F.N.B. Corporation 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, 2007
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 x 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 x
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes x No 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, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the Exchange Act. (Check one):
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Large accelerated filer
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Accelerated filer
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Non-accelerated
filer o
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Smaller Reporting
company o
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No x
The aggregate market value of the registrants outstanding
voting common stock held by non-affiliates on June 30,
2007, determined using a per share closing price on that date of
$16.74, as quoted on the New York Stock Exchange, was
$950,790,702.
As of January 31, 2008, the registrant had outstanding
60,605,610 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, 2008 (Proxy
Statement) are incorporated by reference into Part III,
items 10, 11, 12, 13 and 14, of this Annual Report on
Form 10-K.
The Proxy Statement will be filed with the Securities and
Exchange Commission on or before April 30, 2008.
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 (GLB Act). The Corporation has four reportable business
segments: Community Banking, Wealth Management, Insurance and
Consumer Finance. As of December 31, 2007, the Corporation
had 155 Community Banking offices in Pennsylvania and Ohio and
54 Consumer Finance offices in those states and Tennessee. The
Corporation, through its Community Banking affiliate, also had 6
commercial loan production offices in Pennsylvania and 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.
Recent
Developments
On November 9, 2007, the Corporation announced the signing
of a definitive merger agreement to acquire Omega Financial
Corporation (Omega), a diversified financial services company
with $1.8 billion in assets based in State College,
Pennsylvania. The all-stock transaction is valued at
approximately $393.0 million. Under the terms of the merger
agreement, Omega shareholders will receive 2.022 shares of
F.N.B. Corporation common stock for each share of Omega common
stock. The transaction is expected to be completed in the second
quarter of 2008, pending regulatory and stockholder approvals
and the satisfaction of other closing conditions.
On February 15, 2008, the Corporation announced the signing
of a definitive merger agreement to acquire Iron &
Glass Bancorp, Inc. (IRGB), a bank holding company with
approximately $300.0 million in assets based in
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Pittsburgh, Pennsylvania. The transaction is valued at
approximately $86.1 million. Under the terms of the merger
agreement, IRGB shareholders will be entitled to receive either
$75.00 cash or 5.00 shares of F.N.B. Corporation common
stock, or a combination of cash and shares, for each share of
IRGB stock, subject to a proration of 45% cash and 55% stock, if
either cash or stock is oversubscribed. The transaction is
expected to be completed in the third quarter of 2008, pending
regulatory approvals, the approval of shareholders of IRGB and
the satisfaction of other closing conditions.
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, 2007, the Community Banking
segment consisted of a regional community bank. The Wealth
Management segment, as of that date, consisted of a trust
company, a registered investment advisor and a subsidiary that
offered 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 as of that date. The Consumer Finance segment
consisted of a multi-state consumer finance company as of that
date.
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 high quality,
profitable revenue growth through increased business with its
current customers, attract new customer relationships through
FNBPAs current branches and loan production offices and
expand 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 five commercial loan production
offices in Florida, one commercial loan production office in
Pennsylvania and one mortgage loan production office in
Tennessee, the underwriting for which is performed centrally.
The lending philosophy of Community Banking is to establish high
quality customer relationships while minimizing credit losses by
following strict credit approval standards (which include
independent analysis of realizable collateral value),
diversifying its loan portfolio by industry and borrower and
conducting ongoing review and management of the loan portfolio.
Commercial loans are generally made to established businesses
within the geographic market areas served by Community Banking.
No material portion of the loans or deposits of Community
Banking has been obtained from a single 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
substantial majority of the loans and deposits have been
generated within the geographic market 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.
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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, 2007, 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 maintained.
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 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 insurance brokerage 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 five other subsidiaries. F.N.B.
Statutory Trust I and F.N.B. Statutory Trust II were
established to issue trust preferred securities to third-party
investors. Regency Consumer Financial Services, Inc. and FNB
Consumer Financial Services, Inc. are the general partner and
limited partner, respectively, of FNB Financial Services, LP, a
company established to issue, administer and repay subordinated
notes. F.N.B. Capital Corporation, LLC (FNB Capital) offers
financing options for small- to medium-sized businesses that
need financial assistance beyond the parameters of typical
commercial bank lending products. Certain financial information
concerning these subsidiaries, along with the Parent company and
intercompany eliminations, are included in the
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Parent and Other category in the Business Segments
footnote in the Notes to Consolidated Financial Statements,
which is included in Item 8 of this Report.
Market
Area and Competition
The Corporation primarily operates in Pennsylvania and
northeastern Ohio. This area is served by several major
interstate highways and is located at the approximate midpoint
between New York City and Chicago. The primary market area
served by the Corporation also extends to the Great Lakes
shipping port of Erie, the Pennsylvania state capital of
Harrisburg and the Greater Pittsburgh International Airport. The
Corporation also has five commercial loan production offices in
Florida, one commercial loan production office in Pennsylvania
and one mortgage loan production office in Tennessee. In
addition to Pennsylvania and northeastern Ohio, the
Corporations Consumer Finance segment also operates in
northern and central Tennessee and central and southern Ohio.
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, 2008, the Corporation and its
subsidiaries had 1,513 full-time and 380 part-time
employees. Management of the Corporation considers its
relationship with its employees to be satisfactory.
Government
Supervision and Regulation
The following summary sets forth certain of the material
elements of the regulatory framework applicable to bank holding
companies and financial holding companies and their subsidiaries
and to companies engaged in securities and insurance activities
and provides certain specific information about the Corporation.
The bank regulatory framework is intended primarily for the
protection of depositors and the Federal Deposit Insurance Funds
and not for the protection of security holders. Numerous laws
and regulations govern the operations of financial services
institutions and their holding companies. To the extent that the
following information describes statutory and regulatory
provisions, it is qualified in its entirety by express reference
to each of the particular statutory and regulatory provisions. A
change in applicable statutes, regulations or regulatory policy
may have a material effect on the business of the Corporation.
General
The Corporation is a legal entity separate and distinct from its
subsidiaries. As a financial holding company and a bank holding
company, the Corporation is regulated under the Bank Holding
Company Act of 1956,
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as amended (BHC Act), and is subject to inspection, examination
and supervision by the Board of Governors of the Federal Reserve
System (FRB). The Corporation is also subject to regulation by
the SEC as a result of the Corporations status as a public
company and due to the nature of the business activity of
certain of the Corporations affiliates. The
Corporations common stock is listed on the New York Stock
Exchange (NYSE) under the trading symbol FNB and the
Corporation is subject to the rules of the NYSE for listed
companies.
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). FNBPA is also subject
to certain regulatory requirements of the Federal Deposit
Insurance Corporation (FDIC), the FRB and other federal and
state regulatory agencies, including requirements to maintain
reserves against deposits, restrictions on the types and amounts
of loans that may be granted and the interest that may be
charged thereon, limitations on the types of investments that
may be made, activities that may be engaged in and types of
services that may be offered. In addition to banking laws,
regulations and regulatory agencies, the Corporation and its
subsidiaries are subject to various other laws and regulations
and supervision and examination by other regulatory agencies,
all of which directly or indirectly affect the operations and
management of the Corporation and its ability to make
distributions to its stockholders.
As a result of the GLB Act, which repealed or modified a number
of significant statutory provisions, including those of the
Glass-Steagall Act and the BHC Act which imposed restrictions on
banking organizations ability to engage in certain types
of activities, bank holding companies such as the Corporation
now have broad authority to engage in activities that are
financial in nature or incidental to such a financial activity,
including insurance underwriting and brokerage; merchant
banking; securities underwriting, dealing and market-making;
real estate development; and such additional activities as the
FRB in consultation with the Secretary of the Treasury
determines to be financial in nature or incidental thereto. A
bank holding company may engage in these activities directly or
through subsidiaries by qualifying as a financial holding
company. A financial holding company may engage directly
or indirectly in activities considered financial in nature,
either de novo or by acquisition, provided the financial holding
company gives the FRB after-the-fact notice of the new
activities. The GLB Act also permits national banks, such as
FNBPA, to engage in activities considered financial in nature
through a financial subsidiary, subject to certain conditions
and limitations and with the approval of the OCC.
As a regulated financial holding company, the 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 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, but not limited to, 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.
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.
There are numerous laws, regulations and rules governing the
activities of financial institutions and bank holding companies.
The following discussion is general in nature and seeks to
highlight some of the more significant of these regulatory
requirements, but does not purport to be complete or to describe
all of the laws and regulations that apply to the Corporation
and its affiliates.
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Interstate
Banking
Under the BHC Act, bank holding companies, including those that
are also financial holding companies, are required to obtain the
prior approval of the FRB 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 2007, 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. The Relief Act, among other things,
(i) authorized the FRB to set reserve ratios;
(ii) amended regulations relating to the payment of
dividends by national banks; (iii) amended then-applicable
laws relating to such issues as the making of loans to insiders,
regulatory applications, privacy notices, and golden parachute
payments; and (iv) expanded and clarified the enforcement
authority of federal banking regulators.
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 introduced from time to time in the
U.S. Congress. This legislation may seek to 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 change
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, would have on the financial condition or results of
operations of the Corporation or any of its subsidiaries. Any
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 of 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.
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The Corporation, like other bank holding companies, currently is
required to maintain Tier 1 capital and total capital (the
sum of Tier 1, Tier 2 and Tier 3 capital) equal
to at least 4.0% and 8.0%, respectively, of its total
risk-weighted assets (including various off-balance-sheet
items). Risk-based capital ratios are calculated by dividing
Tier 1 and total capital by risk-weighted assets. Assets
and off-balance sheet exposures are assigned to one of four
categories of risk-weights, based primarily on relative credit
risk. At December 31, 2007, the Corporations
Tier 1 and total capital ratios under these guidelines were
10.0% and 11.5%, respectively. At December 31, 2007, the
Corporation had $146.5 million of capital securities that
qualified as Tier 1 capital and $11.5 million of
subordinated debt that qualified as Tier 2 capital.
Bank holding companies and banks are also required to comply
with minimum leverage ratio requirements. The leverage ratio is
determined by dividing Tier 1 capital by adjusted average
total assets (as defined for regulatory purposes). 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, 2007
was 7.5%, 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, restrictions on its business and a
variety of enforcement remedies, including the termination of
deposit insurance by the FDIC, and in certain circumstances to
the appointment of a conservator or receiver. 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,
2007.
The federal bank regulatory authorities risk based capital
guidelines are based upon the 1998 Capital Accord of the Basel
Committee on Banking Supervision, or Basel I. In 2004, federal
bank regulators issued a proposed new framework for risk-based
capital adequacy, sometimes referred to as Basel II.
In July 2007, regulators announced their current plan for
implementing the most advanced approach under Basel II for
banks with over $250 billion in assets or over
$10 billion in foreign exposure. The plan contemplates that
regulators will propose rules allowing smaller financial
institutions, such as the Corporation and its bank subsidiaries,
to select between the current method of calculating risked-based
capital (Basel I) and a standardized
approach under Basel II. The Basel II standardized approach
would lower risk weightings for certain categories of assets
(including mortgages) from the weightings reflected in
Basel I, but unlike Basel I would require an explicit
capital charge for operational risk. The Corporation and its
subsidiaries have not determined whether they would elect to
apply the Basel II approach if presented with that option.
9
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.
Community
Reinvestment Act
The Community Reinvestment Act of 1977, or the CRA, requires
depository institutions to assist in meeting the credit needs of
their market areas consistent with safe and sound banking
practice. Under the CRA, each depository institution is required
to help meet the credit needs of its market areas by, among
other things, providing credit to low- and moderate-income
individuals and communities. Depository institutions are
periodically examined for compliance with the CRA and are
assigned ratings. In order for a financial holding company to
commence any new activity permitted by the BHC Act, or to
acquire any company engaged in any new activity permitted by the
BHC Act, each insured depository institution subsidiary of the
financial holding company must have received a rating of at
least satisfactory in its most recent examination
under the CRA. Furthermore, banking regulators take into account
CRA ratings when considering approval of a proposed transaction.
Financial
Privacy
In accordance with the GLB Act, federal banking regulators
adopted rules that limit the ability of banks and other
financial institutions to disclose non-public information about
consumers to nonaffiliated third parties. These limitations
require disclosure of privacy policies to consumers and, in some
circumstances, allow consumers to prevent disclosure of certain
personal information to a nonaffiliated third party. The privacy
provisions of the GLB Act affect how consumer information is
transmitted through diversified financial companies and conveyed
to outside vendors.
Anti-Money
Laundering Initiatives and the USA Patriot Act
A major focus of governmental policy on financial institutions
in recent years has been aimed at combating money laundering and
terrorist financing. The USA Patriot Act of 2001, or the USA
Patriot Act, substantially broadened the scope of United States
anti-money laundering laws and regulations by imposing
significant new compliance and due diligence obligations,
creating new crimes and penalties and expanding the
extra-territorial jurisdiction of the United States. The U.S.
Treasury Department has issued a number of regulations that
apply various requirements of the USA Patriot Act to financial
institutions such as FNBPA. These regulations require financial
institutions to maintain appropriate policies, procedures and
controls to detect, prevent and report money laundering and
terrorist financing and to verify the identity of their
customers. Failure of a financial institution to maintain and
implement adequate programs to combat money laundering and
terrorist financing, or to comply with all of the relevant laws
or regulations, could have serious legal and reputational
consequences for the institution.
Office of
Foreign Assets Control Regulation
The United States has instituted economic sanctions which affect
transactions with designated foreign countries, nationals and
others. These are typically known as the OFAC rules
because they are administered by the U.S. Treasury
Department Office of Foreign Assets Control (OFAC). The
OFAC-administered sanctions target countries in various ways.
Generally, however, they contain one or more of the following
elements: (i) restrictions on trade with or investment in a
sanctioned country, including prohibitions against direct or
indirect imports from and exports to a sanctioned country, and
prohibitions on U.S. persons engaging in
financial transactions which relate to investments in, or
providing investment-related advice or assistance to, a
sanctioned country; and (ii) a blocking of assets in which
the government or specially designated nationals of the
sanctioned country have an interest, by prohibiting transfers of
property subject to U.S. jurisdiction (including property
in the possession or control of U.S. persons). Blocked
assets (e.g., property and bank deposits) cannot be paid out,
withdrawn, set off or transferred in any manner without a
license from OFAC. Failure to comply with these sanctions could
have serious legal and reputational consequences for the
institution.
10
Consumer
Protection Statutes and Regulations
FNBPA is subject to many federal consumer protection statutes
and regulations including the Truth in Lending Act, Truth in
Savings Act, Equal Credit Opportunity Act, Fair Housing Act,
Real Estate Settlement Procedures Act and Home Mortgage
Disclosure Act. Among other things, these acts:
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require banks to disclose credit terms in meaningful and
consistent ways;
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prohibit discrimination against an applicant in any consumer or
business credit transaction;
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prohibit discrimination in housing-related lending activities;
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require banks to collect and report applicant and borrower data
regarding loans for home purchases or improvement projects;
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require lenders to provide borrowers with information regarding
the nature and cost of real estate settlements;
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prohibit certain lending practices and limit escrow account
amounts with respect to real estate transactions; and
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prescribe possible penalties for violations of the requirements
of consumer protection statutes and regulations.
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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, is dividends
received from FNBPA. FNBPA is subject to federal laws and
regulations governing its ability to pay dividends to the
Corporation. 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 may determine under
certain circumstances that the payment of dividends would be an
unsafe or unsound practice and prohibit payment thereof. In
addition to dividends from FNBPA, other sources of parent
company liquidity for the Corporation include cash and
short-term investments, as well as dividends and loan repayments
from other subsidiaries.
