10-K 1 d95476d10k.htm FORM 10-K Form 10-K
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended December 31, 2015

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.)
12 Federal Street, One North Shore Center, Pittsburgh, PA       15212
(Address of principal executive offices)       (Zip Code)
                  Registrant’s telephone number, including area code:       800-555-5455
Securities registered pursuant to Section 12(b) of the Act:      
Title of Each Class       Name of Exchange on which Registered
Common Stock, par value $0.01 per share       New York Stock Exchange

Depositary Shares each representing a 1/40th interest in a

share of Fixed-to-Floating Rate Non-Cumulative Perpetual

Preferred Stock, Series E, par value $0.01 per share

      New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  x    No  ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.    Yes  ¨    No  x

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    x

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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer  x   

Accelerated Filer  ¨

     Non-accelerated Filer  ¨   Smaller Reporting Company  ¨
   (Do not check if a smaller reporting company)

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

The aggregate market value of the registrant’s outstanding voting common stock held by non-affiliates on June 30, 2015, determined using a per share closing price on that date of $14.32, as quoted on the New York Stock Exchange, was $2,405,282,056.

As of February 15, 2016, the registrant had outstanding 209,445,037 shares of common stock.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of F.N.B. Corporation’s definitive proxy statement to be filed pursuant to Regulation 14A for the Annual Meeting of Stockholders to be held on May 18, 2016 are incorporated by reference into Part III, Items 10, 11, 12, 13 and 14, of this Annual Report on Form 10-K. F.N.B. Corporation will file its definitive proxy statement with the Securities and Exchange Commission on or before April 15, 2016.

 


Table of Contents

INDEX

 

         PAGE  

PART I

    

Item 1.

  Business.      3   

Item 1A.

  Risk Factors.      25   

Item 1B.

  Unresolved Staff Comments.      38   

Item 2.

  Properties.      38   

Item 3.

  Legal Proceedings.      38   

Item 4.

  Mine Safety Disclosures.      38   

PART II

    
Item 5.   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.      39   

Item 6.

  Selected Financial Data.      41   
Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations.      43   

Item 7A.

  Quantitative and Qualitative Disclosures About Market Risk.      77   

Item 8.

  Financial Statements and Supplementary Data.      78   
Item 9.   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.      151   

Item 9A.

  Controls and Procedures.      151   

Item 9B.

  Other Information.      152   

PART III

    

Item 10.

  Directors, Executive Officers and Corporate Governance.      152   

Item 11.

  Executive Compensation.      152   
Item 12.   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.      152   

Item 13.

  Certain Relationships and Related Transactions, and Director Independence.      153   

Item 14.

  Principal Accounting Fees and Services.      153   

PART IV

    

Item  15.

  Exhibits and Financial Statement Schedules.      153   
Signatures      154   

Index to Exhibits

     156   

 

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PART I

Forward-Looking Statements: From time to time F.N.B. Corporation (the Corporation) has made and may continue to make written or oral forward-looking statements with respect to the Corporation’s outlook or expectations for earnings, revenues, expenses, capital levels, asset quality or other future financial or business performance, strategies or expectations, or the impact of legal, regulatory or supervisory matters on the Corporation’s business operations or performance. This Annual Report on Form 10-K (the Report) also includes forward-looking statements. See Cautionary Statement Regarding Forward-Looking Information in Item 7 of this Report.

 

ITEM 1. BUSINESS

Overview

The Corporation was formed in 1974 as a bank holding company. The Corporation is a financial holding company under the Gramm-Leach-Bliley Act of 1999 (GLB Act). The Corporation has four reportable business segments: Community Banking, Wealth Management, Insurance and Consumer Finance. As of December 31, 2015, the Corporation had 288 Community Banking offices in Pennsylvania, Ohio, Maryland and West Virginia and 76 Consumer Finance offices in Pennsylvania, Ohio, Tennessee and Kentucky.

As a diversified financial services holding company, the Corporation, through its subsidiaries, provides a full range of financial services, principally to consumers, corporations, governments and small- to medium-sized businesses in its market areas. The Corporation’s business strategy focuses primarily on providing quality, consumer- and commercial-based financial services adapted to the needs of each of the markets it serves. The Corporation seeks to maintain its community orientation by providing local management with certain autonomy in decision making, enabling them to respond to customer requests more quickly and to concentrate on transactions within their market areas. However, while the Corporation seeks to preserve some decision making at a local level, it has centralized legal, loan review and underwriting, accounting, investment, audit, loan operations, deposit operations and data processing functions. The centralization of these processes enables the Corporation to maintain consistent quality of these functions and to achieve certain economies of scale.

As of December 31, 2015, the Corporation had total assets of $17.6 billion, loans of $12.2 billion and deposits of $12.6 billion. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and Item 8, “Financial Statements and Supplementary Data,” of this Report.

Recent Developments

The Corporation seeks to grow organically and by opportunistic acquisitions. Descriptions of the most recent acquisitions by the Corporation are provided below.

Pending Branch Purchase – Fifth Third Bank

On September 3, 2015, the Corporation announced that it entered into a purchase and assumption agreement to acquire approximately $383,000 in retail and private banking deposits, 17 branch-banking locations and related consumer loans in the Pittsburgh, Pennsylvania area from Fifth Third Bank. The transaction is expected to close during the second quarter of 2016.

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. On the acquisition date, METR had assets with a net book value of approximately $2.9 billion, including $2.0 billion in loans and deposits with a net book value of

 

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approximately $2.3 billion. The acquisition was valued at approximately $403.0 million 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.

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), in which the Corporation acquired approximately $154.6 million in deposits.

Insurance Brokerage – Conway E&S, Inc.

On July 18, 2015, the Corporation, through its wholly-owned subsidiary, First National Insurance Agency, LLC (FNIA), acquired certain account assets of Conway E&S, Inc., a Pittsburgh-based independent insurance brokerage firm. Under the purchase agreement, the Corporation paid $0.4 million in cash and recorded goodwill of $0.2 million and other intangibles of $0.2 million in connection with this acquisition.

Insurance Brokerage – First Niagara Risk Management, Inc.

On June 22, 2015, FNIA acquired the Pittsburgh Insurance Brokerage Segment of First Niagara Risk Management, Inc. Under the purchase agreement, the Corporation paid $3.1 million in cash and recorded goodwill of $1.6 million, other intangibles of $1.2 million and miscellaneous other assets of $0.2 million in connection with this acquisition.

Other acquisitions completed during the last five years are summarized below (dollars in millions):

 

Acquired Entity

  

Acquired Bank

       Date          Fair
Value of

Assets
Acquired
 

OBA Financial Services, Inc. (OBA)

   OBA Bank      2014       $ 390.2   

BCSB Bancorp, Inc. (BCSB)

   Baltimore County Savings Bank      2014         594.0   

PVF Capital Corp. (PVF)

   Park View Federal Savings Bank      2013         737.2   

Annapolis Bancorp, Inc. (ANNB)

   BankAnnapolis      2013         430.3   

Parkvale Financial Corporation (Parkvale)

   Parkvale Bank      2012         1,743.9   

Comm Bancorp, Inc. (CBI)

   Community Bank and Trust Company      2011         625.6   

These acquisitions have supported the expansion of the Corporation into the attractive markets of Pittsburgh, Pennsylvania, Cleveland, Ohio and Baltimore, Maryland. For more detailed information concerning the most recent acquisitions, see the Mergers and Acquisitions footnote in the Notes to Consolidated Financial Statements, which is included in Item 8 of this Report.

Debt Offering

On October 2, 2015, the Corporation completed its offering of $100.0 million aggregate principal amount of 4.875% subordinated notes due in 2025. The subordinated notes are eligible for treatment as tier 2 capital for regulatory capital purposes. The net proceeds of the debt offering after deducting underwriting discounts and commissions and offering expenses were $98.4 million. The Corporation intends to use the net proceeds from the sale of the subordinated notes for general corporate purposes, which may include investments at the holding company level, providing capital to support the growth of FNBPA and its business, repurchases of its common shares and the payment of the cash consideration components of future acquisitions.

 

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Business Segments

In addition to the following information relating to the Corporation’s business segments, more detailed information is contained in the Business Segments footnote in the Notes to Consolidated Financial Statements, which is included in Item 8 of this Report. As of December 31, 2015, the Corporation had four business segments, with the largest being the Community Banking segment consisting of a regional community bank. The Wealth Management segment consists of a trust company, a registered investment advisor and a subsidiary that offers broker-dealer services through a third party networking arrangement with a non-affiliated licensed broker-dealer entity. The Insurance segment consists of an insurance agency and a reinsurer. The Consumer Finance segment consists of a multi-state consumer finance company.

Community Banking

The Corporation’s Community Banking segment consists of First National Bank of Pennsylvania (FNBPA), which offers services traditionally offered by full-service commercial banks, including commercial and individual demand, savings and time deposit accounts and commercial, mortgage and individual installment loans. As of December 31, 2015, the Corporation operated its Community Banking business through a network of 288 branches in Pennsylvania, Ohio, Maryland and West Virginia.

The goals of Community Banking are to generate high-quality, profitable revenue growth through increased business with its current customers, attract new customer relationships through FNBPA’s current branches and expand into new and existing markets through de novo branch openings, acquisitions and the establishment of loan production offices. The Corporation considers Community Banking an important source of revenue opportunity through the cross-selling of products and services offered by the Corporation’s other business segments.

The lending philosophy of Community Banking is to establish high-quality customer relationships, while minimizing credit losses by following strict credit approval standards (which include independent analysis of realizable collateral value), diversifying its loan portfolio by industry and borrower and conducting ongoing review and management of the loan portfolio. Commercial loans are generally made to established businesses within the geographic market areas served by Community Banking.

No material portion of the loans or deposits of Community Banking has been obtained from a single customer or small group of customers, and the loss of any one customer’s loans or deposits or a small group of customers’ loans or deposits by Community Banking would not have a material adverse effect on the Community Banking segment or on the Corporation. The substantial majority of the loans and deposits have been generated within the geographic market areas in which Community Banking operates.

Wealth Management

The Corporation’s Wealth Management segment delivers wealth management services to individuals, corporations and retirement funds, as well as existing customers of Community Banking, located primarily within the Corporation’s geographic markets.

The Corporation’s Wealth Management operations are conducted through three subsidiaries of FNBPA. First National Trust Company (FNTC) provides a broad range of personal and corporate fiduciary services, including the administration of decedent and trust estates. As of December 31, 2015, the fair value of trust assets under management was approximately $3.7 billion. FNTC is required to maintain certain minimum capitalization levels in accordance with regulatory requirements. FNTC periodically measures its capital position to ensure all minimum capitalization levels are maintained.

The Corporation’s Wealth Management segment also includes two other subsidiaries. First National Investment Services Company, LLC (FNIS) offers a broad array of investment products and services for

 

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customers of Wealth Management through a networking relationship with a third-party licensed brokerage firm. F.N.B. Investment Advisors, Inc. (FNBIA), an investment advisor registered with the Securities and Exchange Commission (SEC), offers customers of Wealth Management comprehensive investment programs featuring mutual funds, annuities, stocks and bonds.

No material portion of the business of Wealth Management has been obtained from a single customer or small group of customers, and the loss of any one customer’s business or the business of a small group of customers by Wealth Management would not have a material adverse effect on the Wealth Management segment or on the Corporation.

Insurance

The Corporation’s Insurance segment operates principally through FNIA, which is a subsidiary of the Corporation. FNIA is a full-service insurance brokerage agency offering numerous lines of commercial and personal insurance through major carriers to businesses and individuals primarily within the Corporation’s geographic markets. The goal of FNIA is to grow revenue through cross-selling to existing clients of Community Banking and to gain new clients through its own channels.

The Corporation’s Insurance segment also includes a reinsurance subsidiary, Penn-Ohio Life Insurance Company (Penn-Ohio). Penn-Ohio underwrites, as a reinsurer, credit life and accident and health insurance sold by the Corporation’s lending subsidiaries. Additionally, FNBPA owns a direct subsidiary, First National Corporation, which offers title insurance products.

No material portion of the business of Insurance has been obtained from a single customer or small group of customers, and the loss of any one customer’s business or the business of a small group of customers by Insurance would not have a material adverse effect on the Insurance segment or on the Corporation.

Consumer Finance

The Corporation’s Consumer Finance segment operates through its subsidiary, Regency Finance Company (Regency), which is involved principally in making personal installment loans to individuals and purchasing installment sales finance contracts from retail merchants. Such activity is primarily funded through the sale at Regency’s branch offices of subordinated notes which are issued by one of the Corporation’s indirect subsidiaries, FNB Financial Services, LP, and guaranteed by the Corporation. The Consumer Finance segment operates in Pennsylvania, Ohio, Tennessee and Kentucky.

No material portion of the business of Consumer Finance has been obtained from a single customer or small group of customers, and the loss of any one customer’s business or the business of a small group of customers by Consumer Finance would not have a material adverse effect on the Consumer Finance segment or on the Corporation.

Other

The Corporation also operates other non-banking subsidiaries. F.N.B. Capital Corporation, LLC (FNBCC) was formed as a merchant banking subsidiary to offer mezzanine financing options for small- to medium-sized businesses that need financial assistance beyond the parameters of typical commercial bank lending products. FNBCC ceased financing new portfolio companies in July 2013. FNBCC has a 21.9% funding commitment in F.N.B. Capital Partners, L.P. (FNBCP), a Small Business Investment Company licensed by the U.S. Small Business Administration (the Corporation licensed FNBCP to use its name). FNBCP, which is not an affiliate or a subsidiary of the Corporation, was formed by former employees of FNBCC. F.N.B. Statutory Trust II and Omega Financial Capital Trust I issued TPS to third-party investors. Regency Consumer Financial Services, Inc. and FNB Consumer Financial Services, Inc. are the general partner and limited partner, respectively, of FNB Financial Services, LP, the company established to issue, administer and repay the subordinated notes through which loans in the Consumer Finance segment are funded. Additionally, Bank

 

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Capital Services, LLC, a subsidiary of FNBPA, offers commercial loans and leases to customers in need of new or used equipment. Certain financial information concerning these subsidiaries, along with the parent company and intercompany eliminations, are included in the “Parent and Other” category in the Business Segments footnote in the Notes to Consolidated Financial Statements, which is included in Item 8 of this Report.

Market Area and Competition

The Corporation operates in Pennsylvania, eastern Ohio, and northern West Virginia, which are areas with relatively stable markets and modest growth. Additionally, the Corporation operates in the Baltimore, Maryland Metropolitan Statistical Area and Montgomery County, Maryland, which are relatively higher growth markets. In addition to Pennsylvania and Ohio, the Corporation’s Consumer Finance segment also operates in northern and central Tennessee and western and central Kentucky.

The Corporation’s subsidiaries compete for loans, deposits and financial services business with a large number of other financial institutions, many of which offer such services through the internet and mobile devices. Competition for loans comes principally from commercial banks, savings banks, mortgage banking companies, credit unions, insurance companies and other financial services companies. The most direct competition for deposits historically comes from commercial banks, savings banks and credit unions. Additional competition for deposits comes from non-depositary competitors such as mutual funds, securities and brokerage firms and insurance companies. In providing wealth and asset management services, as well as insurance brokerage services, the Corporation’s subsidiaries compete with many other financial services firms, brokerage firms, mutual fund complexes, investment management firms, trust and fiduciary service providers and insurance agencies.

In Regency’s market areas of Pennsylvania, Ohio, Tennessee and Kentucky, its active competitors include banks, credit unions and national, regional and local consumer finance companies, some of which have substantially greater resources than that of Regency. The ready availability of consumer credit through charge accounts and credit cards constitutes additional competition. In this market area, competition is based on the rates of interest charged for loans, the rates of interest paid to obtain funds and the availability of customer services.

The ability to deploy and use technology effectively is an important competitive factor in the financial services industry. Technology is not only important with respect to delivery of financial services and protection of the security of customer information, but also in processing information. The Corporation and each of its subsidiaries must continually make technological investments to remain competitive in the financial services industry. FNBPA is currently executing several initiatives under its retail delivery strategy that are designed to integrate and streamline FNBPA’s physical branch and e-delivery channels.

Underwriting

Commercial Loans

The Corporation’s Credit Policy requires, among other things, that all commercial loans be underwritten to document the borrower’s financial capacity to support the cash flow required to repay the loan. The Credit Policy also contains additional guidelines and requirements applicable to specific loan products or lines of business. The Corporation has developed a proprietary underwriting system for all corporate business loan relationships and utilizes a third party solution for small business loan relationships, with both platforms allowing for consistency in underwriting across the entire footprint that also generally permits credit decisions at the local and regional level. As part of this underwriting, the Corporation requires clear and concise documentation of the borrower’s ability to repay the loan based on current financial statements and/or tax returns, plus pro-forma financial statements, as appropriate. Specific guidelines for loan terms and conditions are outlined in the Corporation’s Credit Policy. The guidelines also detail the collateral requirements for various loan types. It is the Corporation’s general practice to obtain personal guarantees, supported by current personal financial statements and/or tax returns, to reduce the credit risk, as appropriate.

 

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For loans secured by commercial real estate, the Corporation obtains current and independent appraisals from licensed or certified appraisers to assess the value of the underlying collateral. The Corporation’s general policy for commercial real estate loans is to limit the terms of the loans to not more than 15 years and to have loan-to-value (LTV) ratios not exceeding 80% on owner-occupied and income producing properties. For non-owner occupied commercial real estate loans, the loan terms are generally aligned with the property’s lease terms, and in many instances, these loans mature within 5 years. The Corporation’s Credit Policy also delineates similar guidelines for maximum terms and acceptable advance rates for loans that are not secured by real estate.

Consumer Loans

The Corporation’s revolving home equity lines of credit (HELOC) are generally variable rate loans underwritten based on fully indexed rates. For home equity loans, the Corporation’s policy is to generally require a LTV ratio not in excess of 85% and FICO scores of not less than 660. In certain circumstances, the Corporation will extend credit to borrowers with a LTV ratio over 85% on a limited and closely monitored basis. The Corporation’s underwriters evaluate a borrower’s debt service capacity on all line of credit applications by utilizing an interest shock rate of 3% over the prevailing variable interest rate at origination. The borrower’s debt-to-income ratio must remain within the Corporation’s guidelines under the shock rate repayment formula. The Corporation has elected, with the onset of the qualified mortgage (QM) rules established by the Consumer Financial Protection Bureau (CFPB) in 2014, to tightly limit the origination of non-QM loans.

The Corporation’s policy for its indirect installment loans, which third parties (primarily auto dealers) originate, is to require a minimum FICO score of 640 for the borrower, the age of the vehicle not to exceed 7 years or 100,000 miles and an appropriate LTV ratio, not to exceed 115% inclusive of back-end added products, based on the year and make of the vehicle financed.

The Corporation structures its consumer loan products to meet the diverse credit needs of consumers in the Corporation’s market for personal and household purposes. These loan products are on a fixed amount or revolving basis depending on customer need and borrowing capacity. The Corporation’s loans and lines of credit attempt to balance borrower budgeting sensitivities with realistic repayment maturities within a philosophy that encourages consumer financial responsibility, sound credit risk management and development of strong customer relationships.

The Corporation’s consumer loan policies and procedures require prospective borrowers to provide appropriate and accurate financial information that will enable the Corporation’s loan underwriting personnel to make credit decisions. Specific information requirements vary based on loan type, risk profile and secondary investor requirements where applicable. In all extensions of credit, however, the Corporation insists on evidence of capacity as well as an independent credit report to assess the prospective borrower’s willingness and ability to repay the debt. If any information submitted by the prospective borrower raises reasonable doubts with respect to the willingness and ability of the borrower to repay the loan, the Corporation denies the credit. The Corporation does not provide loans in which there is no verification of the prospective borrower’s income. The Corporation does not make interest-only or similar type residential mortgage loans.

The Corporation often takes collateral to support an extension of credit and to provide additional protection should the primary source of repayment fail. Consequently, the Corporation limits unsecured extensions of credit in amount and only grants them to borrowers with adequate capacity and above-average credit profiles. The Corporation expressly discourages unsecured credit lines for debt consolidation unless there is compelling evidence that the borrower has sufficient liquidity and net worth to repay the loan from alternative sources in the event of income disruption.

The Corporation generally obtains full independent appraisals of residential real estate collateral values on residential mortgage applications of $100,000 and greater. The Corporation may use algorithm-based

 

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valuation models for residential mortgages under $100,000. The Corporation recognizes the limitations as well as the benefits of these valuation products. The Corporation’s policy is to be conservative in their use but fluid and flexible in interpreting reasonable collateral values when obtained.

The Corporation monitors consumer loans with exceptions to its policy including, but not limited to, LTV ratios, FICO scores and debt-to-income ratios. Management routinely evaluates the type, nature, trend and scope of these exceptions and reacts through policy changes, lender counseling, adjustment of loan authorities and similar prerogatives to assure that the retail assets generated meet acceptable credit quality standards. As an added precaution, the Corporation’s risk management personnel conduct periodic reviews of loan files.

Regency Finance Company Loans

Regency originates three general types of loans: direct real estate, direct non-real estate and indirect sales finance. Regency has written policies and procedures that it distributes to each Regency branch office defining underwriting, pricing and loan servicing guidelines. Regency issues written credit authority limits based upon the individual loan underwriter’s capability. On a monthly basis, Regency evaluates specific metrics relating to Regency’s origination and servicing of its loan portfolio. Regency also uses a quality control program to review, in an independent manner, loan origination and servicing on a monthly basis to ensure adherence with compliance and credit criteria standards.

Regency evaluates each applicant for credit on an individual basis measuring attributes derived from the review of credit reports, income verification and collateral, if applicable, with product-specific underwriting standards. Regency utilizes a prospective borrower’s reported income to derive debt-to-income ratios that permit Regency to follow a conservative approach in evaluating a potential borrower’s ability to pay debt service.

Regency underwrites direct real estate loans utilizing a risk-based pricing matrix that evaluates the applicants by FICO score, credit criteria and LTV ratio. First lien general LTV standards permit a maximum of 85% of appraised value. Regency does not offer variable rate real estate secured loans. Regency does not offer unverified or no documentation loans.

Regency underwrites direct financing for automobile secured loans utilizing a risk-based pricing matrix that evaluates the applicants by FICO score, credit criteria and advance rate as a percentage of the book value of the vehicle. Regency will only grant credit secured by an automobile at the current (time of application) National Automobile Dealers Association Book retail price.

Regency generates indirect sales finance applications and subsequent loans through dealers that Regency approves for the purpose of the customer’s finance of a purchase such as furniture or windows. Regency grants credit in a similar manner as set forth above for direct real estate loans. Pricing parameters are generally dealer and geographic specific. Regency underwrites direct non-real estate personal and secured loans represented above with the exception that this product does not rely on FICO scores. Specific analysis of the applicant’s credit report and income verification are the principal elements of Regency’s credit decision with respect to direct non-real estate personal and secured loans.

Employees

As of January 31, 2016, the Corporation and its subsidiaries had 2,747 full-time and 458 part-time employees. Management of the Corporation considers its relationship with its employees to be satisfactory.

Government Supervision and Regulation

The following summary sets forth certain of the material elements of the regulatory framework applicable to bank holding companies and financial holding companies and their banking subsidiaries and to companies

 

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engaged in the same types of securities and insurance activities as the Corporation’s subsidiaries and provides certain specific information about the Corporation. The bank regulatory framework is intended primarily for the protection of depositors through the federal deposit insurance guarantee, and not for the protection of security holders. Numerous laws and regulations govern the operations of financial services institutions and their holding companies. Significant elements of the laws and regulations applicable to the Corporation and its affiliates are described in this section. Such descriptions are qualified in their entirety by reference to the full text of the statutes, regulations and policies referenced herein. In addition, certain of the Corporation’s public disclosure, internal control environment, risk and capital management and corporate governance principles are subject to the Sarbanes-Oxley Act of 2002 (SOX), the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act) and related regulations and rules of the SEC under the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended. The Corporation’s common stock and Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series E, are listed on the New York Stock Exchange, Inc. (NYSE) under the trading symbols “FNB” and “FNBPrE,” respectively, and the Corporation is subject to the rules of the NYSE for listed companies. To the extent that the following information describes statutory and regulatory provisions, it is qualified in its entirety by express reference to each of the particular statutory and regulatory provisions. New laws or regulations or changes to existing laws and regulations (including changes in interpretation or enforcement) could materially adversely affect the Corporation’s financial condition or results of operations. As a financial institution, to the extent that different regulatory systems impose overlapping or inconsistent requirements on the conduct of the Corporation’s business, it faces increased complexity and additional costs in its compliance efforts.

General

The Corporation is a legal entity separate and distinct from its subsidiaries. As a financial holding company and a bank holding company, the Corporation is regulated under the Bank Holding Company Act of 1956, as amended (BHC Act), and is subject to regulation, inspection, examination and supervision by the Board of Governors of the Federal Reserve System (FRB). The Corporation is also subject to regulation by the SEC as a result of the Corporation’s status as a public company and due to the nature of the business activities of certain of the Corporation’s subsidiaries.

The FRB is the “umbrella” regulator of a financial holding company. In addition, a financial holding company’s operating entities, such as its subsidiary broker-dealers, investment managers, investment companies, insurance companies and banks, are subject to the jurisdiction of various federal and state “functional” regulators.

The Corporation’s subsidiary bank, FNBPA, and FNBPA’s subsidiary trust company, FNTC, are organized as national banking associations, which are subject to regulation, supervision and examination by the Office of the Comptroller of the Currency (OCC), which is a bureau of the U.S. Department of the Treasury (UST). FNBPA is also subject to certain regulatory requirements of the Federal Deposit Insurance Corporation (FDIC), the FRB and other federal and state regulatory agencies, including requirements to maintain reserves against deposits, capital requirements, limitations regarding dividends, restrictions on the types and amounts of loans that may be granted and the interest that may be charged on loans, inter-affiliate transactions, monitoring obligations under the federal bank secrecy act and anti-money laundering requirements, limitations on the types of investments that may be made, activities that may be engaged in and types of services that may be offered. In addition to banking laws, regulations and regulatory agencies, the Corporation and its subsidiaries are subject to various other laws and regulations and supervision and examination by other regulatory agencies, all of which directly or indirectly affect the operations and management of the Corporation and its ability to make distributions to its stockholders. If the Corporation fails to comply with these or other applicable laws and regulations, it may be subject to civil monetary penalties, imposition of cease and desist orders or other written directives, removal of management and, in certain cases, criminal penalties.

Pursuant to the GLB Act, bank holding companies such as the Corporation that have qualified as financial holding companies because they are “well-capitalized” and “well managed” have broad authority to engage in

 

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activities that are financial in nature or incidental to such financial activity, including insurance underwriting and brokerage, merchant banking, securities underwriting, dealing and market-making; and such additional activities as the FRB in consultation with the Secretary of the UST determines to be financial in nature, incidental thereto or complementary to a financial activity. The GLB Act repealed or modified a number of significant statutory provisions, including those of the Glass-Steagall Act and the BHC Act, which had previously restricted banking organizations’ ability to engage in certain types of business activities (subsequently further modified by the Dodd-Frank Act, as discussed below). As a result of the GLB Act, a bank holding company may engage in those activities directly or through subsidiaries by qualifying as a “financial holding company.” A financial holding company may engage directly or indirectly in activities considered financial in nature, either de novo or by acquisition, provided the financial holding company continues such status and gives the FRB after-the-fact notice of the new activities. The GLB Act also permits national banks, such as FNBPA, to engage in activities considered financial in nature through a financial subsidiary, subject to certain conditions and limitations and with the approval of the OCC.

As a regulated financial holding company, the Corporation’s relationships and good standing with its regulators are of fundamental importance to the continuation and growth of the Corporation’s businesses. The FRB, OCC, FDIC, CFPB and SEC have broad enforcement powers and authority to approve, deny or refuse to act upon applications or notices of the Corporation or its subsidiaries to open new or close existing offices, conduct new activities, acquire or divest businesses or assets or reconfigure existing operations. In addition, the Corporation, FNBPA, FNTC and other affiliates are subject to examination by the various regulators, which results in examination reports (which are not publicly available) and ratings that can impact the conduct and growth of the Corporation’s businesses. These examinations consider not only safety and soundness principles, but also compliance with applicable laws and regulations, including bank secrecy and anti-money laundering requirements, loan quality and administration, capital levels, asset quality and risk management ability and performance, earnings, liquidity, consumer compliance, community reinvestment and various other factors. An examination downgrade by any of the Corporation’s federal bank regulators could potentially result in the imposition of significant limitations and prohibitions on the activities and growth of the Corporation and its subsidiaries.

