Edgar Filing: FNB CORP/FL/

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2011

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

For the transition period from to

Commission file number 001-31940

F.N.B. CORPORATION

(Exact name of registrant as specified in its charter)

Florida

25-1255406

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)


One F.N.B. Boulevard, Hermitage, PA		16148
(Address of principal executive offices)		(Zip Code)

724-981-6000

Registrant’s telephone number, including area code:

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

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

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

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

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

APPLICABLE ONLY TO CORPORATE ISSUERS:

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


Class		Outstanding at October 31, 2011
Common Stock, $0.01 Par Value		127,135,221 Shares

F.N.B. CORPORATION

FORM 10-Q

September 30, 2011

INDEX


PART I – FINANCIAL INFORMATION			PAGE

Item 1. Financial Statements

Consolidated Balance Sheets			2
Consolidated Statements of Income			3
Consolidated Statements of Stockholders’ Equity			4
Consolidated Statements of Cash Flows			5
Notes to Consolidated Financial Statements			6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			45

Item 3. Quantitative and Qualitative Disclosures About Market Risk			64

Item 4. Controls and Procedures			64

PART II – OTHER INFORMATION

Item 1. Legal Proceedings			65

Item 1A. Risk Factors			65

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			66

Item 3. Defaults Upon Senior Securities			66

Item 5. Other Information			66

Item 6. Exhibits			66

Signatures			67

F.N.B. CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

Dollars in thousands, except par value


	September 30, 2011			December 31, 2010
	(Unaudited)
Assets
Cash and due from banks	$	197,753		$	115,556
Interest bearing deposits with banks		34,982			16,015

Cash and Cash Equivalents		232,735			131,571
Securities available for sale		802,455			738,125
Securities held to maturity (fair value of $1,020,643 and $959,414)		984,201			940,481
Residential mortgage loans held for sale		10,307			12,700
Loans, net of unearned income of $45,145 and $42,183		6,788,540			6,088,155
Allowance for loan losses		(108,813	)		(106,120	)

Net Loans		6,679,727			5,982,035
Premises and equipment, net		125,748			115,956
Goodwill		567,511			528,720
Core deposit and other intangible assets, net		32,772			32,428
Bank owned life insurance		207,600			208,051
Other assets		308,288			269,848

Total Assets	$	9,951,344		$	8,959,915

Liabilities
Deposits:
Non-interest bearing demand	$	1,335,417		$	1,093,230
Savings and NOW		3,794,127			3,423,844
Certificates and other time deposits		2,238,745			2,129,069

Total Deposits		7,368,289			6,646,143
Other liabilities		124,479			97,951
Short-term borrowings		817,343			753,603
Long-term debt		222,788			192,058
Junior subordinated debt		203,954			204,036

Total Liabilities		8,736,853			7,893,791
Stockholders’ Equity
Common stock—$0.01 par value
Authorized – 500,000,000 shares
Issued – 127,342,749 and 114,902,454 shares		1,268			1,143
Additional paid-in capital		1,222,123			1,094,713
Retained earnings		24,760			6,564
Accumulated other comprehensive loss		(30,248	)		(33,732	)
Treasury stock – 215,150 and 155,369 shares at cost		(3,412	)		(2,564	)

Total Stockholders’ Equity		1,214,491			1,066,124

Total Liabilities and Stockholders’ Equity	$	9,951,344		$	8,959,915

See accompanying Notes to Consolidated Financial Statements

F.N.B. CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

Dollars in thousands, except per share data

Unaudited


	Three Months Ended September 30,					Nine Months Ended September 30,
	2011			2010		2011			2010
Interest Income
Loans, including fees	$	86,038		$	81,507	$	255,937		$	241,885
Securities:
Taxable		10,744			10,524		32,233			33,100
Nontaxable		1,847			1,779		5,676			5,489
Dividends		13			17		144			54
Other		60			120		238			326

Total Interest Income		98,702			93,947		294,228			280,854
Interest Expense
Deposits		13,078			15,742		41,727			50,072
Short-term borrowings		1,644			2,029		5,111			6,191
Long-term debt		1,698			1,825		4,981			6,462
Junior subordinated debt		1,880			2,092		6,030			5,984

Total Interest Expense		18,300			21,688		57,849			68,709

Net Interest Income		80,402			72,259		236,379			212,145
Provision for loan losses		8,573			12,313		25,352			36,516

Net Interest Income After Provision for Loan Losses		71,829			59,946		211,027			175,629
Non-Interest Income
Impairment losses on securities		(473	)		—		(473	)		(9,539	)
Non-credit related losses on securities not expected to be sold (recognized in other comprehensive income)		436			—		436			7,251

Net impairment losses on securities		(37	)		—		(37	)		(2,288	)
Service charges		16,057			14,250		46,058			42,634
Insurance commissions and fees		4,002			3,921		11,812			12,094
Securities commissions and fees		1,858			1,794		5,960			5,122
Trust fees		3,565			3,084		11,222			9,430
Gain on sale of securities		49			80		141			2,517
Gain on sale of residential mortgage loans		657			964		1,800			2,339
Bank owned life insurance		1,309			1,448		3,913			3,760
Other		2,170			2,213		6,451			10,864

Total Non-Interest Income		29,630			27,754		87,320			86,472
Non-Interest Expense
Salaries and employee benefits		37,149			33,831		112,059			100,348
Net occupancy		5,514			4,781		16,484			15,159
Equipment		4,749			4,486		14,149			13,625
Amortization of intangibles		1,808			1,675		5,409			5,041
Outside services		5,447			5,737		16,024			17,144
FDIC insurance		1,699			2,627		6,288			7,890
Merger related		282			72		4,589			72
Other		12,569			11,038		37,141			33,495

Total Non-Interest Expense		69,217			64,247		212,143			192,774

Income Before Income Taxes		32,242			23,453		86,204			69,327
Income taxes		8,469			6,236		22,894			18,208

Net Income	$	23,773		$	17,217	$	63,310		$	51,119

Net Income per Share – Basic	$	0.19		$	0.15	$	0.51		$	0.45
Net Income per Share – Diluted		0.19			0.15		0.51			0.45
Cash Dividends per Share		0.12			0.12		0.36			0.36

See accompanying Notes to Consolidated Financial Statements

F.N.B. CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Dollars in thousands, except per share data

Unaudited


	Compre-hensive Income		Common Stock		Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Loss			Treasury Stock			Total
Balance at January 1, 2011			$	1,143	$	1,094,713		$	6,564		$	(33,732	)	$	(2,564	)	$	1,066,124
Net income	$	63,310							63,310									63,310
Change in other comprehensive income, net of tax		3,484										3,484						3,484

Comprehensive income	$	66,794

Common stock dividends ($0.36/share)									(45,114	)								(45,114	)
Issuance of common stock				125		124,100									(848	)		123,377
Restricted stock compensation						3,371												3,371
Tax expense of stock-based compensation						(61	)											(61	)

Balance at September 30, 2011			$	1,268	$	1,222,123		$	24,760		$	(30,248	)	$	(3,412	)	$	1,214,491


Balance at January 1, 2010			$	1,138	$	1,087,369		$	(12,833	)	$	(30,633	)	$	(1,739	)	$	1,043,302
Net income	$	51,119							51,119									51,119
Change in other comprehensive income, net of tax		7,152										7,152						7,152

Comprehensive income	$	58,271

Common stock dividends ($0.36/share)									(41,412	)								(41,412	)
Issuance of common stock				4		3,604									(778	)		2,830
Restricted stock compensation						2,060												2,060
Tax expense of stock-based compensation						(205	)											(205	)

Balance at September 30, 2010			$	1,142	$	1,092,828		$	(3,126	)	$	(23,481	)	$	(2,517	)	$	1,064,846

See accompanying Notes to Consolidated Financial Statements

F.N.B. CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Dollars in thousands

Unaudited


	Nine Months Ended September 30,
	2011			2010
Operating Activities
Net income	$	63,310		$	51,119
Adjustments to reconcile net income to net cash flows provided by operating activities:
Depreciation, amortization and accretion		16,990			21,558
Provision for loan losses		25,352			36,516
Deferred taxes		6,892			(3,137	)
Gain on sale of securities		(141	)		(2,517	)
Other-than-temporary impairment losses on securities		37			2,288
Tax expense of stock-based compensation		61			205
Net change in:
Interest receivable		883			275
Interest payable		(1,519	)		(1,685	)
Trading securities		110,490			—
Residential mortgage loans held for sale		2,393			(3,975	)
Bank owned life insurance		476			(2,289	)
Other, net		26,806			14,145

Net cash flows provided by operating activities		252,030			112,503

Investing Activities
Net change in loans		(323,897	)		(204,584	)
Securities available for sale:
Purchases		(250,558	)		(335,865	)
Sales		10,883			59,459
Maturities		292,247			259,191
Securities held to maturity:
Purchases		(332,870	)		(278,089	)
Maturities		176,009			181,662
Purchase of bank owned life insurance		(26	)		(27	)
Withdrawal/surrender of bank owned life insurance		—			360
Increase in premises and equipment		(9,648	)		(5,305	)
Net cash received in business combinations		23,374			—

