Edgar Filing: FNB CORP/FL/

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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 June 30, 2012

¨	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)

Registrant’s telephone number, including area code: 724-981-6000

(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 July 31, 2012
Common Stock, $0.01 Par Value		139,714,572 Shares

F.N.B. CORPORATION

FORM 10-Q

June 30, 2012

INDEX


		PAGE

PART I – FINANCIAL INFORMATION

Item 1.	Financial Statements

	Consolidated Balance Sheets		2
	Consolidated Statements of Comprehensive 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		50

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		71

Item 4.	Controls and Procedures		71

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings		72

Item 1A.	Risk Factors		72

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		73

Item 3.	Defaults Upon Senior Securities		73

Item 4.	Mine Safety Disclosures		73

Item 5.	Other Information		73

Item 6.	Exhibits		73

Signatures			74

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

F.N.B. CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

Dollars in thousands, except par value


	June 30,			December 31,
	2012			2011
	(Unaudited)
Assets
Cash and due from banks	$	197,317		$	197,349
Interest bearing deposits with banks		25,441			11,604

Cash and Cash Equivalents		222,758			208,953
Securities available for sale		1,071,924			640,571
Securities held to maturity (fair value of $1,240,956 and $952,033)		1,203,240			917,212
Residential mortgage loans held for sale		17,000			14,275
Loans, net of unearned income of $52,114 and $47,110		7,860,856			6,856,667
Allowance for loan losses		(101,647	)		(100,662	)

Net Loans		7,759,209			6,756,005
Premises and equipment, net		148,806			130,043
Goodwill		673,094			568,462
Core deposit and other intangible assets, net		42,337			30,953
Bank owned life insurance		237,871			208,927
Other assets		374,500			311,082

Total Assets	$	11,750,739		$	9,786,483


Liabilities
Deposits:
Non-interest bearing demand	$	1,614,476		$	1,340,465
Savings and NOW		4,686,599			3,790,863
Certificates and other time deposits		2,685,225			2,158,440

Total Deposits		8,986,300			7,289,768
Other liabilities		162,786			143,239
Short-term borrowings		934,510			851,294
Long-term debt		90,654			88,016
Junior subordinated debt		203,993			203,967

Total Liabilities		10,378,243			8,576,284

Stockholders’ Equity
Common stock—$0.01 par value
Authorized – 500,000,000 shares
Issued – 140,080,637 and 127,436,261 shares		1,396			1,268
Additional paid-in capital		1,367,855			1,224,572
Retained earnings		49,485			32,925
Accumulated other comprehensive loss		(41,361	)		(45,148	)
Treasury stock – 371,335 and 215,502 shares at cost		(4,879	)		(3,418	)

Total Stockholders’ Equity		1,372,496			1,210,199

Total Liabilities and Stockholders’ Equity	$	11,750,739		$	9,786,483

See accompanying Notes to Consolidated Financial Statements

F.N.B. CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Dollars in thousands, except per share data

Unaudited


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2012		2011		2012		2011
Interest Income
Loans, including fees	$	95,037	$	85,189	$	188,175	$	169,899
Securities:
Taxable		12,515		10,975		24,552		21,489
Nontaxable		1,680		1,882		3,401		3,829
Dividends		14		12		349		131
Other		39		97		95		178

Total Interest Income		109,285		98,155		216,572		195,526
Interest Expense
Deposits		10,613		14,054		22,571		28,649
Short-term borrowings		1,335		1,634		2,779		3,467
Long-term debt		889		1,655		1,842		3,283
Junior subordinated debt		1,967		2,118		3,978		4,150

Total Interest Expense		14,804		19,461		31,170		39,549

Net Interest Income		94,481		78,694		185,402		155,977
Provision for loan losses		7,027		8,551		13,599		16,779

Net Interest Income After Provision for Loan Losses		87,454		70,143		171,803		139,198
Non-Interest Income
Service charges		17,588		15,666		34,753		30,001
Insurance commissions and fees		3,882		3,664		8,054		7,810
Securities commissions and fees		2,030		2,130		4,041		4,102
Trust fees		3,842		3,947		7,576		7,657
Net securities gains		260		38		368		92
Gain on sale of residential mortgage loans		711		376		1,520		1,143
Bank owned life insurance		1,579		1,372		3,138		2,604
Other		2,886		2,065		5,073		4,281

Total Non-Interest Income		32,778		29,258		64,523		57,690
Non-Interest Expense
Salaries and employee benefits		41,070		36,528		85,676		74,910
Net occupancy		6,178		5,060		12,784		10,970
Equipment		5,684		4,925		10,870		9,400
Amortization of intangibles		2,369		1,805		4,650		3,601
Outside services		7,310		5,377		13,677		10,577
FDIC insurance		2,187		1,870		4,158		4,589
State taxes		1,953		2,019		3,453		3,955
Merger related		317		161		7,311		4,307
Other		11,414		10,624		22,576		20,617

Total Non-Interest Expense		78,482		68,369		165,155		142,926

Income Before Income Taxes		41,750		31,032		71,171		53,962
Income taxes		12,620		8,670		20,459		14,425

Net Income	$	29,130	$	22,362	$	50,712	$	39,537

Net Income per Share – Basic	$	0.21	$	0.18	$	0.36	$	0.32
Net Income per Share – Diluted		0.21		0.18		0.36		0.32
Cash Dividends per Share		0.12		0.12		0.24		0.24
Comprehensive Income	$	31,504	$	25,325	$	54,499	$	42,553

