F.N.B. Corp. 10-K
UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to
Section 13 or 15(d) of the Securities Exchange Act of
1934
For the fiscal year ended December 31, 2006
Commission file number
001-31940
F.N.B. CORPORATION
(Exact name of registrant as specified in its charter)
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Florida
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25-1255406
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer Identification
No.)
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One F.N.B. Boulevard,
Hermitage, PA
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16148
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(Address of principal executive
offices)
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(Zip Code)
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Registrants telephone
number, including area code:
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724-981-6000
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Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class
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Name of Exchange on which
Registered
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Common Stock, par value
$0.01 per share
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New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act.
Yes þ No o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Exchange Act. Yes o
No þ
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 þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of the registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and
large accelerated filer in
Rule 12b-2
of the Exchange Act.
Large Accelerated Filer
þ Accelerated
Filer o Non-accelerated
Filer o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange Act). Yes
o No þ
The aggregate market value of the registrants outstanding
voting common stock held by non-affiliates on June 30,
2006, determined using a per share closing price on that date of
$15.77, as quoted on the New York Stock Exchange, was
$885,897,665.
As of January 31, 2007, the registrant had outstanding
60,404,759 shares of common stock.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement of F.N.B. Corporation
to be filed pursuant to Regulation 14A for the Annual
Meeting of Stockholders to be held on May 14, 2007 (Proxy
Statement) are incorporated by reference into Part III of
this Annual Report on
Form 10-K.
The Proxy Statement will be filed on or before April 30,
2007.
PART I
Forward-Looking Statements: From time to time F.N.B.
Corporation (the Corporation) has made and may continue to make
written or oral forward-looking statements with respect to the
Corporations outlook or expectations for earnings,
revenues, expenses, capital levels, asset quality or other
future financial or business performance, strategies or
expectations, or the impact of legal, regulatory or supervisory
matters on the Corporations business operations or
performance. This Annual Report on
Form 10-K
(the Report) also includes forward-looking statements. With
respect to all such forward-looking statements, see Cautionary
Statement Regarding Forward-Looking Information in Item 7
of this Report.
The Corporation was formed in 1974 as a bank holding company.
During 2000, the Corporation elected to become and remains a
financial holding company under the Gramm-Leach-Bliley Act of
1999. The Corporation has four reportable business segments:
Community Banking, Wealth Management, Insurance and Consumer
Finance. As of December 31, 2006, the Corporation had 154
Community Banking offices in Pennsylvania and Ohio and
53 Consumer Finance offices in those states and Tennessee.
The Corporation, through its Community Banking affiliate, also
had four commercial loan production offices in Florida and one
mortgage loan production office in Tennessee as of that date.
The Corporation, through its subsidiaries, provides a full range
of financial services, principally to consumers and small- to
medium-sized businesses in its market areas. The
Corporations business strategy focuses primarily on
providing quality, community-based financial services adapted to
the needs of each of the markets it serves. The Corporation
emphasizes its community orientation by allowing local
management certain autonomy in decision-making, enabling it to
respond to customer requests more quickly and to concentrate on
transactions within its market areas. However, while the
Corporation seeks to preserve some decision-making at a local
level, it has established centralized legal, loan review and
underwriting, accounting, investment, audit, loan operations and
data processing functions. The centralization of these processes
has enabled the Corporation to maintain consistent quality of
these functions and to achieve certain economies of scale.
On January 1, 2004, the Corporation spun off its Florida
operations into a separate, publicly traded company known as
First National Bankshares of Florida, Inc. (Bankshares).
Effective January 1, 2004, the Corporation transferred all
of its Florida operations, which included a community bank,
wealth management and insurance agency, to Bankshares. At the
same time, the Corporation distributed all of the outstanding
stock of Bankshares to the Corporations stockholders of
record as of December 26, 2003. Stockholders eligible for
the distribution received one share of Bankshares common stock
for each outstanding share of the Corporations common
stock held. Immediately following the distribution, the
Corporation and its subsidiaries did not own any shares of
Bankshares common stock and Bankshares became an independent
public company. Concurrent with the spin-off of its Florida
operations, the Corporation moved its executive offices from
Naples, Florida to Hermitage, Pennsylvania on January 1,
2004.
As a result of the spin-off, for periods prior to
January 1, 2004, the Florida operations earnings have
been reclassified as discontinued operations and assets and
liabilities related to these discontinued operations have been
disclosed separately in Item 6, Selected Financial Data.
Business
Segments
In addition to the following information relating to the
Corporations business segments, information is contained
in the Business Segments footnote in the Notes to Consolidated
Financial Statements, which is included in Item 8 of this
Report. As of December 31, 2006, the Community Banking
segment consisted of a regional community bank. The Wealth
Management segment consisted of a trust company, a registered
investment advisor and a subsidiary which offers broker-dealer
services through a third party networking arrangement with a
non-affiliated licensed broker-dealer entity. The Insurance
segment consisted of an insurance agency and a reinsurer. The
Consumer Finance segment consisted of a multi-state consumer
finance company.
1
Community
Banking
The Corporations Community Banking affiliate, First
National Bank of Pennsylvania (FNBPA), offers services
traditionally offered by full-service commercial banks,
including commercial and individual demand, savings and time
deposit accounts and commercial, mortgage and individual
installment loans.
The goal of Community Banking is to generate quality, profitable
revenue growth through increased business with its current
customers, attraction of new customer relationships through
FNBPAs current branches and loan production offices and
expansion into new and existing markets through de novo branch
openings, acquisitions and the establishment of additional loan
production offices. Consistent with this strategy, on
May 26, 2006, October 7, 2005 and February 18,
2005, the Corporation completed its acquisitions of The Legacy
Bank (Legacy), North East Bancorp, Inc. (North East) and NSD
Bancorp, Inc. (NSD), respectively. For information pertaining to
these acquisitions, see the Mergers and Acquisitions footnote in
the Notes to Consolidated Financial Statements, which is
included in Item 8 of this Report. In addition, the
Corporation considers Community Banking a fundamental source of
revenue opportunity through the cross-selling of products and
services offered by the Corporations other business
segments.
Community Banking also includes four commercial loan production
offices in Florida and a mortgage loan production office in
Tennessee which were opened in 2005 and 2006, the underwriting
for which is performed centrally. The Corporation has recent
prior experience and knowledge of the Florida market due to its
former ownership of the Bankshares operations, which were spun
off on January 1, 2004.
The lending philosophy of Community Banking is to establish
quality customer relationships while minimizing credit losses by
following strict credit approval standards (which include
independent analysis of realizable collateral value),
diversifying its loan portfolio by industry and borrower and
conducting ongoing review and management of the loan portfolio.
Commercial loans are generally made to established businesses
within the geographic market areas served by Community Banking.
Consistent with its lending philosophy, Community Banking does
not have any highly leveraged transaction loans.
No material portion of the loans or deposits of Community
Banking has been obtained from a single or small group of
customers, and the loss of any one customers loans or
deposits or a small group of customers loans or deposits
by Community Banking would not have a material adverse effect on
the Community Banking segment or on the Corporation. The
majority of the loans and deposits have been generated within
the areas in which Community Banking operates.
Wealth
Management
Wealth Management delivers comprehensive wealth management
services to individuals, corporations and retirement funds as
well as existing customers of Community Banking. Wealth
Management provides services to individuals and corporations
located within the Corporations geographic markets.
The Corporations trust subsidiary, First National Trust
Company (FNTC), provides a broad range of personal and corporate
fiduciary services, including the administration of decedent and
trust estates. As of December 31, 2006, the market value of
trust assets under management totaled approximately
$1.7 billion.
The Corporations Wealth Management segment also includes
two other wholly-owned subsidiaries. First National Investment
Services Company, LLC offers a broad array of investment
products and services for customers of Wealth Management through
a networking relationship with a third-party licensed brokerage
firm. F.N.B. Investment Advisors, Inc. (Investment Advisors), an
investment advisor registered with the Securities and Exchange
Commission (SEC), offers customers of Wealth Management
objective investment programs featuring mutual funds, annuities,
stocks and bonds.
FNTC is required to maintain certain minimum capitalization
levels in accordance with regulatory requirements. FNTC
periodically measures its capital position to ensure all minimum
capitalization levels are met.
No material portion of the business of Wealth Management has
been obtained from a single or small group of customers, and the
loss of any one customers business or the business of a
small group of customers by
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Wealth Management would not have a material adverse effect on
the Wealth Management segment or on the Corporation.
Insurance
The Corporations Insurance segment operates principally
through First National Insurance Agency, LLC (FNIA). FNIA is a
full-service agency offering numerous lines of commercial and
personal insurance through major carriers to businesses and
individuals primarily within the Corporations geographic
markets. The goal of FNIA is to grow revenue through
cross-selling to existing clients of Community Banking and to
gain new clients through its own channels.
The Corporations Insurance segment also includes a
reinsurance subsidiary, Penn-Ohio Life Insurance Company
(Penn-Ohio). Penn-Ohio underwrites, as a reinsurer, credit life
and accident and health insurance sold by the Corporations
lending subsidiaries. Additionally, FNBPA owns a direct
subsidiary, First National Corporation (a Pennsylvania
corporation), which offers title insurance products.
No material portion of the business of Insurance has been
obtained from a single or small group of customers, and the loss
of any one customers business or the business of a small
group of customers by Insurance would not have a material
adverse effect on the Insurance segment or on the Corporation.
Consumer
Finance
The Corporations Consumer Finance segment operates through
its wholly-owned subsidiary, Regency Finance Company (Regency),
which is involved principally in making personal installment
loans to individuals and purchasing installment sales finance
contracts from retail merchants. Such activity is primarily
funded through the sale of the Corporations subordinated
notes at Regencys branch offices. The Consumer Finance
segment operates in Pennsylvania, Ohio and Tennessee.
No material portion of the business of Consumer Finance has been
obtained from a single or small group of customers, and the loss
of any one customers business or the business of a small
group of customers by Consumer Finance would not have a material
adverse effect on the Consumer Finance segment or on the
Corporation.
Other
The Corporation also has six other subsidiaries. First National
Corporation (a Delaware corporation) holds equity securities and
other assets for the holding company. F.N.B. Statutory
Trust I and F.N.B. Statutory Trust II hold the junior
subordinated debt securities of the Corporation (debentures).
Regency Consumer Financial Services, Inc. and FNB Consumer
Financial Services, Inc. are the general partner and limited
partner, respectively, of FNB Financial Services, LP, a company
established to issue, administer and repay subordinated notes.
F.N.B. Capital Corporation, LLC (FNB Capital) offers
subordinated debt and other types of financing options for
small- to medium-sized commercial enterprises that need
financial assistance beyond the parameters of typical bank
commercial lending products. These subsidiaries, along with the
Parent company and intercompany eliminations, are included in
the Other category in the Business Segments footnote in the
Notes to Consolidated Financial Statements, which is included in
Item 8 of this Report.
Market
Area and Competition
The Corporation primarily operates in Pennsylvania and
northeastern Ohio in an area that has a diversified mix of light
manufacturing, service and distribution industries. This area is
served by several major interstate highways and is located at
the approximate midpoint between New York City and Chicago. This
area includes the Great Lakes shipping port of Erie, the
Pennsylvania state capital of Harrisburg and the Greater
Pittsburgh International Airport. The Corporation also has four
commercial loan production offices in Florida and one mortgage
loan production office in Tennessee. In addition to
Pennsylvania, the Corporations Consumer Finance segment
also operates in northern and central Tennessee and central and
southern Ohio.
3
The Corporations subsidiaries compete for deposits, loans
and financial services business with a large number of other
financial institutions, such as commercial banks, savings banks,
savings and loan associations, credit life insurance companies,
mortgage banking companies, consumer finance companies, credit
unions and commercial finance and leasing companies, many of
which have greater resources than the Corporation. In providing
wealth and asset management services, as well as insurance
brokerage and merchant banking products and services, the
Corporations subsidiaries compete with many other
financial services firms, brokerage firms, mutual fund
complexes, investment management firms, merchant and investment
banking firms, trust and fiduciary service providers and
insurance agencies.
In Regencys market areas of Pennsylvania, Ohio and
Tennessee, the active competitors include banks, credit unions
and national, regional and local consumer finance companies,
some of which have substantially greater resources than that of
Regency. The ready availability of consumer credit through
charge accounts and credit cards constitutes additional
competition. In this market area, competition is based on the
rates of interest charged for loans, the rates of interest paid
to obtain funds and the availability of customer services.
The ability to access and use technology is an increasingly
important competitive factor in the financial services industry.
Technology is not only important with respect to delivery of
financial services, but also in processing information. The
Corporation and each of its subsidiaries must continually make
technological investments to remain competitive in the financial
services industry.
Mergers
and Acquisitions
See the Mergers and Acquisitions footnote in the Notes to
Consolidated Financial Statements, which is included in
Item 8 of this Report.
Employees
As of January 31, 2007, the Corporation and its
subsidiaries had 1,487 full-time and 357 part-time
employees. Management of the Corporation considers its
relationship with its employees to be satisfactory.
Government
Supervision and Regulation
The following discussion describes elements of an extensive
regulatory framework applicable to bank holding companies,
financial holding companies and banks and specific information
about the Corporation and its subsidiaries. Federal regulation
of banks, bank holding companies and financial holding companies
is intended primarily for the protection of depositors and the
Bank Insurance Fund rather than for the protection of
stockholders and creditors. Numerous laws and regulations govern
the operations of financial services institutions and their
holding companies. Accordingly, the following discussion is
general in nature and does not purport to be complete or to
describe all of the laws and regulations that apply to the
Corporation and its subsidiaries.
General
As a registered bank holding company and financial holding
company, the Corporation is subject to the supervision of, and
regular inspection by, the Board of Governors of the Federal
Reserve System (FRB). The Corporations subsidiary bank
(FNBPA) and trust company (FNTC) are organized as national
banking associations, which are subject to regulation,
supervision and examination by the Office of the Comptroller of
the Currency (OCC). Likewise, FNBPA is subject to certain
regulatory requirements of the Federal Deposit Insurance
Corporation (FDIC), the FRB and other federal and state
regulatory agencies. In addition to banking laws, regulations
and regulatory agencies, the Corporation and its subsidiaries
are subject to various other laws and regulations and
supervision and examination by other regulatory agencies, all of
which directly or indirectly affect the operations and
management of the Corporation and its ability to make
distributions to its stockholders.
As a regulated financial holding company, the Corporations
relationships and good standing with its regulators are of
fundamental importance to the continuation and growth of the
Corporations businesses. The FRB, OCC, FDIC and SEC have
broad enforcement powers, and authority to approve, deny or
refuse to act upon applications or notices of the Corporation or
its subsidiaries to conduct new activities, acquire or divest
businesses
4
or assets or reconfigure existing operations. In addition, the
Corporation, FNBPA and FNTC are subject to examination by
various regulators, which results in examination reports (which
are not publicly available) and ratings that can impact the
conduct and growth of the Corporations businesses. These
examinations consider not only compliance with applicable laws
and regulations, including bank secrecy and anti-money
laundering requirements, but also loan quality and
administration, capital levels, asset quality and risk,
management ability and performance, earnings, liquidity and
various other factors, including community reinvestment. An
examination downgrade by any of the Corporations federal
bank regulators could potentially result in the imposition of
significant limitations on the activities and growth of the
Corporation and its subsidiaries.
A financial holding company and the companies under its control
are permitted to engage in activities considered financial
in nature or incidental thereto as defined by the
Gramm-Leach-Bliley Act and FRB interpretations, including,
without limitation, insurance and securities activities, and
therefore may engage in a broader range of activities than
permitted for bank holding companies and their subsidiaries. A
financial holding company may engage directly or indirectly in
activities considered financial in nature, either de novo or by
acquisition, provided the financial holding company gives the
FRB
after-the-fact
notice of the new activities. The Gramm-Leach-Bliley Act also
permits national banks, such as FNBPA, to engage in activities
considered financial in nature through a financial subsidiary,
subject to certain conditions and limitations and with the
approval of the OCC.
The FRB is the umbrella regulator of a financial
holding company. In addition, a financial holding companys
operating entities, such as its subsidiary broker-dealers,
investment managers, merchant banking operations, investment
companies, insurance companies and banks, are also subject to
the jurisdiction of various federal and state
functional regulators.
Interstate
Banking
Bank holding companies, including those that are also financial
holding companies, are required to obtain the prior approval of
the FRB before acquiring more than five percent of any class of
voting stock of any non-affiliated bank. Pursuant to the
Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994 (Interstate Banking Act), a bank holding company may
acquire banks located in states other than its home state
without regard to the permissibility of such acquisitions under
state law, but subject to any state requirement that the bank
has been organized and operating for a minimum period of time,
not to exceed five years, and the requirement that the bank
holding company, after the proposed acquisition, controls no
more than 10 percent of the total amount of deposits of
insured depository institutions in the United States and no more
than 30 percent or such lesser or greater amount set by
state law of such deposits in that state.
Subject to certain restrictions, the Interstate Banking Act also
authorizes banks to merge across state lines to create
interstate banks. The Interstate Banking Act also permits a bank
to open new branches in a state in which it does not already
have banking operations if such state enacts a law permitting de
novo branching. During 2006, the Corporation had one retail
subsidiary national bank, FNBPA. FNBPA owns and operates eleven
interstate branch offices within Ohio.
Recent
Statutory Developments
The Financial Services Regulatory Relief Act of 2006 (Relief
Act) was enacted into law on October 13, 2006. The Relief
Act is generally designed to remove or reduce various regulatory
constraints and compliance orders imposed on the banking
industry.
Changes
in Regulations
Various legislation, including proposals to change substantially
the financial institution regulatory system and to expand or
contract the powers of banking institutions and bank holding
companies, is from time to time introduced in Congress. This
legislation may change banking statutes and the operating
environment of the Corporation and its subsidiaries in
substantial and unpredictable ways. If enacted, such legislation
could increase or decrease the cost of doing business, limit or
expand permissible activities or affect the competitive balance
among banks, savings associations, credit unions and other
financial institutions. The Corporation cannot predict whether
any of this potential legislation will be enacted, and, if
enacted, the effect that it, or any implemented regulations,
5
would have on the financial condition or results of operations
of the Corporation or any of its subsidiaries. A change in
statutes, regulations or regulatory policies applicable to the
Corporation or its subsidiaries could have a material adverse
effect on the business of the Corporation and its subsidiaries.
Capital
and Operational Requirements
The FRB, the OCC and the FDIC have issued substantially similar
risk-based and leverage capital guidelines applicable to United
States banking organizations. In addition, these regulatory
agencies may from time to time require that a banking
organization maintain capital above the minimum levels, whether
because of its financial condition or actual or anticipated
growth. The FRBs risk-based guidelines define a three-tier
capital framework. Tier 1 capital includes common
stockholders equity and qualifying preferred stock, less
goodwill and other adjustments. Tier 2 capital consists of
preferred stock not qualifying as Tier 1 capital, mandatory
convertible debt, limited amounts of subordinated debt, other
qualifying term debt and the allowance for loan losses up to
1.25 percent of risk-weighted assets. Tier 3 capital
includes subordinated debt that is unsecured, fully paid, has an
original maturity of at least two years, is not redeemable
before maturity without prior approval by the FRB and includes a
lock-in clause precluding payment of either interest or
principal if the payment would cause the issuing banks
risk-based capital ratio to fall or remain below the required
minimum.
The sum of Tier 1 and 2 capital represents the
Corporations qualifying total capital. Risk-based capital
ratios are calculated by dividing Tier 1 and total capital
by risk-weighted assets. Assets and off-balance sheet exposures
are assigned to one of four categories of risk-weights, based
primarily on relative credit risk. The minimum Tier 1
capital ratio is four percent and the minimum total capital
ratio is eight percent. At December 31, 2006, the
Corporations Tier 1 and total capital ratios under
these guidelines were 9.9% and 11.4%, respectively. At
December 31, 2006, the Corporation had $146.5 million
of capital securities that qualified as Tier 1 capital and
$9.1 million of subordinated debt that qualified as
Tier 2 capital.
The leverage ratio is determined by dividing Tier 1 capital
by adjusted average total assets. Although the stated minimum
ratio is 100 to 200 basis points above three percent, banking
organizations are required to maintain a ratio of at least five
percent to be classified as well-capitalized. The
Corporations leverage ratio at December 31, 2006 was
7.3% and as such, the Corporation meets its leverage ratio
requirements.
The Federal Deposit Insurance Corporation Improvement Act of
1991 (FDICIA), among other things, identified five capital
categories for insured depository institutions
(well-capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized)
and requires the respective federal regulatory agencies to
implement systems for prompt corrective action for
insured depository institutions that do not meet minimum capital
requirements within such categories. FDICIA imposes
progressively more restrictive constraints on operations,
management and capital distributions, depending on the category
in which an institution is classified. Failure to meet the
capital guidelines could also subject a banking institution to
capital-raising requirements. An undercapitalized
bank must develop a capital restoration plan and its parent
holding company must guarantee that banks compliance with
the plan. The liability of the parent holding company under any
such guarantee is limited to the lesser of five percent of the
banks assets at the time it became
undercapitalized or the amount needed to comply with
the plan. Furthermore, in the event of the bankruptcy of the
parent holding company, such guarantee would take priority over
the parents general unsecured creditors. In addition,
FDICIA requires the various regulatory agencies to prescribe
certain non-capital standards for safety and soundness relating
generally to operations and management, asset quality and
executive compensation and permits regulatory action against a
financial institution that does not meet such standards.
The various regulatory agencies have adopted substantially
similar regulations that define the five capital categories
identified by FDICIA, using the total risk-based capital,
Tier 1 risk-based capital and leverage capital ratios as
the relevant capital measures. Such regulations establish
various degrees of corrective action to be taken when an
institution is considered undercapitalized. Under the
regulations, a well-capitalized institution must
have a Tier 1 risk-based capital ratio of at least six
percent, a total risk-based capital ratio of at least ten
percent and a leverage ratio of at least five percent and not be
subject to a capital directive order. Under these guidelines,
FNBPA was considered well-capitalized as of December 31,
2006.
6
Federal regulators must also take into consideration
(a) concentrations of credit risk; (b) interest rate
risk (when the interest rate sensitivity of an
institutions assets does not match the sensitivity of its
liabilities or its off-balance sheet position) and
(c) risks from non-traditional activities, as well as an
institutions ability to manage those risks when
determining the adequacy of an institutions capital. This
evaluation is made as a part of the institutions regular
safety and soundness examination. In addition, the Corporation,
and any bank with significant trading activity, must incorporate
a measure for market risk in their regulatory capital
calculations.
Dividend
Restrictions
The Corporations primary source of funds for cash
distributions to its stockholders, and funds used to pay
principal and interest on its indebtedness, are dividends
received from FNBPA. FNBPA is subject to federal laws and
regulations governing its ability to pay dividends to the
Corporation. In addition to dividends from FNBPA, other sources
of parent company liquidity for the Corporation include cash and
short-term investments, as well as dividends and loan repayments
from other subsidiaries. FNBPA is subject to various regulatory
policies and requirements relating to the payment of dividends,
including requirements to maintain capital above regulatory
minimums. The appropriate federal regulatory agency is
authorized to determine under certain circumstances relating to
the financial condition of a bank or bank holding company that
the payment of dividends would be an unsafe or unsound practice
and to prohibit payment thereof.
In addition, the ability of the Corporation and FNBPA to pay
dividends may be affected by the various minimum capital
requirements and the capital and non-capital standards
established under FDICIA, as described above. The right of the
Corporation, its stockholders and its creditors to participate
in any distribution of the assets or earnings of its
subsidiaries is further subject to the prior claims of creditors
of the respective subsidiaries.
Source of
Strength
According to FRB policy, a financial or bank holding company is
expected to act as a source of financial strength to each of its
subsidiary banks and to commit resources to support each such
subsidiary. Consistent with the source of strength
policy for subsidiary banks, the FRB has stated that, as a
matter of prudent banking, a bank holding company generally
should not maintain a rate of cash dividends unless its net
income available to common stockholders has been sufficient to
fully fund the dividends and the prospective rate of earnings
retention appears to be consistent with the Corporations
capital needs, asset quality and overall financial condition.
This support may be required at times when a bank holding
company may not be able to provide such support. Similarly,
under the cross-guarantee provisions of the Federal Deposit
Insurance Act, in the event of a loss suffered or anticipated by
the FDIC either as a result of default of a banking subsidiary
or related to FDIC assistance provided to a subsidiary in danger
of default, the other banks that are members of the FDIC may be
assessed for the FDICs loss, subject to certain exceptions.
In addition, if FNBPA was no longer well-capitalized
and well-managed within the meaning of the Bank
Holding Company Act and FRB rules (which take into consideration
capital ratios, examination ratings and other factors), the
expedited processing of certain types of FRB applications would
not be available to the Corporation. Moreover, examination
ratings of 3 or lower, unsatisfactory
ratings, lower capital ratios below well-capitalized levels,
regulatory concerns regarding management, controls, assets,
operations or other factors can all potentially result in
practical limitations on the ability of a bank or bank holding
company to engage in new activities, grow, acquire new
businesses, repurchase its stock or pay dividends or continue to
conduct existing activities.
Securities
and Exchange Commission
The Corporation is also subject to regulation by the SEC by
virtue of the Corporations status as a public company and
due to the nature of certain of its businesses.
The Sarbanes-Oxley Act of 2002 contains important requirements
for public companies in the area of financial disclosure and
corporate governance. In accordance with section 302(a) of
the Sarbanes-Oxley Act, written certifications by the
Corporations Chief Executive Officer and Chief Financial
Officer are required with respect to each of the
Corporations quarterly and annual reports filed with the
SEC. These certifications attest that
7
the applicable report does not contain any untrue statement of a
material fact. The Corporation also maintains a program designed
to comply with Section 404 of the Sarbanes-Oxley Act, which
includes the identification of significant processes and
accounts, documentation of the design of control effectiveness
over process and entity level controls and testing of the
operating effectiveness of key controls. See Item 9A,
Controls and Procedures, of this Report for the
Corporations evaluation of its disclosure controls and
procedures.