Net cash flows used in investing activities		(414,486	)		(323,198	)

Financing Activities
Net change in:
Non-interest bearing deposits, savings and NOW accounts		297,049			235,883
Time deposits		(116,864	)		(18,278	)
Short-term borrowings		38,629			148,415
Increase in long-term debt		46,569			108,871
Decrease in long-term debt		(25,114	)		(230,492	)
Decrease in junior subordinated debt		(82	)		(506	)
Net proceeds from issuance of common stock		68,608			4,890
Tax expense of stock-based compensation		(61	)		(205	)
Cash dividends paid		(45,114	)		(41,412	)

Net cash flows provided by financing activities		263,620			207,166

Net Increase in Cash and Cash Equivalents		101,164			(3,529	)
Cash and cash equivalents at beginning of period		131,571			310,550

Cash and Cash Equivalents at End of Period	$	232,735		$	307,021

See accompanying Notes to Consolidated Financial Statements

F.N.B. CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Dollars in thousands, except share data

(Unaudited)

September 30, 2011

BUSINESS

F.N.B. Corporation (the Corporation) is a diversified financial services company headquartered in Hermitage, Pennsylvania. Its primary businesses include community banking, consumer finance, wealth management and insurance. The Corporation also conducts commercial leasing and merchant banking activities. The Corporation operates its community banking business through a full service branch network in Pennsylvania and Ohio and through a loan production office in Pennsylvania. The Corporation operates its wealth management and insurance businesses within the existing branch network. It also conducts selected consumer finance business in Pennsylvania, Ohio, Tennessee and Kentucky.

BASIS OF PRESENTATION

The Corporation’s accompanying consolidated financial statements and these notes to the financial statements include subsidiaries in which the Corporation has a controlling financial interest. The Corporation owns and operates First National Bank of Pennsylvania (FNBPA), First National Trust Company, First National Investment Services Company, LLC, F.N.B. Investment Advisors, Inc., First National Insurance Agency, LLC, Regency Finance Company (Regency), F.N.B. Capital Corporation, LLC and Bank Capital Services, LLC, and includes results for each of these entities in the accompanying consolidated financial statements.

The accompanying consolidated financial statements include all adjustments that are necessary, in the opinion of management, to fairly reflect the Corporation’s financial position and results of operations in accordance with U.S. generally accepted accounting principles (GAAP). All significant intercompany balances and transactions have been eliminated. Certain prior period amounts have been reclassified to conform to the current period presentation. Events occurring subsequent to the date of the balance sheet have been evaluated for potential recognition or disclosure in the consolidated financial statements through the date of the filing of the consolidated financial statements with the Securities and Exchange Commission (SEC).

Certain information and note disclosures normally included in consolidated financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC. The interim operating results are not necessarily indicative of operating results the Corporation expects for the full year. These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Corporation’s Annual Report on Form 10-K filed with the SEC on February 25, 2011.

USE OF ESTIMATES

The accounting and reporting policies of the Corporation conform with GAAP. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could materially differ from those estimates. Material estimates that are particularly susceptible to significant changes include the allowance for loan losses, securities valuations, goodwill and other intangible assets and income taxes.

COMMON STOCK

On May 18, 2011, the Corporation completed a public offering of 6,037,500 shares of common stock at a price of $10.70 per share, including 787,500 shares of common stock purchased by the underwriters pursuant to an over-allotment option, which the underwriters exercised in full. The net proceeds of the offering after deducting underwriting discounts and commissions and offering expenses were $62,803.

MERGERS AND ACQUISITIONS

On January 1, 2011, the Corporation completed its acquisition of Comm Bancorp, Inc. (CBI), a bank holding company based in Clarks Summit, Pennsylvania. On the acquisition date, CBI had $625,570 in assets, which included $445,271 in loans, and $561,796 in deposits. The transaction, valued at $75,547, resulted in the Corporation paying $17,202 in cash and issuing 5,940,742 shares of its common stock in exchange for 1,719,820 shares of CBI common stock. The assets and liabilities of CBI were recorded on the Corporation’s balance sheet at their fair values as of January 1, 2011, the acquisition date, and CBI’s results of operations have been included in the Corporation’s consolidated statement of income since that date. CBI’s banking affiliate, Community Bank and Trust Company, was merged into FNBPA on January 1, 2011. Based on a preliminary purchase price allocation, the Corporation recorded $38,790 in goodwill and $4,785 in core deposit intangible as a result of the acquisition. The Corporation has not yet finalized its determination of the fair values of certain acquired assets and liabilities and will adjust goodwill upon completion of the valuation process. None of the goodwill is deductible for income tax purposes.

Pending Acquisition

On June 15, 2011, the Corporation announced the signing of a definitive merger agreement to acquire Parkvale Financial Corporation (PFC), a savings and loan holding company with approximately $1,800,000 in assets based in Monroeville, Pennsylvania. The transaction is valued at approximately $130,000. Under the terms of the merger agreement, PFC shareholders will be entitled to receive 2.178 shares of F.N.B. Corporation common stock for each share of PFC common stock. PFC’s banking affiliate, Parkvale Savings Bank, will be merged into FNBPA. The transaction is expected to be completed in the first quarter of 2012, pending regulatory approvals, the approval of shareholders of PFC and the satisfaction of other closing conditions.

Acquired Loans

All loans acquired in acquisitions after December 31, 2010 are recorded at fair value with no carryover of the related allowance for loan losses. Determining the fair value of the loans involves estimating the amount and timing of principal and interest cash flows expected to be collected on the loans and discounting those cash flows at a market rate of interest.

The excess of gross expected cash flows at acquisition over the estimated fair value is referred to as the accretable yield and is recognized into interest income over the remaining life of the loan. The difference between contractually required payments at acquisition and the expected cash flows to be collected at acquisition is referred to as the non-accretable yield. The non-accretable yield represents estimated future credit losses expected to be incurred over the life of the loan. Subsequent decreases in expected cash flows that are attributable, at least in part, to credit quality are recognized as impairments through a charge to the provision for loan losses resulting in an increase in the allowance for loan losses. Subsequent improvements in expected cash flows result in an increase to the accretable yield that is recognized into interest income over the remaining life of the loan using the interest method. The Corporation’s evaluation of the amount of future cash flows that it expects to collect is performed in a similar manner as that used to determine its allowance for loan losses. Charge-offs of the principal amount on acquired loans would be first applied to the non-accretable discount portion of the fair value adjustment.

Acquired loans that met the criteria for non-accrual of interest prior to acquisition may be considered performing upon acquisition, regardless of whether the customer is contractually delinquent, if the Corporation can reasonably estimate the timing and amount of the expected cash flows on such loans and if the Corporation expects to fully collect the new carrying value of the loans. As such, the Corporation may no longer consider the loan to be non-accrual or non-performing and may accrue interest on these loans.

NEW ACCOUNTING STANDARDS

Intangibles – Goodwill and Other

In September 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-08, Intangibles – Goodwill and Other, which simplifies how entities test goodwill for impairment. Under the amendments in this ASU, an entity has the option to perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing updated

qualitative factors, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, it would not have to perform the current two-step goodwill impairment test. These amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted. The Corporation intends to adopt this standard during the fourth quarter of 2011. Adoption of this standard is not expected to have a material effect on the financial statements, results of operations or liquidity of the Corporation.

Comprehensive Income

In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income, with the intention of increasing the prominence of other comprehensive income in the financial statements. The FASB has eliminated the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity and will require it be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The single continuous statement format would include the components of net income and total net income, the components of other comprehensive income and a total for other comprehensive income as well as the total comprehensive income. In the two statement approach, the first statement would be the traditional income statement which would immediately be followed by a separate statement which includes the components of other comprehensive income, total other comprehensive income and total comprehensive income. These requirements should be applied retrospectively and are effective for the first interim or annual period beginning after December 15, 2011. Adoption of this standard is not expected to have a material effect on the financial statements, results of operations or liquidity of the Corporation.

Amendments to Fair Value Measurements

In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurements, to improve the comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with GAAP and International Financial Reporting Standards (IFRSs). The amendments explain how to measure fair value. They do not require additional fair value measurements and are not intended to establish valuation standards or affect valuation practices. The amendments result in common fair value measurement and disclosure requirements in GAAP and IFRS. Some of the amendments clarify the application of existing fair value measurement requirements and others change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. Many of the previous fair value requirements are not changed by this standard. The amendments in this standard are to be applied prospectively and are effective during interim and annual periods beginning after December 15, 2011. Adoption of this standard is not expected to have a material effect on the financial statements, results of operations or liquidity of the Corporation.

