Edgar Filing: FNB CORP/FL/

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Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2016

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

For the transition period from to

Commission file number 001-31940

F.N.B. CORPORATION

(Exact name of registrant as specified in its charter)


Florida		25-1255406
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)


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


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

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

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

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

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

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

APPLICABLE ONLY TO CORPORATE ISSUERS:

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


Class		Outstanding at April 30, 2016
Common Stock, $0.01 Par Value		209,803,853 Shares

F.N.B. CORPORATION

FORM 10-Q

March 31, 2016

INDEX


		PAGE
PART I – FINANCIAL INFORMATION
Item 1.	Financial Statements

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

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		44

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		63

Item 4.	Controls and Procedures		63

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings		64

Item 1A.	Risk Factors		64

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		64

Item 3.	Defaults Upon Senior Securities		64

Item 4.	Mine Safety Disclosures		64

Item 5.	Other Information		64

Item 6.	Exhibits		64

Signatures			65

PART I – FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

F.N.B. CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

In thousands, except share and per share data


	March 31, 2016			December 31, 2015
	(Unaudited)
Assets
Cash and due from banks	$	260,426		$	207,399
Interest bearing deposits with banks		85,519			281,720

Cash and Cash Equivalents		345,945			489,119
Securities available for sale		2,099,343			1,630,567
Securities held to maturity (fair value of $1,803,453 and $1,643,416)		1,776,020			1,637,061
Residential mortgage loans held for sale		7,683			4,781
Loans and leases, net of unearned income of $49,332 and $51,642		14,165,599			12,190,440
Allowance for credit losses		(147,800	)		(142,012	)

Net Loans and Leases		14,017,799			12,048,428
Premises and equipment, net		208,672			159,080
Goodwill		1,006,934			833,086
Core deposit and other intangible assets, net		80,116			45,644
Bank owned life insurance		310,106			308,192
Other assets		471,906			401,704

Total Assets	$	20,324,524		$	17,557,662

Liabilities
Deposits:
Non-interest bearing demand	$	3,896,782		$	3,059,949
Interest bearing demand		6,512,461			5,311,589
Savings		2,291,656			1,786,459
Certificates and other time deposits		2,689,584			2,465,466

Total Deposits		15,390,483			12,623,463
Short-term borrowings		1,563,888			2,048,896
Long-term borrowings		657,445			641,480
Other liabilities		194,687			147,641

Total Liabilities		17,806,503			15,461,480
Stockholders’ Equity
Preferred stock—$0.01 par value; liquidation preference of $1,000 per share
Authorized – 20,000,000 shares
Issued – 110,877 shares		106,882			106,882
Common stock—$0.01 par value
Authorized – 500,000,000 shares
Issued – 211,016,267 and 176,595,060 shares		2,112			1,766
Additional paid-in capital		2,214,959			1,808,210
Retained earnings		242,045			243,217
Accumulated other comprehensive loss		(33,651	)		(51,133	)
Treasury stock – 1,282,976 and 1,153,390 shares at cost		(14,326	)		(12,760	)

Total Stockholders’ Equity		2,518,021			2,096,182

Total Liabilities and Stockholders’ Equity	$	20,324,524		$	17,557,662

See accompanying Notes to Consolidated Financial Statements

F.N.B. CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

In thousands, except per share data

Unaudited


	Three Months Ended March 31,
	2016		2015
Interest Income
Loans and leases, including fees	$	137,121	$	117,739
Securities:
Taxable		16,493		14,214
Nontaxable		2,018		1,373
Dividends		5		11
Other		117		32

Total Interest Income		155,754		133,369
Interest Expense
Deposits		9,486		7,449
Short-term borrowings		2,361		1,768
Long-term borrowings		3,553		2,231

Total Interest Expense		15,400		11,448

Net Interest Income		140,354		121,921
Provision for credit losses		11,768		8,136

Net Interest Income After Provision for Credit Losses		128,586		113,785
Non-Interest Income
Service charges		21,276		15,817
Trust fees		5,282		5,161
Insurance commissions and fees		4,921		4,369
Securities commissions and fees		3,374		3,057
Net securities gains (losses)		71		(9	)
Mortgage banking operations		1,595		1,799
Bank owned life insurance		2,062		1,843
Other		7,463		6,145

Total Non-Interest Income		46,044		38,182
Non-Interest Expense
Salaries and employee benefits		56,425		49,269
Net occupancy		9,266		8,976
Equipment		8,556		7,648
Amortization of intangibles		2,649		2,115
Outside services		9,303		8,777
FDIC insurance		3,968		3,689
Merger and acquisition related		24,940		—
Other		21,541		14,181

Total Non-Interest Expense		136,648		94,655

Income Before Income Taxes		37,982		57,312
Income taxes		11,850		16,969

Net Income		26,132		40,343
Less: Preferred stock dividends		2,010		2,010

Net Income Available to Common Stockholders	$	24,122	$	38,333

Net Income per Common Share – Basic	$	0.12	$	0.22
Net Income per Common Share – Diluted		0.12		0.22
Cash Dividends per Common Share		0.12		0.12
Comprehensive Income	$	43,614	$	51,366

See accompanying Notes to Consolidated Financial Statements

F.N.B. CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Dollars in thousands, except per share data

Unaudited


	Preferred Stock		Common Stock		Additional Paid-In Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total
Balance at January 1, 2016	$	106,882	$	1,766	$	1,808,210	$	243,217		$	(51,133	)	$	(12,760	)	$	2,096,182
Comprehensive income								26,132			17,482						43,614
Dividends declared:
Preferred stock								(2,010	)								(2,010	)
Common stock: $0.12/share								(25,294	)								(25,294	)
Issuance of common stock				5		1,657								(1,566	)		96
Issuance of common stock—acquisitions				341		403,679											404,020
Restricted stock compensation						1,136											1,136
Tax benefit of stock-based compensation						277											277

Balance at March 31, 2016	$	106,882	$	2,112	$	2,214,959	$	242,045		$	(33,651	)	$	(14,326	)	$	2,518,021

Balance at January 1, 2015	$	106,882	$	1,754	$	1,798,984	$	176,120		$	(46,003	)	$	(16,281	)	$	2,021,456
Comprehensive income								40,343			11,023						51,366
Dividends declared:
Preferred stock								(2,010	)								(2,010	)
Common stock: $0.12/share								(20,992	)								(20,992	)
Issuance of common stock				9		5,986								(1,560	)		4,435
Restricted stock compensation						340											340
Tax benefit of stock-based compensation						681											681

Balance at March 31, 2015	$	106,882	$	1,763	$	1,805,991	$	193,461		$	(34,980	)	$	(17,841	)	$	2,055,276

See accompanying Notes to Consolidated Financial Statements

F.N.B. CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Dollars in thousands

Unaudited


	Three Months Ended March 31,
	2016			2015
Operating Activities
Net income	$	26,132		$	40,343
Adjustments to reconcile net income to net cash flows provided by operating activities:
Depreciation, amortization and accretion		11,759			11,725
Provision for credit losses		11,768			8,136
Deferred tax expense		255			3,217
Net securities (gains) losses		(71	)		9
Tax benefit of stock-based compensation		(277	)		(681	)
Loans originated for sale		(95,503	)		(71,499	)
Loans sold		94,765			74,870
Gain on sale of loans		(2,164	)		(1,813	)
Net change in:
Interest receivable		(109	)		(1,704	)
Interest payable		1,301			(178	)
Bank owned life insurance		(1,850	)		(1,323	)
Other, net		47,865			5,187

Net cash flows provided by operating activities		93,871			66,289

Investing Activities
Net change in loans and leases		(122,982	)		(167,685	)
Securities available for sale:
Purchases		(510,271	)		(90,156	)
Sales		615,199			33,228
Maturities		170,266			66,275
Securities held to maturity:
Purchases		(217,574	)		(130,506	)
Sales		—			69,394
Maturities		77,369			—
Purchase of bank owned life insurance		(64	)		(8	)
Increase in premises and equipment		(13,878	)		(6,199	)
Net cash received in business combinations		46,854			—

Net cash flows provided by (used in) investing activities		44,919			(225,657	)

Financing Activities
Net change in:
Demand (non-interest bearing and interest bearing) and savings accounts		411,857			445,685
Time deposits		28,558			(20,779	)
Short-term borrowings		(687,409	)		(301,158	)
Increase in long-term borrowings		42,371			6,598
Decrease in long-term borrowings		(51,546	)		(6,579	)
Net proceeds from issuance of common stock		1,232			4,775
Tax benefit of stock-based compensation		277			681
Cash dividends paid:
Preferred stock		(2,010	)		(2,010	)
Common stock		(25,294	)		(20,992	)

Net cash flows (used in) provided by financing activities		(281,964	)		106,221

Net Decrease in Cash and Cash Equivalents		(143,174	)		(53,147	)
Cash and cash equivalents at beginning of period		489,119			287,393

Cash and Cash Equivalents at End of Period	$	345,945		$	234,246

See accompanying Notes to Consolidated Financial Statements

F.N.B. CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Dollars in thousands, except share data

(Unaudited)

March 31, 2016

NATURE OF OPERATIONS

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 March 31, 2016, the Corporation had 317 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 fiduciary and brokerage services, asset management, private banking and insurance. The Corporation also operates Regency Finance Company (Regency), which had 76 consumer finance offices in Pennsylvania, Ohio, Kentucky and Tennessee as of March 31, 2016.