Investment Advisors is registered with the SEC as an investment
advisor and, therefore, is subject to the requirements of the
Investment Advisors Act of 1940 and the SECs regulations
thereunder. The principal purpose of the regulations applicable
to investment advisors is the protection of clients and the
securities markets, rather than the protection of creditors and
stockholders of investment advisors. The regulations applicable
to investment advisors cover all aspects of the investment
advisory business, including limitations on the ability of
investment advisors to charge performance-based or
non-refundable fees to clients, record-keeping, operating,
marketing and reporting requirements, disclosure requirements,
limitations on principal transactions between an advisor or its
affiliates and advisory clients, as well as other anti-fraud
prohibitions. The Corporations investment advisory
subsidiary also may be subject to certain state securities laws
and regulations.
Additional legislation, changes in or new rules promulgated by
the SEC and other federal and state regulatory authorities and
self-regulatory organizations or changes in the interpretation
or enforcement of existing laws and rules, may directly affect
the method of operation and profitability of Investment
Advisors. The profitability of Investment Advisors could also be
affected by rules and regulations that impact the business and
financial communities in general, including changes to the laws
governing taxation, antitrust regulation, homeland security and
electronic commerce.
Under various provisions of the federal and state securities
laws, including in particular those applicable to
broker-dealers, investment advisors and registered investment
companies and their service providers, a determination by a
court or regulatory agency that certain violations have occurred
at a company or its affiliates can result in a limitation of
permitted activities and disqualification to continue to conduct
certain activities.
Investment Advisors is also subject to rules and regulations
promulgated by the National Association of Securities Dealers,
Inc. (NASD), among others. The principal purpose of these
regulations is the protection of clients and the securities
markets, rather than the protection of stockholders and
creditors.
Consumer
Finance Subsidiary
Regency is subject to regulation under Pennsylvania, Tennessee
and Ohio state laws that require, among other things, that it
maintain licenses in effect for consumer finance operations for
each of its offices. Representatives of the Pennsylvania
Department of Banking, the Tennessee Department of Financial
Institutions and the Ohio Division of Consumer Finance
periodically visit Regencys offices and conduct extensive
examinations in order to determine compliance with such laws and
regulations. Additionally, the FRB, as umbrella
regulator of the Corporation pursuant to the Gramm-Leach Bliley
Act, may conduct an examination of Regencys offices or
operations. Such examinations include a review of loans and the
collateral therefor, as well as a check of the procedures
employed for making and collecting loans. Additionally, Regency
is subject to certain federal laws that require that certain
information relating to credit terms be disclosed to customers
and, in certain instances, afford customers the right to rescind
transactions.
Insurance
Agencies
FNIA is subject to licensing requirements and extensive
regulation under the laws of the Commonwealth of Pennsylvania
and the various states in which FNIA conducts business. These
laws and regulations are primarily for the benefit of clients.
In all jurisdictions, the applicable laws and regulations are
subject to amendment or interpretation by regulatory
authorities. Generally, such authorities are vested with
relatively broad discretion to grant, renew and revoke licenses
and approvals and to implement regulations. Licenses may be
denied or revoked for various reasons, including the violation
of such regulations or the conviction of crimes. Possible
sanctions that may be imposed for violation of regulations
include the suspension of individual employees, limitations on
engaging in a particular business for a specified period of
time, revocation of licenses, censures and fines.
8
Penn-Ohio is subject to examination on a triennial basis by the
Arizona Department of Insurance. Representatives of the Arizona
Department of Insurance periodically determine whether Penn-Ohio
has maintained required reserves, established adequate deposits
under a reinsurance agreement and complied with reporting
requirements under the applicable Arizona statutes.
Merchant
Banking
FNB Capital is subject to regulation and examination by the FRB
and is subject to rules and regulations issued by the NASD.
Governmental
Policies
The operations of the Corporation and its subsidiaries are
affected not only by general economic conditions, but also by
the policies of various regulatory authorities. In particular,
the FRB regulates money and credit and interest rates in order
to influence general economic conditions. These policies have a
significant influence on overall growth and distribution of
loans, investments and deposits and affect interest rates
charged on loans or paid for time and savings deposits. FRB
monetary policies have had a significant effect on the operating
results of all financial institutions in the past and may
continue to do so in the future.
Available
Information
The Corporation maintains a website at
www.fnbcorporation.com. The Corporation makes
available on its website, free of charge, its Annual Report on
Form 10-K,
Quarterly Reports on
Form 10-Q
and Current Reports on
Form 8-K
(and amendments to any of the foregoing) as soon as practicable
after such reports are filed with or furnished to the SEC. These
reports are available on the Corporations website at
www.fnbcorporation.com and are also available to
stockholders, free of charge, upon written request to F.N.B.
Corporation, Attn: David B. Mogle, Corporate Secretary, One
F.N.B. Boulevard, Hermitage, PA 16148. A fee to cover the
Corporations reproduction costs will be charged for any
requested exhibits to these documents. The
Corporations common stock is traded on the New York Stock
Exchange (NYSE) under the symbol FNB. The
Corporation filed the certifications of its Chief Executive
Officer (CEO) and Chief Financial Officer (CFO) required
pursuant to Section 302 of the Sarbanes Oxley Act of 2002
with respect to its Annual Report on
Form 10-K
for 2005 with the SEC as exhibits to that Report and have filed
certifications required by Section 302 of that Act with
respect to this Annual Report on
Form 10-K
as exhibits to this Report. The Corporations CEO submitted
the required annual CEO Certification regarding the NYSEs
corporate governance listing standards to the NYSE within
30 days of the 2006 annual shareholders meeting. The
Corporations Code of Business Conduct and Ethics, the
Charters of its Audit, Compensation, Corporate Governance and
Nominating Committees and the Corporations Corporate
Governance Guidelines are available on the Corporations
website and in printed form upon request.
The Corporation is subject to a number of risks that may
potentially impact its business, financial condition, results of
operations and cash flows. As a financial services organization,
certain elements of risk are inherent in every one of its
transactions and are presented by every business decision it
makes. Thus, the Corporation encounters risk as part of the
normal course of its business, and designs its risk management
processes to help manage these risks.
In many cases, there are risks that are known to exist at the
outset of a transaction but which cannot reasonably be
eliminated. For example, every loan transaction presents credit
risk (the risk that the borrower may not perform in accordance
with contractual terms) and interest rate risk (a potential loss
in earnings or economic value due to adverse movement in market
interest rates or credit spreads), with the nature and extent of
these risks principally depending on the identity of the
borrower and overall economic conditions. These risks are
inherent in every loan transaction; if the Corporation wishes to
make loans, it must manage these risks through the terms and
structure of the loans and through the management of deposits
and other funding sources. The success of the Corporations
business is dependent on its ability to identify, understand and
manage the risks presented by its
9
business activities so that it can appropriately balance
revenue generation and profitability with these inherent risks.
The Corporation discusses its principal risk management
processes and, in appropriate places, related historical
performance in the Market Risk section included in Item 7
of this Report.
The following are the most significant risk factors that affect
the Corporation. These risk factors are also discussed further
in other parts of this Report.
The Corporations status as a holding company makes it
dependent on dividends from its subsidiaries to meet its
obligations.
The Corporation is a holding company and conducts almost all of
its operations through its subsidiaries. The Corporation does
not have any significant assets other than the stock of its
subsidiaries. Accordingly, the Corporation depends on dividends
from its subsidiaries to meet its obligations and obtain
revenue. The Corporations right to participate in any
distribution of earnings or assets of its subsidiaries is
subject to the prior claims of creditors of such subsidiaries.
Under federal and state law, FNBPA is limited in the amount of
dividends it may pay to the Corporation without prior regulatory
approval. Also, bank regulators have the authority to prohibit
FNBPA from paying dividends if the bank regulators determine the
payment would be an unsafe and unsound banking practice.
Interest rate volatility could significantly harm the
Corporations business.
The Corporations results of operations are affected by the
monetary and fiscal policies of the federal government and the
regulatory policies of governmental authorities. A significant
component of the Corporations earnings is its net interest
income, which is the difference between the income from interest
earning assets, such as loans, and the expense of interest
bearing liabilities, such as deposits. A change in market
interest rates could adversely affect the Corporations
earnings if market interest rates change such that the interest
the Corporation pays on deposits and borrowings increases faster
or decreases more slowly than the interest it collects on loans
and investments. Consequently, the business of the Corporation,
along with that of other financial institutions, generally is
sensitive to interest rate fluctuations.
The Corporations results of operations are
significantly affected by the ability of its borrowers to repay
their loans.
Lending money is an essential part of the banking business.
However, borrowers do not always repay their loans. The risk of
non-payment is affected by:
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credit risks of a particular borrower;
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changes in economic and industry conditions;
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the duration of the loan; and
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in the case of a collateralized loan, uncertainties as to the
future value of the collateral.
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Generally, commercial/industrial, construction and commercial
real estate loans present a greater risk of non-payment by a
borrower than other types of loans. In addition, consumer loans
typically have shorter terms and lower balances with higher
yields compared to real estate mortgage loans, but generally
carry higher risks of default. Consumer loan collections are
dependent on the borrowers continuing financial stability,
and thus are more likely to be affected by adverse personal
circumstances. Furthermore, the application of various federal
and state laws, including bankruptcy and insolvency laws, may
limit the amount that can be recovered on these loans.
The Corporations financial condition and results of
operations would be adversely affected if its allowance for loan
losses is not sufficient to absorb actual losses.
There is no precise method of predicting loan losses. The
Corporation can give no assurance that its allowance for loan
losses is or will be sufficient to absorb actual loan losses.
Excess loan losses could have a material adverse effect on the
Corporations financial condition and results of
operations. The Corporation attempts to maintain an appropriate
allowance for loan losses to provide for estimated losses in its
loan portfolio. The
10
Corporation periodically determines the amount of its allowance
for loan losses based upon consideration of several factors,
including:
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a regular review of the quality, mix and size of the overall
loan portfolio;
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historical loan loss experience;
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evaluation of non-performing loans;
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assessment of economic conditions and their effects on the
Corporations existing portfolio; and
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the amount and quality of collateral, including guarantees,
securing loans.
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The Corporations financial condition may be adversely
affected if it is unable to attract sufficient deposits to fund
its anticipated loan growth.
The Corporation funds its loan growth primarily through
deposits. To the extent that the Corporation is unable to
attract and maintain sufficient levels of deposits to fund its
loan growth, the Corporation would be required to raise
additional funds through public or private financings. The
Corporation can give no assurance that it would be able to
obtain these funds on terms that are favorable to it.
The Corporation could experience significant difficulties and
complications in connection with its growth and acquisition
strategy.
The Corporation has grown significantly through acquisitions
over the last few years and may seek to continue to grow by
acquiring financial institutions and branches as well as
non-depository entities engaged in permissible activities for
its financial institution subsidiaries. However, the market for
acquisitions is highly competitive. The Corporation may not be
as successful in the future as it has been in the past in
identifying financial institution and branch acquisition
candidates, integrating acquired institutions or preventing
deposit erosion at acquired institutions or branches.
As part of its acquisition strategy, the Corporation may acquire
additional banks and non-bank entities that it believes provide
a strategic fit with its business. To the extent that the
Corporation is successful with this strategy, there can be no
assurance that the Corporation will be able to manage this
growth adequately and profitably. For example, acquiring any
bank or non-bank entity will involve risks commonly associated
with acquisitions, including:
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potential exposure to unknown or contingent liabilities of banks
and non-bank entities the Corporation acquires;
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exposure to potential asset quality issues of acquired banks and
non-bank entities;
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potential disruption to the Corporations business;
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potential diversion of the time and attention of the
Corporations management; and
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the possible loss of key employees and customers of the banks
and other businesses the Corporation acquires.
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In addition to acquisitions, FNBPA may expand into additional
communities or attempt to strengthen its position in its current
markets by undertaking additional de novo branch openings or
establishing additional loan production offices. Based on its
experience, the Corporation believes that it generally takes up
to three years for new banking facilities to achieve operational
profitability due to the impact of organizational and overhead
expenses and the
start-up
phase of generating loans and deposits. To the extent that FNBPA
undertakes additional de novo branch openings, FNBPA is likely
to continue to experience the effects of higher operating
expenses relative to operating income from the new banking
facilities, which may have an adverse effect on the
Corporations net income, earnings per share, return on
average equity and return on average assets.
The Corporation may encounter unforeseen expenses, as well as
difficulties and complications in integrating expanded
operations and new employees without disruption to its overall
operations. Following each acquisition, the Corporation must
expend substantial resources to integrate the entities. The
integration of non-
11
banking entities often involves combining different industry
cultures and business methodologies. The failure to integrate
successfully the entities the Corporation acquires into its
existing operations may adversely affect its results of
operations and financial condition.
The Corporation could be adversely affected by changes in the
law, especially changes in the regulation of the banking
industry.
The Corporation and its subsidiaries operate in a highly
regulated industry and are subject to supervision and regulation
by several governmental agencies, including, among others, the
FRB, the OCC and the FDIC. Regulations are generally intended to
provide protection for depositors and customers rather than for
investors. The Corporation is subject to changes in federal and
state law, regulations, governmental policies, income tax laws
and accounting principles. Changes in regulation could adversely
affect the banking and financial services industry as a whole
and could limit the Corporations growth and the return to
investors by restricting such activities as:
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the payment of dividends;
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mergers with or acquisitions of other institutions;
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investments;
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loans and interest rates;
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the provision of securities, insurance or trust services; and
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the types of non-deposit activities in which the
Corporations financial institution subsidiaries may engage.
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In addition, legislation may change present capital
requirements, which could restrict the Corporations
activities and require the Corporation to maintain additional
capital.
The Corporations results of operations could be
adversely affected due to significant competition.
The Corporation may not be able to compete effectively in its
markets, which could adversely affect the Corporations
results of operations. The banking and financial services
industry in each of the Corporations market areas is
highly competitive. The competitive environment is a result of:
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changes in regulation;
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changes in technology and product delivery systems; and
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the accelerated pace of consolidation among financial services
providers.
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The Corporation competes for loans, deposits and customers with
various bank and non-bank financial service providers, many of
which are larger in terms of total assets and capitalization,
have greater access to the capital markets and offer a broader
array of financial services than the Corporation does.
Competition with such institutions may cause the Corporation to
increase its deposit rates or decrease its interest rate spread
on loans it originates. Loan pricing and credit standards are
under competitive pressure as various lenders seek to deploy
capital and a broader range of borrowers have access to the
capital markets. Likewise, traditional deposit activities are
subject to intense pricing pressures and increasing customer
migration as the financial service providers compete for
consumers investment dollars.
The Corporations continued pace of growth may require
it to raise additional capital in the future, but that capital
may not be available when it is needed.
The Corporation is required by federal and state regulatory
authorities to maintain adequate levels of capital to support
its operations. As a financial holding company, the Corporation
seeks to maintain capital sufficient to meet the
well-capitalized standard set by regulators. The
Corporation anticipates that its current capital resources will
satisfy its capital requirements for the foreseeable future. The
Corporation may at some point, however, need to raise additional
capital to support continued growth, whether such growth occurs
internally or through acquisitions.
12
The Corporations ability to raise additional capital, if
needed, will depend on conditions in the capital markets at that
time, which are outside the Corporations control, and on
its financial performance. Accordingly, there can be no
assurance of the Corporations ability to raise additional
capital, if needed, on terms acceptable to it. If the
Corporation cannot raise additional capital when needed, its
ability to expand its operations through internal growth and
acquisitions could be materially impaired.
Adverse economic conditions in the Corporations market
area may adversely impact its results of operations and
financial condition.
The majority of the Corporations business is concentrated
in Pennsylvania and eastern Ohio, which are traditionally slower
growth markets than other areas of the United States. Also, the
Corporation originates commercial loans in Florida. As a result,
FNBPAs loan portfolio and results of operations may be
adversely affected by factors that have a significant impact on
the economic conditions in these market areas. The local
economies of the Pennsylvania and Ohio market areas historically
have been less robust than the economy of the nation as a whole
and may not be subject to the same fluctuations as the national
economy. Adverse economic conditions in the Corporations
market areas, including the loss of certain significant
employers, could reduce its growth rate, affect its
borrowers ability to repay their loans and generally
affect the Corporations financial condition and results of
operations. Furthermore, a downturn in real estate values in
FNBPAs market areas could cause many of its loans to
become inadequately collateralized.
The Corporations ability to access and use technology
in an effective and secure manner may be adversely impacted by
an interruption or breach in security.
The ability to securely access and use technology is a
critically important competitive factor in the financial
services industry. Technology is important not only with respect
to delivery of financial services but also in processing
information. Moreover, the ability to effectively protect and
maintain the security of financial and personal information is
absolutely necessary in order to compete in the financial
services industry. The Corporation consistently and prudently
makes significant investments in technology upgrades to maintain
efficient and cost-effective delivery and processing of
financial information and to protect the security of such
information.
Certain provisions of the Corporations Articles of
Incorporation and By-laws and Florida law may discourage
takeovers.
The Corporations Articles of Incorporation and By-laws
contain certain anti-takeover provisions that may discourage or
may make more difficult or expensive a tender offer, change in
control or takeover attempt that is opposed by the
Corporations Board of Directors. In particular, the
Corporations Articles of Incorporation and By-laws:
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classify its Board of Directors into three classes, so that
stockholders elect only one-third of its Board of Directors each
year;
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permit stockholders to remove directors only for cause;
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do not permit stockholders to take action except at an annual or
special meeting of stockholders;
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require stockholders to give the Corporation advance notice to
nominate candidates for election to its Board of Directors or to
make stockholder proposals at a stockholders meeting;
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permit the Corporations Board of Directors to issue,
without stockholder approval unless otherwise required by law,
preferred stock with such terms as its Board of Directors may
determine; and
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require the vote of the holders of at least 75% of the
Corporations voting shares for stockholder amendments to
its By-laws.
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Under Florida law, the approval of a business combination with a
stockholder owning 10% or more of the voting shares of a
corporation requires the vote of holders of at least 2/3 of the
voting shares not owned by such stockholder, unless the
transaction is approved by a majority of the corporations
disinterested directors. In addition, Florida law generally
provides that shares of a corporation that are acquired in
excess of certain specified thresholds
13
will not possess any voting rights unless the voting rights are
approved by a majority of the corporations disinterested
stockholders.
These provisions of the Corporations Articles of
Incorporation and By-laws and of Florida law could discourage
potential acquisition proposals and could delay or prevent a
change in control, even though a majority of the
Corporations stockholders may consider such proposals
desirable. Such provision could also make it more difficult for
third parties to remove and replace members of the
Corporations Board of Directors. Moreover, these
provisions could diminish the opportunities for stockholders to
participate in certain tender offers, including tender offers at
prices above the then-current market price of the
Corporations common stock, and may also inhibit increases
in the trading price of the Corporations common stock that
could result from takeover attempts.
The Corporations business and financial performance
could be adversely affected, directly or indirectly, by natural
disasters, terrorist activities or international hostilities.
The impact of natural disasters, terrorist activities and
international hostilities cannot be predicted with respect to
severity or duration. However, any of these could impact the
Corporation directly (for example, by causing significant damage
to its facilities or preventing it from conducting its business
in the ordinary course), or could impact the Corporation
indirectly through a direct impact on its borrowers, depositors,
other customers, suppliers or other counterparties. The
Corporation could also suffer adverse consequences to the extent
that natural disasters, terrorist activities or international
hostilities affect the economy and financial and capital markets
generally. These types of impacts could lead, for example, to an
increase in delinquencies, bankruptcies or defaults that could
result in the Corporation experiencing higher levels of
non-performing assets, net charge-offs and provisions for loan
losses.
The Corporations ability to mitigate the adverse
consequences of such occurrences is in part dependent on the
quality of its resiliency planning, including its ability to
anticipate the nature of any such event that occurs. The adverse
impact of natural disasters or terrorist activities also could
be increased to the extent that there is a lack of preparedness
on the part of national or regional emergency responders or on
the part of other organizations and businesses that the
Corporation deals with, particularly those that it depends on.
Loss of members of the Corporations executive team
could have a negative impact on business.
The Corporations success is dependent, in part, on the
continued service of its executive officers. The loss of the
service of one or more of these executive officers could have a
negative impact on the Corporations business because of
their skills, relationships in the banking community and years
of industry experience and the difficulty of promptly finding
qualified replacement executive officers.
The Corporation may not be able to attract and retain skilled
people
The Corporations success depends, in large part, on its
ability to attract and retain key people. Competition for the
best people in most activities engaged in by the Corporation can
be intense and the Corporation may not be able to hire people or
to retain them. The unexpected loss of services of one or more
of the Corporations key personnel could have a material
adverse impact on the Corporations business because of
their skills, knowledge of the Corporations market, years
of industry experience and the difficulty of promptly finding
qualified replacement personnel.
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ITEM 1B.
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UNRESOLVED
STAFF COMMENTS
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NONE
The Corporation owns a six-story building in Hermitage,
Pennsylvania that serves as its headquarters, executive and
administrative offices. It shares this facility with Community
Banking and Wealth Management.
The Community Banking offices are located in 23 counties in
Pennsylvania and four counties in Ohio. Community Banking also
has commercial loan production offices located in four counties
in Florida and a mortgage loan production office located in one
county in Tennessee. Wealth Management operates in existing
14
Community Banking offices. The Consumer Finance offices are
located in 17 counties in Pennsylvania, 16 counties in Tennessee
and 12 counties in Ohio. The Insurance offices are located in
seven counties in Pennsylvania. At December 31, 2006, the
Corporations subsidiaries owned 118 of the
Corporations properties and leased 104 properties under
operating leases expiring at various dates through the year
2046. For additional information regarding the lease
commitments, see the Premises and Equipment footnote in the
Notes to Consolidated Financial Statements, which is included in
Item 8 of this Report.
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ITEM 3.
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LEGAL
PROCEEDINGS
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The Corporation and its subsidiaries are involved in a number of
legal proceedings arising from the conduct of their business
activities. These actions include claims brought against the
Corporation and its subsidiaries where the Corporation acted as
one or more of the following: a depository bank, lender,
underwriter, fiduciary, financial advisor, broker or engaged in
other business activities. Although the ultimate outcome cannot
be predicted with certainty, the Corporation believes that it
and its subsidiaries have valid defenses for all asserted
claims. Reserves are established for legal claims when losses
associated with the claims are judged to be probable and the
loss can be reasonably estimated.
Based on information currently available, advice of counsel,
available insurance coverage and established reserves, the
Corporation believes that the eventual outcome of all claims
against the Corporation and its subsidiaries will not,
individually or in the aggregate, have a material adverse effect
on the Corporations consolidated financial position or
results of operations. However, in the event of unexpected
future developments, it is possible that the ultimate resolution
of these matters, if unfavorable, could be material to the
Corporations consolidated results of operations for a
particular period.
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ITEM 4.
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SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
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NONE
15
EXECUTIVE
OFFICERS OF THE REGISTRANT
The name, age, position with the Corporation and principal
occupation for the last five years of each of the current
executive officers of the Corporation is set forth below:
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Position with the Corporation and Prior Occupations in
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Name
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Age
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Previous Five Years
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Stephen J. Gurgovits
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63
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President and Chief Executive
Officer of the Corporation since January 2004; Vice Chairman of
the Corporation from 1998 to 2003; Chairman of FNBPA since 2004;
President and Chief Executive Officer of FNBPA from 1988 to 2004.
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Brian F. Lilly
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49
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Chief Financial Officer of the
Corporation since January 2004; Chief Administrative Officer of
FNBPA since 2003; Chief Financial Officer of Billingzone, LLC,
Pittsburgh, Pennsylvania from 2000 to 2003; Chief Financial
Officer of various businesses of PNC Financial Services Group,
Inc., Pittsburgh, Pennsylvania from 1991 to 2000.
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Gary J. Roberts
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57
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President and Chief Executive
Officer of FNBPA since 2004; Senior Executive Vice President and
Chief Operating Officer of FNBPA from 2003 to 2004; Senior
Executive Vice President of FNBPA from 2002 to 2003; President
and Chief Executive Officer of Metropolitan National Bank,
Youngstown, Ohio from 1997 to 2002.
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David B. Mogle
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57
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Corporate Secretary of the
Corporation since 1994; Treasurer of the Corporation from 1986
to 2004; Secretary and Senior Vice President of FNBPA since
1994; Treasurer of FNBPA from 1999 to 2004.
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James G. Orie
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Chief Legal Officer of the
Corporation since January 2004; Vice President and Corporate
Counsel of the Corporation from 1996 to 2003; Senior Vice
President of FNBPA since January 2004.
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Scott D. Free
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Treasurer of the Corporation since
2005; Treasurer and Senior Vice President of FNBPA since 2005;
various titles at First Merit Corporation, Akron, Ohio from 1994
to 2004, last as Senior Vice President.
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There are no family relationships among any of the above
executive officers, and there is no arrangement or understanding
between any of the above executive officers and any other person
pursuant to which he was selected as an officer. The executive
officers are elected by and serve at the pleasure of the
Corporations Board of Directors.
16
PART II.
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ITEM 5.
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MARKET
FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
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The Corporations common stock is listed on the New York
Stock Exchange (NYSE) under the symbol FNB. The
accompanying table shows the range of high and low sales prices
per share of the common stock as reported by the NYSE for 2006
and 2005. The table also shows dividends per share paid on the
outstanding common stock during these periods. As of
January 31, 2007, there were 11,014 holders of record of
the Corporations common stock.
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Quarter Ended 2006
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Low
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|
High
|
|
|
Dividends
|
|
|
March 31
|
|
$
|
15.74
|
|
|
$
|
17.70
|
|
|
$
|
.235
|
|
June 30
|
|
|
15.19
|
|
|
|
17.24
|
|
|
|
.235
|
|
September 30
|
|
|
15.15
|
|
|
|
17.00
|
|
|
|
.235
|
|
December 31
|
|
|
16.31
|
|
|
|
18.85
|
|
|
|
.235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31
|
|
|
18.55
|
|
|
|
20.70
|
|
|
|
.23
|
|
June 30
|
|
|
17.49
|
|
|
|
19.85
|
|
|
|
.23
|
|
September 30
|
|
|
16.80
|
|
|
|
21.00
|
|
|
|
.23
|
|
December 31
|
|
|
16.18
|
|
|
|
18.87
|
|
|
|
.235
|
|
The information required by this Item 5 with respect to
securities authorized for issuance under equity compensation
plans is set forth in Part III, Item 12 of this Report.