Troubled Debt Restructurings

In April 2011, the FASB issued ASU No. 2011-02, A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring, to address diversity in practice concerning determining whether a restructuring constitutes a troubled debt restructuring. This update specifies that in evaluating whether a restructuring is a troubled debt restructuring (TDR), a creditor must separately conclude both that a concession has been granted by the creditor and that the debtor is experiencing financial difficulties. Also, ASU No. 2011-02 provides clarifying guidance in determining whether a concession has been granted and whether a debtor is experiencing financial difficulties. In addition, the update precludes a creditor from using the effective interest rate test in the debtor’s guidance on restructuring of payables when evaluating whether a restructuring is a TDR. These requirements are effective for the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to restructurings made during the period from the beginning of the annual period of adoption to the date of adoption. Adoption of this standard did not have a material effect on the financial statements, results of operations or liquidity of the Corporation.

Disclosure of Supplementary Pro Forma Information for Business Combinations

In December 2010, the FASB issued ASU No. 2010-29, Disclosure of Supplementary Pro Forma Information for Business Combinations, to address diversity in practice concerning pro forma revenue and earnings disclosure requirements for business combinations. This update specifies that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The update also expands the supplemental pro forma disclosures to include a description of the nature and amount

of material, nonrecurring pro forma adjustments directly attributable to the business combination(s) included in the reported pro forma revenue and earnings. These requirements are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. Adoption of this standard did not have a material effect on the financial statements, results of operations or liquidity of the Corporation.

Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses

In July 2010, the FASB issued ASU No. 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, to provide financial statement users with greater transparency about credit quality of financing receivables and allowance for credit losses. This update requires additional disclosures as of the end of a reporting period and additional disclosures about activity that occurs during a reporting period that will assist financial statement users in assessing credit risk exposures and evaluating the adequacy of the allowance for credit losses.

The additional disclosures are required to be provided on a disaggregated basis. ASU No. 2010-20 defines two levels of disaggregation and provides additional implementation guidance to determine the appropriate level of disaggregation of information. The disclosures should facilitate evaluation of the nature of the credit risk inherent in a portfolio of financing receivables, how that risk is analyzed and assessed in arriving at the allowance for credit losses, and the changes and reasons for those changes in the allowance for credit losses.

The disclosures as of the end of a reporting period were effective for interim and annual reporting periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010 and are included in this Report. Adoption of this standard did not have a material effect on the financial statements, results of operations or liquidity of the Corporation.

SECURITIES

The amortized cost and fair value of securities are as follows:

Securities Available For Sale:


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
September 30, 2011
U.S. Treasury and other U.S. government agencies and corporations	$	307,769	$	1,079	$	(59	)	$	308,789
Residential mortgage-backed securities:
Agency mortgage-backed securities		225,184		8,000		—			233,184
Agency collateralized mortgage obligations		203,014		3,298		—			206,312
Non-agency collateralized mortgage obligations		32		—		(1	)		31
States of the U.S. and political subdivisions		40,310		1,437		—			41,747
Collateralized debt obligations		19,224		—		(13,539	)		5,685
Other debt securities		6,860		—		(1,887	)		4,973

Total debt securities		802,393		13,814		(15,486	)		800,721
Equity securities		1,593		196		(55	)		1,734

	$	803,986	$	14,010	$	(15,541	)	$	802,455


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
December 31, 2010
U.S. Treasury and other U.S. government agencies and corporations	$	299,861	$	1,395	$	(688	)	$	300,568
Residential mortgage-backed securities:
Agency mortgage-backed securities		205,443		6,064		—			211,507
Agency collateralized mortgage obligations		146,977		1,081		(192	)		147,866
Non-agency collateralized mortgage obligations		37		1		—			38
States of the U.S. and political subdivisions		57,830		934		(26	)		58,738
Collateralized debt obligations		19,288		—		(13,314	)		5,974
Other debt securities		12,989		—		(1,744	)		11,245

Total debt securities		742,425		9,475		(15,964	)		735,936
Equity securities		1,867		381		(59	)		2,189

	$	744,292	$	9,856	$	(16,023	)	$	738,125

Securities Held To Maturity:


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
September 30, 2011
U.S. Treasury and other U.S. government agencies and corporations	$	4,605	$	351	$	—		$	4,956
Residential mortgage-backed securities:
Agency mortgage-backed securities		739,501		31,714		—			771,215
Agency collateralized mortgage obligations		58,610		750		(172	)		59,188
Non-agency collateralized mortgage obligations		27,006		197		(1,135	)		26,068
States of the U.S. and political subdivisions		150,419		5,305		(6	)		155,718
Collateralized debt obligations		2,477		—		(434	)		2,043
Other debt securities		1,583		31		(159	)		1,455

	$	984,201	$	38,348	$	(1,906	)	$	1,020,643

December 31, 2010
U.S. Treasury and other U.S. government agencies and corporations	$	4,925	$	212	$	—		$	5,137
Residential mortgage-backed securities:
Agency mortgage-backed securities		688,575		23,878		(3,079	)		709,374
Agency collateralized mortgage obligations		71,102		511		(889	)		70,724
Non-agency collateralized mortgage obligations		33,950		328		(1,331	)		32,947
States of the U.S. and political subdivisions		137,210		1,735		(1,630	)		137,315
Collateralized debt obligations		3,132		—		(778	)		2,354
Other debt securities		1,587		18		(42	)		1,563

	$	940,481	$	26,682	$	(7,749	)	$	959,414

The Corporation classifies securities as trading securities when management intends to sell such securities in the near term. Such securities are carried at fair value, with unrealized gains (losses) reflected through the consolidated statement of income. The Corporation acquired securities in conjunction with the CBI acquisition that the Corporation classified as trading securities. The Corporation both acquired and sold these trading securities during the first quarter of 2011. As of September 30, 2011 and December 31, 2010, the Corporation did not hold any trading securities.

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


	Three Months Ended September 30,				Nine Months Ended September 30,
	2011		2010		2011			2010
Gross gains	$	49	$	80	$	337		$	2,517
Gross losses		—		—		(196	)		—

	$	49	$	80	$	141		$	2,517

The gross gains for the nine months ended September 30, 2010 included a gain of $2,291 relating to the sale of a $6,016 U.S. government agency security and $52,625 of mortgage backed securities. These securities were sold to better position the balance sheet.

As of September 30, 2011, the amortized cost and fair value of securities, by contractual maturities, were as follows:


	Available for Sale				Held to Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less	$	40,077	$	40,384	$	6,708	$	6,769
Due from one to five years		264,448		265,085		14,500		15,185
Due from five to ten years		10,883		11,260		37,817		39,193
Due after ten years		58,755		44,465		100,059		103,025

		374,163		361,194		159,084		164,172
Residential mortgage-backed securities:
Agency mortgage-backed securities		225,184		233,184		739,501		771,215
Agency collateralized mortgage obligations		203,014		206,312		58,610		59,188
Non-agency collateralized mortgage obligations		32		31		27,006		26,068
Equity securities		1,593		1,734		—		—

	$	803,986	$	802,455	$	984,201	$	1,020,643

Maturities may differ from contractual terms because borrowers may have the right to call or prepay obligations with or without penalties. Periodic payments are received on mortgage-backed securities based on the payment patterns of the underlying collateral.

At September 30, 2011 and December 31, 2010, securities with a carrying value of $651,077 and $651,299, respectively, were pledged to secure public deposits, trust deposits and for other purposes as required by law. Securities with a carrying value of $681,225 and $676,083 at September 30, 2011 and December 31, 2010, respectively, were pledged as collateral for short-term borrowings.

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

Securities available for sale:


	Less than 12 Months					Greater than 12 Months					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
September 30, 2011
U.S. Treasury and other U.S. government agencies and corporations	$	38,449	$	(59	)	$	—	$	—		$	38,449	$	(59	)
Residential mortgage-backed securities:
Non-agency collateralized mortgage obligations		31		(1	)		—		—			31		(1	)
Collateralized debt obligations		—		—			5,685		(13,539	)		5,685		(13,539	)
Other debt securities		—		—			4,973		(1,887	)		4,973		(1,887	)
Equity securities		288		(18	)		636		(37	)		924		(55	)

	$	38,768	$	(78	)	$	11,294	$	(15,463	)	$	50,062	$	(15,541	)

December 31, 2010
U.S. Treasury and other U.S. government agencies and corporations	$	117,140	$	(688	)	$	—	$	—		$	117,140	$	(688	)
Residential mortgage-backed securities:
Agency collateralized mortgage obligations		22,616		(192	)		—		—			22,616		(192	)
States of the U.S. and political subdivisions		3,322		(26	)		—		—			3,322		(26	)
Collateralized debt obligations		—		—			5,974		(13,314	)		5,974		(13,314	)
Other debt securities		4,024		(62	)		7,221		(1,682	)		11,245		(1,744	)
Equity securities		—		—			648		(59	)		648		(59	)

	$	147,102	$	(968	)	$	13,843	$	(15,055	)	$	160,945	$	(16,023	)

Securities held to maturity:


	Less than 12 Months					Greater than 12 Months					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
September 30, 2011
Residential mortgage-backed securities:
Agency collateralized mortgage obligations	$	12,651	$	(172	)	$	—	$	—		$	12,651	$	(172	)
Non-agency collateralized mortgage obligations		3,594		(11	)		8,913		(1,124	)		12,507		(1,135	)
States of the U.S. and political subdivisions		1,478		(6	)		—		—			1,478		(6	)
Collateralized debt obligations		—		—			2,043		(434	)		2,043		(434	)
Other debt securities		—		—			1,168		(159	)		1,168		(159	)

	$	17,723	$	(189	)	$	12,124	$	(1,717	)	$	29,847	$	(1,906	)

December 31, 2010
Residential mortgage-backed securities:
Agency mortgage-backed securities	$	156,544	$	(3,079	)	$	—	$	—		$	156,544	$	(3,079	)
Agency collateralized mortgage obligations		39,074		(889	)		—		—			39,074		(889	)
Non-agency collateralized mortgage obligations		2,551		(12	)		10,739		(1,319	)		13,290		(1,331	)
States of the U.S. and political subdivisions		47,125		(1,415	)		2,319		(215	)		49,444		(1,630	)
Collateralized debt obligations		—		—			2,354		(778	)		2,354		(778	)
Other debt securities		—		—			1,288		(42	)		1,288		(42	)

	$	245,294	$	(5,395	)	$	16,700	$	(2,354	)	$	261,994	$	(7,749	)

As of September 30, 2011, securities with unrealized losses for less than 12 months include 3 investments in U.S. Treasury and other U.S. government agencies and corporations, 3 investments in residential mortgage-backed securities (1 investment in an agency collateralized mortgage obligation (CMO) and 2 investments in non-agency CMOs),

1 investment in states of the U.S. and political subdivisions and 3 investments in equity securities. Securities with unrealized losses of greater than 12 months include 2 investments in residential mortgage-backed securities (non-agency CMOs), 13 investments in collateralized debt obligations (CDOs), 5 investments in other debt securities and 2 investments in equity securities as of September 30, 2011. The Corporation does not intend to sell the debt securities and it is not more likely than not the Corporation will be required to sell the securities before recovery of their amortized cost basis.

The Corporation’s unrealized losses on CDOs relate to investments in trust preferred securities (TPS). The Corporation’s portfolio of TPS consists of single-issuer and pooled securities. The single-issuer securities are primarily from money-center and large regional banks. The pooled securities consist of securities issued primarily by banks and thrifts, with some of the pools including a limited number of insurance companies. Investments in pooled securities are all in mezzanine tranches except for one investment in a senior tranche, and are secured by over-collateralization or default protection provided by subordinated tranches. The non-credit portion of unrealized losses on investments in TPS is attributable to temporary illiquidity and the uncertainty affecting these markets, as well as changes in interest rates.

Other-Than-Temporary Impairment

The Corporation evaluates its investment securities portfolio for other-than-temporary impairment (OTTI) on a quarterly basis. Impairment is assessed at the individual security level. The Corporation considers an investment security impaired if the fair value of the security is less than its cost or amortized cost basis.

When impairment of an equity security is considered to be other-than-temporary, the security is written down to its fair value and an impairment loss is recorded as a loss within non-interest income in the consolidated statement of income. When impairment of a debt security is considered to be other-than-temporary, the amount of the OTTI recorded as a loss within non-interest income and thereby recognized in earnings depends on whether the Corporation intends to sell the security or whether it is more likely than not that the Corporation will be required to sell the security before recovery of its amortized cost basis.

If the Corporation intends to sell the debt security or more likely than not will be required to sell the security before recovery of its amortized cost basis, OTTI shall be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value.

If the Corporation does not intend to sell the debt security and it is not more likely than not the Corporation will be required to sell the security before recovery of its amortized cost basis, OTTI shall be separated into the amount representing credit loss and the amount related to all other market factors. The amount related to credit loss shall be recognized in earnings. The amount related to other market factors shall be recognized in other comprehensive income, net of applicable taxes.

The Corporation performs its OTTI evaluation process in a consistent and systematic manner and includes an evaluation of all available evidence. Documentation of the process is as extensive as necessary to support a conclusion as to whether a decline in fair value below cost or amortized cost is temporary or other-than-temporary and includes documentation supporting both observable and unobservable inputs and a rationale for conclusions reached. In making these determinations for pooled TPS, the Corporation consults with third-party advisory firms to provide additional valuation assistance.

This process considers factors such as the severity, length of time and anticipated recovery period of the impairment, recoveries or additional declines in fair value subsequent to the balance sheet date, recent events specific to the issuer, including investment downgrades by rating agencies and economic conditions in its industry, and the issuer’s financial condition, repayment capacity, capital strength and near-term prospects.

For debt securities, the Corporation also considers the payment structure of the debt security, the likelihood of the issuer being able to make future payments, failure of the issuer of the security to make scheduled interest and principal payments, whether the Corporation has made a decision to sell the security and whether the Corporation’s cash or working capital requirements or contractual or regulatory obligations indicate that the debt security will be required to be sold before a forecasted recovery occurs. For equity securities, the Corporation also considers its intent and ability to retain the security for a period of time sufficient to allow for a recovery in fair value. Among the factors that the Corporation considers in determining its intent and ability to retain the security is a review of its capital adequacy, interest rate risk position and liquidity. The assessment of a security’s ability to recover any decline in fair value, the ability of

the issuer to meet contractual obligations, the Corporation’s intent and ability to retain the security, and whether it is more likely than not the Corporation will be required to sell the security before recovery of its amortized cost basis require considerable judgment.

Debt securities with credit ratings below AA at the time of purchase that are repayment-sensitive securities are evaluated using the guidance of ASC Topic 325, Investments—Other. All other securities are required to be evaluated under ASC Topic 320, Investments – Debt Securities.

The Corporation invested in TPS issued by special purpose vehicles (SPVs) which hold pools of collateral consisting of trust preferred and subordinated debt securities issued by banks, bank holding companies, thrifts and insurance companies. The securities issued by the SPVs are generally segregated into several classes known as tranches. Typically, the structure includes senior, mezzanine and equity tranches. The equity tranche represents the first loss position. The Corporation generally holds interests in mezzanine tranches. Interest and principal collected from the collateral held by the SPVs are distributed with a priority that provides the highest level of protection to the senior-most tranches. In order to provide a high level of protection to the senior tranches, cash flows are diverted to higher-level tranches if the principal and interest coverage tests are not met.

The Corporation prices its holdings of TPS using Level 3 inputs in accordance with ASC Topic 820, Fair Value Measurements and Disclosures, and guidance issued by the SEC. In this regard, the Corporation evaluates current available information in estimating the future cash flows of these securities and determines whether there have been favorable or adverse changes in estimated cash flows from the cash flows previously projected. The Corporation considers the structure and term of the pool and the financial condition of the underlying issuers. Specifically, the evaluation incorporates factors such as over-collateralization and interest coverage tests, interest rates and appropriate risk premiums, the timing and amount of interest and principal payments and the allocation of payments to the various tranches. Current estimates of cash flows are based on the most recent trustee reports, announcements of deferrals or defaults, and assumptions regarding expected future default rates, prepayment and recovery rates and other relevant information. In constructing these assumptions, the Corporation considers the following:

•

that current defaults would have no recovery;

•

that some individually analyzed deferrals will cure at rates varying from 10% to 90% after the deferral period ends;

•

recent historical performance metrics, including profitability, capital ratios, loan charge-offs and loan reserve ratios, for the underlying institutions that would indicate a higher probability of default by the institution;

•

that institutions identified as possessing a higher probability of default would recover at a rate of 10% for banks and 15% for insurance companies;

•

that financial performance of the financial sector continues to be affected by the economic environment resulting in an expectation of additional deferrals and defaults in the future;

•

whether the security is currently deferring interest; and

•

the external rating of the security and recent changes to its external rating.

The primary evidence utilized by the Corporation is the level of current deferrals and defaults, the level of excess subordination that allows for receipt of full principal and interest, the credit rating for each security and the likelihood that future deferrals and defaults will occur at a level that will fully erode the excess subordination based on an assessment of the underlying collateral. The Corporation combines the results of these factors considered in estimating the future cash flows of these securities to determine whether there has been an adverse change in estimated cash flows from the cash flows previously projected.

The Corporation’s portfolio of trust preferred CDOs consists of 13 pooled issues and five single issue securities. One of the pooled issues is a senior tranche; the remaining 12 are mezzanine tranches. At September 30, 2011, the 13 pooled TPS had an estimated fair value of $7,728 while the single-issuer TPS had an estimated fair value of $6,141. The Corporation has concluded from the analysis performed at September 30, 2011 that it is probable that the Corporation will collect all contractual principal and interest payments on all of its single-issuer and pooled TPS sufficient to recover the amortized cost basis of the securities.

The Corporation recognized net impairment losses on securities of $37 and $2,288 for the nine months ended September 30, 2011 and 2010, respectively, due to the write-down of securities that the Corporation deemed to be other-than-temporarily impaired.

At September 30, 2011, all 12 of the pooled trust preferred security investments on which OTTI has been recognized are classified as non-performing investments.