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


	Common Stock		Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Loss			Treasury Stock			Total
Balance at January 1, 2012	$	1,268	$	1,224,572		$	32,925		$	(45,148	)	$	(3,418	)	$	1,210,199
Net income							50,712									50,712
Change in other comprehensive income, net of tax										3,787						3,787
Common stock dividends ($0.24/share)							(33,775	)								(33,775	)
Issuance of common stock		128		140,704			(377	)					(1,461	)		138,994
Restricted stock compensation				2,206												2,206
Tax expense of stock-based compensation				373												373

Balance at June 30, 2012	$	1,396	$	1,367,855		$	49,485		$	(41,361	)	$	(4,879	)	$	1,372,496

Balance at January 1, 2011	$	1,143	$	1,094,713		$	6,564		$	(33,732	)	$	(2,564	)	$	1,066,124
Net income							39,537									39,537
Change in other comprehensive income, net of tax										3,016						3,016
Common stock dividends ($0.24/share)							(29,753	)								(29,753	)
Issuance of common stock		124		123,180									(848	)		122,456
Restricted stock compensation				1,832												1,832
Tax expense of stock-based compensation				(62	)											(62	)

Balance at June 30, 2011	$	1,267	$	1,219,663		$	16,348		$	(30,716	)	$	(3,412	)	$	1,203,150

See accompanying Notes to Consolidated Financial Statements

F.N.B. CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Dollars in thousands

Unaudited


	Six Months Ended June 30,
	2012			2011
Operating Activities
Net income	$	50,712		$	39,537
Adjustments to reconcile net income to net cash flows provided by operating activities:
Depreciation, amortization and accretion		13,644			11,867
Provision for loan losses		13,599			16,779
Deferred taxes		9,149			2,183
Net securities gains		(368	)		(92	)
Tax (benefit) expense of stock-based compensation		(373	)		62
Net change in:
Interest receivable		348			1,312
Interest payable		(3,153	)		(620	)
Trading securities		331,972			110,490
Residential mortgage loans held for sale		(2,726	)		2,778
Bank owned life insurance		(2,733	)		(638	)
Other, net		15,901			17,588

Net cash flows provided by operating activities		425,972			201,246

Investing Activities
Net change in loans		(107,351	)		(226,196	)
Securities available for sale:
Purchases		(610,783	)		(138,672	)
Sales		63,082			10,883
Maturities		259,981			162,150
Securities held to maturity:
Purchases		(427,756	)		(299,545	)
Sales		2,903			—
Maturities		150,069			117,207
Purchase of bank owned life insurance		(20,023	)		(26	)
Withdrawal/surrender of bank owned life insurance		20,701			—
Increase in premises and equipment		(8,104	)		(6,843	)
Net cash received in business combinations		203,538			23,375

Net cash flows used in investing activities		(473,743	)		(357,667	)

Financing Activities
Net change in:
Non-interest bearing deposits, savings and NOW accounts		368,857			288,317
Time deposits		(192,535	)		(79,887	)
Short-term borrowings		70,276			(50,414	)
Increase in long-term debt		13,591			37,592
Decrease in long-term debt		(169,618	)		(17,864	)
Increase (decrease) in junior subordinated debt		26			(95	)
Net proceeds from issuance of common stock		4,381			66,148
Tax benefit (expense) of stock-based compensation		373			(62	)
Cash dividends paid		(33,775	)		(29,752	)

Net cash flows provided by financing activities		61,576			213,983

Net Increase in Cash and Cash Equivalents		13,805			57,562
Cash and cash equivalents at beginning of period		208,953			131,571

Cash and Cash Equivalents at End of Period	$	222,758		$	189,133

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)

June 30, 2012

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, Ohio and West Virginia. 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 28, 2012.

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, 2012, the Corporation completed its acquisition of Parkvale Financial Corporation (Parkvale), a unitary savings and loan holding company based in Monroeville, Pennsylvania. On the acquisition date, Parkvale had $1,815,663 in assets, which included $937,350 in loans, and $1,505,671 in deposits. The acquisition, net of equity offering costs, was valued at $136,818 and resulted in the Corporation issuing 12,159,312 shares of its common stock in exchange for 5,582,846 shares of Parkvale common stock. The assets and liabilities of Parkvale were recorded on the Corporation’s balance sheet at their preliminary estimated fair values as of January 1, 2012, the acquisition date, and Parkvale’s results of operations have been included in the Corporation’s consolidated statement of comprehensive income since that date. Parkvale’s banking affiliate, Parkvale Bank, was merged into FNBPA on January 1, 2012. In conjunction with the completion of this acquisition, the Corporation fully repaid the $31,762 of Parkvale preferred stock previously issued to the U.S. Department of the Treasury (UST) under the Capital Purchase Program (CPP). The warrant issued by Parkvale to the UST has been converted into a warrant to purchase up to 819,640 shares of the Corporation’s common stock. The warrant expires December 23, 2018 and has an exercise price of $5.81. Based on a preliminary purchase price allocation, the Corporation recorded $104,142 in goodwill and $16,033 in core deposit intangible as a result of the acquisition. The Corporation has recorded estimates of the fair values of acquired assets and liabilities. The fair values for loans, goodwill and other intangible assets, other assets and other liabilities are provisional amounts based on third party valuations that are currently under review. None of the goodwill is deductible for income tax purposes.

During the first six months of 2012, the Corporation recorded merger and integration charges of $7,301 associated with the Parkvale acquisition.