The following table provides information about purchases by the
Corporation of its equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuer Purchases of Equity Securities(1)
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
|
Maximum
|
|
|
|
|
|
|
Average
|
|
|
Shares Purchased
|
|
|
Number of Shares
|
|
|
|
Total
|
|
|
Price
|
|
|
as Part of
|
|
|
that May Yet Be
|
|
|
|
Number of
|
|
|
Paid
|
|
|
Publicly
|
|
|
Purchased Under
|
|
|
|
Shares
|
|
|
per
|
|
|
Announced Plans
|
|
|
the Plans or
|
|
Period
|
|
Purchased
|
|
|
Share
|
|
|
or Programs
|
|
|
Programs
|
|
|
October 1 31, 2006
|
|
|
50,000
|
|
|
$
|
16.97
|
|
|
|
N/A
|
|
|
|
N/A
|
|
November 1 30, 2006
|
|
|
75,000
|
|
|
|
17.36
|
|
|
|
N/A
|
|
|
|
N/A
|
|
December 1 31, 2006
|
|
|
75,000
|
|
|
|
17.94
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
(1) |
|
All shares were purchased in open-market transactions under SEC
Rule 10b-18,
and were not purchased as part of a publicly announced purchase
plan or program. The Corporation has funded the shares required
for employee benefit plans and the Corporations dividend
reinvestment plan through open-market transactions or purchases
directed by the Corporation. This practice may be discontinued
at the Corporations discretion. |
17
STOCK
PERFORMANCE GRAPH
Comparison of Total Return on F.N.B. Corporations
Common Stock with Certain Averages
The following five-year performance graph compares the
cumulative total shareholder return (assuming reinvestment of
dividends) on the Corporations common stock
(u) to the NASDAQ Bank Index
( 5) and the Russell 2000
Index (). This stock performance graph assumes $100 was
invested on December 31, 2001, and the cumulative return is
measured as of each subsequent fiscal year end.
F.N.B.
Corporation Five-Year Stock Performance
Total Return, Including Stock and Cash
Dividends
Total
Return Performance
18
|
|
ITEM 6.
|
SELECTED
FINANCIAL DATA
|
Dollars in thousands, except per share data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
Total interest income
|
|
|
$342,422
|
|
|
|
$295,480
|
|
|
|
$253,568
|
|
|
|
$256,102
|
|
|
|
$275,061
|
|
Total interest expense
|
|
|
153,585
|
|
|
|
108,780
|
|
|
|
84,390
|
|
|
|
86,990
|
|
|
|
98,372
|
|
Net interest income
|
|
|
188,837
|
|
|
|
186,700
|
|
|
|
169,178
|
|
|
|
169,112
|
|
|
|
176,689
|
|
Provision for loan losses
|
|
|
10,412
|
|
|
|
12,176
|
|
|
|
16,280
|
|
|
|
17,155
|
|
|
|
13,624
|
|
Total non-interest income
|
|
|
79,275
|
|
|
|
57,807
|
|
|
|
77,326
|
|
|
|
67,319
|
|
|
|
65,595
|
|
Total non-interest expense
|
|
|
160,514
|
|
|
|
155,226
|
|
|
|
140,892
|
|
|
|
183,272
|
|
|
|
183,661
|
|
Income from continuing operations
|
|
|
67,649
|
|
|
|
55,258
|
|
|
|
61,795
|
|
|
|
27,038
|
|
|
|
31,271
|
|
Income from discontinued
operations, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31,751
|
|
|
|
32,064
|
|
Net income
|
|
|
67,649
|
|
|
|
55,258
|
|
|
|
61,795
|
|
|
|
58,789
|
|
|
|
63,335
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At Year-End
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
$6,007,592
|
|
|
|
$5,590,326
|
|
|
|
$5,027,009
|
|
|
|
$8,308,310
|
|
|
|
$7,090,232
|
|
Assets of discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,751,136
|
|
|
|
2,735,204
|
|
Net loans
|
|
|
4,200,569
|
|
|
|
3,698,340
|
|
|
|
3,338,994
|
|
|
|
3,213,058
|
|
|
|
3,188,223
|
|
Deposits
|
|
|
4,372,842
|
|
|
|
4,011,943
|
|
|
|
3,598,087
|
|
|
|
3,439,510
|
|
|
|
3,304,105
|
|
Short-term borrowings
|
|
|
363,910
|
|
|
|
378,978
|
|
|
|
395,106
|
|
|
|
232,966
|
|
|
|
255,370
|
|
Long-term and junior
subordinated debt
|
|
|
670,921
|
|
|
|
662,569
|
|
|
|
636,209
|
|
|
|
584,808
|
|
|
|
400,056
|
|
Liabilities of discontinued
operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,386,021
|
|
|
|
2,467,123
|
|
Total stockholders equity
|
|
|
537,372
|
|
|
|
477,202
|
|
|
|
324,102
|
|
|
|
606,909
|
|
|
|
598,596
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Common
Share (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
|
$1.15
|
|
|
|
$.99
|
|
|
|
$1.31
|
|
|
|
$.58
|
|
|
|
$.68
|
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
.69
|
|
|
|
.69
|
|
Net income
|
|
|
1.15
|
|
|
|
.99
|
|
|
|
1.31
|
|
|
|
1.27
|
|
|
|
1.37
|
|
Diluted earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
|
1.14
|
|
|
|
.98
|
|
|
|
1.29
|
|
|
|
.57
|
|
|
|
.67
|
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
.68
|
|
|
|
.68
|
|
Net income
|
|
|
1.14
|
|
|
|
.98
|
|
|
|
1.29
|
|
|
|
1.25
|
|
|
|
1.35
|
|
Cash dividends declared
|
|
|
.94
|
|
|
|
.925
|
|
|
|
.92
|
|
|
|
.93
|
|
|
|
.81
|
|
Book value (2)
|
|
|
8.90
|
|
|
|
8.31
|
|
|
|
6.47
|
|
|
|
13.10
|
|
|
|
12.93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average assets (2)
|
|
|
1.15
|
%
|
|
|
.99
|
%
|
|
|
1.29
|
%
|
|
|
.74
|
%
|
|
|
.93
|
%
|
Return on average equity (2)
|
|
|
13.15
|
|
|
|
12.44
|
|
|
|
23.54
|
|
|
|
9.66
|
|
|
|
10.97
|
|
Return on average tangible equity
(2)
|
|
|
26.30
|
|
|
|
23.62
|
|
|
|
30.42
|
|
|
|
16.81
|
|
|
|
11.46
|
|
Dividend payout ratio (2)
|
|
|
81.84
|
|
|
|
94.71
|
|
|
|
72.56
|
|
|
|
72.90
|
|
|
|
59.03
|
|
Average equity to average assets
(2)
|
|
|
8.73
|
|
|
|
7.97
|
|
|
|
5.50
|
|
|
|
7.66
|
|
|
|
8.51
|
|
|
|
|
(1) |
|
Per share amounts for 2003 and 2002 have been restated for the
common stock dividend declared on April 28, 2003. |
|
(2) |
|
Effective January 1, 2004, F.N.B. Corporation spun off its
Florida operations into a separate independent public company.
As a result of the spin-off, the Florida operations
earnings for prior years have been classified as discontinued
operations on the Corporations consolidated income
statements and the assets and liabilities related to the
discontinued operations have been disclosed separately on the
Corporations consolidated balance sheets for prior years.
In addition, note that the book value at period end,
stockholders equity, the return on average assets ratio,
the return on average equity ratio, return on average tangible
equity ratio and the dividend payout ratio for 2003 and 2002
include the discontinued operations. |
19
QUARTERLY
EARNINGS SUMMARY (Unaudited)
Dollars in thousands, except per share data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended 2006
|
|
Mar. 31
|
|
|
June 30
|
|
|
Sept. 30
|
|
|
Dec. 31
|
|
|
Total interest income
|
|
$
|
77,621
|
|
|
$
|
83,465
|
|
|
$
|
90,576
|
|
|
$
|
90,760
|
|
Total interest expense
|
|
|
31,802
|
|
|
|
36,772
|
|
|
|
42,209
|
|
|
|
42,802
|
|
Net interest income
|
|
|
45,819
|
|
|
|
46,693
|
|
|
|
48,367
|
|
|
|
47,958
|
|
Provision for loan losses
|
|
|
2,958
|
|
|
|
2,497
|
|
|
|
2,428
|
|
|
|
2,529
|
|
Gain on sale of securities
|
|
|
547
|
|
|
|
340
|
|
|
|
510
|
|
|
|
405
|
|
Other non-interest income
|
|
|
19,082
|
|
|
|
19,998
|
|
|
|
19,502
|
|
|
|
18,891
|
|
Total non-interest expense
|
|
|
39,771
|
|
|
|
40,723
|
|
|
|
40,625
|
|
|
|
39,395
|
|
Net income
|
|
|
15,802
|
|
|
|
16,635
|
|
|
|
17,619
|
|
|
|
17,593
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Common Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
.28
|
|
|
$
|
.29
|
|
|
$
|
.29
|
|
|
$
|
.29
|
|
Diluted earnings per share
|
|
|
.27
|
|
|
|
.28
|
|
|
|
.29
|
|
|
|
.29
|
|
Cash dividends declared
|
|
|
.235
|
|
|
|
.235
|
|
|
|
.235
|
|
|
|
.235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended 2005
|
|
Mar. 31
|
|
|
June 30
|
|
|
Sept. 30
|
|
|
Dec. 31
|
|
|
Total interest income
|
|
$
|
69,073
|
|
|
$
|
73,749
|
|
|
$
|
75,475
|
|
|
$
|
77,183
|
|
Total interest expense
|
|
|
23,490
|
|
|
|
26,335
|
|
|
|
28,555
|
|
|
|
30,400
|
|
Net interest income
|
|
|
45,583
|
|
|
|
47,414
|
|
|
|
46,920
|
|
|
|
46,783
|
|
Provision for loan losses
|
|
|
2,331
|
|
|
|
2,686
|
|
|
|
3,448
|
|
|
|
3,711
|
|
Gain (loss) on sale of securities
|
|
|
607
|
|
|
|
564
|
|
|
|
431
|
|
|
|
(13,305
|
)
|
Impairment loss on equity security
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,953
|
)
|
Other non-interest income
|
|
|
17,686
|
|
|
|
17,777
|
|
|
|
18,306
|
|
|
|
17,694
|
|
Total non-interest expense
|
|
|
39,888
|
|
|
|
37,766
|
|
|
|
37,501
|
|
|
|
40,071
|
|
Net income
|
|
|
14,910
|
|
|
|
17,541
|
|
|
|
18,086
|
|
|
|
4,721
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Common Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
.28
|
|
|
$
|
.31
|
|
|
$
|
.32
|
|
|
$
|
.08
|
|
Diluted earnings per share
|
|
|
.28
|
|
|
|
.31
|
|
|
|
.32
|
|
|
|
.08
|
|
Cash dividends declared
|
|
|
.23
|
|
|
|
.23
|
|
|
|
.23
|
|
|
|
.235
|
|
20
|
|
ITEM 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
Managements discussion and analysis represents an overview
of the consolidated results of operations and financial
condition of the Corporation. This discussion and analysis
should be read in conjunction with the consolidated financial
statements and notes presented in Item 8 of this Report.
Important
Note Regarding Forward-Looking Statements
Certain statements in this annual report are
forward-looking within the meaning of the Private
Securities Litigation Reform Act of 1995, which statements
generally can be identified by the use of forward-looking
terminology, such as may, will,
expect, estimate,
anticipate, believe, target,
plan, project or continue or
the negatives thereof or other variations thereon or similar
terminology, and are made on the basis of managements
plans and current analyses of the Corporation, its business and
the banking industry as a whole. These forward-looking
statements are subject to risks and uncertainties, including,
but not limited to, economic conditions, competition, interest
rate sensitivity and exposure to regulatory and legislative
changes. The above factors in some cases have affected, and in
the future could affect, the Corporations financial
performance and could cause actual results to differ materially
from those expressed or implied in such forward-looking
statements. The Corporation does not undertake to update
publicly or revise its forward-looking statements even if
experience or future changes make it clear that any previous
projected results expressed or implied therein will not be
realized.
Application
of Critical Accounting Policies
The Corporations consolidated financial statements are
prepared in accordance with U.S. generally accepted
accounting principles. Application of these principles requires
management to make estimates, assumptions and judgments that
affect the amounts reported in the consolidated financial
statements and accompanying notes. These estimates, assumptions
and judgments are based on information available as of the date
of the consolidated financial statements; accordingly, as this
information changes the consolidated financial statements could
reflect different estimates, assumptions and judgments. Certain
policies inherently have a greater reliance on the use of
estimates, assumptions and judgments and, as such, have a
greater possibility of producing results that could be
materially different than originally reported.
The most significant accounting policies followed by the
Corporation are presented in the Summary of Significant
Accounting Policies footnote in the Notes to Consolidated
Financial Statements, which is included in Item 8 of this
Report. These policies, along with the disclosures presented in
the Notes to Consolidated Financial Statements, provide
information on how significant assets and liabilities are valued
in the consolidated financial statements and how those values
are determined.
Management views critical accounting policies to be those which
are highly dependent on subjective or complex judgments,
estimates and assumptions, and where changes in those estimates
and assumptions could have a significant impact on the
consolidated financial statements. Management currently views
the determination of the allowance for loan losses, securities
valuation, goodwill and other intangible assets and income taxes
to be critical accounting policies.
Allowance
for Loan Losses
The allowance for loan losses addresses credit losses inherent
in the loan portfolio and is presented as a reserve against
loans on the consolidated balance sheet. Loan losses are charged
off against the allowance for loan losses, with recoveries of
amounts previously charged off credited to the allowance for
loan losses. Provisions for loan losses are charged to
operations based on managements periodic evaluation of the
adequacy of the allowance.
Estimating the amount of the allowance for loan losses requires
significant judgment and the use of estimates related to the
amount and timing of expected future cash flows on impaired
loans, estimated losses on pools of homogeneous loans based on
historical loss experience and consideration of current economic
trends and conditions, all of which may be susceptible to
significant change.
21
Managements assessment of the adequacy of the allowance
for loan losses considers individual impaired loans, pools of
homogeneous loans with similar risk characteristics and other
environmental risk factors. The allowance established for
individual impaired loans reflects expected losses resulting
from analyses developed through specific credit allocations for
individual loans. The specific credit allocations are based on
regular analyses of all loans over a fixed dollar amount where
the internal credit rating is at or below a predetermined
classification. These analyses involve a high degree of judgment
in estimating the amount of loss associated with specific
impaired loans, including estimating the amount and timing of
future cash flows, current market value of the loan and
collateral values. Independent loan review results are evaluated
and considered in estimating reserves as well as the experience,
ability and depth of lending management and staff. The
consideration of this component of the allowance requires
considerable judgment in order to estimate inherent loss
exposures.
Pools of homogeneous loans with similar risk characteristics are
also assessed for probable losses. A loss migration and
historical charge-off analysis is performed quarterly and loss
factors are updated regularly based on actual experience. This
analysis examines historical loss experience, the related
internal gradings of loans charged off and considers inherent
but undetected losses within the portfolio. Inherent but
undetected losses may arise due to uncertainties in economic
conditions, delays in obtaining information, including
unfavorable information about a borrowers financial
condition, the difficulty in identifying triggering events that
correlate perfectly to subsequent loss rates and risk factors
that have not yet manifested themselves in loss allocation
factors. The Corporation has grown through acquisition and
expanded the geographic footprint in which it operates. As a
result, historical loss experience data used to establish loss
estimates may not precisely correspond to the current portfolio.
Also, loss data representing a complete economic cycle is not
available for all sectors. Uncertainty surrounding the strength
and timing of economic cycles also affects estimates of loss.
The historical loss experience used in the migration and
historical charge-off analysis may not be representative of
actual unrealized losses inherent in the portfolio.
Management also evaluates the impact of environmental factors
which pose additional risks that may not adequately be addressed
in the analyses described above. Such environmental factors
could include: levels of, and trends in, consumer bankruptcies,
delinquencies, impaired loans, charge-offs and recoveries;
trends in volume and terms of loans; effects of any changes in
lending policies and procedures including those for
underwriting, collection, charge-off and recovery; experience,
ability and depth of lending management and staff; national and
local economic trends and conditions; industry and geographic
conditions; concentrations of credit such as, but not limited
to, local industries, their employees or suppliers; or any other
common risk factor that might affect loss experience across one
or more components of the portfolio. The determination of this
component of the allowance requires considerable management
judgment.
There are many factors affecting the allowance for loan losses;
some are quantitative while others require qualitative judgment.
Although management believes its process for determining the
allowance adequately considers all of the factors that could
potentially result in credit losses, the process includes
subjective elements and may be susceptible to significant
change. To the extent actual outcomes differ from management
estimates, additional provisions for loan losses could be
required that could adversely affect the Corporations
earnings or financial position in future periods.
The Allowance and Provision for Loan Losses section of this
financial review includes a discussion of the factors driving
changes in the allowance for loan losses during the current
period.
Securities
Valuation
Investment securities, which are composed of debt securities and
certain equity securities, comprise a significant portion of the
Corporations consolidated balance sheet. Such securities
can be classified as Trading, Securities Held
to Maturity or Securities Available for Sale.
As of December 31, 2006 and 2005, the Corporation did not
carry a portfolio of trading securities.
Securities held to maturity are comprised of debt securities,
which were purchased with managements positive intent and
ability to hold such securities until their maturity. Such
securities are carried at cost, adjusted for related
amortization of premiums and accretion of discounts through
interest income from securities.
22
Securities that are not classified as trading or held to
maturity are classified as available for sale. The
Corporations available for sale securities portfolio is
comprised of debt securities and marketable equity securities.
Such securities are carried at fair value with net unrealized
gains and losses not deemed
other-than-temporary
reported separately as a component of other comprehensive
income, net of tax. Realized gains and losses on the sale of and
other-than-temporary
impairment charges on available for sale securities are recorded
on the consolidated statement of income. Realized gains and
losses on the sale of securities are determined using the
specific-identification method.
Securities are periodically reviewed for
other-than-temporary
impairment based upon a number of factors, including but not
limited to, length of time and extent to which the market value
has been less than cost, financial condition of the underlying
issuer, ability of the issuer to meet contractual obligations,
the likelihood of the securitys ability to recover any
decline in its market value and managements intent and
ability to retain the security for a period of time sufficient
to allow for recovery in market value. Among the factors that
are considered in determining managements intent and
ability is a review of the Corporations capital adequacy,
interest rate risk position and liquidity. The assessment of a
securitys ability to recover any decline in market value,
the ability of the issuer to meet contractual obligations and
managements intent and ability requires considerable
judgment. A decline in value that is considered to be
other-than-temporary
is recorded as a loss within non-interest income in the
consolidated statement of income.
Goodwill
and Other Intangible Assets
Goodwill arising from business acquisitions represents the value
attributable to unidentifiable intangible elements in the
businesses acquired. The majority of the Corporations
goodwill relates to value inherent in its Community Banking and
Insurance segments. The amount of goodwill is impacted by the
fair value of underlying assets and liabilities acquired,
including loans, deposits and long-term debt, which is
significantly influenced by managements estimates and
assumptions which are judgmental in nature.
The Corporation tests goodwill for impairment at least annually,
or when indicators of impairment exist, to determine whether
impairment may exist. Determining the fair value of a reporting
unit under the first step of the goodwill impairment test and
determining the fair value of individual assets and liabilities
of a reporting unit under the second step of the goodwill
impairment test are judgmental in nature and often involves the
use of significant estimates and assumptions. Similarly,
estimates and assumptions are used in determining the fair value
of other intangible assets. These estimates and assumptions
could have a significant impact on whether or not an impairment
charge is recognized and also the magnitude of any such charge.
The Corporation performs an internal valuation analysis and
considers other market information that is publicly available.
Estimates of fair value are primarily determined using
discounted cash flows, market comparisons and recent
transactions. These approaches use significant estimates and
assumptions including projected future cash flows, discount rate
reflecting the risk inherent in future cash flows, growth rate
and determination and evaluation of appropriate market
comparables.
The value of goodwill is dependent upon the Corporations
ability to provide quality, cost-effective services in the face
of competition. As such, goodwill value is supported ultimately
by revenue that is driven by the volume of business transacted.
A decline in earnings as a result of a lack of growth or the
Corporations inability to deliver cost effective services
over sustained periods can lead to impairment of goodwill which
could result in additional expense and adversely impact earnings
in future periods.
Other intangible assets that have finite lives, such as core
deposit intangibles and customer and renewal lists, are
amortized over their estimated useful lives and are also subject
to periodic impairment testing.
Income
Taxes
The Corporation is subject to the income tax laws of the U.S.,
its states and other jurisdictions where it conducts business.
The laws are complex and subject to different interpretations by
the taxpayer and various taxing authorities. In determining the
provision for income taxes, management must make judgments and
estimates about the application of these inherently complex
laws, related regulations and case law. In the process of
preparing the Corporations tax returns, management
attempts to make reasonable interpretations of the tax laws.
These
23
interpretations are subject to challenge by the taxing
authorities based on audit results or to further interpretation
based on managements ongoing assessment of the facts and
evolving case law.
The Corporation establishes a valuation allowance when it is
more likely than not that the Corporation will not be able to
realize a benefit from its deferred tax assets, or when future
deductibility is uncertain. Periodically, the valuation
allowance is reviewed and adjusted based on managements
assessments of realizable deferred tax assets.
On a quarterly basis, management assesses the reasonableness of
the Corporations effective tax rate based on
managements current best estimate of net income and the
applicable taxes for the full year. Deferred tax assets and
liabilities are assessed on an annual basis, or sooner, if
business events or circumstances warrant.
Recent
Accounting Pronouncements and Developments
The New and Proposed Accounting Standards footnote in the Notes
to Consolidated Financial Statements, which is included in
Item 8 of this Report, discusses new accounting
pronouncements adopted by the Corporation in 2006 and the
expected impact of accounting pronouncements recently issued or
proposed but not yet required to be adopted.
Overview
The Corporation is a diversified financial services company
headquartered in Hermitage, Pennsylvania. Its primary businesses
include commercial and retail banking, consumer finance, asset
management and insurance. The Corporation operates its retail
and commercial banking business through a full service branch
network in Pennsylvania and Ohio, commercial loan production
offices in Florida and a mortgage loan production office in
Tennessee, and conducts selected consumer finance business in
Pennsylvania, Ohio and Tennessee.
In 2006, the Corporation successfully completed the acquisition
of Legacy, a bank holding company headquartered in Harrisburg,
Pennsylvania, with eight branches in the Harrisburg market.
During 2006, the Corporation also opened two additional
commercial loan production offices in Florida and a mortgage
loan production office in Tennessee to continue to supplement
the Corporations core market loan production.
2006 was a challenging year for the banking industry. The
Federal Reserve Board increased short term interest rates four
times totaling 1.0% and as a result the yield curve continued to
flatten and became slightly inverted in the latter half of the
year. As the yield curve becomes flatter, there is less
opportunity to increase net interest income by taking on
interest rate risk as the differential between short-term and
long-term interest rates decreases. The Corporation experienced
less opportunity to earn higher rates on earning assets as
compared to the need to increase rates on its deposits and
repurchase agreements driven by market rates and competitive
prices, which resulted in a 14 basis point decrease in the
Corporations net interest margin.
Despite a challenging economic environment the Corporation
delivered a strong financial performance. Net interest income
increased by $2.6 million with the increase in earning
assets substantially offset by a decline in the net interest
margin. The provision for loan losses decreased by
$1.8 million due to improving trends in non-accrual loans
and the commercial and consumer loan portfolios. Non-interest
income increased by $21.5 million as the prior year was
negatively impacted by an $11.7 million loss on the sale of
securities and a $2.0 million
other-than-temporary
impairment loss on an equity security. Also, insurance,
securities and trust revenues all increased due to organic
growth in their respective customer bases and the
Corporations acquisitions in 2005 and 2006. Non-interest
expense increased $5.3 million primarily due to higher
operating expenses resulting from acquisitions in 2005 and 2006.
Total average loans increased as a result of a combination of
organic growth and the Corporations acquisitions in 2005
and 2006. The Corporation focused on its desirable customer
relationship oriented higher yielding commercial loan portfolio
offset by a managed decline in the indirect loan portfolio.
Total average deposit growth in 2006 was due to organic growth
in certificates and other time deposits and customer repurchase
agreements and the Corporations acquisitions in 2005 and
2006. The Corporation experienced an unfavorable shift in its
deposit mix from non-interest bearing demand and lower interest
bearing
24
savings deposits toward more price sensitive certificates of
deposit and other higher interest bearing deposits. The
Corporation also experienced growth in its customer repurchase
agreements resulting from the implementation of a strategic
initiative to increase and expand its commercial lending
relationships. The Corporation continues to expand its suite of
deposit products to attract and retain customers by offering
rates favorable to current short-term borrowing costs.
Asset quality continued to improve during 2006. The Corporation
experienced favorable trends in key asset quality indicators
including declines in delinquent loans, non-performing loans and
net loan charge-offs as a percentage of average loans. Improving
trends in non-accrual loans and the commercial and consumer loan
portfolios continued to produce lower levels of expected losses.
The Corporation also benefited from actions taken to improve the
ongoing efficiency of its customer service model and from its
successful implementation of other cost control initiatives
including the modernization of its pension and postretirement
plans.
Results
of Operations
Year
Ended December 31, 2006 Compared to Year Ended
December 31, 2005
Net income for 2006 was $67.6 million or $1.14 per
diluted share, compared to net income for 2005 of
$55.3 million or $.98 per diluted share. Net income
increased by $12.4 million or 22.4% primarily due to the
Corporations acquisitions in 2005 and 2006 and as a result
of a balance sheet repositioning, an
other-than-temporary
impairment loss on an equity security and efficiency improvement
charges, all of which reduced 2005 net income by
$10.9 million after-tax. Also, net income increased from
improved profitability of the Corporations insurance,
securities and trust businesses.