In addition, the ability of the Corporation and FNBPA to pay
dividends may be affected by the various minimum capital
requirements and the capital and non-capital standards
established under FDICIA, as described above. The right of the
Corporation, its stockholders and its creditors to participate
in any distribution of the assets or earnings of 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, 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 BHC Act
and FRB rules (which take into consideration capital ratios,
examination ratings and other factors), the expedited processing
of certain types of FRB applications would not be available to
the Corporation. Moreover, examination ratings of 3
or lower, unsatisfactory ratings, 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.
11
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 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 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 investment advisory
clients and the securities markets, rather than the protection
of creditors and stockholders of investment advisors. The
regulations applicable to investment advisors cover all aspects
of the investment advisory business, including limitations on
the ability of investment advisors to charge performance-based
or non-refundable fees to clients, record-keeping, 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 Financial Industry Regulatory Authority
(FINRA), 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 GLB 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.
12
Insurance
Agencies
FNIA is subject to licensing requirements and extensive
regulation under the laws of the Commonwealth of Pennsylvania
and the various states in which FNIA conducts business. These
laws and regulations are primarily for the benefit of
policyholders. In all jurisdictions, the applicable laws and
regulations are subject to amendment or interpretation by
regulatory authorities. Generally, 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.
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 FINRA.
Governmental
Policies
The operations of the Corporation and its subsidiaries are
affected not only by general economic conditions, but also by
the policies of various regulatory authorities. In particular,
the FRB regulates monetary policy and interest rates in order to
influence general economic conditions. These policies have a
significant influence on overall growth and distribution of
loans, investments and deposits and affect interest rates
charged on loans or paid for 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 2006 with the SEC as exhibits to that Report and has 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, without qualification,
regarding the NYSEs corporate governance listing standards
to the NYSE within 30 days of the 2007 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.
As a financial services organization, the Corporation takes on a
certain amount of risk in every business decision and activity.
For example, every time FNBPA opens an account or approves a
loan for a customer, processes a payment, hires a new employee,
or implements a new computer system, FNBPA and the Corporation
incur a certain amount of risk. As an organization, the
Corporation must balance revenue generation and
13
profitability with the risks associated with its business
activities. Risk management is not about eliminating risks, but
about identifying and accepting risks and then effectively
managing them so as to optimize total shareholder value.
The Corporation has identified five major categories of risk:
credit risk, market risk, liquidity risk, operational risk and
compliance risk. Credit risk, market risk and liquidity risk,
and the program implemented by management to address these
risks, are more fully discussed 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. Operational risk arises from inadequate information
systems and technology, weak internal control systems or other
failed internal processes or systems, human error, fraud or
external events. Compliance risk relates to each of the other
four major categories of risk listed above, but specifically
addresses internal control failures that result in
non-compliance with laws, rules, regulations or ethical
standards.
The key to effective risk management is to be proactive in
identifying, measuring, evaluating and monitoring risk on an
ongoing basis. Risk management practices support
decision-making, improve the success rate for new initiatives,
and strengthen the markets confidence in the Corporation
and its affiliates.
The Corporations risk management process is supported
through a governance structure involving its Board of Directors
and senior management. The Corporations Risk Committee
helps insure that business decisions within the organization are
executed within the Corporations desired risk profile. The
Risk Committee has the following key roles:
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facilitate the identification, assessment and monitoring of risk
across the Corporation;
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provide support and oversight to the Corporations
businesses; and
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identify and implement risk management best practices, as
appropriate.
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Additionally, FNBPA has a Risk Management Committee comprised of
senior management to provide oversight to specific areas of risk
with respect to the level of risk and risk management structure.
The Risk Management Committee reports on a regular basis to the
Corporations Risk Committee regarding the enterprise risk
profile of the Corporation and other relevant risk management
issues. The Corporations audit function performs an
independent assessment of the internal control environment.
Moreover, the Corporations audit function plays a critical
role in risk management, testing the operation of internal
control systems and reporting findings to management and to the
Corporations Audit Committee. Both the Corporations
Risk Committee and FNBPAs Risk Management Committee
regularly assess the Corporations enterprise-wide risk
profile and provide guidance on action to address key risk
issues.
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 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
14
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, and
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. For additional information,
see the Lending Activity section of Managements Discussion
and Analysis of Financial Condition and Results of Operations,
which is included in Item 7 of this Report. 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
inherent in its loan portfolio. The 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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For additional discussion relating to this matter, refer to the
Allowance and Provision for Loan Losses section of
Managements Discussion and Analysis of Financial Condition
and Results of Operations, which is included in Item 7 of
this Report.
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 acceptable terms.
The
Corporations controls and procedures may fail or be
circumvented.
Management regularly reviews and updates the Corporations
internal controls, disclosure controls and procedures, and
corporate governance policies and procedures. Any system of
controls, however well designed and operated, is based in part
on certain assumptions and can provide only reasonable, not
absolute, assurances that the
15
objectives of the system are met. Any failure or circumvention
of the Corporations controls and procedures or failure to
comply with regulations related to controls and procedures could
have a material adverse effect on the Corporations
business, results of operations and financial condition.
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-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 environment and are subject to supervision and
regulation by several governmental agencies, including the FRB,
the OCC and the FDIC. Regulations are generally intended to
provide protection for depositors, borrowers and other 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 raise additional
capital.
The
Corporations results of operations could be adversely
affected due to significant competition.
The Corporation faces substantial competition in all areas of
its operations from a variety of different competitors, many of
which are larger and may have more financial resources than the
Corporation. 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. 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 (see the Government Supervision and Regulation
section included in Item 1 of this Report). As a financial
holding company, the Corporation seeks to maintain capital
sufficient to meet the well-capitalized standard set
by regulators. The Corporation anticipates that its current
capital resources will satisfy its capital requirements for the
foreseeable future. The Corporation may at some point, however,
need to raise additional capital to support continued growth,
whether such growth occurs internally or through acquisitions.
The Corporations ability to raise additional capital, if
needed, will depend on conditions in the capital markets at that
time, which are outside of 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 acceptable terms. 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, which risk
factors are discussed in the following paragraph. 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
17
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
Corporation may be adversely affected by the recent downturn in
Florida real estate markets.
According to published reports, many Florida real estate
markets, including the markets in Orlando, Naples,
Fort Myers, Sarasota and Tampa, where the Corporation has
loan production offices, have declined in value throughout 2007
and may continue to undergo a period of slowdown. The
Corporation operates five commercial loan production offices in
the Florida market place and is therefore exposed to the
weakening real estate conditions in the Florida geographic
region. During a period of prolonged general economic downturn
in the Florida market, the Corporation in that market may
experience a reduction in loan origination activity and
increases in non-performing assets, net charge-offs and
provisions for loan losses.
The
Corporations information systems may experience an
interruption or breach in security.
The Corporation relies heavily on communications and information
systems to conduct its business. Any failure, interruption or
breach in security of these systems could result in failures or
disruptions in the Corporations customer relationship
management, general ledger, deposit, loan and other systems.
While the Corporation has policies and procedures designed to
prevent or limit the effect of the failure, interruption or
security breach of these information systems, there can be no
assurance that any such failures, interruptions or security
breaches will not occur or, if they do occur, that they will be
adequately addressed. The occurrence of any failures,
interruptions or security breaches of the Corporations
information systems could damage its reputation, result in a
loss of customer business, subject it to additional regulatory
scrutiny, or expose it to civil litigation and possible
financial liability, any of which could have a material adverse
effect on the Corporations financial condition and results
of operations.
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:
|
|
|
|
|
classify its Board of Directors into three classes, so that
stockholders elect only one-third of its Board of Directors each
year;
|
|
|
permit stockholders to remove directors only for cause;
|
|
|
do not permit stockholders to take action except at an annual or
special meeting of stockholders;
|
|
|
require stockholders to give the Corporation advance notice to
nominate candidates for election to its Board of Directors or to
make stockholder proposals at a stockholders meeting;
|
|
|
permit the 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;
|
|
|
require the vote of the holders of at least 75% of the
Corporations voting shares for stockholder amendments to
its By-laws;
|
|
|
allow the Board of Directors to increase the number of directors
and to fill any open seats created through such an increase;
|
|
|
require a vote of the holders of at least 75% of the
Corporations voting shares to approve a merger not
supported by the Board of Directors; and
|
|
|
require a vote of the holders of at least 75% of the
Corporations voting shares to remove any director without
cause.
|
Under Florida law, the approval of a business combination with a
stockholder owning 10% or more of the voting shares of a
corporation requires the vote of holders of at least two-thirds
of the voting shares not owned by such stockholder, unless the
transaction is approved by a majority of the corporations
disinterested directors. In
18
addition, Florida law generally provides that shares of a
corporation that are acquired in excess of certain specified
thresholds will not possess any voting rights unless the voting
rights are approved by a majority of the 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 likelihood or impact of natural disasters, terrorist
activities and international hostilities cannot be predicted.
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 also could
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 contingency 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 with which the
Corporation deals, particularly those on which it depends.
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 continue to attract and retain
skilled people.
The Corporations success depends, in large part, on its
ability to continue 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.
The
Corporation is exposed to risk of environmental liabilities with
respect to properties to which it takes title.
Portions of the Corporations loan portfolio are secured by
real property. In the course of its business, the Corporation
may own or foreclose and take title to real estate, and could be
subject to environmental liabilities with respect to these
properties. The Corporation may be held liable to a governmental
entity or to third parties for property damage, personal injury,
investigation and
clean-up
costs incurred by these parties in connection with environmental
contamination, or may be required to investigate or clean up
hazardous or toxic substances, or chemical releases at a
property. The costs associated with investigation or remediation
activities could be substantial. In addition, as the owner or
former owner of a contaminated site, the Corporation may be
subject to common law claims by third parties based on damages
and costs resulting from environmental contamination
19
emanating from the property. If the Corporation ever becomes
subject to significant environmental liabilities, the
Corporations business, financial condition, liquidity and
results of operations could be materially and adversely affected.
Recent
developments in the mortgage market have increased the
volatility of the Corporations stock price and may affect
the Corporations ability to originate loans as well as the
profitability of loans in the Corporations
pipeline.
The mortgage lending industry has experienced a significant
increase in delinquencies in recent months. The decline in
credit quality is most noteworthy among subprime lenders.
Generally, the Corporation has not originated residential
mortgage loans with FICO credit scores below 620, except for a
minimal number of CRA loans. Recent reports of credit quality,
financial solvency and other problems among subprime lenders
have increased volatility in the stock market. If the subprime
segment continues to have problems in the future
and/or
credit quality problems spread to other industry segments,
including lenders who make reduced documentation loans to prime
credit quality borrowers, there could be a prolonged decrease in
the demand for the Corporations loans in the secondary
market, adversely affecting the Corporations earnings and
negatively impacting the price of the Corporations common
stock.
Changes
in economic conditions and the composition of the
Corporations loan portfolio could lead to higher loan
charge-offs or an increase in the Corporations provision
for loan losses and may reduce the Corporations net
income.
Recent changes in national and regional economic conditions
could impact the loan portfolios of the Corporation. For
example, an increase in unemployment, a decrease in real estate
values or increases in interest rates, as well as other factors,
could weaken the economies of the communities the Corporation
serves. Weakness in the market areas served by the Corporation
could depress its earnings and consequently its financial
condition because customers may not want or need the
Corporations products or services; borrowers may not be
able to repay their loans; the value of the collateral securing
the Corporations loans to borrowers may decline; and the
quality of the Corporations loan portfolio may decline.
Any of the latter three scenarios could require the Corporation
to charge-off a higher percentage of its loans
and/or
increase its provision for loan losses, which would reduce its
net income.
|
|
ITEM 1B.
|
UNRESOLVED
STAFF COMMENTS
|
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 24 counties in
Pennsylvania and 4 counties in Ohio. Community Banking also has
commercial loan production offices located in 5 counties in
Florida and one county in Pennsylvania and a mortgage loan
production office located in one county in Tennessee. Wealth
Management operates in existing Community Banking offices. The
Consumer Finance offices are located in 17 counties in
Pennsylvania, 16 counties in Tennessee and 13 counties in Ohio.
The Insurance offices are located in 6 counties in Pennsylvania.
At December 31, 2007, the Corporations subsidiaries
owned 110 of the Corporations properties and leased 114
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.
|
|
ITEM 3.
|
LEGAL
PROCEEDINGS
|
The Corporation and its subsidiaries are involved in various
pending and threatened legal proceedings in which claims for
monetary damages and other relief are asserted. These actions
include claims brought against the Corporation and its
subsidiaries where the Corporation acted as one or more of the
following: a depository bank,
20
lender, underwriter, fiduciary, financial advisor, broker or was
engaged in other business activities. Although the ultimate
outcome for any asserted claim cannot be predicted with
certainty, the Corporation believes that it and its subsidiaries
have valid defenses for all asserted claims. Reserves are
established for legal claims when losses associated with the
claims are judged to be probable and the amount of the loss can
be reasonably estimated.
Based on information currently available, advice of counsel,
available insurance coverage and established reserves, the
Corporation does not anticipate, at the present time, that the
aggregate liability, if any, arising out of such legal
proceedings will have a material adverse effect on the
Corporations consolidated financial position. However, the
Corporation cannot determine whether or not any claims asserted
against it will have a material adverse effect on its
consolidated results of operations in any future reporting
period. It is possible, in the event of unexpected future
developments, that the ultimate resolution of these matters, if
unfavorable, may be material to the Corporations
consolidated results of operations for a particular period.
|
|
ITEM 4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
|
NONE.
EXECUTIVE
OFFICERS OF THE REGISTRANT
The name, age, position with the Corporation and principal
occupation for the last five years of each of the executive
officers of the Corporation as of December 31, 2007 is set
forth below:
|
|
|
|
|
|
|
|
|
Position with the Corporation and Prior Occupations in
|
Name
|
|
Age
|
|
Previous Five Years
|
|
Stephen J. Gurgovits
|
|
64
|
|
Chairman of the Corporation since December 2007; President and
Chief Executive Officer of the Corporation since 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.
|
Brian F. Lilly
|
|
49
|
|
Chief Financial Officer of the Corporation since 2004; Chief
Administrative Officer of FNBPA since 2003; Chief Financial
Officer of Billingzone, LLC, Pittsburgh, Pennsylvania from 2000
to 2003.
|
Gary J. Roberts
|
|
58
|
|
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.
|
David B. Mogle
|
|
57
|
|
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.
|
Vincent J. Calabrese
|
|
45
|
|
Corporate Controller of the Corporation since 2007; Senior Vice
President, Controller and Chief Accounting Officer of Peoples
Bank, Connecticut, from 2003 to 2007.
|
James G. Orie
|
|
49
|
|
Chief Legal Officer of the Corporation since 2004; Corporate
Counsel of the Corporation from 1996 to 2003; Senior Vice
President of FNBPA since 2003.
|
Scott D. Free
|
|
44
|
|
Treasurer of the Corporation since 2005; Chief Financial Officer
of FNBPA since 2007; Treasurer and Senior Vice President of
FNBPA since 2005; Senior Vice President of First Merit
Corporation, Ohio from 1994 to 2004.
|
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.
21
PART II.
|
|
ITEM 5.
|
MARKET
FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
|
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 2007
and 2006. The table also shows dividends per share paid on the
outstanding common stock during those periods. As of
January 31, 2008, there were 10,257 holders of record of
the Corporations common stock.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Low
|
|
|
High
|
|
|
Dividends
|
|
|
Quarter Ended 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31
|
|
$
|
16.21
|
|
|
$
|
18.79
|
|
|
$
|
0.235
|
|
June 30
|
|
|
16.41
|
|
|
|
17.91
|
|
|
|
0.235
|
|
September 30
|
|
|
14.05
|
|
|
|
18.24
|
|
|
|
0.240
|
|
December 31
|
|
|
13.85
|
|
|
|
17.92
|
|
|
|
0.240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31
|
|
$
|
15.74
|
|
|
$
|
17.70
|
|
|
$
|
0.235
|
|
June 30
|
|
|
15.19
|
|
|
|
17.24
|
|
|
|
0.235
|
|
September 30
|
|
|
15.15
|
|
|
|
17.00
|
|
|
|
0.235
|
|
December 31
|
|
|
16.31
|
|
|
|
18.85
|
|
|
|
0.235
|
|
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 Corporation did not purchase any of its own equity
securities during the fourth quarter of 2007.