The following table shows the calculation of the purchase price and the resulting goodwill relating to the Parkvale acquisition:


Fair value of stock issued, net of offering costs				$	136,818

Fair value of:
Tangible assets acquired	$	1,522,449
Core deposit and other intangible assets acquired		16,033
Liabilities assumed		(1,709,147	)
Net cash received in the acquisition		203,341

Fair value of net assets acquired					32,676

Goodwill recognized				$	104,142

The following table summarizes the fair value of the net assets that the Corporation acquired from Parkvale:


Assets
Cash and due from banks	$	203,538
Securities		486,186
Loans		919,609
Goodwill and other intangible assets		120,175
Accrued income and other assets		116,457

Total assets		1,845,965
Liabilities
Deposits		1,525,253
Borrowings		171,606
Accrued expenses and other liabilities		12,288

Total liabilities		1,709,147

Purchase price	$	136,818

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 $561,775 in deposits. The transaction, valued at $75,547, resulted in the Corporation paying $17,203 in cash and issuing 5,941,287 shares of its common stock in exchange for 1,719,978 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 comprehensive income since that date. CBI’s banking affiliate, Community Bank and Trust Company, was merged into FNBPA on January 1, 2011. Based on the purchase price allocation, the Corporation recorded $40,232 in goodwill and $4,785 in core deposit intangible as a result of the acquisition. None of the goodwill is deductible for income tax purposes.

NEW ACCOUNTING STANDARDS

Comprehensive Income

In June 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (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. Instead, in annual periods, companies are required to present components of net income and other comprehensive income and a total for comprehensive income in a single continuous statement of comprehensive income or two separate but consecutive statements. In interim periods, companies are required to present a total for comprehensive income in a single continuous statement of comprehensive income or two separate but consecutive statements. These requirements, which were applied retrospectively, were effective January 1, 2012. For interim periods, the Corporation has adopted the single continuous statement of comprehensive income approach. Adoption of this standard did not 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 (IFRS). 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, which were applied prospectively, were effective January 1, 2012. 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
June 30, 2012
U.S. Treasury and other U.S. government agencies and corporations	$	353,522	$	1,315	$	—		$	354,837
Residential mortgage-backed securities:
Agency mortgage-backed securities		321,892		7,451		(17	)		329,326
Agency collateralized mortgage obligations		306,733		3,784		—			310,517
Non-agency collateralized mortgage obligations		3,267		1		(14	)		3,254
States of the U.S. and political subdivisions		27,060		1,420		—			28,480
Collateralized debt obligations		34,556		178		(14,290	)		20,444
Other debt securities		23,826		564		(1,275	)		23,115

Total debt securities		1,070,856		14,713		(15,596	)		1,069,973
Equity securities		1,555		420		(24	)		1,951

	$	1,072,411	$	15,133	$	(15,620	)	$	1,071,924


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
December 31, 2011
U.S. Treasury and other U.S. government agencies and corporations	$	231,187	$	642	$	—		$	231,829
Residential mortgage-backed securities:
Agency mortgage-backed securities		166,758		4,853		—			171,611
Agency collateralized mortgage obligations		181,493		2,236		—			183,729
Non-agency collateralized mortgage obligations		31		—		(1	)		30
States of the U.S. and political subdivisions		38,509		1,841		—			40,350
Collateralized debt obligations		19,224		—		(13,226	)		5,998
Other debt securities		6,863		—		(1,666	)		5,197

Total debt securities		644,065		9,572		(14,893	)		638,744
Equity securities		1,593		257		(23	)		1,827

	$	645,658	$	9,829	$	(14,916	)	$	640,571

Securities Held To Maturity:


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
June 30, 2012
U.S. Treasury and other U.S. government agencies and corporations	$	4,399	$	413	$	—		$	4,812
Residential mortgage-backed securities:
Agency mortgage-backed securities		915,239		31,300		(16	)		946,523
Agency collateralized mortgage obligations		109,107		967		—			110,074
Non-agency collateralized mortgage obligations		17,814		97		(940	)		16,971
Commercial mortgage-backed securities		1,025		13		—			1,038
States of the U.S. and political subdivisions		153,525		6,127		(116	)		159,536
Collateralized debt obligations		808		—		(108	)		700
Other debt securities		1,323		—		(21	)		1,302

	$	1,203,240	$	38,917	$	(1,201	)	$	1,240,956

December 31, 2011
U.S. Treasury and other U.S. government agencies and corporations	$	4,523	$	360	$	—		$	4,883
Residential mortgage-backed securities:
Agency mortgage-backed securities		683,100		28,722		—			711,822
Agency collateralized mortgage obligations		54,319		573		(11	)		54,881
Non-agency collateralized mortgage obligations		24,348		143		(1,373	)		23,118
States of the U.S. and political subdivisions		147,748		6,877		—			154,625
Collateralized debt obligations		1,592		—		(314	)		1,278
Other debt securities		1,582		25		(181	)		1,426

	$	917,212	$	36,700	$	(1,879	)	$	952,033

The Corporation classifies securities as trading securities when management intends to sell such securities in the near term. Such securities are carried at fair value, with unrealized gains (losses) reflected through the consolidated statements of comprehensive income. The Corporation classified certain securities acquired in conjunction with the Parkvale and CBI acquisitions as trading securities. The Corporation both acquired and sold these trading securities during the quarters in which each of these acquisitions occurred. As of June 30, 2012 and December 31, 2011, the Corporation did not hold any trading securities.