Net income for the years 2006 and 2005 was favorably impacted by
the acquisition of Legacy on May 26, 2006 and the Penn
Group Insurance, Inc. (Penn Group), North East and NSD
acquisitions on November 1, 2005, October 7, 2005 and
February 18, 2005, respectively. The favorable impact of
the Corporations acquisitions in 2005 and 2006 was
substantially offset by the 14 basis point decrease in the
net interest margin.
The balance sheet repositioning, completed during the fourth
quarter of 2005, reduced the Corporations exposure to an
anticipated rise in interest rates and resulted in a realized
loss of $8.6 million after-tax from the sale of fixed rate
available for sale debt securities. The Corporation also
recorded an
other-than-temporary
impairment loss on an equity security of $1.3 million
after-tax in 2005. For additional information related to the
balance sheet restructuring and
other-than-temporary
impairment loss refer to the Balance Sheet Repositioning,
Efficiency Improvement Charges and Merger Expenses and
Securities footnotes in the Notes to Consolidated Financial
Statements, which is included in Item 8 of this Report.
Also, 2005 income taxes were favorably impacted by
$1.0 million due to the successful resolution of an
uncertain tax position.
The Corporations return on average equity was 13.15%, its
return on average tangible equity was 26.30% and its return on
average assets was 1.15% for 2006, as compared to 12.44%, 23.62%
and .99%, respectively, for 2005.
25
The following table provides information regarding the average
balances and yields and rates on interest earning assets and
interest bearing liabilities (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
Interest
|
|
|
|
|
|
|
|
|
Interest
|
|
|
|
|
|
|
|
|
Interest
|
|
|
|
|
|
|
Average
|
|
|
Income/
|
|
|
Yield/
|
|
|
Average
|
|
|
Income/
|
|
|
Yield/
|
|
|
Average
|
|
|
Income/
|
|
|
Yield/
|
|
|
|
Balance
|
|
|
Expense
|
|
|
Rate
|
|
|
Balance
|
|
|
Expense
|
|
|
Rate
|
|
|
Balance
|
|
|
Expense
|
|
|
Rate
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits with banks
|
|
$
|
1,540
|
|
|
$
|
76
|
|
|
|
4.97
|
%
|
|
$
|
1,643
|
|
|
$
|
50
|
|
|
|
3.04
|
%
|
|
$
|
1,377
|
|
|
$
|
14
|
|
|
|
1.02
|
%
|
Federal funds sold
|
|
|
23,209
|
|
|
|
1,184
|
|
|
|
5.03
|
|
|
|
8,615
|
|
|
|
357
|
|
|
|
4.14
|
|
|
|
21
|
|
|
|
|
|
|
|
.89
|
|
Short-term investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,389
|
|
|
|
|
|
|
|
|
|
Taxable investment securities(1)
|
|
|
965,533
|
|
|
|
47,424
|
|
|
|
4.92
|
|
|
|
1,111,743
|
|
|
|
49,417
|
|
|
|
4.45
|
|
|
|
970,898
|
|
|
|
42,368
|
|
|
|
4.36
|
|
Non-taxable investment
securities(1)(2)
|
|
|
145,858
|
|
|
|
7,529
|
|
|
|
5.16
|
|
|
|
136,944
|
|
|
|
6,873
|
|
|
|
5.02
|
|
|
|
83,139
|
|
|
|
4,242
|
|
|
|
5.10
|
|
Loans(2)(3)
|
|
|
4,059,936
|
|
|
|
290,143
|
|
|
|
7.15
|
|
|
|
3,685,073
|
|
|
|
242,246
|
|
|
|
6.57
|
|
|
|
3,278,600
|
|
|
|
209,379
|
|
|
|
6.39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest earning assets
|
|
|
5,196,076
|
|
|
|
346,356
|
|
|
|
6.67
|
|
|
|
4,944,018
|
|
|
|
298,943
|
|
|
|
6.05
|
|
|
|
4,335,424
|
|
|
|
256,003
|
|
|
|
5.90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
|
116,643
|
|
|
|
|
|
|
|
|
|
|
|
113,075
|
|
|
|
|
|
|
|
|
|
|
|
101,584
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
|
(52,757
|
)
|
|
|
|
|
|
|
|
|
|
|
(52,106
|
)
|
|
|
|
|
|
|
|
|
|
|
(48,270
|
)
|
|
|
|
|
|
|
|
|
Premises and equipment
|
|
|
85,791
|
|
|
|
|
|
|
|
|
|
|
|
82,639
|
|
|
|
|
|
|
|
|
|
|
|
78,034
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
544,172
|
|
|
|
|
|
|
|
|
|
|
|
484,351
|
|
|
|
|
|
|
|
|
|
|
|
305,545
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,889,925
|
|
|
|
|
|
|
|
|
|
|
$
|
5,571,977
|
|
|
|
|
|
|
|
|
|
|
$
|
4,772,317
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing demand
|
|
$
|
1,256,829
|
|
|
|
29,793
|
|
|
|
2.37
|
|
|
$
|
980,267
|
|
|
|
10,680
|
|
|
|
1.09
|
|
|
$
|
852,541
|
|
|
|
6,940
|
|
|
|
0.81
|
|
Savings
|
|
|
627,522
|
|
|
|
8,911
|
|
|
|
1.42
|
|
|
|
692,736
|
|
|
|
6,236
|
|
|
|
0.90
|
|
|
|
641,655
|
|
|
|
3,656
|
|
|
|
0.57
|
|
Certificates and other time
|
|
|
1,729,836
|
|
|
|
67,975
|
|
|
|
3.93
|
|
|
|
1,574,464
|
|
|
|
49,196
|
|
|
|
3.12
|
|
|
|
1,339,525
|
|
|
|
41,804
|
|
|
|
3.12
|
|
Repurchase agreements
|
|
|
213,045
|
|
|
|
9,099
|
|
|
|
4.21
|
|
|
|
182,779
|
|
|
|
4,693
|
|
|
|
2.57
|
|
|
|
130,698
|
|
|
|
1,380
|
|
|
|
1.06
|
|
Other short-term borrowings
|
|
|
145,064
|
|
|
|
6,686
|
|
|
|
4.55
|
|
|
|
266,839
|
|
|
|
9,808
|
|
|
|
3.68
|
|
|
|
226,633
|
|
|
|
5,898
|
|
|
|
2.60
|
|
Long-term debt
|
|
|
542,208
|
|
|
|
20,752
|
|
|
|
3.83
|
|
|
|
566,757
|
|
|
|
19,872
|
|
|
|
3.51
|
|
|
|
511,204
|
|
|
|
18,726
|
|
|
|
3.66
|
|
Junior subordinated debt
|
|
|
142,286
|
|
|
|
10,369
|
|
|
|
7.29
|
|
|
|
128,866
|
|
|
|
8,295
|
|
|
|
6.44
|
|
|
|
128,866
|
|
|
|
5,986
|
|
|
|
4.65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing liabilities
|
|
|
4,656,790
|
|
|
|
153,585
|
|
|
|
3.29
|
|
|
|
4,392,708
|
|
|
|
108,780
|
|
|
|
2.48
|
|
|
|
3,831,122
|
|
|
|
84,390
|
|
|
|
2.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing demand
|
|
|
649,191
|
|
|
|
|
|
|
|
|
|
|
|
661,668
|
|
|
|
|
|
|
|
|
|
|
|
609,626
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
69,581
|
|
|
|
|
|
|
|
|
|
|
|
73,362
|
|
|
|
|
|
|
|
|
|
|
|
68,965
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,375,562
|
|
|
|
|
|
|
|
|
|
|
|
5,127,738
|
|
|
|
|
|
|
|
|
|
|
|
4,509,713
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders
equity
|
|
|
514,363
|
|
|
|
|
|
|
|
|
|
|
|
444,239
|
|
|
|
|
|
|
|
|
|
|
|
262,604
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,889,925
|
|
|
|
|
|
|
|
|
|
|
$
|
5,571,977
|
|
|
|
|
|
|
|
|
|
|
$
|
4,772,317
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excess of interest earning assets
over interest bearing liabilities
|
|
$
|
539,286
|
|
|
|
|
|
|
|
|
|
|
$
|
551,310
|
|
|
|
|
|
|
|
|
|
|
$
|
504,302
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (FTE)
|
|
|
|
|
|
|
192,771
|
|
|
|
|
|
|
|
|
|
|
|
190,163
|
|
|
|
|
|
|
|
|
|
|
|
171,613
|
|
|
|
|
|
Tax-equivalent adjustment
|
|
|
|
|
|
|
3,934
|
|
|
|
|
|
|
|
|
|
|
|
3,463
|
|
|
|
|
|
|
|
|
|
|
|
2,435
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
$
|
188,837
|
|
|
|
|
|
|
|
|
|
|
$
|
186,700
|
|
|
|
|
|
|
|
|
|
|
$
|
169,178
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest spread
|
|
|
|
|
|
|
|
|
|
|
3.38
|
%
|
|
|
|
|
|
|
|
|
|
|
3.57
|
%
|
|
|
|
|
|
|
|
|
|
|
3.70
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin(2)
|
|
|
|
|
|
|
|
|
|
|
3.71
|
%
|
|
|
|
|
|
|
|
|
|
|
3.85
|
%
|
|
|
|
|
|
|
|
|
|
|
3.96
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The average balances and yields earned on securities are based
on historical cost. |
|
(2) |
|
The interest income amounts are reflected on a fully taxable
equivalent (FTE) basis which adjusts for the tax benefit of
income on certain tax-exempt loans and investments using the
federal statutory tax rate of 35.0% for each period presented.
The yield on earning assets and the net interest margin are
presented on an FTE basis. The Corporation believes this measure
to be the preferred industry measurement of net interest income
and provides relevant comparison between taxable and non-taxable
amounts. |
|
(3) |
|
Average balances include non-accrual loans. Loans consist of
average total loans less average unearned income. The amount of
loan fees included in interest income on loans is immaterial. |
26
Net
Interest Income
Net interest income, which is the Corporations major
source of revenue, is the difference between interest income
from earning assets (loans, securities and federal funds sold)
and interest expense paid on liabilities (deposits, repurchase
agreements and short- and long-term borrowings). In 2006, net
interest income, which comprised 70.4% of net revenue (net
interest income plus non-interest income) as compared to 76.4%
in 2005, was negatively affected by the general level of
interest rates, changes in interest rates, the flattening of the
yield curve and the changes in the amount and mix of earning
assets and interest bearing liabilities.
Net interest income, on a fully taxable equivalent basis
increased $2.6 million from $190.2 million for 2005 to
$192.8 million for 2006. The increase primarily resulted
from an increase in average earning assets offset by a decrease
in the net interest margin. Average earning assets increased
$252.1 million or 5.1% and average interest bearing
liabilities increased $254.1 million or 5.8% from 2005 due
to organic commercial loan and deposit growth and the
acquisitions in 2005 and 2006. However, the Corporations
net interest margin decreased by 14 basis points from 2005
to 3.71% for 2006 and was negatively impacted by a flattening of
the yield curve which became slightly inverted in the latter
half of 2006. As such, the Corporation experienced less
opportunity to earn higher rates on earning assets compared to
the need to increase rates on its deposits and repurchase
agreements driven by interest rates and competitive pricing.
Details on changes in tax equivalent net interest income
attributed to changes in earning assets, interest bearing
liabilities, yields and cost of funds can be found in the
preceding table.
The following table sets forth certain information regarding
changes in net interest income attributable to changes in the
volumes of interest earning assets and interest bearing
liabilities and changes in the rates for the periods indicated
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 vs 2005
|
|
|
2005 vs 2004
|
|
|
|
Volume
|
|
|
Rate
|
|
|
Net
|
|
|
Volume
|
|
|
Rate
|
|
|
Net
|
|
|
Interest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits with
banks
|
|
$
|
(3
|
)
|
|
$
|
29
|
|
|
$
|
26
|
|
|
$
|
3
|
|
|
$
|
33
|
|
|
$
|
36
|
|
Federal funds sold
|
|
|
728
|
|
|
|
99
|
|
|
|
827
|
|
|
|
354
|
|
|
|
3
|
|
|
|
357
|
|
Securities
|
|
|
(7,028
|
)
|
|
|
5,691
|
|
|
|
(1,337
|
)
|
|
|
8,870
|
|
|
|
810
|
|
|
|
9,680
|
|
Loans
|
|
|
25,461
|
|
|
|
22,436
|
|
|
|
47,897
|
|
|
|
26,782
|
|
|
|
6,085
|
|
|
|
32,867
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,158
|
|
|
|
28,255
|
|
|
|
47,413
|
|
|
|
36,009
|
|
|
|
6,931
|
|
|
|
42,940
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing demand
|
|
|
3,699
|
|
|
|
15,414
|
|
|
|
19,113
|
|
|
|
1,131
|
|
|
|
2,609
|
|
|
|
3,740
|
|
Savings
|
|
|
255
|
|
|
|
2,420
|
|
|
|
2,675
|
|
|
|
312
|
|
|
|
2,268
|
|
|
|
2,580
|
|
Certificates and other time
|
|
|
5,417
|
|
|
|
13,362
|
|
|
|
18,779
|
|
|
|
7,392
|
|
|
|
|
|
|
|
7,392
|
|
Repurchase agreements
|
|
|
880
|
|
|
|
3,526
|
|
|
|
4,406
|
|
|
|
724
|
|
|
|
2,589
|
|
|
|
3,313
|
|
Other short-term borrowings
|
|
|
(5,308
|
)
|
|
|
2,186
|
|
|
|
(3,122
|
)
|
|
|
1,170
|
|
|
|
2,740
|
|
|
|
3,910
|
|
Long-term debt
|
|
|
(886
|
)
|
|
|
1,766
|
|
|
|
880
|
|
|
|
2,205
|
|
|
|
(1,059
|
)
|
|
|
1,146
|
|
Junior subordinated debt
|
|
|
914
|
|
|
|
1,160
|
|
|
|
2,074
|
|
|
|
|
|
|
|
2,309
|
|
|
|
2,309
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,971
|
|
|
|
39,834
|
|
|
|
44,805
|
|
|
|
12,934
|
|
|
|
11,456
|
|
|
|
24,390
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Change
|
|
$
|
14,187
|
|
|
$
|
(11,579
|
)
|
|
$
|
2,608
|
|
|
$
|
23,075
|
|
|
$
|
(4,525
|
)
|
|
$
|
18,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The amount of change not solely due to rate or volume was
allocated between the change due to rate and the change due to
volume based on the net size of the rate and volume changes. |
|
(2) |
|
Interest income amounts are reflected on a FTE basis which
adjusts for the tax benefit of income on certain tax-exempt
loans and investments using the federal statutory tax rate of
35.0% for each period presented. The Corporation believes this
measure to be the preferred industry measurement of net interest
income and provides relevant comparison between taxable and
non-taxable amounts. |
27
Interest income, on a fully taxable equivalent basis, of
$346.4 million in 2006 increased by $47.4 million or
15.9% from 2005. This increase was caused by an improvement in
the yield on earning assets of 62 basis points to 6.67% for
2006 and an increase in average earning assets of
$252.1 million, or 5.1%, from 2005. The increase in earning
assets was driven by an increase of $374.9 million in
average loans, partially offset by a decrease of
$146.3 million in investment securities. The increase in
average loans was a result of a combination of organic growth
and the Corporations acquisitions in 2005 and 2006 while
the decrease in investment securities was a result of a planned
reduction to provide funding for loan growth.
Interest expense of $153.6 million for 2006 increased by
$44.8 million or 41.2% from 2005. This increase was
primarily attributable to an increase of 81 basis points in the
Corporations cost of funds to 3.29% for 2006. Also,
interest bearing liabilities increased $264.1 million or
6.0% to average $4.7 billion for 2006. This growth was
primarily attributable to a combined increase of
$211.3 million or 12.6% in the core deposit categories of
interest bearing demand deposit and savings, a
$30.3 million or 16.7% increase in customer repurchase
agreements and an increase in certificates and other time
deposits of $155.4 million or 9.9%. Interest bearing
demand, savings and certificates and other time deposits
increased due to organic growth resulting from an expanded suite
of deposit products designed to attract and retain customers and
from the acquisitions in 2005 and 2006. Customer repurchase
agreements increased primarily due to the implementation of a
strategic initiative to increase and expand commercial deposit
relationships. The average balance for junior subordinated debt
owed to unconsolidated subsidiary trusts also increased by
$13.4 million or 10.4% for 2006 due to the issuance of
$21.5 million of new debt to partially finance the Legacy
acquisition. Offsetting these increases were declines in average
short-term borrowings of $121.8 million or 45.6% from 2005
and average long-term debt of $24.5 million or 4.3% from
2005.
Provision
for Loan Losses
The provision for loan losses is determined based on
managements estimates of the appropriate level of
allowance for loan losses needed to absorb probable losses
inherent in the loan portfolio, after giving consideration to
charge-offs and recoveries for the period.
The provision for loan losses of $10.4 million in 2006
decreased $1.8 million or 14.5% from 2005 primarily due to
continued improvement in credit quality. Improving trends in
non-accrual loans and the commercial and consumer loan
portfolios continued to produce lower levels of expected losses.
More specifically, in 2006 net charge-offs totaled
$11.6 million or .29% as a percentage of average loans
compared to $16.9 million or .46% as a percentage of
average loans in 2005. The 2005 results included the charge-off
of a $1.5 million loan or .05% that was on non-accrual and
was previously fully reserved for in the allowance for loan
losses. The ratio of non-performing loans to total loans was
.66% at December 31, 2006 compared to .88% at
December 31, 2005 and the ratio of non-performing assets to
total assets was .57% and .71%, respectively, for these same
periods. For additional information, refer to the Allowance and
Provision for Loan Losses section of this financial review.
Non-Interest
Income
Total non-interest income of $79.3 million in 2006
increased $21.5 million or 37.1% from 2005. This increase
resulted primarily from a $1.8 million gain on the sale of
securities in 2006 compared to a loss of $11.7 million in
2005. Also, the Corporation recorded an
other-than-temporary
impairment loss on an equity security of $2.0 million in
2005. Additionally, the year over year increase in total
non-interest income was due to modest increases in charges and
fees.
Service charges on loans and deposits of $40.1 million
increased $1.9 million or 5.1% from 2005 primarily because
the Corporations customer base expanded as a result of the
acquisitions in 2006 and 2005 and also due to selected fee
increases.
Insurance commissions and fees of $14.0 million increased
$1.2 million or 9.3% from 2005 principally due to an
increase in contingent fees of $0.3 million, organic
customer growth and the Penn Group acquisition in the fourth
quarter of 2005.
Securities commissions of $4.9 million for 2006 increased
by $.4 million or 8.5% from 2005 levels, primarily due to
higher annuity and securities sales and also was benefited by
the Legacy acquisition in 2006.
28
Trust fees of $7.8 million in 2006 increased by
$.7 million or 9.2% due to growth in assets under
management resulting from higher equity valuations in 2006
compared to 2005, growth in overall trust assets and the number
of trust accounts and from the acquisition of Legacy in 2006.
Gain on sale of securities of $1.8 million increased
$13.5 million from a loss of $11.7 million in 2005.
During the fourth quarter of 2005, management changed its intent
with respect to certain available for sale securities and as a
result sold $559.6 million of fixed-rate securities
resulting in a $13.3 million loss. These 2005 sales were
part of the Corporations initiative to improve its
interest rate risk position and improve future income levels.
The Corporation recognized an
other-than-temporary
impairment loss of $2.0 million on an equity security
classified as available for sale in 2005. The Corporation
recognized no such impairment loss in 2006.
Gain on sale of mortgage loans of $1.6 million for 2006
increased by $0.2 million or 15.4% from 2005 due to
increased mortgage origination volume in 2006.
Other income of $5.8 million for 2006 increased
$1.6 million or 37.0% from 2005. The increase was primarily
attributable to gains on settlements of impaired loans acquired
of $1.3 million. Also, income from non-marketable equity
securities increased $0.7 million from 2005 which was
partially offset by a decrease in gains on the sale of fixed
assets of $0.4 million from 2005.
Non-Interest
Expense
Total non-interest expense of $160.5 million in 2006
increased $5.3 million or 3.4% from 2005. This increase was
primarily attributable to operating expenses resulting from the
acquisitions in 2006 and 2005. As a result of improvements in
its customer service model, the Corporation recorded an expense
of $1.5 million for severance costs related to staff
reductions implemented in 2005. This amount also included early
retirement and supplemental retirement benefit costs for former
employees as well as other miscellaneous items.
Salaries and employee benefits of $83.6 million in 2006
increased $2.6 million or 3.2% from 2005. This increase was
the result of additional costs associated with the employees
retained from the acquisitions in 2006 and 2005, combined with
normal compensation and benefit expense increases partially
offset by lower salary and benefit costs due to staff reductions
in the fourth quarter of 2005 and lower pension and
postretirement plan costs due to the changes in the
Corporations retirement plans.
Combined net occupancy and equipment expense of
$27.6 million in 2006 increased $2.0 million or 7.8%
from the combined 2005 level. The increase was primarily due to
additional operating costs associated with the acquisitions in
2006 and 2005 and the opening of new branches and loan
production offices.
Amortization of intangibles expense of $4.1 million in 2006
increased $0.4 million or 10.8% from 2005. This increase
was attributable to the amortization of additional core deposit
and other intangibles resulting from the acquisitions in 2006
and 2005.
State taxes of $4.7 million in 2006 increased
$0.7 million or 18.5% from 2005 primarily due to higher net
worth based taxes resulting from the Corporations
acquisitions in 2005 and 2006.
Advertising and promotional expense of $2.8 million in 2006
decreased $0.4 million or 11.4% from 2005 resulting from
ongoing expense management by concentrating on the most
effective delivery methods.
The Corporation recorded merger-related expenses of
$0.6 million in 2006 related to costs incurred as a result
of the acquisition of Legacy and $1.3 in 2005 million
relating to the acquisitions of NSD and North East.
Other non-interest expenses of $34.5 million in 2006
increased $0.8 million or 2.2% from 2005. This increase was
primarily the result of higher expenses due to the acquisitions
in 2006 and 2005.
Income
Taxes
The Corporations income tax expense of $29.5 million
in 2006 was at an effective tax rate of 30.4% while the 2005
income tax expense of $21.8 million was at an effective tax
rate of 28.3%. Both years tax rates are lower than the
35.0% federal statutory tax rate due to the tax benefits
primarily resulting from tax-exempt
29
instruments and excludable dividend income. The 2005 income
taxes were also favorably impacted by $1.0 million due to
the successful resolution of an uncertain tax position.
Year
Ended December 31, 2005 Compared to Year Ended
December 31, 2004
Net income for 2005 was $55.3 million or $.98 per
diluted share, compared to net income for 2004 of
$61.8 million or $1.29 per diluted share. Net income
decreased $6.5 million or 10.6% due to a balance sheet
repositioning, an
other-than-temporary
impairment loss on an equity security, efficiency improvement
charges and merger costs, all of which netted to
$12.7 million after-tax. Net income also declined due to a
lower net interest margin as a result of a continued flattening
of the yield curve, and lower gains on sale of loans as rising
interest rates led to a slow-down in mortgage refinancing
activity.
The balance sheet repositioning, completed during the fourth
quarter of 2005, reduced the Corporations exposure to an
anticipated rise in interest rates and resulted in a realized
loss of $8.6 million after-tax from the sale of fixed rate
available for sale debt securities. The Corporation also
recorded an
other-than-temporary
impairment loss on an equity security of $1.3 million
after-tax in 2005. For additional information related to the
balance sheet restructuring and
other-than-temporary
impairment loss refer to the Balance Sheet Repositioning,
Efficiency Improvement Charges and Merger Expenses and
Securities footnotes in the Notes to Consolidated Financial
Statements, which is included in Item 8 of this Report.
Also, 2005 income taxes were favorably impacted by
$1.0 million due to the successful resolution of an
uncertain tax position.
Net income for the years 2005 and 2004 was favorably impacted by
the acquisitions of North East, NSD, Slippery Rock Financial
Corporation (Slippery Rock) and Morrell, Butz and Junker, Inc.
and MBJ Benefits, Inc. (collectively, MBJ), on October 7,
2005, February 18, 2005, October 8, 2004 and
July 30, 2004, respectively.
Net income for 2004 included a gain on the sale of two branches,
a termination fee associated with the discontinuation of the
Corporations data processing servicing arrangement with
Sun Bancorp, Inc. (Sun), gains related to the Corporations
ownership of Sun stock, a debt extinguishment penalty relating
to the repayment of higher cost Federal Home Loan Bank
(FHLB) advances and merger costs, all of which netted to an
increase in net income of $4.4 million after-tax. For
additional information related to the Sun items refer to the
Equity Method Investment section of the Summary of
Significant Accounting Policies footnote in the Notes to
Consolidated Financial Statements, which is included in
Item 8 of this Report.
The Corporations return on average equity was 12.44%,
return on average tangible equity was 23.62% and return on
average assets was .99% for 2005, as compared to 23.54%, 30.42%
and 1.29%, respectively, for 2004.
Net
Interest Income
Net interest income, which is the Corporations major
source of revenue, is the difference between interest income
from earning assets (loans, securities and federal funds sold)
and interest expense paid on liabilities (deposits and short-
and long-term borrowings). In 2005, net interest income, which
comprised 76.4% of net revenue (net interest income plus
non-interest income) as compared to 68.6% in 2004, was affected
by the general level of interest rates, changes in interest
rates, the steepness of the yield curve and the changes in the
amount and mix of earning assets and interest bearing
liabilities.
Net interest income, on a fully taxable equivalent basis, was
$190.2 million for 2005 and $171.6 million for 2004.
The increase primarily resulted from an increase in average
earning assets offset by a decrease in the net interest margin.
The average earning assets increased $608.6 million or
14.0% and average interest bearing liabilities increased
$561.6 million or 14.7% from 2004 primarily due to the
acquisitions of Slippery Rock, NSD and North East. However, the
Corporations net interest margin decreased by
11 basis points from 2004 to 3.85% for 2005 and was
impacted by a flattening of the yield curve throughout 2005 and
the majority of 2004. As such, the Corporation experienced less
opportunity to earn higher rates on earning assets compared to
the need to increase rates on its deposits and repurchase
agreements, driven by market rates and competitive prices.