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The Corporation’s accompanying consolidated financial statements and these notes to the financial statements include subsidiaries in which the Corporation has a controlling financial interest. The Corporation owns and operates FNBPA, First National Trust Company, First National Investment Services Company, LLC, F.N.B. Investment Advisors, Inc., First National Insurance Agency, LLC, Regency, 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 Corporation’s financial position and results of operations in accordance with U.S. generally accepted accounting principles (GAAP). All significant intercompany balances and transactions have been eliminated. Certain prior period amounts have been reclassified to conform to the current period presentation. Events occurring subsequent to the date of the balance sheet have been evaluated for potential recognition or disclosure in the consolidated financial statements through the date of the filing of the consolidated financial statements with the Securities and Exchange Commission (SEC).

Certain information and note disclosures normally included in consolidated financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC. The interim operating results are not necessarily indicative of operating results the Corporation expects for the full year. These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Corporation’s Annual Report on Form 10-K filed with the SEC on February 26, 2016.

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, fair value measurements and income taxes.

Business Combinations

Business combinations are accounted for by applying the acquisition method in accordance with Accounting Standards Codification (ASC) 805, Business Combinations. Under the acquisition method, identifiable assets acquired and liabilities assumed, and any non-controlling interest in the acquiree at the acquisition date are measured at their fair

values as of that date, and are recognized separately from goodwill. Results of operations of the acquired entities are included in the consolidated statement of comprehensive income from the date of acquisition. Beginning in 2016, measurement-period adjustments are recorded in the period the adjustment is identified. Prior to this time, measurement-period adjustments were recorded retrospectively.

Cloud Computing Arrangements

Beginning in 2016, for new or materially modified contracts, the Corporation prospectively adopted new accounting principles to evaluate fees paid for cloud computing arrangements to determine if those arrangements include the purchase of or license to software that should be accounted for separately as internal-use software. If a contract includes the purchase or license to software that should be accounted for separately as internal-use software, the contract is amortized over the software’s identified useful life in amortization of intangibles. For contracts that do not include a software license, the contract is accounted for as a service contract with fees paid recorded in other non-interest expense.

Stock Based Compensation

The Corporation accounts for its stock based compensation awards in accordance with Accounting Standards Codification (ASC) 718, Compensation—Stock Compensation, which requires the measurement and recognition of compensation expense, based on estimated fair values, for all share-based awards, including stock options and restricted stock, made to employees and directors.

ASC 718 requires companies to estimate the fair value of share-based awards on the date of grant. The value of the portion of the award that is ultimately expected to vest is recognized as expense in the Corporation’s consolidated statement of comprehensive income over the shorter of requisite service periods or the period through the date that the employee first becomes eligible to retire. Some of the Corporation’s plans contain performance targets that affect vesting and can be achieved after the requisite service period and accounted for as a performance condition. Beginning in 2016, the performance target is not reflected in the estimation of the award’s grant date fair value and compensation cost is recognized in the period in which it becomes probable that the performance condition will be achieved.

Because share-based compensation expense is based on awards that are ultimately expected to vest, share-based compensation expense has been reduced to account for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

Variable Interest Entities

The Corporation has investments in certain partnerships and limited liability entities that qualify as variable interest entities (VIEs). These entities are evaluated on an on-going basis to determine whether they should be consolidated. Consolidation of a VIE is appropriate if a reporting entity holds a controlling financial interest in the VIE. The Corporation has determined that it does not hold a controlling financial interest in any of the VIEs and, therefore, the assets and liabilities of these entities are not consolidated into its financial statements. Instead, investments in these entities are accounted for under the equity method of accounting and are evaluated periodically for impairment. The recorded investment in these entities is reported in other assets on the consolidated balance sheets.

2. NEW ACCOUNTING STANDARDS

The following paragraphs summarize accounting pronouncements applicable to the Corporation that have been issued by the Financial Accounting Standards Board (FASB) but are not yet effective.

Revenue Recognition

Accounting Standards Update (ASU or Update) 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, clarifies several aspects of identifying performance obligations and licensing implementation guidance including guidance that is expected to reduce the cost and complexity by eliminating the need to assess whether goods and services are performance obligations if they are immaterial in the context of the contract with the customer.

ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), clarifies the guidance on principal versus agent considerations when another party is involved in providing goods and services to a customer. The guidance requires a company to determine whether it is required to provide the specific good or service itself or to arrange for that good or service to be provided by another party.

ASU 2014-09, Revenue from Contracts with Customers (Topic 606), modifies the guidance used to recognize revenue from contracts with customers for transfers of goods and services and transfers of nonfinancial assets, unless those contracts are within the scope of other guidance. The guidance also requires new qualitative and quantitative disclosures about contract balances and performance obligations. The Update can be adopted using either the full retrospective method or modified retrospective method. The Corporation intends to use the modified retrospective approach when adopted.

The guidance for these Revenue Recognition Updates is effective for annual periods beginning in the first quarter of 2018. Early application is permitted beginning in the first quarter of 2017. The Corporation is currently assessing the potential impact to its Consolidated Financial Statements.

Stock Based Compensation

ASU 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. The Update is effective in the first quarter of 2017 by an application method determined by the type of transaction impacted by the adoption. Early application is permitted. The Corporation is currently assessing the potential impact to its Consolidated Financial Statements.

Investments

ASU 2016-07, Investments—Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting, eliminates the requirement for an investor to retrospectively apply the equity method when an investment that it had accounted for by another method qualifies for use of the equity method. The Update is effective in the first quarter of 2017 with prospective application. Early application is permitted. This Update is not expected to have a material effect on the Consolidated Financial Statements.

Derivative and Hedging Activities

ASU 2016-06, Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments (a consensus of the Emerging Issues Task Force), provides clarification that determination of whether an embedded contingent put or call option in a financial instrument is clearly and closely related to the debt host requires only an analysis of the four-step decision sequence described in ASC 815-15-25-42. The Update is effective in the first quarter of 2017 with modified retrospective application. Early application is permitted. If an entity is no longer required to bifurcate an embedded derivative as a result of this Update and elects fair value accounting, the effects should be reported as a cumulative-effect adjustment. This Update is not expected to have a material effect on the Consolidated Financial Statements.

ASU 2016-05, Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships (a consensus of the Emerging Issues Task Force), clarifies that a change in counterparty to a derivative instrument that has been designated as a hedging instrument under Topic 815 does not, in and of itself, require dedesignation of that hedging relationship provided all other hedge accounting criteria continue to be met. The Update is effective in the first quarter of 2017 with either prospective or modified retrospective application. Early application is permitted. This Update is not expected to have a material effect on the Consolidated Financial Statements.

Extinguishments of Liabilities

ASU 2016-04, Liabilities—Extinguishments of Liabilities (Subtopic 405-20): Recognition of Breakage for Certain Prepaid Stored-Value Products (a consensus of the Emerging Issues Task Force), requires entities that sell prepaid stored-value products redeemable for goods, services or cash at third-party merchants to recognize breakage. The Update is effective in the first quarter of 2018 with either the modified retrospective method by means of a cumulative-effect adjustment to retained earnings or retrospective application. Early application is permitted. This Update is not expected to have a material effect on the Consolidated Financial Statements.

Leases

ASU 2016-02, Leases (Topic 842), requires lessees to put most leases on their balance sheet but recognize expenses in the income statement similar to current accounting. In addition, the Update changes the guidance for sale-leaseback transactions, initial direct costs and lease executory costs for most entities. All entities will classify leases to determine how to recognize lease related revenue and expense. The Update is effective in the first quarter of 2019 with modified retrospective application including a number of optional practical expedients. Early application is permitted. The Corporation is currently assessing the potential impact to its Consolidated Financial Statements.

Financial Instruments – Recognition and Measurement

ASU 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, amends the presentation and accounting for certain financial instruments, including liabilities measured at fair value under the fair value option, and equity investments. The guidance also updates fair value presentation and disclosure requirements for financial instruments measured at amortized cost. The Update is effective in the first quarter of 2018 with a cumulative-effect adjustment as of the beginning of the fiscal year of adoption. Early application is prohibited except for the provision requiring the recognition of changes in fair value related to changes in an entity’s own credit risk in other comprehensive income for financial liabilities measured using the fair value option. This Update is not expected to have a material effect on the Consolidated Financial Statements.

3. MERGERS AND ACQUISITIONS

Branch Purchase – Fifth Third Bank

On April 22, 2016, the Corporation completed its purchase of 17 branch-banking locations and related consumer loans in the Pittsburgh, Pennsylvania metropolitan area from Fifth Third Bank, in which the Corporation acquired approximately $99,500 in loans and $302,000 in deposits. The assets and liabilities relating to the branches purchased were recorded on the Corporation’s consolidated balance sheet at their preliminary fair values as of April 22, 2016, and the related results of operation for these branches have been included in the Corporation’s consolidated statement of comprehensive income since that date. Based on the preliminary purchase price allocation, the Corporation recorded $10,798 in goodwill and $5,200 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.

Metro Bancorp, Inc.

