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EX-21 - EX-21 - FNB CORP/PA/l38910exv21.htm
EX-12 - EX-12 - FNB CORP/PA/l38910exv12.htm
EX-99.3 - EX-99.3 - FNB CORP/PA/l38910exv99w3.htm
EX-99.1 - EX-99.1 - FNB CORP/PA/l38910exv99w1.htm
EX-31.1 - EX-31.1 - FNB CORP/PA/l38910exv31w1.htm
EX-32.2 - EX-32.2 - FNB CORP/PA/l38910exv32w2.htm
EX-99.2 - EX-99.2 - FNB CORP/PA/l38910exv99w2.htm
EX-31.2 - EX-31.2 - FNB CORP/PA/l38910exv31w2.htm
EX-32.1 - EX-32.1 - FNB CORP/PA/l38910exv32w1.htm
EX-23 - EX-23 - FNB CORP/PA/l38910exv23.htm
Table of Contents

 
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, 2009
Commission file number 001-31940
 
F.N.B. CORPORATION
(Exact name of registrant as specified in its charter)
 
     
Florida   25-1255406
     
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)
     
One F.N.B. Boulevard, Hermitage, PA   16148
     
(Address of principal executive offices)   (Zip Code)
Registrant’s telephone number, including area code:
  724-981-6000
     
 
Securities registered pursuant to Section 12(b) of the Act:
 
         
Title of Each Class   Name of Exchange on which Registered
 
Common Stock, par value $0.01 per share     New York Stock Exchange  
 
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 whether the registrant has submitted electronically and posted on its Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o     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 registrant’s 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):
 
Large accelerated filer x Accelerated filer o Non-accelerated filer o Smaller reporting company o
(Do not check if a smaller reporting company)
 
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 registrant’s outstanding voting common stock held by non-affiliates on June 30, 2009, determined using a per share closing price on that date of $6.19, as quoted on the New York Stock Exchange, was $674,864,366.
 
As of January 31, 2010, the registrant had outstanding 114,311,658 shares of common stock.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
Portions of F.N.B. Corporation’s definitive proxy statement to be filed pursuant to Regulation 14A for the Annual Meeting of Stockholders to be held on May 19, 2010 are incorporated by reference into Part III, items 10, 11, 12, 13 and 14, of this Annual Report on Form 10-K. F.N.B. Corporation will file its definitive proxy statement with the Securities and Exchange Commission on or before April 30, 2010.
 


 

 
INDEX
 
             
        PAGE
 
           
           
           
  Business.     3  
           
  Risk Factors.     16  
           
  Unresolved Staff Comments.     22  
           
  Properties.     22  
           
  Legal Proceedings.     22  
           
  Submission of Matters to a Vote of Security Holders.     23  
           
           
           
  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.     24  
           
  Selected Financial Data.     26  
           
  Management’s Discussion and Analysis of Financial Condition and Results of Operations.     28  
           
  Quantitative and Qualitative Disclosures About Market Risk.     56  
           
  Financial Statements and Supplementary Data.     57  
           
  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.     120  
           
  Controls and Procedures.     120  
           
  Other Information.     120  
           
           
           
  Directors, Executive Officers and Corporate Governance.     121  
           
  Executive Compensation.     121  
           
  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.     121  
           
  Certain Relationships and Related Transactions, and Director Independence.     121  
           
  Principal Accountant Fees and Services.     122  
           
           
           
  Exhibits and Financial Statement Schedules.     122  
       
Signatures     123  
       
Index to Exhibits     125  
 EX-12
 EX-21
 EX-23
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2
 EX-99.1
 EX-99.2
 EX-99.3


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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 Corporation’s 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 Corporation’s business operations or performance. This Annual Report on Form 10-K (the Report) also includes forward-looking statements. See Cautionary Statement Regarding Forward-Looking Information in Item 7 of this Report.
 