Interest income, on a fully taxable equivalent basis, of
$298.9 million in 2005 increased by $42.9 million or
16.8% from 2004. This increase was partially caused by an
improvement in yield on earning assets of 15 basis points to
6.05% for 2005. In addition, average earning assets of
$4.9 billion for 2005 grew $608.6 million or 14.0%
30
from 2004 driven by increases of $194.7 million in
investment securities and $406.5 million in loans. These
increases were primarily the result of the Corporations
acquisitions in 2005 and late 2004.
Interest expense of $108.8 million for 2005 increased by
$24.4 million or 28.9% from 2004. This variance was
partially attributable to an increase of 28 basis points in the
Corporations cost of funds to 2.48% for 2005.
Additionally, interest bearing liabilities increased
$561.6 million or 14.7% to average $4.4 billion for
2005. This growth was primarily attributable to a combined
increase of $230.9 million or 14.2% in the core deposit
categories of interest bearing demand deposit, savings and
customer repurchase agreements, and an increase in time deposits
of $234.9 million or 17.5%. These increases were primarily
the result of the Corporations acquisitions in 2005 and
late 2004. In addition, average long-term debt of
$695.6 million for 2005 increased $55.6 million or
8.7% from 2004 while average short-term borrowings of
$266.8 million for 2005 increased $40.2 million or
17.7%. This trend was primarily the result of the previously
mentioned acquisitions.
Provision
for Loan Losses
The provision for loan losses is determined based on
managements estimates of the appropriate level of
allowance for loan losses needed to absorb probable losses in
the loan portfolio, after giving consideration to charge-offs
and recoveries for the period.
The provision for loan losses of $12.2 million in 2005
decreased $4.1 million or 25.2% from 2004 primarily due to
continued improvement in credit quality. Improving trends in the
consumer loan portfolio, particularly the indirect installment
portfolio, continued to produce lower levels of expected losses.
More specifically, in 2005 net charge-offs totaled
$16.9 million or .46% as a percentage of average loans
compared to $16.3 million or .50% as a percentage of
average loans in 2004. The 2005 results included the charge-off
of a $1.5 million loan or .05% that was on non-accrual and
was previously fully reserved for in the allowance for loan
losses. The ratio of non-performing loans to total loans was
.88% at December 31, 2005 compared to .94% at
December 31, 2004 and the ratio of non-performing assets to
total assets was .71% and .76% for these same periods,
respectively. For additional information, refer to the Allowance
and Provision for Loan Losses section of this financial review.
Non-Interest
Income
Total non-interest income of $57.8 million in 2005
decreased $19.5 million or 25.2% from 2004. This decrease
resulted primarily from a $11.7 million loss on the sale of
securities in 2005 compared to a gain of $0.6 million in
2004. Also, the Corporation recorded an
other-than-temporary
impairment loss on an equity security of $2.0 million in
2005. During 2004, the Corporation recognized certain one-time
gains, including a $4.1 million gain related to the sale of
two branches, $3.8 million from the termination of its data
processing servicing arrangement with Sun and $2.1 million
related to its ownership of Sun stock. The Corporation held an
equity investment in Sun until it was acquired by Omega
Financial Corporation in October 2004. The Corporation also had
a contract to provide data processing services to Sun, which was
terminated upon its acquisition. The Sun-related servicing
income ceased in the fourth quarter of 2004.
Service charges on loans and deposits of $38.1 million
increased $5.6 million or 17.0% from 2004 primarily as the
result of the acquisitions in 2005 and late 2004 and also due to
selected fee increases. Insurance commissions and fees of
$12.8 million increased $1.5 million or 13.8% from
2004 as the Corporation expanded its presence in this desirable
line of business through the acquisition of MBJ in July 2004.
Securities commissions of $4.5 million for 2005 decreased
by $0.5 million or 9.4% from 2004 levels, primarily due to
a shift in mix from annuities to other investment products that
are preferable in a rising interest rate environment. Trust fees
of $7.1 million in 2005 increased by $0.2 million or
2.9%. The Corporations efforts to streamline its
operations and improve productivity resulted in a 22.9% increase
in net income for the Wealth Management business segment, which
includes securities commissions and trust fees. For additional
information, see the Business Segments footnote in the Notes to
Consolidated Financial Statements, which is included in
Item 8 of this Report. Loss on sale of securities of
$11.7 million decreased $12.3 million as a result of
the Corporation recognizing a $13.3 million loss in the
fourth quarter of 2005. During the fourth quarter of 2005,
management changed its intent with respect to certain available
for sale securities and as a result sold $559.6 million of
fixed rate securities with an average yield of
31
4.13% and an average life of three years. These sales were part
of the Corporations initiative to improve its interest
rate risk position and improve future income levels. During
2005, the Corporation recognized an
other-than-temporary
impairment loss of $2.0 million on an equity security
classified as available for sale. Gain on sale of mortgage loans
of $1.4 million for 2005 decreased by $0.4 million or
21.3% from 2004 due to lower mortgage originations resulting
from higher interest rates and increased competition. Other
income of $4.2 million for 2005 decreased $3.6 million
or 45.8% from 2004. A $2.1 million gain related to the
ownership of Sun stock during 2004 accounted for the majority of
this decrease. Also, lower gains on sales of fixed assets and
repossessed assets were offset by higher income from
non-marketable securities.
Non-Interest
Expense
Total non-interest expense of $155.2 million in 2005
increased $14.3 million or 10.2% from 2004. This increase
was primarily attributable to operating expenses resulting from
the acquisitions in 2005 and late 2004. As a result of
improvements in its customer service model, the Corporation
recorded an expense of $1.5 million for severance costs
related to staff reductions implemented. This amount also
includes early retirement and supplemental retirement benefit
costs for former employees as well as other miscellaneous items.
Salaries and employee benefits of $81.0 million in 2005
increased $9.7 million or 13.6% from 2004. This increase
was the result of additional costs associated with the employees
retained from the acquisitions in 2005 and late 2004, combined
with normal compensation and benefit expense increases, and
expenses associated with the Corporations customer service
model. Combined net occupancy and equipment expense of
$25.6 million in 2005 increased $1.2 million or 5.1%
from the combined 2004 level. The increase was primarily due to
additional costs associated with the acquisitions in 2005 and
late 2004. Amortization of intangibles expense of
$3.7 million in 2005 increased $1.3 million or 55.0%
from 2004. This increase was attributable to the partial year
impacts of the amortization of customer list intangibles
resulting from the acquisition of MBJ, mortgage servicing rights
resulting from the acquisition of Slippery Rock and core deposit
intangibles resulting from the acquisitions of Slippery Rock,
NSD and North East. The Corporation recorded merger-related
expenses of $1.3 million in 2005 related to costs incurred
as a result of the acquisitions of NSD and North East. During
2004, the Corporation incurred costs of $1.7 million
relating to its acquisition of Slippery Rock. The Corporation
recorded a debt extinguishment penalty of $2.2 million in
2004 related to its repayment of $207.0 million in higher
cost FHLB advances. Other non-interest expenses of
$33.8 million in 2005 increased $4.0 million or 13.3%
from 2004. This increase was primarily the result of higher
expenses due to the acquisitions in 2005 and late 2004.
Income
Taxes
The Corporations income tax expense of $21.8 million
in 2005 was at an effective tax rate of 28.3% while the 2004
income tax expense of $27.5 million was at an effective tax
rate of 30.8%. Both years tax rates are lower than the
35.0% federal statutory tax rate due to the tax benefits
resulting from tax-exempt instruments and excludable dividend
income. The 2005 income taxes were also favorably impacted by
$1.0 million due to the successful resolution of an
uncertain tax position.
Liquidity
The Corporations goal in liquidity management is to meet
the cash flow requirements of depositors and borrowers as well
as the operating cash needs of the Corporation with
cost-effective funding. The Board of Directors has established
an Asset/Liability Policy in order to achieve and maintain
earnings performance consistent with long-term goals while
maintaining acceptable levels of interest rate risk, a
well-capitalized balance sheet and adequate levels
of liquidity. This policy designates the Corporate
Asset/Liability Committee (ALCO) as the body responsible for
meeting these objectives. The ALCO, which includes members of
executive management, reviews liquidity on a periodic basis and
approves significant changes in strategies that affect balance
sheet or cash flow positions. Liquidity is centrally managed on
a daily basis by the Corporations Treasury Department.
Liquidity sources from assets include payments from loans and
investments as well as the ability to securitize, pledge or sell
loans and investment securities. The Corporation continues to
originate mortgage loans,
32
most of which are resold in the secondary market. Proceeds from
the sale of mortgage loans totaled $108.1 million for 2006
compared to $98.7 million for 2005.
Liquidity sources from liabilities are generated primarily
through deposits. As of December 31, 2006 and 2005,
deposits comprised 79.9% and 78.5% of total liabilities,
respectively. To a lesser extent, the Corporation also makes use
of wholesale sources that include federal funds purchased,
repurchase agreements and public funds. In addition, the
Corporation has the ability to borrow funds from the FHLB,
Federal Reserve Bank and the capital markets. FHLB advances are
a competitively priced and reliable source of funds. As of
December 31, 2006, outstanding FHLB advances declined
$70.9 million to $469.1 million, or 7.8% of total
assets, while the total availability from these sources was
$1.9 billion, or 31.7% of total assets. At
December 31, 2005, outstanding FHLB advances were
$540.0 million, or 9.7% of total assets, while the total
availability from these sources was $1.9 billion, or 34.9%
of total assets.
The principal source of cash for the parent company is dividends
from its subsidiaries. The parent also has approved lines of
credit with several major domestic banks, of which
$3.0 million was used as of December 31, 2006. The
Corporation also issues subordinated debt on a regular basis.
The Corporation has repurchased shares of its common stock for
re-issuance under various employee benefit plans and the
Corporations dividend reinvestment plan since 1991. During
2006, the Corporation purchased treasury shares totaling
$9.6 million and received $10.4 million upon
re-issuance. In 2005 and 2004, the Corporation purchased
treasury shares totaling $10.9 million and
$21.1 million, respectively, and received
$12.5 million and $19.1 million, respectively, as a
result of re-issuance.
The ALCO regularly monitors various liquidity ratios and
forecasts of cash position. Management believes the Corporation
has sufficient liquidity available to meet its normal operating
and contingency funding cash needs.
Market
Risk
Market risk refers to potential losses arising from changes in
interest rates, foreign exchange rates, equity prices and
commodity prices. The Corporation is primarily exposed to
interest rate risk which results from its role as a financial
intermediary. To succeed in this capacity, the Corporation
offers an extensive variety of financial products to meet the
diverse needs of its customers. These products sometimes create
risk for the Corporation when product groups do not complement
one another. For example, depositors may want short-term
deposits while borrowers desire long-term loans.
Changes in market interest rates may result in changes in the
fair value of the Corporations financial instruments, cash
flows and net interest income. The ALCO is responsible for
market risk management: devising policy guidelines, risk
measures and limits, and managing the amount of interest rate
risk and its effect on net interest income and capital. The
Corporations Treasury Department measures interest rate
risk and manages interest rate risk on a daily basis.
Interest rate risk is comprised of repricing risk, basis risk,
yield curve risk and options risk. Repricing risk arises from
differences in the cash flow or repricing between asset and
liability portfolios. Basis risk arises when asset and liability
portfolios are related to different market rate indices, which
do not always change by the same amount. Yield curve risk arises
when asset and liability portfolios are related to different
maturities on a given yield curve; when the yield curve changes
shape, the risk position is altered. Options risk arises from
embedded options within asset and liability products
as certain borrowers have the option to prepay their loans when
rates fall while certain depositors can redeem their
certificates early when rates rise.
The Corporation uses a sophisticated asset/liability model to
measure its interest rate risk. Interest rate risk measures
utilized by the Corporation include earnings simulation,
economic value of equity (EVE) and gap analysis.
Gap analysis and EVE are static measures that do not incorporate
assumptions regarding future business. Gap analysis, while a
helpful diagnostic tool, displays cash flows for only a single
rate environment. EVEs long-term horizon helps identify
changes in optionality and longer-term positions. However,
EVEs liquidation
33
perspective does not translate into the earnings-based measures
that are the focus of managing and valuing a going concern. Net
interest income simulations explicitly measure the exposure to
earnings from changes in market rates of interest. The
Corporations current financial position is combined with
assumptions regarding future business to calculate net interest
income under various hypothetical rate scenarios. The
Corporations net interest income simulations assume a
level balance sheet whereby new volumes equal runoffs. The ALCO
reviews earnings simulations over multiple years under various
interest rate scenarios. Reviewing these various measures
provides the Corporation with a reasonably comprehensive view of
its interest rate profile.
The following gap analysis compares the difference between the
amount of interest earning assets and interest bearing
liabilities subject to repricing over a period of time. The
ratio of rate sensitive assets to rate sensitive liabilities
repricing within a one year period was .97 and 1.05 at
December 31, 2006 and 2005, respectively. A ratio of less
than one indicates a higher level of repricing liabilities over
repricing assets over the next twelve months.
Following is the gap analysis as of December 31, 2006
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within
|
|
|
2-3
|
|
|
4-6
|
|
|
7-12
|
|
|
Total
|
|
|
|
1 Month
|
|
|
Months
|
|
|
Months
|
|
|
Months
|
|
|
1 Year
|
|
|
Interest Earning Assets
(IEA)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
1,146,769
|
|
|
$
|
233,989
|
|
|
$
|
328,238
|
|
|
$
|
495,835
|
|
|
$
|
2,204,831
|
|
Investments
|
|
|
51,972
|
|
|
|
109,500
|
|
|
|
79,443
|
|
|
|
163,362
|
|
|
|
404,277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,198,741
|
|
|
|
343,489
|
|
|
|
407,681
|
|
|
|
659,197
|
|
|
|
2,609,108
|
|
Interest Bearing Liabilities
(IBL)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-maturity deposits
|
|
|
854,955
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
854,955
|
|
Time deposits
|
|
|
140,703
|
|
|
|
207,360
|
|
|
|
376,222
|
|
|
|
580,690
|
|
|
|
1,304,975
|
|
Borrowings
|
|
|
283,945
|
|
|
|
44,487
|
|
|
|
71,749
|
|
|
|
143,289
|
|
|
|
543,470
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,279,603
|
|
|
|
251,847
|
|
|
|
447,971
|
|
|
|
723,979
|
|
|
|
2,703,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period Gap
|
|
$
|
(80,862
|
)
|
|
$
|
91,642
|
|
|
$
|
(40,290
|
)
|
|
$
|
(64,782
|
)
|
|
$
|
(94,292
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative Gap
|
|
$
|
(80,862
|
)
|
|
$
|
10,780
|
|
|
$
|
(29,510
|
)
|
|
$
|
(94,292
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IEA/IBL (Cumulative)
|
|
|
.94
|
|
|
|
1.01
|
|
|
|
.99
|
|
|
|
.97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative Gap to IEA
|
|
|
(1.53
|
)%
|
|
|
.20
|
%
|
|
|
(.56
|
)%
|
|
|
(1.78
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The allocation of non-maturity deposits to the one-month
maturity category is based on the estimated sensitivity of each
product to changes in market rates. For example, if a
products rate is estimated to increase by 50% as much as
the market rates, then 50% of the account balance was placed in
this category. The current allocation is representative of the
estimated sensitivities for a +/- 100 basis point change in
market rates.
The following table presents an analysis of the potential
sensitivity of the Corporations annual net interest income
and EVE to sudden and parallel changes (shocks) in market rates
versus if rates remained unchanged:
|
|
|
|
|
|
|
|
|
December 31
|
|
2006
|
|
|
2005
|
|
|
Net interest income change
(12 months):
|
|
|
|
|
|
|
|
|
+ 100 basis points
|
|
|
.2
|
%
|
|
|
.1
|
%
|
−100 basis points
|
|
|
(.2
|
)%
|
|
|
(1.1
|
)%
|
|
|
|
|
|
|
|
|
|
Economic value of equity:
|
|
|
|
|
|
|
|
|
+ 100 basis points
|
|
|
(1.8
|
)%
|
|
|
(2.6
|
)%
|
−100 basis points
|
|
|
(.4
|
)%
|
|
|
(3.3
|
)%
|
The overall level of interest rate risk has improved and is
considered to be relatively low and stable.
The ALCO is responsible for the identification and management of
interest rate risk exposure. As such, the ALCO continuously
evaluates strategies to manage the Corporations exposure
to interest rate fluctuations. Since 2004, short-term interest
rates have risen significantly while long-term interest rates
have increased only
34
slightly. This flattening and more recent inversion of the yield
curve has made short-term deposits and long-term loans more
attractive to customers: a situation that created additional
interest rate risk for the Corporation. In order to keep the
risk measures in an acceptable position, the ALCO crafted
several strategies to mitigate the Corporations risk
position. During February 2005, the Corporation entered into a
forward starting interest rate swap with a notional amount of
$125.0 million. Under the agreement, the Corporation pays a
fixed rate of interest and receives a variable rate based on the
London Inter-Bank Offered Rate (LIBOR). The effective date of
the swap was January 3, 2006 and the maturity date is
March 31, 2008 (for additional information, refer to the
Interest Rate Swap section of the Summary of Significant
Accounting Policies in the Notes to Consolidated Financial
Statements, which is included in Item 8 of this Report).
During 2005, the Corporation repositioned its investment
portfolio in order to reduce its interest rate risk. The
transaction lowered the level of mortgage-related assets held by
the Corporation which reduced the repricing risk and options
risk of the Corporation. The transaction also reduced the
average duration of the portfolio (for additional information,
refer to the Securities footnote in the Notes to Consolidated
Financial Statements, which is included in Item 8 of this
Report). The Corporation increased its holdings of variable-rate
loans from 13.7% of total assets at December 31, 2005 to
16.8% of total assets as of December 31, 2006. In addition,
the Corporation regularly sells fixed-rate, residential
mortgages to the secondary mortgage loan market in order to
manage its holdings of long-term, fixed-rate loans.
The Corporation recognizes that asset/liability models are based
on methodologies that may have inherent shortcomings.
Furthermore, asset/liability models require certain assumptions
be made, such as prepayment rates on earning assets and pricing
impact on non-maturity deposits, which may differ from actual
experience. These business assumptions are based upon the
Corporations experience, business plans and published
industry experience. While management believes such assumptions
to be reasonable, there can be no assurance that modeled results
will approximate actual results.
Contractual
Obligations, Commitments and Off-Balance Sheet
Arrangements
The following table sets forth contractual obligations of
principal that represent required and potential cash outflows as
of December 31, 2006 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within
|
|
|
|
|
|
|
|
|
After
|
|
|
|
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
5 Years
|
|
|
Total
|
|
|
Deposits without a stated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
maturity
|
|
$
|
2,599,324
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,599,324
|
|
Certificates and other time
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
deposits
|
|
|
1,304,528
|
|
|
$
|
250,753
|
|
|
$
|
202,040
|
|
|
$
|
16,197
|
|
|
|
1,773,518
|
|
Operating leases
|
|
|
3,974
|
|
|
|
6,032
|
|
|
|
3,331
|
|
|
|
16,140
|
|
|
|
29,477
|
|
Long-term debt
|
|
|
242,083
|
|
|
|
113,524
|
|
|
|
112,706
|
|
|
|
51,577
|
|
|
|
519,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,149,909
|
|
|
$
|
370,309
|
|
|
$
|
318,077
|
|
|
$
|
83,914
|
|
|
$
|
4,922,209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth the amounts and expected
maturities of commitments to extend credit and other off-balance
sheet items as of December 31, 2006 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within
|
|
|
|
|
|
|
|
|
After
|
|
|
|
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
5 Years
|
|
|
Total
|
|
|
Commitments to extend credit
|
|
$
|
751,873
|
|
|
$
|
53,162
|
|
|
$
|
9,325
|
|
|
$
|
65,347
|
|
|
$
|
879,707
|
|
Standby letters of credit
|
|
|
39,346
|
|
|
|
44,547
|
|
|
|
4,789
|
|
|
|
3,003
|
|
|
|
91,685
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
791,219
|
|
|
$
|
97,709
|
|
|
$
|
14,114
|
|
|
$
|
68,350
|
|
|
$
|
971,392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments to extend credit and standby letters of credit do
not necessarily represent future cash requirements in that the
borrower has the ability to draw upon these commitments at any
time and these commitments often expire without being drawn upon.
Lending
Activity
The loan portfolio consists principally of loans to individuals
and small- and medium-sized businesses within the
Corporations primary market area of Pennsylvania and
northeastern Ohio. The Corporation, through its
35
banking affiliate, also operates commercial loan production
offices in Florida. In addition, the portfolio contains consumer
finance loans to individuals in Pennsylvania, Ohio and Tennessee.
Following is a summary of loans (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
Commercial
|
|
$
|
2,111,752
|
|
|
$
|
1,613,960
|
|
|
$
|
1,440,674
|
|
|
$
|
1,297,559
|
|
|
$
|
1,257,132
|
|
Direct installment
|
|
|
926,766
|
|
|
|
890,288
|
|
|
|
820,886
|
|
|
|
776,716
|
|
|
|
594,909
|
|
Consumer lines of credit
|
|
|
254,054
|
|
|
|
262,969
|
|
|
|
251,037
|
|
|
|
229,005
|
|
|
|
206,026
|
|
Residential mortgages
|
|
|
490,215
|
|
|
|
485,542
|
|
|
|
479,769
|
|
|
|
468,173
|
|
|
|
592,678
|
|
Indirect installment
|
|
|
461,214
|
|
|
|
493,740
|
|
|
|
389,754
|
|
|
|
452,170
|
|
|
|
523,428
|
|
Lease financing
|
|
|
638
|
|
|
|
1,685
|
|
|
|
2,926
|
|
|
|
16,594
|
|
|
|
36,975
|
|
Other
|
|
|
8,505
|
|
|
|
863
|
|
|
|
4,415
|
|
|
|
18,980
|
|
|
|
24,060
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,253,144
|
|
|
$
|
3,749,047
|
|
|
$
|
3,389,461
|
|
|
$
|
3,259,197
|
|
|
$
|
3,235,208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans increased by $504.1 million or 13.4% to
$4.3 billion at December 31, 2006 compared to
December 31, 2005. The Corporation focused on the
commercial loan segment which grew by $497.8 million as a
result of organic growth combined with the acquisition of Legacy.
Total loans increased by $359.6 million or 10.6% to
$3.7 billion at December 31, 2005 compared to
December 31, 2004. The Corporation focused on growing the
more desirable segments of the loan portfolio as commercial,
direct installment and consumer lines of credit combined
increased by $254.6 million or 10.1% primarily as a result
of the acquisitions of NSD and North East and organic loan
growth. Indirect installment increased $104.0 million or
26.7% as a result of the acquisitions of NSD and North East.
As of December 31, 2006 and 2005, there were no
concentrations of loans relating to any industry in excess of
10% of total loans.
Following is a summary of the maturity distribution of certain
loan categories based on remaining scheduled repayments of
principal as of December 31, 2006 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within
|
|
|
1-5
|
|
|
Over
|
|
|
|
|
|
|
1 Year
|
|
|
Years
|
|
|
5 Years
|
|
|
Total
|
|
|
Commercial
|
|
$
|
168,722
|
|
|
$
|
629,946
|
|
|
$
|
1,313,084
|
|
|
$
|
2,111,752
|
|
Residential mortgages
|
|
|
894
|
|
|
|
18,616
|
|
|
|
470,705
|
|
|
|
490,215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
169,616
|
|
|
$
|
648,562
|
|
|
$
|
1,783,789
|
|
|
$
|
2,601,967
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total amount of loans due after one year includes
$1.7 billion with floating or adjustable rates of interest
and $748.8 million with fixed rates of interest.
Non-Performing
Loans
Non-performing loans include non-accrual loans and restructured
loans. Non-accrual loans represent loans on which interest
accruals have been discontinued. Restructured loans are loans in
which the borrower has been granted a concession on the interest
rate or the original repayment terms due to financial distress.
The Corporation discontinues interest accruals when principal or
interest is due and has remained unpaid for 90 to 180 days
or more 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.
Non-performing loans are closely monitored on an ongoing basis
as part of the Corporations loan review and work-out
process. The potential risk of loss on these loans is evaluated
by comparing the loan balance to the fair value of any
underlying collateral or the present value of projected future
cash flows. Losses are recognized where appropriate.
36
Following is a summary of non-performing loans (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
Non-accrual loans
|
|
$
|
24,636
|
|
|
$
|
28,100
|
|
|
$
|
27,029
|
|
|
$
|
22,449
|
|
|
$
|
18,329
|
|
Restructured loans
|
|
|
3,492
|
|
|
|
5,032
|
|
|
|
4,993
|
|
|
|
5,719
|
|
|
|
5,915
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
28,128
|
|
|
$
|
33,132
|
|
|
$
|
32,022
|
|
|
$
|
28,168
|
|
|
$
|
24,244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing loans as a
percentage of total loans
|
|
|
.66
|
%
|
|
|
.88
|
%
|
|
|
.94
|
%
|
|
|
.86
|
%
|
|
|
.75
|
%
|
Following is a table showing the amounts of contractual interest
income and actual interest income related to non-accrual and
restructured loans (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
Gross interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per contractual terms
|
|
$
|
2,046
|
|
|
$
|
3,179
|
|
|
$
|
2,076
|
|
|
$
|
2,227
|
|
|
$
|
2,354
|
|
Recorded during the year
|
|
|
458
|
|
|
|
528
|
|
|
|
727
|
|
|
|
923
|
|
|
|
855
|
|
Following is a summary of loans 90 days or more past due on
which interest accruals continue (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
Loans 90 days or more past due
|
|
$
|
5,528
|
|
|
$
|
5,755
|
|
|
$
|
5,113
|
|
|
$
|
5,100
|
|
|
$
|
6,924
|
|
As a percentage of total loans
|
|
|
.13
|
%
|
|
|
.15
|
%
|
|
|
.15
|
%
|
|
|
.16
|
%
|
|
|
.21
|
%
|
It is the Corporations policy to discontinue interest
accruals when principal or interest is due and has remained
unpaid for 90 days or more unless the loan is both well
secured and in the process of collection.