The following table presents a summary of the cumulative credit-related OTTI charges recognized as components of earnings for securities for which a portion of an OTTI is recognized in other comprehensive income:


	September 30, 2011			December 31, 2010
Beginning balance of the amount related to credit loss for which a portion of OTTI was recognized in other comprehensive income	$	(18,332	)	$	(16,051	)
Additions related to credit loss for securities with previously recognized OTTI		(37	)		(2,235	)
Additions related to credit loss for securities with initial OTTI		—			(46	)

Ending balance of the amount related to credit loss for which a portion of OTTI was recognized in other comprehensive income	$	(18,369	)	$	(18,332	)

TPS continue to experience price volatility as the secondary market for such securities remains limited. Write-downs in 2010 were based on the individual securities’ credit performance and its ability to make its contractual principal and interest payments. Should credit quality deteriorate to a greater extent than projected, it is possible that additional write-downs may be required. The Corporation monitors actual deferrals and defaults as well as expected future deferrals and defaults to determine if there is a high probability for expected losses and contractual shortfalls of interest or principal, which could warrant further impairment. The Corporation evaluates its entire portfolio each quarter to determine if additional write-downs are warranted.

The following table provides information relating to the Corporation’s TPS as of September 30, 2011:


Deal Name	Class	Current Par Value		Amortized Cost		Fair Value		Unrealized Loss			Lowest Credit Ratings	Number of Issuers Currently Performing		Actual Defaults (as a percent of original collateral)		Actual Deferrals (as a percent of original collateral)		Projected Recovery Rates on Current Deferrals (1)		Expected Defaults (%) (2)
Pooled TPS:
P1	C1	$	5,500	$	2,266	$	901	$	(1,365	)	C		42		21		17		43		11
P2	C1		4,889		2,746		572		(2,174	)	C		41		16		15		29		12
P3	C1		5,561		4,218		1,237		(2,981	)	C		50		13		5		23		14
P4	C1		3,994		2,852		776		(2,076	)	C		52		15		8		32		14
P5	MEZ		482		330		209		(121	)	C		17		19		9		57		11
P6	MEZ		1,909		1,050		614		(436	)	C		16		19		17		38		9
P7	B3		2,000		726		268		(458	)	C		20		29		9		34		10
P8	B1		3,028		2,386		711		(1,675	)	C		49		14		23		39		13
P9	C		5,048		756		138		(618	)	C		32		14		32		41		11
P10	C		507		461		71		(390	)	C		50		13		14		25		12
P11	C		2,010		788		111		(677	)	C		41		15		16		30		13
P12	A4L		2,000		645		77		(568	)	C		23		16		26		46		13

Total OTTI			36,928		19,224		5,685		(13,539	)			433		16		15		36		12

P13(3)	SNR		2,383		2,477		2,043		(434	)	BBB		15		13		16		37		12

Total Not OTTI			2,383		2,477		2,043		(434	)			15		13		16		37		12

Total Pooled TPS		$	39,311	$	21,701	$	7,728	$	(13,973	)			448		16		15		36		12

Single Issuer TPS:
S1		$	2,000	$	1,949	$	1,225	$	(724	)	BB+		1
S2			2,000		1,913		1,438		(475	)	BBB+		1
S3			2,000		2,000		1,734		(266	)	B+		1
S4			1,000		999		577		(422	)	BB+		1
S5			1,300		1,326		1,167		(159	)	BB+		1

Total Single Issuer TPS		$	8,300	$	8,187	$	6,141	$	(2,046	)			5

Total TPS		$	47,611	$	29,888	$	13,869	$	(16,019	)			453

(1)	Some current deferrals will cure at rates varying from 10% to 90% after five years.

(2)	Expected future defaults as a percent of remaining performing collateral.

(3)	Excess subordination represents the additional defaults in excess of both current and projected defaults that the CDO can absorb before the bond experiences any credit impairment. The P13 security had excess subordination as a percent of current collateral of 67.42% as of September 30, 2011.

States of the U.S. and Political Subdivisions

The Corporation’s municipal bond portfolio of $192,166 as of September 30, 2011 is highly rated with an average rating of AA and 99.6% of the portfolio rated A or better. General obligation bonds comprise 100% of the portfolio. Geographically, these support the Corporation’s footprint as 77.1% of the securities are from municipalities located throughout Pennsylvania. The average holding size of the securities in the municipal bond portfolio is $966. Finally, this portfolio is supported by underlying insurance as 82.3% of the securities have credit support.

Non-Agency CMOs

The Corporation purchased $161,151 of non-agency CMOs from 2003 through 2005. These securities, which are classified as held to maturity, have a book value of $27,006 at September 30, 2011. Paydowns during the first nine months of 2011 amounted to $6,943, an annualized paydown rate of 27.3%. At the time of purchase, these securities were all rated AAA, with an original average loan-to-value (LTV) ratio of 66.1% and original credit score of 724. At origination, the credit support, or the amount of loss the collateral pool could absorb before the AAA securities would incur a credit loss, ranged from 2.0% to 7.0%. The current credit support range is now 2.5% to 20.0%, due to paydowns and good credit performance through the first half of 2008. Beginning in the second half of 2008, national delinquencies, an early warning sign of potential default, began to accelerate on the collateral pools. The slight upward trend of the rate of delinquencies throughout 2010 generally continued through the third quarter of 2011. All CMO holdings are current with regards to principal and interest.

The rating agencies monitor the underlying collateral performance of these non-agency CMOs for delinquencies, foreclosures and defaults. They also factor in trends in bankruptcies and housing values to ultimately arrive at an expected loss for a given piece of defaulted collateral. Based on deteriorating performance of the collateral, many of these types of securities have been downgraded by the rating agencies. For the Corporation’s portfolio, six of the ten non-agency CMOs have been downgraded since the original purchase date with one being downgraded this quarter.

The Corporation determines its credit-related losses by running scenario analysis on the underlying collateral. This analysis applies default assumptions to delinquencies already in the pipeline, projects future defaults based in part on the historical trends for the collateral, applies a rate of severity and estimates prepayment rates. Because of the limited historical trends for the collateral, multiple default scenarios were analyzed including scenarios that significantly elevate defaults over the next 12—18 months. Based on the results of the analysis, the Corporation’s management has concluded that there are currently no credit-related losses in its non-agency CMO portfolio.

The following table provides information relating to the Corporation’s non-agency CMOs as of September 30, 2011:


													Subordination Data
					Credit Rating				Credit Support %				Delinquency %												% Total Delinquency		Original % LTV		Original Credit Score
Security	Original Year		Book Value		S&P		Moody’s		Original		Current		. 30 Day		60 Day		90 Day		% Foreclosure		% OREO		% Bankruptcy		% Total Delinquency		Original % LTV		Original Credit Score
1		2003	$	2,991		AAA		n/a		2.5		5.9		0.9		0.3		0.8		0.7		0.0		0.5		3.2		51.9		738
2		2003		2,103		AAA		n/a		4.3		16.6		1.9		1.3		3.5		3.4		0.6		1.5		12.1		55.9		710
3		2003		1,403		AAA		n/a		2.0		6.6		0.9		0.0		1.1		2.6		0.2		0.5		5.3		47.2		741
4		2003		1,406		AAA		n/a		2.7		18.4		1.2		0.0		0.9		3.1		0.0		1.4		6.5		49.9		n/a
5		2004		3,604		AAA		Baa2		7.0		20.0		1.2		0.4		2.5		6.9		1.1		1.1		13.2		55.1		689
6		2004		2,514		AA+		n/a		5.3		10.4		0.0		0.5		3.7		2.4		0.0		1.0		7.6		46.1		734
7		2004		1,155		n/a		A1		2.5		8.7		0.0		0.0		0.0		6.3		0.0		0.0		6.3		55.6		736
8		2004		1,793		AAA		Baa2		4.4		9.4		1.2		0.8		0.7		2.5		0.5		1.5		7.2		55.0		733
9		2005		6,345		CCC		Caa1		5.1		4.6		3.8		1.2		10.5		7.7		1.2		2.2		26.6		65.3		706
10		2005		3,692		CC		B3		4.7		2.5		3.5		1.7		3.1		10.0		1.2		1.2		20.7		65.6		726

			$	27,006						4.1		9.3																57.1		718

FEDERAL HOME LOAN BANK STOCK

The Corporation is a member of the Federal Home Loan Bank (FHLB) of Pittsburgh. The FHLB requires members to purchase and hold a specified minimum level of FHLB stock based upon their level of borrowings, collateral balances and participation in other programs offered by the FHLB. Stock in the FHLB is non-marketable and is redeemable at the discretion of the FHLB. Both cash and stock dividends on FHLB stock are reported as income.

Members do not purchase stock in the FHLB for the same reasons that traditional equity investors acquire stock in an investor-owned enterprise. Rather, members purchase stock to obtain access to the low-cost products and services offered by the FHLB. Unlike equity securities of traditional for-profit enterprises, the stock of FHLB does not provide its holders with an opportunity for capital appreciation because, by regulation, FHLB stock can only be purchased, redeemed and transferred at par value.

