MERGERS AND ACQUISITIONS

Yadkin Financial Corporation

On March 11, 2017, we completed our acquisition of Yadkin Financial Corporation (YDKN), a bank holding company based in Raleigh, North Carolina. YDKN’s banking affiliate, Yadkin Bank, was also merged into FNBPA on March 11, 2017. YDKN’s results of operations have been included in our consolidated statements of income since that date. The acquisition enabled us to enter several North Carolina markets, including Raleigh, Charlotte and the Piedmont Triad, which is comprised of Winston-Salem, Greensboro and High Point. We also completed the core systems conversion activities during the first quarter.

On the acquisition date, the fair values of YDKN included $6.8 billion in assets, of which there was $5.1 billion in loans and $5.2 billion in deposits. The acquisition was valued at $1.8 billion based on the acquisition-date FNB common stock closing price of $15.97 and resulted in FNB issuing 111,619,622 shares of common stock in exchange for 51,677,565 shares of YDKN common stock. Under the terms of the merger agreement, shareholders of YDKN received 2.16 shares of FNB common stock for each share of YDKN common stock and cash in lieu of fractional shares. YDKN’s fully vested and outstanding stock options were converted into options to purchase and receive FNB common stock. In conjunction with the acquisition, we assumed a warrant that was issued by YDKN to the U.S. Department of the Treasury (UST) under the Capital Purchase Program (CPP). Based on the exchange ratio, this warrant, which expires in 2019, was converted into a warrant to purchase up to 207,320 shares of FNB common stock with an exercise price of $9.63.

The acquisition of YDKN constituted a business combination and has been accounted for using the acquisition method of accounting, and accordingly, assets acquired, liabilities assumed and consideration exchanged were recorded at fair value on the acquisition date. The determination of fair values required management to make certain estimates about discount rates, future expected cash flows, market conditions, and other future events that are highly subjective in nature and may require adjustments, which can be updated for up to a year following the acquisition. As of December 31, 2017, we believe that all fair values and related adjustments to goodwill have been recorded with the exception of acquired premises and equipment which were recorded at provisional amounts.

The following table presents the provisional estimate and fair value amounts recorded for certain acquired items:



(in thousands)
Acquired Asset or Liability	Balance Sheet Line Item	Provisional Estimate		Fair Value		Increase (Decrease)
Loans and leases	Loans and leases, net	$	5,116,497	$	5,114,355	$	(2,142	)
Premises and equipment	Premises and equipment, net	95,208		70,031		(25,177		)
Deferred taxes	Other assets	94,307		125,100		30,793
Other liabilities	Other liabilities	70,761		68,264		(2,497		)

These adjustments to fair value did not result in any significant impact on the consolidated income statement for 2017. Based on the purchase price allocation, we recorded $1.2 billion in goodwill and $55.7 million in core deposit intangibles as a result of the acquisition. The core deposit intangible asset is being amortized over the estimated useful life of approximately ten years utilizing an accelerated method. Goodwill is not amortized, but is periodically evaluated for impairment. None of the goodwill is deductible for income tax purposes.

The following pro forma financial information for the periods presented reflects our estimated consolidated pro forma results of operations as if the YDKN acquisition occurred on January 1, 2016, unadjusted for potential cost savings and other business synergies we expect to receive as a result of the acquisition:



(dollars in thousands, except per share data)	FNB		YDKN		Pro Forma Adjustments			Pro Forma Combined
Twelve Months Ended December 31, 2017
Revenue (net interest income and non-interest income)	$	1,077,984	$	74,574	$	3,419		$	1,155,977
Net income	227,478		22,435		(1,165		)	248,748
Net income available to common stockholders	219,437		22,435		(1,165		)	240,707
Earnings per common share – basic	0.92		0.78		—			0.80
Earnings per common share – diluted	0.91		0.77		—			0.79
Twelve Months Ended December 31, 2016
Revenue	$	813,273	$	293,655	$	(5,290	)	$	1,101,638
Net income	170,891		55,168		(7,862		)	218,197
Net income available to common stockholders	162,850		55,168		(7,862		)	210,156
Earnings per common share – basic	0.79		1.15		—			0.67
Earnings per common share – diluted	0.78		1.14		—			0.67

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

In connection with the YDKN acquisition, we incurred expenses related to systems conversions and other costs of integrating and conforming acquired operations with and into FNB. These merger-related expenses, that were expensed as incurred, amounted to $56.2 million for the year ended December 31, 2017. Contract terminations and severance costs comprised 30.9% and 24.3%, respectively, of the merger-related expenses, with the remainder consisting of other non-interest expenses, including professional services, marketing and advertising, technology and communications, occupancy and equipment, and charitable contributions. We also incurred issuance costs of $0.6 million which were charged to additional paid-in capital.