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


	Three Months Ended June 30,					Six Months Ended June 30,
	2012			2011		2012			2011
Gross gains	$	447		$	38	$	796		$	288
Gross losses		(187	)		—		(428	)		(196	)

	$	260		$	38	$	368		$	92

As of June 30, 2012, 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	$	19,598	$	19,641	$	6,696	$	6,813
Due from one to five years		346,533		348,008		10,901		11,336
Due from five to ten years		16,700		17,734		47,742		49,836
Due after ten years		56,133		41,493		94,716		98,365

		438,964		426,876		160,055		166,350
Residential mortgage-backed securities:
Agency mortgage-backed securities		321,892		329,326		915,239		946,523
Agency collateralized mortgage obligations		306,733		310,517		109,107		110,074
Non-agency collateralized mortgage obligations		3,267		3,254		17,814		16,971
Commercial mortgage-backed securities		—		—		1,025		1,038
Equity securities		1,555		1,951		—		—

	$	1,072,411	$	1,071,924	$	1,203,240	$	1,240,956

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 June 30, 2012 and December 31, 2011, securities with a carrying value of $632,074 and $547,727, respectively, were pledged to secure public deposits, trust deposits and for other purposes as required by law. Securities with a carrying value of $780,941 and $680,212 at June 30, 2012 and December 31, 2011, 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					12 Months or More					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
June 30, 2012
Residential mortgage-backed securities:
Agency mortgage-backed securities	$	5,197	$	(17	)	$	—	$	—		$	5,197	$	(17	)
Non-agency collateralized mortgage obligations		3,226		(14	)		—		—			3,226		(14	)
Collateralized debt obligations		11,290		(1,130	)		5,242		(13,160	)		16,532		(14,290	)
Other debt securities		—		—			5,593		(1,275	)		5,593		(1,275	)
Equity securities		720		(24	)		—		—			720		(24	)

	$	20,433	$	(1,185	)	$	10,835	$	(14,435	)	$	31,268	$	(15,620	)


	Less than 12 Months					12 Months or More					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
December 31, 2011
Residential mortgage-backed securities:
Non-agency collateralized mortgage obligations	$	30	$	(1	)	$	—	$	—		$	30	$	(1	)
Collateralized debt obligations		—		—			5,998		(13,226	)		5,998		(13,226	)
Other debt securities		—		—			5,197		(1,666	)		5,197		(1,666	)
Equity securities		100		(9	)		659		(14	)		759		(23	)

	$	130	$	(10	)	$	11,854	$	(14,906	)	$	11,984	$	(14,916	)

Securities held to maturity:


	Less than 12 Months					12 Months or More					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
June 30, 2012
Residential mortgage-backed securities:
Agency mortgage-backed securities	$	20,407	$	(16	)	$	—	$	—		$	20,407	$	(16	)
Non-agency collateralized mortgage obligations		2,974		(18	)		3,917		(922	)		6,891		(940	)
States of the U.S. and political subdivisions		13,194		(116	)		—		—			13,194		(116	)
Collateralized debt obligations		—		—			700		(108	)		700		(108	)
Other debt securities		—		—			1,301		(21	)		1,301		(21	)

	$	36,575	$	(150	)	$	5,918	$	(1,051	)	$	42,493	$	(1,201	)

December 31, 2011
Residential mortgage-backed securities:
Agency collateralized mortgage obligations	$	12,911	$	(11	)	$	—	$	—		$	12,911	$	(11	)
Non-agency collateralized mortgage obligations		5,374		(64	)		4,351		(1,309	)		9,725		(1,373	)
Collateralized debt obligations		—		—			1,278		(314	)		1,278		(314	)
Other debt securities		—		—			1,144		(181	)		1,144		(181	)

	$	18,285	$	(75	)	$	6,773	$	(1,804	)	$	25,058	$	(1,879	)

As of June 30, 2012, securities with unrealized losses for less than 12 months included 4 investments in residential mortgage-backed securities (2 investments in agency mortgage-backed securities and 2 investments in non-agency collateralized mortgage obligations (CMOs)), 11 investments in states of the U.S. and political subdivisions, 11 investments in collateralized debt obligations (CDOs) and 2 investments in equity securities. Securities with unrealized losses of 12 months or more included 1 investment in a residential mortgage-backed security (non-agency CMO), 12 investments in CDOs, and 5 investments in other debt securities as of June 30, 2012. 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 comprehensive 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 325, Investments—Other. All other securities are required to be evaluated under ASC 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 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 TPS consists of 26 pooled issues and six single-issuer securities. One of the pooled issues is a senior tranche; the remaining 25 are mezzanine tranches. At June 30, 2012, the 26 pooled TPS had an estimated fair value of $21,144 while the single-issuer TPS had an estimated fair value of $7,899. The Corporation has concluded from the analysis performed at June 30, 2012 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 did not recognize any impairment losses on securities for the six months ended June 30, 2012 and 2011.

At June 30, 2012, all six single-issuer TPS are current in regards to their principal and interest payments. Of the 26 pooled TPS, four are accruing interest based on the coupon rate, fourteen are accreting income based on future expected cash flows and the remaining eight are on nonaccrual status. Income of $1,544 was recognized on pooled TPS for the first six months of 2012. Included in this amount was $34 recognized on two pooled TPS which were sold in the second quarter of 2012.

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


	Collateralized Debt Obligations			Residential Non-Agency CMOs			Total
For the Six Months Ended June 30, 2012
Beginning balance	$	(18,369	)	$	(29	)	$	(18,398	)
Loss where impairment was not previously recognized		—			—			—
Additional loss where impairment was previously recognized		—			—			—
Reduction due to credit impaired securities sold		1,056			29			1,085

Ending balance	$	(17,313	)	$	—		$	(17,313	)

For the Six Months Ended June 30, 2011
Beginning balance	$	(18,332	)	$	—		$	(18,332	)
Loss where impairment was not previously recognized		—			—			—
Additional loss where impairment was previously recognized		—			—			—
Reduction due to credit impaired securities sold		—			—			—

Ending balance	$	(18,332	)	$	—		$	(18,332	)

TPS continue to experience price volatility as the secondary market for such securities remains limited. Write-downs, when required, are based on an individual security’s 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 TPS portfolio each quarter to determine if additional write-downs are warranted.