At September 30, 2011 and December 31, 2010, the Corporation’s FHLB stock totaled $24,754 and $26,564, respectively, and is included in other assets on the balance sheet. The Corporation accounts for the stock in accordance with ASC Topic 325, which requires the investment to be carried at cost and evaluated for impairment based on the ultimate recoverability of the par value.

The Corporation periodically evaluates its FHLB investment for possible impairment based on, among other things, the capital adequacy of the FHLB and its overall financial condition. The Federal Housing Finance Agency, the regulator of the FHLB, requires it to maintain a total capital-to-assets ratio of at least 4.0%. At June 30, 2011, the FHLB’s capital ratio of 7.9% exceeded the regulatory requirement. Failure by the FHLB to meet this regulatory capital requirement would require an in-depth analysis of other factors including:

•

the member’s ability to access liquidity from the FHLB;

•

the member’s funding cost advantage with the FHLB compared to alternative sources of funds;

•

a decline in the market value of FHLB’s net assets relative to book value which may or may not affect future financial performance or cash flow;

•

the FHLB’s ability to obtain credit and source liquidity, for which one indicator is the credit rating of the FHLB;

•

the FHLB’s commitment to make payments taking into account its ability to meet statutory and regulatory payment obligations and the level of such payments in relation to the FHLB’s operating performance; and

•

the prospects of amendments to laws that affect the rights and obligations of the FHLB.

At September 30, 2011, the Corporation believes its holdings in the stock are ultimately recoverable at par value and, therefore, determined that FHLB stock was not other-than-temporarily impaired. In addition, the Corporation has ample liquidity and does not require redemption of its FHLB stock in the foreseeable future.

LOANS

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


	September 30, 2011		December 31, 2010
Commercial	$	3,819,806	$	3,337,992
Direct installment		1,033,688		1,002,725
Residential mortgages		673,598		622,242
Indirect installment		538,366		514,369
Consumer lines of credit		580,968		493,881
Commercial leases		103,764		79,429
Other		38,350		37,517

	$	6,788,540	$	6,088,155

Commercial is comprised of both commercial real estate loans and commercial and industrial loans. 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 mortgage loans for non-commercial properties. Indirect installment is comprised of loans written by third parties, primarily automobile loans. Consumer lines of credit includes home equity lines of credit (HELOC) and consumer lines of credit that are either unsecured or secured by collateral other than home equity. Commercial leases consist of loans for new or used equipment. Other is primarily comprised of mezzanine loans and student loans.

Unearned income on loans was $45,145 and $42,183 at September 30, 2011 and December 31, 2010, respectively.

The loan portfolio consists principally of loans to individuals and small- and medium-sized businesses within the Corporation’s primary market area of Pennsylvania and northeastern Ohio. The portfolio also includes commercial loans in Florida, which totaled $176,578 or 2.6% of total loans as of September 30, 2011 compared to $195,281 or 3.2% of total loans as of December 31, 2010. In addition, the portfolio contains consumer finance loans to individuals in Pennsylvania, Ohio, Tennessee and Kentucky, which totaled $161,832 or 2.4% of total loans as of September 30, 2011 compared to $162,805 or 2.7% of total loans as of December 31, 2010.

The composition of the Corporation’s commercial loan portfolio in Florida consisted of the following as of September 30, 2011: unimproved residential land (7.5%), unimproved commercial land (18.3%), improved land (2.5%), income producing commercial real estate (51.2%), residential construction (6.4%), commercial construction (12.8%) and owner-occupied (1.3%). The weighted average loan-to-value ratio for this portfolio based on most recent appraisals was 81.5% as of September 30, 2011.

The majority of the Corporation’s loan portfolio consists of commercial loans. As of September 30, 2011 and December 31, 2010, commercial real estate loans were $2,310,497 and $2,115,492, or 34.0% and 34.7% of total loans, respectively. As of September 30, 2011, approximately 47.0% of the commercial real estate loans were owner-occupied, while the remaining 53.0% were non-owner-occupied. As of September 30, 2011 and December 31, 2010, the Corporation had commercial construction loans of $199,649 and $202,018, respectively, representing 2.9% and 3.3%, respectively, of total loans for those periods.

CREDIT QUALITY

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

Non-performing loans include non-accrual loans and non-performing 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 generally when principal or interest is due and has remained unpaid for 90 to 180 days depending on the loan type. When a loan is placed on non-accrual status, all unpaid interest recognized in the current year is reversed and interest accrued in prior years is charged to the allowance for loan losses. Non-accrual loans may not be restored to accrual status until all delinquent principal and interest have been paid and the ultimate collectibility of 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.

Following is a summary of non-performing assets:


	September 30, 2011		December 31, 2010
Non-accrual loans	$	113,416	$	115,589
Troubled debt restructurings		12,017		19,705

Total non-performing loans		125,433		135,294
Other real estate owned (OREO)		34,640		32,702

Total non-performing loans and OREO		160,073		167,996
Non-performing investments		5,685		5,974

Total non-performing assets	$	165,758	$	173,970


	September 30, 2011			December 31, 2010
Asset quality ratios:
Non-performing loans as a percent of total loans		1.85	%		2.22	%
Non-performing loans + OREO as a percent of total loans + OREO		2.35	%		2.74	%
Non-performing assets as a percent of total assets		1.67	%		1.94	%

Following is an age analysis of the Corporation’s past due loans, by class:


	30-89 Days Past Due		>90 Days Past Due and Still Accruing		Non- Accrual		Total Past Due		Current		Total Loans
September 30, 2011
Commercial	$	17,139	$	9,604	$	103,101	$	129,844	$	3,689,962	$	3,819,806
Direct installment		8,692		2,709		3,435		14,836		1,018,852		1,033,688
Residential mortgages		11,593		3,723		3,577		18,893		654,705		673,598
Indirect installment		3,668		300		899		4,867		533,499		538,366
Consumer lines of credit		2,303		260		1,054		3,617		577,351		580,968
Commercial leases		1,021		—		1,350		2,371		101,393		103,764
Other		1		14		—		15		38,335		38,350

	$	44,417	$	16,610	$	113,416	$	174,443	$	6,614,097	$	6,788,540

December 31, 2010
Commercial	$	17,101	$	3,020	$	106,724	$	126,845	$	3,211,147	$	3,337,992
Direct installment		8,603		2,496		3,285		14,384		988,341		1,002,725
Residential mortgages		9,127		2,144		3,272		14,543		607,699		622,242
Indirect installment		5,659		394		750		6,803		507,566		514,369
Consumer lines of credit		1,581		571		588		2,740		491,141		493,881
Commercial leases		1,551		9		970		2,530		76,899		79,429
Other		—		—		—		—		37,517		37,517

	$	43,622	$	8,634	$	115,589	$	167,845	$	5,920,310	$	6,088,155

The Corporation utilizes the following categories to monitor credit quality within its commercial loan portfolio:



Pass		in general, the condition of the borrower and the performance of the loan is satisfactory or better

Special Mention		in general, the condition of the borrower has deteriorated although the loan performs as agreed

Substandard		in general, the condition of the borrower has significantly deteriorated and the performance of the loan could further deteriorate if deficiencies are not corrected

Doubtful		in general, the condition of the borrower has significantly deteriorated and the collection in full of both principal and interest is highly questionable or improbable

The use of these internally assigned credit quality categories within the commercial loan portfolio permits management’s use of migration and roll rate analysis to estimate a quantitative portion of credit risk. The Corporation’s internal credit risk grading system is based on past experiences with similarly graded loans and conforms with regulatory categories. In general, loan risk ratings within each category are reviewed on an ongoing basis according to the Corporation’s policy for each class of loans. Each quarter, management analyzes the resulting ratings, as well as other external statistics and factors such as delinquency, to track the migration performance of the commercial loan portfolio. Loans that migrate toward the Pass credit category or within the Pass credit category generally have a lower risk of loss and therefore a lower risk factor compared to loans that migrate toward the Substandard or Doubtful credit categories which generally have a higher risk of loss and therefore a higher risk factor applied to those related loan balances.

Following is a table showing commercial loans by credit quality category:


	Commercial Loan Credit Quality Categories
	Pass		Special Mention		Substandard		Doubtful		Total
September 30, 2011
Commercial – PA	$	3,319,082	$	133,017	$	185,777	$	5,352	$	3,643,228
Commercial – FL		79,010		16,912		80,656		—		176,578
Commercial leases		98,685		3,195		1,884		—		103,764

	$	3,496,777	$	153,124	$	268,317	$	5,352	$	3,923,570

December 31, 2010
Commercial – PA	$	2,887,682	$	80,409	$	170,714	$	3,906	$	3,142,711
Commercial – FL		83,444		38,664		73,173		—		195,281
Commercial leases		77,945		505		979		—		79,429

	$	3,049,071	$	119,578	$	244,866	$	3,906	$	3,417,421

The Corporation uses payment status and delinquency migration analysis within the consumer and other loan classes to enable management to estimate a quantitative portion of credit risk. Each month, management analyzes payment and volume activity, as well as other external statistics and factors such as unemployment, to determine how consumer loans are performing.