Branch Purchase – Fifth Third Bank

On April 22, 2016, we completed our purchase of 17 branch-banking locations and certain consumer loans in the Pittsburgh, Pennsylvania metropolitan area from Fifth Third Bank (Fifth Third). The fair value of the acquired assets totaled $312.4 million, including $198.9 million in cash, $95.4 million in loans and $14.1 million in fixed and other assets. We also assumed $302.5 million in deposits, for which we paid a deposit premium of 1.97%, as part of the transaction. The assets and liabilities relating to these purchased branches were recorded on our balance sheet at their fair values as of April 22, 2016, and the related results of operations for these branches have been included in our consolidated income statement since that date. We recorded $14.1 million in goodwill and $4.1 million in core deposit intangibles as a result of the purchase transaction. The goodwill for this transaction is deductible for income tax purposes.

Metro Bancorp, Inc.

On February 13, 2016, we completed our acquisition of Metro Bancorp, Inc. (METR), a bank holding company based in Harrisburg, Pennsylvania. The acquisition enhanced our distribution and scale across Central Pennsylvania, strengthened our position as the largest Pennsylvania-based regional bank and allowed us to leverage the significant infrastructure investments made in connection with the expansion of our product offerings and risk management systems. On the acquisition date, the fair values of METR included $2.8 billion in assets, of which there was $1.9 billion in loans and $2.3 billion in deposits.

The acquisition was valued at $404.2 million and resulted in FNB issuing 34,041,181 shares of common stock in exchange for 14,345,319 shares of METR common stock. We also acquired the fully vested outstanding stock options of METR. The assets and liabilities of METR were recorded on our consolidated balance sheet at their fair values as of the acquisition date, and METR’s results of operations have been included in our consolidated income statement since that date. METR’s banking affiliate, Metro Bank, was merged into FNBPA on February 13, 2016. Based on the purchase price allocation, we recorded $185.1 million in goodwill and $24.2 million in core deposit intangibles as a result of the acquisition. None of the goodwill is deductible for income tax purposes as the acquisition is accounted for as a tax-free exchange for tax purposes.

In connection with the METR acquisition, we incurred expenses related to systems conversions and other costs of integrating and conforming acquired operations with and into FNB. These merger-related charges, that were expensed as incurred, amounted to $0.4 million and $31.0 million for the years ended December 31, 2017 and 2016. Severance costs comprised 39.9% of the merger-related expenses, with the remainder consisting of other non-interest expenses, including professional services, marketing and advertising, technology and communications, occupancy and equipment, and charitable contributions. We also incurred issuance costs of $0.7 million which were charged to additional paid-in capital.

Branch Purchase – Bank of America

On September 18, 2015, we completed our purchase of five branch-banking locations in southeastern Pennsylvania from Bank of America (BofA). The fair value of the acquired assets totaled $153.1 million, including $148.2 million in cash and $2.0 million in fixed and other assets. We also assumed $154.6 million in deposits associated with these branches. We paid a deposit premium of 1.96% and acquired an immaterial amount of loans as part of the transaction. Our operating results for 2015 include the impact of branch activity subsequent to the September 18, 2015 closing date. We recorded $1.5 million in goodwill and $3.0 million in core deposit intangibles as a result of the purchase transaction. The goodwill for this transaction is deductible for income tax purposes.

Insurance Brokerage Purchases

On June 22 and July 18, 2015, we, through our wholly-owned subsidiary, FNIA, acquired certain insurance-related assets from Pittsburgh-area insurance brokerage firms. Under the combined purchase agreements, we paid $3.4 million in cash and recorded goodwill of $1.8 million, other intangibles of $1.4 million and miscellaneous other assets of $0.2 million in connection with these acquisitions.

The following table summarizes the amounts recorded on the consolidated balance sheets as of each of the acquisition dates in conjunction with the acquisitions discussed above:



(in thousands)	YDKN		Fifth Third Branches			METR		BofA Branches
Fair value of consideration paid	$	1,784,783	$	—		$	404,242	$	—
Fair value of identifiable assets acquired:
Cash and cash equivalents	196,964		198,872			46,890		148,159
Securities	940,272		—			722,980		—
Loans	5,114,355		95,354			1,862,447		842
Core deposit and other intangible assets	69,555		4,129			24,163		3,000
Fixed and other assets	461,293		14,069			127,185		1,133
Total identifiable assets acquired	6,782,439		312,424			2,783,665		153,134
Fair value of liabilities assumed:
Deposits	5,176,915		302,529			2,328,238		154,619
Borrowings	969,385		—			227,539		—
Other liabilities	68,264		24,041			8,700		—
Total liabilities assumed	6,214,564		326,570			2,564,477		154,619
Fair value of net identifiable assets acquired	567,875		(14,146		)	219,188		(1,485		)
Goodwill recognized ⁽¹⁾	$	1,216,908	$	14,146		$	185,054	$	1,485


(1)	All of the goodwill for these transactions has been recorded in the Community Banking segment.