22
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
(n)
and the Russell 2000 Index
(5).
This stock performance graph assumes $100 was invested on
December 31, 2002, 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
23
|
|
ITEM 6.
|
SELECTED
FINANCIAL DATA
|
Dollars in thousands, except per share data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Total interest income
|
|
|
$368,890
|
|
|
|
$342,422
|
|
|
|
$295,480
|
|
|
|
$253,568
|
|
|
|
$256,102
|
|
Total interest expense
|
|
|
174,053
|
|
|
|
153,585
|
|
|
|
108,780
|
|
|
|
84,390
|
|
|
|
86,990
|
|
Net interest income
|
|
|
194,837
|
|
|
|
188,837
|
|
|
|
186,700
|
|
|
|
169,178
|
|
|
|
169,112
|
|
Provision for loan losses
|
|
|
12,693
|
|
|
|
10,412
|
|
|
|
12,176
|
|
|
|
16,280
|
|
|
|
17,155
|
|
Total non-interest income
|
|
|
81,609
|
|
|
|
79,275
|
|
|
|
57,807
|
|
|
|
77,326
|
|
|
|
67,319
|
|
Total non-interest expense
|
|
|
165,614
|
|
|
|
160,514
|
|
|
|
155,226
|
|
|
|
140,892
|
|
|
|
183,272
|
|
Income from continuing operations
|
|
|
69,678
|
|
|
|
67,649
|
|
|
|
55,258
|
|
|
|
61,795
|
|
|
|
27,038
|
|
Income from discontinued operations, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31,751
|
|
Net income
|
|
|
69,678
|
|
|
|
67,649
|
|
|
|
55,258
|
|
|
|
61,795
|
|
|
|
58,789
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At Year-End
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
$6,088,021
|
|
|
|
$6,007,592
|
|
|
|
$5,590,326
|
|
|
|
$5,027,009
|
|
|
|
$8,308,310
|
|
Assets of discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,751,136
|
|
Net loans
|
|
|
4,291,429
|
|
|
|
4,200,569
|
|
|
|
3,698,340
|
|
|
|
3,338,994
|
|
|
|
3,213,058
|
|
Deposits
|
|
|
4,397,684
|
|
|
|
4,372,842
|
|
|
|
4,011,943
|
|
|
|
3,598,087
|
|
|
|
3,439,510
|
|
Short-term borrowings
|
|
|
449,823
|
|
|
|
363,910
|
|
|
|
378,978
|
|
|
|
395,106
|
|
|
|
232,966
|
|
Long-term and junior subordinated debt
|
|
|
632,397
|
|
|
|
670,921
|
|
|
|
662,569
|
|
|
|
636,209
|
|
|
|
584,808
|
|
Liabilities of discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,386,021
|
|
Total stockholders equity
|
|
|
544,357
|
|
|
|
537,372
|
|
|
|
477,202
|
|
|
|
324,102
|
|
|
|
606,909
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Common Share (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
|
$1.16
|
|
|
|
$1.15
|
|
|
|
$0.99
|
|
|
|
$1.31
|
|
|
|
$0.58
|
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.69
|
|
Net income
|
|
|
1.16
|
|
|
|
1.15
|
|
|
|
0.99
|
|
|
|
1.31
|
|
|
|
1.27
|
|
Diluted earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
|
1.15
|
|
|
|
1.14
|
|
|
|
0.98
|
|
|
|
1.29
|
|
|
|
0.57
|
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.68
|
|
Net income
|
|
|
1.15
|
|
|
|
1.14
|
|
|
|
0.98
|
|
|
|
1.29
|
|
|
|
1.25
|
|
Cash dividends declared
|
|
|
0.95
|
|
|
|
0.94
|
|
|
|
0.925
|
|
|
|
0.92
|
|
|
|
0.93
|
|
Book value (2)
|
|
|
8.99
|
|
|
|
8.90
|
|
|
|
8.31
|
|
|
|
6.47
|
|
|
|
13.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average assets (2)
|
|
|
1.15
|
%
|
|
|
1.15
|
%
|
|
|
.99
|
%
|
|
|
1.29
|
%
|
|
|
0.74
|
%
|
Return on average tangible assets (2)
|
|
|
1.25
|
|
|
|
1.25
|
|
|
|
1.07
|
|
|
|
1.34
|
|
|
|
0.79
|
|
Return on average equity (2)
|
|
|
12.89
|
|
|
|
13.15
|
|
|
|
12.44
|
|
|
|
23.54
|
|
|
|
9.66
|
|
Return on average tangible equity (2)
|
|
|
26.23
|
|
|
|
26.30
|
|
|
|
23.62
|
|
|
|
30.42
|
|
|
|
16.81
|
|
Dividend payout ratio (2)
|
|
|
82.45
|
|
|
|
81.84
|
|
|
|
94.71
|
|
|
|
72.56
|
|
|
|
72.90
|
|
Average equity to average assets (2)
|
|
|
8.93
|
|
|
|
8.73
|
|
|
|
7.97
|
|
|
|
5.50
|
|
|
|
7.66
|
|
|
|
|
(1) |
|
Per share amounts for 2003 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 tangible assets ratio, the return on
average equity ratio, return on average tangible equity ratio
and the dividend payout ratio for 2003 include the discontinued
operations. |
24
QUARTERLY EARNINGS SUMMARY (Unaudited)
Dollars in thousands, except per share data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended 2007
|
|
Mar. 31
|
|
|
June 30
|
|
|
Sept. 30
|
|
|
Dec. 31
|
|
|
Total interest income
|
|
|
$90,487
|
|
|
|
$91,620
|
|
|
|
$93,949
|
|
|
|
$92,834
|
|
Total interest expense
|
|
|
42,567
|
|
|
|
43,271
|
|
|
|
44,791
|
|
|
|
43,424
|
|
Net interest income
|
|
|
47,920
|
|
|
|
48,349
|
|
|
|
49,158
|
|
|
|
49,410
|
|
Provision for loan losses
|
|
|
1,847
|
|
|
|
1,838
|
|
|
|
3,776
|
|
|
|
5,232
|
|
Gain on sale of securities
|
|
|
740
|
|
|
|
415
|
|
|
|
|
|
|
|
|
|
Impairment loss on equity securities
|
|
|
|
|
|
|
(111
|
)
|
|
|
(7
|
)
|
|
|
|
|
Other non-interest income
|
|
|
20,176
|
|
|
|
20,071
|
|
|
|
19,689
|
|
|
|
20,636
|
|
Total non-interest expense
|
|
|
41,896
|
|
|
|
41,822
|
|
|
|
41,278
|
|
|
|
40,618
|
|
Net income
|
|
|
17,370
|
|
|
|
17,622
|
|
|
|
17,624
|
|
|
|
17,062
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Common Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
|
$0.29
|
|
|
|
$0.29
|
|
|
|
$0.29
|
|
|
|
$0.28
|
|
Diluted earnings per share
|
|
|
0.29
|
|
|
|
0.29
|
|
|
|
0.29
|
|
|
|
0.28
|
|
Cash dividends declared
|
|
|
0.235
|
|
|
|
0.235
|
|
|
|
0.24
|
|
|
|
0.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
$0.28
|
|
|
|
$0.29
|
|
|
|
$0.29
|
|
|
|
$0.29
|
|
Diluted earnings per share
|
|
|
0.27
|
|
|
|
0.28
|
|
|
|
0.29
|
|
|
|
0.29
|
|
Cash dividends declared
|
|
|
0.235
|
|
|
|
0.235
|
|
|
|
0.235
|
|
|
|
0.235
|
|
25
|
|
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.
Results of operations for the periods included in this review
are not necessarily indicative of results to be obtained during
any future period.
Important
Note Regarding Forward-Looking Statements
Certain statements in this quarterly 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
current plans and analyses of the Corporation, its business and
the industry in which it operates 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 in or implied
by such forward-looking statements. The Corporation does not
undertake to publicly update or revise its forward-looking
statements even if experience or future changes make it clear
that any 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 existing loan portfolio and is presented as a reserve
against loans on the consolidated balance sheet. Loan losses are
charged off against the allowance for 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
26
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.
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
risk factors concerning the economic environment. 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 other qualitative risk factors that may affect the loan.
The evaluation 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 ratings 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 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 various factors
concerning the economic environment which pose additional risks
that may not adequately be addressed in the analyses described
above. Such 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, 2007 and 2006, the Corporation did not
hold any trading securities.
27
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.
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 available for sale
securities and other-than-temporary impairment charges are
recorded within non-interest income in the consolidated
statement of income. Realized gains and losses on the sale of
securities are determined using the specific-identification
method.
Securities are periodically reviewed for other-than-temporary
impairment based upon a number of factors, including, but not
limited to, the length of time and extent to which the market
value has been less than cost, the financial condition of the
underlying issuer, the 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 hold the security for a period of time
sufficient to allow for a 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 involve 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 analyses, market comparisons and recent
transactions. These approaches use significant estimates and
assumptions including projected future cash flows, discount
rates reflecting the risk inherent in future cash flows, growth
rates 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
28
authorities. In determining the provision for income taxes,
management must make judgments and estimates about the
application of these inherently complex tax statutes, related
regulations and case law. In the process of preparing the
Corporations tax returns, management attempts to make
reasonable interpretations of the tax laws. These
interpretations are subject to challenge by the taxing
authorities based on audit results or to change 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 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 2007 and the
expected impact of accounting pronouncements recently issued or
proposed but not yet required to be adopted.
Financial
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 Pennsylvania and Florida and a mortgage loan
production office in Tennessee, and conducts selected consumer
finance business in Pennsylvania, Ohio and Tennessee.
During 2007, the Corporation opened two additional commercial
loan production offices, one in Pennsylvania and one in Florida,
in order to continue to supplement the Corporations core
market loan production.
The economic environment made 2007 another challenging year for
the banking industry, particularly in the lending business. The
Corporations practice of conservative underwriting has
helped it to substantially avoid the types of losses from
certain loans, such as subprime residential mortgages, which
have recently impacted other financial institutions.
Despite a challenging economic environment, the Corporation
delivered a strong financial performance in 2007. Net interest
income on a fully taxable equivalent (FTE) basis increased by
$6.7 million and the net interest margin increased
2 basis points compared to 2006. The provision for loan
losses increased by $2.3 million compared to 2006,
primarily as the result of recording a specific reserve of
$2.0 million associated with one loan. Non-interest income
increased by $2.3 million or 2.9% and non-interest expense
increased by $5.1 million or 3.2% from 2006.
Both total average loans and deposits increased as a result of a
combination of organic growth and the Legacy acquisition in
2006. On the loan side, the Corporations growth is focused
on its desirable customer relationship oriented higher yielding
commercial loan portfolio offset by a decline in the indirect
loan portfolio. For deposits, the Corporations expanded
suite of deposit products continues to attract customers.
The Corporations asset quality measures continue to be
strong despite actions taken with one developer in the Florida
market during the latter part of 2007. The year end
non-performing assets include $9.9 million related to this
one developer relationship and accounts for the declines in
credit measures from historically low figures earlier in 2007.
29
Results
of Operations
Year
Ended December 31, 2007 Compared to Year Ended
December 31, 2006
Net income for 2007 was $69.7 million or $1.15 per diluted
share, an increase of $2.0 million or 3.0% from net income
for 2006 of $67.6 million or $1.14 per diluted share. The
increase in net income is a result of several factors, including
loan growth, recurring fee income and controlling expenses, as
well as the full year impact of the Legacy acquisition.
Additionally, the 2007 income taxes were favorably impacted by
$0.9 million due to the expiration of an uncertain tax
position.
The Corporations return on average equity was 12.89%, its
return on average tangible equity (net income less amortization
of intangibles, net of tax, divided by average equity less
average intangibles) was 26.23%, its return on average assets
was 1.15% and its return on tangible assets (net income less
amortization of intangibles, net of tax, divided by average
assets less average intangibles) was 1.25% for 2007, as compared
to 13.15%, 26.30%, 1.15% and 1.25%, respectively, for 2006.