On February 13, 2016, the Corporation completed its acquisition of Metro Bancorp, Inc. (METR), a bank holding company based in Harrisburg, Pennsylvania. The acquisition will enhance the Corporation’s distribution and scale across Central Pennsylvania, strengthen its position as the largest Pennsylvania-based regional bank and allow the Corporation to leverage the significant infrastructure investments made in connection with the expansion of its product offerings and risk management systems. On the acquisition date, the estimated fair values of METR included $2,797,199 in assets, $1,869,046 in loans and $2,327,219 in deposits. The acquisition was valued at $404,020 and resulted in the Corporation issuing 34,041,181 shares of its common stock in exchange for 14,345,319 shares of METR common stock. The Corporation also acquired the fully vested outstanding stock options of METR. The assets and liabilities of METR were recorded on the Corporation’s consolidated balance sheet at their preliminary estimated fair values as of February 13, 2016, the acquisition date, and METR’s results of operations have been included in the Corporation’s consolidated statement of comprehensive income since that date. METR’s banking affiliate, Metro Bank, was merged into FNBPA on February 13, 2016. Based on the preliminary purchase price allocation, the Corporation recorded $173,848 in goodwill and $36,801 in core deposit intangibles as a result of the acquisition. These fair value estimates are provisional amounts based on third party valuations that are currently under review. None of the goodwill is deductible for income tax purposes.

The following pro forma financial information for the three months ended March 31, 2015 reflects the Corporation’s estimated consolidated pro forma results of operations as if the METR acquisition occurred on January 1, 2015, unadjusted for potential cost savings and other business synergies the Corporation expects to receive as a result of the acquisition:


	F.N.B. Corporation		METR		Pro Forma Adjustments			Pro Forma Combined
Revenue (net interest income and non-interest income)	$	160,103	$	33,626	$	(1,061	)	$	192,668
Net income		40,343		5,722		(2,003	)		44,062
Net income available to common stockholders		38,333		5,702		(1,983	)		42,052
Earnings per common share – basic		0.22		0.40		—			0.20
Earnings per common share – diluted		0.22		0.39		—			0.20

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

In connection with the METR acquisition, the Corporation incurred expenses related to systems conversions and other costs of integrating and conforming acquired operations with and into the Corporation. These merger-related charges amounted to $24,577 and were expensed as incurred. Severance costs comprised 50.9% of the merger-related expenses, with the remainder consisting of other non-interest expenses, including professional services, marketing and advertising, technology and communications, occupancy and equipment, and charitable contributions. The Corporation also incurred issuance costs of $743 which were charged to additional paid-in capital.

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 (BofA). The fair value of the acquired assets totaled $154,619, including $148,159 in cash, $4,485 in goodwill and intangible assets, and $1,975 in fixed and other assets. The Corporation also assumed $154,619 in deposits associated with these branches. The Corporation paid a deposit premium of 1.94% and acquired an immaterial amount of loans as part of the transaction. The Corporation’s operating results for 2015 include the impact of branch activity subsequent to the September 18, 2015 closing date. Goodwill of $1,485 for this transaction is deductible for income tax purposes.

The following table summarizes the amounts recorded on the consolidated balance sheet as of each of the acquisition dates in conjunction with the METR acquisition and the BofA branch acquisition discussed above:


	METR		BofA Branches
Fair value of consideration paid	$	404,020	$	—
Fair value of identifiable assets acquired:
Cash and cash equivalents		46,854		148,159
Securities		722,980		—
Loans		1,869,046		842
Other intangible assets		36,801		3,000
Other assets		121,518		1,133

Total identifiable assets acquired		2,797,199		153,134
Fair value of liabilities assumed:
Deposits		2,327,219		154,619
Borrowings		227,539		—
Other liabilities		12,269		—

Total liabilities assumed		2,567,027		154,619
Fair value of net identifiable assets acquired		230,172		(1,485	)

Goodwill recognized (1)	$	173,848	$	1,485

(1)

All of the goodwill for both of these transactions has been recorded by FNBPA.

4. 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
March 31, 2016
U.S. Treasury	$	29,771	$	223	$	—		$	29,994
U.S. government-sponsored entities		398,497		2,617		(36	)		401,078
Residential mortgage-backed securities:
Agency mortgage-backed securities		1,075,195		12,691		(21	)		1,087,865
Agency collateralized mortgage obligations		524,722		3,812		(2,904	)		525,630
Non-agency collateralized mortgage obligations		1,111		—		(15	)		1,096
Commercial mortgage-backed securities		3,674		—		(1	)		3,673
States of the U.S. and political subdivisions		39,620		283		(99	)		39,804
Other debt securities		9,754		177		(1,023	)		8,908

Total debt securities		2,082,344		19,803		(4,099	)		2,098,048
Equity securities		975		320		—			1,295

	$	2,083,319	$	20,123	$	(4,099	)	$	2,099,343

December 31, 2015
U.S. Treasury	$	29,738	$	58	$	—		$	29,796
U.S. government-sponsored entities		368,463		856		(1,325	)		367,994
Residential mortgage-backed securities:
Agency mortgage-backed securities		703,069		4,594		(2,832	)		704,831
Agency collateralized mortgage obligations		503,328		1,032		(8,530	)		495,830
Non-agency collateralized mortgage obligations		1,177		13		—			1,190
Commercial mortgage-backed securities		4,299		—		(12	)		4,287
States of the U.S. and political subdivisions		10,748		309		—			11,057
Other debt securities		14,729		208		(651	)		14,286

Total debt securities		1,635,551		7,070		(13,350	)		1,629,271
Equity securities		975		324		(3	)		1,296

	$	1,636,526	$	7,394	$	(13,353	)	$	1,630,567

Securities Held to Maturity
March 31, 2016
U.S. Treasury	$	500	$	184	$	—		$	684
U.S. government-sponsored entities		122,333		1,606		—			123,939
Residential mortgage-backed securities:
Agency mortgage-backed securities		830,640		18,063		(4	)		848,699
Agency collateralized mortgage obligations		520,576		4,123		(2,931	)		521,768
Non-agency collateralized mortgage obligations		2,436		4		(9	)		2,431
Commercial mortgage-backed securities		50,526		1,222		(92	)		51,656
States of the U.S. and political subdivisions		249,009		5,441		(174	)		254,276

	$	1,776,020	$	30,643	$	(3,210	)	$	1,803,453

December 31, 2015
U.S. Treasury	$	500	$	153	$	—		$	653
U.S. government-sponsored entities		137,385		809		(395	)		137,799
Residential mortgage-backed securities:
Agency mortgage-backed securities		709,970		9,858		(1,176	)		718,652
Agency collateralized mortgage obligations		499,694		803		(7,657	)		492,840
Non-agency collateralized mortgage obligations		2,681		14		—			2,695
Commercial mortgage-backed securities		51,258		115		(259	)		51,114
States of the U.S. and political subdivisions		235,573		4,191		(101	)		239,663

	$	1,637,061	$	15,943	$	(9,588	)	$	1,643,416

The increase in securities in 2016 primarily relates to the METR acquisition completed on February 13, 2016.

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


	Three Months Ended
	March 31,
	2016		2015
Gross gains	$	71	$	—
Gross losses		—		(9	)

	$	71	$	(9	)

As of March 31, 2016, the amortized cost and fair value of securities, by contractual maturities, were as follows:


	Available for Sale				Held to Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less	$	179	$	180	$	12,126	$	12,140
Due from one to five years		441,067		444,025		114,319		115,578
Due from five to ten years		29,112		29,332		53,587		54,986
Due after ten years		7,284		6,247		191,810		196,195

		477,642		479,784		371,842		378,899
Residential mortgage-backed securities:
Agency mortgage-backed securities		1,075,195		1,087,865		830,640		848,699
Agency collateralized mortgage obligations		524,722		525,630		520,576		521,768
Non-agency collateralized mortgage obligations		1,111		1,096		2,436		2,431
Commercial mortgage-backed securities		3,674		3,673		50,526		51,656
Equity securities		975		1,295		—		—

	$	2,083,319	$	2,099,343	$	1,776,020	$	1,803,453

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 March 31, 2016 and December 31, 2015, securities with a carrying value of $2,472,531 and $1,728,939, respectively, were pledged to secure public deposits, trust deposits and for other purposes as required by law. Securities with a carrying value of $361,338 and $272,629 at March 31, 2016 and December 31, 2015, respectively, were pledged as collateral for short-term borrowings. In total, 73.1% of securities as of March 31, 2016 were pledged for purposes as stated above, compared to 61.3% as of December 31, 2015.