There are numerous laws, regulations and rules governing the activities of financial institutions, financial holding companies and bank holding companies. The following discussion is general in nature and seeks to highlight some of the more significant of these regulatory requirements, but does not purport to be complete or to describe all of the laws and regulations that apply to the Corporation and its subsidiaries.

Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010

Implementation of the Dodd-Frank Act has had and will continue to have a broad impact on the financial services industry by introducing significant regulatory and compliance changes including, among other things,

 

    enhanced authority over troubled and failing banks and their holding companies;
    increased capital and liquidity requirements;
    increased regulatory examination fees;
    increases to the assessments banks must pay the FDIC for federal deposit insurance; and
    specific provisions designed to improve supervision and oversight of, and strengthening safety and soundness by imposing restrictions and limitations on the scope and type of banking and financial activities.

In addition, the Dodd-Frank Act establishes a new framework for systemic risk oversight within the financial system that is enforced by new and existing federal regulatory agencies and authorities, including the Financial Stability Oversight Council (FSOC), FRB, OCC, FDIC and CFPB. The following description briefly summarizes certain impacts of the Dodd-Frank Act on the operations and activities, both currently and prospectively, of the Corporation and its subsidiaries.

 

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Deposit Insurance.    The Dodd-Frank Act made permanent the $250,000 deposit insurance limit for insured deposits. Amendments to the Federal Deposit Insurance Act also revised the assessment base against which an insured depository institution’s deposit insurance premiums paid to the FDIC’s Deposit Insurance Fund (DIF) are calculated. Under the amendments, the FDIC assessment base is no longer the institution’s deposit base, but rather its average consolidated total assets less its average tangible equity. The Dodd-Frank Act also changed the minimum designated reserve ratio of the DIF, requiring the minimum to be increased from 1.15% to 1.35% of the estimated amount of total insured deposits by September 30, 2020, and eliminated the requirement that the FDIC pay dividends to depository institutions when the reserve ratio exceeds certain thresholds, leaving the designated reserve ratio to the discretion of the FDIC, which has set 2% as the designated reserve ratio. Several of these provisions have increased, and may continue to increase, the FDIC deposit insurance premiums FNBPA pays.

Interest on Demand Deposits.    The Dodd-Frank Act permits depository institutions to pay interest on demand deposits. In accordance therewith, the Corporation pays interest on certain classes of commercial demand deposits.

Trust Preferred Securities.    Pursuant to Section 619 of the Dodd-Frank Act (the Volcker Rule), the federal bank regulatory agencies issued interim final rules which permits banking entities with consolidated assets less than $15 billion to continue to retain interests in TPS as tier 1 capital provided the TPS was established, and interest was issued prior to May 19, 2010, the banking entity reasonably believes the offering proceeds received by the TPS were invested in certain qualifying TPS collateral and the banking entity’s interest in the TPS was acquired prior to December 31, 2013. In addition, the interim final rules provide that for banking entities with $15 billion or more in consolidated assets, TPS will, on a phased-out basis, no longer qualify as tier 1 capital after January 1, 2016 (see discussion under the captions, “Capital and Operational Requirements” and “Increased Capital Standards and Enhanced Supervision”).

The Consumer Financial Protection Bureau.    The Dodd-Frank Act created a new, independent CFPB within the FRB. The CFPB’s responsibility is to establish, implement and enforce rules and regulations under certain federal consumer protection laws with respect to the conduct of both bank and non-bank providers of certain consumer financial products and services. The CFPB has rulemaking authority over many of the statutes that govern products and services banks offer to consumers. The CFPB has authority to prevent unfair, discriminatory, deceptive or abusive practices in connection with the offering of consumer financial products. In addition, the Dodd-Frank Act permits states to adopt consumer protection laws and regulations that are more stringent than those regulations promulgated by the CFPB, and state attorneys general will have the authority to enforce consumer protection rules that the CFPB adopts against state-chartered institutions and against, with respect to certain non-preempted laws, national banks. Compliance with any such new regulations established by the CFPB and/or states could reduce the Corporation’s revenue, increase its cost of operations, and limit its ability to expand into certain products and services.

Debit Card Interchange Fees.    On June 29, 2011, the FRB, pursuant to its authority under the Dodd-Frank Act, issued rules regarding interchange fees charged for electronic debit transactions by payment card issuers having assets over $10 billion, adopting a per-transaction interchange cap base of $0.21 plus a 5-basis point fraud loss adjustment per transaction. Following completion of the Corporation’s acquisition of Parkvale on January 1, 2012, the Corporation’s assets exceeded the $10 billion threshold. As a result, the Corporation became subject to the new rules regarding debit card interchange fees as of July 1, 2013.

Transactions with Affiliates.    The Dodd-Frank Act enhances the requirements for certain transactions with affiliates under Sections 23A and 23B of the Federal Reserve Act, including an expansion of the definition of “covered transactions” to include the borrowing or lending of securities or derivative transactions, and an increase in the amount of time for which collateral requirements regarding covered transactions must be maintained.

Certain transactions (including loans and credit extensions from FNBPA) between FNBPA and the Corporation and/or its affiliates and subsidiaries are subject to quantitative and qualitative limitations, collateral

 

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requirements, and other restrictions imposed by statute and FRB regulation. Transactions subject to these restrictions are generally required to be made on an arm’s-length basis. These restrictions generally do not apply to transactions between FNBPA and its direct wholly-owned subsidiaries.

Transactions with Insiders.    The Dodd-Frank Act expands insider transaction limitations through the strengthening of loan restrictions to insiders and extending the types of transactions subject to the various requirements to include derivative transactions, repurchase agreements, reverse repurchase agreements and securities lending and borrowing transactions. The Dodd-Frank Act also places restrictions on certain asset sales to and from an insider of an institution, including requirements that such sales be on market terms and, in certain circumstances, receive the approval of the institution’s board of directors.

Enhanced Lending Limits.    The Dodd-Frank Act strengthens the existing limits on a depository institution’s credit exposure to one borrower. Federal banking law currently limits a national bank’s ability to extend credit to one person or group of related persons to an amount that does not exceed certain thresholds. Among other things, the Dodd-Frank Act expands the scope of these restrictions to include credit exposure arising from derivative transactions, repurchase agreements and securities lending and borrowing transactions.

Corporate Governance.    The Dodd-Frank Act addresses many corporate governance and executive compensation matters that will affect most U.S. publicly traded companies, including the Corporation. The Dodd-Frank Act:

 

    grants shareholders of U.S. publicly traded companies an advisory vote on executive compensation;
    enhances independence requirements for compensation committee members; and
    requires companies listed on national securities exchanges to adopt clawback policies for incentive-based compensation plans applicable to executive officers.

Although many of the requirements of the Dodd-Frank Act have been implemented there still remain a number of its requirements that will be implemented over time. Given the uncertainty associated with the manner in which the federal banking agencies may implement the provisions of the Dodd-Frank Act, the full extent of the impact such requirements may have on the Corporation’s compliance responsibilities, operations and the financial services markets is unclear at this time. The changes resulting from the Dodd-Frank Act may impact the Corporation’s profitability, require changes to certain of the Corporation’s business practices, including limitations on fee income opportunities, increased compliance costs, imposition of more stringent capital, liquidity and leverage requirements upon the Corporation or otherwise adversely affect the Corporation’s business. These changes may also require the Corporation to continue to invest significant management attention and compliance, legal, risk and audit resources to evaluate and make any changes necessary to comply with new statutory and regulatory requirements. The Corporation cannot predict what effect any newly implemented, presently contemplated or future changes in the laws or regulations or their interpretations would have on the Corporation.

Capital and Operational Requirements

The FRB, OCC and FDIC issued substantially similar risk-based and leverage capital guidelines applicable to U.S. banking organizations. In addition, these regulatory agencies may from time to time require that a banking organization maintain capital above the minimum levels, due to its financial condition or actual or anticipated growth.

The FRB’s risk-based guidelines are based on a three-tier capital framework. Tier 1 capital includes common stockholders’ equity and qualifying preferred stock, less goodwill and other adjustments. Tier 2 capital consists of preferred stock not qualifying as tier 1 capital, mandatory convertible debt, limited amounts of subordinated debt, other qualifying term debt and the allowance for credit losses of up to 1.25 percent of risk-weighted assets. Tier 3 capital includes subordinated debt that is unsecured, fully paid, and has an original maturity of at least two years, is not redeemable before maturity without prior approval by the FRB and includes a lock-in clause precluding payment of either interest of principal if the payment would cause the issuing bank’s risk-based capital ratio to fall or remain below the required minimum.

 

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The Corporation, like other bank holding companies, through December 31, 2015 was required to maintain tier 1 capital and total capital (the sum of tier 1 and tier 2 capital) equal to at least 4.0% and 8.0%, respectively, of its total risk-weighted assets (including various off-balance sheet items). Risk-based capital ratios are calculated by dividing tier 1 and total capital by risk-weighted assets. Assets and off-balance sheet exposures are assigned to one of four categories of risk-weights, based primarily on relative credit risk. The risk-based capital standards are designed to make regulatory capital requirements more sensitive to differences in credit and market risk profiles among banks and financial holding companies, to account for off-balance sheet exposure, and to minimize disincentives for holding liquid assets. Assets and off-balance sheet items are assigned to broad risk categories, each with appropriate weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance sheet items. At December 31, 2015, the Corporation’s tier 1 and total capital ratios under these guidelines were 10.4% and 12.9%, respectively. At December 31, 2015, the Corporation had $14.4 million of capital securities that qualified as tier 1 capital and $163.1 million of capital securities and subordinated debt that qualified as tier 2 capital.

In addition, the FRB has established minimum leverage ratio guidelines for bank holding companies. These guidelines currently provide for a minimum ratio of tier 1 capital to average total assets, less goodwill and certain other intangible assets (the leverage ratio), of 3.0% for bank holding companies that meet certain specified criteria, including the highest regulatory rating. All other bank holding companies generally are required to maintain a leverage ratio of at least 4.0%. The guidelines also provide that bank holding companies experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels without significant reliance on intangible assets. Further, the FRB has indicated that it will consider a “tangible tier 1 capital leverage ratio” (deducting all intangibles) and all other indicators of capital strength in evaluating proposals for expansion or new activities. The Corporation’s leverage ratio at December 31, 2015 was 8.1%.

Increased Capital Standards and Enhanced Supervision

The Dodd-Frank Act imposes a series of more onerous capital requirements on financial companies and other companies, including swap dealers and non-bank financial companies that are determined to be of systemic risk. Compliance with heightened capital standards may reduce the Corporation’s ability to generate or originate revenue-producing assets and thereby restrict revenue generation from banking and non-banking operations.

The Dodd-Frank Act’s new regulatory capital requirements are intended to ensure that “financial institutions hold sufficient capital to absorb losses during future periods of financial distress.” The Dodd-Frank Act directs federal banking agencies to establish minimum leverage and risk-based capital requirements on a consolidated basis for insured depository institutions, their holding companies and non-bank financial companies that have been determined to be systemically significant by the FSOC.

The Dodd-Frank Act requires that, at a minimum, regulators apply to bank holding companies and other systemically significant non-bank financial companies the same capital and risk standards that such regulators apply to banks insured by the FDIC. An important consequence of this requirement is that hybrid capital instruments, such as TPS, will no longer be included in the definition of tier 1 capital after December 31, 2015, for banking entities with over $15 billion in consolidated assets. Tier 1 capital includes common stock, retained earnings, certain types of preferred stock and TPS. Since TPS are not currently counted as tier 1 capital for insured banks, the effect of the Dodd-Frank Act is that such securities will no longer be included as tier 1 capital for bank holding companies or financial holding companies. Excluding TPS from tier 1 capital could significantly decrease regulatory capital levels of holding companies that have traditionally relied on TPS to meet capital requirements. The Dodd-Frank Act capital requirements may force bank holding companies to raise other forms of tier 1 capital, for example, by issuing perpetual non-cumulative preferred stock. Since common stock must typically constitute at least 50 percent of tier 1 capital, many bank holding companies and systemically significant non-bank companies may consider dilutive follow-on offerings of common stock, such as that executed by the Corporation in November 2013.

 

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In order to ease the compliance burden associated with the new capital requirements, the Dodd-Frank Act provides a number of exceptions and phase-in periods. For bank holding companies with over $15 billion in consolidated assets and systemically important non-bank financial companies, any “regulatory capital deductions” for debt or equity issued before May 19, 2010 was phased in incrementally from January 1, 2013 to January 1, 2016. The term “regulatory capital deductions” refers to the exclusion of hybrid capital from tier 1 capital. On a fully phased-in basis under these new standards, the Corporation continues to exceed all estimated well-capitalized regulatory requirements.

Basel III Capital Rules

In July 2013, the Corporation’s and FNBPA’s primary federal regulator, the FRB, published the Basel III Capital Rules (Basel III) establishing a new comprehensive capital framework for U.S. banking organizations. The rules implement the Basel Committee’s December 2010 framework for strengthening international capital standards as well as certain provisions of the Dodd-Frank Act. Basel III substantially revised the risk-based capital requirements applicable to bank holding companies and depository institutions, including the Corporation and FNBPA, compared to the then-existing U.S. risk-based capital rules. Basel III defines the components of capital and addresses other issues affecting the numerator in banking institutions’ regulatory capital ratios. Basel III also addresses risk weights and other issues affecting the denominator in a banking institution’s regulatory capital ratios and replaces the existing risk-weighting approach, which was derived from the Basel I capital accords of the Basel Committee, with a more risk-sensitive approach based, in part, on the standardized approach in the Basel Committee’s 2004 “Basel II” capital accords. Basel III also implements the requirements of Section 939A of the Dodd-Frank Act to remove references to credit ratings from the federal banking agencies’ rules. Basel III became effective for the Corporation and FNBPA on January 1, 2015 (subject to a phase-in period for certain provisions).

Basel III, among other things, (i) introduces a new capital measure called “Common Equity Tier 1” (CET1), (ii) specifies that tier 1 capital consists of CET1 and “Additional Tier 1” capital instruments meeting specified requirements, (iii) defines CET1 narrowly by requiring that most deductions/adjustments to regulatory capital measures be made to CET1 and not to the other components of capital and (iv) expands the scope of the deductions/adjustments as compared to existing regulations.

When fully phased in on January 1, 2019, Basel III will require the Corporation and FNBPA to maintain (i) a minimum ratio of CET1 to risk-weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer” (which is added to the 4.5% CET1 ratio as that buffer is phased in, effectively resulting in a minimum ratio of CET1 to risk-weighted assets of at least 7% upon full implementation), (ii) a minimum ratio of tier 1 capital to risk-weighted assets of at least 6.0%, plus the capital conservation buffer (which is added to the 6.0% tier 1 capital ratio as that buffer is phased in, effectively resulting in a minimum tier 1 capital ratio of 8.5% upon full implementation), (iii) a minimum ratio of total capital (that is, tier 1 plus tier 2) to risk-weighted assets of at least 8.0%, plus the capital conservation buffer (which is added to the 8.0% total capital ratio as that buffer is phased in, effectively resulting in a minimum total capital ratio of 10.5% upon full implementation) and (iv) a minimum leverage ratio of 4%, calculated as the ratio of tier 1 capital to average quarterly assets (as compared to a current minimum leverage ratio of 3% for banking organizations that either have the highest supervisory rating or have implemented the appropriate federal regulatory authority’s risk-adjusted measure for market risk).

Basel III also provides for a “countercyclical capital buffer” that is applicable to only certain covered institutions and does not have any current applicability to the Corporation or FNBPA.

The aforementioned capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of CET1 to risk-weighted assets above the minimum but below the conservation buffer (or below the combined capital conservation buffer and countercyclical capital buffer, when the latter is applied) will face constraints on dividends, equity repurchases and compensation depending on the amount of the shortfall.

 

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Under Basel III, the initial minimum capital ratios that became effective on January 1, 2015 are as follows:

 

    4.5% CET1 to risk-weighted assets;
    6.0% tier 1 capital to risk-weighted assets;
    8.0% total capital to risk-weighted assets; and
    4.0% tier 1 capital to average quarterly assets.

Basel III provides for a number of deductions from and adjustments to CET1. These include, for example, the requirement that mortgage servicing rights, deferred tax assets arising from temporary differences that could not be realized through net operating loss carrybacks and significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such categories in the aggregate exceed 15% of CET1. Under capital standards in effect as of December 31, 2014, the effects of accumulated other comprehensive income items included in capital are excluded for the purposes of determining regulatory capital ratios. Under Basel III, the effects of certain accumulated other comprehensive items are not excluded; however, banking organizations which do not use the advanced approach, such as the Corporation and FNBPA, may make a one-time permanent election to continue to exclude these items. The Corporation and FNBPA made this election in order to avoid significant variations in the level of capital depending upon the impact of interest rate fluctuations on the fair value of the Corporation’s available-for-sale securities portfolio. Basel III also precludes certain hybrid securities, such as TPS, as tier 1 capital of bank holding companies, subject to phase-out. TPS no longer included in the Corporation’s tier 1 capital may nonetheless be included as a component of tier 2 capital on a permanent basis without phase-out.

Implementation of the deductions and other adjustments to CET1 began on January 1, 2015 and will be phased-in over a four-year period (starting at 40% on January 1, 2015, with an additional 20% per year thereafter). The implementation of the capital conservation buffer will begin on January 1, 2016 at the 0.625% level and be phased in over a four-year period (increasing by that amount on each subsequent January 1, until it reaches 2.5% on January 1, 2019).

With respect to FNBPA, Basel III also revises the “prompt corrective action” regulations pursuant to Section 38 of the Federal Deposit Insurance Act, as discussed below under “Prompt Corrective Action.”

Basel III prescribes a standardized approach for risk weightings that expand the risk-weighting categories from the four Basel I-derived categories (0%, 20%, 50% and 100%) to a much larger and more risk-sensitive number of categories, depending on the nature of the assets, generally ranging from 0% for U.S. government and agency securities, to 600% for certain equity exposures, and resulting in higher risk weights for a variety of asset categories. Specific changes to the rules impacting the Corporation’s determination of risk-weighted assets include, among other things:

 

    applying a 150% risk weight instead of a 100% risk weight for certain high volatility commercial real estate acquisition, development and construction loans;
    assigning a 150% risk weight to exposures (other than residential mortgage exposures) that are 90 days past due;
    providing for a 20% credit conversion factor for the unused portion of a commitment with an original maturity of one year or less that is not unconditionally cancellable (currently set at 0%);
    providing for a risk weight, generally not less than 20% with certain exceptions, for securities lending transactions based on the risk weight category of the underlying collateral securing the transaction;
    providing for a 100% risk weight for claims on securities firms;
    eliminating the current 50% cap on the risk weight for OTC derivatives.

In addition, Basel III provides more advantageous risk weights for derivatives and repurchase-style transactions cleared through a qualifying central counterparty and increases the scope of eligible guarantors and eligible collateral for purposes of credit risk mitigation.

 

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Management believes that, as of December 31, 2015, the Corporation and FNBPA meet all capital adequacy requirements under Basel III on a fully phased-in basis as if such requirements had been in effect.

Stress Testing

As required by the Dodd-Frank Act, the FRB and OCC published final rules regarding company-run stress testing. The rules require institutions, such as, the Corporation and FNBPA, with average total consolidated assets greater than $10 billion, to conduct an annual company-run stress test of capital, consolidated earnings and losses under one base and at least two stress scenarios provided by the federal bank regulators. Implementation of the rules for covered institutions with total consolidated assets between $10 billion and $50 billion began in 2013. The stress test rules and guidance require increased involvement by boards of directors in the stress testing process and public disclosure of the results. The company-run stress tests were conducted using data as of September 30, 2014 and 2013 and scenarios released by the agencies. Stress test results must be reported to the agencies by the following March 31st. Public disclosure of summary stress test results under the severely adverse scenario began in June 2015 for stress tests commencing in 2014. The next public disclosure of the Corporations’ stress testing results using data as of December 31, 2015 will be in June 2016. The Corporation’s capital ratios reflected in the stress test calculations are an important factor considered by the FRB in evaluating the capital adequacy of the Corporation and FNBPA and whether the appropriateness of any proposed payments of dividends or stock repurchases may be an unsafe or unsound practice. In reviewing the Corporation’s and FNBPA’s stress test results, the FRB and OCC will consider both quantitative and qualitative factors.

Liquidity Requirements

Historically, the regulation and monitoring of bank and bank holding company liquidity has been addressed as a supervisory matter, without required formulaic measures. Liquidity risk management has become increasingly important since the financial crisis. The Basel III liquidity framework requires banks and bank holding companies to measure their liquidity against specific liquidity tests that, although similar in some respects to liquidity measures historically applied by banks and regulators for management and supervisory purposes, going forward would be required by regulation. One test, referred to as the liquidity coverage ratio (LCR), is designed to ensure that the banking entity maintains an adequate level of unencumbered high-quality liquid assets equal to the entity’s expected net cash outflow for a 30-day time horizon (or, if greater, 25% of its expected total cash outflow) under an acute liquidity stress scenario. The other test, referred to as the net stable funding ratio (NSFR), is designed to promote more medium- and long-term funding of the assets and activities of banking entities over a one-year time horizon. These requirements are designed to incent banking entities to increase their holdings of U.S. Treasury securities and other sovereign debt as a component of assets and increase the use of long-term debt as a funding source.

In September 2014, the federal bank regulators approved final rules implementing the LCR for advanced approaches banking organizations (i.e., banking organizations with $250 billion or more in total consolidated assets or $10 billion or more in total on-balance sheet foreign exposure) and a modified version of the LCR for bank holding companies with at least $50 billion in total consolidated assets that are not advanced approach banking organizations, neither of which apply to the Corporation or FNBPA. The federal bank regulators have not yet proposed rules to implement the NSFR or addressed the scope of bank organizations to which it will apply. The Basel Committee’s final NSFR document states that the NSFR applies to internationally active banks, as did its final LCR document as to the ratio.

Prompt Corrective Action

The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA), among other things, classifies insured depository institutions into five capital categories (well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized) and requires the respective federal regulatory agencies to implement systems for “prompt corrective action” for insured depository

 

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institutions that do not meet minimum capital requirements within such categories. FDICIA imposes progressively more restrictive constraints on operations, management and capital distributions, depending on the category in which an institution is classified. Failure to meet the capital guidelines could also subject a banking institution to capital-raising requirements, restrictions on its business and a variety of enforcement remedies, including the termination of deposit insurance by the FDIC, and in certain circumstances the appointment of a conservator or receiver. An “undercapitalized” bank must develop a capital restoration plan and its parent holding company must guarantee that bank’s compliance with the plan. The liability of the parent holding company under any such guarantee is limited to the lesser of five percent of the bank’s assets at the time it became “undercapitalized” or the amount needed to comply with the plan. Furthermore, in the event of the bankruptcy of the parent holding company, the obligation under such guarantee would take priority over the parent’s general unsecured creditors. In addition, FDICIA requires the various regulatory agencies to prescribe certain non-capital standards for safety and soundness relating generally to operations and management, asset quality and executive compensation and permits regulatory action against a financial institution that does not meet such standards.

The various regulatory agencies have adopted substantially similar regulations that define the five capital categories identified by FDICIA, using the total risk-based capital, tier 1 risk-based capital and leverage capital ratios as the relevant capital measures. Such regulations establish various degrees of corrective action to be taken when an institution is considered undercapitalized. Under the regulations, a “well-capitalized” institution must have a tier 1 risk-based capital ratio of at least 6.0%, a total risk-based capital ratio of at least 10.0% and a leverage ratio of at least 5.0% and not be subject to a capital directive order. Under these guidelines, FNBPA was considered well-capitalized as of December 31, 2015.

When determining the adequacy of an institution’s capital, federal regulators must also take into consideration (a) concentrations of credit risk; (b) interest rate risk (when the interest rate sensitivity of an institution’s assets does not match the sensitivity of its liabilities or its off-balance sheet position) and (c) risks from non-traditional activities, as well as an institution’s ability to manage those risks. This evaluation is made as part of the institution’s regular safety and soundness examination. In addition, the Corporation, and any bank with significant trading activity, must incorporate a measure for market risk in their regulatory capital calculations.

Expanded FDIC Powers Upon Insolvency of Insured Depository Institutions

The Dodd-Frank Act provides a mechanism for appointing the FDIC as receiver for a financial company if the failure of the company and its liquidation under the Bankruptcy Code or other insolvency procedures would pose a significant risk to the financial stability of the U.S.

If appointed as receiver for a failing financial company for which a systemic risk determination has been made, the FDIC has broad authority under the Dodd-Frank Act and the Orderly Liquidation Authority it created to operate or liquidate the business, sell the assets, and resolve the liabilities of the company immediately after its appointment as receiver or as soon as conditions make this appropriate. This authority will enable the FDIC to act immediately to sell assets of the company to another entity or, if that is not possible, to create a bridge financial company to maintain critical functions as the entity is wound down. In receiverships of insured depository institutions, the ability to act quickly and decisively has been found to reduce losses to creditors while maintaining key banking services for depositors and businesses. The FDIC will similarly be able to act quickly in resolving non-bank financial companies under the Dodd-Frank Act.

The FDIC Office of Complex Financial Institutions is responsible for implementing its expanded responsibilities attendant to its new receivership authority. The FDIC adopted five major rules for the implementation of its new receivership authority.

 

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Subject to these new rules, if the FDIC is appointed the conservator or receiver of an insured depository institution upon its insolvency or in certain other events, the FDIC has the power to:

 

    transfer any of the depository institution’s assets and liabilities to a new obligor without the approval of the depository institution’s creditors;
    enforce the terms of the depository institution’s contracts pursuant to their terms; and
    repudiate or disaffirm any contract or lease to which the depository institution is a party, the performance of which is determined by the FDIC to be burdensome and the disaffirmation or repudiation of which is determined by the FDIC to promote the orderly administration of the depository institution. Also, under applicable law, the claims of a receiver of an insured depository institution for administrative expense and claims of holders of U.S. deposit liabilities (including the FDIC, as subrogee of the depositors) have priority over the claims of other unsecured creditors of the institution in the event of the liquidation or other resolution of the institution. As a result, whether or not the FDIC would ever seek to repudiate any obligations held by public note holders, such persons would be treated differently from, and could receive, if anything, substantially less than the depositors of the depository institution.

Interstate Banking

Under the BHC Act, bank holding companies, including those that are also financial holding companies, are required to obtain the prior approval of the FRB (unless waived by the FRB) before acquiring more than five percent of any class of voting stock of any non-affiliated bank. Pursuant to the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (Interstate Banking Act), a bank holding company may acquire banks located in states other than its home state without regard to the permissibility of such acquisitions under state law, but subject to any state requirement that the bank has been organized and operating for a minimum period of time, not to exceed five years, and the requirement that the bank holding company, after the proposed acquisition, controls no more than 10 percent of the total amount of deposits of insured depository institutions in the U.S. and no more than 30 percent or such lesser or greater amount set by state law of such deposits in that state.

The Dodd-Frank Act confers on state and national banks the ability to branch de novo into any state, provided that the law of that state permits a bank chartered in that state to establish a branch at that same location.

Community Reinvestment Act

The Community Reinvestment Act of 1977 (CRA) requires depository institutions to assist in meeting the credit needs of their market areas consistent with safe and sound banking practices. Under the CRA, each depository institution is required to help meet the credit needs of its market areas by, among other things, providing credit to and investments in low- and moderate-income individuals and communities. Depository institutions are periodically examined for compliance with the CRA and are assigned ratings. In order for a financial holding company to commence any new activity permitted by the BHC Act, or to acquire any company engaged in any new activity permitted by the BHC Act, each insured depository institution subsidiary of the financial holding company must have received a rating of at least “satisfactory” in its most recent examination under the CRA. Furthermore, banking regulators take into account CRA ratings when considering approval of a proposed transaction.

Financial Privacy

In accordance with the GLB Act, federal banking regulators adopted rules that limit the ability of banks and other financial institutions to disclose non-public information about consumers to nonaffiliated third parties. These limitations require disclosure of privacy policies to consumers and, in some circumstances, allow

 

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consumers to prevent disclosure of certain personal information to a nonaffiliated third party. The privacy provisions of the GLB Act affect how consumer information is transmitted through diversified financial companies and conveyed to outside vendors.