30
The following table provides information regarding the average
balances and yields earned on interest earning assets and the
average balances and rates paid on interest bearing liabilities
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
Interest
|
|
|
|
|
|
|
|
|
Interest
|
|
|
|
|
|
|
|
|
Interest
|
|
|
|
|
|
|
Average
|
|
|
Income/
|
|
|
Yield/
|
|
|
Average
|
|
|
Income/
|
|
|
Yield/
|
|
|
Average
|
|
|
Income/
|
|
|
Yield/
|
|
Assets
|
|
Balance
|
|
|
Expense
|
|
|
Rate
|
|
|
Balance
|
|
|
Expense
|
|
|
Rate
|
|
|
Balance
|
|
|
Expense
|
|
|
Rate
|
|
|
Interest earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits with banks
|
|
$
|
1,588
|
|
|
$
|
78
|
|
|
|
4.89
|
%
|
|
$
|
1,540
|
|
|
$
|
76
|
|
|
|
4.97
|
%
|
|
$
|
1,643
|
|
|
$
|
50
|
|
|
|
3.04
|
%
|
Federal funds sold
|
|
|
10,429
|
|
|
|
547
|
|
|
|
5.17
|
|
|
|
23,209
|
|
|
|
1,184
|
|
|
|
5.03
|
|
|
|
8,615
|
|
|
|
357
|
|
|
|
4.14
|
|
Taxable investment securities (1)
|
|
|
874,130
|
|
|
|
44,188
|
|
|
|
5.04
|
|
|
|
965,533
|
|
|
|
47,424
|
|
|
|
4.92
|
|
|
|
1,111,743
|
|
|
|
49,417
|
|
|
|
4.45
|
|
Non-taxable investment
securities (1)(2)
|
|
|
165,406
|
|
|
|
8,795
|
|
|
|
5.32
|
|
|
|
145,858
|
|
|
|
7,529
|
|
|
|
5.16
|
|
|
|
136,944
|
|
|
|
6,873
|
|
|
|
5.02
|
|
Loans (2)(3)
|
|
|
4,305,158
|
|
|
|
319,940
|
|
|
|
7.43
|
|
|
|
4,059,936
|
|
|
|
290,143
|
|
|
|
7.15
|
|
|
|
3,685,073
|
|
|
|
242,246
|
|
|
|
6.57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest earning assets
|
|
|
5,356,711
|
|
|
|
373,548
|
|
|
|
6.97
|
|
|
|
5,196,076
|
|
|
|
346,356
|
|
|
|
6.67
|
|
|
|
4,944,018
|
|
|
|
298,943
|
|
|
|
6.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
|
113,314
|
|
|
|
|
|
|
|
|
|
|
|
116,643
|
|
|
|
|
|
|
|
|
|
|
|
113,075
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
|
(52,346
|
)
|
|
|
|
|
|
|
|
|
|
|
(52,757
|
)
|
|
|
|
|
|
|
|
|
|
|
(52,106
|
)
|
|
|
|
|
|
|
|
|
Premises and equipment
|
|
|
84,106
|
|
|
|
|
|
|
|
|
|
|
|
85,791
|
|
|
|
|
|
|
|
|
|
|
|
82,639
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
553,599
|
|
|
|
|
|
|
|
|
|
|
|
544,172
|
|
|
|
|
|
|
|
|
|
|
|
484,351
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,055,384
|
|
|
|
|
|
|
|
|
|
|
$
|
5,889,925
|
|
|
|
|
|
|
|
|
|
|
$
|
5,571,977
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing demand
|
|
$
|
1,441,316
|
|
|
|
36,734
|
|
|
|
2.55
|
|
|
$
|
1,256,829
|
|
|
|
29,793
|
|
|
|
2.37
|
|
|
$
|
980,267
|
|
|
|
10,680
|
|
|
|
1.09
|
|
Savings
|
|
|
589,298
|
|
|
|
9,881
|
|
|
|
1.68
|
|
|
|
627,522
|
|
|
|
8,911
|
|
|
|
1.42
|
|
|
|
692,736
|
|
|
|
6,236
|
|
|
|
0.90
|
|
Certificates and other time
|
|
|
1,744,691
|
|
|
|
77,661
|
|
|
|
4.45
|
|
|
|
1,729,836
|
|
|
|
67,975
|
|
|
|
3.93
|
|
|
|
1,574,464
|
|
|
|
49,196
|
|
|
|
3.12
|
|
Treasury management accounts
|
|
|
266,726
|
|
|
|
12,150
|
|
|
|
4.49
|
|
|
|
213,045
|
|
|
|
9,099
|
|
|
|
4.21
|
|
|
|
182,779
|
|
|
|
4,693
|
|
|
|
2.57
|
|
Other short-term borrowings
|
|
|
147,439
|
|
|
|
7,285
|
|
|
|
4.87
|
|
|
|
145,064
|
|
|
|
6,686
|
|
|
|
4.55
|
|
|
|
266,839
|
|
|
|
9,808
|
|
|
|
3.68
|
|
Long-term debt
|
|
|
467,047
|
|
|
|
19,360
|
|
|
|
4.15
|
|
|
|
542,208
|
|
|
|
20,752
|
|
|
|
3.83
|
|
|
|
566,757
|
|
|
|
19,872
|
|
|
|
3.51
|
|
Junior subordinated debt
|
|
|
151,031
|
|
|
|
10,982
|
|
|
|
7.27
|
|
|
|
142,286
|
|
|
|
10,369
|
|
|
|
7.29
|
|
|
|
128,866
|
|
|
|
8,295
|
|
|
|
6.44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing liabilities
|
|
|
4,807,548
|
|
|
|
174,053
|
|
|
|
3.61
|
|
|
|
4,656,790
|
|
|
|
153,585
|
|
|
|
3.29
|
|
|
|
4,392,708
|
|
|
|
108,780
|
|
|
|
2.48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing demand
|
|
|
634,537
|
|
|
|
|
|
|
|
|
|
|
|
649,191
|
|
|
|
|
|
|
|
|
|
|
|
661,668
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
72,830
|
|
|
|
|
|
|
|
|
|
|
|
69,581
|
|
|
|
|
|
|
|
|
|
|
|
73,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,514,915
|
|
|
|
|
|
|
|
|
|
|
|
5,375,562
|
|
|
|
|
|
|
|
|
|
|
|
5,127,738
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity
|
|
|
540,469
|
|
|
|
|
|
|
|
|
|
|
|
514,363
|
|
|
|
|
|
|
|
|
|
|
|
444,239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,055,384
|
|
|
|
|
|
|
|
|
|
|
$
|
5,889,925
|
|
|
|
|
|
|
|
|
|
|
$
|
5,571,977
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excess of interest earning assets over interest bearing
liabilities
|
|
$
|
549,163
|
|
|
|
|
|
|
|
|
|
|
$
|
539,286
|
|
|
|
|
|
|
|
|
|
|
$
|
551,310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (FTE)
|
|
|
|
|
|
|
199,495
|
|
|
|
|
|
|
|
|
|
|
|
192,771
|
|
|
|
|
|
|
|
|
|
|
|
190,163
|
|
|
|
|
|
Tax-equivalent adjustment
|
|
|
|
|
|
|
4,658
|
|
|
|
|
|
|
|
|
|
|
|
3,934
|
|
|
|
|
|
|
|
|
|
|
|
3,463
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
$
|
194,837
|
|
|
|
|
|
|
|
|
|
|
$
|
188,837
|
|
|
|
|
|
|
|
|
|
|
$
|
186,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest spread
|
|
|
|
|
|
|
|
|
|
|
3.36
|
%
|
|
|
|
|
|
|
|
|
|
|
3.38
|
%
|
|
|
|
|
|
|
|
|
|
|
3.57
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin (2)
|
|
|
|
|
|
|
|
|
|
|
3.73
|
%
|
|
|
|
|
|
|
|
|
|
|
3.71
|
%
|
|
|
|
|
|
|
|
|
|
|
3.85
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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.
|
31
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, treasury
management accounts and short- and long-term borrowings). In
2007, net interest income, which comprised 70.5% of net revenue
(net interest income plus non-interest income) as compared to
70.4% in 2006, was affected by the general level of interest
rates, changes in interest rates, the shape of the yield curve
and changes in the amount and mix of interest earning assets and
interest bearing liabilities.
Net interest income, on an FTE basis, increased
$6.7 million or 3.5% from $192.8 million for 2006 to
$199.5 million for 2007. Average interest earning assets
increased $160.6 million or 3.1% and average interest
bearing liabilities increased $150.8 million or 3.2% from
2006 due to organic commercial loan and deposit growth and the
Legacy acquisition. The Corporations net interest margin
increased by 2 basis points from 2006 to 3.73% for 2007 as
higher rates on interest earning assets were partially offset by
increased rates paid on interest bearing liabilities and lower
balances of non-interest bearing demand deposits. Details on
changes in tax equivalent net interest income attributed to
changes in interest 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
average volumes and yields earned on interest earning assets and
the average volumes and rates paid for interest bearing
liabilities for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 vs 2006
|
|
|
2006 vs 2005
|
|
|
|
Volume
|
|
|
Rate
|
|
|
Net
|
|
|
Volume
|
|
|
Rate
|
|
|
Net
|
|
|
Interest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits with banks
|
|
$
|
2
|
|
|
$
|
|
|
|
$
|
2
|
|
|
$
|
(3
|
)
|
|
$
|
29
|
|
|
$
|
26
|
|
Federal funds sold
|
|
|
(670
|
)
|
|
|
33
|
|
|
|
(637
|
)
|
|
|
728
|
|
|
|
99
|
|
|
|
827
|
|
Securities
|
|
|
(3,644
|
)
|
|
|
1,674
|
|
|
|
(1,970
|
)
|
|
|
(7,028
|
)
|
|
|
5,691
|
|
|
|
(1,337
|
)
|
Loans
|
|
|
18,652
|
|
|
|
11,145
|
|
|
|
29,797
|
|
|
|
25,461
|
|
|
|
22,436
|
|
|
|
47,897
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,340
|
|
|
|
12,852
|
|
|
|
27,192
|
|
|
|
19,158
|
|
|
|
28,255
|
|
|
|
47,413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing demand
|
|
|
4,591
|
|
|
|
2,350
|
|
|
|
6,941
|
|
|
|
3,699
|
|
|
|
15,414
|
|
|
|
19,113
|
|
Savings
|
|
|
290
|
|
|
|
680
|
|
|
|
970
|
|
|
|
255
|
|
|
|
2,420
|
|
|
|
2,675
|
|
Certificates and other time
|
|
|
526
|
|
|
|
9,160
|
|
|
|
9,686
|
|
|
|
5,417
|
|
|
|
13,362
|
|
|
|
18,779
|
|
Treasury management accounts
|
|
|
2,414
|
|
|
|
637
|
|
|
|
3,051
|
|
|
|
880
|
|
|
|
3,526
|
|
|
|
4,406
|
|
Other short-term borrowings
|
|
|
176
|
|
|
|
423
|
|
|
|
599
|
|
|
|
(5,308
|
)
|
|
|
2,186
|
|
|
|
(3,122
|
)
|
Long-term debt
|
|
|
(3,027
|
)
|
|
|
1,635
|
|
|
|
(1,392
|
)
|
|
|
(886
|
)
|
|
|
1,766
|
|
|
|
880
|
|
Junior subordinated debt
|
|
|
636
|
|
|
|
(23
|
)
|
|
|
613
|
|
|
|
914
|
|
|
|
1,160
|
|
|
|
2,074
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,606
|
|
|
|
14,862
|
|
|
|
20,468
|
|
|
|
4,971
|
|
|
|
39,834
|
|
|
|
44,805
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Change
|
|
$
|
8,734
|
|
|
$
|
(2,010
|
)
|
|
$
|
6,724
|
|
|
$
|
14,187
|
|
|
$
|
(11,579
|
)
|
|
$
|
2,608
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The amount of change not solely due
to rate or volume was allocated between the change due to rate
and the change due to volume based on the net size of the rate
and volume changes.
|
|
(2)
|
|
Interest income amounts are
reflected on an FTE basis which adjusts for the tax benefit of
income on certain tax-exempt loans and investments using the
federal statutory tax rate of 35.0% for each period presented.
The Corporation believes this measure to be the preferred
industry measurement of net interest income and provides
relevant comparison between taxable and non-taxable amounts.
|
Interest income, on an FTE basis, of $373.5 million in
2007, increased by $27.2 million or 7.9% from 2006. This
increase was caused by an improvement in the yield on interest
earning assets of 30 basis points to 6.97% for 2007 and an
increase in average interest earning assets of
$160.6 million or 3.1% from 2006. The increase in average
interest earning assets was driven by an increase of
$245.2 million in average loans, partially offset by a
32
decrease of $71.9 million in average investment securities.
The increase in average loans was a result of a combination of
organic growth and the Legacy acquisition while the decrease in
average investment securities partially funded loan growth.
Interest expense of $174.1 million for 2007 increased by
$20.5 million or 13.3% from 2006. This increase was
primarily attributable to an increase of 32 basis points in
the Corporations cost of funds to 3.61% for 2007. Also,
average interest bearing liabilities increased
$150.8 million or 3.2% to $4.8 billion for 2007. This
growth was primarily attributable to a combined increase of
$146.3 million or 7.8% in the core deposit categories of
average interest bearing demand deposit and savings, a
$53.7 million or 25.2% increase in average treasury
management accounts and an increase in average certificates and
other time deposits of $14.9 million or 0.9%. Average
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 Legacy acquisition. Average
treasury management accounts 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 $8.7 million or 6.1% for 2007 due to the
issuance of $21.5 million of new debt in mid-2006 to
partially finance the Legacy acquisition. Partially offsetting
these increases was a decline in average long-term debt of
$75.2 million or 13.9% from 2006.
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 existing loan portfolio, after giving
consideration to charge-offs and recoveries for the period.
The provision for loan losses of $12.7 million in 2007
increased $2.3 million or 21.9% from 2006 primarily due to
actions taken during late 2007 relating to one developer
relationship in the Florida market. These actions included the
charge-off of $0.9 million relating to one project and the
recording of a specific reserve of $2.0 million relating to
a second project. Additionally, the Corporation transferred the
remaining $1.7 million relating to the first project to
other real estate owned and transferred the entire
$8.2 million balance of the second project to non-accrual
status. In 2007, net charge-offs totaled $12.5 million or
0.29% of average loans compared to $11.6 million or 0.29%
of average loans in 2006. The ratio of non-performing loans to
total loans was 0.75% at December 31, 2007, compared to
0.66% at December 31, 2006, and the ratio of non-performing
assets to total assets was 0.67% and 0.57%, respectively, at
these same dates. 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 $81.6 million in 2007
increased $2.3 million or 2.9% from 2006. This increase
resulted primarily from increases in all major fee businesses
except for insurance-related fees, partially offset by decreases
in gain on sale of securities and other non-interest income.
Service charges on loans and deposits of $40.8 million for
2007 increased $0.8 million or 1.9% from 2006, reflecting
expansion of the Corporations customer base as a result of
the Legacy acquisition in 2006 and also due to higher activity
in check card and business demand deposit account fees.
Insurance commissions and fees were $14.0 million for 2007,
which remained stable compared to 2006 as growth in the book of
business was offset by lower commissions. As a result of a soft
renewal market in the insurance industry, many account renewal
commissions have declined due to lower premiums charged by
insurance carriers.
Securities commissions of $6.3 million for 2007 increased
by $1.5 million or 30.0% from 2006 levels primarily due to
higher organic annuity and securities sales.
Trust fees of $8.6 million in 2007 increased by
$0.8 million or 10.2% from 2006 due to growth in assets
under management resulting from organic growth in overall trust
assets, higher equity valuations and the Legacy acquisition in
2006.
33
Gain (loss) on sale of securities of $1.2 million decreased
$0.6 million or 35.9% from 2006 as management did not sell
any equity securities during the second half of 2007 due to
unfavorable market prices in the bank stock portfolio.
Gain on sale of mortgage loans of $1.7 million for 2007
increased by $0.1 million or 6.7% from 2006 due to an
increase in mortgage origination volume in 2007.
Income from bank owned life insurance of $4.1 million for
2007 increased by $0.7 million or 22.2% from 2006 due to a
combination of a higher crediting rate in 2007 and the Legacy
acquisition in 2006.
Other income of $5.0 million for 2007 decreased
$0.8 million or 13.6% from 2006. The primary reason for
this decrease was $0.8 million in lower gains on
settlements of impaired loans acquired in previous acquisitions.
In 2006, the Corporation recognized gains on settlements of
impaired loans of $1.3 million compared to
$0.5 million in 2007. The Corporation also recognized a
loss of $0.5 million in 2007 on the sale of a building
acquired in a previous merger. Offsetting these decreases was a
$0.4 million increase in customer swap fee income.
Non-Interest
Expense
Total non-interest expense of $165.6 million in 2007
increased $5.1 million or 3.2% from 2006. This increase was
primarily attributable to operating expenses resulting from the
Legacy acquisition in 2006.
Salaries and employee benefits of $87.2 million in 2007
increased $3.6 million or 4.3% from 2006. This increase was
primarily attributable to normal annual compensation and benefit
increases, additional costs associated with the employees
retained from the Corporations acquisition of Legacy in
2006, higher commission expense tied to growth in securities
commission revenue and an increase in stock compensation expense
related to the issuance of restricted stock, partially offset by
lower expense due to the amendment to the Corporations
pension and postretirement benefit plans and lower medical
expenses.
Combined net occupancy and equipment expense of
$27.7 million in 2007 increased $0.2 million or 0.6%
from the combined 2006 level. This increase was primarily due to
additional operating costs associated with the
Corporations acquisition of Legacy in 2006, the opening of
a new branch in 2006 and several new loan production offices in
2006 and 2007, partially offset by lower depreciation on
equipment.
Amortization of intangibles expense of $4.4 million in 2007
increased $0.3 million or 6.2% from 2006 due to the
amortization of additional core deposit and other intangibles as
a result of the Corporations acquisition of Legacy in 2006.
State taxes of $5.5 million in 2007 increased
$0.8 million or 16.4% from 2006 primarily due to higher net
worth based taxes resulting from the Corporations
acquisition of Legacy in 2006.
Advertising and promotional expense of $2.9 million in 2007
increased $0.1 million or 2.4% from 2006 due to the
Corporations acquisition of Legacy in 2006.
The Corporation recorded merger-related expenses of
$0.2 million in 2007 relating to the pending acquisition of
Omega Financial Corporation (Omega) and $0.6 million in
2006 related to costs incurred as a result of the acquisition of
Legacy. The pending acquisition of Omega is discussed in the
Mergers and Acquisitions footnote in the Notes to Consolidated
Financial Statements, which is included in Item 8 of this
Report.
Other non-interest expenses of $35.4 million in 2007
increased $0.9 million or 2.5% from 2006. This increase was
primarily due to additional operating costs associated with the
Corporations acquisition of Legacy in 2006 and higher fees
for outside professional services.