Following is a table showing consumer and other loans by payment activity:


	Consumer Loan Credit Quality by Payment Status
	Performing		Non-Performing		Total
September 30, 2011
Direct installment	$	1,025,841	$	7,847	$	1,033,688
Residential mortgages		664,190		9,408		673,598
Indirect installment		537,399		967		538,366
Consumer lines of credit		579,820		1,148		580,968
Other		38,350		—		38,350

December 31, 2010
Direct installment	$	991,921	$	10,804	$	1,002,725
Residential mortgages		608,642		13,600		622,242
Indirect installment		513,619		750		514,369
Consumer lines of credit		493,075		806		493,881
Other		37,517		—		37,517

Loans are designated as impaired when, in the opinion of management, based on current information and events, the collection of principal and interest in accordance with the loan contract is doubtful. Typically, the Corporation does not consider loans for impairment unless a sustained period of delinquency (i.e. 90-plus days) is noted or there are subsequent events that impact repayment probability (i.e. negative financial trends, bankruptcy filings, imminent foreclosure proceedings, etc.). Impairment is evaluated in total for smaller-balance loans of a similar nature and on an individual loan basis for other loans. If a loan is impaired, a specific valuation allowance is allocated, if necessary, so that the loan is reported net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Consistent with the Corporation’s existing method of income recognition for loans, interest on impaired loans, except those classified as non-accrual, is recognized as income using the accrual method. Impaired loans, or portions thereof, are charged off when deemed uncollectible.

Following is a summary of information pertaining to loans considered to be impaired, by class of loans:


	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
At or For the Nine Months Ended September 30, 2011
With no specific allowance recorded:
Commercial	$	69,982	$	92,343	$	—	$	67,551	$	347
Direct installment		7,847		8,091		—		9,894		244
Residential mortgages		9,408		9,570		—		12,411		208
Indirect installment		967		1,062		—		971		8
Consumer lines of credit		1,148		1,148		—		1,108		7
Commercial leases		1,350		1,350		—		1,045		—
Other		—		—		—		—		—

With a specific allowance recorded:
Commercial		35,681		38,471		9,012		34,654		65
Direct installment		—		—		—		—		—
Residential mortgages		—		—		—		—		—
Indirect installment		—		—		—		—		—
Consumer lines of credit		—		—		—		—		—
Commercial leases		—		—		—		—		—
Other		—		—		—		—		—

Total:
Commercial		105,663		130,814		9,012		102,205		412
Direct installment		7,847		8,091		—		9,894		244
Residential mortgages		9,408		9,570		—		12,441		208
Indirect installment		967		1,062		—		971		8
Consumer lines of credit		1,148		1,148		—		1,108		7
Commercial leases		1,350		1,350		—		1,045		—
Other		—		—		—		—		—


	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
At or For the Year Ended December 31, 2010
With no specific allowance recorded:
Commercial	$	70,832	$	95,725	$	—	$	81,394	$	98
Direct installment		4,542		4,669		—		5,613		77
Residential mortgages		8,032		8,055		—		8,233		260
Indirect installment		750		1,930		—		833		—
Consumer lines of credit		589		604		—		584		—
Commercial leases		979		979		—		749		—
Other		—		—		—		—		—

With a specific allowance recorded:
Commercial		37,532		39,250		10,313		38,070		—
Direct installment		6,262		6,340		626		4,503		275
Residential mortgages		5,568		5,568		557		4,252		246
Indirect installment		—		—		—		—		—
Consumer lines of credit		217		217		22		138		9
Commercial leases		—		—		—		—		—
Other		—		—		—		—		—

Total:
Commercial		108,364		134,975		10,313		119,464		98
Direct installment		10,804		11,009		626		10,116		352
Residential mortgages		13,600		13,623		557		12,485		506
Indirect installment		750		1,930		—		833		—
Consumer lines of credit		806		821		22		722		9
Commercial leases		979		979		—		749		—
Other		—		—		—		—		—

Troubled Debt Restructurings

TDRs are loans whose contractual terms have been modified in a manner that grants a concession to a borrower experiencing financial difficulties. TDRs typically result from loss mitigation activities and could include the extension of a maturity date, interest rate reduction, principal forgiveness, deferral or decrease in payments for a period of time and other actions intended to minimize the economic loss and to avoid foreclosure or repossession of collateral.

Following is a summary of the composition of total TDRs:


	September 30, 2011		December 31, 2010
Accruing:
Performing	$	15,415	$	—
Non-performing		12,017		19,705
Non-accrual		12,076		19,627

	$	39,508	$	39,332

TDRs that are accruing and performing include acquired loans that met the criteria for non-accrual of interest prior to acquisition for which the Corporation can reasonably estimate the timing and amount of the expected cash flows on such loans and for which the Corporation expects to fully collect the new carrying value of the loans. During the quarter ended September 30, 2011, the Corporation returned to performing status $9,623 in restructured loans secured by residential mortgages that have consistently met their modified obligations for an extended period of time. TDRs that are accruing and non-performing are comprised of loans that have not demonstrated a consistent repayment pattern for more than six months. TDRs that are on non-accrual are comprised of loans that have been 90 days or more past

due at some point in time. These loans are not placed on accruing status until all delinquent principal and interest have been paid and the ultimate collectibility of the remaining principal and interest is reasonably assured as evidenced by a period of satisfactory performance of six months. Some loan modifications classified as TDRs may not ultimately result in the full collection of principal and interest, as modified, and result in potential incremental losses which are factored into the allowance for loan losses estimate.

Excluding purchased impaired loans, commercial loans whose terms have been modified in a TDR are generally placed on non-accrual, individually analyzed and measured for estimated impairment based on the fair value of the underlying collateral. The Corporation’s allowance for loan losses included specific reserves for commercial TDRs of $146 and $515 at September 30, 2011 and December 31, 2010, respectively. Upon default, the amount of the recorded investment in the TDR in excess of the fair value of the collateral less estimated selling costs is generally considered a confirmed loss and is charged-off against the allowance for loan losses.

All other classes of loans, which are primarily secured by residential properties, whose terms have been modified in a TDR are pooled and measured for estimated impairment based on the expected net present value of the estimated future cash flows of the pool. The Corporation’s allowance for loan losses included pooled reserves for these classes of loans of $916 and $1,205 at September 30, 2011 and December 31, 2010, respectively. Upon default of an individual loan, the Corporation’s charge-off policy is followed accordingly for that class of loan.

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


	Three Months Ended September 30, 2011						Nine Months Ended September 30, 2011
	Number of Contracts		Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Number of Contracts		Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment
Commercial		13	$	1,424	$	1,368		17	$	4,728	$	4,672
Direct installment		106		1,182		1,159		258		3,019		2,961
Residential mortgages		19		1,106		1,106		72		5,043		5,043
Indirect installment		5		4		4		16		41		41
Consumer lines of credit		2		3		2		2		3		2
Commercial leases		—		—		—		—		—		—
Other		—		—		—		—		—		—

		145	$	3,719	$	3,639		365	$	12,834	$	12,719

Following is a summary of TDRs, by class of loans, for which there was a payment default during the periods indicated. Default occurs when a loan is 90 days or more past due and is within 12 months of restructuring.


	Three Months Ended September 30, 2011 (1)				Nine Months Ended September 30, 2011 (1)
	Number of Contracts		Recorded Investment		Number of Contracts		Recorded Investment
Commercial		1	$	240		4	$	2,390
Direct installment		—		—		18		301
Residential mortgages		—		—		2		20
Indirect installment		—		—		2		4
Consumer lines of credit		—		—		—		—
Commercial leases		—		—		—		—
Other		—		—		—		—

		1	$	240		26	$	2,715

(1)	Excludes loans that were either charged-off or cured by period end. The recorded investment is as of September 30, 2011.

ALLOWANCE FOR LOAN LOSSES

The allowance for loan 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 through both periodic provisions charged to income and recoveries of losses previously incurred. Reductions to the allowance occur as loans are charged off. Management evaluates the adequacy of the allowance at least quarterly, and in doing so relies on various factors including, but not limited to, assessment of historical loss experience, delinquency and non-accrual trends, portfolio growth, underlying collateral coverage and current economic conditions. This evaluation is subjective and requires material estimates that may change over time.

The components of the allowance for loan losses represent estimates based upon ASC Topic 450, Contingencies, and ASC Topic 310, Receivables. ASC Topic 450 applies to homogeneous loan pools such as consumer installment, residential mortgages and consumer lines of credit, as well as commercial loans that are not individually evaluated for impairment under ASC Topic 310. ASC Topic 310 is applied to commercial loans that are individually evaluated for impairment.

Under ASC Topic 310, a loan is impaired when, based upon current information and events, it is probable that the loan will not be repaid according to its original contractual terms, including both principal and interest. Management performs individual assessments of impaired loans to determine the existence of loss exposure and, where applicable, the extent of loss exposure based upon the present value of expected future cash flows available to pay the loan, or based upon the fair value of the collateral less estimated selling costs where a loan is collateral dependent.