Allowance
and Provision for Loan Losses
The allowance for loan losses represents managements
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 Financial Accounting Standards Board
Statement (FAS) 5, Accounting for Contingencies, and
FAS 114, Accounting by Creditors for Impairment of a
Loan. FAS 5 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 FAS 114. FAS 114 is
applied to commercial loans that are considered impaired.
Under FAS 114, a loan is impaired when, based upon current
information and events, it is probable that the loan will not be
repaid according to its 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 estimated
realizable collateral where a loan is collateral dependent.
Commercial loans excluded from FAS 114 individual
impairment analysis are collectively evaluated by management to
estimate reserves for loan losses inherent in those loans in
accordance with FAS 5.
In estimating probable loan losses, management applies
historical loan loss rates and also considers how the loss rates
may be impacted by changes in current economic conditions,
delinquency and non-performing loan trends, changes in loan
underwriting guidelines and credit policies, as well as the
results of internal loan reviews. Homogeneous loan pools are
evaluated using similar criteria that are based upon historical
loss rates of various loan
37
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 Corporations historical loan loss
experience.
Following is a summary of changes in the allowance for loan
losses (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
Balance at beginning of period
|
|
$
|
50,707
|
|
|
$
|
50,467
|
|
|
$
|
46,139
|
|
|
$
|
46,984
|
|
|
$
|
46,345
|
|
Additions due to acquisitions
|
|
|
3,035
|
|
|
|
4,996
|
|
|
|
4,354
|
|
|
|
|
|
|
|
|
|
Reductions due to branch sales
|
|
|
|
|
|
|
(59
|
)
|
|
|
(54
|
)
|
|
|
|
|
|
|
|
|
Charge-offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
(2,642
|
)
|
|
|
(3,422
|
)
|
|
|
(2,333
|
)
|
|
|
(2,447
|
)
|
|
|
(1,583
|
)
|
Installment
|
|
|
(9,811
|
)
|
|
|
(14,847
|
)
|
|
|
(14,736
|
)
|
|
|
(15,769
|
)
|
|
|
(12,577
|
)
|
Residential mortgage
|
|
|
(2,215
|
)
|
|
|
(966
|
)
|
|
|
(639
|
)
|
|
|
(571
|
)
|
|
|
(849
|
)
|
Lease financing
|
|
|
(12
|
)
|
|
|
(472
|
)
|
|
|
(1,088
|
)
|
|
|
(1,457
|
)
|
|
|
(1,548
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total charge-offs
|
|
|
(14,680
|
)
|
|
|
(19,707
|
)
|
|
|
(18,796
|
)
|
|
|
(20,244
|
)
|
|
|
(16,557
|
)
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
764
|
|
|
|
650
|
|
|
|
667
|
|
|
|
505
|
|
|
|
1,799
|
|
Installment
|
|
|
1,919
|
|
|
|
1,891
|
|
|
|
1,651
|
|
|
|
1,482
|
|
|
|
1,635
|
|
Residential mortgage
|
|
|
319
|
|
|
|
144
|
|
|
|
94
|
|
|
|
53
|
|
|
|
57
|
|
Lease financing
|
|
|
99
|
|
|
|
149
|
|
|
|
132
|
|
|
|
204
|
|
|
|
81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recoveries
|
|
|
3,101
|
|
|
|
2,834
|
|
|
|
2,544
|
|
|
|
2,244
|
|
|
|
3,572
|
|
Net charge-offs
|
|
|
(11,579
|
)
|
|
|
(16,873
|
)
|
|
|
(16,252
|
)
|
|
|
(18,000
|
)
|
|
|
(12,985
|
)
|
Provision for loan losses
|
|
|
10,412
|
|
|
|
12,176
|
|
|
|
16,280
|
|
|
|
17,155
|
|
|
|
13,624
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
52,575
|
|
|
$
|
50,707
|
|
|
$
|
50,467
|
|
|
$
|
46,139
|
|
|
$
|
46,984
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs as a percent of
average loans, net of unearned income
|
|
|
.29
|
%
|
|
|
.46
|
%
|
|
|
.50
|
%
|
|
|
.56
|
%
|
|
|
.41
|
%
|
Allowance for loan losses as a
percent of total loans, net of unearned income
|
|
|
1.24
|
%
|
|
|
1.35
|
%
|
|
|
1.49
|
%
|
|
|
1.42
|
%
|
|
|
1.45
|
%
|
Allowance for loan losses as a
percent of non-performing loans
|
|
|
186.9
|
%
|
|
|
153.05
|
%
|
|
|
157.60
|
%
|
|
|
163.80
|
%
|
|
|
193.80
|
%
|
The installment category in the above table includes direct
installment, consumer lines of credit and indirect installment
loans.
The allowance for loan losses increased $1.9 million during
2006 representing a 3.7% increase in reserves for loan losses
between December 31, 2005 and December 31, 2006. The
Legacy acquisition brought with it $297.0 million in loans
and an associated allowance for loan losses of
$3.0 million, which represented 1.0% of Legacys
loans. Offsetting the acquired reserves were net charge-offs of
$11.6 million and a provision for loan losses of
$10.4 million. The decrease in net charge-offs and the
provision for loan losses is a result of the Corporations
continued improvement in asset quality.
The allowance for loan losses increased $0.2 million during
2005 representing a .5% increase in reserves for loan losses
between December 31, 2004 and December 31, 2005. The
NSD acquisition brought with it $310.4 million in loans and
an associated allowance for loan losses of $3.6 million,
which represented 1.2% of NSDs loans. The North East
acquisition brought with it $49.5 million in loans and
associated allowance for loan losses of $1.4 million, which
represented 3.1% of North Easts loans. Offsetting these
acquired reserves were net
38
charge-offs of $16.9 million and a provision for loan
losses of $12.2 million. This decrease in provision is a
direct result of the Corporations improved asset quality.
Management considers numerous factors when estimating reserves
for loan losses, including historical charge-off rates and
subsequent recoveries. Consideration is given to the impact of
changes in qualitative factors that influence the
Corporations credit quality, such as the local and
regional economies that the Corporation serves. Assessment of
relevant economic factors indicates that the Corporations
primary markets tend to lag the national economy, with local
economies in the Corporations market areas also improving,
but at a more measured rate than the national trends. Regional
economic factors influencing managements estimate of
reserves include uncertainty of the labor markets in the regions
the Corporation serves and a contracting labor force due, in
part, to productivity growth and industry consolidations. In
2005, interest rates and energy costs increased, but have
moderated in 2006. Higher rates directly affect borrowers tied
to floating rate loans as increasing debt service requirements
pressure customers that now face higher loan payments. Higher
interest rates and energy costs also affect consumer loan
customers who carry historically high debt loads. Consumer
credit risk and loss exposures are evaluated using loss
histories of the FAS 5 pools and roll rate analysis to
estimate credit quality migration and expected losses within the
homogeneous loan pools.
Charge-offs reflect the realization of losses in the portfolio
that were estimated previously through provisions for credit
losses. Loans charged off during 2006 decreased
$5.0 million to $14.7 million over 2005 charge-offs.
Loans charged off during 2005 increased $0.9 million to
$19.7 million over 2004 charge-offs, primarily due to the
charge-off of a $1.5 million loan that was previously fully
reserved. Net charge-offs (annualized) as a percent of average
loans decreased to .29% in 2006 compared to .46% in 2005
reflecting improved performance. Loans charged off in 2004
decreased $1.4 million to $18.8 million versus 2003.
Loans charged off in 2003 increased $3.7 million compared
to 2002. Loans charged off in 2002 decreased $9.2 million
over 2001.
Following is a summary of the allocation of the allowance for
loan losses (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Loans
|
|
|
|
|
|
% of Loans
|
|
|
|
|
|
% of Loans
|
|
|
|
|
|
% of Loans
|
|
|
|
|
|
% of Loans
|
|
|
|
|
|
|
in each
|
|
|
|
|
|
in each
|
|
|
|
|
|
in each
|
|
|
|
|
|
in each
|
|
|
|
|
|
in each
|
|
|
|
|
|
|
Category to
|
|
|
|
|
|
Category to
|
|
|
|
|
|
Category to
|
|
|
|
|
|
Category to
|
|
|
|
|
|
Category to
|
|
|
|
Dec 31,
|
|
|
Total
|
|
|
Dec. 31,
|
|
|
Total
|
|
|
Dec. 31,
|
|
|
Total
|
|
|
Dec. 31,
|
|
|
Total
|
|
|
Dec. 31,
|
|
|
Total
|
|
|
|
2006
|
|
|
Loans
|
|
|
2005
|
|
|
Loans
|
|
|
2004
|
|
|
Loans
|
|
|
2003
|
|
|
Loans
|
|
|
2002
|
|
|
Loans
|
|
|
Commercial
|
|
$
|
30,813
|
|
|
|
50
|
%
|
|
$
|
27,112
|
|
|
|
43
|
%
|
|
$
|
28,271
|
|
|
|
43
|
%
|
|
$
|
23,332
|
|
|
|
40
|
%
|
|
$
|
21,282
|
|
|
|
40
|
%
|
Direct installment
|
|
|
11,445
|
|
|
|
22
|
|
|
|
11,631
|
|
|
|
24
|
|
|
|
10,947
|
|
|
|
24
|
|
|
|
9,429
|
|
|
|
24
|
|
|
|
10,376
|
|
|
|
18
|
|
Consumer lines of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
credit
|
|
|
2,343
|
|
|
|
6
|
|
|
|
2,486
|
|
|
|
7
|
|
|
|
1,280
|
|
|
|
7
|
|
|
|
1,282
|
|
|
|
7
|
|
|
|
1,194
|
|
|
|
7
|
|
Residential mortgages
|
|
|
3,068
|
|
|
|
11
|
|
|
|
2,958
|
|
|
|
13
|
|
|
|
632
|
|
|
|
14
|
|
|
|
579
|
|
|
|
14
|
|
|
|
818
|
|
|
|
18
|
|
Indirect installment
|
|
|
4,649
|
|
|
|
11
|
|
|
|
6,324
|
|
|
|
13
|
|
|
|
9,072
|
|
|
|
12
|
|
|
|
8,432
|
|
|
|
14
|
|
|
|
6,984
|
|
|
|
16
|
|
Lease financing
|
|
|
15
|
|
|
|
|
|
|
|
80
|
|
|
|
|
|
|
|
265
|
|
|
|
|
|
|
|
939
|
|
|
|
1
|
|
|
|
1,500
|
|
|
|
1
|
|
Other
|
|
|
242
|
|
|
|
|
|
|
|
116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated portion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,146
|
|
|
|
|
|
|
|
4,830
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
52,575
|
|
|
|
100
|
%
|
|
$
|
50,707
|
|
|
|
100
|
%
|
|
$
|
50,467
|
|
|
|
100
|
%
|
|
$
|
46,139
|
|
|
|
100
|
%
|
|
$
|
46,984
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amount allocated to commercial loans increased in 2006 due
to the increased loan balance while the amount allocated to
indirect installment loans decreased due to an improvement in
credit quality as a result of improved underwriting guidelines
and a planned run-off in loan balance.
The amount allocated to commercial loans decreased in 2005 due
to the charge-off of a $1.5 million loan that was
previously fully reserved while the amount allocated to indirect
installment loans decreased due to an improvement in credit
quality as a result of improved underwriting guidelines. The
amounts allocated to consumer lines of credit and residential
mortgages increased in 2005 primarily as a result of the
increased loan balances associated with the NSD acquisition.
39
Investment
Activity
Investment activities serve to enhance the overall yield on
earning assets while supporting interest rate sensitivity and
liquidity positions. Securities purchased with the intent and
ability to retain until maturity are categorized as securities
held to maturity and carried at amortized cost. All other
securities are categorized as securities available for sale and
are recorded at fair market value. Securities are subject to
similar interest rate and credit risk as loans. In addition, by
their nature, securities classified as available for sale are
also subject to market value risks that could negatively affect
the level of liquidity available to the Corporation, as well as
equity. A change in value of held to maturity securities could
also negatively affect the level of equity if there was a
decline in the underlying creditworthiness of the issuers or a
change in the Corporations intent and ability to hold the
securities to maturity.
During 2006, securities available for sale decreased by
$20.9 million and securities held to maturity decreased by
$105.1 million from December 31, 2005 as the proceeds
from securities that matured during 2006 were used to fund loan
growth. During 2005, management changed its intent with respect
to certain available for sale debt securities and as a result
sold $559.6 million of fixed rate securities with an
average yield of 4.13% and an average life of three years
resulting in a realized loss of $13.3 million. These sales
were part of the Corporations initiative to improve its
interest rate risk position and improve future income levels.
The proceeds from the sale were used to retire
$89.8 million of higher rate short-term borrowings and to
purchase $469.8 million of shorter maturity securities that
have an average life of two years and a yield of 4.94%.
As of December 31, 2006, securities with an amortized cost
of $256.3 million and $776.1 million were classified
as available for sale and held to maturity, respectively.
Management believes the Corporation has sufficient liquidity
available to meet its normal operating cash needs.
During 2004, the Corporation transferred $519.4 million
from available for sale to held to maturity. This transaction
resulted in $4.0 million being recorded as other
comprehensive income, which is being amortized over the
remaining average life of the securities transferred. The
Corporation initiated this transfer to better reflect
managements intentions and to reduce the volatility of the
equity adjustment due to the fluctuation in market prices of
available for sale securities.
The following table indicates the respective maturities and
weighted-average yields of securities as of December 31,
2006 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Amount
|
|
|
Yield
|
|
|
Obligations of U.S. Treasury
and other U.S. Government agencies:
|
|
|
|
|
|
|
|
|
Maturing within one year
|
|
$
|
209,858
|
|
|
|
4.76
|
%
|
Maturing after one year within
five years
|
|
|
22,453
|
|
|
|
4.99
|
|
Maturing after ten years
|
|
|
508
|
|
|
|
5.61
|
|
|
|
|
|
|
|
|
|
|
States of the U.S. and political
subdivisions:
|
|
|
|
|
|
|
|
|
Maturing within one year
|
|
|
6,668
|
|
|
|
5.22
|
|
Maturing after one year within
five years
|
|
|
28,384
|
|
|
|
4.77
|
|
Maturing after five years within
ten years
|
|
|
71,913
|
|
|
|
5.19
|
|
Maturing after ten years
|
|
|
42,289
|
|
|
|
5.94
|
|
|
|
|
|
|
|
|
|
|
Corporate and other debt
securities:
|
|
|
|
|
|
|
|
|
Maturing within one year
|
|
|
786
|
|
|
|
5.76
|
|
Maturing after one year within
five years
|
|
|
1,795
|
|
|
|
6.06
|
|
Maturing after ten years
|
|
|
53,165
|
|
|
|
6.95
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
|
586,842
|
|
|
|
4.91
|
|
Equity securities
|
|
|
9,697
|
|
|
|
5.58
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,034,358
|
|
|
|
5.06
|
|
|
|
|
|
|
|
|
|
|
40
The weighted average yields for tax-exempt securities are
computed on a tax equivalent basis using the federal statutory
tax rate of 35.0%. The weighted average yields for securities
available for sale are based on amortized cost.
Deposits
and Short-Term Borrowings
As a bank holding company, the Corporations primary source
of funds is deposits. Those deposits are provided by businesses
and individuals located within the markets served by the
Corporations subsidiaries.
Total deposits increased $360.9 million to
$4.4 billion at December 31, 2006 compared to
December 31, 2005, as a result of the acquisition of Legacy
and organic growth resulting from an expanded suite of deposit
products designed to attract and retain customers. The
Corporation also experienced an unfavorable shift in its deposit
mix during 2006 as non-interest bearing demand decreased
$33.8 million or 4.9% while certificates of deposit
increased $125.4 million or 7.6%.
Short-term borrowings, made up of repurchase agreements, federal
funds purchased, FHLB advances, subordinated notes and other
short-term borrowings, decreased by $15.1 million to
$363.9 million at December 31, 2006 compared to
December 31, 2005. This decrease is the result of decreases
of $40.0 million, $30.0 million and $17.6 million
in FHLB advances, federal funds purchased and subordinated
notes, respectively, which were partially offset by an increase
of $69.5 million in repurchase agreements. The increase in
repurchase agreements is the result of the Corporations
strategic initiative to increase and expand its commercial
lending relationships.
Repurchase agreements and subordinated notes are the largest
components of short-term borrowings. At December 31, 2006,
repurchase agreements and subordinated notes represented 69.3%
and 29.7%, respectively, of total short-term borrowings.
Following is a summary of selected information relating to
repurchase agreements (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Balance at year-end
|
|
$
|
252,064
|
|
|
$
|
182,517
|
|
|
$
|
160,847
|
|
Maximum month-end balance
|
|
|
252,064
|
|
|
|
196,470
|
|
|
|
160,847
|
|
Average balance during year
|
|
|
213,045
|
|
|
|
182,779
|
|
|
|
130,698
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average interest rates:
|
|
|
|
|
|
|
|
|
|
|
|
|
At end of year
|
|
|
4.64
|
%
|
|
|
3.49
|
%
|
|
|
1.56
|
%
|
During the year
|
|
|
4.27
|
|
|
|
2.57
|
|
|
|
1.06
|
|
The repurchase agreements have next day maturities.
Following is a summary of selected information relating to
short-term subordinated notes (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Balance at year-end
|
|
$
|
108,118
|
|
|
$
|
125,673
|
|
|
$
|
151,860
|
|
Maximum month-end balance
|
|
|
121,804
|
|
|
|
148,014
|
|
|
|
151,860
|
|
Average balance during year
|
|
|
112,661
|
|
|
|
138,531
|
|
|
|
142,062
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average interest rates:
|
|
|
|
|
|
|
|
|
|
|
|
|
At end of year
|
|
|
4.90
|
%
|
|
|
4.02
|
%
|
|
|
3.41
|
%
|
During the year
|
|
|
4.62
|
|
|
|
3.97
|
|
|
|
3.29
|
|
Approximately 83.0% of the short-term subordinated notes are
daily notes. The remaining 17.0% of the short-term subordinated
notes have various terms ranging from three to twelve months.
41
Capital
Resources
The assessment of capital adequacy depends on a number of
factors such as asset quality, liquidity, earnings performance,
changing competitive conditions and economic forces. The
Corporation seeks to maintain a strong capital base to support
its growth and expansion activities, to provide stability to
current operations and to promote public confidence.
The Corporation has an effective $200.0 million shelf
registration statement with the SEC. The Corporation may, from
time to time, issue any combination of common stock, preferred
stock, debt securities or trust preferred securities in one or
more offerings up to a total dollar amount of
$200.0 million.
Capital management is a continuous process. Both the Corporation
and FNBPA are subject to various regulatory capital requirements
administered by the federal banking agencies. For additional
information, see the Regulatory Matters footnote in the Notes to
the Consolidated Financial Statements, which is included in
Item 8 of this Report. Book value per share was $8.90 at
December 31, 2006 compared to $8.31 at December 31,
2005. The Corporation issues shares, which were initially
acquired through the acquisition of treasury stock, in
connection with its various benefit plans.
In late 2005, the four federal banking agencies, the OCC, FRB,
the FDIC and the Office of Thrift Supervision, published an
interagency advance notice of proposed rulemaking regarding
potential revisions to the existing risk-based capital
framework. These changes would apply to banks, bank holding
companies and savings associations. The Corporation will
continue to monitor these potential changes to the risk-based
capital standards and will make the necessary changes to ensure
that it remains well-capitalized.
The Corporation may continue to grow through acquisitions, which
can potentially impact its capital position. The Corporation may
issue additional common stock in order maintain its
well-capitalized status.
|
|
ITEM 7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
The information called for by this item is provided in the
Market Risk section of Managements Discussion and Analysis
of Financial Condition and Results of Operations, which is
included in Item 7 of this Report.
42
|
|
ITEM 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
Managements
Report on Internal Control Over Financial Reporting
F.N.B. Corporation (the Corporation) is responsible for the
preparation, integrity and fair presentation of the consolidated
financial statements included in this Annual Report. The
consolidated financial statements and notes included in this
Annual Report have been prepared in conformity with United
States generally accepted accounting principles (U.S. GAAP)
We, as management of the Corporation, are responsible for
establishing and maintaining effective internal control over
financial reporting that is designed to produce reliable
financial statements in conformity with U.S. GAAP. The
system of internal control over financial reporting as it
relates to the financial statements is evaluated for
effectiveness by management and tested for reliability through a
program of internal audits. Actions are taken to correct
potential deficiencies as they are identified. Any system of
internal control, no matter how well designed, has inherent
limitations, including the possibility that a control can be
circumvented or overridden and misstatements due to error or
fraud may occur and not be detected. Also, because of changes in
conditions, internal control effectiveness may vary over time.
Accordingly, even an effective system of internal control will
provide only reasonable assurance with respect to financial
statement preparation.
Management assessed the Corporations system of internal
control over financial reporting as of December 31, 2006 in
relation to criteria set forth for effective internal control
over financial reporting as described in Internal
Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO). Based on this assessment, management concluded that as
of December 31, 2006, the Corporations internal
control over financial reporting is effective and meets the
criteria of the Internal Control Integrated
Framework. Ernst & Young LLP, independent
registered public accounting firm, has issued an audit report on
managements assessment of the Corporations internal
control over financial reporting.
|
|
|
|
|
|
/s/ Stephen
J.
Gurgovits Stephen
J. Gurgovits
|
|
/s/ Brian
F. Lilly
Brian
F. Lilly
|
President and Chief Executive
Officer
|
|
Chief Financial Officer
|
43
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
F.N.B. Corporation
We have audited the accompanying consolidated balance sheets of
F.N.B. Corporation and subsidiaries as of December 31, 2006
and 2005, and the related consolidated statements of income,
shareholders equity, and cash flows for each of the three
years in the period ended December 31, 2006. These
financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of F.N.B. Corporation and subsidiaries at
December 31, 2006 and 2005, and the consolidated results of
their operations and their cash flows for each of the three
years in the period ended December 31, 2006, in conformity
with U.S. generally accepted accounting principles.
As discussed in footnote 19 to the consolidated financial
statements, F.N.B. Corporation changed its method of accounting
for defined benefit pension and other postretirement plans as of
December 31, 2006, in accordance with Financial Accounting
Standards Board Statement No. 158, Employers
Accounting for Defined Benefit Pension and Other Postretirement
Plans. As discussed in footnote 2 to the consolidated
financial statements, F.N.B. Corporation adopted the provisions
of Staff Accounting Bulletin No. 108, Considering
the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of F.N.B. Corporations internal control over
financial reporting as of December 31, 2006, based on
criteria established in Internal ControlIntegrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission and our report dated February 23,
2007, expressed an unqualified opinion thereon.
Pittsburgh, Pennsylvania
February 23, 2007
44
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
F.N.B. Corporation
We have audited managements assessment, included in the
accompanying Report of Management on Internal Control Over
Financial Reporting, that F.N.B. Corporation maintained
effective internal control over financial reporting as of
December 31, 2006, based on criteria established in
Internal ControlIntegrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(the COSO criteria). F.N.B. Corporations management is
responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness
of internal control over financial reporting. Our responsibility
is to express an opinion on managements assessment and an
opinion on the effectiveness of the companys internal
control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
managements assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. Because
managements assessment and our audit were conducted to
also meet the reporting requirements of Section 112 of the
Federal Deposit Insurance Corporation Improvement Act (FDICIA),
managements assessment and our audit of F.N.B.
Corporations internal control over financial reporting
included controls over the preparation of financial statements
in accordance with the instructions for the preparation of
Consolidated Financial Statements for Bank Holding Companies
(Form FRY-9C).
A companys internal control over financial reporting
includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions
of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance
with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use, or
disposition of the companys assets that could have a
material effect on the financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, managements assessment that F.N.B.
Corporation maintained effective internal control over financial
reporting as of December 31, 2006, is fairly stated, in all
material respects, based on the COSO criteria. Also, in our
opinion, F.N.B. Corporation maintained, in all material
respects, effective internal control over financial reporting as
of December 31, 2006, based on the COSO criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of F.N.B. Corporation as of
December 31, 2006 and 2005, and the related consolidated
statements of income, stockholders equity, and cash flows
for each of the three years in the period ended
December 31, 2006, of F.N.B. Corporation and our report
dated February 23, 2007, expressed an unqualified opinion
thereon.
Pittsburgh, Pennsylvania
February 23, 2007
45
F.N.B.
Corporation and Subsidiaries
Consolidated Balance Sheets
Dollars
in thousands, except par values
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
2006
|
|
|
2005
|
|
|
Assets
|
Cash and due from banks
|
|
$
|
122,362
|
|
|
$
|
131,604
|
|
Interest bearing deposits with
banks
|
|
|
1,472
|
|
|
|
627
|
|
Securities available for sale
|
|
|
258,279
|
|
|
|
279,219
|
|
Securities held to maturity (fair
value of $766,295 and $867,122)
|
|
|
776,079
|
|
|
|
881,139
|
|
Mortgage loans held for sale
|
|
|
3,955
|
|
|
|
4,740
|
|
Loans, net of unearned income of
$26,704 and $27,595
|
|
|
4,253,144
|
|
|
|
3,749,047
|
|
Allowance for loan losses
|
|
|
(52,575
|
)
|
|
|
(50,707
|
)
|
|
|
|
|
|
|
|
|
|
Net Loans
|
|
|
4,200,569
|
|
|
|
3,698,340
|
|
Premises and equipment, net
|
|
|
86,532
|
|
|
|
87,013
|
|
Goodwill
|
|
|
242,479
|
|
|
|
196,354
|
|
Core deposit and other intangible
assets, net
|
|
|
23,859
|
|
|
|
23,401
|
|
Bank owned life insurance
|
|
|
131,391
|
|
|
|
122,666
|
|
Other assets
|
|
|
160,615
|
|
|
|
165,223
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
6,007,592
|
|
|
$
|
5,590,326
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
Deposits:
|
|
|
|
|
|
|
|
|
Non-interest bearing demand
|
|
$
|
654,617
|
|
|
$
|
688,391
|
|
Savings and NOW
|
|
|
1,944,707
|
|
|
|
1,675,395
|
|
Certificates and other time
deposits
|
|
|
1,773,518
|
|
|
|
1,648,157
|
|
|
|
|
|
|
|
|
|
|
Total Deposits
|
|
|
4,372,842
|
|
|
|
4,011,943
|
|
Other liabilities
|
|
|
62,547
|
|
|
|
59,634
|
|
Short-term borrowings
|
|
|
363,910
|
|
|
|
378,978
|
|
Long-term debt
|
|
|
519,890
|
|
|
|
533,703
|
|
Junior subordinated debt owed to
unconsolidated subsidiary trusts
|
|
|
151,031
|
|
|
|
128,866
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
5,470,220
|
|
|
|
5,113,124
|
|
|
|
|
|
|
|
|
|
|
Stockholders
Equity
|
|
|
|
|
|
|
|
|
Common stock
$0.01 par value
|
|
|
|
|
|
|
|
|
Authorized
500,000,000 shares
|
|
|
|
|
|
|
|
|
Issued 60,451,533 and
57,513,586
|
|
|
601
|
|
|
|
575
|
|
Additional paid-in capital
|
|
|
506,024
|
|
|
|
454,546
|
|
Retained earnings
|
|
|
33,321
|
|
|
|
24,376
|
|
Accumulated other comprehensive
(loss) income
|
|
|
(1,546
|
)
|
|
|
3,597
|
|
Deferred stock compensation
|
|
|
|
|
|
|
(4,154
|
)
|
Treasury stock 57,254
and 94,545 shares at cost
|
|
|
(1,028
|
)
|
|
|
(1,738
|
)
|
|
|
|
|
|
|
|
|
|
Total Stockholders
Equity
|
|
|
537,372
|
|
|
|
477,202
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and
Stockholders Equity
|
|
$
|
6,007,592
|
|
|
$
|
5,590,326
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements
46
F.N.B.