Income
Taxes
The Corporations income tax expense of $28.5 million
for 2007 decreased by $1.1 million or 3.6% from 2006. The
effective tax rate of 29.0% for 2007 declined from 30.4% for the
prior year. The income tax expense for 2007 was favorably
impacted by $0.9 million due to the expiration of an
uncertain tax position. The lower effective tax rate also
reflects benefits resulting from tax-exempt income on
investments, loans and bank owned life
34
insurance. Both periods tax rates are lower than the 35.0%
federal statutory tax rate due to the tax benefits primarily
resulting from tax-exempt instruments and excludable dividend
income.
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
$0.98 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 expiration 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.
Net
Interest Income
In 2006, net interest income, which comprised 70.4% of net
revenue 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 interest 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 interest earning assets offset by a
decrease in the net interest margin. Average interest earning
assets increased $252.1 million or 5.1% and average
interest bearing liabilities increased $264.1 million or
6.0% 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 interest earning assets compared to the need to
increase rates on its deposits and treasury management accounts
driven by interest rates and competitive pricing.
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 interest earning assets of 62 basis points to
6.67% for 2006 and an increase in average interest earning
assets of $252.1 million, or 5.1%, from 2005. The increase
in average interest earning assets was driven by an increase of
$374.9 million in average loans, partially offset by a
decrease of $146.3 million in average 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 average
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
35
primarily attributable to a combined increase of
$211.3 million or 12.6% in the core deposit categories of
average interest bearing demand deposit and savings, a
$30.3 million or 16.6% increase in average treasury
management accounts and an increase in average certificates and
other time deposits of $155.4 million or 9.9%. Average
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.
Average treasury management accounts 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 0.29% as a percentage of average loans
compared to $16.9 million or 0.46% 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
0.66% at December 31, 2006 compared to 0.88% 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 $0.4 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. Trust fees of
$7.8 million in 2006 increased by $0.7 million or 9.2%
from 2005 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
36
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 million in 2005
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 instruments and excludable
dividend income. The 2005 income taxes were also favorably
impacted by $1.0 million due to the expiration of an
uncertain tax position.
Liquidity
The Corporations goal in liquidity management is to
satisfy 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 of the
Corporation 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, investment securities and other assets. The Corporation
continues to originate mortgage loans, most of which are sold in
the secondary market. Mortgage loan originations totaled
$163.5 million and $144.8 million for 2007 and 2006,
respectively. Proceeds from the sale of mortgage loans totaled
$117.4 million for 2007 compared to $108.1 million for
2006.
37
Liquidity sources from liabilities are generated primarily
through deposits. As of December 31, 2007 and 2006,
deposits comprised 79.3% and 79.9% of total liabilities,
respectively. To a lesser extent, the Corporation also makes use
of wholesale sources of liquidity that include federal funds
purchased, treasury management accounts and public funds. In
addition, the Corporation has the ability to borrow funds from
the Federal Home Loan Bank (FHLB), Federal Reserve Bank and the
capital markets. FHLB advances are a competitively priced and
reliable source of funds. As of December 31, 2007,
outstanding FHLB advances declined $42.0 million to
$427.1 million, or 7.0% of total assets, while the total
availability from these sources was $1.9 billion, or 30.4%
of total assets. At December 31, 2006, outstanding FHLB
advances were $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.
The principal source of the parent companys cash flow is
dividends from its subsidiaries. These dividends may be impacted
by the parents or the subsidiaries capital needs,
statutory laws and regulations, corporate policies, contractual
restrictions and other factors. The parent also may draw on
approved lines of credit of $90.0 million with several
major domestic banks, which were unused as of December 31,
2007. In addition, the Corporation also issues subordinated
notes on a regular basis.
The Corporation periodically repurchases shares of its common
stock for re-issuance under various employee benefit plans and
the Corporations dividend reinvestment plan. During 2007,
the Corporation purchased 535,000 shares of its common
stock for a total purchase price of $9.2 million and
received $7.5 million upon re-issuance of
549,884 shares. In 2006, the Corporation purchased
572,800 shares of its common stock for a total purchase
price of $9.6 million and received $9.0 million upon
re-issuance of 610,091 shares. In 2005, the Corporation
purchased 576,100 shares of its common stock for a total
purchase price of $10.9 million and received
$10.3 million upon re-issuance of 639,485 shares.
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 inherent in its lending and deposit taking
activities as a financial intermediary. To succeed in this
capacity, the Corporation offers an extensive variety of
financial products to meet the diverse needs of its customers.
These products sometimes contribute to interest rate risk for
the Corporation when product groups do not complement one
another. For example, depositors may want short-term deposits
while borrowers desire long-term loans.
Changes in market interest rates may result in changes in the
fair value of the 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 manages interest rate
risk. The Corporation uses derivative financial instruments for
market risk management purposes (principally interest rate risk)
and not for trading or speculative purposes.
Interest rate risk is comprised of repricing risk, basis risk,
yield curve risk and options risk. Repricing risk arises from
differences in the cash flow or repricing between asset and
liability portfolios. Basis risk arises when asset and liability
portfolios are related to different market rate indexes, which
do not always change by the same amount. Yield curve risk arises
when asset and liability portfolios are related to different
maturities on a given yield curve; when the yield curve changes
shape, the risk position is altered. Options risk arises from
embedded options within asset and liability products
as certain borrowers have the option to prepay their loans when
rates fall while certain depositors can redeem their
certificates of deposit early when rates rise.
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-
38
term horizon helps identify changes in optionality and
longer-term positions. However, EVEs liquidation
perspective does not translate into the earnings-based measures
that are the focus of managing and valuing a going concern. Net
interest income simulations explicitly measure the exposure to
earnings from changes in market rates of interest. The
Corporations current financial position is combined with
assumptions regarding future business to calculate net interest
income under various hypothetical rate scenarios. The ALCO
reviews earnings simulations over multiple years under various
interest rate scenarios. Reviewing these various measures
provides the Corporation with a reasonably comprehensive view of
its interest rate risk profile.
The following gap analysis compares the difference between the
amount of interest earning assets (IEA) and interest bearing
liabilities (IBL) subject to repricing over a period of time. A
ratio of more than one indicates a higher level of repricing
assets over repricing liabilities for the time period.
Conversely, a ratio of less than one indicates a higher level of
repricing liabilities over repricing assets for the time period.
The following table presents the amounts of interest earning
assets and interest bearing liabilities as of December 31,
2007 that are subject to repricing within the periods indicated
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within
|
|
|
2-3
|
|
|
4-6
|
|
|
7-12
|
|
|
Total
|
|
|
|
1 Month
|
|
|
Months
|
|
|
Months
|
|
|
Months
|
|
|
1 Year
|
|
|
Interest Earning Assets (IEA)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
1,150,448
|
|
|
$
|
302,624
|
|
|
$
|
343,033
|
|
|
$
|
503,468
|
|
|
$
|
2,299,573
|
|
Investments
|
|
|
44,234
|
|
|
|
102,232
|
|
|
|
92,178
|
|
|
|
141,638
|
|
|
|
380,282
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,194,682
|
|
|
|
404,856
|
|
|
|
435,211
|
|
|
|
645,106
|
|
|
|
2,679,855
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Bearing Liabilities (IBL)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-maturity deposits
|
|
|
990,122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
990,122
|
|
Time deposits
|
|
|
99,464
|
|
|
|
202,118
|
|
|
|
256,426
|
|
|
|
457,961
|
|
|
|
1,015,969
|
|
Borrowings
|
|
|
353,835
|
|
|
|
167,360
|
|
|
|
23,636
|
|
|
|
42,306
|
|
|
|
587,137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,443,421
|
|
|
|
369,478
|
|
|
|
280,062
|
|
|
|
500,267
|
|
|
|
2,593,228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period Gap
|
|
$
|
(248,739
|
)
|
|
$
|
35,378
|
|
|
$
|
155,149
|
|
|
$
|
144,839
|
|
|
$
|
86,627
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative Gap
|
|
$
|
(248,739
|
)
|
|
$
|
(213,361
|
)
|
|
$
|
(58,212
|
)
|
|
$
|
86,627
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IEA/IBL (Cumulative)
|
|
|
0.83
|
|
|
|
0.88
|
|
|
|
0.97
|
|
|
|
1.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative Gap to IEA
|
|
|
(4.63)%
|
|
|
|
(3.98)%
|
|
|
|
(1.08)%
|
|
|
|
1.61%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The cumulative twelve-month, IEA to IBL ratio changed to 1.03
for December 31, 2007 from 0.97 for December 31, 2006.
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.
39
The following table presents an analysis of the potential
sensitivity of the Corporations annual net interest income
and EVE to changes in interest rates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ALCO
|
|
December 31
|
|
2007
|
|
|
2006
|
|
|
Guidelines
|
|
|
Net interest income change (12 months):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
+ 200 basis points
|
|
|
(2.0
|
)%
|
|
|
(2
|
.2)
|
%
|
|
|
+/−5.0
|
%
|
+ 100 basis points
|
|
|
(0.5
|
)%
|
|
|
0
|
.2
|
%
|
|
|
+/−5.0
|
%
|
− 100 basis points
|
|
|
(1.7
|
)%
|
|
|
(0
|
.2)
|
%
|
|
|
+/−5.0
|
%
|
− 200 basis points
|
|
|
(4.7
|
)%
|
|
|
(1
|
.8)
|
%
|
|
|
+/−5.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Economic value of equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
+ 200 basis points
|
|
|
(4.9
|
)%
|
|
|
(5
|
.7)
|
%
|
|
|
|
|
+ 100 basis points
|
|
|
(1.5
|
)%
|
|
|
(1
|
.8)
|
%
|
|
|
|
|
− 100 basis points
|
|
|
(3.3
|
)%
|
|
|
(0
|
.4)
|
%
|
|
|
|
|
− 200 basis points
|
|
|
(9.7
|
)%
|
|
|
(4
|
.1)
|
%
|
|
|
|
|
The measures were calculated using rate shocks, representing
immediate rate changes that move all market rates by the same
amount. The variance percentages represent the change between
the net interest income or EVE calculated under the particular
rate shock versus the net interest income or EVE that was
calculated assuming market rates as of December 31, 2007.
The Corporations overall level of interest rate risk is
considered to be relatively low and stable. The Corporation has
a slightly liability-sensitive interest rate risk position. In
other words, in the short run, more liabilities reprice than
assets. This is why net interest income and EVE decrease under
higher rate shock scenarios. The Corporation also has various
asset categories with call options, which grant option holders
the right to prepay when rates decline. The extreme nature of
rate shock scenarios triggers a high level of asset prepayments,
causing net interest income and EVE to decrease under lower rate
shock scenarios.
The Corporations yield curve shifted lower during 2007.
This was primarily the result of the economic weakness caused by
the subprime mortgage crisis. Applying the down rate shocks to
these lower interest rates as of December 31, 2007 caused
higher asset prepayments for the measurement period. The
-200 basis point shock lowers long term rates to
historically low levels, creating the higher asset prepayments.
The ALCO deems this scenario to be improbable and will continue
to manage its exposure to asset prepayment risk in a gradual
manner. With the increased economic weakness and lower rates,
loan customers typically prefer to lock-in long-term, fixed
rates with the Corporation, creating pressure for a higher
sensitivity to higher rates.
Throughout 2007, the ALCO utilized several strategies to
maintain the Corporations interest rate risk position at
an acceptable level. For example, the Corporation successfully
promoted longer-term certificates of deposit and utilized
long-term FHLB advances. On the lending side, the Corporation
regularly sells long-term, fixed-rate residential mortgages to
the secondary market and has been focusing on the origination of
commercial loans with short-term repricing characteristics. The
investment portfolio is used, in part, to supplement the
Corporations interest rate risk position. For 2007, the
average life and duration of new investment activity was lower
than the existing portfolio, helping to reduce interest rate
risk. Finally, the Corporation has made use of interest rate
swaps to lessen its interest rate risk position. For additional
information regarding the interest rate swaps, see the Interest
Rate Swaps footnote in the Notes to Consolidated Financial
Statements, which is included in Item 8 of this Report.
The Corporation recognizes that asset/liability models such as
those used by the Corporation to measure its interest rate risk
are based on methodologies that may have inherent shortcomings.
Furthermore, asset/liability models require certain assumptions
be made, such as prepayment rates on interest 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 be achieved.
40
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, 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within
|
|
|
|
|
|
|
|
|
After
|
|
|
|
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
5 Years
|
|
|
Total
|
|
|
Deposits without a stated maturity
|
|
$
|
2,663,301
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2,663,301
|
|
Certificates and other time deposits
|
|
|
1,012,069
|
|
|
|
475,372
|
|
|
|
230,822
|
|
|
|
16,120
|
|
|
|
1,734,383
|
|
Operating leases
|
|
|
4,118
|
|
|
|
5,695
|
|
|
|
3,691
|
|
|
|
15,293
|
|
|
|
28,797
|
|
Long-term debt
|
|
|
101,279
|
|
|
|
295,041
|
|
|
|
83,597
|
|
|
|
1,449
|
|
|
|
481,366
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,780,767
|
|
|
$
|
776,108
|
|
|
$
|
318,110
|
|
|
$
|
32,862
|
|
|
$
|
4,907,847
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth the amounts and expected
maturities of commitments to extend credit and standby letters
of credit as of December 31, 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within
|
|
|
|
|
|
|
|
|
After
|
|
|
|
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
5 Years
|
|
|
Total
|
|
|
Commitments to extend credit
|
|
$
|
783,459
|
|
|
$
|
42,152
|
|
|
$
|
42,082
|
|
|
$
|
75,584
|
|
|
$
|
943,277
|
|
Standby letters of credit
|
|
|
38,873
|
|
|
|
26,318
|
|
|
|
11,111
|
|
|
|
406
|
|
|
|
76,708
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
822,332
|
|
|
$
|
68,470
|
|
|
$
|
53,193
|
|
|
$
|
75,990
|
|
|
$
|
1,019,985
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments to extend credit and standby letters of credit do
not necessarily represent future cash requirements because while
the borrower has the ability to draw upon these commitments at
any time, these commitments often expire without being drawn
upon. For additional information relating to commitments to
extend credit and standby letters of credit, see the
Commitments, Credit Risk and Contingencies footnote in the Notes
to Consolidated Financial Statements, which is included in
Item 8 of this Report.
Lending
Activity
The loan 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 banking
affiliate, also operates commercial loan production offices in
Pennsylvania and Florida, as well as a mortgage loan production
office in Tennessee. The Corporation had commercial loans in
Florida totaling $264.3 million or 6.1% of total loans as
of December 31, 2007. In addition, the portfolio contains
consumer finance loans to individuals in Pennsylvania, Ohio and
Tennessee, which totaled $150.3 million or 3.5% of total
loans as of December 31, 2007.
Following is a summary of loans (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Commercial
|
|
$
|
2,232,860
|
|
|
$
|
2,111,752
|
|
|
$
|
1,613,960
|
|
|
$
|
1,440,674
|
|
|
$
|
1,297,559
|
|
Direct installment
|
|
|
941,249
|
|
|
|
926,766
|
|
|
|
890,288
|
|
|
|
820,886
|
|
|
|
776,716
|
|
Consumer lines of credit
|
|
|
251,100
|
|
|
|
254,054
|
|
|
|
262,969
|
|
|
|
251,037
|
|
|
|
229,005
|
|
Residential mortgages
|
|
|
465,881
|
|
|
|
490,215
|
|
|
|
485,542
|
|
|
|
479,769
|
|
|
|
468,173
|
|
Indirect installment
|
|
|
427,663
|
|
|
|
461,214
|
|
|
|
493,740
|
|
|
|
389,754
|
|
|
|
452,170
|
|
Other
|
|
|
25,482
|
|
|
|
9,143
|
|
|
|
2,548
|
|
|
|
7,341
|
|
|
|
35,574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,344,235
|
|
|
$
|
4,253,144
|
|
|
$
|
3,749,047
|
|
|
$
|
3,389,461
|
|
|
$
|
3,259,197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans at December 31, 2007 increased by
$91.1 million or 2.1% to $4.3 billion as compared to
December 31, 2006. The commercial loan segment grew by
$121.1 million due to the Corporations focus on
growth in the Florida market as well as the Pittsburgh and
Harrisburg, Pennsylvania markets.