The following table provides information relating to the Corporation’s TPS as of June 30, 2012:


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)		Excess Subordination (as a percent of current collateral) (3)
Pooled TPS:
P1	C1	$	5,500	$	2,355	$	906	$	(1,449	)	C		42		21		13		38		11		0.00
P2	C1		4,889		2,840		781		(2,059	)	C		43		17		15		37		17		0.00
P3	C1		5,561		4,218		1,060		(3,158	)	C		47		13		9		34		12		0.00
P4	C1		3,994		2,931		745		(2,186	)	C		51		15		9		39		13		0.00
P5	MEZ		474		296		214		(82	)	C		14		19		7		75		8		0.00
P6	B3		2,000		726		333		(393	)	C		19		29		13		48		10		0.00
P7	B1		3,028		2,386		652		(1,734	)	C		49		14		21		41		12		0.00
P8	C		5,048		756		238		(518	)	C		33		14		32		43		11		0.00
P9	C		507		461		60		(401	)	C		47		13		19		37		11		0.00
P10	C		2,010		788		84		(704	)	C		39		16		16		39		12		0.00
P11	A4L		2,000		645		169		(476	)	C		23		16		23		43		12		0.00

Total OTTI			35,011		18,402		5,242		(13,160	)			407		17		16		41		12

P12	SNR		760		808		700		(108	)	BBB		11		15		14		43		10		77.27
P13	C1		5,219		902		860		(42	)	C		42		21		13		38		11		0.00
P14	A2A		5,000		2,027		1,814		(213	)	B		43		17		15		37		17		45.76
P15	C1		4,781		1,104		912		(192	)	C		47		13		9		34		12		0.00
P16	C1		5,260		1,052		980		(72	)	C		51		15		9		39		13		0.00
P17	C1		5,190		870		706		(164	)	C		56		14		18		33		14		0.00
P18	C1		3,206		331		174		(157	)	C		42		19		12		22		13		0.00
P19	C		3,339		527		618		91		C		35		15		16		24		14		0.00
P20	B		2,069		577		549		(28	)	C		34		12		25		33		16		20.04
P21	B2		5,000		2,158		2,176		18		CCC		21		0		8		10		10		41.76
P22	B		4,019		906		832		(74	)	C		39		16		16		39		12		10.42
P23	A1		3,887		2,278		2,247		(31	)	BB-		50		21		7		40		12		48.61
P24	B		5,000		1,211		1,202		(9	)	C		17		18		6		7		11		0.00
P25	C1		5,531		1,162		1,014		(148	)	C		27		15		12		40		10		0.00
P26	C1		5,606		1,049		1,118		69		C		26		16		13		48		11		0.00

Total Not OTTI			63,867		16,962		15,902		(1,060	)			541		16		12		33		13

Total Pooled TPS		$	98,878	$	35,364	$	21,144	$	(14,220	)			948		16		14		37		12


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)	Excess Subordination (as a percent of current collateral) (3)
Single Issuer TPS:
S1		$	2,000	$	1,951	$	1,553	$	(398	)	BB		1
S2			2,000		1,917		1,427		(490	)	BBB		1
S3			1,000		954		1,005		51		BB-		1
S4			2,000		2,000		1,827		(173	)	BB-		1
S5			1,000		999		785		(214	)	BB		1
S6			1,300		1,323		1,302		(21	)	BB		1

Total Single Issuer TPS		$	9,300	$	9,144	$	7,899	$	(1,245	)			6

Total TPS		$	108,178	$	44,508	$	29,043	$	(15,465	)			954

(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.

States of the U.S. and Political Subdivisions

The Corporation’s municipal bond portfolio of $182,005 as of June 30, 2012 is highly rated with an average entity specific rating of AA and 99.4% of the portfolio rated A or better. General obligation bonds comprise 99.5% of the portfolio. Geographically, the municipal bonds support the Corporation’s footprint as 77.7% of the securities are from municipalities located throughout Pennsylvania. The average holding size of the securities in the municipal bond portfolio is $1,000. In addition to the strong stand-alone ratings, over 75% of the municipalities have purchased credit enhancement insurance to strengthen the creditworthiness of their issue.

Non-Agency CMOs

The Corporation purchased $161,151 of non-agency CMOs from 2003 through 2005. 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%. Since the time of these original purchases, all of which are classified as held to maturity, two holdings have been sold and one holding has paid off. The Corporation acquired and retained $60 of non-agency CMOs from the acquisition of Omega Financial Corporation in 2008 and acquired $42,810 and retained $4,238 of non-agency CMOs from the Parkvale acquisition. These acquired and retained securities are classified as available for sale. Non-agency CMOs have a book value of $21,081 at June 30, 2012. Paydowns during the first six months of 2012 amounted to $5,090, an annualized paydown rate of 35.5%. The credit support range at June 30, 2012 was 3.0% to 20.6%, due to paydowns, continued good credit performance and the sale of one non-agency CMO having a book value of $2,848 during the first quarter of 2012. National delinquencies, an early warning sign of potential default, have been increasing for the past five years. The slight upward trend of the rate of delinquencies throughout 2011 appears to have flattened off during the second quarter of 2012. All non-agency 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. Since 2008, the collateral performance on many of these types of securities has deteriorated, resulting in downgrades by the rating agencies. For the Corporation’s portfolio, six of the eleven non-agency CMOs have been downgraded since their original purchase date.