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


	Less than 12 Months							12 Months or More							Total
	#		Fair Value		Unrealized Losses			#		Fair Value		Unrealized Losses			#		Fair Value		Unrealized Losses
Securities Available for Sale
March 31, 2016
U.S. government-sponsored entities		2	$	17,960	$	(36	)		—	$	—	$	—			2	$	17,960	$	(36	)
Residential mortgage-backed securities:
Agency mortgage-backed securities		2		56,402		(21	)		—		—		—			2		56,402		(21	)
Agency collateralized mortgage obligations		2		29,786		(28	)		15		175,354		(2,876	)		17		205,140		(2,904	)
Non-agency collateralized mortgage obligations		1		1,091		(15	)		—		—		—			1		1,091		(15	)
Commercial mortgage-backed securities		1		3,673		(1	)		—		—		—			1		3,673		(1	)
States of the U.S. and political subdivisions		16		21,325		(99	)		—		—		—			16		21,325		(99	)
Other debt securities		—		—		—			3		3,875		(1,023	)		3		3,875		(1,023	)

		24	$	130,237	$	(200	)		18	$	179,229	$	(3,899	)		42	$	309,466	$	(4,099	)

December 31, 2015
U.S. government-sponsored entities		6	$	99,131	$	(814	)		2	$	34,487	$	(511	)		8	$	133,618	$	(1,325	)
Residential mortgage-backed securities:
Agency mortgage-backed securities		19		359,250		(2,832	)		—		—		—			19		359,250		(2,832	)
Agency collateralized mortgage obligations		9		126,309		(1,366	)		18		215,330		(7,164	)		27		341,639		(8,530	)
Commercial mortgage-backed securities		1		4,287		(12	)		—		—		—			1		4,287		(12	)
Other debt securities		—		—		—			3		4,245		(651	)		3		4,245		(651	)
Equity securities		1		632		(3	)		—		—		—			1		632		(3	)

		36	$	589,609	$	(5,027	)		23	$	254,062	$	(8,326	)		59	$	843,671	$	(13,353	)

Securities Held to Maturity
March 31, 2016
Residential mortgage-backed securities:
Agency mortgage-backed securities		1	$	922		(4	)		—	$	—		—			1	$	922	$	(4	)
Agency collateralized mortgage obligations		—		—		—			16		181,913		(2,931	)		16		181,913		(2,931	)
Non-agency collateralized mortgage obligations		2		1,294		(9	)		—		—		—			2		1,294		(9	)
Commercial mortgage-backed securities		1		8,579		(92	)		—		—		—			1		8,579		(92	)
States of the U.S. and political subdivisions		5		10,007		(173	)		1		2,055		(1	)		6		12,062		(174	)

		9	$	20,802	$	(278	)		17	$	183,968	$	(2,932	)		26	$	204,770	$	(3,210	)

December 31, 2015
U.S. government-sponsored entities		3	$	39,843	$	(173	)		1	$	14,778	$	(222	)		4	$	54,621	$	(395	)
Residential mortgage-backed securities:
Agency mortgage-backed securities		17		212,024		(1,159	)		1		917		(17	)		18		212,941		(1,176	)
Agency collateralized mortgage obligations		11		150,593		(1,434	)		14		160,716		(6,223	)		25		311,309		(7,657	)
Commercial mortgage-backed securities		3		46,278		(259	)		—		—		—			3		46,278		(259	)
States of the U.S. and political subdivisions		9		17,616		(101	)		—		—		—			9		17,616		(101	)

		43	$	466,354	$	(3,126	)		16	$	176,411	$	(6,462	)		59	$	642,765	$	(9,588	)

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.

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:


	Equities		Total
For the Three Months Ended March 31, 2016
Beginning balance	$	27	$	27
Loss where impairment was not previously recognized		—		—
Additional loss where impairment was previously recognized		—		—
Reduction due to credit impaired securities sold		—		—

Ending balance	$	27	$	27

For the Three Months Ended March 31, 2015
Beginning balance	$	27	$	27
Loss where impairment was not previously recognized		—		—
Additional loss where impairment was previously recognized		—		—
Reduction due to credit impaired securities sold		—		—

Ending balance	$	27	$	27

The Corporation did not recognize any impairment losses on securities for the three months ended March 31, 2016 or 2015.

States of the U.S. and Political Subdivisions

The Corporation’s municipal bond portfolio with a carrying amount of $288,813 as of March 31, 2016 is highly rated with an average entity-specific rating of AA and 97.0% of the portfolio rated A or better. General obligation bonds comprise 99.8% of the portfolio. Geographically, municipal bonds support the Corporation’s primary footprint as 94.8% of the securities are from municipalities located throughout Pennsylvania, Ohio and Maryland. The average holding size of the securities in the municipal bond portfolio is $1,730. In addition to the strong stand-alone ratings, 81.0% 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.

5. LOANS AND LEASES

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


	Originated Loans		Acquired Loans		Total Loans and Leases
March 31, 2016
Commercial real estate	$	3,605,301	$	1,648,359	$	5,253,660
Commercial and industrial		2,574,321		471,946		3,046,267
Commercial leases		202,605		—		202,605

Total commercial loans and leases		6,382,227		2,120,305		8,502,532
Direct installment		1,686,037		104,765		1,790,802
Residential mortgages		1,105,680		425,699		1,531,379
Indirect installment		1,025,413		314		1,025,727
Consumer lines of credit		1,034,681		226,812		1,261,493
Other		53,666		—		53,666

	$	11,287,704	$	2,877,895	$	14,165,599


	Originated Loans		Acquired Loans		Total Loans and Leases
December 31, 2015
Commercial real estate	$	3,531,146	$	577,910	$	4,109,056
Commercial and industrial		2,534,351		67,371		2,601,722
Commercial leases		204,553		—		204,553

Total commercial loans and leases		6,270,050		645,281		6,915,331
Direct installment		1,660,717		45,919		1,706,636
Residential mortgages		1,044,689		351,282		1,395,971
Indirect installment		996,175		554		996,729
Consumer lines of credit		1,021,830		115,425		1,137,255
Other		38,518		—		38,518

	$	11,031,979	$	1,158,461	$	12,190,440

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.

The loan and lease portfolio consists principally of loans to individuals and small- and medium-sized businesses within the Corporation’s primary market area of Pennsylvania, eastern Ohio, Maryland and northern West Virginia. The total loan portfolio also contains consumer finance loans to individuals in Pennsylvania, Ohio, Tennessee and Kentucky, which totaled $180,889 or 1.3% of total loans and leases at March 31, 2016, compared to $186,162 or 1.5% of total loans and leases at December 31, 2015. Due to the relative size of the consumer finance loan portfolio, these loans are not segregated from other consumer loans.

As of March 31, 2016, 38.2% of the commercial real estate loans were owner-occupied, while the remaining 61.8% were non-owner-occupied, compared to 38.1% and 61.9%, respectively, as of December 31, 2015. As of March 31, 2016 and December 31, 2015, the Corporation had commercial construction loans of $458,388 and $352,322, respectively, representing 3.2% and 2.9% 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:


	March 31, 2016		December 31, 2015
Accounted for under ASC 310-30:
Outstanding balance	$	2,849,661	$	1,258,418
Carrying amount		2,485,752		1,011,139
Accounted for under ASC 310-20:
Outstanding balance		403,252		146,161
Carrying amount		386,564		140,595
Total acquired loans:
Outstanding balance		3,252,913		1,404,579
Carrying amount		2,872,316		1,151,734

The carrying amount of purchased credit impaired loans included in the table above totaled $17,161 at March 31, 2016 and $5,940 at December 31, 2015, 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.


	Three Months Ended March 31,
	2016			2015
Balance at beginning of period	$	256,120		$	331,899
Acquisitions		284,092			—
Reduction due to unexpected early payoffs		(9,375	)		(11,909	)
Reclass from non-accretable difference		10,494			7,676
Disposals/transfers		(260	)		(118	)
Accretion		(13,204	)		(16,264	)

Balance at end of period	$	527,867		$	311,284

The following table reflects amounts at acquisition for all purchased loans subject to ASC 310-30 (impaired and non-impaired) acquired from METR.


	Acquired Impaired Loans			Acquired Performing Loans			Total
Contractually required cash flows at acquisition	$	99,611		$	2,074,623		$	2,174,234
Non-accretable difference (expected losses and foregone interest)		(52,995	)		(248,666	)		(301,661	)

Cash flows expected to be collected at acquisition		46,616			1,825,957			1,872,573
Accretable yield		(1,063	)		(283,029	)		(284,092	)

Basis in acquired loans at acquisition	$	45,553		$	1,542,928		$	1,588,481

In addition, loans purchased in the METR acquisition that were not subject to ASC 310-30 had the following balances at the date of acquisition: fair value of $273,966; unpaid principal balance of $296,484; and contractual cash flows not expected to be collected of $98,021.

Credit Quality

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

Non-performing loans include non-accrual loans and non-performing troubled debt restructurings (TDRs). Past due loans are reviewed on a monthly basis to identify loans for non-accrual status. The Corporation places a loan on non-accrual status and discontinues interest accruals on originated loans generally when principal or interest is due and has remained unpaid for a certain number of days or when the principal and interest is deemed uncollectible, unless the loan is both well secured and in the process of collection. Commercial loans are placed on non-accrual at 90 days, installment loans are placed on non-accrual at 120 days and residential mortgages and consumer lines of credit are generally placed on non-accrual at 180 days. 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:


	March 31, 2016			December 31, 2015
Non-accrual loans	$	63,036		$	49,897
Troubled debt restructurings		21,453			22,028

Total non-performing loans		84,489			71,925
Other real estate owned (OREO)		50,526			38,918

Total non-performing assets	$	135,015		$	110,843

Asset quality ratios:
Non-performing loans as a percent of total loans and leases		0.60	%		0.59	%
Non-performing loans + OREO as a percent of total loans and leases + OREO		0.95	%		0.91	%
Non-performing assets as a percent of total assets		0.66	%		0.63	%

The carrying value of residential OREO held as a result of obtaining physical possession upon completion of a foreclosure or through completion of a deed in lieu of foreclosure totaled $4,590 at March 31, 2016 and $5,219 at December 31, 2015. The recorded investment of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process at March 31, 2016 and December 31, 2015 totaled $10,174 and $11,725, respectively.