Corporation and Subsidiaries
Consolidated Statements of Income
Dollars
in thousands, except per share data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Interest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, including fees
|
|
|
$288,553
|
|
|
|
$240,966
|
|
|
|
$208,307
|
|
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
47,319
|
|
|
|
49,275
|
|
|
|
42,248
|
|
Nontaxable
|
|
|
4,757
|
|
|
|
4,138
|
|
|
|
2,554
|
|
Dividends
|
|
|
533
|
|
|
|
694
|
|
|
|
445
|
|
Other
|
|
|
1,260
|
|
|
|
407
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Interest Income
|
|
|
342,422
|
|
|
|
295,480
|
|
|
|
253,568
|
|
Interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
106,679
|
|
|
|
66,112
|
|
|
|
52,400
|
|
Short-term borrowings
|
|
|
15,785
|
|
|
|
14,501
|
|
|
|
7,278
|
|
Long-term debt
|
|
|
20,752
|
|
|
|
19,872
|
|
|
|
18,726
|
|
Junior subordinated debt owed to
unconsolidated subsidiary trusts
|
|
|
10,369
|
|
|
|
8,295
|
|
|
|
5,986
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Interest Expense
|
|
|
153,585
|
|
|
|
108,780
|
|
|
|
84,390
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income
|
|
|
188,837
|
|
|
|
186,700
|
|
|
|
169,178
|
|
Provision for loan losses
|
|
|
10,412
|
|
|
|
12,176
|
|
|
|
16,280
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income After
Provision for Loan Losses
|
|
|
178,425
|
|
|
|
174,524
|
|
|
|
152,898
|
|
Non-Interest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges
|
|
|
40,053
|
|
|
|
38,121
|
|
|
|
32,569
|
|
Insurance commissions and fees
|
|
|
13,988
|
|
|
|
12,794
|
|
|
|
11,245
|
|
Securities commissions and fees
|
|
|
4,871
|
|
|
|
4,490
|
|
|
|
4,954
|
|
Trust
|
|
|
7,780
|
|
|
|
7,125
|
|
|
|
6,926
|
|
Bank owned life insurance
|
|
|
3,368
|
|
|
|
3,301
|
|
|
|
3,459
|
|
Gain on sale of mortgage loans
|
|
|
1,607
|
|
|
|
1,393
|
|
|
|
1,769
|
|
Gain (loss) on sale of securities
|
|
|
1,802
|
|
|
|
(11,703
|
)
|
|
|
607
|
|
Impairment loss on equity security
|
|
|
|
|
|
|
(1,953
|
)
|
|
|
|
|
Gain on sale of branches
|
|
|
|
|
|
|
|
|
|
|
4,135
|
|
Data processing contract termination
|
|
|
|
|
|
|
|
|
|
|
3,840
|
|
Other
|
|
|
5,806
|
|
|
|
4,239
|
|
|
|
7,822
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-Interest
Income
|
|
|
79,275
|
|
|
|
57,807
|
|
|
|
77,326
|
|
Non-Interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
|
83,649
|
|
|
|
81,035
|
|
|
|
71,328
|
|
Net occupancy
|
|
|
13,963
|
|
|
|
12,666
|
|
|
|
11,064
|
|
Equipment
|
|
|
13,600
|
|
|
|
12,911
|
|
|
|
13,282
|
|
Amortization of intangibles
|
|
|
4,148
|
|
|
|
3,743
|
|
|
|
2,415
|
|
State taxes
|
|
|
4,682
|
|
|
|
3,951
|
|
|
|
4,244
|
|
Advertising and promotional
|
|
|
2,845
|
|
|
|
3,210
|
|
|
|
2,142
|
|
Insurance claims paid
|
|
|
2,558
|
|
|
|
2,654
|
|
|
|
2,696
|
|
Merger related
|
|
|
564
|
|
|
|
1,303
|
|
|
|
1,681
|
|
Debt extinguishment penalty
|
|
|
|
|
|
|
|
|
|
|
2,245
|
|
Other
|
|
|
34,505
|
|
|
|
33,753
|
|
|
|
29,795
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-Interest
Expense
|
|
|
160,514
|
|
|
|
155,226
|
|
|
|
140,892
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Before Income
Taxes
|
|
|
97,186
|
|
|
|
77,105
|
|
|
|
89,332
|
|
Income taxes
|
|
|
29,537
|
|
|
|
21,847
|
|
|
|
27,537
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
|
$67,649
|
|
|
|
$55,258
|
|
|
|
$61,795
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income per Common
Share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
$1.15
|
|
|
|
$.99
|
|
|
|
$1.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
$1.14
|
|
|
|
$.98
|
|
|
|
$1.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Dividends Paid per Common
Share
|
|
|
$.94
|
|
|
|
$.925
|
|
|
|
$.92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements
47
F.N.B.
Corporation and Subsidiaries
Consolidated Statements of Stockholders Equity
Dollars
in thousands
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumu-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
lated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Addi-
|
|
|
|
|
|
Other
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
Compre-
|
|
|
|
|
|
tional
|
|
|
|
|
|
Compre-
|
|
|
Stock
|
|
|
|
|
|
|
|
|
|
hensive
|
|
|
Common
|
|
|
Paid-In
|
|
|
Retained
|
|
|
hensive
|
|
|
Compen-
|
|
|
Treasury
|
|
|
|
|
|
|
Income
|
|
|
Stock
|
|
|
Capital
|
|
|
Earnings
|
|
|
Income
|
|
|
sation
|
|
|
Stock
|
|
|
Total
|
|
|
Balance at January 1,
2004
|
|
|
|
|
|
$
|
464
|
|
|
$
|
589,339
|
|
|
$
|
8,202
|
|
|
$
|
10,251
|
|
|
$
|
|
|
|
$
|
(1,347
|
)
|
|
$
|
606,909
|
|
Net income
|
|
$
|
61,795
|
|
|
|
|
|
|
|
|
|
|
|
61,795
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61,795
|
|
Change in other comprehensive
income (loss)
|
|
|
(3,388
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,388
|
)
|
|
|
|
|
|
|
|
|
|
|
(3,388
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
58,407
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common dividends declared:
$.92/share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(43,476
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(43,476
|
)
|
Spin-off of Florida operations
|
|
|
|
|
|
|
|
|
|
|
(363,219
|
)
|
|
|
|
|
|
|
(1,898
|
)
|
|
|
|
|
|
|
|
|
|
|
(365,117
|
)
|
Purchase of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(21,101
|
)
|
|
|
(21,101
|
)
|
Issuance of common stock
|
|
|
|
|
|
|
38
|
|
|
|
72,614
|
|
|
|
(3,674
|
)
|
|
|
|
|
|
|
|
|
|
|
19,109
|
|
|
|
88,087
|
|
Tax benefit of stock-based
compensation
|
|
|
|
|
|
|
|
|
|
|
1,821
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,821
|
|
Change in deferred stock
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,428
|
)
|
|
|
|
|
|
|
(1,428
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31,
2004
|
|
|
|
|
|
|
502
|
|
|
|
300,555
|
|
|
|
22,847
|
|
|
|
4,965
|
|
|
|
(1,428
|
)
|
|
|
(3,339
|
)
|
|
|
324,102
|
|
Net income
|
|
$
|
55,258
|
|
|
|
|
|
|
|
|
|
|
|
55,258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55,258
|
|
Change in other comprehensive
income (loss)
|
|
|
(1,368
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,368
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,368
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
53,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common dividends declared:
$.925/share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(52,336
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(52,336
|
)
|
Purchase of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,926
|
)
|
|
|
(10,926
|
)
|
Issuance of common stock
|
|
|
|
|
|
|
73
|
|
|
|
152,210
|
|
|
|
(1,393
|
)
|
|
|
|
|
|
|
|
|
|
|
12,527
|
|
|
|
163,417
|
|
Tax benefit of stock-based
compensation
|
|
|
|
|
|
|
|
|
|
|
1,781
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,781
|
|
Change in deferred stock
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,726
|
)
|
|
|
|
|
|
|
(2,726
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31,
2005
|
|
|
|
|
|
|
575
|
|
|
|
454,546
|
|
|
|
24,376
|
|
|
|
3,597
|
|
|
|
(4,154
|
)
|
|
|
(1,738
|
)
|
|
|
477,202
|
|
Net income
|
|
$
|
67,649
|
|
|
|
|
|
|
|
|
|
|
|
67,649
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67,649
|
|
Change in other comprehensive
income (loss)
|
|
|
(438
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(438
|
)
|
|
|
|
|
|
|
|
|
|
|
(438
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
67,211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of change in
accounting for pension and postretirement obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,705
|
)
|
|
|
|
|
|
|
|
|
|
|
(4,705
|
)
|
Cumulative effect of change in
accounting from adoption of SAB 108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,599
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,599
|
)
|
Common dividends declared:
$.94/share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(55,362
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(55,362
|
)
|
Purchase of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,649
|
)
|
|
|
(9,649
|
)
|
Issuance of common stock
|
|
|
|
|
|
|
29
|
|
|
|
53,803
|
|
|
|
(1,743
|
)
|
|
|
|
|
|
|
|
|
|
|
10,359
|
|
|
|
62,448
|
|
Restricted stock compensation
|
|
|
|
|
|
|
|
|
|
|
1,203
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,203
|
|
Tax benefit of stock-based
compensation
|
|
|
|
|
|
|
|
|
|
|
623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
623
|
|
Reclassification arising from
adoption of FAS 123R
|
|
|
|
|
|
|
(3
|
)
|
|
|
(4,151
|
)
|
|
|
|
|
|
|
|
|
|
|
4,154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31,
2006
|
|
|
|
|
|
$
|
601
|
|
|
$
|
506,024
|
|
|
$
|
33,321
|
|
|
$
|
(1,546
|
)
|
|
$
|
0
|
|
|
$
|
(1,028
|
)
|
|
$
|
537,372
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements
48
F.N.B.
Corporation and Subsidiaries
Consolidated Statements of Cash Flows
Dollars
in thousands
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
67,649
|
|
|
$
|
55,258
|
|
|
$
|
61,795
|
|
Adjustments to reconcile net income
to net cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation, amortization and
accretion
|
|
|
14,467
|
|
|
|
15,315
|
|
|
|
14,620
|
|
Provision for loan losses
|
|
|
10,412
|
|
|
|
12,176
|
|
|
|
16,280
|
|
Deferred taxes
|
|
|
955
|
|
|
|
5,881
|
|
|
|
(2,751
|
)
|
(Gain) loss on sale of securities
|
|
|
(1,802
|
)
|
|
|
11,703
|
|
|
|
(607
|
)
|
Gain on sale of loans
|
|
|
(1,607
|
)
|
|
|
(1,393
|
)
|
|
|
(1,769
|
)
|
Proceeds from sale of trading
securities
|
|
|
|
|
|
|
|
|
|
|
14,187
|
|
Proceeds from sale of loans
|
|
|
108,053
|
|
|
|
98,652
|
|
|
|
93,630
|
|
Loans originated for sale
|
|
|
(105,662
|
)
|
|
|
(96,180
|
)
|
|
|
(96,245
|
)
|
Tax benefit of stock-based
compensation
|
|
|
(623
|
)
|
|
|
1,781
|
|
|
|
1,821
|
|
Net change in:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest receivable
|
|
|
(2,952
|
)
|
|
|
916
|
|
|
|
(1,760
|
)
|
Interest payable
|
|
|
1,698
|
|
|
|
(8,677
|
)
|
|
|
(3,789
|
)
|
Other, net
|
|
|
27,164
|
|
|
|
(23,919
|
)
|
|
|
14,548
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows provided by
operating activities
|
|
|
117,752
|
|
|
|
71,513
|
|
|
|
109,960
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits with banks
|
|
|
(846
|
)
|
|
|
2,295
|
|
|
|
(1,769
|
)
|
Loans
|
|
|
(224,556
|
)
|
|
|
(20,692
|
)
|
|
|
37,519
|
|
Bank owned life insurance
|
|
|
(756
|
)
|
|
|
(1,482
|
)
|
|
|
112
|
|
Securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
|
|
|
(42,918
|
)
|
|
|
(398,976
|
)
|
|
|
(447,957
|
)
|
Sales
|
|
|
27,081
|
|
|
|
649,144
|
|
|
|
95,990
|
|
Maturities
|
|
|
75,181
|
|
|
|
101,260
|
|
|
|
203,519
|
|
Securities held to maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
|
|
|
(26,761
|
)
|
|
|
(356,655
|
)
|
|
|
(93,250
|
)
|
Maturities
|
|
|
130,532
|
|
|
|
118,945
|
|
|
|
45,722
|
|
Increase in premises and equipment
|
|
|
(4,222
|
)
|
|
|
(5,677
|
)
|
|
|
(968
|
)
|
Net cash (paid) received for
mergers and acquisitions
|
|
|
(17,123
|
)
|
|
|
12,571
|
|
|
|
3,070
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows (used in) provided
by investing activities
|
|
|
(84,388
|
)
|
|
|
100,733
|
|
|
|
(158,012
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in:
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing deposits,
savings, and NOW accounts
|
|
|
120,491
|
|
|
|
(98,945
|
)
|
|
|
(83,223
|
)
|
Time deposits
|
|
|
(3,251
|
)
|
|
|
73,148
|
|
|
|
(21,104
|
)
|
Short-term borrowings
|
|
|
(67,417
|
)
|
|
|
(31,073
|
)
|
|
|
176,651
|
|
Proceeds from the issuance of
junior subordinated debt owed to unconsolidated subsidiary trusts
|
|
|
22,165
|
|
|
|
|
|
|
|
|
|
Increase in long-term debt
|
|
|
29,749
|
|
|
|
64,031
|
|
|
|
262,950
|
|
Decrease in long-term debt
|
|
|
(81,484
|
)
|
|
|
(103,788
|
)
|
|
|
(243,969
|
)
|
Purchase of common stock
|
|
|
(9,649
|
)
|
|
|
(10,926
|
)
|
|
|
(21,101
|
)
|
Issuance of common stock
|
|
|
1,529
|
|
|
|
18,408
|
|
|
|
17,003
|
|
Tax benefit of stock-based
compensation
|
|
|
623
|
|
|
|
|
|
|
|
|
|
Cash dividends paid
|
|
|
(55,362
|
)
|
|
|
(52,336
|
)
|
|
|
(43,476
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows (used in) provided
by financing activities
|
|
|
(42,606
|
)
|
|
|
(141,481
|
)
|
|
|
43,731
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (Decrease) Increase in Cash
and Due from Banks
|
|
|
(9,242
|
)
|
|
|
30,765
|
|
|
|
(4,321
|
)
|
Cash and due from banks at
beginning of year
|
|
|
131,604
|
|
|
|
100,839
|
|
|
|
105,160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Due from Banks at End
of Year
|
|
$
|
122,362
|
|
|
$
|
131,604
|
|
|
$
|
100,839
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements
49
F.N.B.
Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Nature of
Operations
F.N.B. Corporation (the Corporation) is a diversified financial
services company headquartered in Hermitage, Pennsylvania. Its
primary businesses include commercial and retail banking,
consumer finance, asset management and insurance. The
Corporation operates its retail and commercial banking business
through a full service branch network in Pennsylvania and Ohio
and loan production offices in Florida and Tennessee, and
conducts selected consumer finance business in Pennsylvania,
Ohio and Tennessee.
|
|
1.
|
Summary
of Significant Accounting Policies
|
Basis of
Presentation
The accompanying consolidated financial statements of F.N.B.
Corporation include the accounts of the Corporation and its
subsidiaries. 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
(FNIA), Regency Finance Company (Regency) and F.N.B. Capital
Corporation, LLC.
The Corporation completed several acquisitions during 2006, 2005
and 2004. These acquisitions are discussed in the Mergers and
Acquisitions footnote. The consolidated financial statements
include the results of operations of the acquired entities from
their respective dates of acquisition.
The accompanying consolidated financial statements include all
adjustments, in the opinion of management, to fairly reflect the
Corporations financial position and results of operations.
All significant intercompany balances and transactions have been
eliminated. Certain prior period amounts have been reclassified
to conform to the current period presentation.
The Corporations consolidated financial statements include
subsidiaries in which the Corporation has a controlling
financial interest. Investments in companies in which the
Corporation controls operating and financing decisions
(principally defined as owning a voting or economic interest
greater than 50%) are consolidated. Variable interest entities
are consolidated if the Corporation is exposed to the majority
of the variable interest entitys expected losses
and/or
residual returns (i.e., the Corporation is considered to be the
primary beneficiary).
Use of
Estimates
The accounting and reporting policies of the Corporation conform
with U.S. generally accepted accounting principles (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.
Business
Combinations
Business combinations are accounted for under the purchase
method of accounting. Under the purchase method, assets and
liabilities are recorded at their estimated fair values as of
the date of acquisition with any excess of the cost of the
acquisition over the fair value of the net tangible and
intangible assets acquired recorded as goodwill. Results of
operations of the acquired entities are included in the
consolidated statement of income from the date of acquisition.
Cash
Equivalents
The Corporation considers cash and demand balances due from
banks as cash and cash equivalents.
50
Securities
Investment securities, which are composed of debt securities and
certain equity securities, comprise a significant portion of the
Corporations consolidated balance sheet. Such securities
can be classified as Trading, Securities Held
to Maturity or Securities Available for Sale.
Trading securities are held primarily as a result of
managements intent to resell such securities in the near
term and are carried at fair value, with unrealized gains
(losses) reflected through the consolidated statement of income.
As of December 31, 2006 and 2005, the Corporation did not
carry a portfolio of trading securities.
Securities held to maturity are comprised of debt securities,
for which management has the positive intent and ability to hold
such securities until their maturity. Such securities are
carried at cost, adjusted for related amortization of premiums
and accretion of discounts through interest income from
securities.
Securities that are not classified as trading or held to
maturity are classified as available for sale. The
Corporations available for sale securities portfolio is
comprised of debt securities and marketable equity securities.
Such securities are carried at fair value with net unrealized
gains and losses not deemed
other-than-temporary
reported separately as a component in other comprehensive
income, net of tax. Realized gains and losses on the sale of and
other-than-temporary
impairment charges on available for sale securities are recorded
on the consolidated statement of income. Realized gains and
losses on the sale of securities are determined using the
specific-identification method.
Securities are periodically reviewed for
other-than-temporary
impairment based upon a number of factors, including but not
limited to, length of time and extent to which the market value
has been less than cost, financial condition of the underlying
issuer, ability of the issuer to meet contractual obligations,
likelihood of the securitys ability to recover any decline
in its market value and managements intent and ability to
retain the security for a period of time sufficient to allow for
recovery in market value or maturity. Among the factors that are
considered in determining intent and ability is a review of the
Corporations capital adequacy, interest rate risk position
and liquidity. The assessment of a securitys ability to
recover any decline in market value, the ability of the issuer
to meet contractual obligations and managements intent and
ability requires considerable judgment. A decline in value that
is considered to be
other-than-temporary
is recorded as a loss within non-interest income in the
consolidated statement of income.
Equity
Method Investment
Through September 8, 2004, the Corporation accounted for
its ownership of the common stock of Sun Bancorp, Inc. (Sun)
under the equity method. Under the equity method, the carrying
value of the Corporations investment in Sun was adjusted
for the Corporations share of Suns earnings and
reduced by dividends received from Sun. On September 9,
2004, the Corporation ceased to have any management control over
Sun as the Corporation gave up its two seats on the Sun Board of
Directors. As a result, the Corporation changed its accounting
method to the cost basis of accounting and moved 56% of its
investment in Sun to securities available for trading. In
conjunction with this transfer, the Corporation recognized a
$1.2 million gain due to the market value being higher than
book value at the end of the third quarter of 2004. The
remaining 44% of the Corporations investment in Sun was
moved from the equity method of accounting to securities
available for sale, at the securities carrying value at that
date.
On October 1, 2004, Omega Financial Corporation (Omega)
completed its acquisition of Sun. Under the terms of the
agreement, Sun stockholders were entitled to receive either
0.664 shares of Omega common stock for each share of Sun
common stock or $23.25 in cash for each share held, subject to a
pro rata allocation such that 20% of the merger consideration
would be paid in cash and 80% would be in the form of Omega
common stock. On October 15, 2004, the Corporation received
cash for 610,192 shares of Sun common stock that it
categorized as trading. The remaining 479,930 shares of Sun
common stock were converted into 318,673 shares of Omega
common stock. As provided under
EITF 91-5,
Nonmonetary Exchange of Cost-Method Investments, on
October 1, 2004, the Corporation recorded a gain of
$1.0 million to reflect the difference between market value
at the transaction date and the carrying value of the remaining
shares classified as available for sale.
51
In conjunction with Omegas acquisition of Sun, Omega
terminated the servicing agreement that the Corporation had with
Sun. For the year ended December 31, 2004, the Corporation
recognized a $3.8 million gain as a result of this contract
termination.
The Corporation recognized an
other-than-temporary
impairment loss of $2.0 million in 2005 on the Omega
securities classified as available for sale.
Securities
Sold Under Agreements to Repurchase
Securities sold under agreements to repurchase are accounted for
as collateralized financing transactions and are recorded at the
amounts at which the securities were sold plus accrued interest.
Securities, generally U.S. government and federal agency
securities, pledged as collateral under these financing
arrangements cannot be sold or repledged by the secured party.
The fair value of collateral either received from or provided to
a third party is continually monitored and additional collateral
is obtained or is requested to be returned to the Corporation as
deemed appropriate.
Derivative
Instruments and Hedging Activities
From time to time the Corporation may enter into derivative
transactions principally to protect against the risk of adverse
price or interest rate movements on the value of certain assets
and liabilities and on future cash flows. The Corporation
formally documents all relationships between hedging instruments
and hedged items, as well as its risk management objective and
strategy for undertaking each hedge transaction. All derivative
instruments are carried at fair value on the balance sheet in
accordance with the requirements of FAS 133, Accounting
for Derivative Instruments and Hedging Activities.
Cash flow hedges are accounted for under the requirements of
FAS 133 by recording the fair value of the derivative
instrument on the balance sheet as either a freestanding asset
or liability, with a corresponding offset recorded in
accumulated other comprehensive income within stockholders
equity, net of tax. Amounts are reclassified from accumulated
other comprehensive income to the consolidated income statement
in the period or periods the hedged transaction affects earnings.
Derivative gains and losses under cash flow hedges not effective
in hedging the change in fair value or expected cash flows of
the hedged item are recognized immediately in the income
statement. At the hedges inception and at least quarterly
thereafter, a formal assessment is performed to determine
whether changes in the fair values or cash flows of the
derivative instruments have been highly effective in offsetting
changes in fair values or cash flows of the hedged items and
whether they are expected to be highly effective in the future.
If it is determined a derivative instrument has not been or will
not continue to be highly effective as a hedge, hedge accounting
is discontinued.
Mortgage
Loans Held for Sale and Loan Commitments
Certain residential mortgage loans are originated for sale in
the secondary mortgage loan market and typically sold with
servicing rights released. These loans are classified as loans
held for sale and are carried at the lower of cost or estimated
market value on an aggregate basis. Market value is determined
on the basis of rates obtained in the respective secondary
market for the type of loan held for sale. Loans are generally
sold at a premium or discount from the carrying amount of the
loan. Such premium or discount is recognized at the date of
sale. Gain or loss on the sale of loans is recorded in
non-interest income at the time consideration is received and
all other criteria for sales treatment have been met.
The Corporation routinely issues commitments to make loans as a
part of its residential lending operations. These commitments
are considered derivatives. The Corporation also enters into
commitments to sell loans to mitigate the risk that the market
value of residential loans may decline between the time the rate
commitment is issued to the customer and the time the
Corporation contracts to sell the loan. These commitments and
sales contracts are also derivatives. Both types of derivatives
are recorded at fair value. Sales contracts and commitments to
sell loans are not designated as hedges of the fair value of
loans held for sale. Fair value
52
adjustments related to derivatives are recorded in current
period earnings as an adjustment to net gains on sale of loans.
Loans and
the Allowance for Loan Losses
Loans are reported at their outstanding principal amount
outstanding net of unearned income, unamortized premiums or
discounts, acquisition fair value adjustments and any deferred
fees or costs on originated loans.
Interest income on loans is accrued on the principal
outstanding. It is the Corporations policy to discontinue
interest accruals when principal or interest is due and has
remained unpaid for 90 days or more unless the loan is both
well secured and in the process of collection. When a loan is
placed on non-accrual status, all unpaid interest is reversed.
