 | | | 5,288 | 515 | 27,777 | ||||||||||||||||||
Non-interest income |
85,281 | 26,268 | 9,948 | 2,124 | (4,328 | ) | 119,293 | |||||||||||||||||
Non-interest expense |
236,324 | 20,127 | 10,952 | 14,785 | 967 | 283,155 | ||||||||||||||||||
Intangible amortization |
5,601 | 205 | 342 | | | 6,148 | ||||||||||||||||||
Income tax expense (benefit) |
48,744 | 2,143 | (433 | ) | 3,660 | (1,539 | ) | 52,575 | ||||||||||||||||
Net income (loss) |
113,424 | 3,793 | (846 | ) | 5,265 | (1,109 | ) | 120,527 | ||||||||||||||||
Total assets |
16,658,489 | 21,099 | 22,201 | 187,721 | (53,437 | ) | 16,836,073 | |||||||||||||||||
Total intangibles |
855,164 | 10,516 | 13,069 | 1,809 | | 880,558 | ||||||||||||||||||
At or for the Nine Months Ended September 30, 2014 |
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Interest income |
$ | 339,974 | $ | | $ | 74 | $ | 28,716 | $ | 5,122 | $ | 373,886 | ||||||||||||
Interest expense |
26,413 | | | 2,481 | 2,356 | 31,250 | ||||||||||||||||||
Net interest income |
313,561 | | 74 | 26,235 | 2,766 | 342,636 | ||||||||||||||||||
Provision for credit losses |
23,148 | | | 4,754 | 706 | 28,608 | ||||||||||||||||||
Non-interest income |
86,512 | 23,530 | 10,582 | 2,120 | (3,932 | ) | 118,812 | |||||||||||||||||
Non-interest expense |
231,390 | 19,038 | 8,900 | 14,800 | 1,270 | 275,398 | ||||||||||||||||||
Intangible amortization |
6,680 | 216 | 303 | | | 7,199 | ||||||||||||||||||
Income tax expense (benefit) |
41,738 | 1,555 | 521 | 3,386 | (1,703 | ) | 45,497 | |||||||||||||||||
Net income (loss) |
97,117 | 2,721 | 932 | 5,415 | (1,439 | ) | 104,746 | |||||||||||||||||
Total assets |
15,584,832 | 21,892 | 19,148 | 182,301 | (51,128 | ) | 15,757,045 | |||||||||||||||||
Total intangibles |
856,454 | 10,792 | 10,223 | 1,809 | | 879,288 |
FAIR VALUE MEASUREMENTS
The Corporation uses fair value measurements to record fair value adjustments to certain financial assets and liabilities and to determine fair value disclosures. Securities available for sale and derivatives are recorded at fair value on a recurring basis. Additionally, from time to time, the Corporation may be required to record at fair value other assets on a non-recurring basis, such as mortgage loans held for sale, certain impaired loans, OREO and certain other assets.
Fair value is defined as an exit price, representing the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements are not adjusted for transaction costs. Fair value is a market-based measure considered from the perspective of a market participant who holds the asset or owes the liability rather than an entity-specific measure.
In determining fair value, the Corporation uses various valuation approaches, including market, income and cost approaches. ASC 820, Fair Value Measurements and Disclosures, establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability, which are developed based on market data obtained from sources independent of the Corporation. Unobservable inputs reflect the Corporations assumptions about the assumptions that market participants would use in pricing an asset or liability, which are developed based on the best information available in the circumstances.
38
The fair value hierarchy gives the highest priority to unadjusted quoted market prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). The fair value hierarchy is broken down into three levels based on the reliability of inputs as follows:
Measurement |
Definition | |
Level 1 | valuation is based upon unadjusted quoted market prices for identical instruments traded in active markets. | |
Level 2 | valuation is based upon quoted market prices for similar instruments traded in active markets, quoted market prices for identical or similar instruments traded in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by market data. | |
Level 3 | valuation is derived from other valuation methodologies including discounted cash flow models and similar techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in determining fair value. |
A financial instruments level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.
Following is a description of the valuation methodologies the Corporation uses for financial instruments recorded at fair value on either a recurring or non-recurring basis:
Securities Available For Sale
Securities available for sale consists of both debt and equity securities. These securities are recorded at fair value on a recurring basis. At September 30, 2015, 99.9% of these securities used valuation methodologies involving market-based or market-derived information, collectively Level 1 and Level 2 measurements, to measure fair value. The remaining 0.1% of these securities was measured using model-based techniques, with primarily unobservable (Level 3) inputs.
The Corporation closely monitors market conditions involving assets that have become less actively traded. If the fair value measurement is based upon recent observable market activity of such assets or comparable assets (other than forced or distressed transactions) that occur in sufficient volume, and do not require significant adjustment using unobservable inputs, those assets are classified as Level 1 or Level 2; if not, they are classified as Level 3. Making this assessment requires significant judgment.
The Corporation uses prices from independent pricing services and, to a lesser extent, indicative (non-binding) quotes from independent brokers, to measure the fair value of investment securities. The Corporation validates prices received from pricing services or brokers using a variety of methods, including, but not limited to, comparison to secondary pricing services, corroboration of pricing by reference to other independent market data such as secondary broker quotes and relevant benchmark indices, and review of pricing information by Corporate personnel familiar with market liquidity and other market-related conditions.