Anti-Money Laundering Initiatives and the USA PATRIOT Act

A major focus of governmental policy on financial institutions in recent years has been aimed at combating money laundering and terrorist financing. The USA PATRIOT Act of 2001 (USA PATRIOT Act) substantially broadened the scope of U.S. anti-money laundering laws and regulations by imposing significant new compliance and due diligence obligations, creating new crimes and penalties and expanding the extra-territorial jurisdiction of the U.S. The UST has issued a number of regulations that apply various requirements of the USA PATRIOT Act to financial institutions such as FNBPA. These regulations require financial institutions to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering and terrorist financing and to verify the identity of their customers. Failure of a financial institution to maintain and implement adequate programs to combat money laundering and terrorist financing, or to comply with all of the relevant laws or regulations, could have serious legal, including criminal law enforcement, and reputational consequences for the institution.

Office of Foreign Assets Control Regulation

The U.S. has instituted economic sanctions which affect transactions with designated foreign countries, nationals and others. These are typically known as the “OFAC rules” because they are administered by the UST Office of Foreign Assets Control (OFAC). The OFAC-administered sanctions target countries in various ways. Generally, however, they contain one or more of the following elements: (i) restrictions on trade with or investment in a sanctioned country, including prohibitions against direct or indirect imports from and exports to a sanctioned country, and prohibitions on “U.S. persons” engaging in financial transactions which relate to investments in, or providing investment-related advice or assistance to, a sanctioned country; and (ii) a blocking of assets in which the government or specially designated nationals of the sanctioned country have an interest, by prohibiting transfers of property subject to U.S. jurisdiction (including property in the possession or control of U.S. persons). Blocked assets (e.g., property and bank deposits) cannot be paid out, withdrawn, set off or transferred in any manner without a license from OFAC. Failure to comply with these sanctions could have serious legal and reputational consequences for the institution.

Consumer Protection Statutes and Regulations

In addition to the consumer regulations that may be issued by the CFPB pursuant to its authority under the Dodd-Frank Act, FNBPA is subject to various federal consumer protection statutes and regulations including the Truth in Lending Act, Truth in Savings Act, Equal Credit Opportunity Act, Fair Housing Act, Real Estate Settlement Procedures Act and Home Mortgage Disclosure Act. Among other things, these acts:

 

    require banks to disclose credit terms in meaningful and consistent ways;
    prohibit discrimination against an applicant in any consumer or business credit transaction;
    prohibit discrimination in housing-related lending activities;
    require banks to collect and report applicant and borrower data regarding loans for home purchases or improvement projects;
    require lenders to provide borrowers with more detailed information regarding the nature and cost of real estate settlements;
    prohibit certain lending practices and limit escrow account amounts with respect to real estate transactions;
    prescribe possible penalties for violations of the requirements of consumer protection statutes and regulations and
    prohibit unfair and deceptive practices in connection with consumer loans.

 

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The CFPB has implemented a series of final consumer protection and disclosure rules related to mortgage loan origination and mortgage loan servicing designed to address the Dodd-Frank Act mortgage lending protections. In particular, the CFPB issued a rule implementing the ability-to-repay and QM provisions of the Truth in Lending Act, as amended by the Dodd-Frank Act (the QM Rule). The ability-to-repay provision requires creditors to make reasonable, good faith determinations that borrowers are able to repay their mortgages before extending the credit based on a number of factors and consideration of financial information about the borrower from reasonably reliable third-party documents. Under the Dodd-Frank Act and the QM Rule, loans meeting the definition of “qualified mortgage” are entitled to a presumption that the lender satisfied the ability-to-repay requirements. The presumption is a conclusive presumption/safe harbor for prime loans meeting the QM requirements, and a rebuttable presumption for higher-priced/subprime loans meeting the QM requirements. The definition of a “qualified mortgage” incorporates the statutory requirements, such as not allowing negative amortization or terms longer than 30 years. The QM Rule also adds an explicit maximum 43% debt-to-income ratio for borrowers if the loan is to meet the QM definition, though some mortgages that meet underwriting guidelines of U.S. government-sponsored entities, the Federal Housing Administration and the U.S. Department of Veteran Affairs may, for a period not to exceed seven years, meet the QM definition without being subject to the 43% debt-to-income limits. The QM Rule became effective January 10, 2014. Additionally, regulations governing the servicing of residential mortgages that became effective in January 2014 have placed additional requirements on mortgage servicers that often lengthen the process for foreclosing on residential mortgages.

The Corporation is still evaluating the impact of the rules recently issued by the CFPB to determine if they will have any long-term impact on its mortgage loan origination and servicing activities. Compliance with these rules will likely increase the Corporation’s overall regulatory compliance costs and decrease fee income opportunities.

Dividend Restrictions

The Corporation’s primary source of funds for cash distributions to its stockholders, and funds used to pay principal and interest on its indebtedness, is dividends received from FNBPA. FNBPA is subject to federal laws and regulations governing its ability to pay dividends to the Corporation, including requirements to maintain capital above regulatory minimums. Under federal law, the amount of dividends that a national bank, such as FNBPA, may pay in a calendar year is dependent on the amount of its net income for the current year combined with its retained net income for the two preceding years. The OCC has the authority to prohibit the payment of dividends by a national bank if it determines such payment would be an unsafe or unsound banking practice. In addition to dividends from FNBPA, other sources of parent company liquidity for the Corporation include cash and short-term investments, as well as dividends and loan repayments from other subsidiaries.

In addition, the ability of the Corporation and FNBPA to pay dividends may be affected by the various minimum capital requirements and the capital and non-capital standards established under FDICIA, as described above. The right of the Corporation, its stockholders and its creditors to participate in any distribution of the assets or earnings of the Corporation’s subsidiaries is further subject to the prior claims of creditors of the respective subsidiaries.

Source of Strength

According to the Dodd-Frank Act and FRB policy, a financial or bank holding company is expected to act as a source of financial strength to each of its subsidiary banks and to commit resources to support each such subsidiary. Consistent with the “source of strength” policy, the FRB has stated that, as a matter of prudent banking, a bank or financial holding company generally should not maintain a rate of cash dividends unless its net income has been sufficient to fully fund the dividends and the prospective rate of earnings retention appears to be consistent with the Corporation’s capital needs, asset quality and overall financial condition. This support may be required at times when the parent holding company may not be able to provide such support. Similarly, under the cross-guarantee provisions of the Federal Deposit Insurance Act, in the event of a loss suffered or

 

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anticipated by the FDIC either as a result of default of a banking subsidiary or related to FDIC assistance provided to a subsidiary in danger of default, the other banks that are within the same holding company family as the distressed bank that are members of the FDIC may be assessed for the FDIC’s loss, subject to certain exceptions.

In addition, if FNBPA was no longer “well-capitalized” and “well-managed” within the meaning of the BHC Act and FRB rules (which take into consideration capital ratios, examination ratings and other factors), the expedited processing of certain types of FRB applications would not be available to the Corporation. Moreover, examination ratings of “3” or lower, “unsatisfactory” ratings, capital ratios below well-capitalized levels, regulatory concerns regarding management, controls, assets, operations or other factors can all potentially result in the loss of financial holding company status, practical limitations on the ability of a bank or bank (or financial) holding company to engage in new activities, grow, acquire new businesses, repurchase its stock or pay dividends or continue to conduct existing activities.

Financial Holding Company Status and Activities

Under the BHC Act, an eligible bank holding company may elect to be a “financial holding company” and thereafter may engage in a range of activities that are financial in nature and that were not previously permissible for banks and bank holding companies. The Corporation is a financial holding company under the BHC Act. The financial holding company may engage directly or through a subsidiary in certain statutorily authorized activities (subject to certain restrictions and limitations imposed by the Dodd-Frank Act). A financial holding company may also engage in any activity that has been determined by rule or order to be financial in nature, incidental to such financial activity, or (with prior FRB approval) complementary to a financial activity and that does not pose substantial risk to the safety and soundness of an institution or to the financial system generally. In addition to these activities, a financial holding company may engage in those activities permissible for a bank holding company that has not elected to be treated as a financial holding company.

For a bank holding company to be eligible for financial holding company status, all of its subsidiary U.S. depository institutions must be “well-capitalized” and “well-managed.” The FRB generally must deny expanded authority to any bank holding company with a subsidiary insured depository institution that received less than a satisfactory rating on its most recent CRA review as of the time it submits its request for financial holding company status. If, after becoming a financial holding company and undertaking activities not permissible for a bank holding company under the BHC Act, the company fails to continue to meet any of the requirements for financial holding company status, the company must enter into an agreement with the FRB to comply with all applicable capital and management requirements. If the company does not return to compliance within 180 days, the FRB may order the company to divest its subsidiary banks or the company may discontinue or divest investments in companies engaged in activities permissible only for a bank holding company that has elected to be treated as a financial holding company.

Activities and Acquisitions

The BHC Act requires a bank or financial holding company to obtain the prior approval of the FRB before:

 

    the company may acquire direct or indirect ownership or control of any voting shares of any bank or savings and loan association, if after such acquisition the bank holding company will directly or indirectly own or control more than five percent of any class of voting securities of the institution;
    any of the company’s subsidiaries, other than a bank, may acquire all or substantially all of the assets of any bank or savings and loan association; or
    the company may merge or consolidate with any other bank or financial holding company.

 

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The Interstate Banking Act generally permits bank holding companies to acquire banks in any state, and preempts all state laws restricting the ownership by a holding company of banks in more than one state. The Interstate Banking Act also permits:

 

    a bank to merge with an out-of-state bank and convert any offices into branches of the resulting bank;
    a bank to acquire branches from an out-of-state bank; and
    a bank to establish and operate de novo interstate branches whenever the host state permits de novo branching of its own state-chartered banks.

Bank or financial holding companies and banks seeking to engage in mergers authorized by the Interstate Banking Act must be at least adequately capitalized as of the date that the application is filed, and the resulting institution must be well-capitalized and managed upon consummation of the transaction.

The Change in Bank Control Act prohibits a person, entity or group of persons or entities acting in concert, from acquiring “control” of a bank holding company or bank unless the FRB has been given prior notice and has not objected to the transaction. Under FRB regulations, the acquisition of 10% or more (but less than 25%) of the voting stock of a corporation would, under the circumstances set forth in the regulations, create a rebuttable presumption of acquisition of control of the corporation.

Securities and Exchange Commission

The Corporation is also subject to regulation by the SEC by virtue of the Corporation’s status as a public company and due to the nature of the business activities of certain subsidiaries. The Dodd-Frank Act significantly expanded the SEC’s jurisdiction over hedge funds, credit ratings agencies and governance of public companies, among other areas, and enhanced the SEC’s enforcement powers. Several of the provisions could lead to significant changes in SEC enforcement practice and may have long-term implications for public companies, their officers and employees, accountants, brokerage firms, investment advisers and persons associated with them. For example, these provisions (1) authorize new rewards to and provide expanded protections of whistleblowers; (2) provide the SEC authority to impose substantial civil penalties on all persons subject to cease-and-desist proceedings, not merely securities brokers, investment advisers and their associated persons; (3) broaden standards for the imposition of secondary liability; (4) confer on the SEC extraterritorial jurisdiction over alleged fraud violations involving conduct abroad and enhancing the ability of the SEC and the Public Company Accounting Oversight Board to inspect audit work by foreign public accounting firms; and (5) expand the applicability of collateral bars.

SOX contains important requirements for public companies in the areas of financial disclosure and corporate governance. In accordance with section 302(a) of SOX, written certifications by the Corporation’s Chief Executive Officer (CEO) and Chief Financial Officer (CFO) are required with respect to each of the Corporation’s quarterly and annual reports filed with the SEC. These certifications attest that the applicable report does not contain any untrue statement of a material fact. The Corporation also maintains a program designed to comply with Section 404 of SOX, which includes identification of significant processes and accounts, documentation of the design of process and entity level controls and testing of the operating effectiveness of key controls. See Item 9A, Controls and Procedures, of this Report for the Corporation’s evaluation of its disclosure controls and procedures.

FNBIA is registered with the SEC as an investment advisor and, therefore, is subject to the requirements of the Investment Advisers Act of 1940 and the SEC’s regulations thereunder. The principal purpose of the regulations applicable to investment advisors is the protection of investment advisory clients and the securities markets, rather than the protection of creditors and stockholders of investment advisors. The regulations applicable to investment advisors cover all aspects of the investment advisory business, including limitations on the ability of investment advisors to charge performance-based or non-refundable fees to clients, record-keeping,

 

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operating, marketing and reporting requirements, disclosure requirements, limitations on principal transactions between an advisor or its affiliates and advisory clients, as well as other anti-fraud prohibitions. FNBIA also may be subject to certain state securities laws and regulations.

Additional legislation, changes in or new rules promulgated by the SEC and other federal and state regulatory authorities and self-regulatory organizations or changes in the interpretation or enforcement of existing laws and rules, may directly affect the method of operation and profitability of FNBIA. The profitability of FNBIA could also be affected by rules and regulations that impact the business and financial communities in general, including changes to the laws governing taxation, antitrust regulation, homeland security and electronic commerce.

Under various provisions of the federal and state securities laws, including in particular those applicable to broker-dealers, investment advisors and registered investment companies and their service providers, a determination by a court or regulatory agency that certain violations have occurred at a company or its affiliates can result in a limitation of permitted activities and disqualification to continue to conduct certain activities.

FNBIA also may be required to conduct its business in a manner that complies with rules and regulations promulgated by the U.S. Department of Labor under the Employee Retirement Income Security Act of 1974 (ERISA), among others. The principal purpose of these regulations is the protection of clients and plan assets and beneficiaries, rather than the protection of stockholders and creditors.

Consumer Finance Subsidiary

Regency is subject to regulation under Pennsylvania, Tennessee, Ohio and Kentucky state laws that require, among other things, that it maintain licenses in effect for consumer finance operations for each of its offices. Representatives of the Pennsylvania Department of Banking and Securities, the Tennessee Department of Financial Institutions, the Ohio Division of Financial Institutions and the Kentucky Department of Financial Institutions periodically visit Regency’s offices and conduct extensive examinations in order to determine compliance with such laws and regulations. Additionally, the FRB, as “umbrella” regulator of the Corporation pursuant to the GLB Act, may conduct an examination of Regency’s offices or operations. Such examinations include a review of loans and the collateral securing those loans, as well as a check of the procedures employed for making and collecting loans. Additionally, Regency is under the jurisdiction of the CFPB and is subject to certain federal consumer protection laws that require that certain information relating to credit terms be disclosed to customers and, in certain instances, afford customers the right to rescind transactions. The CFPB may also periodically visit Regency’s offices and conduct extensive consumer protection examinations. As a Pennsylvania corporation, Regency is subject to Pennsylvania’s requirements concerning dividend payments.

Insurance Agencies

FNIA is subject to licensing requirements and extensive regulation under the laws of the Commonwealth of Pennsylvania and the various states in which FNIA conducts business. These laws and regulations are primarily for the benefit of policyholders. In all jurisdictions, the applicable laws and regulations are subject to amendment or interpretation by regulatory authorities. Generally, those authorities are vested with relatively broad discretion to grant, renew and revoke licenses and approvals and to implement regulations. Licenses may be denied or revoked for various reasons, including for regulatory violations or upon conviction for certain crimes. Possible sanctions that may be imposed for violation of regulations include the suspension of individual employees, limitations on engaging in a particular business for a specified period of time, revocation of licenses, censures and fines.

Penn-Ohio is subject to examination by the Arizona Department of Insurance. Representatives of the Arizona Department of Insurance periodically determine whether Penn-Ohio has maintained required reserves, established adequate deposits under a reinsurance agreement and complied with reporting requirements under the applicable Arizona statutes.

 

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Governmental Policies

The operations of the Corporation and its subsidiaries are affected not only by general economic conditions, but also by the policies of various regulatory authorities. In particular, the FRB regulates monetary policy and interest rates in order to influence general economic conditions. These policies have a significant influence on overall growth and distribution of loans, investments and deposits and affect interest rates charged on loans or paid for deposits. FRB monetary policies have had a significant effect on the operating results of all financial institutions in the past and may continue to do so in the future.

Available Information

The Corporation makes available through its website at www.fnbcorporation.com, free of charge, its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K (and amendments to any of the foregoing) as soon as reasonably practicable after such reports are filed with or furnished to the SEC. Information on the Corporation’s website is not incorporated by reference into this document and should not be considered part of this Report. The Corporation’s common stock is traded on the NYSE under the symbol “FNB”.

ITEM 1A.    RISK FACTORS

As a financial services organization, the Corporation takes on a certain amount of risk in every business decision, strategic initiative and activity. For example, every time FNBPA opens an account or approves a loan for a customer, processes a payment, offers a new product or service, hires a new employee, or implements a new computer system, FNBPA and the Corporation incur a certain amount of risk. As an organization, the Corporation must balance revenue generation and profitability with the risks associated with its business activities. The objective of risk management is not to eliminate risk, but to identify and accept risk and then manage risk effectively so as to optimize total shareholder value.

The Corporation has identified seven major categories of risk: credit risk, market risk, liquidity risk, reputational risk, operational risk, regulatory compliance risk and strategic risk. The Corporation more fully describes credit risk, market risk and liquidity risk, and the programs the Corporation’s management has implemented to address these risks, in the Market Risk section of “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, which is included in Item 7 of this Report. Reputational risk relates to a risk of loss resulting from damage to a company’s reputation, in lost revenue or destruction of shareholder value, even if the company is not subject to regulatory or other sanctions or penalties. Operational risk arises from inadequate information systems and technology, weak internal control systems or other failed internal processes or systems, human error, fraud or external events. Regulatory compliance risk relates to each of the other five major categories of risk listed above, but specifically addresses internal control failures that result in non-compliance with laws, rules, regulations, safety and soundness or ethical standards.

The following discussion highlights specific risks that could affect the Corporation and its businesses. You should carefully consider each of the following risks and all of the other information set forth in this Report. Based on the information currently known, the Corporation believes that the following information identifies the most significant risk factors affecting the Corporation. However, the risks and uncertainties the Corporation faces are not limited to those described below. Additional risks and uncertainties not presently known or that the Corporation currently believes to be immaterial may also adversely affect its business.

If any of the following risks and uncertainties develop into actual events or if the circumstances described in the risks and uncertainties occur or continue to occur, these events or circumstances could have a material adverse effect on the Corporation’s business, financial condition or results of operations. These events could also have a negative effect on the trading price of the Corporation’s securities.

 

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If the Corporation is not able to continue its historical levels of growth, it may not be able to maintain its historical revenue trends.

To achieve its past levels of growth, the Corporation has focused on both organic growth and acquisitions. The Corporation may not be able to sustain its historical rate of growth or may not be able to grow at all. More specifically, the Corporation may not be able to obtain the financing necessary to fund additional growth and may not be able to find suitable acquisition candidates. Various factors, such as economic conditions and competition, may impede or prohibit the opening of new retail branches and the completion of acquisitions. Further, the Corporation may be unable to attract and retain experienced bankers, which could adversely affect its internal growth. If the Corporation is not able to continue its historical levels of growth, it may not be able to maintain its historical revenue trends.

The Corporation’s results of operations are significantly affected by the ability of its borrowers to repay their loans. A significant portion of the Corporation’s loan portfolio is comprised of commercial and consumer loans, which generally bear a higher risk of non-payment and loss than certain other types of loans, such as one-to-four family residential mortgage loans.

Lending money is an essential part of the banking business. However, for various reasons, borrowers do not always repay their loans. The risk of non-payment is affected by:

 

    credit risks of a particular borrower;
    changes in economic conditions which impact certain geographic markets or industries;
    the duration of the loan; and
    in the case of a collateralized loan, uncertainties as to the future value of the collateral.

Generally, commercial/industrial, construction and commercial real estate loans present a greater risk of non-payment by a borrower than other types of loans. They typically involve larger loan balances and are particularly sensitive to economic conditions. The borrower’s ability to repay usually depends on the successful operation of the business and the income stream of the borrowers. In addition, many of the Corporation’s commercial borrowers have more than one loan outstanding with the Corporation, which means that an adverse development with respect to one loan or one credit relationship can expose it to significantly greater risk of loss. Also, in the case of commercial/industrial loans, the collateral often consists of accounts receivable, inventory and equipment, which usually does not yield a substantial recovery in the event of a foreclosure and is susceptible to deterioration or other loss in advance of foreclosure. However, these types of loans historically have driven the growth in the Corporation’s loan portfolio and the Corporation intends to continue to emphasize this type of lending. At December 31, 2015, commercial/industrial, construction and commercial real estate loans comprised 56.7% of the Corporation’s loan portfolio. In addition to commercial loans, consumer loans (comprised of direct installment loans and consumer lines of credit) comprise a significant portion of the Corporation’s loan portfolio. These loans, which were 23.3% of the Corporation’s loan portfolio at December 31, 2015, typically have shorter terms and lower balances with higher yields compared to real estate mortgage loans, but generally carry higher risks of default. Consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be affected by adverse personal circumstances. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount that can be recovered on these loans. For additional information, see the Lending Activity section of “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, which is included in Item 7 of this Report.

The Corporation’s financial condition may be adversely affected if it is unable to attract sufficient deposits to fund its anticipated loan growth and meet liquidity objectives.

The Corporation funds its loan growth primarily through deposits and customer repurchase agreements. Deposits and customer repurchase agreements are a low cost and stable source of funding for the Corporation.

 

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However, the Corporation competes with commercial banks, savings banks and credit unions, as well as non-depositary competitors such as mutual funds, securities and brokerage firms and insurance companies, for deposits and customer repurchase agreements. To the extent that the Corporation is unable to attract and maintain sufficient levels of deposits and customer repurchase agreements to fund its loan growth and liquidity objectives, it may be subject to paying higher funding costs by raising interest rates that are paid on deposits and customer repurchase agreements. Higher funding costs would reduce the Corporation’s net interest margin and net interest income. The Corporation also could seek to raise additional funds through public or private financings. However, the Corporation can give no assurance that it would be able to obtain these funds on terms that are attractive to it.

The Corporation’s financial condition and results of operations could be adversely affected if it must further increase its provision for credit losses or if its allowance for credit losses is not sufficient to absorb actual losses.

There is no precise method of predicting loan losses. The Corporation can give no assurance that its allowance for credit losses will be sufficient to absorb actual loan losses. Excess loan losses could have a material adverse effect on the Corporation’s financial condition and results of operations. The Corporation attempts to maintain an adequate allowance for credit losses to provide for estimated losses inherent in its loan portfolio as of the corresponding reporting date based on various assumptions and judgments about the collectability of the loan portfolio. The Corporation periodically determines the amount of its allowance for credit losses based upon consideration of several quantitative and qualitative factors including, but not limited to, the following:

 

    a regular review of the quality, mix and size of the overall loan portfolio;
    historical loan loss experience;
    evaluation of non-performing loans;
    geographic or industry concentrations;
    assessment of economic conditions and their effects on the Corporation’s existing portfolio;
    the amount and quality of collateral, including guarantees, securing loans; and
    geographic or industry economic market conditions.

The level of the allowance for credit losses reflects the judgment and estimates of management regarding the amount and timing of future cash flows, current fair value of the underlying collateral and other qualitative risk factors that may affect the loan. Determination of the allowance is inherently subjective and is based on factors that are susceptible to significant change. Continuing deterioration in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of the Corporation’s control, may require an increase in the allowance for credit losses. In addition, bank regulatory agencies periodically review the Corporation’s allowance and may require an increase in the provision for credit losses or the recognition of additional loan charge-offs, based on judgments different from those of management. In addition, if charge-offs in future periods exceed the allowance for credit losses, the Corporation will need additional provisions to increase the allowance. Any increases in the allowance will result in a decrease in net income and capital and may have a material adverse effect on the Corporation’s financial condition and results of operations. For additional discussion relating to this matter, refer to the Allowance and Provision for Credit Losses section of “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, which is included in Item 7 of this Report.

Changes in economic conditions and the composition of the Corporation’s loan portfolio could lead to higher loan charge-offs or an increase in the Corporation’s provision for credit losses and may reduce the Corporation’s net income.

Changes in national and regional economic conditions, and in large metropolitan areas within the Corporation’s market, continue to impact the loan portfolios of the Corporation. For example, an increase in unemployment, a decrease in real estate values or changes in interest rates, as well as other factors, could weaken the economies of the communities the Corporation serves. Weakness in the market areas served by the

 

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Corporation could depress its earnings and consequently its financial condition because customers may not want or need the Corporation’s products or services; borrowers may not be able to repay their loans; the value of the collateral securing the Corporation’s loans to borrowers may decline; and the quality of the Corporation’s loan portfolio may decline. Any of the latter three scenarios could require the Corporation to charge-off a higher percentage of its loans and/or increase its provision for credit losses, which would reduce its net income.

The Corporation’s business and financial performance is impacted significantly by market rates and changes in those rates. The monetary, tax and other policies of governmental agencies, including the UST and the FRB, have a direct impact on interest rates and overall financial market performance over which the Corporation and its subsidiary bank have no control and which may not be able to be predicted with reasonable accuracy.

As a result of the high percentage of the Corporation’s assets and liabilities that are in the form of interest-bearing or interest-related instruments, changes in interest rates in the shape of the yield curve or in spreads between different market interest rates can have a material effect on its business, profitability and the value of its financial assets and liabilities. Such scenarios may include the following:

 

    changes in interest rates or interest rate spreads can affect the difference between the interest that FNBPA can earn on assets and the interest that FNBPA may pay on liabilities, which impacts FNBPA’s overall net interest income and profitability;
    such changes can affect the ability of borrowers to meet obligations under variable or adjustable rate loans and other debt instruments and can, in turn, affect the Corporation’s loss rates on those assets;
    such changes may decrease the demand for interest rate-based products or services, including bank loans and deposit products and the subordinated notes offered at Regency offices;
    such changes can also affect the Corporation’s ability to hedge various forms of market and interest rate risks and may decrease the profitability or increase the risk associated with such hedges; and
    movements in interest rates also affect mortgage repayment speeds and could result in impairments of mortgage servicing assets or otherwise affect the profitability of such assets.

The monetary, tax and other policies of the U.S. Government and its agencies also have a significant impact on interest rates and overall financial market performance. An important function of the FRB is to regulate the national supply of bank credit and certain interest rates. The actions of the FRB influence the rates of interest that FNBPA may charge on loans and what FNBPA may pay on borrowings and interest-bearing deposits and can also affect the value of the Corporation’s and FNBPA’s on-balance sheet and off-balance sheet financial instruments. Principally, due to the impact of rates and by controlling access to direct funding from the Federal Reserve Banks, the FRB’s policies also influence to a significant extent, FNBPA’s cost of funding. The Corporation cannot predict the nature or timing of future changes in monetary, tax and other policies or the effects that they may have on FNBPA’s and other affiliates’ activities and financial results.

The financial soundness of other financial institutions may adversely affect the Corporation, FNBPA and other affiliates.

Financial services institutions are interrelated as a result of trading, clearing, counterparty and other relationships. The Corporation, FNBPA and other affiliates are exposed to many different industries and counterparties and they routinely execute transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks and other institutional clients. Many of these type transactions expose the Corporation, FNBPA and other affiliates to credit risk in the event of default of the counterparty or client. In addition, FNBPA and other affiliates’ credit risks may be exacerbated when the collateral held by it cannot be realized upon or is liquidated at prices that are not sufficient to recover the full amount of the loan or derivative exposure that it is due.

There may be risks resulting from the extensive use of models in FNBPA’s business.

FNBPA relies on quantitative models to measure risks and to estimate certain financial values. Models may be used in such processes as determining the pricing of various products, assessing potential acquisition

 

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opportunities, for developing presentations made to market analysts and others, creating loans and extending credit, measuring interest rate and other market risks, predicting losses, assessing capital adequacy, testing, developing strategic planning initiatives, capital stress testing and calculating regulatory capital levels, as well as to estimate the value of financial instruments and balance sheet items. Poorly designed or implemented models present the risk that FNBPA’s business decisions based on information incorporating models will be adversely affected due to the inadequacy of such information. Also, information the Corporation provides to the public or to its regulators based on poorly designed or implemented models could be inaccurate or misleading. Certain decisions that the regulators make, including those related to capital distributions and dividends to the Corporation’s shareholders, could be adversely affected due to the regulator’s perception that the quality of FNBPA’s models used to generate the relevant information is insufficient.

The Corporation’s asset valuations may include methodologies, estimations and assumptions that are subject to differing interpretations and this, along with market factors such as volatility in one or more markets or industries, could result in changes to asset valuations that may materially adversely affect the Corporation’s subsidiary bank’s results of operations or financial condition.