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


	30-89 Days Past Due		³ 90 Days Past Due and Still Accruing		Non- Accrual		Total Past Due		Current		Total Loans and Leases
Originated Loans and Leases
March 31, 2016
Commercial real estate	$	9,342	$	1	$	24,083	$	33,426	$	3,571,875	$	3,605,301
Commercial and industrial		4,653		3		24,627		29,283		2,545,038		2,574,321
Commercial leases		1,422		15		894		2,331		200,274		202,605

Total commercial loans and leases		15,417		19		49,604		65,040		6,317,187		6,382,227
Direct installment		6,845		3,463		5,646		15,954		1,670,083		1,686,037
Residential mortgages		7,398		1,545		3,446		12,389		1,093,291		1,105,680
Indirect installment		5,479		369		1,347		7,195		1,018,218		1,025,413
Consumer lines of credit		1,523		661		1,954		4,138		1,030,543		1,034,681
Other		49		63		—		112		53,554		53,666

	$	36,711	$	6,120	$	61,997	$	104,828	$	11,182,876	$	11,287,704

December 31, 2015
Commercial real estate	$	11,006	$	1	$	23,503	$	34,510	$	3,496,636	$	3,531,146
Commercial and industrial		5,409		3		14,382		19,794		2,514,557		2,534,351
Commercial leases		924		—		659		1,583		202,970		204,553

Total commercial loans and leases		17,339		4		38,544		55,887		6,214,163		6,270,050
Direct installment		9,254		3,813		4,806		17,873		1,642,844		1,660,717
Residential mortgages		8,135		1,470		2,882		12,487		1,032,202		1,044,689
Indirect installment		9,472		379		1,361		11,212		984,963		996,175
Consumer lines of credit		2,410		1,189		1,181		4,780		1,017,050		1,021,830
Other		73		169		—		242		38,276		38,518

	$	46,683	$	7,024	$	48,774	$	102,481	$	10,929,498	$	11,031,979


	30-89 Days Past Due		³ 90 Days Past Due and Still Accruing		Non- Accrual		Total Past Due (1) (2)		Current		Discount			Total Loans
Acquired Loans
March 31, 2016
Commercial real estate	$	27,329	$	23,563	$	740	$	51,632	$	1,695,949	$	(99,222	)	$	1,648,359
Commercial and industrial		1,879		6,596		152		8,627		499,764		(36,445	)		471,946

Total commercial loans		29,208		30,159		892		60,259		2,195,713		(135,667	)		2,120,305
Direct installment		2,855		958		—		3,813		97,964		2,988			104,765
Residential mortgages		11,010		15,498		—		26,508		436,528		(37,337	)		425,699
Indirect installment		—		6		—		6		413		(105	)		314
Consumer lines of credit		1,578		1,292		147		3,017		228,682		(4,887	)		226,812

	$	44,651	$	47,913	$	1,039	$	93,603	$	2,959,300	$	(175,008	)	$	2,877,895

December 31, 2015
Commercial real estate	$	6,399	$	12,752	$	931	$	20,082	$	593,128	$	(35,300	)	$	577,910
Commercial and industrial		1,065		616		103		1,784		72,037		(6,450	)		67,371

Total commercial loans		7,464		13,368		1,034		21,866		665,165		(41,750	)		645,281
Direct installment		837		659		—		1,496		43,596		827			45,919
Residential mortgages		5,871		15,136		—		21,007		366,742		(36,467	)		351,282
Indirect installment		32		9		—		41		571		(58	)		554
Consumer lines of credit		830		546		89		1,465		117,443		(3,483	)		115,425

	$	15,034	$	29,718	$	1,123	$	45,875	$	1,193,517	$	(80,931	)	$	1,158,461

(1)	Past due information for acquired loans is based on the contractual balance outstanding at March 31, 2016 and December 31, 2015.

(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.

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 management’s use of transition matrices to estimate a quantitative portion of credit risk. The Corporation’s internal credit risk grading system is based on past experiences with similarly graded loans and 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 Corporation’s 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 Corporation’s commercial loans and leases by credit quality category, segregated by loans and leases originated and loans acquired:


	Originated Commercial Loan and Lease Credit Quality Categories
	Pass		Special Mention		Substandard		Doubtful		Total
Originated Loans and Leases
March 31, 2016
Commercial real estate	$	3,445,547	$	97,426	$	61,928	$	400	$	3,605,301
Commercial and industrial		2,346,483		114,408		107,818		5,612		2,574,321
Commercial leases		194,947		3,121		4,537		—		202,605

	$	5,986,977	$	214,955	$	174,283	$	6,012	$	6,382,227

December 31, 2015
Commercial real estate	$	3,416,527	$	52,887	$	61,411	$	321	$	3,531,146
Commercial and industrial		2,335,103		109,539		87,380		2,329		2,534,351
Commercial leases		198,207		2,447		3,899		—		204,553

	$	5,949,837	$	164,873	$	152,690	$	2,650	$	6,270,050

Acquired Loans
March 31, 2016
Commercial real estate	$	1,331,863	$	156,709	$	152,929	$	6,858	$	1,648,359
Commercial and industrial		369,178		23,214		77,897		1,657		471,946

	$	1,701,041	$	179,923	$	230,826	$	8,515	$	2,120,305

December 31, 2015
Commercial real estate	$	464,162	$	47,619	$	66,129		—	$	577,910
Commercial and industrial		56,446		3,182		7,743		—		67,371

	$	520,608	$	50,801	$	73,872		—	$	645,281

Credit quality information for acquired loans is based on the contractual balance outstanding at March 31, 2016 and December 31, 2015. The increase in acquired loans in 2016 relates to the METR acquisition completed on February 13, 2016.

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.

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


	Originated Consumer Loan Credit Quality by Payment Status
	Performing		Non- Performing		Total
March 31, 2016
Direct installment	$	1,671,896	$	14,141	$	1,686,037
Residential mortgages		1,092,329		13,351		1,105,680
Indirect installment		1,023,909		1,504		1,025,413
Consumer lines of credit		1,031,798		2,883		1,034,681
Other		53,666		—		53,666

	$	4,873,598	$	31,879	$	4,905,477


	Originated Consumer Loan Credit Quality by Payment Status
	Performing		Non- Performing		Total
December 31, 2015
Direct installment	$	1,646,925	$	13,792	$	1,660,717
Residential mortgages		1,031,926		12,763		1,044,689
Indirect installment		994,661		1,514		996,175
Consumer lines of credit		1,019,783		2,047		1,021,830
Other		38,518		—		38,518

	$	4,731,813	$	30,116	$	4,761,929

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 Corporation’s 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 Three Months Ended March 31, 2016
Commercial real estate	$	33,434	$	24,035	$	1,520	$	25,555	$	400	$	25,374
Commercial and industrial		25,965		12,042		12,479		24,521		5,612		19,620
Commercial leases		894		894		—		894		—		—

Total commercial loans and leases		60,293		36,971		13,999		50,970		6,012		44,994
Direct installment		15,135		14,141		—		14,141		—		13,966
Residential mortgages		13,881		13,351		—		13,351		—		13,058
Indirect installment		3,667		1,504		—		1,504		—		1,509
Consumer lines of credit		3,436		2,883		—		2,883		—		2,465

	$	96,412	$	68,850	$	13,999	$	82,849	$	6,012	$	75,992

At or for the Year Ended December 31, 2015
Commercial real estate	$	33,780	$	24,423	$	772	$	25,195	$	321	$	26,143
Commercial and industrial		15,860		9,176		5,543		14,719		2,329		12,298
Commercial leases		659		659		—		659		—		747

Total commercial loans and leases		50,299		34,258		6,315		40,573		2,650		39,188
Direct installment		14,679		13,792		—		13,792		—		13,267
Residential mortgages		13,394		12,763		—		12,763		—		12,896
Indirect installment		3,745		1,514		—		1,514		—		1,401
Consumer lines of credit		2,408		2,047		—		2,047		—		2,198

	$	84,525	$	64,374	$	6,315	$	70,689	$	2,650	$	68,950

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 $2,821; commercial and industrial of $499; direct installment of $1,322; residential mortgages of $487; indirect installment of $222; and consumer lines of credit of $229, totaling $5,580 at March 31, 2016 and commercial real estate of $3,073; commercial and industrial of $695; direct installment of $1,557; residential mortgages of $659; indirect installment of $221; and consumer lines of credit of $522, totaling $6,727 at December 31, 2015.

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:


	March 31, 2016		December 31, 2015
Accruing:
Performing	$	16,508	$	15,165
Non-performing		21,453		22,028
Non-accrual		11,953		8,307

	$	49,914	$	45,500

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 three months ended March 31, 2016, the Corporation returned to performing status $2,488 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 Corporation’s allowance for credit losses included specific reserves for commercial TDRs of $298 and $300 at March 31, 2016 and December 31, 2015, respectively, and pooled reserves for individual loans under $500 of $865 and $929 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 Corporation’s allowance for credit losses included pooled reserves for these classes of loans of $3,405 and $3,515 at March 31, 2016 and December 31, 2015, respectively. Upon default of an individual loan, the Corporation’s charge-off policy is followed accordingly for that class of loan.