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 one non-agency CMO that incurred a credit-related loss in 2011 was sold in March 2012 and resulted in a net loss on sale of $226, which was recognized in first quarter 2012 earnings.

The following table provides information relating to the Corporation’s non-agency CMOs as of June 30, 2012:


													Subordination Data
					Credit Rating				Credit Support %				Delinquency %												%		Original		Original
Security	Original Year		Book Value (1)		S&P		Moody’s		Original		Current		. 30 Day		60 Day		90 Day		% Foreclosure		% OREO		% Bankruptcy		Total Delinquency		% LTV		Credit Score
1		2003	$	2,100		AAA		n/a		2.5		6.4		1.3		0.7		1.0		0.5		0.0		1.7		5.2		51.1		736
2		2003		1,616		AAA		n/a		4.3		17.2		3.3		0.9		3.2		4.2		0.7		1.7		14.0		55.1		709
3		2003		957		AAA		n/a		2.0		7.3		1.6		0.5		0.6		3.3		0.3		0.5		6.7		46.8		740
4		2003		974		AAA		n/a		2.7		19.9		0.0		1.1		0.0		2.9		0.4		2.0		6.4		48.3		n/a
5		2003		3,240		AAA		n/a		2.5		5.2		0.9		0.6		0.5		2.3		0.1		0.8		5.3		50.5		731
6		2004		2,993		AAA		Ba3		7.0		20.6		2.4		0.5		3.0		10.8		0.2		1.4		18.2		54.9		690
7		2004		1,978		AA+		n/a		5.3		10.4		0.0		0.6		3.1		5.0		0.0		1.2		10.0		45.6		732
8		2004		928		n/a		A1		2.5		10.0		0.0		0.0		1.4		5.2		0.0		0.0		6.6		54.3		733
9		2004		1,429		AAA		Baa2		4.4		9.5		1.2		0.6		1.0		2.8		0.3		1.5		7.4		54.2		733
10		2005		4,839		CCC		Caa1		5.1		3.0		2.8		1.8		7.3		10.0		0.7		3.3		25.9		65.1		705

			$	21,054						4.0		9.7																54.6		718

(1)	One acquired available for sale non-agency CMO with a June 30, 2012 book value of $27 is not included in the above table. The bond rating at acquisition was AAA and is now Baa2. This non-agency CMO is current with regards to principal and interest.

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 June 30, 2012 and December 31, 2011, the Corporation’s FHLB stock totaled $31,250 and $23,516, respectively, and is included in other assets on the balance sheet. The increase is a result of the Parkvale acquisition. The Corporation accounts for the stock in accordance with ASC 325, which requires the investment to be carried at cost and evaluated for impairment based on the ultimate recoverability of the par value.

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 March 31, 2012, the FHLB’s capital ratio of 7.0% 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 June 30, 2012, the Corporation believes its holdings in the stock are ultimately recoverable at par value and, therefore, determined that FHLB stock was not other-than-temporarily impaired. In addition, the Corporation has ample liquidity and does not require redemption of its FHLB stock in the foreseeable future.

LOANS AND ALLOWANCE FOR LOAN LOSSES

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


	June 30, 2012		December 31, 2011
Commercial real estate	$	2,532,116	$	2,341,646
Commercial real estate – FL		84,642		154,081
Commercial and industrial		1,493,378		1,363,692
Commercial leases		125,293		110,795

Total commercial loans and leases		4,235,429		3,970,214
Direct installment		1,109,676		1,029,187
Residential mortgages		1,158,377		670,936
Indirect installment		577,903		540,789
Consumer lines of credit		741,509		607,280
Other		37,962		38,261

	$	7,860,856	$	6,856,667

Commercial loans include both owner occupied and non-owner occupied loans secured by commercial properties, as well as commercial and industrial loans. Commercial leases consist of loans for new or used equipment. Direct installment is comprised of fixed-rate, closed-end consumer loans for personal, family or household use, such as home equity loans and automobile loans. Residential mortgages consist of conventional and jumbo mortgage loans for non-commercial properties. Indirect installment is comprised of loans written by third parties, primarily automobile loans. Consumer lines of credit include home equity lines of credit (HELOC) and consumer lines of credit that are either unsecured or secured by collateral other than home equity. Other is comprised primarily of mezzanine loans and student loans.

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 real estate loans in Florida, of which 33% were land-related as of June 30, 2012. Additionally, the portfolio contains consumer finance loans to individuals in Pennsylvania, Ohio, Tennessee and Kentucky, which totaled $162,678 or 2.1% of total loans as of June 30, 2012, compared to $163,856 or 2.4% of total loans as of December 31, 2011. Due to the relative size of the consumer finance loan portfolio and the lower risk profile relative to the Florida loans, they are not segregated from other consumer loans.

As of June 30, 2012, approximately 46% of the commercial real estate loans, including those in Florida, were owner-occupied, while the remaining 54% were non-owner-occupied. As of June 30, 2012 and December 31, 2011, the Corporation had commercial construction loans of $177,027 and $210,098, respectively, representing 2.3% and 3.1% of total loans, respectively.

For each reporting period, total cash flows (both principal and interest) expected to be collected over the remaining life of the loan incorporate assumptions regarding default rates, loss severities, the amounts and timing of prepayments, the value of underlying collateral based on independent appraisals that the Corporation reviews for acceptability and considering the time and costs of foreclosure and disposition of the collateral and other factors that reflect then-current market conditions. The Corporation modifies, updates and refines assumptions as circumstances change. Contractual cash flows at each reporting period are determined utilizing the amortized cost method of loan accounting after recognition of contractual interest.