Payments on non-accrual loans are generally applied to either
principal or interest or both, depending on managements
evaluation of collectibility. Consumer installment loans are
generally charged off against the allowance for loan losses upon
reaching 90 to 180 days past due, depending on the
installment loan type. Commercial loan charges-offs, either in
whole or in part, are generally made as soon as facts and
circumstances raise a serious doubt as to the collectibility of
all or a portion of the principal. Loan origination fees and
related costs are deferred and recognized over the life of the
loans as an adjustment of yield in interest income.
The allowance for loan losses is maintained at a level that, in
managements judgment, is believed adequate to absorb
probable losses associated with specifically identified loans,
as well as estimated probable credit losses inherent in the
remainder of the loan portfolio at the balance sheet date. The
allowance for loan losses is based on managements
evaluation of potential loan losses in the loan portfolio, which
includes an assessment of past experience, current economic
conditions in specific industries and geographic areas, general
economic conditions, known and inherent risks in the loan
portfolio, the estimated value of underlying collateral and
residuals and changes in the composition of the loan portfolio.
Determination of the allowance is inherently subjective as it
requires significant estimates, including the amounts and timing
of expected future cash flows on impaired loans, estimated
losses on pools of homogeneous loans based on historical loss
experience and consideration of current environmental factors
and economic trends, all of which are susceptible to significant
change. Loan losses are charged off against the allowance when
the loss actually occurs or when a determination is made that a
loss is probable while recoveries of amounts previously charged
off are credited to the allowance. A provision for credit losses
is recorded based on managements periodic evaluation of
the factors previously mentioned as well as other pertinent
factors. Evaluations are conducted at least quarterly and more
often as deemed necessary.
Management estimates the allowance for loan losses pursuant to
FAS 5, Accounting for Contingencies, and
FAS 114, Accounting by Creditors for Impairment of a
Loan. Larger balance commercial and commercial real estate
loans that are considered impaired as defined in FAS 114
are reviewed individually to assess the likelihood and severity
of loss exposure. Loans subject to individual review are, where
appropriate, reserved for according to the present value of
expected future cash flows available to repay the loan, or the
estimated realizable value of the collateral. Commercial loans
excluded from individual assessment, as well as smaller balance
homogeneous loans, such as consumer, residential real estate and
home equity loans, are evaluated for loss exposure under
FAS 5 based upon historical loss rates for each of these
categories of loans. Historical loss rates for each of these
loan categories may be adjusted to reflect managements
estimates of the impacts of current economic conditions, trends
in delinquencies and non-performing loans, as well as changes in
credit underwriting and approval requirements. The accrual of
interest on impaired loans is discontinued when the loan is
90 days past due or in managements opinion the
account should be placed on non-accrual status (loans partially
charged off are immediately placed on non-accrual status). When
interest accrual is discontinued, all unpaid accrued interest is
reversed against interest income. Interest income is
subsequently recognized only to the extent that cash payments
are received.
Acquired
Loans
Loans acquired through the completion of a transfer, including
loans acquired in a business combination, that have evidence of
deterioration of credit quality since origination and for which
it is probable at acquisition, that the Corporation will be
unable to collect all contractually required payment receivable,
are initially recorded at fair value (as determined by the
present value of expected future cash flows) with no valuation
allowance. The difference between the undiscounted cash flows
expected at acquisition and the investment in the loan, or the
53
accretable yield, is recognized as interest income
on a level-yield method over the life of the loan. Contractually
required payments for interest and principal that exceed the
undiscounted cash flows expected at acquisition, or the
nonaccretable difference, are not recognized as a
yield adjustment or as a loss accrual or a valuation allowance.
Increases in expected cash flows subsequent to the initial
investment are recognized prospectively through adjustment of
the yield on the loan over its remaining life. Decreases in
expected cash flows are recognized as impairment. Valuation
allowances on these impaired loans reflect only losses incurred
after the acquisition.
Premises
and Equipment
Premises and equipment are stated at cost less accumulated
depreciation. Depreciation is computed on the straight-line
method over the assets estimated useful life. Leasehold
improvements are expensed over the lesser of the assets
estimated useful life or the term of the lease including renewal
periods when reasonably assured. Useful lives are dependent upon
the nature and condition of the asset and range from 3 to
40 years. Maintenance and repairs are charged to expense as
incurred, while major improvements are capitalized and amortized
to operating expense over the identified useful life.
Other
Real Estate Owned
Other real estate owned (OREO) is comprised principally of
commercial and residential real estate properties obtained in
partial or total satisfaction of loan obligations. OREO acquired
in settlement of indebtedness is included in other assets at the
estimated fair value less estimated selling costs. Changes to
the value subsequent to transfer are recorded in non-interest
expense along with direct operating expenses. Gains or losses
not previously recognized resulting from the sale of OREO are
recognized in non-interest expense on the date of sale.
Goodwill
and Other Intangible Assets
Goodwill represents the excess of the cost of an acquisition
over the fair value of the net assets acquired. Other intangible
assets represent purchased assets that lack physical substance
but can be distinguished from goodwill because of contractual or
other legal rights. For each acquisition, goodwill and other
intangible assets are allocated to the reporting units based
upon the relative fair value of the assets and liabilities
assigned to each reporting unit. Intangible assets that have
finite lives, such as core deposit intangibles, customer
relationship intangibles and renewal lists, are amortized over
their estimated useful lives and subject to periodic impairment
testing. Core deposit intangibles are primarily amortized over
ten years using straight line and accelerated methods. Customer
and renewal lists and other intangible assets are amortized over
their estimated useful lives which range from ten to twelve
years.
The Corporation tests goodwill and other intangible assets for
impairment at least annually, or when indicators of impairment
exist, to determine whether impairment may exist. Determining
the fair value of a reporting unit under the first step of the
goodwill impairment test and determining the fair value of
individual assets and liabilities of a reporting unit under the
second step of the goodwill impairment test are judgmental and
often involves the use of significant estimates and assumptions.
Similarly, estimates and assumptions are used in determining the
fair value of other intangible assets. Estimates of fair value
are primarily determined using discounted cash flows, market
comparisons and recent transactions. These approaches use
significant estimates and assumptions including projected future
cash flows, discount rates reflecting the market rate of return,
growth rates and determination and evaluation of appropriate
market comparables.
Income
Taxes
The Corporation and a majority of its subsidiaries file a
consolidated federal income tax return. The provision for
federal and state income taxes is based on income reported on
the consolidated financial statements, rather than the amounts
reported on the respective income tax returns. Deferred tax
assets and liabilities are computed using tax rates expected to
apply to taxable income in the years in which those assets and
liabilities are expected to be realized. The effect on deferred
tax assets and liabilities resulting from a change in tax rates
is recognized as income or expense in the period that the change
in tax rates is enacted.
54
The Corporation makes certain estimates and judgments in
determining income tax expense for financial statement purposes.
These estimates and judgments are applied in the calculation of
certain tax credits and in the calculation of the deferred
income tax expense or benefit associated with certain deferred
tax assets and liabilities. Significant changes to these
estimates may result in an increase or decrease to the
Corporations tax provision in a subsequent period.
The Corporation assesses the likelihood that it will be able to
recover its deferred tax assets. If recovery is not likely, the
Corporation will increase its provision for income taxes by
recording a valuation allowance against the deferred tax assets
that are unlikely to be recovered. The Corporation believes that
a substantial majority of the deferred tax assets recorded on
the balance sheet will ultimately be recovered. However, should
there be a change in the Corporations ability to recover
its deferred tax assets, the effect of this change would be
recorded through the provision for income taxes in the period
during which such change occurs.
Advertising
and Promotional Costs
Advertising and promotional costs are generally expensed as
incurred.
Per Share
Amounts
Basic earnings per common share is calculated by dividing net
income by the weighted average number of shares of common stock
outstanding net of unvested shares of restricted stock.
Diluted earnings per common share is calculated by dividing net
income adjusted for interest expense on convertible debt by the
weighted average number of shares of common stock outstanding,
adjusted for the dilutive effect of potential common shares
issuable for stock options, warrants, restricted shares and
convertible debt. Such adjustments to the weighted average
number of shares of common stock outstanding are made only when
such adjustments dilute earnings per common share.
Pension
and Postretirement Benefit Plans
The Corporation sponsors pension and other postretirement
benefit plans for its employees. The expense associated with the
pension plans is calculated in accordance with FAS 87,
Employers Accounting for Pensions, while the
expense associated with the postretirement benefit plans is
calculated in accordance with FAS 106, Employers
Accounting for Postretirement Benefits Other Than Pension.
The associated expense utilizes assumptions and methods
determined in accordance therewith, including a policy of
reflecting trust assets at their fair market value for the
qualified pension plans. The Corporation adopted FAS 158,
Employers Accounting for Defined Benefit Pension and
Other Postretirement Plans, on December 31, 2006 and
began recognizing the overfunded and underfunded status of the
pension and postretirement plans on its consolidated balance
sheet. Gains and losses, prior service costs and credits and
remaining transition amounts under FAS 87 and FAS 106
are recognized in accumulated other comprehensive income, net of
tax, until they are amortized.
Stock
Based Compensation
On January 1, 2006, the Corporation adopted FAS 123R,
Share-Based Payment, which requires the measurement and
recognition of compensation expense, based on estimated fair
values, for all share-based awards, including stock options and
restricted stock, made to employees and directors. The
Corporation adopted FAS 123R using the modified prospective
transition method. The consolidated financial statements for
2006 reflect the impact of FAS 123R. In accordance with the
modified prospective transition method, the consolidated
financial statements for prior periods have not been restated to
reflect, and do not include, the impact of FAS 123R. Prior
to the adoption of FAS 123R, the Corporation accounted for
share-based awards to employees and directors using the
intrinsic value method in accordance with Accounting Principles
Board (APB) Opinion No. 25, Accounting for Stock Issued
to Employees, as allowed under FAS 123, Accounting
for Stock-Based Compensation. Details related to the
adoption of FAS 123R and the impact on the
Corporations consolidated financial statements are more
fully discussed in the Stock Incentive Plans footnote.
55
|
|
2.
|
New and
Proposed Accounting Standards
|
Employers
Accounting for Defined Benefit Pension and Other Postretirement
Plans
In September 2006, the Financial Accounting Standards Board
(FASB) issued FAS 158, Employers Accounting for
Defined Benefit Pension and Other Postretirement Plans,
which amends FAS 87 and FAS 106 to require recognition
of the overfunded or underfunded status of pension and other
postretirement benefit plans on the balance sheet. Under
FAS 158, gains and losses, prior service costs and credits,
and any remaining transition amounts under FAS 87 and
FAS 106 that have not yet been recognized through net
periodic benefit cost will be recognized in accumulated other
comprehensive income, net of taxes, until they are amortized as
a component of net periodic cost. The Corporation already
complied with the requirement under FAS 158 to measure plan
assets and benefit obligations as of the date of the year-end
consolidated balance sheet. FAS 158 is effective for fiscal
years ending after December 15, 2006. The Corporation
adopted the balance sheet recognition provisions of FAS 158
on December 31, 2006. Details related to the adoption of
FAS 158 and the impact on the Corporations
consolidated financial statements are more fully discussed in
the Retirement Plans footnote and the Other Postretirement
Benefit Plans footnote.
Fair
Value Measurements
In September 2006, the FASB issued FAS 157, Fair Value
Measurements, which replaces the different definitions of
fair value in existing accounting literature with a single
definition, sets out a framework for measuring fair value and
requires additional disclosures about fair value measurements.
The statement clarifies that fair value is the price that would
be received to sell an asset or the price paid to transfer a
liability in the most advantageous market available to the
entity and emphasizes that fair value is a market-based
measurement and should be based on the assumptions market
participants would use. The Corporation will be required to
apply the new guidance prospectively beginning January 1,
2008, and does not expect it to have a material impact on its
consolidated financial statements or liquidity.
Considering
the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements
In September 2006, the SEC issued Staff Accounting Bulletin
(SAB) 108, Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year
Financial Statements, which is effective for fiscal years
ending on or after November 15, 2006. SAB 108 provides
guidance on how the effects of prior-year uncorrected financial
statement misstatements should be considered in quantifying a
current year misstatement. SAB 108 requires public
companies to quantify misstatements using both an income
statement (rollover) and balance sheet (iron curtain) approach
and evaluate whether either approach results in a misstatement
that, when all relevant quantitative and qualitative factors are
considered, is material. If prior year errors that had been
previously considered immaterial are now considered material
based on either approach, no restatement is required so long as
management properly applied its previous approach and all
relevant facts and circumstances are considered. Adjustments
considered immaterial in prior years under the method previously
used, but now considered material under the dual approach
required by SAB 108, are to be recorded upon initial
adoption of SAB 108.
In the fourth quarter of 2006, the Corporation evaluated two
prior-year uncorrected financial statement misstatements related
to accounting for operating leases and non-accrual interest that
had been previously considered immaterial to the prior
years consolidated statements of income. Upon evaluating
the impact of correcting these errors in the December 31,
2005 balance sheet through the 2006 statement of income,
management concluded that the errors were material. As such,
these errors have been corrected through a cumulative effect
adjustment in opening retained earnings as of January 1,
2006 of $1.6 million.
The Corporation understated its liability and expense for
operating leases in prior periods as it accounted for leases
based on the escalating lease payments pertaining to each
reporting period. The Corporation changed its method of
accounting for operating leases to the straight line method in
accordance with FAS 13, Accounting for Leases, in
the fourth quarter of 2006. The cumulative after-tax effect of
the misstatement as of January 1, 2006 was
$1.0 million.
56
The Corporation previously identified an out of balance
condition related to non-accrual interest associated with an
acquisition in 2002 which was not corrected in prior years. The
cumulative after-tax effect of correcting the balance sheet as
of January 1, 2006 was $0.6 million.
Accounting
for Servicing of Financial Assets
In March 2006, the FASB issued FAS 156, Accounting for
Servicing of Financial Assets an amendment of FASB Statement
No. 140 (FAS 140). FAS 140 established, among
other things, the accounting for all separately recognized
servicing assets and servicing liabilities. FAS 156 amends
FAS 140 to require that all separately recognized servicing
assets and servicing liabilities be initially measured at fair
value, if practicable. FAS 156 also permits, but does not
require, the subsequent measurement of separately recognized
servicing assets and servicing liabilities at fair value. Under
FAS 156, an entity can elect subsequent fair value
measurement to account for its separately recognized servicing
assets and servicing liabilities. Adoption of FAS 156 is
required as of the beginning of the first fiscal year beginning
after September 15, 2006. Upon adoption, the Corporation
will apply the requirements for recognition and initial
measurement of servicing assets and servicing liabilities
prospectively to all transactions. The Corporation will adopt
FAS 156 for the year beginning January 1, 2007. The
adoption is not expected to have a significant impact on its
consolidated financial statements as the Corporation expects to
continue to utilize the amortized cost method.
Accounting
for Certain Hybrid Financial Instruments
In February 2006, the FASB issued FAS 155, Accounting
for Certain Hybrid Financial Instruments, which amends
FAS 133, Accounting for Derivative Instruments and
Hedging Activities, and FAS 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities. FAS 155 requires entities to
evaluate and identify whether interests in securitized financial
assets are freestanding derivatives, hybrid financial
instruments that contain an embedded derivative requiring
bifurcation, or hybrid financial instruments that contain
embedded derivatives that do not require bifurcation.
FAS 155 also permits fair value measurement for any hybrid
financial instrument that contains an embedded derivative that
otherwise would require bifurcation. This statement will be
effective for all financial instruments acquired or issued by
the Corporation on or after January 1, 2007 and is not
expected to have a material impact on the Corporations
consolidated financial statements or liquidity.
Accounting
for Uncertainty in Income Taxes
In July 2006, the FASB issued FAS Interpretation
No. 48 (FIN 48), Accounting for Uncertainty in
Income Taxes. FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in an enterprises
financial statements in accordance with FAS 109,
Accounting for Income Taxes. FIN 48
prescribes a recognition threshold and measurement attributable
for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return.
FIN 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim
periods, disclosures and transitions. FIN 48 is effective
for fiscal years beginning after December 15, 2006 and is
not expected to have a material impact on the Corporations
consolidated financial statements.
|
|
3.
|
Mergers
and Acquisitions
|
On May 26, 2006, the Corporation completed its acquisition
of The Legacy Bank (Legacy), a commercial bank and trust company
headquartered in Harrisburg, Pennsylvania, with
$375.1 million in assets, including $297.0 million in
loans, and $256.5 million in deposits. Consideration paid
by the Corporation totaled $72.4 million comprised
primarily of 2,682,053 shares of the Corporations
common stock and $21.1 million in exchange for
3,831,505 shares of Legacy common stock. At the time of the
acquisition, Legacy was merged into FNBPA. Based on the
preliminary purchase price allocation, the Corporation recorded
$47.0 million in goodwill and $4.3 million in core
deposit intangibles as a result of the acquisition. None of the
goodwill is deductible for income tax purposes. As of
December 31, 2006, the purchase price is still subject to
final adjustment.
57
On November 1, 2005, the Corporation completed the
acquisition of the assets of Penn Group Insurance, Inc. (Penn
Group), a full-service insurance agency based in Pittsburgh,
Pennsylvania. Penn Group, an established life and employee
benefits agency, became a part of the Corporations
existing insurance agency, FNIA.
On October 7, 2005, the Corporation completed its
acquisition of North East (Pink Sheets: NEBI), a bank holding
company headquartered in North East, Pennsylvania with
$68.0 million in assets, $49.4 million in loans and
$61.2 million in deposits. The acquisition was accounted
for as a purchase. Consideration paid by the Corporation totaled
$15.4 million comprised of 862,611 shares of the
Corporations common stock and $169,800 in exchange for
145,168 shares of North East common stock. North
Easts banking subsidiary, The National Bank of North East,
was merged into FNBPA. The Corporation recorded
$10.3 million in goodwill and $0.3 million in core
deposit intangibles as a result of the acquisition. None of the
goodwill is deductible for income tax purposes.
On February 18, 2005, the Corporation completed its
acquisition of NSD (Nasdaq: NSDB), a bank holding company
headquartered in Pittsburgh, Pennsylvania with
$503.0 million in assets, $308.9 million in loans and
$378.8 million in deposits. The acquisition, which was
accounted for as a purchase, was a stock transaction valued at
approximately $127.5 million. The Corporation issued
5,944,343 shares of its common stock in exchange for
3,302,485 shares of NSD common stock. NSDs banking
subsidiary, NorthSide Bank, was merged into FNBPA. The
Corporation recorded $97.9 million in goodwill and
$8.4 million in core deposit intangibles as a result of the
acquisition. None of the goodwill is deductible for income tax
purposes.
On October 8, 2004, the Corporation completed its
acquisition of Slippery Rock (OTC BB: SRCK), a bank holding
company headquartered in Slippery Rock, Pennsylvania with
$335.0 million in assets. The acquisition, which was
accounted for as a purchase, was a stock and cash transaction
valued at $84.3 million. The Corporation issued
3,309,203 shares of its common stock in exchange for
2,346,952 shares of Slippery Rock common stock. In
addition, the Corporation paid $11.6 million to Slippery
Rock stockholders in exchange for 414,482 shares of
Slippery Rock common stock. Slippery Rocks banking
subsidiary, First National Bank of Slippery Rock, was merged
into FNBPA. FNBPA recognized $53.4 million in goodwill and
$5.3 million in core deposit intangibles as a result of the
acquisition. None of the goodwill is deductible for income tax
purposes.
On July 30, 2004, the Corporation completed the acquisition
of the assets of MBJ, a full-service insurance agency based in
Pittsburgh, Pennsylvania. MBJ was one of the largest independent
insurance agencies in western Pennsylvania with annual revenues
of $4.0 million. MBJ, which offered property and casualty,
life and health, and group benefits coverage to both commercial
and individual clients, became a part of the Corporations
existing insurance agency, FNIA, doubling the size of the
Corporations insurance business. The acquisition agreement
includes an earn- out provision of up to $3.0 million based
on defined revenue and profitability targets over the five-year
period ending December 31, 2009.
On April 30, 2004, Regency completed its acquisition of
eight consumer finance offices in the greater Columbus, Ohio
area from The Modern Finance Company (Modern Finance), an
affiliate of Thaxton Group, Inc., headquartered in South
Carolina. This acquisition added approximately $7.0 million
in net loans outstanding to Regencys portfolio.
The assets and liabilities of these acquired entities were
recorded on the balance sheet at their estimated fair values as
of their respective acquisition dates. The consolidated
financial statements include the results of operations of these
entities from their respective dates of acquisition.
4. Balance
Sheet Repositioning, Efficiency Improvement Charges and Merger
Expenses
During the fourth quarter of 2005, the Corporation completed a
balance sheet repositioning to reduce its exposure to an
anticipated rise in interest rates and improve future net income
levels. The Corporation realized a loss of $13.3 million
from the sale of fixed rate available for sale debt securities.
The repositioning had a nominal impact on the Corporations
stockholders equity as the previously unrealized losses
associated with the securities sold had been reflected in
accumulated other comprehensive income. Additional information
is provided in the Securities footnote.
The Corporation also took actions in the fourth quarter of 2005
to improve the efficiency of its customer service model. The
Corporation recorded an expense of $1.5 million to account
for severance costs related to staff
58
reductions implemented as a result of improvements in its
customer service model. This amount also includes early
retirement and supplemental retirement benefit costs for former
employees as well as other miscellaneous items. In addition, the
Corporation recorded $0.6 million, $1.3 million and
$1.7 million in merger and integration charges in 2006,
2005 and 2004, respectively associated with the acquisitions of
Legacy in 2006, North East and NSD in 2005 and Slippery Rock in
2004.
The amortized cost and fair value of securities are as follows
(in thousands):
Securities Available For Sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
December 31,
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and other
U.S. government agencies and corporations
|
|
|
$143,589
|
|
|
$
|
|
|
|
$
|
(148
|
)
|
|
|
$143,441
|
|
Mortgage-backed securities of
U.S. government agencies
|
|
|
27,471
|
|
|
|
9
|
|
|
|
(296
|
)
|
|
|
27,184
|
|
States of the U.S. and political
subdivisions
|
|
|
36,574
|
|
|
|
564
|
|
|
|
(110
|
)
|
|
|
37,028
|
|
Corporate and other debt securities
|
|
|
40,790
|
|
|
|
226
|
|
|
|
(87
|
)
|
|
|
40,929
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities
|
|
|
248,424
|
|
|
|
799
|
|
|
|
(641
|
)
|
|
|
248,582
|
|
Equity securities
|
|
|
7,853
|
|
|
|
1,859
|
|
|
|
(15
|
)
|
|
|
9,697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$256,277
|
|
|
$
|
2,658
|
|
|
$
|
(656
|
)
|
|
|
$258,279
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and other
U.S. government agencies and corporations
|
|
|
$190,413
|
|
|
$
|
|
|
|
$
|
(112
|
)
|
|
|
$190,301
|
|
Mortgage-backed securities of
U.S. government agencies
|
|
|
33,036
|
|
|
|
5
|
|
|
|
(545
|
)
|
|
|
32,496
|
|
States of the U.S. and political
subdivisions
|
|
|
5,433
|
|
|
|
11
|
|
|
|
(59
|
)
|
|
|
5,385
|
|
Corporate and other debt securities
|
|
|
36,382
|
|
|
|
417
|
|
|
|
(58
|
)
|
|
|
36,741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities
|
|
|
265,264
|
|
|
|
433
|
|
|
|
(774
|
)
|
|
|
264,923
|
|
Equity securities
|
|
|
11,898
|
|
|
|
2,419
|
|
|
|
(21
|
)
|
|
|
14,296
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$277,162
|
|
|
$
|
2,852
|
|
|
$
|
(795
|
)
|
|
|
$279,219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and other
U.S. government agencies and corporations
|
|
|
$170,125
|
|
|
$
|
238
|
|
|
$
|
(892
|
)
|
|
|
$169,471
|
|
Mortgage-backed securities of
U.S. government agencies
|
|
|
306,639
|
|
|
|
1,116
|
|
|
|
(1,134
|
)
|
|
|
306,621
|
|
States of the U.S. and political
subdivisions
|
|
|
1,160
|
|
|
|
20
|
|
|
|
|
|
|
|
1,180
|
|
Corporate and other debt securities
|
|
|
15,154
|
|
|
|
882
|
|
|
|
|
|
|
|
16,036
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities
|
|
|
493,078
|
|
|
|
2,256
|
|
|
|
(2,026
|
)
|
|
|
493,308
|
|
Equity securities
|
|
|
19,257
|
|
|
|
3,798
|
|
|
|
(136
|
)
|
|
|
22,919
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$512,335
|
|
|
$
|
6,054
|
|
|
$
|
(2,162
|
)
|
|
|
$516,227
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59
Securities Held To Maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
December 31,
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and other
U.S. government agencies and corporations
|
|
$
|
89,378
|
|
|
$
|
23
|
|
|
$
|
(300
|
)
|
|
$
|
89,101
|
|
Mortgage-backed securities of
U.S. government agencies
|
|
|
559,658
|
|
|
|
355
|
|
|
|
(8,930
|
)
|
|
|
551,083
|
|
States of the U.S. and political
subdivisions
|
|
|
112,226
|
|
|
|
122
|
|
|
|
(842
|
)
|
|
|
111,506
|
|
Corporate and other debt securities
|
|
|
14,817
|
|
|
|
17
|
|
|
|
(229
|
)
|
|
|
14,605
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
776,079
|
|
|
$
|
517
|
|
|
$
|
(10,301
|
)
|
|
$
|
766,295
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and other
U.S. government agencies and corporations
|
|
$
|
105,355
|
|
|
$
|
42
|
|
|
$
|
(64
|
)
|
|
$
|
105,333
|
|
Mortgage-backed securities of
U.S. government agencies
|
|
|
631,160
|
|
|
|
311
|
|
|
|
(12,086
|
)
|
|
|
619,385
|
|
States of the U.S. and political
subdivisions
|
|
|
124,649
|
|
|
|
101
|
|
|
|
(2,013
|
)
|
|
|
122,737
|
|
Corporate and other debt securities
|
|
|
19,975
|
|
|
|
50
|
|
|
|
(358
|
)
|
|
|
19,667
|
|