ITEM 1.      BUSINESS
 
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, 2009, the Corporation had 224 Community Banking offices in Pennsylvania and Ohio and 57 Consumer Finance offices in those states and Tennessee. The Corporation, through its Community Banking affiliate, also had 4 commercial loan production offices in Pennsylvania and Florida 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 Corporation’s business strategy focuses primarily on providing quality, community-based financial services adapted to the needs of each of the markets it serves. The Corporation seeks to maintain its community orientation by providing local management with certain autonomy in decision-making, enabling them to respond to customer requests more quickly and to concentrate on transactions within their market areas. However, while the Corporation seeks to preserve some decision-making at a local level, it has centralized legal, loan review and underwriting, accounting, investment, audit, loan operations and data processing functions. The centralization of these processes enables the Corporation to maintain consistent quality of these functions and to achieve certain economies of scale.
 
As of December 31, 2009, the Corporation had total assets of $8.7 billion, loans of $5.8 billion and deposits of $6.4 billion. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and Item 8, “Financial Statements and Supplementary Data,” of this Report.
 
On January 9, 2009, the Corporation received a $100.0 million investment as part of its voluntary participation in the United States Treasury Department’s (UST) Capital Purchase Program (CPP) implemented pursuant to the Emergency Economic Stabilization Act (EESA) enacted on October 3, 2008.
 
On June 16, 2009, the Corporation completed a public offering of 24,150,000 shares of common stock at a price of $5.50 per share, including 3,150,000 shares of common stock purchased by the underwriters pursuant to an over-allotment option, which the underwriters exercised in full. The net proceeds of the offering after deducting underwriting discounts and commissions and offering expenses were $125.8 million.
 
On September 9, 2009, the Corporation utilized a portion of the proceeds of its public offering to redeem all of the preferred stock issued to the UST under the CPP implemented pursuant to the EESA. The Corporation paid $100.3 million to the UST to redeem the preferred stock issued by the Corporation in connection with its participation in the CPP. This amount includes the original investment amount of $100.0 million plus accrued unpaid dividends of approximately $0.3 million. In addition, as a condition of its participation in the CPP, the Corporation issued to the UST a warrant to purchase up to 1,302,083 shares of the Corporation’s common stock. However, under the terms of the CPP, the Corporation’s June 16, 2009 public offering automatically reduced the number of the Corporation’s shares of common stock subject to the warrant by one-half to 651,042 shares. The warrant remains outstanding and has an exercise price of $11.52 per share.


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Business Segments
 
In addition to the following information relating to the Corporation’s 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, 2009, 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 Corporation’s Community Banking segment consists of First National Bank of Pennsylvania (FNBPA), which 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 FNBPA’s 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 August 16, 2008 and April 1, 2008, the Corporation completed its acquisitions of Iron and Glass Bancorp, Inc. (IRGB) and Omega Financial Corporation (Omega), 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 Corporation’s other business segments.
 
As of December 31, 2009, the Corporation operates its Community Banking business through a network of 224 branches in Pennsylvania and Ohio.
 
Community Banking also includes three commercial loan production offices in Florida and one commercial loan production office in Pennsylvania. The underwriting for all loan production offices is centrally performed. The Florida offices have their business operations focused on managing the loan portfolio originated in prior years.
 
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 customer’s 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
 
The Corporation’s Wealth Management segment 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 businesses located within the Corporation’s geographic markets.


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The Corporation’s Wealth Management operations are conducted through three subsidiaries of the Corporation. The Corporation’s 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, 2009, the fair value of trust assets under management was approximately $2.2 billion. 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.
 
The Corporation’s Wealth Management segment also includes two other 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.
 