The Corporation and FNBPA must use estimates, assumptions and judgments when assets are measured and reported at fair value. Assets carried at fair value inherently result in a higher degree of financial statement volatility. Because the assets are carried at fair value, a decline in their value may cause the Corporation to incur losses even if the assets in question present minimal risk. Fair values and information used to record valuation adjustments for certain assets and liabilities are based on quoted market prices and/or other observable inputs provided by independent third-party resources, when available. When such third-party information is not available, the Corporation estimates fair value primarily by using cash flow and other financial modeling techniques utilizing assumptions such as credit quality, liquidity, interest rates and other relative inputs. Changes in underlying factors or assumptions in any of the areas underlying these estimates could materially impact the Corporation’s future financial condition and results of operations.

During periods of market disruption, including periods of significantly rising or high interest rates, rapidly widening credit spreads or illiquidity, it may be more difficult to value certain assets if trading becomes less frequent and/or market data becomes less observable. There may be certain asset classes that were historically in active markets with significant observable data that rapidly become illiquid due to market volatility, a loss in market confidence or other factors. In such cases, valuations in certain asset classes may require more subjectivity and management discretion; valuations may include inputs and assumptions that are less observable or require greater estimation. Further, rapidly changing and unprecedented market conditions in any particular market (e.g., credit, equity, fixed income) could materially impact the valuation of assets as reported within the Corporation’s consolidated financial statements, and the period-to-period changes in value could vary significantly.

The Corporation may be required to record future impairment charges if the declines in asset values are considered other-than-temporary. If the impairment charges are significant enough, they could affect the ability of FNBPA to pay dividends to the Corporation (which could have a material adverse effect on the Corporation’s liquidity and its ability to pay dividends to shareholders), and could also negatively impact its regulatory capital ratios and result in FNBPA not being classified as “well-capitalized” for regulatory purposes.

The Corporation is subject to operational risk that could damage its reputation and its business. It engages in a variety of businesses in diverse markets and relies on systems, employees, service providers and counterparties to properly process a high volume of transactions.

Like all businesses, the Corporation is subject to operational risk, which represents the risk of loss resulting from inadequate or failed internal processes in its systems, human error and external events. Operational risk also encompasses technology, compliance and legal risk, which is the risk of loss from violations of, or noncompliance with, rules, regulations, prescribed practices or ethical standards, as well as the

 

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risk of the Corporation’s and its subsidiaries’ noncompliance with contractual and other obligations. The Corporation is also exposed to operational risk through its outsourcing arrangements, and the effect the changes in circumstances or capabilities of the Corporation’s outsourcing vendors can have on the Corporation’s ability to continue to perform operational functions necessary to the Corporation’s business. The Corporation outsources certain of its data processing and online and mobile banking services to third party providers. Those third party providers could also be sources of operational and information security risk to the Corporation, including from breakdowns or failures of their own systems or capacity constraints. Although the Corporation seeks to mitigate operational risks through a system of internal controls which the Corporation regularly reviews and updates, no system of controls, however well designed and maintained, is infallible, and, to the extent the risks arise from the operations of third party vendors or customers, the Corporation has limited ability to control those risks. Control weaknesses or failures or other operational risk could result in charges, increased operational costs, harm to the Corporation’s reputation, inability to secure insurance, civil litigation, regulatory intervention or sanctions, foregone business opportunities, the loss of customer business, especially if customers are discouraged from using mobile bill pay, mobile banking and online banking services, or the unauthorized release, gathering, monitoring, misuse, loss or destruction of proprietary information.

The Corporation’s business could be adversely affected by difficult economic conditions in the regions in which it operates.

The Corporation operates primarily in Pennsylvania, eastern Ohio, Maryland and northern West Virginia. Most of the Corporation’s customers are individuals and small- and medium-sized businesses that are dependent upon their regional economies. Although economic conditions have improved since the recent recessionary conditions, due to the protracted and inconsistent recovery, further deterioration or minimal improvement in economic and employment conditions in the market areas the Corporation serves could result in the following consequences, any of which could have a material adverse effect on the Corporation’s business, financial condition and results of operations:

 

    demand for the Corporation’s loans, deposits and services may decline;
    loan delinquencies, problem assets and foreclosures may increase;
    weak economic conditions may continue to limit the demand for loans by creditworthy borrowers, limiting the Corporation’s capacity to leverage its retail deposits and maintain its net interest income;
    collateral for the Corporation’s loans may decline further in value; and
    the amount of the Corporation’s low-cost or non-interest-bearing deposits may decrease.

The Corporation could be adversely affected by changes in the law, especially changes in the regulation of the banking industry.

The Corporation and its subsidiaries operate in a highly regulated environment and their businesses are subject to supervision and regulation by several governmental agencies, including the SEC, FRB, OCC, CFPB, FDIC and state regulatory and licensing agencies. Regulations are generally intended to provide protection for depositors, borrowers and other customers, rather than for investors in the Corporation’s securities. The Corporation is subject to changes in federal and state law, regulations, governmental policies, tax laws and accounting principles. Changes in regulations or the regulatory environment could adversely affect the banking and financial services industry as a whole and could limit the Corporation’s growth and the return to investors by restricting such activities as:

 

    the payment of dividends;
    mergers with or acquisitions of other institutions or branches;
    investments;
    loans and interest rates;
    assessments of fees, such as overdraft and electronic transfer interchange fees;
    the provision of securities, insurance, brokerage or trust services;

 

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    the types of non-deposit activities in which the Corporation’s financial institution subsidiaries may engage; and
    offering of new products and services.

Under regulatory capital adequacy guidelines and other regulatory requirements, the Corporation and FNBPA must meet guidelines subject to qualitative judgments by regulators about components, risk weightings and other factors. From time to time, the regulators implement changes to those regulatory capital adequacy guidelines. Changes resulting from the Dodd-Frank Act and the regulatory accords on international banking institutions formulated by the Basel Committee on banking supervision and implemented by the FRB, when fully phased in, will likely require the Corporation to satisfy additional, more stringent and complex capital adequacy standards (see discussion under Business – Government Supervision and Regulation – “Basel III Capital Rules”).

These changes to present capital and liquidity requirements could restrict the Corporation’s activities and require it to maintain additional capital. Compliance with heightened capital standards may reduce its ability to generate or originate revenue-producing assets and thereby restrict revenue generation from banking and non-banking operations. If the Corporation fails to meet these minimum liquidity capital guidelines and other regulatory requirements, its financial condition would be materially and adversely affected.

The Dodd-Frank Act effects fundamental changes in the regulation of the financial services industry, some of which may adversely affect the Corporation’s business.

The Dodd-Frank Act imposes new regulatory requirements and oversight over banks and other financial institutions in a number of ways, among which are: (i) creating the CFPB to regulate consumer financial products and services sold by banks and non-banks, and to review their compliance with federal consumer protection unfair and deceptive practice standards and fair lending laws; (ii) creating the FSOC to identify and impose stronger regulatory oversight on large financial firms and to identify systemic risks; (iii) granting orderly liquidation authority to the FDIC for the liquidation of financial corporations that pose a risk to the financial system of the U.S.; (iv) limiting debit card interchange fees; (v) adopting certain changes to stockholder rights, including a stockholder “say on pay” vote on executive compensation; (vi) strengthening the SEC’s powers to regulate securities markets; (vii) regulating OTC derivative markets; (viii) making more loans subject to provisions for higher cost loans, new disclosures, and certain other revisions; (ix) providing consumers a defense of set-off or recoupment in a foreclosure or collection action if the lender violates the newly created “reasonable ability to repay” provision; (x) amending the Truth in Lending Act with respect to mortgage originations, including originator compensation, disallowing mandatory arbitration, and prepayment considerations; (xi) the “Volcker Rule” which, among other things, imposes restrictions on proprietary trading and investment activities of banks and bank holding companies and restricts the sponsoring of hedge funds or private equity funds; (xii) reform related to the regulation of credit rating agencies; and (xiii) placing additional and sometimes more time consuming requirements on the process of foreclosing on residential mortgage loans in default.

Regulators are tasked with adopting regulations that implement and define the breadth and scope of the Dodd-Frank Act, many of which have yet to be implemented. A number of the regulations that must be adopted under the Dodd-Frank Act have yet to be proposed, and it is difficult to gauge the impact of certain provisions of the Dodd-Frank Act because so many important details related to the concepts adopted in the Dodd-Frank Act were left within the sole discretion of the regulators. For example, the CFPB has the power to adopt new regulations, such as the QM Rule, to protect consumers, which power it may exercise at its discretion so long as it advances the general concept of the protection of consumers.

Consequently, the full impact of these regulations and other regulations to be adopted pursuant to the Dodd-Frank Act remains unclear, but they may impair the Corporation’s ability to meet all of the product needs of its customers, lead customers to seek financial solutions and products through non-banking channels and adversely affect the Corporation’s profitability. Moreover, the increased regulatory scrutiny resulting from the Dodd-Frank Act regulations will likely continue to increase the Corporation’s cost of compliance, divert its resources and may adversely affect profitability.

 

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Among those regulations that have been proposed or adopted, the following may adversely affect the business of the Corporation:

 

    limitations on debit card interchange fees may adversely affect its revenues and earnings;
    changing the methodology for calculating deposit insurance premium rates will become more complex, less predictable and more pro-cyclical, diverting its resources and potentially having a material adverse effect on its financial condition, results of operations and ability to pay dividends;
    changing the procedures for liquidation may adversely impact its credit ratings and adversely impact its liquidity, financial condition, and its ability to fund itself;
    increases in requirements for regulatory capital while eliminating certain sources of capital may adversely affect its financial condition and ability to pay dividends;
    the ability to pay interest on commercial demand deposit accounts may increase its interest expenses; and
    uncertainty as to the types of activities which may be deemed unfair and deceptive practices which may impact fee income opportunities.

These provisions may limit the types of products the Corporation is able to offer, the methods of offering them and prices at which they are offered. They may also increase the cost of offering these products. These provisions likely will affect different financial institutions in different ways, and therefore, may also affect the competitive landscape.

Increases in or required prepayments of FDIC insurance premiums may adversely affect the Corporation’s earnings.

Since 2008, higher levels of bank failures have dramatically increased resolution costs of the FDIC and depleted its DIF. In addition, the FDIC instituted temporary programs, some of which were made permanent by the Dodd-Frank Act, to further insure customer deposits at FDIC-insured banks, which have placed additional stress on the DIF.

In order to maintain a strong funding position and restore reserve ratios of the DIF, the FDIC has increased assessment rates of insured institutions. Pursuant to the Dodd-Frank Act, the minimum reserve ratio for the DIF was increased from 1.15% to 1.35% of estimated insured deposits, or the assessment base, and the FDIC was directed to take the steps needed to cause the reserve ratio of the DIF to reach 1.35% of estimated insured deposits by September 30, 2020. On December 15, 2010, as part of its long-range management plan to ensure that the DIF is able to maintain a positive balance despite banking crises and steady, moderate assessment rates despite economic and credit cycles, the FDIC set the DIF’s designated reserve ratio (DRR) at 2% of estimated insured deposits. The FDIC is required to offset the effect of the increased minimum reserve ratio for banks with assets of less than $10 billion, so smaller community banks will be spared the cost of funding the increase in the minimum reserve ratio (FNBPA exceeds the $10 billion threshold).

Historically, the FDIC utilized a risk-based assessment system that imposed insurance premiums based upon a risk matrix that takes into account several components, including but not limited to the bank’s capital level and supervisory rating. Pursuant to the Dodd-Frank Act, the FDIC amended its regulations to base insurance assessments on the average consolidated assets less the average tangible equity of the insured depository institution during the assessment period; to set deposit insurance assessment rates in light of the new assessment base; and to revise the assessment system applicable to large banks (those having at least $10 billion in total assets) to better differentiate for the risks that a large bank could pose to the DIF.

The likely effect of the new assessment scheme will be to increase assessment fees for institutions that rely more heavily on non-deposit funding sources. However, the higher assessments for institutions that have relied on non-deposit sources of funding in the past could force these institutions to change their funding models and more actively search for deposits. If this happens, it could drive up the costs to attain deposits across the market, a situation that would negatively impact community banks like FNBPA, which derive the majority of their funding from deposits.

 

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The Corporation generally will be unable to control the amount of premiums that it is required to pay for FDIC insurance. Any future increases in or required prepayments of FDIC insurance premiums may adversely affect the Corporation’s financial condition and results of operations. In light of the recent increases in the assessment rates, the potential for additional increases, and the Corporation’s status as a large bank, FNBPA may be required to pay additional amounts to the DIF, which could have an adverse effect on its earnings. If FNBPA’s deposit insurance premium assessment rate increases again, either because of its risk classification, because of emergency assessments, or because of another uniform increase, the earnings of the Corporation could be further adversely impacted.

The Corporation must comply with stress-testing requirements.

The stress testing requirements under the Dodd-Frank Act stipulate that all U.S. banks such as the Corporation with consolidated assets between $10 billion and $50 billion are required to conduct annual stress tests calculated under a multi-scenario analysis (see discussion under Business – Government Supervision and Regulation – “Stress Testing”).

The economic and financial market scenarios used in the annual company-run stress test include baseline, adverse and severely adverse scenarios. Each scenario includes 26 variables, including economic activity, unemployment, exchange rates, prices, incomes and interest rates. The adverse and severely adverse scenarios are not forecasts, but rather hypothetical scenarios designed to assess the strength and resilience of financial institutions under severe economic conditions. If the Corporation fails to meet these stress-test requirements, it could be required to take certain actions, including raising additional capital. The results of the stress test could also impact the FRB’s decision-making regarding future dividend payments, as well as acquisitions and new business activities by the Corporation.

Recently adopted rules regulating the imposition of debit card fees may adversely affect the Corporation’s revenues and earnings.

On June 29, 2011, the FRB, pursuant to its authority under the Dodd-Frank Act, issued rules regarding interchange fees charged for electronic debit transactions by payment card issuers having assets over $10 billion, adopting a per-transaction interchange cap base of $0.21 plus a 5-basis point fraud loss adjustment per transaction. The FRB deemed such fees reasonable and proportional to the actual cost of a transaction to the issuer. Entities which had assets in excess of $10 billion as of December 31, 2011 were required to comply with those rules effective as of July 1, 2012. Beginning in 2012 and for each calendar year thereafter, entities having assets in excess of $10 billion as of the end of that calendar year were required to comply with those rules no later than the immediately following July 1. The Corporation became subject to the FRB rules concerning debit card interchange fees as of July 1, 2013.

An interruption in or breach in security of the Corporation’s information systems may result in a loss of customer business and have an adverse effect on the Corporation’s results of operations, financial condition and cash flows.

As part of its business, the Corporation collects, processes and retains sensitive and confidential client and customer information in both paper and electronic form and relies heavily on communications and information systems for these functions. Additionally, certain of these data processing functions are not handled by the Corporation directly, but are outsourced to third party providers. The Corporation has taken reasonable and prudent security measures to prevent the loss of this information, including policies and plans that involve its third party providers to detect and deter cyber-related crimes intended to infiltrate the Corporation’s networks, capture sensitive client and customer information, deny service to customers, or harm electronic processing capabilities. Despite these efforts, the facilities and systems of the Corporation, and those of its third party service providers, may be vulnerable to security breaches, acts of vandalism, computer viruses or compromises, misplaced or lost data, programming and/or human errors or other similar events. Any security breach involving

 

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the misappropriation, loss or other unauthorized disclosure of confidential Corporation, business, employee or customer information, whether by the Corporation, its vendors and retail businesses, could severely damage the reputation of the Corporation, expose it to the risks of civil litigation and liability, disrupt its operations, and have a material adverse effect on its business. Moreover, cyber-security risks appear to be growing. In the last few years, there have been an increasing number of cyber incidents, including several well-publicized cyber-attacks that targeted other U.S. companies, including financial services companies much larger than the Corporation. Further, as technology advances, the ability to initiate transactions and access data has become more widely distributed among mobile devices, personal computers, automated teller machines, remote deposit capture sites and similar access points. These technological advances increase cybersecurity risk. Although the Corporation maintains specific “cyber” insurance coverage, which would apply in the event of various breach scenarios, the amount of coverage may not be adequate in any particular case. In addition, cyber threat scenarios are inherently difficult to predict and can take many forms, many of which may not be covered under the Corporation’s cyber insurance coverage. As cyber threats continue to evolve and increase, the Corporation may be required to spend significant additional resources to continue to modify or enhance its protective and preventative measures or to investigate and remediate any information security vulnerabilities.

The banking and financial services industry continually encounters technological change, especially in the systems that are used to deliver products to, and execute transactions on behalf of, customers, and if the Corporation fails to continue to invest in technological improvements as they become appropriate or necessary, its ability to compete effectively could be severely impaired.

The banking and financial services industry continually undergoes technological changes, with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and reduce costs. The Corporation’s future success will depend, in part, on its ability to address customer needs by using secure technology to provide products and services that will satisfy customer demands, as well as create additional efficiencies in the Corporation’s operations. Many of the Corporation’s competitors have greater resources to invest in technological improvements, and the Corporation may not effectively implement new technology-driven products and services or do so as quickly as its competitors. Failure to successfully keep pace with technological change affecting the banking and financial services industry could negatively affect the Corporation’s revenue and profitability.

The Corporation’s day-to-day operations rely heavily on the proper functioning of products, information systems and services provided by third-party, external vendors.

The Corporation relies on certain external vendors to provide products, information systems and services necessary to maintain day-to-day operations of the Corporation. These third parties provide key components of the Corporation’s business operations such as data processing, recording and monitoring transactions, online banking interfaces and services, Internet connections and network access. While the Corporation has selected these third party vendors carefully, it does not control their actions. Any complications caused by these third parties, including those resulting from disruptions in communication services provided by a vendor, failure of a vendor to handle current or higher volumes, cyber-attacks and security breaches at a vendor, failure of a vendor to provide services for any reason or poor performance of services, could adversely affect the Corporation’s ability to deliver products and services to its customers and otherwise conduct its business. Financial or operational difficulties of a third party vendor could also hurt the Corporation’s operations if those difficulties interfere with the vendor’s ability to provide services. Furthermore, the Corporation’s vendors could also be sources of operational and information security risk, including from breakdowns or failures of their own systems or capacity constraints. Replacing these third-party vendors could also create significant delay and expense. Problems caused by external vendors could be disruptive to the Corporation’s operations, which could have a material adverse impact on the Corporation’s business and, in turn, the Corporation’s financial condition and results of operations.

 

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The Corporation’s failure to continue to recruit and retain qualified banking professionals could adversely affect its ability to compete successfully and affect its profitability.

The Corporation’s continued success and future growth depends heavily on its ability to attract and retain highly skilled and motivated banking professionals. The Corporation competes against many institutions with greater financial resources both within its industry and in other industries to attract these qualified individuals. Its failure to recruit and retain adequate talent could reduce its ability to compete successfully and adversely affect its business and profitability.

The Corporation could experience significant difficulties and complications in connection with its growth and acquisition strategy.

The Corporation has grown significantly over the last few years, including through acquisitions, and intends to seek to continue to grow by acquiring financial institutions and branches as well as non-depository entities engaged in permissible activities for its financial institution subsidiaries. However, the market for acquisitions is highly competitive. The Corporation may not be as successful as it anticipates in identifying financial institutions and branch acquisition candidates, integrating acquired institutions or preventing deposit erosion at acquired institutions or branches. Even if the Corporation is successful with this strategy, there can be no assurance that it will be able to manage this growth adequately and profitably. For example, acquiring any bank or non-bank entity will involve risks commonly associated with acquisitions, including:

 

    potential exposure to unknown or contingent liabilities, including fraud, of banks and non-bank entities that the Corporation acquires;
    exposure to potential asset quality issues of acquired banks and non-bank entities due to different underwriting standards that may have been employed by the predecessor entities;
    potential disruption to the Corporation’s business;
    potential diversion of the time and attention of the Corporation’s management;
    the possible loss of key employees and customers of the banks and other businesses that the Corporation acquires; and
    potential dilution of current shareholders’ ownership of the Corporation to the extent that the Corporation issues additional shares of stock to pay for those acquisitions.

The Corporation may encounter unforeseen expenses, as well as difficulties and complications in integrating expanded operations and new employees without disruption to its overall operations. Following each acquisition, the Corporation must expend substantial resources to integrate the entities. The integration of non-banking entities often involves combining different industry cultures and business methodologies. The failure to integrate acquired entities successfully with the Corporation’s existing operations may adversely affect its results of operations and financial condition. As the Corporation grows, its regulatory costs also may become more significant.

In addition to acquisitions, the Corporation may expand into additional communities or attempt to strengthen its position in its current markets by undertaking additional de novo branch openings. Based on its experience, the Corporation believes that it generally takes up to three years for new banking facilities to achieve operational profitability due to the impact of organizational and overhead expenses and the start-up phase of generating loans and deposits. To the extent that the Corporation undertakes additional de novo branch openings or branch acquisitions, it is likely to continue to experience the effects of higher operating expenses relative to operating income from the new banking facilities, which may have an adverse effect on its net income, earnings per share, return on average shareholders’ equity and return on average assets.

The Corporation’s growth may require it to raise additional capital in the future, but that capital may not be available when it is needed.

The Corporation is required by federal and state regulatory authorities to maintain adequate levels of capital to support its operations (see the Government Supervision and Regulation section included in Item 1 of

 

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this Report). As a financial holding company, the Corporation seeks to maintain capital sufficient to meet the “well-capitalized” standard set by regulators. The Corporation anticipates that its current capital resources will satisfy its capital requirements for the foreseeable future. The Corporation may at some point, however, need to raise additional capital to support continued growth, whether such growth occurs internally or through acquisitions.

The availability of additional capital or financing will depend on a variety of factors, many of which are outside of the Corporation’s control, such as market conditions, the general availability of credit, the overall availability of credit to the financial services industry, the Corporation’s credit ratings and credit capacity, marketability of the Corporation’s stock, as well as the possibility that lenders could develop a negative perception of the Corporation’s long- or short-term financial prospects if the Corporation incurs large credit losses or if the level of business activity decreases due to economic conditions. Accordingly, there can be no assurance of the Corporation’s ability to expand its operations through internal growth and acquisitions. As such, the Corporation may be forced to delay raising capital, issue shorter term securities than desired or bear an unattractive cost of capital, which could decrease profitability and significantly reduce financial flexibility. In addition, if the Corporation decides to raise additional equity capital, it could be dilutive to the Corporation’s existing shareholders.

The Corporation’s key assets include its brand and reputation and the Corporation’s business may be affected by how it is perceived in the market place.

The Corporation’s brand and its attributes are key assets of the Corporation. The Corporation’s ability to attract and retain banking, insurance, consumer finance, wealth management and corporate clients and employees is highly dependent upon external perceptions of its level of service, security, trustworthiness, business practices and financial condition. Negative perceptions or publicity regarding these matters could damage the Corporation’s reputation among existing customers and corporate clients and employees, which could make it difficult for the Corporation to attract new clients and employees and retain existing ones. Adverse developments with respect to the financial services industry may also, by association, negatively impact the Corporation’s reputation, or result in greater regulatory or legislative scrutiny or litigation against the Corporation. Although the Corporation monitors developments for areas of potential risk to its reputation and brand, negative perceptions or publicity could materially and adversely affect the Corporation’s revenues and profitability.

The Corporation is dependent on dividends from its subsidiaries to meet its financial obligations and pay dividends to stockholders.

The Corporation is a holding company and conducts almost all of its operations through its subsidiaries. The Corporation does not have any significant assets other than cash and the stock of its subsidiaries. Accordingly, the Corporation depends on dividends from its subsidiaries to meet its financial obligations and to pay dividends to stockholders. The Corporation’s right to participate in any distribution of earnings or assets of its subsidiaries is subject to the prior claims of creditors of such subsidiaries. Under federal law, the amount of dividends that a national bank, such as FNBPA, may pay in a calendar year is dependent on the amount of its net income for the current year combined with its retained net income for the two preceding years. The OCC has the authority to prohibit FNBPA from paying dividends if it determines such payment would be an unsafe and unsound banking practice. Likewise, the Corporation’s state-based entities are subject to state laws governing dividend practices and payments.

Regulatory authorities may restrict the Corporation’s ability to pay dividends on and repurchase its common stock.

Dividends on the Corporation’s common stock will be payable only if, when and as authorized and declared by its board of directors. In addition, banking laws and regulations and its banking regulators may limit the Corporation’s ability to pay dividends and make share repurchases. For example, the Corporation’s ability to make capital distributions, including its ability to pay dividends or repurchase shares of its common stock, is

 

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subject to the review and non-objection of its annual capital plan by the FRB. In certain circumstances, the Corporation will not be able to make a capital distribution unless the FRB has approved such distribution, including if the dividend could not be fully funded by the Corporation’s net income over the last four quarters (net of dividends paid), the Corporation’s prospective rate of earnings retention appears inconsistent with its capital needs, asset quality, and overall financial condition, or the Corporation will not be able to continue meeting minimum required capital ratios. As a bank holding company, the Corporation also is required to consult with the FRB before increasing dividends or redeeming or repurchasing capital instruments. Additionally, the FRB could prohibit or limit the Corporation’s payment of dividends if it determines that payment of the dividend would constitute an unsafe or unsound practice. There can be no assurance that the Corporation will declare and pay any dividends or repurchase any shares of its common stock in the future.

The Corporation has outstanding securities senior to the common stock which could limit the Corporation’s ability to pay dividends on its common stock.

The Corporation has outstanding TPS and Series E preferred stock that are senior to the common stock and could adversely affect the ability of the Corporation to declare or pay dividends or distributions on the Corporation’s common stock. The terms of the TPS prohibit the Corporation from declaring or paying dividends or making distributions on its junior capital stock, including the common stock, or purchasing, acquiring, or making a liquidation payment on any junior capital stock, if: (1) an event of default has occurred and is continuing under the junior subordinated debentures underlying the TPS, (2) the Corporation is in default with respect to a guarantee payment under the guarantee of the related TPS or (3) the Corporation has given notice of its election to defer interest payments, but the related deferral period has not yet commenced or a deferral period is continuing. The Corporation also would be prohibited from paying dividends on its common stock unless all full dividends for the latest dividend period have been declared and paid on all outstanding shares of the Series E preferred stock. If the Corporation experiences a material deterioration in its financial condition, liquidity, capital, results of operations or risk profile, the Corporation’s regulators may not permit it to make future payments on its TPS or preferred stock, which would also prevent the Corporation from paying any dividends on its common stock.

Certain provisions of the Corporation’s Articles of Incorporation and By-laws and Florida law may discourage takeovers.

The Corporation’s Articles of Incorporation and By-laws contain certain anti-takeover provisions that may discourage or may make more difficult or expensive a tender offer, change in control or takeover attempt that is opposed by the Corporation’s Board of Directors. In particular, the Corporation’s Articles of Incorporation and By-laws:

 

    require stockholders to give the Corporation advance notice to nominate candidates for election to its Board of Directors or to make stockholder proposals at a stockholders’ meeting;
    permit the Corporation’s Board of Directors to issue, without approval of its common stockholders unless otherwise required by law, preferred stock with such terms as its Board of Directors may determine;
    require the vote of the holders of at least 75% of the Corporation’s voting shares for stockholder amendments to its By-laws.

Under Florida law, the approval of a business combination with a stockholder owning 10% or more of the voting shares of a corporation requires the vote of holders of at least two-thirds of the voting shares not owned by such stockholder, unless the transaction is approved by a majority of the corporation’s disinterested directors. In addition, Florida law generally provides that shares of a corporation that are acquired in excess of certain specified thresholds will not possess any voting rights unless the voting rights are approved by a majority of the corporation’s disinterested stockholders.

These provisions of the Corporation’s Articles of Incorporation and By-laws and of Florida law could discourage potential acquisition proposals and could delay or prevent a change in control, even though the

 

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holders of a majority of the Corporation’s stock may consider such proposals desirable. Such provisions could also make it more difficult for third parties to remove and replace members of the Corporation’s Board of Directors. Moreover, these provisions could diminish the opportunities for stockholders to participate in certain tender offers, including tender offers at prices above the then-current market price of the Corporation’s common stock, and may also inhibit increases in the trading price of the Corporation’s common stock that could result from takeover attempts.

ITEM 1B.    UNRESOLVED STAFF COMMENTS

NONE.

ITEM 2.    PROPERTIES

The Corporation’s corporate headquarters are located in Pittsburgh, Pennsylvania. The Pittsburgh offices, which are leased, are also occupied by Community Banking, Wealth Management and Insurance employees. The Corporation also leases office space for regional headquarters in the Cleveland, Ohio and Baltimore, Maryland markets. In Hermitage, Pennsylvania, the Corporation continues to maintain its administrative offices, as well as offices for Community Banking and Wealth Management personnel, in a six-story office building, and a data processing and technology center in a two-story office building, both of which are owned by the Corporation. Additionally, the Corporation leases additional office space in Hermitage, Pennsylvania, which houses various support departments.