Purchased Credit-Impaired (PCI) Loans

The Corporation has acquired loans for which there was evidence of deterioration of credit quality since origination and for which it was probable, at acquisition, that all contractually required payments would not be collected.

Following are provisional amounts recognized for PCI loans identified in the Corporation’s acquisition of Parkvale:


	At Acquisition
Contractually required principal and interest at acquisition	$	8,989
Contractual cash flows not expected to be collected (non-accretable difference)		2,835

Expected cash flows at acquisition		6,154
Interest component of expected cash flows (accretable difference)		589

Fair value at acquisition	$	5,565

Following is additional information about PCI loans identified in the Corporation’s acquisition of Parkvale:


	At Acquisition		June 30, 2012
Outstanding balance	$	8,989	$	9,184
Carrying amount		5,565		5,470
Allowance for loan losses		n/a		—
Impairment recognized since acquisition		n/a		—
Allowance reduction recognized since acquisition		n/a		—

Following is information about the Corporation’s PCI loans:


	Contractual Receivable			Non-Accretable Difference			Expected Cash Flows			Accretable Yield			Carrying Amount
For the Six Months Ended June 30, 2012
Balance at beginning of period	$	51,693		$	(33,377	)	$	18,316		$	(2,477	)	$	15,839
Acquisitions		8,989			(2,835	)		6,154			(589	)		5,565
Accretion		—			—			—			2,704			2,704
Payments received		(2,745	)		—			(2,745	)		—			(2,745	)
Reclass from non-accretable difference		—			1,017			1,017			(1,017	)		—
Disposals/transfers		(1,045	)		842			(203	)		—			(203	)
Contractual interest		1,330			(1,330	)		—			—			—

Balance at end of period	$	58,222		$	(35,683	)	$	22,539		$	(1,379	)	$	21,160

For the Year Ended December 31, 2011
Balance at beginning of period	$	20,356		$	(15,589	)	$	4,767		$	(791	)	$	3,976
Acquisitions		38,890			(19,401	)		19,489			(2,025	)		17,464
Accretion		—			—			—			903			194
Payments received		(4,784	)		—			(4,784	)		—			(4,075	)
Reclass from non-accretable difference		—			709			709			(709	)		—
Disposals/transfers		(6,128	)		4,263			(1,865	)		145			(1,720	)
Contractual interest		3,359			(3,359	)		—			—			—

Balance at end of period	$	51,693		$	(33,377	)	$	18,316		$	(2,477	)	$	15,839

The accretion in the table above includes $1,017 in 2012 and $709 in 2011 that primarily represents payoffs received on certain loans in excess of expected cash flows. This accretion was recorded as interest income in the Consolidated Statements of Comprehensive Income.

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 troubled debt restructurings (TDRs). Past due loans are reviewed on a monthly basis to identify loans for non-accrual status. The Corporation places a loan on non-accrual status and discontinues interest accruals 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 is reversed. Non-accrual loans may not be restored to accrual status until all delinquent principal and interest have been paid and the ultimate collectability 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 that have not been returned to accrual status.

Following is a summary of non-performing assets:


	June 30, 2012		December 31, 2011
Non-accrual loans	$	84,322	$	94,335
Troubled debt restructurings		11,842		11,893

Total non-performing loans		96,164		106,228
Other real estate owned (OREO)		35,647		34,719

Total non-performing loans and OREO		131,811		140,947
Non-performing investments		2,811		8,972

Total non-performing assets	$	134,622	$	149,919


	June 30, 2012			December 31, 2011
Asset quality ratios:
Non-performing loans as a percent of total loans		1.22	%		1.55	%
Non-performing loans + OREO as a percent of total loans + OREO		1.67	%		2.05	%
Non-performing assets as a percent of total assets		1.15	%		1.53	%

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
June 30, 2012
Commercial real estate	$	14,814	$	13,746	$	39,192	$	67,752	$	2,464,364	$	2,532,116
Commercial real estate – FL		—		—		23,668		23,668		60,974		84,642
Commercial and industrial		2,579		960		9,515		13,054		1,480,324		1,493,378
Commercial leases		939		43		1,262		2,244		123,049		125,293

Total commercial loans and leases		18,332		14,749		73,637		106,718		4,128,711		4,235,429
Direct installment		8,804		3,175		3,057		15,036		1,094,640		1,109,676
Residential mortgages		19,104		23,004		2,722		44,830		1,113,547		1,158,377
Indirect installment		4,063		451		1,027		5,541		572,362		577,903
Consumer lines of credit		1,663		624		379		2,666		738,843		741,509
Other		19		13		3,500		3,532		34,430		37,962

	$	51,985	$	42,016	$	84,322	$	178,323	$	7,682,533	$	7,860,856

December 31, 2011
Commercial real estate	$	13,868	$	9,612	$	37,134	$	60,614	$	2,281,032	$	2,341,646
Commercial real estate – FL		—		—		39,122		39,122		114,959		154,081
Commercial and industrial		2,164		690		6,956		9,810		1,353,882		1,363,692
Commercial leases		1,102		5		1,084		2,191		108,604		110,795

Total commercial loans and leases		17,134		10,307		84,296		111,737		3,858,477		3,970,214
Direct installment		8,228		3,614		2,525		14,367		1,014,820		1,029,187
Residential mortgages		14,492		3,342		2,443		20,277		650,659		670,936
Indirect installment		5,031		282		918		6,231		534,558		540,789
Consumer lines of credit		1,253		586		653		2,492		604,788		607,280
Other		36		—		3,500		3,536		34,725		38,261