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 customer’s 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 Corporation’s Insurance segment operates principally through First National Insurance Agency, LLC (FNIA), which is a subsidiary of the Corporation. 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 Corporation’s 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 Corporation’s 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 Corporation’s lending subsidiaries. Additionally, FNBPA owns a direct subsidiary, First National 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 customer’s 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 Corporation’s Consumer Finance segment operates through its 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 Corporation’s subordinated notes at Regency’s 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 customer’s 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 seven other subsidiaries. F.N.B. Statutory Trust I, F.N.B. Statutory Trust II, Omega Financial Capital Trust I and Sun Bancorp Statutory Trust I issue trust preferred securities (TPS) 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,


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administer and repay the subordinated notes through which loans in the Consumer Finance segment are funded. F.N.B. Capital Corporation, LLC (FNB Capital), a merchant banking subsidiary, 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 “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 Pittsburgh International Airport. The Corporation also has three commercial loan production offices in Florida and one commercial loan production office in Pennsylvania. In addition to Pennsylvania and Ohio, the Corporation’s Consumer Finance segment also operates in northern and central Tennessee and central and southern Ohio.
 
The Corporation’s 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 Corporation’s 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 Regency’s 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 and protecting the security of customer information, 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, 2010, the Corporation and its subsidiaries had 2,028 full-time and 497 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 through the federal deposit insurance


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guarantee, 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.
 
Many aspects of the Corporation’s business are subject to rigorous regulation by the U.S. federal and state regulatory agencies and securities exchanges and by non-government agencies or regulatory bodies and securities exchanges. Certain of the Corporation’s public disclosure, internal control environment and corporate governance principles are subject to the Sarbanes-Oxley Act of 2002 and related regulations and rules of the SEC and the New York Stock Exchange, Inc. (NYSE). New laws or regulations or changes to existing laws and regulations (including changes in interpretation or enforcement) could materially adversely affect the Corporation’s financial condition or results of operations. As a financial institution, to the extent that different regulatory systems impose overlapping or inconsistent requirements on the conduct of the Corporation’s business, it faces increased complexity and additional costs in its compliance efforts.
 
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, 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 Corporation’s status as a public company and due to the nature of the business activities of certain of the Corporation’s subsidiaries. The Corporation’s common stock is listed on the NYSE under the trading symbol “FNB” and the Corporation is subject to the listed company rules of the NYSE.
 
The Corporation’s 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 business 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 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 UST 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 Corporation’s relationships and good standing with its regulators are of fundamental importance to the continuation and growth of the Corporation’s businesses. The FRB, OCC, FDIC and SEC have broad enforcement powers and authority to approve, deny or refuse to act upon


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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 Corporation’s 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 Corporation’s 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 company’s operating entities, such as its subsidiary broker-dealers, investment managers, merchant banking operations, investment companies, insurance companies and banks, are 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 subsidiaries.
 
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. The Corporation’s retail subsidiary national bank, FNBPA, owns and operates eleven interstate branch offices within Ohio.
 
Capital and Operational Requirements
 
The FRB, OCC and FDIC 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, due to its financial condition or actual or anticipated growth.
 
The FRB’s risk-based guidelines are based on 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 bank’s 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. The risk-based capital standards are designed to make regulatory capital requirements more sensitive to differences in credit and market risk profiles among banks and financial holding companies, to account for off-balance sheet exposure, and to minimize disincentives for holding liquid assets. Assets and off-balance sheet items are assigned to broad risk categories, each with appropriate weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance sheet items. At December 31, 2009, the Corporation’s tier 1 and total capital ratios under these guidelines were 11.42% and 12.88%, respectively. At December 31, 2009, the Corporation had $199.0 million of capital securities that qualified as tier 1 capital and $12.6 million of subordinated debt that qualified as tier 2 capital.
 
In addition, the FRB has established minimum leverage ratio guidelines for bank holding companies. These guidelines provide for a minimum ratio tier 1 capital to average total assets, less goodwill and certain other intangible assets (the leverage ratio), of 3.0% for bank holding companies that meet certain specified criteria, including the highest regulatory rating. All other bank holding companies generally are required to maintain a leverage ratio of at least 4.0%. The guidelines also provide that bank holding companies experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels without significant reliance on intangible assets. Further, the FRB has indicated that it will consider a “tangible tier 1 capital leverage ratio” (deducting all intangibles) and all other indicators of capital strength in evaluating proposals for expansion or new activities. The Corporation’s leverage ratio at December 31, 2009 was 8.68%.
 