As of December 31, 2015, the Community Banking segment had 288 offices, located in 38 counties in Pennsylvania, 11 counties in Ohio, six counties in Maryland and one county in West Virginia, of which 160 were owned and 128 were leased. As of December 31, 2015, the Consumer Finance segment had 76 offices, located in 21 counties in Pennsylvania, 17 counties in Tennessee, 16 counties in Kentucky and 12 counties in Ohio, all of which were leased. The operating leases for the Community Banking and Consumer Finance offices expire at various dates through the year 2040 and generally include options to renew. For additional information regarding the lease commitments, see the Premises and Equipment footnote in the Notes to Consolidated Financial Statements, which is included in Item 8 of this Report.

ITEM 3.    LEGAL PROCEEDINGS

Other Legal Proceedings

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

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

ITEM 4.    MINE SAFETY DISCLOSURES

Not Applicable.

 

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EXECUTIVE OFFICERS OF THE REGISTRANT

The name, age and principal occupation for each of the executive officers of the Corporation as of January 31, 2016 are set forth below:

 

Name

   Age     

Principal Occupation

Vincent J. Delie, Jr.

     51      

President and Chief Executive Officer of the Corporation;

Chief Executive Officer of FNBPA

Vincent J. Calabrese, Jr.

     53      

Chief Financial Officer of the Corporation;

Executive Vice President of FNBPA

Gary L. Guerrieri

     55      

Chief Credit Officer of the Corporation;

Executive Vice President of FNBPA

James G. Orie

     57      

Chief Legal Officer and Corporate Secretary of the Corporation;

Senior Vice President of FNBPA

Timothy G. Rubritz

     61       Corporate Controller and Senior Vice President of the Corporation

Robert M. Moorehead

     61       Chief Wholesale Banking Officer of FNBPA

Barry C. Robinson

     52       Chief Consumer Banking Officer of FNBPA

There are no family relationships among any of the above executive officers, and there is no arrangement or understanding between any of the above executive officers and any other person pursuant to which he was selected as an officer. The executive officers are elected by the Corporation’s Board of Directors subject in certain cases to the terms of an employment agreement between the officer and the Corporation.

PART II.

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

The Corporation’s common stock is listed on the NYSE under the symbol “FNB.” The accompanying table shows the range of high and low sales prices per share of the common stock as reported by the NYSE for 2015 and 2014. The table also shows dividends per share paid on the outstanding common stock during those periods. As of January 31, 2016, there were 11,067 holders of record of the Corporation’s common stock.

 

             Low                      High                  Dividends      

Quarter Ended 2015

        

March 31

   $ 11.82       $ 13.43       $ 0.12   

June 30

     12.85         14.61         0.12   

September 30

     12.00         14.80         0.12   

December 31

     12.31         14.66         0.12   

Quarter Ended 2014

        

March 31

   $ 11.40       $ 13.67       $ 0.12   

June 30

     11.78         13.70         0.12   

September 30

     11.84         13.21         0.12   

December 31

     11.50         13.56         0.12   

The information required by this Item 5 with respect to securities authorized for issuance under equity compensation plans is set forth in Part III, Item 12 of this Report.

The Corporation did not purchase any of its own equity securities during the fourth quarter of 2015.

 

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STOCK PERFORMANCE GRAPH

Comparison of Total Return on F.N.B. Corporation’s Common Stock with Certain Averages

The following five-year performance graph compares the cumulative total shareholder return (assuming reinvestment of dividends) on the Corporation’s common stock (¨) to the NASDAQ Bank Index (n) and the Russell 2000 Index (p). This stock performance graph assumes $100 was invested on December 31, 2010, and the cumulative return is measured as of each subsequent fiscal year end.

F.N.B. Corporation Five-Year Stock Performance

Total Return, Including Stock and Cash Dividends

 

LOGO

 

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ITEM 6. SELECTED FINANCIAL DATA

Dollars in thousands, except per share data

 

Year Ended December 31   2015     2014 (1)     2013 (2)     2012 (3)     2011 (4)  

Total interest income

  $ 546,795      $ 508,983      $ 440,386      $ 431,906      $ 391,125   

Total interest expense

    48,573        42,686        44,344        59,055        74,617   

Net interest income

    498,222        466,297        396,042        372,851        316,508   

Provision for credit losses

    40,441        38,648        31,090        31,302        33,641   

Total non-interest income

    162,410        158,274        135,778        131,252        119,730   

Total non-interest expense

    390,549        379,253        338,170        318,618        283,546   

Net income

    159,649        144,050        117,804        110,410        87,047   

Net income available to common stockholders

    151,608        135,698        117,804        110,410        87,047   

At Year-End

         

Total assets

  $ 17,557,662      $ 16,127,090      $ 13,563,405      $ 12,023,976      $ 9,786,483   

Net loans

    12,048,428        11,121,112        9,395,310        8,033,345        6,756,005   

Deposits

    12,623,463        11,382,208        10,198,232        9,082,174        7,289,768   

Short-term borrowings

    2,048,896        2,041,658        1,241,239        1,083,138        851,294   

Long-term borrowings

    641,480        541,443        219,133        293,444        291,983   

Total stockholders’ equity

    2,096,182        2,021,456        1,774,383        1,402,069        1,210,199   

Per Common Share

         

Basic earnings per share

  $ 0.87      $ 0.81      $ 0.81      $ 0.79      $ 0.70   

Diluted earnings per share

    0.86        0.80        0.80        0.79        0.70   

Cash dividends declared

    0.48        0.48        0.48        0.48        0.48   

Book value

    11.34        11.00        10.49        10.02        9.51   

Ratios

         

Return on average assets

    0.96     0.96     0.93     0.94     0.88

Return on average tangible assets

    1.06        1.08        1.04        1.05        0.99   

Return on average equity

    7.70        7.50        7.78        8.02        7.36   

Return on average tangible common equity

    14.46        14.91        16.66        17.64        15.76   

Dividend payout ratio

    55.74        59.85        60.48        61.27        69.72   

Average equity to average assets

    12.48        12.84        11.98        11.68        11.97   

 

(1) On February 15, 2014 and September 19, 2014, the Corporation completed the acquisitions of BCSB Bancorp, Inc. and OBA Financial Services, Inc., respectively.

 

(2) On April 6, 2013 and October 12, 2013, the Corporation completed the acquisitions of Annapolis Bancorp, Inc. and PVF Capital Corp., respectively.

 

(3) On January 1, 2012, the Corporation completed the acquisition of Parkvale Financial Corporation.

 

(4) On January 1, 2011, the Corporation completed the acquisition of Comm Bancorp, Inc.

 

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QUARTERLY EARNINGS SUMMARY

Dollars in thousands, except per share data

 

Quarter Ended 2015    Dec. 31      Sept. 30      June 30      Mar. 31  

Total interest income

   $ 140,781       $ 137,197       $ 135,448       $ 133,369   

Total interest expense

     13,448         11,996         11,681         11,448   

Net interest income

     127,333         125,201         123,767         121,921   

Provision for credit losses

     12,664         10,777         8,864         8,136   

Net securities gains (losses)

     503         314         14         (9

Other non-interest income

     42,614         41,045         39,738         38,191   

Total non-interest expense

     101,246         98,149         96,499         94,655   

Net income

     39,122         40,053         40,131         40,343   

Net income available to common stockholders

     37,111         38,043         38,121         38,333   

Per Common Share

           

Basic earnings per common share

   $ 0.21       $ 0.22       $ 0.22       $ 0.22   

Diluted earnings per common share

     0.21         0.22         0.22         0.22   

Cash dividends declared

     0.12         0.12         0.12         0.12   
Quarter Ended 2014    Dec. 31      Sept. 30      June 30      Mar. 31  

Total interest income

   $ 135,097       $ 131,566       $ 124,440       $ 117,880   

Total interest expense

     11,436         10,947         10,248         10,055   

Net interest income

     123,661         120,619         114,192         107,825   

Provision for credit losses

     10,040         11,197         10,405         7,006   

Net securities gains

     302         1,178         776         9,461   

Other non-interest income

     39,160         36,374         38,414         32,609   

Total non-interest expense

     96,656         95,847         92,584         94,166   

Net income

     39,304         35,391         34,831         34,524   

Net income available to common stockholders

     37,294         33,381         32,821         32,202   

Per Common Share

           

Basic earnings per common share

   $ 0.21       $ 0.20       $ 0.20       $ 0.20   

Diluted earnings per common share

     0.21         0.20         0.20         0.20   

Cash dividends declared

     0.12         0.12         0.12         0.12   

 

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s discussion and analysis represents an overview of the consolidated results of operations and financial condition of the Corporation. This discussion and analysis should be read in conjunction with the consolidated financial statements and notes presented in Item 8 of this Report. Results of operations for the periods included in this review are not necessarily indicative of results to be obtained during any future period.

Important Cautionary Statement Regarding Forward-Looking Information

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

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

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

 

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

 

    Changes in interest rates and valuations in debt, equity and other financial markets.
    Disruptions in the liquidity and other functioning of U.S. and global financial markets.
    The impact of federal regulatory agencies that have oversight or review of the Corporation’s business and securities activities, including the bank regulatory examination and supervisory process.
    Actions by the FRB, UST and other government agencies, including those that impact money supply and market interest rates.
    Slowing or reversal of the rate of growth in the economy and employment levels and other economic factors that affect the Corporation’s liquidity and performance of its loan portfolio, particularly in the markets in which the Corporation operates.
    Changes in customer preferences and behavior, whether due to changing business and economic conditions, legislative and regulatory initiatives, or other factors.

 

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

 

   

Changes resulting from legislative and regulatory reforms, including broad-based restructuring of financial industry regulation; changes to laws and regulations involving tax, pension, bankruptcy, consumer protection, and other industry aspects; and changes in accounting policies and principles. The Corporation will continue to be impacted by extensive reforms provided for in the

 

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Dodd-Frank Act and otherwise growing out of the recent financial crisis, the precise nature, extent and timing of which, and their impact on the Corporation, remains uncertain.

    Results of the regulatory examination and supervisory process.
    Changes to regulations governing bank capital and liquidity standards, including due to the Dodd-Frank Act, Volcker rule, Dodd-Frank stress testing rules (DFAST) and Basel III initiatives.
    Impact on business and operating results of any costs associated with obtaining rights in intellectual property, the adequacy of the Corporation’s intellectual property protection in general, and the Corporation’s operational or security systems or infrastructure, or those of third party vendors or other service providers, and rapid technological developments and changes.

 

  Business and operating results are affected by judgments and assumptions in the Corporation’s analytical and forecasting models, the Corporation’s reliance on the advice of experienced outside advisors and its ability to identify and effectively manage risks inherent in its businesses, including, where appropriate, through effective use of third-party insurance, derivatives, swaps, and capital management techniques, and to meet evolving regulatory capital standards.

 

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

 

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

 

  Business and operating results can also be affected by widespread disasters, dislocations, terrorist activities, cyber-attacks or international hostilities through their impacts on the economy and financial markets.

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

Application of Critical Accounting Policies

The Corporation’s consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (GAAP). Application of these principles requires management to make estimates, assumptions and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. These estimates, assumptions and judgments are based on information available as of the date of the consolidated financial statements; accordingly, as this information changes, the consolidated financial statements could reflect different estimates, assumptions and judgments. Certain policies inherently are based to a greater extent on estimates, assumptions and judgments of management and, as such, have a greater possibility of producing results that could be materially different than originally reported.

 

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The most significant accounting policies followed by the Corporation are presented in the Summary of Significant Accounting Policies footnote in the Notes to Consolidated Financial Statements, which is included in Item 8 of this Report. These policies, along with the disclosures presented in the Notes to Consolidated Financial Statements, provide information on how the Corporation values significant assets and liabilities in the consolidated financial statements, how the Corporation determines those values and how the Corporation records transactions in the consolidated financial statements.

Management views critical accounting policies to be those which are highly dependent on subjective or complex judgments, estimates and assumptions, and where changes in those estimates and assumptions could have a significant impact on the consolidated financial statements. Management currently views the determination of the allowance for credit losses, accounting for acquired loans, securities valuation, goodwill and other intangible assets and income taxes to be critical accounting policies.

Allowance for Credit Losses

The allowance for credit losses addresses credit losses inherent in the existing loan portfolio and is presented as a reserve against loans on the consolidated balance sheet. Loan 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.

Estimating the amount of the allowance for credit losses is based to a significant extent on the judgment and estimates of management regarding the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans and consideration of other qualitative factors, all of which may be susceptible to significant change. In 2014, the Corporation implemented a new allowance model that expanded the number of modeling segments and allows for a more precise calculation through the use of transition matrices and loan level probability of default and loss given default.

Management’s assessment of the adequacy of the allowance for credit losses considers individual impaired loans, pools of homogeneous loans with similar risk characteristics and other risk factors concerning the economic environment. The specific credit allocations for individual impaired commercial loans are based on ongoing analyses of all loans over a $0.5 million threshold. These analyses involve a high degree of judgment in estimating the amount of loss associated with specific impaired loans, including estimating the amount and timing of future cash flows, current fair value of the underlying collateral and other qualitative risk factors that may affect the loan. The evaluation of this component of the allowance for credit losses requires considerable judgment in order to estimate inherent loss exposures.

Pools of homogeneous loans with similar risk characteristics are also assessed for probable losses. Loans are categorized into pools based on loan type and by internal risk rating for commercial loans, or payment performance and FICO score for consumer loans. There is considerable judgment involved in setting internal commercial risk ratings, including an evaluation of the borrower’s current financial condition and ability to repay the loan. Transition matrices are generated on a monthly basis to determine probabilities of default, while historical loss experience is used to generate loss given default results for the pools. Inherent but undetected losses may arise due to uncertainties in economic conditions, delays in obtaining information, including unfavorable information about a borrower’s financial condition, the difficulty in identifying triggering events that correlate to subsequent loss rates and risk factors that have not yet manifested themselves in loss allocation factors. Uncertainty surrounding the strength and timing of economic cycles also affects estimates of loss. The historical loss experience used in the migration and historical charge-off analysis may not be representative of actual unrealized losses inherent in the portfolio.

Management evaluates the impact of various qualitative factors which pose additional risks that may not adequately be addressed in the analyses described above. Expected loss rates for each loan category may be

 

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

There are many factors affecting the allowance for credit losses; some are quantitative, while others require qualitative judgment. Although management believes its process for determining the allowance for credit losses adequately considers all of the factors currently inherent in the portfolio that could potentially result in credit losses, the process includes subjective elements and may be susceptible to significant change. To the extent actual outcomes differ from management estimates, additional provisions for credit losses could be required that may adversely affect the Corporation’s earnings or financial position in future periods.

The Allowance and Provision for Credit Losses section of this financial review includes a discussion of the factors affecting changes in the allowance for credit losses during the current period.

Accounting for Acquired Loans

All acquired loans are initially measured at fair value at the date of acquisition, based on expected cash flows consisting of principal, estimated prepayments and interest, discounted at prevailing market interest rates. An allowance for credit losses is not recorded at the acquisition date because principal and interest not expected to be collected over the life of the loan are a component of the initial fair value.

Acquired loans are evaluated for impairment in accordance with the provisions of Accounting Standards Codification (ASC) 310-30. Acquired loans are considered impaired if there is evidence of credit deterioration since origination and if it is probable at time of acquisition that all contractually required payments will not be collected. At the acquisition date, and for subsequent accounting, the Corporation generally aggregates impaired loans into pools of loans with common characteristics. Each pool is accounted for as a single asset with one composite interest rate and an aggregate expectation of cash flows. Expected cash flows at the acquisition date in excess of the fair value of the loans is referred to as the accretable yield and recorded as interest income over the life of the loans. Acquired impaired loans are not classified as non-accrual or non-performing as they are considered to be accruing loans because their interest income relates to the accretable yield recognized at the pool level and not to contractual interest payments at the loan level. Subsequent to the acquisition date, increases in expected cash flows will generally result in a recovery of any previously recorded allowance, to the extent applicable, and/or a reclassification from the non-accretable difference to accretable yield, which will be recognized prospectively. The present value of any decreases in expected cash flows after the acquisition date will generally result in an impairment charge recorded as a provision for credit losses. Revolving loans, including lines of credit and credit card loans, and leases are excluded from acquired impaired loan accounting.

For acquired non-impaired loans, the difference between the acquisition date fair value and the contractual amounts due at the acquisition date represents the fair value adjustment. Fair value adjustments may be discounts (or premiums) to a loan’s cost basis and are accreted (or amortized) to interest income over the loan’s remaining life using the level yield method. Subsequent to the acquisition date, the methods utilized to estimate the required allowance for credit losses for these loans is similar to originated loans; however, the Corporation records a provision for credit losses only when the required allowance exceeds the remaining fair value adjustment.

 

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Securities Valuation and Impairment

Investment securities are classified as trading, held to maturity, or available for sale. As of December 31, 2015 and 2014, the Corporation did not hold any trading securities.

The Corporation classifies debt securities as held to maturity and carries them at cost, adjusted for related amortization of premiums and accretion of discounts through interest income from securities, if there is positive intent and ability to hold the securities to maturity.

Securities not classified as trading or held to maturity are classified as available for sale. The Corporation’s available for sale securities portfolio is comprised predominantly of debt securities. Such securities are carried at fair value with net unrealized gains and losses deemed to be temporary reported separately as a component of other comprehensive income, net of tax. Realized gains and losses on the sale of available for sale securities and other-than-temporary impairment (OTTI) charges are recorded within non-interest income in the consolidated statement of income. Realized gains and losses on the sale of securities are determined using the specific-identification method.

The Corporation evaluates its investment securities portfolio for OTTI on a quarterly basis. Impairment is assessed at the individual security level. An investment security is considered impaired if the fair value of the security is less than its cost or amortized cost basis.

The Corporation’s OTTI evaluation process is performed in a consistent and systematic manner and includes an evaluation of all available evidence. Documentation of the process is extensive to support a conclusion as to whether a decline in fair value below cost or amortized cost is other-than-temporary and includes documentation supporting both observable and unobservable inputs and a rationale for conclusions reached.

This process considers factors such as the severity, length of time and anticipated recovery period of the impairment, recent events specific to the issuer, including investment downgrades by rating agencies and economic conditions of its industry, and the issuer’s financial condition, capital strength and near-term prospects. The Corporation also considers its intent to sell the security and whether it is more likely than not that the Corporation would be required to sell the security prior to the recovery of its amortized cost basis. Among the factors that are considered in determining the Corporation’s intent to sell the security or whether it is more likely than not that the Corporation would be required to sell the security is a review of its capital adequacy, interest rate risk position and liquidity.

The assessment of a security’s ability to recover any decline in fair value, the ability of the issuer to meet contractual obligations, and the Corporation’s intent and ability to retain the security require considerable judgment.

Debt securities with credit ratings below AA at the time of purchase that are repayment-sensitive securities are evaluated using the guidance of ASC 320, Investments—Debt Securities.

Goodwill and Other Intangible Assets

As a result of acquisitions, the Corporation has acquired goodwill and identifiable intangible assets on its balance sheet. Goodwill represents the cost of acquired companies in excess of the fair value of net assets, including identifiable intangible assets, at the acquisition date. The Corporation’s recorded goodwill relates to value inherent in its Community Banking, Wealth Management and Insurance segments.

The value of goodwill and other identifiable intangibles is dependent upon the Corporation’s ability to provide quality, cost-effective services in the face of competition. As such, these values are supported ultimately

 

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by revenue that is driven by the volume of business transacted. A decline in earnings as a result of a lack of growth or the Corporation’s inability to deliver cost-effective services over sustained periods can lead to impairment in value which could result in additional expense and adversely impact earnings in future periods.

Other identifiable intangible assets such as core deposit intangibles, customer renewal lists and mortgage servicing rights are amortized over their estimated useful lives.

The Corporation performs a quantitative assessment to determine whether it is more likely than not that the fair value of each reporting unit is less than its carrying amount. If, after assessing updated quantitative factors, the Corporation determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, it does not perform the two-step goodwill impairment test. The two-step impairment test is used to identify potential goodwill impairment and measure the amount of impairment loss to be recognized, if any. The first step compares the fair value of a reporting unit with its carrying amount. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired and the second step of the test is not necessary. If the carrying amount of a reporting unit exceeds its fair value, the second step is performed to measure impairment loss, if any. Under the second step, the fair value is allocated to all of the assets and liabilities of the reporting unit to determine an implied fair value of goodwill. This allocation is similar to a purchase price allocation performed in purchase accounting. If the implied goodwill value of a reporting unit is less than the carrying amount of that goodwill, an impairment loss is recognized in an amount equal to that difference.

Determining fair values of each reporting unit, of its individual assets and liabilities, and also of other identifiable intangible assets requires considering market information that is publicly available as well as the use of significant estimates and assumptions. These estimates and assumptions could have a significant impact on whether or not an impairment charge is recognized and also the magnitude of any such charge. Inputs used in determining fair values where significant estimates and assumptions are necessary include discounted cash flow calculations, market comparisons and recent transactions, projected future cash flows, discount rates reflecting the risk inherent in future cash flows, long-term growth rates and determination and evaluation of appropriate market comparables.

The Corporation performed an annual test of goodwill for each of its business units as of October 1, 2015 along with an update through year-end and concluded that the recorded value of goodwill was not impaired.

Income Taxes

The Corporation is subject to the income tax laws of the U.S., its states and other jurisdictions where it conducts business. The laws are complex and subject to different interpretations by the taxpayer and various taxing authorities. In determining the provision for income taxes, management must make judgments and estimates about the application of these inherently complex tax statutes, related regulations and case law. In the process of preparing the Corporation’s tax returns, management attempts to make reasonable interpretations of the tax laws. These interpretations are subject to challenge by the taxing authorities or based on management’s ongoing assessment of the facts and evolving case law.

The Corporation establishes a valuation allowance when it is more likely than not that the Corporation will not be able to realize a benefit from its deferred tax assets, or when future deductibility is uncertain. Periodically, the valuation allowance is reviewed and adjusted based on management’s assessments of realizable deferred tax assets.

On a quarterly basis, management assesses the reasonableness of the Corporation’s effective tax rate based on management’s current best estimate of net income and the applicable taxes for the full year. Deferred tax assets and liabilities are assessed on an annual basis, or sooner, if business events or circumstances warrant.

 

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Recent Accounting Pronouncements and Developments

The New Accounting Standards footnote in the Notes to Consolidated Financial Statements, which is included in Item 8 of this Report, discusses new accounting pronouncements adopted by the Corporation in 2015 and the expected impact of accounting pronouncements recently issued or proposed but not yet required to be adopted.

Overview

The Corporation, headquartered in Pittsburgh, Pennsylvania, is a diversified financial services company operating in six states and three major metropolitan areas, including Pittsburgh, Baltimore, Maryland and Cleveland, Ohio. As of December 31, 2015, the Corporation had 288 banking offices throughout Pennsylvania, Ohio, Maryland and West Virginia. The Corporation provides a full range of commercial banking, consumer banking, insurance and wealth management solutions through its subsidiary network which is led by its largest affiliate, FNBPA. Commercial banking solutions include corporate banking, small business banking, investment real estate financing, international banking, business credit, capital markets and lease financing. Consumer banking products and services include deposit products, mortgage lending, consumer lending and a complete suite of mobile and online banking services. Wealth management services include asset management, private banking and insurance. The Corporation also operates Regency, which had 76 consumer finance offices in Pennsylvania, Ohio, Kentucky and Tennessee as of December 31, 2015.

Results of Operations

Year Ended December 31, 2015 Compared to Year Ended December 31, 2014

Net income available to common stockholders for 2015 was $151.6 million or $0.86 per diluted common share, compared to net income available to common stockholders for 2014 of $135.7 million or $0.80 per diluted common share. The increase in net income available to common stockholders is a result of increases of $31.9 million in net interest income and $4.1 million in non-interest income, partially offset by increases of $1.8 million in the provision for credit losses and $11.3 million in non-interest expense. The results for 2015 included $3.0 million in merger costs and reflect costs and benefits associated with the BofA branch purchase that closed on September 18, 2015, combined with costs associated with the Metro acquisition that closed on February 13, 2016. The results for 2014 included $9.6 million in merger costs and reflect the OBA, BCSB and PVF acquisitions that closed on September 19, 2014, February 15, 2014 and October 12, 2013, respectively. Average diluted common shares outstanding increased 7.3 million shares or 4.3% to 176.3 million shares for 2015, primarily as a result of the full-year effect of the previously-mentioned acquisitions.

The Corporation’s return on average equity was 7.70% and its return on average assets was 0.96% for 2015, compared to 7.50% and 0.96%, respectively, for 2014. The Corporation’s return on average tangible common equity was 14.46% and its return on average tangible assets was 1.06% for 2015, compared to 14.91% and 1.08%, respectively, for 2014. Average equity was $2.1 billion and $1.9 billion for 2015 and 2014, respectively, while average tangible equity was $1.2 billion and $1.1 billion, respectively, for those same periods. Average equity for 2015 reflects the full-year impact of the above-mentioned acquisitions that were completed during 2014.

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

 

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The following tables summarize the Corporation’s non-GAAP financial measures for 2015 and 2014 derived from amounts reported in the Corporation’s financial statements (dollars in thousands):

 

Year Ended December 31    2015     2014  

Return on average tangible common equity:

    

Net income available to common stockholders

   $ 151,608      $ 135,698   

Amortization of intangibles, net of tax

     6,861        8,002   
  

 

 

   

 

 

 
   $ 158,469      $ 143,700   
  

 

 

   

 

 

 

Average total stockholders’ equity

   $ 2,072,170      $ 1,920,440   

Less: Average preferred stockholders’ equity

     (106,882     (106,882

Less: Average intangibles

     (869,347     (849,934
  

 

 

   

 

 

 
   $ 1,095,941      $ 963,624   
  

 

 

   

 

 

 

Return on average tangible common equity

     14.46     14.91
  

 

 

   

 

 

 

Return on average tangible assets:

    

Net income

   $ 159,649      $ 144,050   

Amortization of intangibles, net of tax

     6,861        8,002   
  

 

 

   

 

 

 
   $ 166,510      $ 152,052   
  

 

 

   

 

 

 

Average total assets

   $ 16,606,147      $ 14,962,140   

Less: Average intangibles

     (869,347     (849,934
  

 

 

   

 

 

 
   $ 15,736,800      $ 14,112,206   
  

 

 

   

 

 

 

Return on average tangible assets

     1.06     1.08
  

 

 

   

 

 

 

 

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

 

    Year Ended December 31  
    2015     2014     2013  
Assets   Average
Balance
    Interest
Income/
Expense
    Yield/
Rate
    Average
Balance
    Interest
Income/
Expense
    Yield/
Rate
    Average
Balance
    Interest
Income/
Expense
    Yield/
Rate
 

Interest-earning assets:

                 

Interest-bearing deposits with banks

  $ 70,116      $ 117        0.17   $ 51,070      $ 94        0.18   $ 57,605      $ 129        0.22

Taxable investment securities (1)

    2,864,795        58,148        2.03        2,590,746        54,060        2.09        2,125,001        43,551        2.00   

Non-taxable investment securities (1) (2)

    204,076        9,853        4.83        155,608        8,148        5.24        160,601        8,737        5.44   

Residential mortgage loans held for sale

    7,773        382        4.91        3,932        355        9.02        17,772        720        4.05   

Loans (2) (3)

    11,650,742        485,930        4.17        10,364,199        453,225        4.37        8,688,030        394,218        4.54   
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Total interest-earning assets

    14,797,502        554,430        3.75        13,165,555        515,882        3.92        11,049,009        447,355        4.05   

Cash and due from banks

    206,566            197,210            183,656       

Allowance for credit losses

    (133,508         (117,027         (109,050    

Premises and equipment

    165,253            163,986            147,009       

Other assets

    1,570,334            1,552,416            1,370,061       
 

 

 

       

 

 

       

 

 

     
  $ 16,606,147          $ 14,962,140          $ 12,640,685       
 

 

 

       

 

 

       

 

 

     

Liabilities

                 

Interest-bearing liabilities:

                 

Deposits:

                 

Interest-bearing demand

  $ 5,040,102        8,562        0.17      $ 4,352,050        6,812        0.16      $ 3,844,865        5,825        0.15   

Savings

    1,714,587        787        0.05        1,556,040        698        0.04        1,358,386        656        0.05   

Certificates and other time

    2,565,937        21,858        0.85        2,681,055        22,093        0.82        2,489,129        22,960        0.92   

Customer repurchase agreements

    515,108        1,094        0.21        826,125        1,816        0.22        794,436        1,850        0.23   

Other short-term borrowings

    1,149,035        5,981        0.52        616,717        3,822        0.62        231,326        2,573        1.10   

Long-term borrowings

    566,914        10,291        1.82        411,433        7,445        1.81        303,068        10,480        3.46   
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Total interest-bearing liabilities

    11,551,683        48,573        0.42        10,443,420        42,686        0.41        9,021,210        44,344        0.49   

Non-interest-bearing demand

    2,832,982            2,448,546            1,963,431       

Other liabilities

    149,312            149,734            141,573       
 

 

 

       

 

 

       

 

 

     
    14,533,977            13,041,700            11,126,214       

Stockholders’ equity

    2,072,170            1,920,440            1,514,471       
 

 

 

       

 

 

       

 

 

     
  $ 16,606,147          $ 14,962,140          $ 12,640,685       
 

 

 

       

 

 

       

 

 

     

Excess of interest-earning assets over interest-bearing liabilities

  $ 3,245,819          $ 2,722,135          $ 2,027,799       
 

 

 

       

 

 

       

 

 

     

Net interest income (FTE)

      505,857            473,196            403,011     

Tax-equivalent adjustment

      (7,635         (6,899         (6,969  
   

 

 

       

 

 

       

 

 

   

Net interest income

    $ 498,222          $ 466,297          $ 396,042     
   

 

 

       

 

 

       

 

 

   

Net interest spread

        3.33         3.51         3.56
     

 

 

       

 

 

       

 

 

 

Net interest margin (2)

        3.42         3.59         3.65
     

 

 

       

 

 

       

 

 

 

 

(1) The average balances and yields earned on securities are based on historical cost.