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


	Three Months Ended March 31, 2016						Three Months Ended March 31, 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		4	$	778	$	760		2	$	312	$	196
Commercial and industrial		2		5,565		3,279		—		—		—

Total commercial loans		6		6,343		4,039		2		312		196
Direct installment		145		1,991		1,961		131		1,526		1,484
Residential mortgages		18		968		951		14		581		631
Indirect installment		3		11		12		5		16		16
Consumer lines of credit		20		243		238		16		270		270

		192	$	9,556	$	7,201		168	$	2,705	$	2,597

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 March 31, 2016 (1)				Three Months Ended March 31, 2015 (1)
	Number of Contracts		Recorded Investment		Number of Contracts		Recorded Investment
Commercial real estate		—	$	—		—	$	—
Commercial and industrial		—		—		—		—

Total commercial loans		—		—		—		—
Direct installment		28		175		37		105
Residential mortgages		1		50		2		102
Indirect installment		4		5		3		4
Consumer lines of credit		1		10		1		92

		34	$	240		43	$	303

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

6. ALLOWANCE FOR CREDIT LOSSES

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

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 March 31, 2016
Commercial real estate	$	41,741	$	(1,369	)	$	597	$	(772	)	$	2,929		$	43,898
Commercial and industrial		41,023		(298	)		190		(108	)		6,948			47,863
Commercial leases		2,541		(114	)		14		(100	)		377			2,818

Total commercial loans and leases		85,305		(1,781	)		801		(980	)		10,254			94,579
Direct installment		21,587		(2,667	)		454		(2,213	)		1,351			20,725
Residential mortgages		7,909		(85	)		19		(66	)		(33	)		7,810
Indirect installment		9,889		(1,942	)		262		(1,680	)		856			9,065
Consumer lines of credit		9,582		(474	)		56		(418	)		(197	)		8,967
Other		1,013		(554	)		6		(548	)		609			1,074

Total allowance on originated loans and leases		135,285		(7,503	)		1,598		(5,905	)		12,840			142,220

Purchased credit-impaired loans		834		(160	)		—		(160	)		30			704
Other acquired loans		5,893		(221	)		306		85			(1,102	)		4,876

Total allowance on acquired loans		6,727		(381	)		306		(75	)		(1,072	)		5,580

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


Three Months Ended March 31, 2015
Commercial real estate	$	37,588	$	(1,001	)	$	209	$	(792	)	$	1,996		$	38,792
Commercial and industrial		32,645		(684	)		120		(564	)		722			32,803
Commercial leases		2,398		(93	)		10		(83	)		261			2,576

Total commercial loans and leases		72,631		(1,778	)		339		(1,439	)		2,979			74,171
Direct installment		20,538		(2,433	)		269		(2,164	)		2,830			21,204
Residential mortgages		8,024		(511	)		15		(496	)		943			8,471
Indirect installment		7,504		(1,280	)		302		(978	)		1,131			7,657
Consumer lines of credit		8,496		(410	)		40		(370	)		764			8,890
Other		759		(335	)		11		(324	)		419			854

Total allowance on originated loans and leases		117,952		(6,747	)		976		(5,771	)		9,066			121,247

Purchased credit-impaired loans		660		(64	)		19		(45	)		6			621
Other acquired loans		7,314		(77	)		330		253			(936	)		6,631

Total allowance on acquired loans		7,974		(141	)		349		208			(930	)		7,252

Total allowance	$	125,926	$	(6,888	)	$	1,325	$	(5,563	)	$	8,136		$	128,499

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


	Originated Allowance				Originated Loans and Leases Outstanding
	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Loans and Leases		Individually Evaluated for Impairment		Collectively Evaluated for Impairment
March 31, 2016
Commercial real estate	$	400	$	43,498	$	3,605,301	$	14,260	$	3,591,041
Commercial and industrial		5,612		42,251		2,574,321		19,679		2,554,642
Commercial leases		—		2,818		202,605		—		202,605

Total commercial loans and leases		6,012		88,567		6,382,227		33,939		6,348,288
Direct installment		—		20,725		1,686,037		—		1,686,037
Residential mortgages		—		7,810		1,105,680		—		1,105,680
Indirect installment		—		9,065		1,025,413		—		1,025,413
Consumer lines of credit		—		8,967		1,034,681		—		1,034,681
Other		—		1,074		53,666		—		53,666

	$	6,012	$	136,208	$	11,287,704	$	33,939	$	11,253,765

December 31, 2015
Commercial real estate	$	321	$	41,420	$	3,531,146	$	12,904	$	3,518,242
Commercial and industrial		2,329		38,694		2,534,351		10,802		2,523,549
Commercial leases		—		2,541		204,553		—		204,553

Total commercial loans and leases		2,650		82,655		6,270,050		23,706		6,246,344
Direct installment		—		21,587		1,660,717		—		1,660,717
Residential mortgages		—		7,909		1,044,689		—		1,044,689
Indirect installment		—		9,889		996,175		—		996,175
Consumer lines of credit		—		9,582		1,021,830		—		1,021,830
Other		—		1,013		38,518		—		38,518

	$	2,650	$	132,635	$	11,031,979	$	23,706	$	11,008,273

7. BORROWINGS

Following is a summary of short-term borrowings:


	March 31, 2016		December 31, 2015
Securities sold under repurchase agreements	$	297,562	$	266,732
Federal Home Loan Bank advances		490,000		1,090,000
Federal funds purchased		652,000		568,000
Subordinated notes		124,326		124,164

	$	1,563,888	$	2,048,896

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

Following is a summary of long-term borrowings:


	March 31, 2016		December 31, 2015
Federal Home Loan Bank advances	$	425,147	$	400,017
Subordinated notes		85,206		84,668
Junior subordinated debt		48,572		58,298
Other subordinated debt		98,520		98,497

	$	657,445	$	641,480

The Corporation’s banking affiliate has available credit with the FHLB of $5,543,082 of which $915,147 was used as of March 31, 2016. 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 three months ended March 31, 2016 and the year ended December 31, 2015.

The junior subordinated debt is comprised of debt securities issued by the Corporation in relation to its two unconsolidated subsidiary trusts (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, or trust preferred securities (TPS) to third-party investors. The proceeds from the sale of TPS and the issuance of common equity by the Trusts were invested in junior subordinated debt securities issued by the Corporation, which are the sole assets of each Trust. Since third-party investors are the primary beneficiaries, the Trusts are not consolidated in the Corporation’s financial statements. The Trusts pay dividends on the TPS at the same rate as the distributions paid by the Corporation on the junior subordinated debt held by the Trusts. Omega Financial Capital Trust I was assumed as a result of an acquisition.

Distributions on the junior 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 junior subordinated debt. The TPS are eligible for redemption, at any time, at the Corporation’s discretion. Under capital guidelines, beginning in 2016, the entire balance of TPS is 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.

During 2016, the Corporation redeemed $10,000 of the TPS issued by Omega Financial Capital Trust I.

The following table provides information relating to the Trusts as of March 31, 2016:


	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		2.28	%	Variable; 3-month LIBOR + 165 basis points (bps)
Omega Financial Capital Trust I		26,000		1,114		26,407		10/18/34		2.81	%	Variable; 3-month LIBOR + 219 bps

	$	47,500	$	1,779	$	48,572

8. 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.

The following table presents notional amounts and gross fair values of all derivative assets and derivative liabilities held by the Corporation:


	March 31, 2016						December 31, 2015
	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	$	7,859	$	1,341	$	250,000	$	3,178	$	962
Interest rate swaps – not designated		1,373,959		—		80,625		1,262,964		1		50,491
Equity contracts – not designated		1,180		34		—		1,180		18		—

Total subject to master netting arrangements		1,625,139		7,893		81,966		1,514,144		3,197		51,453
Not subject to master netting arrangements:
Interest rate swaps – not designated		1,373,959		80,091		—		1,262,964		49,998		1
Credit risk contracts – not designated		134,204		22		219		114,753		7		133
Equity contracts – not designated		1,180		—		34		1,180		—		18

Total not subject to master netting arrangements		1,509,343		80,113		253		1,378,897		50,005		152

	$	3,134,482	$	88,006	$	82,219	$	2,893,041	$	53,202	$	51,605

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 derivative’s gain or loss is initially reported as a component of other comprehensive income and subsequently reclassified into earnings in the same line item associated with the forecasted transaction when the forecasted transaction affects earnings. The ineffective portion of the gain or loss is reported in earnings immediately.

The notional amount of these interest rate derivative agreements totaled $250,000 at both March 31, 2016 and December 31, 2015. Fair values included in other assets and other liabilities on the consolidated balance sheet applicable to these agreements amounted to $7,859 and $1,341, respectively, at March 31, 2016, and $3,178 and $962, respectively, at December 31, 2015. For the three months ended March 31, 2016, the amount reclassified from accumulated other comprehensive income (AOCI) to interest income and interest expense totaled $687 ($446 net of tax) and $150 ($97 net of tax), respectively.