Prompt Corrective Action
 
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA), among other things, classifies insured depository institutions into five capital categories (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 the appointment of a conservator or receiver. An “undercapitalized” bank must develop a capital restoration plan and its parent holding company must guarantee that bank’s 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 bank’s 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, the obligation under such guarantee would take priority over the parent’s 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 6.0%, a total risk-based capital ratio of at least 10.0% and a leverage ratio of at least 5.0% and not be subject to a capital directive order. Under these guidelines, FNBPA was considered well-capitalized as of December 31, 2009.


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When determining the adequacy of an institution’s capital, federal regulators must also take into consideration (a) concentrations of credit risk; (b) interest rate risk (when the interest rate sensitivity of an institution’s 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 institution’s ability to manage those risks. This evaluation is made as a part of the institution’s 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.
 
FDIC Insurance Assessments
 
In November 2006, the FDIC issued final regulations, as required by the Federal Deposit Insurance Reform Act of 2005, by which the FDIC established a new base rate schedule for the assessment of deposit insurance premiums and set new assessment rates. Under these regulations, each depository institution is assigned to a risk category based upon capital and supervisory measures. Depending upon the risk category to which it is assigned, the depository institution is then assessed insurance premiums based upon its deposits. Some depository institutions are entitled to apply against these premiums a credit that is designed to give effect to premium payments, if any, that the depository institution may have made in prior years.
 
A large portion of the Corporation’s insurance premium paid in 2009 was in the form of a special assessment charged to all FDIC-insured banks in the second quarter of 2009. In addition, the FDIC required all insured institutions to prepay three years of assessments on December 30, 2009, which required the Corporation to prepay $39.6 million in estimated FDIC premiums, with FDIC estimated assessments as follows: $2.5 million for 2009, $10.4 million for 2010, $13.0 million for 2011 and $13.7 million for 2012.
 
Under the Federal Deposit Insurance Act, the FDIC may terminate the insurance of an institution’s deposits upon finding that the institution has engaged in unsafe and unsound practices, is in an unsafe and unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. The Corporation does not know of any practice, condition or violation that might lead to termination of its deposit insurance.
 
FDIC Powers Upon Insolvency of Insured Depository Institutions
 
If the FDIC is appointed the conservator or receiver of an insured depository institution upon its insolvency or in certain other events, the FDIC has the power to:
 
  •     transfer any of the depository institution’s assets and liabilities to a new obligor without the approval of the depository institution’s creditors;
  •     enforce the terms of the depository institution’s contracts pursuant to their terms; and
  •     repudiate or disaffirm any contract or lease to which the depository institution is a party, the performance of which is determined by the FDIC to be burdensome and the disaffirmation or repudiation of which is determined by the FDIC to promote the orderly administration of the depository institution. Also, under applicable law, the claims of a receiver of an insured depository institution for administrative expense and claims of holders of U.S. deposit liabilities (including the FDIC, as subrogee of the depositors) have priority over the claims of other unsecured creditors of the institution in the event of the liquidation or other resolution of the institution. As a result, whether or not the FDIC would ever seek to repudiate any obligations held by public note holders, such persons would be treated differently from, and could receive, if anything, substantially less than the depositors of FNBPA.
 
Emergency Economic Stabilization Act of 2008 and Other Legislative Developments
 
Recent market and industry developments resulting from the unprecedented turmoil, volatility and illiquidity in U.S. and worldwide financial markets, accompanied by uncertain prospects for sustaining a fragile economic recovery, prompted the U.S. federal government, including the UST, FRB, FDIC, and SEC, to embark on


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a number of initiatives designed to stabilize and restore confidence in the financial services industry. These efforts, which may continue to evolve, include the EESA, the American Recovery and Reinvestment Act of 2009 (ARRA), and other legislative, administrative and regulatory initiatives, including the UST’s CPP, the FDIC’s Temporary Liquidity, Guaranty Program (TLGP) and the FRB’s commercial paper funding facility.
 