 

(2) The interest income amounts are reflected on a FTE basis which is a non-GAAP financial measure and adjusts for the tax benefit of income on certain tax-exempt loans and investments using the federal statutory tax rate of 35.0% for each period presented. The yield on earning assets and the net interest margin are presented on an FTE basis. The Corporation believes this measure to be the preferred industry measurement of net interest income and provides relevant comparison between taxable and non-taxable amounts.

 

(3) Average balances include non-accrual loans. Loans consist of average total loans less average unearned income. The amount of loan fees included in interest income on loans is immaterial.

 

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Net Interest Income

Net interest income, which is the Corporation’s major source of revenue, is the difference between interest income from earning assets (loans, securities and interest-bearing deposits with banks) and interest expense paid on liabilities (deposits, customer repurchase agreements, short- and long-term borrowings and junior subordinated debt). In 2015, net interest income, which comprised 75.4% of net revenue (net interest income plus non-interest income) compared to 74.7% in 2014, was affected by the general level of interest rates, changes in interest rates, the timing of repricing of assets and liabilities, the shape of the yield curve, the level of non-accrual loans and changes in the amount and mix of interest-earning assets and interest-bearing liabilities.

Net interest income, on an FTE basis, increased $32.7 million or 6.9% from $473.2 million for 2014 to $505.9 million for 2015. Average earning assets increased $1.6 billion or 12.4% and average interest-bearing liabilities increased $1.1 billion or 10.6% from 2014, due to the acquisitions of OBA and BCSB, combined with organic growth in loans, deposits and customer repurchase agreements. The Corporation’s net interest margin was 3.42% for 2015, compared to 3.59% for 2014, as loan yields declined faster than deposit rates primarily as a result of the current low interest rate environment, partially offset by a benefit from higher accretable yield adjustments. Accretable yield adjustments added 6 basis points to the net interest margin for both 2015 and 2014. Details on changes in tax equivalent net interest income attributable to changes in interest-earning assets, interest-bearing liabilities, yields and cost of funds are set forth in the preceding table.

The following table provides certain information regarding changes in net interest income attributable to changes in the average volumes and yields earned on interest-earning assets and the average volume and rates paid for interest-bearing liabilities for the periods indicated (in thousands):

 

     2015 vs 2014     2014 vs 2013  
     Volume     Rate     Net     Volume     Rate     Net  

Interest Income

            

Interest-bearing deposits with banks

   $ 30      $ (7   $ 23      $ (12   $ (23   $ (35

Securities

     7,241        (1,448     5,793        8,606        1,314        9,920   

Residential mortgage loans held for sale

     239        (212     27        (828     463        (365

Loans

     54,258        (21,553     32,705        73,727        (14,720     59,007   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     61,768        (23,220     38,548        81,493        (12,966     68,527   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest Expense

            

Deposits:

            

Interest-bearing demand

     1,560        190        1,750        1,002        (15     987   

Savings

     111        (22     89        92        (50     42   

Certificates and other time

     (967     732        (235     1,670        (2,537     (867

Customer repurchase agreements

     (663     (59     (722     72        (106     (34

Other short-term borrowings

     2,850        (691     2,159        2,809        (1,587     1,222   

Long-term borrowings

     2,823        23        2,846        540        (3,548     (3,008
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     5,714        173        5,887        6,185        (7,843     (1,658
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Change

   $ 56,054      $ (23,393   $ 32,661      $ 75,308      $ (5,123   $ 70,185   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) The amount of change not solely due to rate or volume was allocated between the change due to rate and the change due to volume based on the net size of the rate and volume changes.

 

(2) Interest income amounts are reflected on an FTE basis which adjusts for the tax benefit of income on certain tax-exempt loans and investments using the federal statutory tax rate of 35.0% for each period presented. The Corporation believes this measure to be the preferred industry measurement of net interest income and provides relevant comparison between taxable and non-taxable amounts.

 

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Interest income, on an FTE basis, of $554.4 million for 2015, increased $38.5 million or 7.5% from 2014, primarily due to increased-earning assets combined with higher accretable yield adjustments, partially offset by lower yields due to competitive market rates throughout 2015 being less than portfolio yields at the end of 2014. During 2015 and 2014, the Corporation recognized a benefit of $5.0 million and $6.6 million, respectively, in accretable yield adjustments on acquired loans. The increase in earning assets was primarily driven by a $1.3 billion or 12.4% increase in average loans, including $1.0 million or 9.7% of organic growth, which reflects the benefit of the Corporation’s expanded banking footprint and successful sales management. The yield on earning assets decreased 17 basis points from 3.92% for 2014 to 3.75% for 2015, reflecting the decreases in market interest rates, competitive pressures and the above-mentioned changes in accretable yield adjustments on acquired loans.

Interest expense of $48.6 million for 2015 decreased $5.9 million or 13.8% from 2014 due to lower rates paid, partially offset by growth in interest-bearing liabilities. The rate paid on interest-bearing liabilities increased 1 basis point to 0.42% for 2015, compared to 0.41% for 2014, reflecting changes in interest rates and the effect of the subordinated debt borrowed in October 2015, partially offset by a favorable shift in deposit mix to lower-cost transaction deposits and customer repurchase agreements. The growth in average interest-bearing liabilities was primarily attributable to growth in average deposits and customer repurchase agreements, which increased by $0.8 billion or 6.8%, including $0.5 billion or 3.9% of organic growth.

Provision for Credit Losses

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

The provision for credit losses of $40.4 million during 2015 increased $1.8 million from 2014, primarily due to an increase of $7.4 million in the provision for the originated portfolio supporting loan growth, and to a lesser degree, some slight credit migration within the originated commercial portfolio. This was partially offset by a decrease of $5.6 million in the provision for the acquired portfolio, which resulted from lower acquired net charge-offs and generally more favorable cash flow re-estimations during the year. During 2015, net charge-offs were $24.4 million, or 0.21% of average loans and leases, compared to $23.5 million, or 0.23% of average loans and leases, for 2014. The ratio of the allowance for credit losses to total loans and leases equaled 1.16% and 1.12% at December 31, 2015 and 2014, respectively, reflecting the Corporation’s overall favorable credit quality performance, along with the addition of loans acquired in the BCSB and OBA acquisitions during 2014, which did not carry a corresponding allowance for credit losses in accordance with acquired loan accounting rules. For additional information relating to the allowance and provision for credit losses, refer to the Allowance for Credit Losses section of this Management’s Discussion and Analysis.

Non-Interest Income

Total non-interest income of $162.4 million for 2015 increased $4.1 million or 2.6% from $158.3 million in 2014. The variances in significant individual non-interest income items are further explained in the following paragraphs.

Service charges on loans and deposits of $70.7 million for 2015 increased $2.4 million or 3.6% from $68.3 million in 2014. Customer-related interchange fees increased $1.4 million or 12.1% over this period due to higher volume usage of debit and credit cards. Overdraft fees decreased $1.9 million or 6.7% over this period, following a nationwide trend as consumers are better managing their accounts to avoid these types of fees. Other service charges and fees increased $3.0 million or 10.7% over this period, reflecting the impact of organic growth and the expanded customer base due to acquisitions.

Trust fees of $20.9 million for 2015 increased $1.6 million or 8.1% from $19.4 million in 2014, primarily driven by strong organic growth activity, geographic expansion and improved market conditions. The market value of assets under management increased $194.9 million or 5.5% to $3.7 billion during 2015.

 

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Insurance commissions and fees of $16.3 million for 2015 decreased $0.5 million or 2.9% from $16.8 million in 2014, primarily due to reduced contingent fee income resulting from increases in claims and higher loss ratios during 2015 compared to 2014.

Securities commissions of $13.6 million for 2015 increased $2.2 million or 19.1% from $11.5 million in 2014, primarily due to positive results from initiatives generating new customer relationships combined with increased volume, geographic expansion and improved market conditions. Partially offsetting these increases were the costs associated with a securities system conversion combined with the impact of severe weather conditions throughout the Corporation’s market area in the first half of 2014.

Net securities gains were $0.8 million and $11.7 million for 2015 and 2014, respectively. During 2014, the Corporation strategically sold its entire portfolio of pooled TPS for net proceeds of $51.5 million and a gain of $13.8 million. Of the 23 pooled securities sold, one was determined to be a disallowed investment under the Volcker Rule of the Dodd-Frank Act, and as such, was required to be disposed of by July 2016. Partially offsetting this gain was a net loss of $2.1 million relating to the sale of other securities. By selling these securities, the Corporation strengthened the risk profile of its investment portfolio, improved its capital levels due to lowered risk-weighted assets and generated capital to support future growth.

Mortgage banking operations generated income of $8.6 million and $3.7 million for 2015 and 2014, respectively. This increase was primarily due to higher origination volume and successful cross-selling efforts generated from a strengthened mortgage management team and expanded market presence. During 2015, the Corporation sold $444.7 million of residential mortgage loans, compared to $162.7 million for 2014.

Income from BOLI of $8.0 million for 2015 increased $0.3 million or 3.82% from $7.7 million in 2014, primarily as a result of improved market conditions and an increase in death claims.

Other non-interest income was $23.4 million and $19.3 million for 2015 and 2014, respectively. During 2015, the Corporation recorded $3.7 million more in fees earned through its commercial loan interest rate swap program, reflecting strong commercial loan growth. Additionally, the Corporation recorded $1.7 million more in dividends on non-marketable equity securities, primarily resulting from a special dividend paid by the FHLB totaling $1.0 million. Also during 2015, the Corporation recorded $1.0 million more in gains from an equity investment, a gain of $0.4 million relating to the sale of its ownership interest in a non-banking affiliate and a gain of $0.4 million relating to the settlement of an insurance benefit. Additionally during 2015, the Corporation recognized $0.5 million more in gains on the sale of fixed assets, $0.5 million more in foreign currency exchange income, $0.4 million less in recoveries of impaired loans acquired in previous acquisitions and $0.5 million less in swap valuation income due to changes in the yield curve. During 2015, the Corporation recorded $0.9 million in short-term equipment rental income. During 2014, the Corporation recognized a one-time $2.7 million gain from an overpayment related to a predecessor bank’s acquisition of another bank prior to becoming part of the Corporation and recorded a gain of $0.9 million related to the sale of impaired commercial loans.

Non-Interest Expense

Total non-interest expense of $390.5 million for 2015 increased $11.3 million or 3.0% from $379.3 million in 2014. The variances in the individual non-interest expense items are further explained in the following paragraphs with an overriding theme of the expense increases being primarily related to the expanded operations from acquisitions.

Salaries and employee benefits of $202.1 million for 2015 increased $7.1 million or 3.6% from $195.0 million in 2014. This increase primarily relates to employees added in conjunction with the acquisitions and heightened regulatory compliance costs, combined with new hires, merit increases and higher medical insurance costs in 2015. Additionally, the Corporation recorded a net charge of $1.9 million in 2014 relating to the mutual conclusion of a consulting agreement with a retired executive.

 

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Occupancy and equipment expense of $65.5 million for 2015 increased $4.0 million or 6.5% from $61.5 in 2014, primarily resulting from acquisitions, combined with an increase in rental expense relating to the Pittsburgh headquarters and regional headquarters in Cleveland, Ohio and Baltimore, Maryland. Additionally, the Corporation’s continued focus on new technology, both in meeting customer needs via the utilization of electronic delivery channels, such as online and mobile banking, and in meeting the continued regulatory requirements, resulted in an increase of $2.6 million in technology-related expense during 2015.

Amortization of intangibles expense of $8.3 million for 2015 decreased $1.4 million or 14.5% from $9.7 million in 2014, due to a combination of certain intangible assets being completely amortized during 2014 and declining amortization expense on some intangible assets due to accelerated amortization methods.

Outside services expense of $34.7 million for 2015 increased $1.5 million or 4.5% from $33.2 million in 2014. During 2015, data processing services, security services and other services provided increased $0.5 million, $0.4 million and $0.3 million, respectively, primarily resulting from the OBA and BCSB acquisitions and costs related to compliance with new regulations. Additionally, consulting fees increased $0.8 million during this same period, as 2014 reflected a refund of previously paid consulting fees, and check card expenses decreased $0.8 million as a result of obtaining a new contract with an outside party providing processing services.

FDIC insurance of $12.9 million for 2015 decreased $0.4 million or 2.8% from $13.3 million in 2014, due to the Corporation implementing certain business strategies to lower its assessment rate along with a refinement of previous estimates related to Basel III requirements.

Supplies expense of $8.1 million for 2015 increased $1.0 million or 13.6% from $7.1 million in 2014, as the Corporation recognized additional costs associated with the recent acquisitions and recent company-wide conversion to an enhanced internal network platform.

State tax expense of $8.1 million for 2015 increased $1.2 million or 17.0% from $7.0 million in 2014, primarily due to a higher assessment base resulting from enhanced capital levels at FNBPA due to the 2014 acquisitions.

Telephone expense of $6.2 million for 2015 increased $0.5 million or 9.2% from $5.7 million in 2014, as the Corporation recognized additional costs associated with the recent acquisitions and an expanded mobile work force.

Advertising and promotional expense of $8.4 million for 2015 increased $0.6 million or 7.3% from $7.8 million in 2014, primarily due to higher expenses associated with the recent acquisitions, as the Corporation implemented promotional efforts to support further expansion in the Cleveland, Ohio and the higher cost Baltimore, Maryland metropolitan markets.

Loan-related expense of $6.2 million for 2015 increased $1.2 million or 24.9% from $4.9 million in 2014, primarily due to appraisal fees and processing costs incurred for enhanced underwriting standards.

OREO expense of $4.6 million for 2015 increased slightly from 2014, as the Corporation incurred higher levels of write-downs to permit the sale of certain properties in its continuing effort to manage expenses.

The Corporation recorded $3.0 million in merger-related costs in 2015, primarily associated with the Metro acquisition and BofA branch purchase. The merger-related costs for 2015 were comprised of $0.2 million in severance and other employee benefit costs, $1.6 million in professional services, $0.4 million in data processing conversion costs, $0.4 million in marketing costs and $0.4 million in other expenses. Merger-related costs recorded during 2014 were $9.6 million, primarily in conjunction with the OBA and BCSB acquisitions. The merger-related costs for 2014 were comprised of $4.9 million in severance and other employee benefit costs, $2.8 million in professional services, $1.0 million in data processing conversion costs, $0.7 million in marketing costs and $0.2 million in other expenses.

 

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Other non-interest expense was $22.4 million and $20.0 million for 2015 and 2014, respectively. During 2015, the Corporation recognized $0.7 million more in other taxes, primarily due to acquisitions and volume increases related to organic growth. In addition, other miscellaneous losses increased $0.3 million, primarily due to higher credit card disputes and fraud losses and $0.6 million in costs associated with short-term equipment rental income.

Income Taxes

The Corporation’s income tax expense of $70.0 million for 2015 increased $7.4 million or 11.8% from $62.6 million in 2014. The effective tax rate of 30.5% for 2015 increased slightly from 30.3% for 2014, due to higher levels of pre-tax income, offset by the reversal of a valuation allowance on state deferred taxes. Both periods’ tax rates are lower than the 35% federal statutory tax rate due to the tax benefits primarily resulting from tax-exempt income on investments and loans, tax credits and income from BOLI.

Year Ended December 31, 2014 Compared to Year Ended December 31, 2013

Net income available to common stockholders for 2014 was $135.7 million or $0.80 per diluted common share, compared to net income available to common stockholders for 2013 of $117.8 million or $0.80 per diluted common share. The increase in net income available to common stockholders is a result of an increase of $70.3 million in net interest income, combined with an increase of $22.5 million in non-interest income, partially offset by increases of $7.6 million in the provision for credit losses, $41.1 million in non-interest expense and $8.4 million in preferred stock dividends. The results for 2014 included $9.6 million in merger costs and reflect the OBA, BCSB and PVF acquisitions that closed on September 19, 2014, February 15, 2014 and October 12, 2013, respectively. The results for 2013 included $8.2 million in merger costs, relating to the PVF acquisition and the ANNB acquisition that closed on April 6, 2013. Average diluted common shares outstanding increased 21.3 million shares or 14.4% to 169.1 million shares for 2014, primarily as a result of the previously mentioned acquisitions, combined with the common stock offering completed in November 2013.

The Corporation’s return on average equity was 7.50% and its return on average assets was 0.96% for 2014, compared to 7.78% and 0.93%, respectively, for 2013. The Corporation’s return on average tangible common equity was 14.91% and its return on average tangible assets was 1.08% for 2014, compared to 16.66% and 1.04%, respectively, for 2013. Average equity was $1.9 billion and $1.5 billion for 2014 and 2013, respectively, while average tangible equity was $1.1 billion and $761.6 million, respectively, for those same periods. Average equity for 2014 reflects the impact of the above-mentioned acquisitions, combined with the full year impact of the common and preferred stock offerings completed in November 2013.

Net Interest Income

In 2014, net interest income, which comprised 74.7% of net revenue (net interest income plus non-interest income) compared to 74.5% in 2013, was affected by the general level of interest rates, changes in interest rates, the timing of repricing of assets and liabilities, the shape of the yield curve, the level of non-accrual loans and changes in the amount and mix of interest-earning assets and interest-bearing liabilities.

Net interest income, on an FTE basis, increased $70.2 million or 17.4% from $403.0 million for 2013 to $473.2 million for 2014. Average earning assets increased $2.1 billion or 19.2% and average interest-bearing liabilities increased $1.4 billion or 15.8% from 2013, due to the acquisitions of BCSB, PVF and ANNB, combined with organic growth in loans, deposits and customer repurchase agreements. The Corporation’s net interest margin was 3.59% for 2014, compared to 3.65% for 2013, as loan yields declined faster than deposit rates primarily as a result of the current low interest rate environment, partially offset by an increase in net interest margin due to higher accretable yield adjustments. Accretable yield adjustments added 6 basis points to the net interest margin for 2014 compared to 3 basis points for 2013.

 

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Interest income, on an FTE basis, of $515.9 million for 2014, increased $68.5 million or 15.3% from 2013, primarily due to increased earning assets combined with higher accretable yield adjustments, partially offset by lower yields due to competitive market rates throughout 2014 being less than portfolio yields at the end of 2013. During 2014 and 2013, the Corporation recognized a benefit of $6.6 million and $3.3 million, respectively, in accretable yield adjustments on acquired loans. The increase in earning assets was primarily driven by a $1.7 billion or 19.3% increase in average loans, including $823.8 million or 9.0% of organic growth, which reflects the benefit of the Corporation’s expanded banking footprint and successful sales management. Additionally, 2014 average loans increased as a result of the OBA, BCSB, PVF and ANNB acquisitions by $84.8 million, $274.0 million, $418.3 million and $75.2 million, respectively. The yield on earning assets decreased 13 basis points from 4.05% for 2013 to 3.92% for 2014, reflecting the decreases in market interest rates and competitive pressures, partially offset by the above-mentioned changes in accretable yield adjustments on acquired loans.

Interest expense of $42.7 million for 2014 decreased $1.7 million or 3.7% from 2013 due to lower rates paid, partially offset by growth in interest-bearing liabilities. The rate paid on interest-bearing liabilities decreased 8 basis points to 0.41% for 2014, compared to 0.49% for 2013, reflecting changes in interest rates and a favorable shift in deposit mix to lower-cost transaction deposits and customer repurchase agreements. The growth in average interest-bearing liabilities was primarily attributable to growth in average deposits and customer repurchase agreements, which increased by $1.4 billion or 13.5%, including $209.2 million or 1.9% of organic growth, combined with $86.4 million, $461.4 million, $552.5 million and $104.1 million in average deposits and customer repurchase agreements added in the OBA, BCSB, PVF and ANNB acquisitions, respectively.

Provision for Credit Losses

The provision for credit losses of $38.6 million during 2014 increased $7.6 million from 2013, primarily due to an increase of $7.9 million in the provision for the originated portfolio to support loan growth, partially offset by a decrease of $0.3 million in the provision for the acquired portfolio. During 2014, net charge-offs were $23.5 million, or 0.23% of average loans, compared to $24.7 million, or 0.28% of average loans, for 2013, reflecting stable asset quality performance in the Corporation’s loan portfolio. The ratio of the allowance for credit losses to total loans equaled 1.12% and 1.17% at December 31, 2014 and 2013, respectively, which reflects the Corporation’s overall favorable credit quality performance along with the addition of loans acquired in the BCSB and OBA acquisitions during 2014, which did not carry a corresponding allowance for credit losses in accordance with acquired loan accounting rules. For additional information relating to the allowance and provision for credit losses, refer to the Allowance and Provision for Credit Losses section of this Management’s Discussion and Analysis.

Non-Interest Income

Total non-interest income of $158.3 million for 2014 increased $22.5 million or 16.6% from $135.8 million in 2013. The variances in significant individual non-interest income items are further explained in the following paragraphs.

Service charges on loans and deposits of $68.3 million for 2014 were flat compared to 2013. Customer-related interchange fees were $4.9 million lower in 2014 as the Corporation became subject to the new rules regarding debit card interchange fees imposed by the Durbin Amendment of the Dodd-Frank Act effective July 1, 2013. Partially offsetting this decrease, other service charges and fees increased $4.9 million over this same period, reflecting the impact of organic growth and the expanded customer base due to acquisitions. For information relating to the new regulations on interchange fees, refer to the Dodd-Frank Act section included in the Item 1, “Business” section of this Report.

Trust fees of $19.4 million for 2014 increased $2.6 million or 15.6% from $16.8 million in 2013, primarily driven by strong organic growth activity and improved market conditions. The market value of assets

 

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under management increased $348.4 million or 10.9% to $3.5 billion over this same period, with $305.2 million as a result of organic growth and $43.2 million due to improved stock market conditions.

Insurance commissions and fees of $16.8 million for 2014 increased slightly from $16.6 million in 2013. Increased fee income resulting from the implementation of revenue-enhancing strategies and initiatives during 2014 was partially offset by a reduction in fee income relating to the sale of a book-of-business to an outside agency for which revenue was received during 2013 that was only received for part of 2014.

Securities commissions of $11.5 million for 2014 increased slightly from $11.3 million in 2013, primarily due to positive results from new initiatives generating new customer relationships combined with increased volume and improved market conditions, partially offset by the costs associated with a system conversion combined with the impact of severe weather conditions throughout the Corporation’s market area in the first quarter of 2014.

Net securities gains were $11.7 million for 2014, compared to $0.8 million for 2013. During 2014, the Corporation strategically sold its entire portfolio of pooled TPS for net proceeds of $51.5 million and a gain of $13.8 million. Of the 23 pooled securities sold, one was determined to be a disallowed investment under the Volcker Rule of the Dodd-Frank Act, and as such, was required to be disposed of by July 2015. Partially offsetting this gain was a net loss of $2.1 million relating to the sale of other securities. By selling these securities, the Corporation strengthened the risk profile of its investment portfolio, improved its capital levels due to lowered risk-weighted assets and generated capital to support future growth.

Mortgage banking revenue, which is primarily derived from the gain on sale of residential mortgage loans, was $3.7 million for 2014 and increased slightly from $3.5 million in 2013. During 2014, the Corporation sold $162.7 million of residential mortgage loans, compared to $239.6 million for 2013, as part of its ongoing strategy of generally selling 30-year fixed rate residential mortgage loans. Despite the volume decrease resulting from an industry-wide trend as refinance activity was greatly diminished in 2014, the gain on sale on residential mortgage loans increased due to improved pricing practices.

Income from BOLI of $7.7 million for 2014 increased $0.8 million or 12.2% from $6.9 million in 2013, primarily as a result of improved market conditions, along with additional policies from acquisitions.

Other non-interest income of $19.3 million for 2014 increased $7.5 million from $11.8 million in 2013. During 2014, the Corporation recorded $2.9 million more in fees earned through its commercial loan interest rate swap program, reflecting strong commercial loan growth in 2014 and demand for these products given the interest rate environment. Additionally, the Corporation recorded $1.8 million more in dividends on non-marketable equity securities and $0.9 million more in gains from an equity investment during 2014. Also during 2014, the Corporation recognized a one-time $2.7 million gain from an overpayment related to a predecessor bank’s acquisition of another bank prior to becoming part of the Corporation and the Corporation recorded a gain of $0.9 million related to the sale of impaired commercial loans. Partially offsetting these increases in other non-interest income is a gain of $1.6 million recognized during 2013 related to a debt extinguishment in which $15.0 million of the Corporation-issued TPS was repurchased at a discount. This $15.0 million was opportunistically purchased at auction and represents a portion of the underlying collateral of a pooled TPS that was liquidated by the trustee.

Non-Interest Expense

Total non-interest expense of $379.3 million for 2014 increased $41.1 million or 12.1% from $338.2 million in 2013. The variances in the individual non-interest expense items are further explained in the following paragraphs with an overriding theme of the expense increases being primarily related to the expanded operations from acquisitions.

 

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Salaries and employee benefits of $195.0 million for 2014 increased $15.0 million or 8.4% from $180.0 million in 2013. This increase primarily relates to employees added in conjunction with the acquisitions, combined with new hires, merit increases and higher medical insurance costs in 2014. Additionally, the Corporation recorded a net charge of $1.9 million during 2014 relating to the mutual conclusion of a consulting agreement with a retired executive.

Occupancy and equipment expense of $61.5 million for 2014 increased $9.8 million or 19.0% from $51.7 million in 2013, primarily resulting from acquisitions, combined with an increase in rental expense relating to the Pittsburgh headquarters and regional headquarters in Cleveland, Ohio and Baltimore, Maryland. Additionally, equipment depreciation expense increased during 2014 due to upgrades to incorporate new technology, primarily relating to online and mobile banking applications, and snow removal expense increased as a result of severe weather conditions throughout the Corporation’s market area during 2014 compared to 2013.

Amortization of intangibles expense of $9.7 million for 2014 increased $1.3 million or 15.6% from $8.4 million in 2013, primarily due to core deposit intangibles recorded as a result of acquisitions.

Outside services expense of $33.2 million for 2014 increased $3.0 million or 9.8% from $30.3 million in 2013. For 2014, compared to 2013, licenses, fees and dues, data processing services and other outside services increased $0.6 million, $0.4 million and $1.8 million, respectively, primarily resulting from acquisitions and costs related to compliance with new regulations, including capital stress testing. These increases were partially offset by a decrease of $0.5 million in consulting fees due to a refund of previously paid fees for system enhancements.

FDIC insurance of $13.3 million for 2014 increased $3.1 million or 30.1% from $10.2 million in 2013, primarily due to an increased asset base resulting from acquisitions.

State tax expense of $7.0 million for 2014 increased $2.7 million or 63.4% from $4.3 million in 2013, primarily due to a higher assessment base resulting from state tax code changes. The Pennsylvania bank shares tax in 2014 was based on equity at December 31, 2013, compared to the previous method of using a six-year average, along with the replacement of a three-factor formula with the single factor formula of receipts.

Loan-related expense of $4.9 million for 2014 increased $1.0 million or 25.0% from $3.9 million in 2013, primarily due to appraisal fees and processing costs incurred for enhanced underwriting standards.