As of March 31, 2016, the maximum length of time over which forecasted interest cash flows are hedged is seven years. In the twelve months that follow March 31, 2016, the Corporation expects to reclassify from the amount currently reported in AOCI net derivative gains of $1,979 ($1,286 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 March 31, 2016.

There were no components of derivative gains or losses excluded from the assessment of hedge effectiveness related to these cash flow hedges. For the three months ended March 31, 2016 and 2015, there was no hedge ineffectiveness. Also, during the three months ended March 31, 2016 and 2015, 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.

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 Corporation’s counterparty.

The notional amount of these customer derivative agreements and the offsetting derivative counterparty positions each totaled $1,373,959 at March 31, 2016. Fair values included in other assets and other liabilities on the consolidated balance sheet applicable to these agreements amounted to $80,091 and $80,625, respectively, at March 31, 2016. At December 31, 2015, the notional amount of these customer derivative agreements and the offsetting derivative counterparty positions each totaled $1,262,964. At December 31, 2015, fair values included in other assets and other liabilities on the consolidated balance sheet amounted to $49,999 and $50,492, 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 $83,010 as of March 31, 2016 have remaining terms ranging from one to fourteen years. Under these agreements, the Corporation’s maximum exposure assuming a customer defaults on their obligation to perform under certain derivative swap contracts with third parties would be $219 at March 31, 2016 and $133 at December 31, 2015.

The fair values of risk participation agreements purchased and sold were not material at March 31, 2016 and December 31, 2015.

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 $1,894 and $1,333 as of March 31, 2016 and December 31, 2015, respectively, in excess of amounts previously posted as collateral with the respective counterparty.

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
March 31, 2016
Derivative Assets
Subject to master netting arrangements:
Interest rate contracts
Designated	$	7,859		—	$	7,859
Not designated		—		—		—
Equity contracts – not designated		34		—		34
Not subject to master netting arrangements:
Interest rate contracts – not designated		80,091		—		80,091
Credit contracts – not designated		22		—		22

	$	88,006		—	$	88,006

Derivative Liabilities
Subject to master netting arrangements:
Interest rate contracts
Designated	$	1,341		—	$	1,341
Not designated		80,625		—		80,625
Not subject to master netting arrangements:
Interest rate contracts – not designated		—		—		—
Credit contracts – not designated		219		—		219
Equity contracts – not designated		34		—		34

	$	82,219		—	$	82,219

December 31, 2015
Derivative Assets
Subject to master netting arrangements:
Interest rate contracts
Designated	$	3,178		—	$	3,178
Not designated		1		—		1
Equity contracts – not designated		18		—		18
Not subject to master netting arrangements:
Interest rate contracts – not designated		49,998		—		49,998
Credit contracts – not designated		7				7

	$	53,202		—	$	53,202

Derivative Liabilities
Subject to master netting arrangements:
Interest rate contracts
Designated	$	962		—	$	962
Not designated		50,491		—		50,491
Not subject to master netting arrangements:
Interest rate contracts – not designated		1		—		1
Credit contracts – not designated		133				133
Equity contracts – not designated		18		—		18

	$	51,605		—	$	51,605

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
	Net Amount Presented in the Balance Sheet		Financial Instruments		Cash Collateral		Net Amount
March 31, 2016
Derivative Assets
Interest rate contracts:
Designated	$	7,859	$	5,052	$	2,807		—
Not designated		—		—		—		—
Equity contracts – not designated		34		34		—		—

	$	7,893	$	5,086	$	2,807		—

Derivative Liabilities
Interest rate contracts:
Designated	$	1,341	$	—	$	1,341	$	—
Not designated		80,625		31,472		47,487		1,666

	$	81,966	$	31,472	$	48,828	$	1,666

December 31, 2015
Derivative Assets
Interest rate contracts:
Designated	$	3,178	$	1,516	$	1,662		—
Not designated		1		1		—		—
Equity contracts – not designated		18		18		—		—

	$	3,197	$	1,535	$	1,662		—

Derivative Liabilities
Interest rate contracts:
Designated	$	962	$	792	$	170	$	—
Not designated		50,491		24,579		24,632		1,280

	$	51,453	$	25,371	$	24,802	$	1,280

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


	Income	Three Months Ended
	Statement	March 31,
	Location	2016			2015
Interest Rate Contracts	Interest income—loans and leases	$	687		$	809
Interest Rate Contracts	Interest expense—short-term borrowings		150			—
Interest Rate Swaps	Other income		(41	)		(107	)
Credit Risk Contracts	Other income		(71	)		—

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 Corporation’s rate lock commitments to customers and commitments with investors at March 31, 2016 and December 31, 2015 are not material.

9. COMMITMENTS, CREDIT RISK AND CONTINGENCIES

The Corporation has commitments to extend credit and standby letters of credit that involve certain elements of credit risk in excess of the amount stated in the consolidated balance sheet. The Corporation’s exposure to credit loss in the event of non-performance by the customer is represented by the contractual amount of those instruments. The credit risk associated with loan commitments and standby letters of credit is essentially the same as that involved in extending loans 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:


	March 31, 2016		December 31, 2015
Commitments to extend credit	$	4,463,138	$	3,781,719
Standby letters of credit		118,167		92,979

At March 31, 2016, funding of 75.4% of the commitments to extend credit was dependent on the financial condition of the customer. The Corporation has the ability to withdraw such commitments at its discretion. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Based on management’s credit evaluation of the customer, collateral may be deemed necessary. Collateral requirements vary and may include accounts receivable, inventory, property, plant and equipment and income-producing commercial properties.

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

In addition, subordinated notes issued by a wholly-owned finance subsidiary of the Corporation are fully and unconditionally guaranteed by the Corporation.

Other Legal Proceedings

In the ordinary course of business, the Corporation and its subsidiaries are routinely named as defendants in, or made parties to, pending and potential legal actions. Also, as regulated entities, the Corporation and its subsidiaries also are subject to governmental and regulatory examinations, information-gathering requests, investigations and proceedings (both formal and informal). Claims for significant monetary damages may be asserted in many of these type legal actions, while claims for disgorgement, restitution, penalties and/or other remedial actions or sanctions may be sought in regulatory matters. It is inherently difficult to predict the eventual outcomes of such matters given their complexity and the particular facts and circumstances at issue in each of these matters. However, on the basis of current knowledge and understanding, and advice of counsel, the Corporation does not believe that judgments, sanctions, settlements or orders, if any, that may arise from these matters (either individually or in the aggregate, after giving effect to applicable reserves and insurance coverage) will have a material adverse effect on the consolidated financial position or liquidity of the Corporation, although they could have a material effect on net income in a given period. In view of the inherent unpredictability of outcomes in litigation and governmental and regulatory matters, particularly where (i) the damages sought are indeterminate, (ii) the proceedings are in the early stages, or (iii) the matters involve novel legal theories or a large number of parties, as a matter of course, there is considerable uncertainty surrounding the timing or ultimate resolution of litigation and governmental and regulatory matters, including a possible eventual loss, fine, penalty, business or reputational impact, if any, associated with each such matter. In accordance with applicable accounting guidance, the Corporation establishes accruals for litigation and governmental and regulatory matters when those matters proceed to a stage where they present loss contingencies that are both probable and reasonably estimable. In such cases, there may be a possible exposure to loss in excess of any amounts accrued. The Corporation will continue to monitor such matters for developments that could affect the amount of the accrual, and will adjust the accrual amount as appropriate. If the loss contingency in question is not both probable and reasonably estimable, the Corporation does not establish an accrual and the matter will continue to be monitored for any developments that would make the loss contingency both probable and reasonably estimable. The Corporation believes that its accruals for legal proceedings are appropriate and, in the aggregate, are not material to the consolidated financial position of the Corporation, although future accruals could have a material effect on net income in a given period.

10. 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 Corporation’s common stock on the grant date. The fair value of the performance-based awards is based on a Monte-Carlo Simulation valuation of the Corporation’s common stock as of the grant date.

The Corporation did not issue any restricted stock awards for the three months ended March 31, 2016 or 2015. For performance-based restricted stock awards granted, the recipients will earn between 0% and 175% of the number of units issued, based on the Corporation’s total stockholder return relative to a specified peer group of financial institutions over the three-year period. 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 March 31, 2016, the Corporation had available up to 3,310,508 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 $1,136 and $340 for the three months ended March 31, 2016 and 2015, the tax benefit of which was $398 and $119, respectively.

The following table summarizes certain information concerning restricted stock awards:


	Three Months Ended March 31,
	2016					2015
	Awards			Weighted Average Grant Price		Awards			Weighted Average Grant Price
Unvested awards outstanding at beginning of period		1,548,444		$	12.85		1,354,093		$	11.86
Net adjustment due to performance		—			—		(46,956	)		10.25
Vested		(363,799	)		12.07		(458,450	)		10.60
Forfeited		(6,368	)		12.79		(2,357	)		17.93
Dividend reinvestment		10,870			11.50		7,656			14.24

Unvested awards outstanding at end of period		1,189,147			13.08		853,986			12.63

The total fair value of awards vested was $4,424 and $5,740 for the three months ended March 31, 2016 and 2015, respectively.