41
Total loans at December 31, 2006 increased by
$504.1 million or 13.4% to $4.3 billion as 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.
The majority of the Corporations loan portfolio consists
of commercial real estate loans as well as commercial and
industrial loans. As of December 31, 2007 and 2006,
commercial real estate loans were $1.4 billion and
$1.3 billion, respectively, or 32.1% and 29.9% of total
loans. As of December 31, 2007 and 2006, 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, 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within
|
|
|
1-5
|
|
|
Over
|
|
|
|
|
|
|
1 Year
|
|
|
Years
|
|
|
5 Years
|
|
|
Total
|
|
|
Commercial
|
|
$
|
293,637
|
|
|
$
|
623,832
|
|
|
$
|
1,315,391
|
|
|
$
|
2,232,860
|
|
Residential mortgages
|
|
|
1,156
|
|
|
|
20,612
|
|
|
|
444,113
|
|
|
|
465,881
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
294,793
|
|
|
$
|
644,444
|
|
|
$
|
1,759,504
|
|
|
$
|
2,698,741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total amount of loans due after one year includes
$1.7 billion with floating or adjustable rates of interest
and $724.8 million with fixed rates of interest.
For additional information relating to lending activity, see the
Loans footnote in the Notes to Consolidated Financial
Statements, which is included in Item 8 of this Report.
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
depending on the loan type, 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. 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.
Following is a summary of non-performing loans (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Non-accrual loans
|
|
$
|
29,211
|
|
|
$
|
24,636
|
|
|
$
|
28,100
|
|
|
$
|
27,029
|
|
|
$
|
22,449
|
|
Restructured loans
|
|
|
3,468
|
|
|
|
3,492
|
|
|
|
5,032
|
|
|
|
4,993
|
|
|
|
5,719
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
32,679
|
|
|
$
|
28,128
|
|
|
$
|
33,132
|
|
|
$
|
32,022
|
|
|
$
|
28,168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing loans as a percentage of total loans
|
|
|
0.75
|
%
|
|
|
0.66
|
%
|
|
|
0.88
|
%
|
|
|
0.94
|
%
|
|
|
0.86
|
%
|
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
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Gross interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per contractual terms
|
|
$
|
2,378
|
|
|
$
|
2,046
|
|
|
$
|
3,179
|
|
|
$
|
2,076
|
|
|
$
|
2,227
|
|
Recorded during the year
|
|
|
362
|
|
|
|
458
|
|
|
|
528
|
|
|
|
727
|
|
|
|
923
|
|
42
Following is a summary of loans 90 days or more past due on
which interest accruals continue (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Loans 90 days or more past due
|
|
$
|
7,540
|
|
|
$
|
5,528
|
|
|
$
|
5,755
|
|
|
$
|
5,113
|
|
|
$
|
5,100
|
|
As a percentage of total loans
|
|
|
0.17
|
%
|
|
|
0.13
|
%
|
|
|
0.15
|
%
|
|
|
0.15
|
%
|
|
|
0.16
|
%
|
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 less than $250,000 are excluded from
FAS 114 individual impairment analysis and are collectively
evaluated by management to estimate reserves for loan losses
inherent in those loans in accordance with FAS 5.
In estimating loan loss contingencies, 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 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.
43
Following is a summary of changes in the allowance for loan
losses (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December
31
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Balance at beginning of period
|
|
$
|
52,575
|
|
|
$
|
50,707
|
|
|
$
|
50,467
|
|
|
$
|
46,139
|
|
|
$
|
46,984
|
|
Additions due to acquisitions
|
|
|
21
|
|
|
|
3,035
|
|
|
|
4,996
|
|
|
|
4,354
|
|
|
|
|
|
Reductions due to branch sales
|
|
|
|
|
|
|
|
|
|
|
(59
|
)
|
|
|
(54
|
)
|
|
|
|
|
Charge-offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
(3,034
|
)
|
|
|
(2,642
|
)
|
|
|
(3,422
|
)
|
|
|
(2,333
|
)
|
|
|
(2,447
|
)
|
Installment
|
|
|
(9,413
|
)
|
|
|
(9,811
|
)
|
|
|
(14,847
|
)
|
|
|
(14,736
|
)
|
|
|
(15,769
|
)
|
Residential mortgage
|
|
|
(2,766
|
)
|
|
|
(2,215
|
)
|
|
|
(966
|
)
|
|
|
(639
|
)
|
|
|
(571
|
)
|
Other
|
|
|
|
|
|
|
(12
|
)
|
|
|
(472
|
)
|
|
|
(1,088
|
)
|
|
|
(1,457
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total charge-offs
|
|
|
(15,213
|
)
|
|
|
(14,680
|
)
|
|
|
(19,707
|
)
|
|
|
(18,796
|
)
|
|
|
(20,244
|
)
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
430
|
|
|
|
764
|
|
|
|
650
|
|
|
|
667
|
|
|
|
505
|
|
Installment
|
|
|
1,850
|
|
|
|
1,919
|
|
|
|
1,891
|
|
|
|
1,651
|
|
|
|
1,482
|
|
Residential mortgage
|
|
|
400
|
|
|
|
319
|
|
|
|
144
|
|
|
|
94
|
|
|
|
53
|
|
Other
|
|
|
50
|
|
|
|
99
|
|
|
|
149
|
|
|
|
132
|
|
|
|
204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recoveries
|
|
|
2,730
|
|
|
|
3,101
|
|
|
|
2,834
|
|
|
|
2,544
|
|
|
|
2,244
|
|
Net charge-offs
|
|
|
(12,483
|
)
|
|
|
(11,579
|
)
|
|
|
(16,873
|
)
|
|
|
(16,252
|
)
|
|
|
(18,000
|
)
|
Provision for loan losses
|
|
|
12,693
|
|
|
|
10,412
|
|
|
|
12,176
|
|
|
|
16,280
|
|
|
|
17,155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
52,806
|
|
|
$
|
52,575
|
|
|
$
|
50,707
|
|
|
$
|
50,467
|
|
|
$
|
46,139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs as a percent of average loans, net of unearned
income
|
|
|
0.29
|
%
|
|
|
0.29
|
%
|
|
|
0.46
|
%
|
|
|
0.50
|
%
|
|
|
0.56
|
%
|
Allowance for loan losses as a percent of total loans, net of
unearned income
|
|
|
1.22
|
%
|
|
|
1.24
|
%
|
|
|
1.35
|
%
|
|
|
1.49
|
%
|
|
|
1.42
|
%
|
Allowance for loan losses as a percent of non-performing loans
|
|
|
161.59%
|
|
|
|
186.91%
|
|
|
|
153.05
|
%
|
|
|
157.60
|
%
|
|
|
163.80
|
%
|
The installment category in the above table includes direct
installment, consumer lines of credit and indirect installment
loans. The other category in the above table includes lease
financing.
The allowance for loan losses increased $0.2 million during
2007 representing a 0.4% increase in reserves for loan losses
between December 31, 2006 and December 31, 2007. Net
charge-offs increased $0.9 million or 7.8% reflecting
higher commercial loan charge-offs, including $0.9 million
relating to a Florida loan, and higher residential mortgage loan
charge-offs, partially offset by lower installment loan
charge-offs. These actions included the charge-off of
$0.9 million relating to one project and the recording of
another specific reserve of $2.0 million relating to a
second project.
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. This decrease in net charge-offs and the
provision for loan losses is a result of the Corporations
continued improvement in 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 historically tend to lag the national economy,
with local economies in the Corporations primary 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. Higher interest rates and energy costs
directly affect borrowers having floating rate loans as
increasing debt service requirements pressure customers that now
face
44
higher loan payments. Higher interest rates and energy costs
also affect consumer loan customers who carry historically high
debt levels. Consumer credit risk and loss exposures are
evaluated using a combination of historical loss experience and
an analysis of the rate at which delinquent loans ultimately
result in charge-offs to estimate credit quality migration and
expected losses within the homogeneous loan pools.
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
|
|
|
|
2007
|
|
|
Loans
|
|
|
2006
|
|
|
Loans
|
|
|
2005
|
|
|
Loans
|
|
|
2004
|
|
|
Loans
|
|
|
2003
|
|
|
Loans
|
|
|
Commercial
|
|
$
|
32,607
|
|
|
|
51
|
%
|
|
$
|
30,813
|
|
|
|
50
|
%
|
|
$
|
27,112
|
|
|
|
43
|
%
|
|
$
|
28,271
|
|
|
|
43
|
%
|
|
$
|
23,332
|
|
|
|
40
|
%
|
Direct installment
|
|
|
11,387
|
|
|
|
21
|
|
|
|
11,445
|
|
|
|
22
|
|
|
|
11,631
|
|
|
|
24
|
|
|
|
10,947
|
|
|
|
24
|
|
|
|
9,429
|
|
|
|
24
|
|
Consumer lines of Credit
|
|
|
2,310
|
|
|
|
6
|
|
|
|
2,343
|
|
|
|
6
|
|
|
|
2,486
|
|
|
|
7
|
|
|
|
1,280
|
|
|
|
7
|
|
|
|
1,282
|
|
|
|
7
|
|
Residential mortgages
|
|
|
2,621
|
|
|
|
11
|
|
|
|
3,068
|
|
|
|
11
|
|
|
|
2,958
|
|
|
|
13
|
|
|
|
632
|
|
|
|
14
|
|
|
|
579
|
|
|
|
14
|
|
Indirect installment
|
|
|
3,766
|
|
|
|
10
|
|
|
|
4,649
|
|
|
|
11
|
|
|
|
6,324
|
|
|
|
13
|
|
|
|
9,072
|
|
|
|
12
|
|
|
|
8,432
|
|
|
|
14
|
|
Other
|
|
|
115
|
|
|
|
1
|
|
|
|
257
|
|
|
|
|
|
|
|
196
|
|
|
|
|
|
|
|
265
|
|
|
|
|
|
|
|
939
|
|
|
|
1
|
|
Unallocated portion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
52,806
|
|
|
|
100
|
%
|
|
$
|
52,575
|
|
|
|
100
|
%
|
|
$
|
50,707
|
|
|
|
100
|
%
|
|
$
|
50,467
|
|
|
|
100
|
%
|
|
$
|
46,139
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amount allocated to commercial loans increased in 2007 due
to a combination of the increased loan balance and the
additional $2.0 million in specific reserves recorded in
relation to the previously mentioned developer relationship in
the Florida market.
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 balances.
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.
Investment
Activity
Investment activities serve to enhance the overall yield on
interest 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 value. Securities, like loans, are
subject to similar interest rate and credit risk. In addition,
by their nature, securities classified as available for sale are
also subject to market value risks that could negatively affect
the level of liquidity available to the Corporation, as well as
stockholders equity. A change in the value of securities
held to maturity could also negatively affect the level of
stockholders equity if there was a decline in the
underlying creditworthiness of the issuers and an
other-than-temporary impairment is deemed or a change in the
Corporations intent and ability to hold the securities to
maturity.
As of December 31, 2007, securities totaling
$358.4 million and $667.6 million were classified as
available for sale and held to maturity, respectively. During
2007, securities available for sale increased by
$100.1 million and securities held to maturity decreased by
$108.5 million from December 31, 2006. The decrease in
securities held to maturity resulted from maturities and
repayments.
45
The following table indicates the respective maturities and
weighted-average yields of securities as of December 31,
2007 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Amount
|
|
|
Yield
|
|
|
Obligations of U.S. Treasury and other U.S. Government agencies:
|
|
|
|
|
|
|
|
|
Maturing within one year
|
|
$
|
10,496
|
|
|
|
4.69
|
%
|
Maturing after one year but within five years
|
|
|
162,840
|
|
|
|
5.15
|
|
Maturing after ten years
|
|
|
507
|
|
|
|
5.61
|
|
|
|
|
|
|
|
|
|
|
States of the U.S. and political subdivisions:
|
|
|
|
|
|
|
|
|
Maturing within one year
|
|
|
3,823
|
|
|
|
5.54
|
|
Maturing after one year but within five years
|
|
|
43,660
|
|
|
|
4.91
|
|
Maturing after five years but within ten years
|
|
|
56,841
|
|
|
|
5.29
|
|
Maturing after ten years
|
|
|
69,345
|
|
|
|
5.95
|
|
|
|
|
|
|
|
|
|
|
Corporate and other debt securities:
|
|
|
|
|
|
|
|
|
Maturing within one year
|
|
|
1,264
|
|
|
|
5.74
|
|
Maturing after one year but within five years
|
|
|
526
|
|
|
|
6.89
|
|
Maturing after ten years
|
|
|
51,741
|
|
|
|
6.47
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
|
619,313
|
|
|
|
5.04
|
|
Equity securities
|
|
|
5,618
|
|
|
|
4.97
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,025,974
|
|
|
|
5.20
|
|
|
|
|
|
|
|
|
|
|
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.
For additional information relating to investment activity, see
the Securities footnote in the Notes to Consolidated Financial
Statements, which is included in Item 8 of this Report.
Deposits
and Short-Term Borrowings
As a bank holding company, the Corporations primary source
of funds is deposits. Those deposits are provided by businesses,
municipalities and individuals located within the markets served
by the Corporations subsidiaries.
Total deposits increased $24.8 million to $4.4 billion
at December 31, 2007, compared to December 31, 2006,
as a result of organic growth resulting from an expanded suite
of deposit products that has attracted additional customers. The
Corporation also experienced a shift in its deposit mix during
2007, as non-interest bearing demand and certificates of deposit
decreased $28.5 million or 4.4% and $39.1 or 2.2%,
respectively, while savings and NOW increased $92.5 million
or 4.8%, compared to 2006.
Short-term borrowings, made up of treasury management accounts,
federal funds purchased, subordinated notes and other short-term
borrowings, increased by $85.9 million to
$449.8 million at December 31, 2007 compared to
December 31, 2006. This increase is the result of increases
of $60.0 million, $24.5 million and $4.7 million
in federal funds purchased, treasury management accounts and
subordinated notes, respectively. At December 31, 2006, the
Corporation did not have any federal funds purchased. The
increase in treasury management accounts is the result of the
Corporations strategic initiative to increase and expand
its commercial lending relationships.
Treasury management accounts and subordinated notes are the
largest components of short-term borrowings. At
December 31, 2007, treasury management accounts and
subordinated notes represented 61.5% and 25.1%, respectively, of
total short-term borrowings.
46
Following is a summary of selected information relating to
treasury management accounts (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Balance at year-end
|
|
$
|
276,552
|
|
|
$
|
252,064
|
|
|
$
|
182,517
|
|
Maximum month-end balance
|
|
|
291,200
|
|
|
|
252,064
|
|
|
|
196,470
|
|
Average balance during year
|
|
|
266,726
|
|
|
|
213,045
|
|
|
|
182,779
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average interest rates:
|
|
|
|
|
|
|
|
|
|
|
|
|
At end of year
|
|
|
3.71%
|
|
|
|
4.64%
|
|
|
|
3.49%
|
|
During the year
|
|
|
4.56
|
|
|
|
4.27
|
|
|
|
2.57
|
|
The treasury management accounts have next day maturities.
For additional information relating to deposits and short-term
borrowings, see the Deposits and Short-Term Borrowings footnotes
in the Notes to Consolidated Financial Statements, which is
included in Item 8 of this Report.
Capital
Resources
The access to, and cost of, funding new business initiatives,
including acquisitions, the ability to engage in expanded
business activities, the ability to pay dividends, the level of
deposit insurance costs and the level and nature of regulatory
oversight depend, in part, on the Corporations capital
strength.