OREO expense of $4.4 million for 2014 increased $1.2 million or 36.8% from $3.2 million in 2013, as the Corporation recorded higher costs in 2014 associated with the disposition of non-strategic properties from acquired banks. These properties were sold as part of the Corporation’s continuing efforts to manage expenses.

Telephone expense of $5.7 million for 2014 increased $0.6 million or 12.8% from $5.1 million in 2013, as the Corporation recognized additional costs associated with the recent acquisitions.

Advertising and promotional expense of $7.8 million for 2014 increased $1.5 million or 23.2% from $6.3 million in 2013, primarily due to higher expenses associated with the recent acquisitions, as the Corporation implemented promotional efforts to support further expansion in the Cleveland, Ohio and the higher cost Baltimore, Maryland metropolitan markets.

The Corporation recorded $9.6 million in merger-related costs in 2014, primarily associated with the OBA and BCSB acquisitions. The merger-related costs for 2014 were comprised of $4.9 million in severance and other employee benefit costs, $2.8 million in professional services, $1.0 million in data processing conversion costs, $0.7 million in marketing costs and $0.2 million in other expenses. Merger-related costs recorded during 2013 were $8.2 million, primarily in conjunction with the PVF and ANNB acquisitions. The merger-related costs for 2013 were comprised of $3.5 million in severance and other employee benefit costs, $3.2 million in professional services, $0.6 million in data processing conversion costs, $0.4 million in marketing costs and $0.5 million in other expenses.

 

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Other non-interest expense increased to $20.0 million for 2014, compared to $19.7 million 2013. For 2014 compared to 2013, business development expenses increased $0.7 million, postage expenses increased $0.5 million and other taxes increased $0.4 million, all primarily due to additional expenses related to acquisitions, partially offset by a decrease of $0.5 million in other non-interest expenses. In addition, other miscellaneous losses increased $0.7 million due to check and fraud losses. During 2014 and 2013, the Corporation recorded $0.6 million and $2.2 million, respectively, in charges related to debt extinguishment in which Corporation-issued TPS were redeemed and the related debt extinguished.

Income Taxes

The Corporation’s income tax expense of $62.6 million for 2014 increased $17.8 million or 39.9% from 2013. The effective tax rate of 30.3% for 2014 increased from 27.5% for 2013, due to higher levels of pre-tax income, which is subject to the marginal tax rate of 35%. Both periods’ tax rates are lower than the 35% federal statutory tax rate due to the tax benefits primarily resulting from tax-exempt income on investments and loans, tax credits and income from BOLI.

Liquidity

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

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

The principal sources of the parent company’s liquidity are its strong existing cash resources plus dividends it receives from its subsidiaries. These dividends may be impacted by the parent’s or its subsidiaries’ capital needs, statutory laws and regulations, corporate policies, contractual restrictions, profitability and other factors. Cash on hand at the parent has been favorably impacted by management strategies over the last few years. These include strong earnings, increasing earnings retention rate and capital actions. On September 29, 2015, the Corporation issued $100.0 million aggregate principal amount of 4.875% subordinated notes due in 2025. The net proceeds of the debt offering after deducting underwriting discounts and commissions and estimated offering expenses were $98.4 million and were received on October 2, 2015. Additional capital actions include the raising of $161.3 million via the issuance of common and preferred equity during the fourth quarter of 2013. These proceeds were subsequently utilized to redeem various TPS obligations of the Corporation totaling $148.0 million. The positive results of these strategies can be seen in the parent’s strong cash position as it has increased from $129.3 million at December 31, 2014 to $226.9 million at December 31, 2015. The Corporation intends to use the net proceeds from the sale of the subordinated notes for general corporate purposes, which may include investments at the holding company level, providing capital to support the growth of FNBPA and its business, repurchases of its common shares and the payment of the cash consideration components of future acquisitions.

 

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Management believes cash levels for the Corporation are appropriate given the current environment. Two metrics that are used to gauge the adequacy of the parent company’s cash position are the Liquidity Coverage Ratio (LCR) and Months of Cash on Hand (MCH). The LCR is defined as the sum of cash on hand plus projected cash inflows over the next 12 months divided by projected cash outflows over the next 12 months. The LCR was 1.8 times at December 31, 2015 and 2.2 times at December 31, 2014. The internal limit for LCR is for the ratio to be greater than 1.0 time. The MCH is defined as the number of months of corporate expenses that can be covered by the cash on hand. The MCH was 14.0 months at December 31, 2015 and 14.2 months at December 31, 2014. The internal limit for MCH is for the ratio to be greater than 12 months. In addition, the Corporation issues subordinated notes on a regular basis. Subordinated notes decreased $3.3 million or 1.5% during 2015 to $208.8 million at December 31, 2015.

The liquidity position of the Corporation continues to be strong as evidenced by its ability to generate growth in relationship-based accounts. Total average deposits and customer repurchase agreements totaled $12.7 billion in 2015 and increased $804.9 million, or 6.8%, including average organic growth of $477.4 million or 3.9% for the year. For the three months ended December 31, 2015 total average deposits and customer repurchase agreements grew organically $284.2 million, or 8.8% annualized. Organic results are adjusted by the impact from the acquisition of five BofA branches on September 18, 2015, the OBA acquisition on September 19, 2014 and the BCSB acquisition on February 15, 2014. Organic growth in low-cost transaction deposits and customer repurchase agreements for 2015 was $691.0 million, or 7.4%, led by strong organic growth in average non-interest-bearing deposits of $328.5 million, or 13.2%. For the three months ended December 31, 2015, total average transaction deposits and customer repurchase agreements grew organically $359.5 million, or 14.0% annualized. The strong growth in low-cost transaction deposits and customer repurchase agreements was partially offset by a decline in average time deposits of $213.5 million or 7.7% for the year on an organic basis. The rate of decline has slowed this year compared to prior periods due to the Corporation’s pricing actions designed to extend time deposit maturities.

FNBPA had unused wholesale credit availability of $5.2 billion or 30.0% of bank assets at December 31, 2015 and $4.6 billion or 29.1% of bank assets at December 31, 2014. These sources include the availability to borrow from the FHLB, the FRB, correspondent bank lines and access to brokered certificates of deposit. In addition to credit availability, FNBPA also possesses salable unpledged government and agency securities which could be utilized to meet funding needs. These securities totaled $1.3 billion, or 7.3% of total assets and $1.1 billion, or 6.6% of total assets as of December 31, 2015 and 2014, respectively. The ALCO Policy minimum level is 3.0%.

 

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Another metric for measuring liquidity risk is the liquidity gap analysis. The following liquidity gap analysis (in thousands) for the Corporation as of December 31, 2015 compares the difference between cash flows from existing assets and liabilities over future time intervals. Management seeks to limit the size of the liquidity gaps so that sources and uses of funds are reasonably matched in the normal course of business. A reasonably matched position lays a better foundation for dealing with additional funding needs during a potential liquidity crisis. The twelve-month cumulative gap to total assets was (2.6)% and (1.0)% as of December 31, 2015 and 2014, respectively.

 

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

Assets

          

Loans

   $ 289,917      $ 582,946      $ 791,027      $ 1,420,941      $ 3,084,831   

Investments

     348,100        85,290        124,310        245,586        803,286   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     638,017        668,236        915,337        1,666,527        3,888,117   

Liabilities

          

Non-maturity deposits

     97,408        194,815        292,225        584,448        1,168,896   

Time deposits

     110,222        228,038        373,498        600,291        1,312,049   

Borrowings

     1,619,127        20,501        39,892        178,530        1,858,050   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     1,826,757        443,354        705,615        1,363,269        4,338,995   

Period Gap (Assets - Liabilities)

   $ (1,188,740   $ 224,882      $ 209,722      $ 303,258      $ (450,878
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cumulative Gap

   $ (1,188,740   $ (963,858   $ (754,136   $ (450,878  
  

 

 

   

 

 

   

 

 

   

 

 

   

Cumulative Gap to Total Assets

     (6.8 )%      (5.5 )%      (4.3 )%      (2.6 )%   
  

 

 

   

 

 

   

 

 

   

 

 

   

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

Market Risk

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

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

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

 

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

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

The following repricing gap analysis (in thousands) as of December 31, 2015 compares the difference between the amount of interest-earning assets and interest-bearing liabilities subject to repricing over a period of time. Management utilizes the repricing gap analysis as a diagnostic tool in managing net interest income and EVE risk measures.

 

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

Assets

          

Loans

   $ 4,841,503      $ 743,276      $ 596,173      $ 1,070,263      $ 7,251,215   

Investments

     379,621        96,585        133,331        251,760        861,297   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     5,221,124        839,861        729,504        1,322,023        8,112,512   

Liabilities

          

Non-maturity deposits

     3,478,044                             3,478,044   

Time deposits

     202,093        228,616        371,918        596,366        1,398,993   

Borrowings

     1,956,481        81,203        23,695        146,138        2,207,517   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     5,636,618        309,819        395,613        742,504        7,084,554   

Off-balance sheet

     (200,000     50,000                      (150,000

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

   $ (615,494   $ 580,042      $ 333,891      $ 579,519      $ 877,958   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cumulative Gap

   $ (615,494   $ (35,452   $ 298,439      $ 877,958     
  

 

 

   

 

 

   

 

 

   

 

 

   

Cumulative Gap to Assets

     (3.9 )%      (0.2 )%      1.9     5.6  
  

 

 

   

 

 

   

 

 

   

 

 

   

The twelve-month cumulative repricing gap to total assets was 5.6% and 6.7% as of December 31, 2015 and 2014, respectively. The positive cumulative gap positions indicate that the Corporation has a greater amount of repricing earning assets than repricing interest-bearing liabilities over the subsequent twelve months. If interest rates increase then net interest income will increase and, conversely, if interest rates decrease then net interest income will decrease.

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

The following net interest income metrics were calculated using rate shocks which move market rates in an immediate and parallel fashion. The variance percentages represent the change between the net interest income or EVE calculated under the particular rate scenario versus the net interest income or EVE that was calculated assuming market rates as of December 31, 2015.

 

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

 

     December 31,
2015
    December 31,
2014
    ALCO
Limits
 

Net interest income change (12 months):

      

+  300 basis points

     5.7     3.3     n/a   

+  200 basis points

     4.0     2.4     (5.0 )% 

+  100 basis points

     2.0     1.1     (5.0 )% 

–  100 basis points

     (3.0 )%      (2.2 )%      (5.0 )% 

Economic value of equity:

      

+  300 basis points

     1.6     (1.2 )%      (25.0 )% 

+  200 basis points

     1.8     (0.1 )%      (15.0 )% 

+  100 basis points

     1.3     0.6     (10.0 )% 

–  100 basis points

     (5.3 )%      (6.3 )%      (10.0 )% 

The Corporation also models rate scenarios which move all rates gradually over twelve months (Rate Ramps) and also scenarios that gradually change the shape of the yield curve. A +300 basis point Rate Ramp increases net interest income (12 months) by 3.6% and 3.1% at December 31, 2015 and 2014, respectively.

The Corporation’s strategy is generally to manage to a neutral interest rate risk position. However, given the current interest rate environment, the interest rate risk position has been managed to a modestly asset-sensitive position. Currently, rising rates are expected to have a modest, positive effect on net interest income versus net interest income if rates remained unchanged.

The ALCO utilizes several tactics to manage the Corporation’s interest rate risk position. As mentioned earlier, the growth in transaction deposits provides funding that is less interest rate-sensitive than time deposits and wholesale borrowings. On the lending side, the Corporation regularly sells long-term fixed-rate residential mortgages to the secondary market and has been successful in the origination of consumer and commercial loans with short-term repricing characteristics. Total variable and adjustable-rate loans were 58.3% and 57.9% of total loans as of December 31, 2015 and 2014, respectively. The investment portfolio is used, in part, to manage the Corporation’s interest rate risk position. The Corporation has managed the duration of its investment portfolio over the last year to be relatively short and relatively unchanged from the prior year end, resulting in a portfolio duration of 3.5 and 3.3 at December 31, 2015 and 2014, respectively. Finally, the Corporation has made use of interest rate swaps to commercial borrowers (commercial swaps) to manage its interest rate risk position as the commercial swaps effectively increase adjustable-rate loans. As of December 31, 2015, the commercial swaps totaled $1.3 billion of notional principal, with $450.1 million in notional swap principal originated during 2015. The success of the aforementioned tactics has resulted in an asset-sensitive position. For additional information regarding interest rate swaps, see the Derivative Instruments footnote in this Report.

The Corporation desired to remain modestly asset-sensitive during 2015. A number of management actions and market occurrences resulted in a slight increase in the asset sensitivity of the Corporation’s interest rate risk position. The primary factors included balance sheet growth in less rate-sensitive deposits and an increase in the amount of adjustable loans repricing in 12 months or less, which was aided by commercial swaps. Organic deposit balance sheet growth and the addition of five BofA branches on September 18, 2015 provided less rate-sensitive deposits. In addition, the amount of outstanding variable and adjustable loans repricing in 12 months or less increased by $297.0 million for the quarter, by $573.4 million for the year, and totaled $7.0 billion at December 31, 2015. These increases in the net asset-sensitivity position were offset by an increase in the use of overnight and short-term borrowings compared to the prior year end. Net overnight and short-term borrowings increased by $480.9 million for the most recent quarter and by $345.4 million for the year. This was primarily due to the normal seasonal outflow of government deposits being exaggerated by the Pennsylvania legislature budget impasse which was not settled by year end.

 

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

Risk Management

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

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

 

    identification, measurement, assessment and monitoring of enterprise-wide risk across the Corporation and its subsidiaries;
    development of appropriate and meaningful risk metrics to use in connection with the oversight of the Corporation’s businesses and strategies;
    review and assessment of the Corporation’s policies and practices to manage the Corporation’s credit, market, liquidity, legal, regulatory and operating risk (including technology, operational, compliance and fiduciary risks); and
    identification and implementation of risk management best practices.

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

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

 

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on risk-related matters to the Corporation’s Board of Directors. In addition, both the Corporation’s Risk Committee and the Risk Management Council regularly assess the Corporation’s enterprise-wide risk profile and provide guidance on actions needed to address key and emerging risk issues.

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

 

    enables the Board of Directors to assess the quality of the information it receives;
    enables the Board of Directors to understand the businesses, investments and financial, accounting, legal, regulatory and strategic considerations of the Corporation and its subsidiaries, and the risks that they face;
    enables the Board of Directors to oversee and assess how senior management evaluates risk; and
    enables the Board of Directors to assess appropriately the quality of the Corporation’s enterprise-wide risk management process.

Contractual Obligations, Commitments and Off-Balance Sheet Arrangements

The following table sets forth contractual obligations of principal that represent required and potential cash outflows as of December 31, 2015 (in thousands):

 

     Within
1 Year
     1-3
Years
     3-5
Years
     After
5 Years
     Total  

Deposits without a stated maturity

   $ 10,157,997       $       $       $       $ 10,157,997   

Certificates and other time deposits

     1,312,627         636,472         411,195         105,172         2,465,466   

Operating leases

     14,529         25,142         17,067         33,280         90,018   

Long-term debt

     155,736         210,818         72,222         202,704         641,480   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 11,640,889       $ 872,432       $ 500,484       $ 341,156       $ 13,354,961   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table sets forth the amounts and expected maturities of commitments to extend credit and standby letters of credit as of December 31, 2015 (in thousands):

 

     Within
1 Year
     1-3
Years
     3-5
Years
     After
5 Years
     Total  

Commitments to extend credit

   $ 2,625,883       $ 520,215       $ 332,866       $ 302,755       $ 3,781,719   

Standby letters of credit

     31,393         8,829         96         52,661         92,979   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 2,657,276       $ 529,044       $ 332,962       $ 355,416       $ 3,874,698   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commitments to extend credit and standby letters of credit do not necessarily represent future cash requirements because while the borrower has the ability to draw upon these commitments at any time, these commitments often expire without being drawn upon. Additionally, a significant portion of these commitments can be terminated by the Corporation. For additional information relating to commitments to extend credit and standby letters of credit, see the Commitments, Credit Risk and Contingencies footnote in the Notes to Consolidated Financial Statements, which is included in Item 8 of this Report.

Lending Activity

The loan and lease portfolio consists principally of loans and leases 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 portfolio also contains consumer finance loans to individuals in Pennsylvania, Ohio, Tennessee and Kentucky, which totaled $186.2 million or 1.5% of total loans at

 

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December 31, 2015, compared to $180.6 million or 1.6% of the total portfolio at December 31, 2014. Due to the relative size of the consumer finance loan portfolio, they are not segregated from other consumer loans.

Following is a summary of loans and leases (in thousands):

 

December 31    2015      2014      2013      2012      2011  

Commercial real estate

   $ 4,109,056       $ 3,815,708       $ 3,245,209       $ 2,707,046       $ 2,495,727   

Commercial and industrial

     2,601,722         2,318,015         1,881,474         1,602,314         1,363,692   

Commercial leases

     204,553         177,824         158,895         130,133         110,795   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial loans and leases

     6,915,331         6,311,547         5,285,578         4,439,493         3,970,214   

Direct installment

     1,706,636         1,644,621         1,467,236         1,178,530         1,029,187   

Residential mortgages

     1,395,971         1,263,053         1,086,739         1,092,228         670,936   

Indirect installment

     996,729         875,551         655,587         582,037         540,789   

Consumer lines of credit

     1,137,255         1,110,976         965,771         805,494         607,280   

Other

     38,518         41,290         45,183         39,937         38,261   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 12,190,440       $ 11,247,038       $ 9,506,094       $ 8,137,719       $ 6,856,667   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial real estate includes both owner-occupied and non-owner-occupied loans secured by commercial properties. Commercial and industrial includes loans to businesses that are not secured by real estate. Commercial leases consist of loans and leases 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.

Additional information relating to originated and acquired loans is provided in the Loans and Leases footnote in the Notes to Consolidated Financial Statements, which is included in Item 8 of this Report.

Total loans and leases increased $943.4 million or 8.4% to $12.2 billion at December 31, 2015, compared to $11.2 billion at December 31, 2014, as a result of solid organic growth, particularly in commercial loans and leases.

Total loans and leases increased $1.7 billion or 18.3% to $11.2 billion at December 31, 2014, compared to $9.5 billion at December 31, 2013. This increase was due to the addition of $304.9 million and $291.4 million in loans from the BCSB and OBA acquisitions, respectively, and solid organic growth, particularly in commercial loans and leases.

As of December 31, 2015, 38.1% of the commercial real estate loans were owner-occupied, while the remaining 61.9% were non-owner-occupied, compared to 41.6% and 58.4%, respectively, as of December 31, 2014. As of December 31, 2015 and 2014, the Corporation had commercial construction loans of $352.3 million and $296.2 million, respectively, representing 2.9% and 2.6% of total loans and leases, respectively.

Within the primary lending footprint, certain industries are more predominant given the geographic location of these lending markets. The Corporation strives to maintain a diverse commercial loan portfolio by avoiding undue concentrations or exposures to any particular sector. Pressured commodity prices related to the energy and metals markets have recently caused some migration of credit for borrowers that are more sensitive to these types of price movements. As of December 31, 2015 and 2014, there were no concentrations of loans and leases relating to any industry in excess of 10% of total loans.

 

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Following is a summary of the maturity distribution of certain loan categories based on remaining scheduled repayments of principal as of December 31, 2015 (in thousands):

 

     Within
1 Year
     1-5
Years
     Over
5 Years
     Total  

Commercial loans and leases

   $ 601,047       $ 2,652,799       $ 3,661,485       $ 6,915,331   

Residential mortgages

     1,977         26,546         1,367,448         1,395,971   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 603,024       $ 2,679,345       $ 5,028,933       $ 8,311,302   
  

 

 

    

 

 

    

 

 

    

 

 

 

The total amount due after one year includes $2.2 billion with fixed rates of interest and $5.5 billion with floating or adjustable rates of interest.

For additional information relating to lending activity, see the Loans and Leases footnote in the Notes to Consolidated Financial Statements, which is included in Item 8 of this Report.

Non-Performing Assets

Non-performing loans include non-accrual loans and non-performing troubled debt restructurings (TDRs). Past due loans are reviewed on a monthly basis to identify loans for non-accrual status. The Corporation places a loan on non-accrual status and discontinues interest accruals on originated loans generally when principal or interest is due and has remained unpaid for a certain number of days unless the loan is both well secured and in the process of collection. Commercial loans are placed on non-accrual at 90 days, installment loans are placed on non-accrual at 120 days and residential mortgages and consumer lines of credit are generally placed on non-accrual at 180 days. When a loan is placed on non-accrual status, all unpaid accrued interest is reversed. Non-accrual loans may not be restored to accrual status until all delinquent principal and interest have been paid and the ultimate ability to collect the remaining principal and interest is reasonably assured. TDRs are loans in which the borrower has been granted a concession on the interest rate or the original repayment terms due to financial distress. Non-performing assets also include debt securities on which OTTI has been taken in the current or prior periods that have not been returned to accrual status.

Following is a summary of non-performing assets (dollars in thousands):

 

December 31    2015     2014     2013     2012     2011  

Non-accrual loans

   $ 49,897      $ 45,113      $ 58,755      $ 66,004      $ 94,335   

Troubled debt restructurings

     22,028        23,439        18,698        14,876        11,893   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-performing loans

     71,925        68,552        77,453        80,880        106,228   

Other real estate owned (OREO)

     38,918        41,466        40,681        35,257        34,719   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-performing loans and OREO

     110,843        110,018        118,134        116,137        140,947   

Non-performing investments

                   797        2,809        8,972   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-performing assets

   $ 110,843      $ 110,018      $ 118,931      $ 118,946      $ 149,919   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-performing loans/total loans and leases

     0.59     0.61     0.81     0.99     1.55

Non-performing loans + OREO/ total loans and leases + OREO

     0.91     0.97     1.24     1.42     2.05

Non-performing assets/total assets

     0.63     0.68     0.88     0.99     1.53

During 2015, non-performing loans and OREO increased $0.8 million. This reflects an increase of $4.8 million in non-accrual loans, partially offset by decreases of $1.4 million and $2.5 million in TDRs and OREO, respectively. The increase in non-accrual loans was primarily due to the migration of a single commercial and

 

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industrial credit tied to the metals market. The decrease in TDRs was attributed to additional consumer borrowers that met the modified terms of their agreements for the required period of time and were returned to performing status. The decrease in OREO was attributed to property sales during 2015 outpacing transfers in, particularly for commercial properties.

During 2014, non-performing loans and OREO decreased $8.1 million. This decrease reflects a reduction of $13.6 million in non-accrual loans, partially offset by increases of $4.7 million and $0.8 million in TDRs and OREO, respectively. The decrease in non-accrual loans was primarily due to loan payoffs and commercial loan resolutions, while the increase in TDRs was attributed to loans secured by residential mortgages that were restructured in conjunction with government programs.

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

 

December 31    2015      2014      2013      2012      2011  

Commercial real estate

   $ 26,087       $ 26,134       $ 43,648       $ 48,483       $ 76,256   

Commercial and industrial

     14,846         8,852         6,683         6,099         6,956   

Commercial leases

     659         722         734         965         1,084   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans and leases

     41,592         35,708         51,065         55,547         84,296   

Direct installment

     13,791         15,901         10,577         8,541         7,163   

Residential mortgages

     12,763         13,842         14,012         11,415         9,544   

Indirect installment

     1,514         1,305         1,202         1,131         979   

Consumer lines of credit

     2,265         1,796         597         746         746   

Other

                             3,500         3,500   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 71,925       $ 68,552       $ 77,453       $ 80,880       $ 106,228   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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.

TDRs that are accruing and performing include loans that 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. TDRs that are accruing and non-performing are comprised of 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 ability to collect 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 incremental losses which are factored into the allowance for credit losses estimate. Additional information related to the Corporation’s TDRs is included in the Loans and Leases footnote in the Notes to Consolidated Financial Statements, which is included in Item 8 of this Report.

 

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

 

     Performing      Non-
Performing
     Non-Accrual      Total  

December 31, 2015

           

Commercial real estate

   $       $ 1,653       $ 6,051       $ 7,704   

Commercial and industrial

             361         813         1,174   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans and leases

             2,014         6,864         8,878   

Direct installment

     7,908         8,985         1,137         18,030   

Residential mortgages

     5,184         9,881         190         15,255   

Indirect installment

             153         24         177   

Consumer lines of credit

     2,073         995         92         3,160   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 15,165       $ 22,028       $ 8,307       $ 45,500   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2014

           

Commercial real estate

   $       $ 2,002       $ 6,188       $ 8,190   

Commercial and industrial

     727         542         132         1,401   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans and leases

     727         2,544         6,320         9,591   

Direct installment

     4,830         8,784         1,352         14,966   

Residential mortgages

     3,689         10,878         503         15,070   

Indirect installment

             156         47         203   

Consumer lines of credit

     195         1,077         50         1,322   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 9,441       $ 23,439       $ 8,272       $ 41,152   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2013

           

Commercial real estate

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

Commercial and industrial

     749         40         237         1,026   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans and leases

     773         2,728         10,672         14,173   

Direct installment

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

Residential mortgages

     3,743         9,752         883         14,378   

Indirect installment

             142         80         222   

Consumer lines of credit

     300         185                 485   
  

 

 

    

 

 

    

 

 

    

 

 

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

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2012

           

Commercial real estate

   $ 850       $ 588       $ 11,156       $ 12,594   

Commercial and industrial

     775         82         283         1,140   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans and leases

     1,625         670         11,439         13,734   

Direct installment

     5,613         5,199         749         11,561   

Residential mortgages

     5,401         8,524         107         14,032   

Indirect installment

             92         90         182   

Consumer lines of credit

     20         391                 411   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 12,659       $ 14,876       $ 12,385       $ 39,920   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2011

           

Commercial real estate

   $ 803       $       $ 10,510       $ 11,313   

Commercial and industrial

     800                 214         1,014   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans and leases

     1,603                 10,724         12,327   

Direct installment

     4,987         4,638         103         9,728   

Residential mortgages

     3,419         7,101                 10,520   

Indirect installment

             61                 61   

Consumer lines of credit

     122         93                 215   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 10,131       $ 11,893       $ 10,827       $ 32,851   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Following is a summary of loans and leases 90 days or more past due on which interest accruals continue (dollars in thousands):

 

December 31    2015     2014     2013     2012     2011  

Loans and leases 90 days or more past due:

          

Originated loans and leases

   $ 6,864      $ 9,248      $ 7,971      $ 6,706      $ 7,016   

Acquired loans

     29,878        38,024        45,823        36,585        11,115   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   $ 36,742      $ 47,272      $ 53,794      $ 43,291      $ 18,131   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

As a percentage of total loans and leases

     0.30     0.42     0.57     0.53     0.26

The annual increases in loans and leases 90 days or more past due and accruing from 2011 through 2014 were primarily the result of acquisitions. Acquired loans that are 90 days or more past due are considered to be accruing since the Corporation can reasonably estimate future cash flows and it expects to fully collect the carrying value of these loans. The acquired loans were discounted and marked to market with interest income recognized via accretion in accordance with GAAP.

Following is a table showing the amounts of contractual interest income and actual interest income related to non-accrual loans and non-performing TDRs (in thousands):

 

December 31    2015      2014      2013      2012      2011  

Gross interest income:

              

Per contractual terms

   $ 7,328       $ 7,366       $ 9,221       $ 8,646       $ 13,540   

Recorded during the year

     747         650         559         369         351   

Allowance and Provision for Credit Losses

The allowance for credit losses represents management’s estimate of probable loan losses inherent in the loan portfolio at a specific point in time. This estimate includes losses associated with specifically identified loans, as well as estimated probable credit losses inherent in the remainder of the loan portfolio. Additions are made to the allowance for credit losses through both periodic provisions charged to income and recoveries of losses previously recorded. Reductions to the allowance for credit losses occur as loans are charged off. Additional information related to the Corporation’s policy for its allowance for credit losses is included in the Application of Critical Accounting Policies section of this financial review and in the Summary of Significant Accounting Policies footnote in the Notes to Consolidated Financial Statements, which is included in Item 8 of this Report.