In estimating loan loss contingencies, management considers numerous factors, including historical charge-off rates and subsequent recoveries. Management also considers, but is not limited to, qualitative factors that influence the Corporation’s credit quality, such as delinquency and non-performing loan trends, changes in loan underwriting guidelines and credit policies, as well as the results of internal loan reviews. Finally, management considers the impact of changes in current local and regional economic conditions in the markets that the Corporation serves. 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 reserves include uncertainty of the labor markets in the regions the Corporation serves as well as the impact of unemployment trends in these areas, which have fluctuated in response to the recent economic cycle. Homogeneous loan pools are evaluated using similar criteria that are based upon historical loss rates for various loan types. Historical loss rates are adjusted to incorporate changes in existing conditions that may impact, both positively or negatively, the degree to which these loss histories may vary. This determination inherently involves a high degree of uncertainty and considers current risk factors that may not have occurred in the Corporation’s historical loan loss experience.

At September 30, 2011 and December 31, 2010, there were $16,372 and $3,626 of loans, respectively, that were impaired loans acquired with no associated allowance for loan losses as they were accounted for in accordance with ASC Topic 310-30, Receivables – Loans and Debt Securities Acquired with Deteriorated Credit Quality.

Following is a summary of changes in the allowance for loan losses:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
Balance at beginning of period	$	109,224		$	114,040		$	106,120		$	104,655
Charge-offs		(9,729	)		(10,210	)		(24,632	)		(26,495	)
Recoveries		745			484			1,973			1,951

Net charge-offs		(8,984	)		(9,726	)		(22,659	)		(24,544	)
Provision for loan losses		8,573			12,313			25,352			36,516

Balance at end of period	$	108,813		$	116,627		$	108,813		$	116,627

Allowance for loan losses to:
Total loans, net of unearned income								1.60	%		1.94	%
Non-performing loans								86.75	%		75.54	%

Following is a summary of changes in the allowance for loan losses by loan class for the three months ended September 30, 2011:


	Balance at Beginning of Period		Charge-Offs			Recoveries		Provision for Loan Losses		Balance at End of Period
Commercial	$	77,958	$	(5,744	)	$	250	$	4,957	$	77,421
Direct installment		14,915		(1,920	)		212		1,371		14,578
Residential mortgages		4,480		(233	)		14		95		4,356
Indirect installment		5,705		(775	)		121		594		5,645
Consumer lines of credit		4,796		(285	)		97		774		5,382
Commercial leases		1,273		(173	)		28		289		1,417
Other		97		(599	)		23		493		14

	$	109,224	$	(9,729	)	$	745	$	8,573	$	108,813

Following is a summary of changes in the allowance for loan losses by loan class for the nine months ended September 30, 2011:


	Balance at Beginning of Period		Charge-Offs			Recoveries		Provision for Loan Losses		Balance at End of Period
Commercial	$	74,606	$	(12,772	)	$	579	$	15,008	$	77,421
Direct installment		14,941		(6,422	)		646		5,413		14,578
Residential mortgages		4,578		(640	)		45		373		4,356
Indirect installment		5,941		(2,312	)		415		1,601		5,645
Consumer lines of credit		4,743		(1,103	)		184		1,558		5,382
Commercial leases		1,070		(378	)		58		667		1,417
Other		241		(1,005	)		46		732		14

	$	106,120	$	(24,632	)	$	1,973	$	25,352	$	108,813

Following is a summary of the individual and collective allowance for loan losses and corresponding loan balances by class as of September 30, 2011:


	Allowance				Loans Outstanding
	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Loans		Individually Evaluated for Impairment		Collectively Evaluated for Impairment
Commercial	$	9,012	$	68,409	$	3,819,806	$	120,825	$	3,698,981
Direct installment		—		14,578		1,033,688		—		1,033,688
Residential mortgages		—		4,356		673,598		—		673,598
Indirect installment		—		5,645		538,366		—		538,366
Consumer lines of credit		—		5,382		580,968		—		580,968
Commercial leases		—		1,417		103,764		—		103,764
Other		—		14		38,350		—		38,350

	$	9,012	$	99,801	$	6,788,540	$	120,825	$	6,667,715

BORROWINGS

Following is a summary of short-term borrowings:


	September 30, 2011		December 31, 2010
Securities sold under repurchase agreements	$	672,866	$	611,902
Subordinated notes		134,477		131,458
Other short-term borrowings		10,000		10,243

	$	817,343	$	753,603

Securities sold under repurchase agreements is comprised of customer repurchase agreements, which are borrowings from commercial customers of FNBPA which are generally renewable on a daily basis. Securities are pledged to these customers in an amount equal to the outstanding balance.

Following is a summary of long-term debt:


	September 30, 2011		December 31, 2010
Federal Home Loan Bank advances	$	136,051	$	118,700
Subordinated notes		77,013		72,745
Other subordinated debt		9,116		—
Convertible debt		608		613

	$	222,788	$	192,058

The Corporation’s banking affiliate has available credit with the FHLB of $2,029,170 of which $136,051 was used as of September 30, 2011. These advances are secured by loans collateralized by 1-4 family mortgages and FHLB stock and are scheduled to mature in various amounts periodically through the year 2019. Effective interest rates paid on these advances range from 0.99% to 4.19% for the nine months ended September 30, 2011 and 0.99% to 4.79% for the year ended December 31, 2010.

JUNIOR SUBORDINATED DEBT

The Corporation has four unconsolidated subsidiary trusts (collectively, the Trusts): F.N.B. Statutory Trust I, F.N.B. Statutory Trust II, Omega Financial Capital Trust I and Sun Bancorp Statutory Trust I. One hundred percent of the common equity of each Trust is owned by the Corporation. The Trusts were formed for the purpose of issuing Corporation-obligated mandatorily redeemable capital securities (TPS) to third-party investors. The proceeds from the sale of TPS and the issuance of common equity by the Trusts were invested in junior subordinated debt securities (subordinated debt) issued by the Corporation, which are the sole assets of each Trust. Since third-party investors are the primary beneficiaries, the Trusts are not consolidated in the Corporation’s financial statements. The Trusts pay dividends on the TPS at the same rate as the distributions paid by the Corporation on the junior subordinated debt held by the Trusts. Omega Financial Capital Trust I and Sun Bancorp Statutory Trust I were acquired as a result of a previous acquisition.

Distributions on the subordinated debt issued to the Trusts are recorded as interest expense by the Corporation. The TPS are subject to mandatory redemption, in whole or in part, upon repayment of the subordinated debt. The TPS are eligible for redemption, at any time, at the Corporation’s discretion. The subordinated debt, net of the Corporation’s investment in the Trusts, qualifies as Tier 1 capital under the Board of Governors of the Federal Reserve System (FRB) guidelines. The Corporation has entered into agreements which, when taken collectively, fully and unconditionally guarantee the obligations under the TPS subject to the terms of each of the guarantees.

The following table provides information relating to the Trusts as of September 30, 2011:


	F.N.B. Statutory Trust I			F.N.B. Statutory Trust II			Omega Financial Capital Trust I			Sun Bancorp Statutory Trust I
Trust preferred securities	$	125,000		$	21,500		$	36,000		$	16,500
Common securities		3,866			665			1,114			511
Junior subordinated debt		128,866			22,165			35,912			17,011
Stated maturity date		3/31/33			6/15/36			10/18/34			2/22/31
Interest rate		3.50	%		2.00	%		2.44	%		10.20	%
		variable; LIBOR plus 325 basis points			variable; LIBOR plus 165 basis points			variable; LIBOR plus 219 basis points

DERIVATIVE INSTRUMENTS

The Corporation is exposed to certain risks arising from both its business operations and economic conditions. The Corporation principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Corporation manages economic risks, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and duration of its assets and liabilities. The Corporation’s existing interest rate derivatives result from a service provided to certain qualifying customers. The Corporation manages its derivative instruments in order to minimize its net risk exposure resulting from such transactions.

The Corporation periodically enters into interest rate swap agreements to meet the financing, interest rate and equity risk management needs of its commercial loan customers. These agreements provide the customer the ability to convert from variable to fixed interest rates. The Corporation then enters into positions with a derivative counterparty in order to offset its exposure on the fixed components of the customer agreements. These agreements meet the definition of derivatives, but are not designated as hedging instruments under ASC Topic 815, Derivatives and Hedging. The interest rate swap agreement with the loan customer and with the counterparty are reported at fair value in other assets and other liabilities on the consolidated balance sheet with any resulting gain or loss recorded in current period earnings as other income.

At September 30, 2011, the Corporation was party to 183 swaps with customers with notional amounts totaling approximately $620,287 and 183 swaps with derivative counterparties with notional amounts totaling approximately $620,287. The following table presents the fair value of the Corporation’s derivative financial instruments as well as their classification on the balance sheet:

Balance
Sheet
Location

September 30,
2011

December 31,

Large Accelerated Filer

Accelerated Filer

Non-accelerated Filer

Smaller reporting company