The assessment of capital adequacy depends on a number of
factors such as asset quality, liquidity, earnings performance,
changing competitive conditions and economic forces. The
Corporation seeks to maintain a strong capital base to support
its growth and expansion activities, to provide stability to
current operations and to promote public confidence.
The Corporation has an effective shelf registration statement
filed with the SEC. Pursuant to this registration statement, the
Corporation may, from time to time, issue and sell in one or
more offerings any combination of common stock, preferred stock,
debt securities or trust preferred securities having a total
dollar value up to $200.0 million. As of December 31,
2007, the Corporation has not issued any such stock or
securities.
Capital management is a continuous process. Both the Corporation
and FNBPA are subject to various regulatory capital requirements
administered by federal banking agencies. For additional
information, see the Regulatory Matters footnote in the Notes to
the Consolidated Financial Statements, which is included in
Item 8 of this Report. Book value per share was $8.99 at
December 31, 2007, compared to $8.90 at December 31,
2006. From time to time, the Corporation issues shares, that
were initially acquired by the Corporation as 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.
47
|
|
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, 2007 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, 2007, the Corporations internal
control over financial reporting is effective and meets the
criteria of the Internal ControlIntegrated
Framework. Ernst & Young LLP, independent
registered public accounting firm, has issued an audit report on
the Corporations internal control over financial reporting.
|
|
|
/s/Stephen J. Gurgovits
|
|
/s/Brian F. Lilly
|
|
|
|
Stephen J. Gurgovits
Chief Executive Officer
|
|
Brian F. Lilly
Chief Financial Officer
|
48
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, 2007
and 2006, and the related consolidated statements of income,
shareholders equity, and cash flows for each of the three
years in the period ended December 31, 2007. 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, 2007 and 2006, and the consolidated results of
their operations and their cash flows for each of the three
years in the period ended December 31, 2007, in conformity
with U.S. generally accepted accounting principles.
As discussed in footnote 2 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,
and adopted the provisions of Staff Accounting
Bulletin No, 108. Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year
Financial Statements in 2006, and changed its method of
accounting for uncertain tax positions on January 1, 2007,
in accordance with FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
F.N.B. Corporations internal control over financial
reporting as of December 31, 2007, based on criteria
established in Internal Control-Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated February 26, 2008,
expressed an unqualified opinion thereon.
/s/Ernst & Young LLP
Pittsburgh, Pennsylvania
February 26, 2008
49
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
F.N.B. Corporation
We have audited F.N.B. Corporations internal control over
financial reporting as of December 31, 2007, based on
criteria established in Internal Control Integrated
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 included in the accompanying
Managements Report on Internal Control Over Financial
Reporting. Our responsibility is to express an opinion on 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, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A 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 FR Y-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, F.N.B Corporation maintained, in all material
respects, effective internal control over financial reporting as
of December 31, 2007, 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, 2007 and 2006, and the related consolidated
statements of income, stockholders equity, and cash flows
for each of the three years in the period ended
December 31, 2007, and our report dated February 26,
2008 expressed an unqualified opinion thereon.
/s/Ernst & Young LLP
Pittsburgh, Pennsylvania
February 26, 2008
50
F.N.B. Corporation and Subsidiaries
Consolidated Balance Sheets
Dollars in thousands, except par values
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
2007
|
|
|
2006
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
130,235
|
|
|
$
|
122,362
|
|
Interest bearing deposits with banks
|
|
|
482
|
|
|
|
1,472
|
|
Securities available for sale
|
|
|
358,421
|
|
|
|
258,279
|
|
Securities held to maturity (fair value of $665,914 and $766,295)
|
|
|
667,553
|
|
|
|
776,079
|
|
Mortgage loans held for sale
|
|
|
5,637
|
|
|
|
3,955
|
|
Loans, net of unearned income of $25,747 and $26,704
|
|
|
4,344,235
|
|
|
|
4,253,144
|
|
Allowance for loan losses
|
|
|
(52,806
|
)
|
|
|
(52,575
|
)
|
|
|
|
|
|
|
|
|
|
Net Loans
|
|
|
4,291,429
|
|
|
|
4,200,569
|
|
Premises and equipment, net
|
|
|
80,472
|
|
|
|
86,532
|
|
Goodwill
|
|
|
242,120
|
|
|
|
242,479
|
|
Core deposit and other intangible assets, net
|
|
|
19,439
|
|
|
|
23,859
|
|
Bank owned life insurance
|
|
|
133,885
|
|
|
|
131,391
|
|
Other assets
|
|
|
158,348
|
|
|
|
160,615
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
6,088,021
|
|
|
$
|
6,007,592
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
Non-interest bearing demand
|
|
$
|
626,141
|
|
|
$
|
654,617
|
|
Savings and NOW
|
|
|
2,037,160
|
|
|
|
1,944,707
|
|
Certificates and other time deposits
|
|
|
1,734,383
|
|
|
|
1,773,518
|
|
|
|
|
|
|
|
|
|
|
Total Deposits
|
|
|
4,397,684
|
|
|
|
4,372,842
|
|
Other liabilities
|
|
|
63,760
|
|
|
|
62,547
|
|
Short-term borrowings
|
|
|
449,823
|
|
|
|
363,910
|
|
Long-term debt
|
|
|
481,366
|
|
|
|
519,890
|
|
Junior subordinated debt owed to unconsolidated subsidiary trusts
|
|
|
151,031
|
|
|
|
151,031
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
5,543,664
|
|
|
|
5,470,220
|
|
|
|
|
|
|
|
|
|
|
Stockholders Equity
|
|
|
|
|
|
|
|
|
Common stock $0.01 par value
|
|
|
|
|
|
|
|
|
Authorized 500,000,000 shares
|
|
|
|
|
|
|
|
|
Issued 60,602,218 and 60,451,533
|
|
|
602
|
|
|
|
601
|
|
Additional paid-in capital
|
|
|
508,891
|
|
|
|
506,024
|
|
Retained earnings
|
|
|
42,426
|
|
|
|
33,321
|
|
Accumulated other comprehensive loss
|
|
|
(6,738
|
)
|
|
|
(1,546
|
)
|
Treasury stock 47,970 and 57,254 shares at cost
|
|
|
(824
|
)
|
|
|
(1,028
|
)
|
|
|
|
|
|
|
|
|
|
Total Stockholders Equity
|
|
|
544,357
|
|
|
|
537,372
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity
|
|
$
|
6,088,021
|
|
|
$
|
6,007,592
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements
51
F.N.B. Corporation and Subsidiaries
Consolidated Statements of Income
Dollars in thousands, except per share data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Interest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, including fees
|
|
$
|
318,015
|
|
|
$
|
288,553
|
|
|
$
|
240,966
|
|
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
44,128
|
|
|
|
47,319
|
|
|
|
49,275
|
|
Nontaxable
|
|
|
5,828
|
|
|
|
4,757
|
|
|
|
4,138
|
|
Dividends
|
|
|
294
|
|
|
|
533
|
|
|
|
694
|
|
Other
|
|
|
625
|
|
|
|
1,260
|
|
|
|
407
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Interest Income
|
|
|
368,890
|
|
|
|
342,422
|
|
|
|
295,480
|
|
Interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
124,276
|
|
|
|
106,679
|
|
|
|
66,112
|
|
Short-term borrowings
|
|
|
19,435
|
|
|
|
15,785
|
|
|
|
14,501
|
|
Long-term debt
|
|
|
19,360
|
|
|
|
20,752
|
|
|
|
19,872
|
|
Junior subordinated debt owed to unconsolidated subsidiary trusts
|
|
|
10,982
|
|
|
|
10,369
|
|
|
|
8,295
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Interest Expense
|
|
|
174,053
|
|
|
|
153,585
|
|
|
|
108,780
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income
|
|
|
194,837
|
|
|
|
188,837
|
|
|
|
186,700
|
|
Provision for loan losses
|
|
|
12,693
|
|
|
|
10,412
|
|
|
|
12,176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income After Provision for Loan Losses
|
|
|
182,144
|
|
|
|
178,425
|
|
|
|
174,524
|
|
Non-Interest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges
|
|
|
40,827
|
|
|
|
40,053
|
|
|
|
38,121
|
|
Insurance commissions and fees
|
|
|
13,994
|
|
|
|
13,988
|
|
|
|
12,794
|
|
Securities commissions and fees
|
|
|
6,326
|
|
|
|
4,871
|
|
|
|
4,490
|
|
Trust
|
|
|
8,577
|
|
|
|
7,780
|
|
|
|
7,125
|
|
Bank owned life insurance
|
|
|
4,117
|
|
|
|
3,368
|
|
|
|
3,301
|
|
Gain on sale of mortgage loans
|
|
|
1,715
|
|
|
|
1,607
|
|
|
|
1,393
|
|
Gain (loss) on sale of securities
|
|
|
1,155
|
|
|
|
1,802
|
|
|
|
(11,703
|
)
|
Impairment loss on equity securities
|
|
|
(118
|
)
|
|
|
|
|
|
|
(1,953
|
)
|
Other
|
|
|
5,016
|
|
|
|
5,806
|
|
|
|
4,239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-Interest Income
|
|
|
81,609
|
|
|
|
79,275
|
|
|
|
57,807
|
|
Non-Interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
|
87,219
|
|
|
|
83,649
|
|
|
|
81,035
|
|
Net occupancy
|
|
|
14,676
|
|
|
|
13,963
|
|
|
|
12,666
|
|
Equipment
|
|
|
13,061
|
|
|
|
13,600
|
|
|
|
12,911
|
|
Amortization of intangibles
|
|
|
4,406
|
|
|
|
4,148
|
|
|
|
3,743
|
|
State taxes
|
|
|
5,451
|
|
|
|
4,682
|
|
|
|
3,951
|
|
Advertising and promotional
|
|
|
2,914
|
|
|
|
2,845
|
|
|
|
3,210
|
|
Insurance claims paid
|
|
|
2,309
|
|
|
|
2,558
|
|
|
|
2,654
|
|
Merger related
|
|
|
210
|
|
|
|
564
|
|
|
|
1,303
|
|
Other
|
|
|
35,368
|
|
|
|
34,505
|
|
|
|
33,753
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-Interest Expense
|
|
|
165,614
|
|
|
|
160,514
|
|
|
|
155,226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Before Income Taxes
|
|
|
98,139
|
|
|
|
97,186
|
|
|
|
77,105
|
|
Income taxes
|
|
|
28,461
|
|
|
|
29,537
|
|
|
|
21,847
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
69,678
|
|
|
$
|
67,649
|
|
|
$
|
55,258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income per Common Share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.16
|
|
|
$
|
1.15
|
|
|
$
|
0.99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
1.15
|
|
|
$
|
1.14
|
|
|
$
|
0.98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Dividends Paid per Common Share
|
|
$
|
0.95
|
|
|
$
|
0.94
|
|
|
$
|
0.925
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements
52
F.N.B. Corporation and Subsidiaries
Consolidated Statements of Stockholders Equity
Dollars in thousands
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumu-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
lated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Addi-
|
|
|
|
|
|
Other
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
Compre-
|
|
|
Com-
|
|
|
tional
|
|
|
|
|
|
Compre-
|
|
|
Stock
|
|
|
|
|
|
|
|
|
|
hensive
|
|
|
mon
|
|
|
Paid-In
|
|
|
Retained
|
|
|
hensive
|
|
|
Compen-
|
|
|
Treasury
|
|
|
|
|
|
|
Income
|
|
|
Stock
|
|
|
Capital
|
|
|
Earnings
|
|
|
Income
|
|
|
sation
|
|
|
Stock
|
|
|
Total
|
|
|
Balance at January 1, 2005
|
|
|
|
|
|
$
|
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: $0.925/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: $0.94/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
|
)
|
|
|
|
|
|
|
(1,028
|
)
|
|
|
537,372
|
|
Net income
|
|
$
|
69,678
|
|
|
|
|
|
|
|
|
|
|
|
69,678
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
69,678
|
|
Change in other comprehensive income (loss)
|
|
|
(5,192
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,192
|
)
|
|
|
|
|
|
|
|
|
|
|
(5,192
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
64,486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common dividends declared: $0.95/share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(57,450
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(57,450
|
)
|
Purchase of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,175
|
)
|
|
|
(9,175
|
)
|
Issuance of common stock
|
|
|
|
|
|
|
1
|
|
|
|
1
|
|
|
|
(1,949
|
)
|
|
|
|
|
|
|
|
|
|
|
9,379
|
|
|
|
7,432
|
|
Restricted stock compensation
|
|
|
|
|
|
|
|
|
|
|
2,231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,231
|
|
Tax benefit of stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
635
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
635
|
|
Adjustment to initially apply FIN 48, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,174
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,174
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
|
|
|
$
|
602
|
|
|
$
|
508,891
|
|
|
$
|
42,426
|
|
|
$
|
(6,738
|
)
|
|
$
|
0
|
|
|
$
|
(824
|
)
|
|
$
|
544,357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements
53
F.N.B. Corporation and Subsidiaries
Consolidated Statements of Cash Flows
Dollars in thousands
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
69,678
|
|
|
$
|
67,649
|
|
|
$
|
55,258
|
|
Adjustments to reconcile net income to net cash flows provided
by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation, amortization and accretion
|
|
|
13,433
|
|
|
|
14,467
|
|
|
|
15,315
|
|
Provision for loan losses
|
|
|
12,693
|
|
|
|
10,412
|
|
|
|
12,176
|
|
Deferred income taxes
|
|
|
3,080
|
|
|
|
955
|
|
|
|
5,881
|
|
(Gain) loss on sale of securities
|
|
|
(1,155
|
)
|
|
|
(1,802
|
)
|
|
|
11,703
|
|
Tax benefit of stock-based compensation
|
|
|
(635
|
)
|
|
|
(623
|
)
|
|
|
1,781
|
|
Net change in:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest receivable
|
|
|
117
|
|
|
|
(2,952
|
)
|
|
|
916
|
|
Interest payable
|
|
|
(3,095
|
)
|
|
|
1,698
|
|
|
|
(8,677
|
)
|
Mortgage loans held for sale
|
|
|
(1,682
|
)
|
|
|
784
|
|
|
|
1,079
|
|
Bank owned life insurance
|
|
|
(2,494
|
)
|
|
|
(756
|
)
|
|
|
(1,482
|
)
|
Other, net
|
|
|
9,885
|
|
|
|
27,164
|
|
|
|
(23,919
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows provided by operating activities
|
|
|
99,825
|
|
|
|
116,996
|
|
|
|
70,031
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits with banks
|
|
|
990
|
|
|
|
(846
|
)
|
|
|
2,295
|
|
Loans
|
|
|
(108,119
|
)
|
|
|
(224,556
|
)
|
|
|
(20,692
|
)
|
Securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
|
|
|
(265,278
|
)
|
|
|
(42,918
|
)
|
|
|
(398,976
|
)
|
Sales
|
|
|
3,162
|
|
|
|
27,081
|
|
|
|
649,144
|
|
Maturities
|
|
|
158,805
|
|
|
|
75,181
|
|
|
|
101,260
|
|
Securities held to maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
|
|
|
(87,600
|
)
|
|
|
(26,761
|
)
|
|
|
(356,655
|
)
|
Maturities
|
|
|
195,454
|
|
|
|
130,532
|
|
|
|
118,945
|
|
Increase in premises and equipment
|
|
|
(2,761
|
)
|
|
|
(4,222
|
)
|
|
|
(5,677
|
)
|
Net cash (paid) received for mergers and acquisitions
|
|
|
|
|
|
|
(17,123
|
)
|
|
|
12,571
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows (used in) provided by investing activities
|
|
|
(105,347
|
)
|
|
|
(83,632
|
)
|
|
|
102,215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in:
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing deposits, savings, and NOW accounts
|
|
|
63,977
|
|
|
|
120,491
|
|
|
|
(98,945
|
)
|
Time deposits
|
|
|
(39,135
|
)
|
|
|
(3,251
|
)
|
|
|
73,148
|
|
Short-term borrowings
|
|
|
85,913
|
|
|
|
(67,417
|
)
|
|
|
(31,073
|
)
|
Proceeds from the issuance of junior subordinated debt owed to
unconsolidated subsidiary trusts
|
|
|
|
|
|
|
22,165
|
|
|
|
|
|
Increase in long-term debt
|
|
|
230,428
|
|
|
|
29,749
|
|
|
|
64,031
|
|
Decrease in long-term debt
|
|
|
(268,952
|
)
|
|
|
(81,484
|
)
|
|
|
(103,788
|
)
|
Purchase of common stock
|
|
|
(9,175
|
)
|
|
|
(9,649
|
)
|
|
|
(10,926
|
)
|
Issuance of common stock
|
|
|
7,154
|
|
|
|
1,529
|
|
|
|
18,408
|
|
Tax benefit of stock-based compensation
|
|
|
635
|
|
|
|
623
|
|
|
|
|
|
Cash dividends paid
|
|
|
(57,450
|
)
|
|
|
(55,362
|
)
|
|
|
(52,336
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows provided by (used in) financing activities
|
|
|
13,395
|
|
|
|
(42,606
|
)
|
|
|
(141,481
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Increase (Decrease) in Cash and Due from Banks
|
|
|
7,873
|
|
|
|
(9,242
|
)
|
|
|
30,765
|
|
Cash and due from banks at beginning of year
|
|
|
122,362
|
|
|
|
131,604
|
|
|
|
100,839
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Due from Banks at End of Year
|
|
$
|
130,235
|
|
|
$
|
122,362
|
|
|
$
|
131,604
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements
54
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 Pennsylvania, 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 Corporations accompanying consolidated financial
statements include subsidiaries in which the Corporation has a
controlling financial interest. 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).