 

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Following is a summary of changes in the allowance for credit losses related to loans and leases (dollars in thousands):

 

Year Ended December 31    2015     2014     2013     2012     2011  

Balance at beginning of period

   $ 125,926      $ 110,784      $ 104,374      $ 100,662      $ 106,120   

Charge-offs:

          

Commercial real estate

     (4,443     (6,568     (5,465     (8,688     (21,018

Commercial and industrial

     (3,562     (3,454     (5,124     (8,098     (3,642

Commercial leases

     (544     (415     (432     (509     (567
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Commercial loans and leases

     (8,549     (10,437     (11,021     (17,295     (25,227

Direct installment

     (10,844     (9,600     (9,059     (7,875     (8,874

Residential mortgages

     (1,010     (760     (1,345     (1,050     (1,261

Indirect installment

     (6,427     (3,627     (3,337     (2,926     (2,957

Consumer lines of credit

     (1,653     (1,495     (1,974     (2,137     (2,110

Other

     (1,691     (1,329     (965     (1,039     (1,194

Purchased impaired loans

     (64     (2,614     (299            (208

Other acquired loans

     (830     (873     (2,530     (254       
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total charge-offs

     (31,068     (30,735     (30,530     (32,576     (41,831

Recoveries:

          

Commercial real estate

     1,117        2,351        1,799        1,765        594   

Commercial and industrial

     1,773        1,412        2,108        693        368   

Commercial leases

     101        105        179        224        75   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Commercial loans and leases

     2,991        3,868        4,086        2,682        1,037   

Direct installment

     1,527        1,163        931        942        876   

Residential mortgages

     85        74        162        194        67   

Indirect installment

     1,190        875        773        605        501   

Consumer lines of credit

     175        218        274        234        213   

Other

     55        24               14        31   

Purchased impaired loans

     19        1                      7   

Other acquired loans

     671        1,006        (376     315          
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total recoveries

     6,713        7,229        5,850        4,986        2,732   

Net charge-offs

     (24,355     (23,506     (24,680     (27,590     (39,099

Provision for credit losses

     40,441        38,648        31,090        31,302        33,641   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 142,012      $ 125,926      $ 110,784      $ 104,374      $ 100,662   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loan charge-offs/average loans

     0.21     0.23     0.28     0.35     0.58

Allowance for credit losses/total loans

     1.16     1.12     1.17     1.28     1.47

Allowance for credit losses/non-performing loans

     197.44     183.69     143.03     129.05     94.76

The allowance for credit losses at December 31, 2015 increased $16.1 million or 12.8% from December 31, 2014 as the provision for credit losses for 2015 of $40.4 million exceeded net charge-offs of $24.4 million, with the remainder supporting loan growth in the originated portfolio, and some credit migration within the commercial and industrial and indirect installment portfolios.

The allowance for credit losses at December 31, 2014 increased $15.1 million or 13.7% from December 31, 2013 as the provision for credit losses for 2014 of $38.6 million exceeded net charge-offs of $23.5 million, with the remainder supporting loan growth and incurred losses in the originated and acquired loan portfolios.

The allowance for credit losses at December 31, 2013 increased $6.4 million or 6.1% from December 31, 2012 as the provision for loans losses for 2013 of $31.1 million exceeded net charge-offs of $24.7 million, with the remainder supporting loan growth and incurred losses in the originated and acquired loan portfolios.

 

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The allowance for credit losses at December 31, 2012 increased $3.7 million or 3.7% from December 31, 2011 as the provision for credit losses for 2012 of $31.3 million exceeded net charge-offs of $27.6 million, with the remainder of the provision supporting loan growth and incurred losses in the originated and acquired loan portfolios.

The allowance for credit losses at December 31, 2011 decreased $5.5 million or 5.1% from December 31, 2010 as net charge-offs for 2011 of $39.1 million exceeded the provision for credit losses of $33.6 million as a result of the Corporation utilizing previously established reserves.

The allowance for credit losses at December 31, 2010 increased $1.5 million or 1.4% from December 31, 2009 as the provision for credit losses for 2010 of $47.3 million exceeded net charge-offs of $45.9 million.

The Corporation’s commercial portfolio experienced significant losses in 2011 related to its legacy Florida portfolio due to continued declines in the real estate values and unstable economic conditions in that market during that time.

Following is a summary of the allocation of the allowance for credit losses (dollars in thousands):

 

    Dec 31,
2015
    % of Loans
in each
Category to
Total
Loans and
Leases
    Dec 31,
2014
    % of Loans
in each
Category to
Total
Loans and
Leases
    Dec 31,
2013
    % of Loans
in each
Category to
Total
Loans and
Leases
    Dec 31,
2012
    % of Loans
in each
Category to
Total
Loans and
Leases
    Dec 31,
2011
    % of Loans
in each
Category to
Total
Loans and
Leases
 

Commercial real estate

  $ 41,741        29   $ 37,588        27   $ 32,548        28   $ 34,810        30   $ 43,283        36

Commercial and industrial

    41,023        21        32,645        19        32,603        18        31,849        19        25,476        20   

Commercial leases

    2,541        1        2,398        2        1,903        2        1,744        2        1,556        2   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Commercial loans and leases

    85,305        51        72,631        48        67,054        48        68,403        51        70,315        58   

Direct installment

    21,587        14        20,538        14        17,824        15        15,130        14        14,814        15   

Residential mortgages

    7,909        9        8,024        7        5,836        7        5,155        8        4,436        10   

Indirect installment

    9,889        8        7,504        8        6,409        7        5,449        7        5,503        8   

Consumer lines of credit

    9,582        8        8,496        9        7,231        9        6,057        9        5,448        9   

Other

    1,013               759               530                             146          
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total originated loans

    135,285        90        117,952        86        104,884        86        100,194        89        100,662        100   

Purchased credit- impaired loans

    834               660               1,000               759                        

Other acquired loans

    5,893        10        7,314        14        4,900        14        3,421        11                 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 142,012        100   $ 125,926        100   $ 110,784        100   $ 104,374        100   $ 100,662        100
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

During 2015, the allowance for credit losses allocated to commercial loans and consumer loans (direct installment, indirect installment and consumer lines of credit) increased to support organic loan growth, while a portion of the commercial and industrial and indirect installment allowance for credit losses also supported some limited credit migration within those portfolios. The allowance for credit losses allocated to residential mortgages decreased slightly during this same period, which was the result of growth-related reserves being more than offset by general improvements in asset quality within that portfolio. The allowance for credit losses allocated to acquired loans decreased during the year as a result of favorable quarterly cash flow re-estimation results and problem credit resolution, with the PVF, ANNB, and CBI portfolios driving the decrease.

During 2014, the allowance for credit losses allocated to commercial loans, consumer loans and residential mortgages increased to support organic loan growth. The allowance for credit losses increased as a result of the growth in each of the loan portfolios noted above and was partially offset by allowance declines as a

 

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result of the general improvement in asset quality and charge-offs throughout 2014, particularly in the commercial loan portfolios. Furthermore, the Corporation expanded the number of modeling segments in 2014, which allowed for a more precise allowance calculation and moderately offset the required allowance as a result of organic loan growth. The allowance for credit losses allocated to acquired loans increased during the year as a result of the quarterly cash flow re-estimation process, moderate builds in a few loan pools and, to a lesser extent, the addition of the BCSB and OBA portfolios.

During 2013, the allowance for credit losses allocated to residential mortgages and consumer loans increased to support organic loan growth. Positive asset quality results in the commercial loan portfolio outpaced loan provisions for organic growth, resulting in the allowance for credit losses allocated to that portfolio to decrease. The allowance for credit losses related to acquired loans increased during the year primarily as a result of some deterioration in a few small business pools within the Parkvale and CBI portfolios.

During 2012, the allowance for credit losses allocated to residential mortgages and consumer lines of credit increased to support organic loan growth, which was partially offset by a decrease in the Corporation’s commercial portfolio due to the change in composition within the commercial real estate portfolio. The allowance for credit losses allocated to acquired loan activities increased during the year as a result of the addition of the Parkvale portfolio.

Investment Activity

Investment activities serve to enhance net interest income while supporting interest rate sensitivity and liquidity positions. Securities purchased with the intent and ability to hold until maturity are categorized as securities held to maturity and carried at amortized cost. All other securities are categorized as securities available for sale and are recorded at fair value. Securities, like loans, are subject to similar interest rate and credit risk. In addition, by their nature, securities classified as available for sale are also subject to fair value risks that could negatively affect the level of liquidity available to the Corporation, as well as stockholders’ equity. A change in the value of securities held to maturity could also negatively affect the level of stockholders’ equity if there was a decline in the underlying creditworthiness of the issuers and an OTTI is deemed to have occurred or if there was a change in the Corporation’s intent and ability to hold the securities to maturity.

As of December 31, 2015, securities totaling $1.6 billion and $1.6 billion were classified as available for sale and held to maturity, respectively. During 2015, securities available for sale increased by $96.5 million and securities held to maturity increased by $183.7 million from December 31, 2014. During 2014, the Corporation classified certain securities acquired in conjunction with its acquisitions as trading securities. The Corporation both acquired and sold these trading securities during the quarters in which the acquisitions occurred. As of December 31, 2015 and 2014, the Corporation did not hold any trading securities.

 

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The following table indicates the respective maturities and weighted-average yields of securities as of December 31, 2015 (dollars in thousands):

 

     Amount      Weighted
Average
Yield
 

Obligations of U.S. Treasury:

     

Maturing after one year but within five years

   $ 29,796         1.17

Maturing after ten years

     500         5.25   

Obligations of U.S. government-sponsored entities:

     

Maturing after one year but within five years

     493,088         1.46   

Maturing after five years but within ten years

     9,489         3.09   

Maturing after ten years

     2,802         2.22   

States of the U.S. and political subdivisions:

     

Maturing within one year

     2,590         3.42   

Maturing after one year but within five years

     12,222         4.21   

Maturing after five years but within ten years

     65,769         4.49   

Maturing after ten years

     166,049         4.71   

Other debt securities:

     

Maturing within one year

     5,002         2.98   

Maturing after one year but within five years

     5,039         3.72   

Maturing after ten years

     4,245         1.26   

Residential mortgage-backed securities:

     

Agency mortgage-backed securities

     1,414,801         2.34   

Agency collateralized mortgage obligations

     995,524         1.90   

Non-agency collateralized mortgage obligations

     3,871         4.37   

Commercial mortgage-backed securities

     55,545         2.34   

Equity securities

     1,296         5.16   
  

 

 

    

Total

   $ 3,267,628         2.25   
  

 

 

    

The weighted average yields for tax-exempt securities are computed on a FTE basis using the federal statutory tax rate of 35.0%. The weighted average yields for securities available for sale are based on amortized cost.

For additional information relating to investment activity, see the Securities footnote in the Notes to Consolidated Financial Statements, which is included in Item 8 of this Report.

Deposits and Short-Term Borrowings

As a bank holding company, the Corporation’s primary source of funds is deposits. These deposits are provided by businesses, municipalities and individuals located within the markets served by the Corporation’s Community Banking subsidiary.

Total deposits increased $1.2 billion to $12.6 billion at December 31, 2015, compared to December 31, 2014, primarily as a result of an organic increase in transaction accounts, which are comprised of non-interest-bearing, savings and NOW accounts (which includes money market deposit accounts). The increase in transaction accounts is a result of the Corporation’s ongoing marketing campaigns designed to attract new customers to the Corporation’s local approach to banking, combined with higher balances being carried by existing customers. Additionally, the Corporation added $154.6 million in deposits in conjunction with the BofA branch purchase completed during September 2015.

Short-term borrowings, made up of customer repurchase agreements (also referred to as securities sold under repurchase agreements), FHLB advances, federal funds purchased and subordinated notes, remained stable

 

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at $2.0 billion at both December 31, 2015 and 2014. The composition of short-term borrowings has changed over this period, as customer repurchase agreements decreased $616.0 million as a result of a planned migration of these accounts to a new premium sweep product included in interest-bearing demand deposits launched during the second quarter of 2015. The customer repurchase agreements, which have next day maturities, are sweep accounts utilized by larger commercial customers to earn interest on their funds. Federal funds purchased and short-term FHLB borrowings increased $358.0 million and $270.0 million in 2015 and 2014, respectively, as the Corporation utilized these sources of funds to support loan growth.

Following is a summary of selected information relating to certain components of short-term borrowings (dollars in thousands):

 

At or For the Year Ended December 31    2015     2014     2013  

Customer Repurchase Agreements

      

Balance at year-end

   $ 266,732      $ 882,696      $ 841,741   

Maximum month-end balance

     835,889        925,659        907,406   

Average balance during year

     515,108        826,125        794,436   

Weighted average interest rates:

      

At year-end

     0.19     0.22     0.23

During the year

     0.21     0.22     0.23

FHLB Advances (Short-term)

      

Balance at year-end

   $ 1,090,000      $ 820,000          

Maximum month-end balance

     1,090,000        820,000          

Average balance during year

     516,025        101,978          

Weighted average interest rates:

      

At year-end

     0.48     0.31       

During the year

     0.40     0.30       

Federal Funds Purchased

      

Balance at year-end

   $ 568,000      $ 210,000      $ 270,000   

Maximum month-end balance

     1,003,000        775,000        270,000   

Average balance during year

     507,321        385,987        99,636   

Weighted average interest rates:

      

At year-end

     0.29     0.25     0.28

During the year

     0.28     0.28     0.27

For additional information relating to deposits and short-term borrowings, see the Deposits and Short-Term Borrowings footnotes in the Notes to Consolidated Financial Statements, which is included in Item 8 of this Report.

Capital Resources

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

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

The Corporation has an effective shelf registration statement filed with the SEC. Pursuant to this registration statement, the Corporation may, from time to time, issue and sell in one or more offerings any

 

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combination of common stock, preferred stock or debt securities. On October 2, 2015, the Corporation completed its offering of $100.0 million aggregate principal amount of 4.875% subordinated notes due in 2025 under this registration statement. The subordinated notes are treated as tier 2 capital for regulatory capital purposes. The net proceeds of the debt offering after deducting underwriting discounts and commissions and offering expenses were $98.4 million. The Corporation intends to use the net proceeds from the sale of the subordinated notes for general corporate purposes, which may include investments at the holding company level, providing capital to support the growth of FNBPA and its business, repurchases of its common shares and the payment of the cash consideration components of future acquisitions.

During November 2013, the Corporation issued 4,693,876 common shares and 4,435,080 Depositary Shares (representing a 1/40th interest in the Non-Cumulative Perpetual Preferred Stock, Series E) in public equity offerings under this registration statement. These equity offerings increased the Corporation’s capital by $161.3 million. The Corporation applied the proceeds from the offerings to the redemption of various Corporation-issued TPS during 2013 and 2014. The Corporation’s preferred stock pays dividends quarterly when, as and if declared by its board of directors, at a rate of 7.25% per year until February 15, 2024; thereafter, dividends are then paid at a floating rate equal to the three-month LIBOR plus 4.60% per year. Additionally, the preferred stock has no maturity date. The preferred stock is redeemable, in whole or in part, from time to time, on any dividend payment date on or after February 15, 2024, at a redemption price of $1,000 per share, plus any declared and unpaid dividends.

Capital management is a continuous process with capital plans and stress testing for the Corporation and FNBPA updated annually. These capital plans include assessing the adequacy of expected capital levels assuming various scenarios by projecting capital needs for a forecast period of 2-3 years beyond the current year. Both the Corporation and FNBPA are subject to various regulatory capital requirements administered by federal banking agencies. For additional information, see the Regulatory Matters footnote in the Notes to the Consolidated Financial Statements, which is included in Item 8 of this Report. From time to time, the Corporation issues shares initially acquired by the Corporation as treasury stock under its various benefit plans. The Corporation may continue to grow through acquisitions, which can potentially impact its capital position. The Corporation may issue additional preferred stock, common stock or subordinated debt in order to maintain its well-capitalized status.

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information called for by this item is provided in the Market Risk section of “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which is included in Item 7 of this Report, and is incorporated herein by reference.

 

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Report of Management on F.N.B. Corporation’s Internal Control Over Financial Reporting

February 26, 2016

F.N.B. Corporation’s (the Corporation) internal control over financial reporting is a process effected by the board of directors, management, and other personnel, designed to provide reasonable assurance regarding the preparation of reliable financial statements in accordance with U.S. generally accepted accounting principles. An entity’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the entity; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the entity are being made only in accordance with authorizations of management and the board of directors; and (3) provide reasonable assurance regarding prevention, or timely detection of unauthorized acquisition, use, or disposition of the entity’s assets that could have a material effect on the financial statements.

Management is responsible for establishing and maintaining adequate internal control over financial reporting. Management assessed the effectiveness of the Corporation’s internal control over financial reporting as of December 31, 2015 based on the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control – Integrated Framework (2013 framework). Based on that assessment, management concluded that, as of December 31, 2015, the Corporation’s internal control over financial reporting is effective based on the criteria established in Internal Control – Integrated Framework (2013 framework). Ernst & Young LLP, independent registered public accounting firm, has issued an attestation report on the Corporation’s internal control over financial reporting.

F.N.B. Corporation

 

/s/ Vincent J. Delie, Jr.

By: Vincent J. Delie, Jr.

President and Chief Executive Officer

/s/ Vincent J. Calabrese, Jr.

By: Vincent J. Calabrese, Jr.

Chief Financial Officer

 

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

F.N.B. Corporation

We have audited the accompanying consolidated balance sheets of F.N.B. Corporation and subsidiaries as of December 31, 2015 and 2014, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2015. These financial statements are the responsibility of the F.N.B. Corporation’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of F.N.B. Corporation and subsidiaries at December 31, 2015 and 2014, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2015, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), F.N.B. Corporation’s internal controls over financial reporting as of December 31, 2015, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 26, 2016 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Pittsburgh, Pennsylvania

February 26, 2016

 

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

F.N.B. Corporation

We have audited F.N.B. Corporation’s internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). F.N.B. Corporation’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Report of Management on F.N.B. Corporation’s Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, F.N.B. Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of F.N.B. Corporation and subsidiaries as of December 31, 2015 and 2014, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2015 of F.N.B. Corporation and subsidiaries and our report dated February 26, 2016 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Pittsburgh, Pennsylvania

February 26, 2016

 

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F.N.B. Corporation and Subsidiaries

Consolidated Balance Sheets

Dollars in thousands, except par values

 

     December 31  
     2015     2014  

Assets

    

Cash and due from banks

   $ 207,399      $ 196,240   

Interest-bearing deposits with banks

     281,720        91,153   
  

 

 

   

 

 

 

Cash and Cash Equivalents

     489,119        287,393   

Securities available for sale

     1,630,567        1,534,065   

Securities held to maturity (fair value of $1,643,416 and $1,468,258)

     1,637,061        1,453,355   

Residential mortgage loans held for sale

     4,781        6,180   

Loans and leases, net of unearned income of $51,642 and $56,131

     12,190,440        11,247,038   

Allowance for credit losses

     (142,012     (125,926
  

 

 

   

 

 

 

Net Loans and Leases

     12,048,428        11,121,112   

Premises and equipment, net

     159,080        168,756   

Goodwill

     833,086        832,213   

Core deposit and other intangible assets, net

     45,644        47,504   

Bank owned life insurance

     308,192        301,771   

Other assets

     401,704        374,741   
  

 

 

   

 

 

 

Total Assets

   $ 17,557,662      $ 16,127,090   
  

 

 

   

 

 

 

Liabilities

    

Deposits:

    

Non-interest-bearing demand

   $ 3,059,949      $ 2,647,623   

Interest-bearing demand

     5,311,589        4,547,628   

Savings

     1,786,459        1,575,922   

Certificates and other time deposits

     2,465,466        2,611,035   
  

 

 

   

 

 

 

Total Deposits

     12,623,463        11,382,208   

Short-term borrowings

     2,048,896        2,041,658   

Long-term borrowings

     641,480        541,443   

Other liabilities

     147,641        140,325   
  

 

 

   

 

 

 

Total Liabilities

     15,461,480        14,105,634   

Stockholders’ Equity

    

Preferred stock – $0.01 par value

    

Authorized – 20,000,000 shares

    

Issued – 110,877 shares

     106,882        106,882   

Common stock – $0.01 par value

    

Authorized – 500,000,000 shares

    

Issued – 176,595,060 and 175,450,303 shares

     1,766        1,754   

Additional paid-in capital

     1,808,210        1,798,984   

Retained earnings

     243,217        176,120   

Accumulated other comprehensive loss

     (51,133     (46,003

Treasury stock – 1,153,390 and 1,458,045 shares at cost

     (12,760     (16,281
  

 

 

   

 

 

 

Total Stockholders’ Equity

     2,096,182        2,021,456   
  

 

 

   

 

 

 

Total Liabilities and Stockholders’ Equity

   $ 17,557,662      $ 16,127,090   
  

 

 

   

 

 

 

See accompanying Notes to Consolidated Financial Statements

 

81


Table of Contents

F.N.B. Corporation and Subsidiaries

Consolidated Statements of Income

Dollars in thousands, except per share data

 

     Year Ended December 31  
     2015      2014      2013  

Interest Income

        

Loans and leases, including fees

   $ 482,086       $ 449,502       $ 390,983   

Securities:

        

Taxable

     58,148         53,877         43,504   

Nontaxable

     6,405         5,282         5,667   

Dividends

     39         228         103   

Other

     117         94         129   
  

 

 

    

 

 

    

 

 

 

Total Interest Income

     546,795         508,983         440,386   

Interest Expense

        

Deposits

     31,207         29,603         29,441   

Short-term borrowings

     7,075         5,638         4,423   

Long-term borrowings

     10,291         7,445         10,480   
  

 

 

    

 

 

    

 

 

 

Total Interest Expense

     48,573         42,686         44,344   
  

 

 

    

 

 

    

 

 

 

Net Interest Income

     498,222         466,297         396,042   

Provision for credit losses

     40,441         38,648         31,090   
  

 

 

    

 

 

    

 

 

 

Net Interest Income After Provision for Credit Losses

     457,781         427,649         364,952   

Non-Interest Income

        

Impairment losses on securities

                     (27
  

 

 

    

 

 

    

 

 

 

Net impairment losses on securities

                     (27

Service charges

     70,698         68,267         68,221   

Trust

     20,934         19,365         16,751   

Insurance commissions and fees

     16,270         16,758         16,598   

Securities commissions and fees

     13,642         11,453         11,286   

Net securities gains

     822         11,717         808   

Mortgage banking operations

     8,619         3,705         3,452   

Bank owned life insurance

     8,010         7,716         6,874   

Other

     23,415         19,293         11,815   
  

 

 

    

 

 

    

 

 

 

Total Non-Interest Income

     162,410         158,274         135,778   

Non-Interest Expense

        

Salaries and employee benefits

     202,068         195,016         179,971   

Net occupancy

     33,670         32,281         26,474   

Equipment

     31,869         29,245         25,214   

Amortization of intangibles

     8,305         9,717         8,407   

Outside services

     34,698         33,208         30,257   

FDIC insurance

     12,888         13,258         10,192   

Supplies

     8,064         7,102         6,887   

State taxes

     8,139         6,954         4,256   

Telephone

     6,234         5,710         5,063   

Advertising and promotional

     8,396         7,824         6,349   

Loan related

     6,161         4,933         3,945   

Other real estate owned

     4,637         4,401         3,215   

Merger and acquisition related

     3,033         9,611         8,210   

Other

     22,387         19,993         19,730   
  

 

 

    

 

 

    

 

 

 

Total Non-Interest Expense

     390,549         379,253         338,170   
  

 

 

    

 

 

    

 

 

 

Income Before Income Taxes

     229,642         206,670         162,560   

Income taxes

     69,993         62,620         44,756   
  

 

 

    

 

 

    

 

 

 

Net Income

     159,649         144,050         117,804   

Preferred stock dividends

     8,041         8,352           
  

 

 

    

 

 

    

 

 

 

Net Income Available to Common Stockholders

   $ 151,608       $ 135,698       $ 117,804   
  

 

 

    

 

 

    

 

 

 

Net Income per Common Share

        

Basic

   $ 0.87       $ 0.81       $ 0.81   
  

 

 

    

 

 

    

 

 

 

Diluted

   $ 0.86       $ 0.80       $ 0.80   
  

 

 

    

 

 

    

 

 

 

Cash Dividends Paid per Common Share

   $ 0.48       $ 0.48       $ 0.48   
  

 

 

    

 

 

    

 

 

 

See accompanying Notes to Consolidated Financial Statements

 

82


Table of Contents

F.N.B. Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income

Dollars in thousands

 

     Year Ended December 31  
     2015     2014     2013  

Net income

   $ 159,649      $ 144,050      $ 117,804   

Other comprehensive (loss) income:

      

Securities available for sale:

      

Unrealized (losses) gains arising during the period, net of tax (benefit) expense of $(1,561), $13,593, and $(10,121)

     (2,899     25,242        (18,796

Reclassification adjustment for gains included in net income, net of tax expense of $288, $4,101 and $269

     (534     (7,616     (500

Derivative instruments:

      

Unrealized gains (losses) arising during the period, net of tax expense (benefit) of $1,989, $4,629 and $(3,165)

     3,694        8,597        (5,878

Reclassification adjustment for gains included in net income, net of tax expense of $1,137, $1,160 and $289

     (2,111     (2,154     (537

Pension and postretirement benefit obligations:

      

Unrealized (losses) gains arising during the period, net of tax (benefit) expense of $(1,766), $(7,080) and $8,083

     (3,280     (13,148     15,011   
  

 

 

   

 

 

   

 

 

 

Other comprehensive (loss) income

     (5,130     10,921        (10,700
  

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 154,519      $ 154,971      $ 107,104   
  

 

 

   

 

 

   

 

 

 

See accompanying Notes to Consolidated Financial Statements

 

83


Table of Contents

F.N.B. Corporation and Subsidiaries

Consolidated Statements of Stockholders’ Equity

Dollars in thousands

 

    Preferred
Stock
    Common
Stock
    Additional
Paid-In
Capital
    Retained
Earnings
    Accumulated
Other
Comprehensive
Income (Loss)
    Treasury
Stock
    Total  

Balance at January 1, 2013

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

Comprehensive income

          117,804        (10,700       107,104   

Dividends declared:

             

Common stock: $0.48/share

          (71,246         (71,246

Issuance of preferred stock

    106,882                  106,882   

Issuance of common stock

      59        58,954            (2,136     56,877   

Issuance of common stock – acquisitions

      135        165,994              166,129   

Restricted stock compensation

        5,242              5,242   

Tax benefit of stock-based compensation

        1,326              1,326   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2013

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

Comprehensive income

          144,050        10,921          154,971   

Dividends declared:

             

Preferred stock

          (8,352         (8,352

Common stock: $0.48/share

          (81,220         (81,220

Issuance of common stock

      23        14,524        (228       (9,127     5,192   

Issuance of common stock – acquisitions

      139        170,011              170,150   

Restricted stock compensation

        3,618              3,618   

Tax benefit of stock-based compensation

        2,714              2,714   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2014

    106,882        1,754        1,798,984        176,120        (46,003     (16,281     2,021,456   

Comprehensive income

          159,649        (5,130       154,519   

Dividends declared:

             

Preferred stock

          (8,041         (8,041

Common stock: $0.48/share

          (84,511         (84,511

Issuance of common stock

      12        4,737            3,521        8,270   

Restricted stock compensation

        4,461              4,461   

Tax benefit of stock-based compensation

        28              28   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2015

  $ 106,882      $ 1,766      $ 1,808,210      $ 243,217      $ (51,133   $ (12,760   $ 2,096,182   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying Notes to Consolidated Financial Statements

 

84


Table of Contents

F.N.B. Corporation and Subsidiaries

Consolidated Statements of Cash Flows

Dollars in thousands

 

     Year Ended December 31  
     2015     2014     2013  

Operating Activities

      

Net income

   $ 159,649      $ 144,050      $ 117,804   

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

      

Depreciation, amortization and accretion

     43,949        40,119        30,768   

Provision for credit losses

     40,441        38,648        31,090   

Deferred tax expense

     550        44,113        15,291   

Net securities gains

     (822     (11,717     (808

Other-than-temporary impairment losses on securities

                   27   

Tax benefit of stock-based compensation

     (28     (2,714     (1,326

Loans originated for sale

     (445,558     (162,010     (219,324

Loans sold

     455,623        168,533        243,782   

Gain on sale of loans

     (8,666     (5,565     (3,845

Net change in:

      

Interest receivable

     (4,688     (2,211     (1,675

Interest payable

     760        (875     (2,173

Securities classified as trading in business combination and sold

            241,595        125,800   

Bank owned life insurance

     (6,397     (10,401     (3,598

Other, net

     (11,333     (34,746     14,280   
  

 

 

   

 

 

   

 

 

 

Net cash flows provided by operating activities

     223,480        446,819        346,093   
  

 

 

   

 

 

   

 

 

 

Investing Activities

      

Net increase in loans and leases

     (985,999     (1,192,618     (643,568

Securities available for sale:

      

Purchases

     (421,901     (829,800     (375,222

Sales

     33,499        175,872        22,047   

Maturities

     284,483        303,875        345,528   

Securities held to maturity:

      

Purchases