As of March 31, 2016, there was $8,097 of unrecognized compensation cost related to unvested restricted stock awards, including $40 that is subject to accelerated vesting under the Plan’s immediate vesting upon retirement provision for awards granted prior to the adoption of ASC 718, Compensation – Stock Compensation. The components of the restricted stock awards as of March 31, 2016 are as follows:


	Service- Based Awards		Performance- Based Awards		Total
Unvested awards		514,702		674,445		1,189,147
Unrecognized compensation expense	$	3,178	$	4,919	$	8,097
Intrinsic value	$	6,696	$	8,775	$	15,471
Weighted average remaining life (in years)		1.69		2.37		2.08

Stock Options

All outstanding stock options were assumed in connection with certain of the Corporation’s 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 24,806 and 60,094 for the three months ended March 31, 2016 and 2015, respectively.

The following table summarizes certain information concerning stock option awards:


	Three Months Ended March 31,
	2016					2015
	Shares			Weighted Average Exercise Price		Shares			Weighted Average Exercise Price
Options outstanding at beginning of period		435,340		$	8.86		568,834		$	8.86
Assumed from acquisitions		1,707,036			7.83		—			—
Exercised		(24,806	)		6.38		(60,094	)		5.04
Forfeited		(92,650	)		6.69		(2,182	)		4.34

Options outstanding and exercisable at end of period		2,024,920			8.12		506,558			9.33

The intrinsic value of outstanding and exercisable stock options at March 31, 2016 was $10,045.

Warrants

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

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 Corporation’s 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 380,390, with a resulting lower exercise price of $3.21 per share as of March 31, 2016. The warrant, which was recorded at its fair value on April 6, 2013, was sold at auction by the UST and expires in 2019.

11. 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 Corporation’s funding guideline has been to make annual contributions to the RIP each year, if necessary, such that minimum funding requirements have been met. The RIP was frozen as of December 31, 2010.

The Corporation also sponsors two supplemental non-qualified retirement plans. The ERISA Excess Retirement Plan provides retirement benefits equal to the difference, if any, between the maximum benefit allowable under the Internal Revenue Code and the amount that would be provided under the RIP, if no limits were applied. The Basic Retirement Plan (BRP) is applicable to certain officers whom the Board of Directors designates. Officers participating in the BRP receive a benefit based on a target benefit percentage based on years of service at retirement and a designated tier as determined by the Board of Directors. When a participant retires, the basic benefit under the BRP is a monthly benefit equal to the target benefit percentage times the participant’s highest average monthly cash compensation during five consecutive calendar years within the last ten calendar years of employment. This monthly benefit 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.

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


	Three Months Ended
	March 31,
	2016			2015
Service cost	$	(4	)	$	17
Interest cost		1,544			1,477
Expected return on plan assets		(2,353	)		(2,491	)
Amortization:
Unrecognized prior service cost		2			2
Unrecognized loss		608			536

Net periodic pension credit	$	(203	)	$	(459	)

The Corporation’s subsidiaries participate in a qualified 401(k) defined contribution plan under which employees may contribute a percentage of their salary. Employees are eligible to participate upon their first day of employment. Under this plan, the Corporation matches 100% of the first 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. The Corporation’s contribution expense was $2,462 and $2,167 for the three months ended March 31, 2016 and 2015, 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.

12. COMPREHENSIVE INCOME

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


	Three Months Ended
	March 31,
	2016			2015
Net income	$	26,132		$	40,343
Other comprehensive income:
Securities available for sale:
Unrealized gains arising during the period, net of tax expense of $7,719 and $4,523		14,335			8,400
Reclassification adjustment for (gains) losses included in net income, net of tax expense of $25 and $(3)		(46	)		6
Derivative instruments:
Unrealized gains arising during the period, net of tax expense of $1,693 and $1,504		3,145			2,793
Reclassification adjustment for gains included in net income, net of tax expense of $188 and $283		(349	)		(526	)
Pension and postretirement benefit obligations:
Unrealized gains arising during the period, net of tax expense of $214 and $189		397			350

Other comprehensive income		17,482			11,023

Comprehensive income	$	43,614		$	51,366

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
Three Months Ended March 31, 2016
Balance at beginning of period	$	(3,873	)	$	1,440		$	(48,700	)	$	(51,133	)
Other comprehensive income before reclassifications		14,335			3,145			397			17,877
Amounts reclassified from AOCI		(46	)		(349	)		—			(395	)

Net current period other comprehensive income		14,289			2,796			397			17,482

Balance at end of period	$	10,416		$	4,236		$	(48,303	)	$	(33,651	)

13. 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
	March 31,
	2016		2015
Net income	$	26,132	$	40,343
Less: Preferred stock dividends		2,010		2,010

Net income available to common stockholders	$	24,122	$	38,333

Basic weighted average common shares outstanding		193,585,702		174,152,283
Net effect of dilutive stock options, warrants, restricted stock and convertible debt		1,292,220		1,673,693

Diluted weighted average common shares outstanding		194,877,922		175,825,976

Earnings per common share:
Basic	$	0.12	$	0.22

Diluted	$	0.12	$	0.22

For the three months ended March 31, 2016 and 2015, 15,501 and 24,272 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.

14. CASH FLOW INFORMATION

Following is a summary of supplemental cash flow information:


	2016		2015
Three Months Ended March 31
Interest paid on deposits and other borrowings	$	13,794	$	11,626
Income taxes paid		—		—
Transfers of loans to other real estate owned		8,049		1,965
Financing of other real estate owned sold		62		166

15. 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 Corporation’s subordinated notes at the finance company’s branch offices.

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


	Community Banking		Wealth Management		Insurance		Consumer Finance		Parent and Other			Consolidated
At or for the Three Months Ended March 31, 2016
Interest income	$	143,978	$	—	$	22	$	9,785	$	1,969		$	155,754
Interest expense		12,594		—		—		941		1,865			15,400
Net interest income		131,384		—		22		8,844		104			140,354
Provision for credit losses		9,917		—		—		1,526		325			11,768
Non-interest income		31,233		8,816		4,194		716		1,085			46,044
Non-interest expense		118,048		7,089		3,301		5,204		357			133,999
Intangible amortization		2,441		65		143		—		—			2,649
Income tax expense (benefit)		10,117		605		275		1,112		(259	)		11,850
Net income (loss)		22,094		1,057		497		1,718		766			26,132
Total assets		20,151,815		20,540		21,680		188,547		(58,058	)		20,324,524
Total intangibles		1,062,079		10,383		12,779		1,809		—			1,087,050


	Community Banking		Wealth Management		Insurance			Consumer Finance		Parent and Other			Consolidated
At or for the Three Months Ended March 31, 2015
Interest income	$	122,118	$	—	$	23		$	9,593	$	1,635		$	133,369
Interest expense		9,941		—		—			860		647			11,448
Net interest income		112,177		—		23			8,733		988			121,921
Provision for credit losses		6,327		—		—			1,574		235			8,136
Non-interest income		27,301		8,387		3,593			676		(1,775	)		38,182
Non-interest expense		77,079		6,493		4,170			4,808		(10	)		92,540
Intangible amortization		1,947		68		100			—		—			2,115
Income tax expense (benefit)		15,931		658		(226	)		1,149		(543	)		16,969
Net income (loss)		38,194		1,168		(428	)		1,878		(469	)		40,343
Total assets		16,100,851		21,125		18,464			182,662		(44,254	)		16,278,848
Total intangibles		852,764		10,652		10,021			1,809		—			875,246

16. 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 Corporation’s assumptions about the assumptions that market participants would use in pricing an asset or liability, which are developed based on the best information available in the circumstances.

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


Measurement Category		Definition
Level 1		valuation is based upon unadjusted quoted market prices for identical instruments traded in active markets.

Level 2		valuation is based upon quoted market prices for similar instruments traded in active markets, quoted market prices for identical or similar instruments traded in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by market data.

Level 3		valuation is derived from other valuation methodologies including discounted cash flow models and similar techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in determining fair value.

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

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

Securities Available For Sale

Securities available for sale consists of both debt and equity securities. These securities are recorded at fair value on a recurring basis. At March 31, 2016, 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 were 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.

Derivative Financial Instruments

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

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

Although the Corporation has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of March 31, 2016, the Corporation has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Corporation has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

Residential Mortgage Loans Held For Sale

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

Impaired Loans

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

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

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

Other Real Estate Owned

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

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


	Level 1		Level 2		Level 3		Total
March 31, 2016
Assets Measured at Fair Value
Available for sale debt securities:
U.S. Treasury	$	—	$	29,994	$	—	$	29,994
U.S. government-sponsored entities		—		401,078		—		401,078
Residential mortgage-backed securities:
Agency mortgage-backed securities		—		1,087,865		—		1,087,865
Agency collateralized mortgage obligations		—		525,630		—		525,630
Non-agency collateralized mortgage obligations		—		5		1,091		1,096
Commercial mortgage-backed securities		—		3,673		—		3,673
States of the U.S. and political subdivisions		—		39,804		—		39,804
Other debt securities		—		8,908		—		8,908

		—		2,096,957		1,091		2,098,048

Available for sale equity securities:
Financial services industry		102		636		424		1,162
Insurance services industry		133		—		—		133

		235		636		424		1,295

		235		2,097,593		1,515		2,099,343
Derivative financial instruments:
Trading		—		80,125		—		80,125
Not for trading		—		7,881		—		7,881

		—		88,006		—		88,006
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