The Corporation completed several acquisitions during 2006 and
2005. These acquisitions are discussed in the Mergers and
Acquisitions footnote. The accompanying 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, necessary 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.
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. Material estimates that
are particularly susceptible to significant changes include the
allowance for loan losses, securities valuation, goodwill and
other intangible assets and income taxes.
Business
Combinations
Business combinations are accounted for under the purchase
method of accounting. Under the purchase method of accounting,
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.
55
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.
Securities are classified as trading securities when management
intends 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, 2007 and 2006, the Corporation did not hold
any 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 available for sale
securities and other-than-temporary impairment charges are
recorded within non-interest income in the consolidated
statement of income. Realized gains and losses on the sale of
securities are determined using the specific-identification
method.
Securities are periodically reviewed for other-than-temporary
impairment based upon a number of factors, including, but not
limited to, the length of time and extent to which the market
value has been less than cost, the financial condition of the
underlying issuer, the 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 a recovery in market value or maturity.
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.
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 statement of
income in the period or periods the hedged transaction affects
earnings.
56
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 consolidated
statement of income. 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 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 principal amount outstanding net of
unearned income, unamortized premiums or discounts, acquisition
fair value adjustments and any deferred origination fees or
costs.
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.
57
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 fair value less estimated selling costs 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
Any 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
payments 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 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
recorded in other non-interest income. 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 using 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
58
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 involve 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.
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 recognizes interest
and/or
penalties related to income tax matters in income tax expense.
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.
The Corporation adopted FAS Interpretation (FIN) 48,
Accounting for Uncertainty in Income Taxes, as of
January 1, 2007. Under FIN 48, a tax position is
recognized as a benefit only if it is more likely than
not that the tax position would be sustained in a tax
examination, with a tax examination being presumed to occur. The
amount recognized is the largest amount of tax benefit that is
greater than 50% likely of being realized on examination. For
tax positions not meeting the more likely than not
test, no tax benefit is recorded. Details relating to the
adoption of FIN 48 and the impact on the Corporations
consolidated financial statements are more fully discussed in
the Income Taxes footnote.
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 as
59
calculated using the treasury stock method. 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
The Corporation accounts for its stock based compensation awards
in accordance with 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 on January 1, 2006 using the modified
prospective transition method. In accordance with the modified
prospective transition method, the consolidated financial
statements for years prior to adoption 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.
FAS 123R requires companies to estimate the fair value of
share-based awards on the date of grant. The value of the
portion of the award that is ultimately expected to vest is
recognized as expense in the Corporations consolidated
statement of income over the requisite service periods. Because
share-based compensation expense is based on awards that are
ultimately expected to vest, share-based compensation expense
has been reduced to account for estimated forfeitures.
FAS 123R requires forfeitures to be estimated at the time
of grant and revised, if necessary, in subsequent periods if
actual forfeitures differ from those estimates. For periods
prior to 2006, the Corporation accounted for forfeitures as they
occurred in the consolidated financial statements under APB
Opinion No. 25 and in the pro forma information under
FAS 123. The cumulative effect of the accounting change
associated with the adoption of FAS 123R was a reduction in
compensation expense of less than $0.1 million.
FAS 123R also requires that awards be expensed over the
shorter of the requisite service period or the period through
the date that the employee first becomes eligible to retire.
Prior to the adoption of FAS 123R, the Corporation recorded
compensation expense for retirement-eligible employees ratably
over the vesting period.
In November 2005, the Financial Accounting Standards Board
(FASB) issued FASB Staff Position (FSP) 123(R)-3, Transition
Election Related to Accounting for the Tax Effects of
Share-Based Payment Awards. FSP 123(R)-3 provides an
elective alternative transition method for calculating the pool
of excess tax benefits available to absorb tax deficiencies
recognized subsequent to the adoption of FAS 123R, which
the Corporation elected to utilize.
|
|
2.
|
New
Accounting Standards
|
Business
Combinations
In December 2007, the FASB issued FAS 141R, Business
Combinations, which establishes principles and requirements
for how an acquirer recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities
assumed, any non-controlling interest in the acquiree and the
goodwill acquired. FAS 141R also establishes disclosure
requirements which will enable users to evaluate the nature and
financial effects of the
60
business combination. FAS 141R is effective for the
Corporation for acquisitions made after January 1, 2009.
The Corporation has not yet determined the impact that the
adoption of FAS 141R will have on its consolidated
financial statements.
Noncontrolling
Interests in Consolidated Financial Statements
In December 2007, the FASB issued FAS 160,
Noncontrolling Interests in Consolidated Financial
Statements, which outlines the accounting and reporting for
ownership interest in a subsidiary held by parties other than
the parent. FAS 160 is effective for the Corporation on
January 1, 2009. The Corporation has not yet determined the
impact that the adoption of FAS 160 will have on its
consolidated financial statements.
Accounting
for Income Tax Benefits of Dividends on Share-Based Payment
Awards
In June 2007, the FASB ratified the consensus reached in
Emerging Issues Task Force (EITF)
06-11,
Accounting for Income Tax Benefits of Dividends on
Share-Based Payment Awards.
EITF 06-11
applies to companies that have share-based payment arrangements
that entitle employees to receive dividends or dividend
equivalents on equity-classified nonvested shares when those
dividends or dividend equivalents are charged to retained
earnings and result in an income tax deduction. Companies that
have share-based payment arrangements that fall within the scope
of
EITF 06-11
will be required to increase capital surplus for any realized
income tax benefit associated with dividend or dividend
equivalents paid to employees for equity classified nonvested
equity awards. Any increase recorded to capital surplus is
required to be included in a companys pool of excess tax
benefits that are available to absorb potential future tax
deficiencies on share-based payment awards. The Corporation will
be required to apply the new guidance prospectively beginning
January 1, 2008. While the Corporation is currently
evaluating the adoption of
EITF 06-11,
it is not expected to have a material effect on its consolidated
financial statements.
Accounting
for Collateral Assignment Split Dollar Life Insurance
In March 2007, the FASB ratified
EITF 06-10,
Accounting for Collateral Assignment Split Dollar Life
Insurance.
EITF 06-10
concludes that an employer should recognize a liability for the
postretirement benefit related to a collateral assignment split
dollar life insurance arrangement in accordance with either
FAS 106, Employers Accounting for Postretirement
Benefits Other Than Pensions, or APB Opinion No. 12,
Ominbus Opinion 1967, if the employer has
agreed to maintain a life insurance policy during the
employees retirement or to provide the employee with a
death benefit based on the substantive arrangement with the
employee.
EITF 06-10
also concludes that an employer should recognize and measure an
asset based on the nature and substance of the collateral
assignment split dollar life insurance arrangement. The
determination of the nature and substance of the arrangement
should involve an evaluation of all available information,
including an assessment of the future cash flows to which the
employer is entitled and the employees obligation and
ability to repay the employer.
EITF 06-10
is effective for fiscal years beginning after December 15,
2007. While the Corporation is currently evaluating the adoption
of
EITF 06-10,
it is not expected to have a material effect on its consolidated
financial statements.
The Fair
Value Option for Financial Assets and Financial
Liabilities
In February 2007, the FASB issued FAS 159, The Fair
Value Option for Financial Assets and Financial Liabilities,
which allows companies to report certain financial assets
and liabilities at fair value with the changes in fair value
included in earnings. In general, a company may elect the fair
value option for an eligible financial asset or financial
liability when it first recognizes the instrument on its balance
sheet or enters into an eligible firm commitment. A company may
also elect the fair value option for eligible items that exist
on the effective date of FAS 159. A companys decision
to elect the fair value option for an eligible item is
irrevocable. The Corporation will be required to apply the new
guidance prospectively beginning January 1, 2008. The
Corporation does not expect to elect the fair value option for
eligible financial assets or financial liabilities.
61
Employers
Accounting for Defined Benefit Pension and Other Postretirement
Plans
In September 2006, the 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 are
recognized in accumulated other comprehensive income, net of
taxes, until they are amortized as a component of net periodic
cost. The Corporation complied with the requirement under
FAS 158 to measure plan assets and benefit obligations as
of December 31, 2006, resulting in a $5.1 million
reduction to equity within accumulated other comprehensive
income, a decrease in prepaid pension asset of
$9.4 million, a decrease in accrued postretirement benefit
obligation of $1.5 million, and an increase in deferred tax
asset of $2.8 million.
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 the principle that fair value should be
based on the assumptions market participants would use when
pricing the asset or liability and establishes a fair value
hierarchy that prioritizes the information used to develop those
assumptions. The Corporation will be required to apply the new
guidance prospectively beginning January 1, 2008. While the
Corporation is currently evaluating the effect that the adoption
of FAS 157 will have on its consolidated financial
statements, the adoption is expected to result in an immaterial
increase to earnings, loans and other real estate owned due to
the changed definition of fair value under FAS 157.
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.
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.
62
Accounting
for Deferred Compensation and Postretirement Benefit Aspects of
Endorsement Split Dollar Life Insurance Arrangements
In September 2006, the FASB ratified
EITF 06-04,
Accounting for Deferred Compensation and Postretirement
Benefit Aspects of Endorsement Split Dollar Life Insurance
Arrangements.
EITF 06-04
concludes that an employer should recognize a liability for the
future benefits related to an endorsement split dollar life
insurance arrangement in accordance with either FAS 106 or
APB Opinion No. 12, Ominbus Opinion 1967.
EITF 06-04
is effective for fiscal years beginning after December 15,
2007. While the Corporation is currently evaluating the adoption
of
EITF 06-04,
it not expected to have a material effect on its consolidated
financial statements.
Accounting
for Uncertainty in Income Taxes
In July 2006, the FASB issued FIN 48. Under FIN 48, a
tax position is recognized as a benefit only if it is more
likely than not that the tax position would be sustained
in a tax examination, with a tax examination being presumed to
occur. The amount recognized is the largest amount of tax
benefit that is greater than 50% likely of being realized on
examination. For tax positions not meeting the more likely
than not test, no tax benefit is recorded. Details
relating to the adoption of FIN 48, which was effective
January 1, 2007, and the impact on the Corporations
consolidated financial statements are more fully discussed in
the Income Taxes footnote.
|
|
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 $294.4 million in
loans, and $256.5 million in deposits. Consideration paid
by the Corporation totaled $72.4 million and was 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 purchase
price allocation, the Corporation recorded $46.4 million in
goodwill and $4.3 million in core deposit intangible as a
result of the acquisition. None of the goodwill is deductible
for income tax purposes.
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 insurance 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, 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 and was
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 intangible 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, 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 intangible as a result of the
acquisition. None of the goodwill is deductible for income tax
purposes.
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.
Pending
Acquisitions
On November 9, 2007, the Corporation announced the signing
of a definitive merger agreement to acquire Omega Financial
Corporation (Omega), a diversified financial services company
with $1.8 billion in assets based in
63
State College, Pennsylvania. The all-stock transaction is valued
at approximately $393.0 million. Under the terms of the
merger agreement, Omega shareholders will receive
2.022 shares of F.N.B. Corporation common stock for each
share of Omega common stock. The transaction is expected to be
completed in the second quarter of 2008, pending regulatory and
stockholder approvals and the satisfaction of other closing
conditions.
On February 15, 2008, the Corporation announced the signing
of a definitive merger agreement to acquire Iron &
Glass Bancorp, Inc. (IRGB), a bank holding company with
approximately $300.0 million in assets based in Pittsburgh,
Pennsylvania. The transaction is valued at approximately
$86.1 million. Under the terms of the merger agreement,
IRGB shareholders will be entitled to receive either $75.00 cash
or 5.00 shares of F.N.B. Corporation common stock, or a
combination of cash and shares, for each share of IRGB stock,
subject to a proration of 45% cash and 55% stock, if either cash
or stock is oversubscribed. The transaction is expected to be
completed in the third quarter of 2008, pending regulatory
approvals, the approval of shareholders of IRGB and the
satisfaction of other closing conditions.
|
|
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 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
$0.2 million, $0.6 million and $1.3 million in
merger and integration charges in 2007, 2006 and 2005,
respectively, associated with the pending acquisition of Omega
in 2007 and the acquisitions of Legacy in 2006 and North East
and NSD in 2005.
64
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, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and other U.S. government agencies and corporations
|
|
$
|
161,969
|
|
|
$
|
870
|
|
|
$
|
|
|
|
$
|
162,839
|
|
Mortgage-backed securities of U.S. government agencies
|
|
|
71,329
|
|
|
|
1,076
|
|
|
|
(138
|
)
|
|
|
72,267
|
|
States of the U.S. and political subdivisions
|
|
|
71,169
|
|
|
|
676
|
|
|
|
(355
|
)
|
|
|
71,490
|
|
Corporate and other debt securities
|
|
|
50,480
|
|
|
|
57
|
|
|
|
(4,330
|
)
|
|
|
46,207
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities
|
|
|
354,947
|
|
|
|
2,679
|
|
|
|
(4,823
|
)
|
|
|
352,803
|
|
Equity securities
|
|
|
5,526
|
|
|
|
404
|
|
|
|
(312
|
)
|
|
|
5,618
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
360,473
|
|
|
$
|
3,083
|
|
|
$
|
(5,135
|
)
|
|
$
|
358,421
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65
Securities Held To Maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and other U.S. government agencies and corporations
|
|
$
|
11,004
|
|
|
$
|
47
|
|
|
$
|
|
|
|
$
|
11,051
|
|
Mortgage-backed securities of U.S. government agencies
|
|
|
547,046
|
|
|
|
2,059
|
|
|
|
(3,865
|
)
|
|
|
545,240
|
|
States of the U.S. and political subdivisions
|
|
|
102,179
|
|
|
|
335
|
|
|
|
(134
|
)
|
|
|
102,380
|
|
Corporate and other debt securities
|
|
|
7,324
|
|
|
|
20
|
|
|
|
(101
|
)
|
|
|
7,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
667,553
|
|
|
$
|
2,461
|
|
|
$
|
(4,100
|
)
|
|
$
|
665,914
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|