	$	46,174	$	18,131	$	94,335	$	158,640	$	6,698,027	$	6,856,667

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


Rating Category		Definition
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 is 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
June 30, 2012
Commercial real estate	$	2,317,580	$	63,685	$	143,750	$	7,101	$	2,532,116
Commercial real estate – FL		44,065		12,811		25,377		2,389		84,642
Commercial and industrial		1,422,591		23,495		43,746		3,546		1,493,378
Commercial leases		123,237		302		1,754		—		125,293

	$	3,907,473	$	100,293	$	214,627	$	13,036	$	4,235,429

December 31, 2011
Commercial real estate	$	2,127,334	$	73,701	$	139,578	$	1,033	$	2,341,646
Commercial real estate – FL		70,802		16,002		67,277		—		154,081
Commercial and industrial		1,275,230		49,282		38,171		1,009		1,363,692
Commercial leases		105,631		3,362		1,802		—		110,795

	$	3,578,997	$	142,347	$	246,828	$	2,042	$	3,970,214

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 status:


	Consumer and Other Loan Credit Quality by Payment Status
	Performing		Non- Performing		Total
June 30, 2012
Direct installment	$	1,102,467	$	7,209	$	1,109,676
Residential mortgages		1,148,257		10,120		1,158,377
Indirect installment		576,767		1,136		577,903
Consumer lines of credit		741,078		431		741,509
Other		34,462		3,500		37,962

December 31, 2011
Direct installment	$	1,022,025	$	7,162	$	1,029,187
Residential mortgages		661,392		9,544		670,936
Indirect installment		539,810		979		540,789
Consumer lines of credit		606,533		747		607,280
Other		34,761		3,500		38,261

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 the aggregate for consumer installment

loans, residential mortgages, consumer lines of credit, commercial leases and commercial loan relationships less than $500. For loan relationships greater than or equal to $500, a specific valuation allowance is allocated, if necessary, so that the loan is reported net, at the present value of estimated future cash flows using a market interest rate or at the fair value of collateral if repayment is expected solely from the collateral. Consistent with the Corporation’s existing method of income recognition for loans, 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		Specific Related Allowance		Average Recorded Investment		Interest Income Recognized
At or For the Six Months Ended June 30, 2012
With no specific allowance recorded:
Commercial real estate	$	30,448	$	37,579	$	—	$	32,059	$	101
Commercial real estate—FL		13,267		29,538		—		13,762		—
Commercial and industrial		6,404		9,739		—		7,054		22
Commercial leases		1,262		1,262		—		1,219		—

Total commercial loans and leases		51,381		78,118		—		54,094		123
Direct installment		7,209		7,435		—		7,110		69
Residential mortgages		10,113		10,648		—		9,832		106
Indirect installment		1,136		1,319		—		1,091		4
Consumer lines of credit		431		456		—		583		—
Other		3,500		3,500		—		3,500		—
Purchased credit-impaired loans		21,160		36,377		—		18,588		—

With a specific allowance recorded:
Commercial real estate		7,938		7,938		2,768		6,176		109
Commercial real estate—FL		10,403		18,197		2,391		17,584		—
Commercial and industrial		3,226		3,226		2,539		1,942		7
Commercial leases		—		—		—		—		—

Total commercial loans and leases		21,567		29,361		7,698		25,702		116
Direct installment		—		—		—		—		—
Residential mortgages		—		—		—		—		—
Indirect installment		—		—		—		—		—
Consumer lines of credit		—		—		—		—		—
Other		—		—		—		—		—
Purchased credit-impaired loans		—		—		—		—		—

Total:
Commercial real estate		38,386		45,517		2,768		38,235		210
Commercial real estate—FL		23,670		47,735		2,391		31,346		—
Commercial and industrial		9,630		12,965		2,539		8,996		29
Commercial leases		1,262		1,262		—		1,219		—

Total commercial loans and leases		72,948		107,479		7,698		79,796		239
Direct installment		7,209		7,435		—		7,110		69
Residential mortgages		10,113		10,648		—		9,832		106
Indirect installment		1,136		1,319		—		1,091		4
Consumer lines of credit		431		456		—		583		—
Other		3,500		3,500		—		3,500		—
Purchased credit-impaired loans		21,160		36,377		—		18,588		—


	Recorded Investment		Unpaid Principal Balance		Specific Related Allowance		Average Recorded Investment		Interest Income Recognized
At or For the Year Ended December 31, 2011
With no specific allowance recorded:
Commercial real estate	$	28,163	$	32,476	$	—	$	31,432	$	151
Commercial real estate—FL		28,721		46,162		—		29,630		33
Commercial and industrial		4,228		4,971		—		4,610		17
Commercial leases		1,084		1,084		—		1,217		—

Total commercial loans and leases		62,196		84,693		—		66,889		201
Direct installment		7,162		7,522		—		7,530		207
Residential mortgages		9,544		9,839		—		10,278		175
Indirect installment		979		1,071		—		973		24
Consumer lines of credit		747		761		—		947		8
Other		3,500		3,500		—		1,750		—
Purchased credit-impaired loans		15,839		18,743		—		15,326		—

With a specific allowance recorded:
Commercial real estate		8,403		8,423		2,482		8,875		32
Commercial real estate—FL		10,401		18,195		2,389		16,559		21
Commercial and industrial		3,588		3,750		2,276		3,603		20
Commercial leases		—		—		—		—		—

Total commercial loans and leases		22,392		30,368		7,147		29,037		73
Direct installment

Large Accelerated Filer

Accelerated Filer

Non-accelerated Filer

Smaller reporting company