On January 9, 2009, the Corporation issued to the UST 100,000 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series C (Series C Preferred Stock) with a liquidation preference of $1,000 per share together with a related warrant to purchase shares of common stock of the Corporation, in accordance with the terms of the CPP. Subsequently, on September 9, 2009, the Corporation redeemed all of the preferred stock issued to the UST under the CPP and repaid all accrued but unpaid dividends through the date of the repurchase.
 
With respect to deposit insurance, the EESA authorizes the FDIC to increase the maximum deposit insurance amount up to $250,000 until December 31, 2013, and removes the statutory limits on the FDIC’s ability to borrow from the UST during this period. In addition, the FDIC established a TLGP under which the FDIC provides a guaranty for newly-issued senior unsecured debt and non-interest bearing transaction deposit accounts at eligible insured institutions. For non-interest bearing transaction deposit accounts, a ten basis point annual rate charge will be applied to deposit amounts in excess of $250,000. The Corporation participates in the TLGP.
 
Due to the current economic environment and issues confronting the financial services industry, as well as certain initiatives being considered by the current administration, the Corporation anticipates new legislative and regulatory initiatives over the next several years, including many focused specifically on banking and other financial services in which the Corporation is engaged. These initiatives will be in addition to the actions already undertaken by Congress and the regulators, including the EESA and the ARRA. Developments today, as well as those that come in the future, have had and are likely to continue to have an impact on the conduct of the Corporation’s business.
 
Community Reinvestment Act
 
The Community Reinvestment Act of 1977 (CRA) requires depository institutions to assist in meeting the credit needs of their market areas consistent with safe and sound banking practices. 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 (USA Patriot Act) substantially broadened the scope of U.S. 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 U.S. The UST has issued a number of regulations that apply various requirements of the USA Patriot Act to


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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 U.S. 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 UST 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.
 
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:
 
  •     require banks to disclose credit terms in meaningful and consistent ways;
  •     prohibit discrimination against an applicant in any consumer or business credit transaction;
  •     prohibit discrimination in housing-related lending activities;
  •     require banks to collect and report applicant and borrower data regarding loans for home purchases or improvement projects;
  •     require lenders to provide borrowers with information regarding the nature and cost of real estate settlements;
  •     prohibit certain lending practices and limit escrow account amounts with respect to real estate transactions; and
  •     prescribe possible penalties for violations of the requirements of consumer protection statutes and regulations.
 
On November 17, 2009, the FRB published a final rule amending Regulation E, which implements the Electronic Fund Transfer Act. The final rule limits the ability of a financial institution to assess an overdraft fee for paying automated teller machine transactions and one-time debit card transactions that overdraw a customer’s account, unless the customer affirmatively consents, or opts in, to the institution’s payment of overdrafts for these transactions.
 
There have been numerous attempts at the federal level to expand consumer protection measures. A major focus of recent legislation has been aimed at the creation of a consumer financial protection agency that would be dedicated to administering and enforcing fair lending and consumer compliance laws with respect to financial products. If enacted, such legislation may have a substantial impact on FNBPA’s operations. However, because any final legislation may differ significantly from current proposals, the specific effects of the legislation cannot be evaluated at this time.


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Dividend Restrictions
 
The Corporation’s 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. Additionally, FNBPA requires prior approval of the OCC for the payment of a dividend if the total of all dividends declared in a calendar year would exceed the total of its net income for the year combined with its retained net income for the two preceding years. 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 the Corporation’s 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 Corporation’s 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 FDIC’s 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, capital ratios below well-capitalized levels, regulatory concerns regarding management, controls, assets, operations or other factors can all potentially result in the loss of financial holding company status, 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.
 
Financial Holding Companies Status and Activities
 
Under the BHC Act, an eligible bank holding company may elect to be a “financial holding company” and thereafter may engage in a range of activities that are financial in nature and that were not previously permissible for banks and bank holding companies. The financial holding company may engage directly or through a subsidiary in certain statutorily authorized activities. A financial holding company may also engage in any activity that has been determined by rule or order to be financial in nature, incidental to such financial activity, or (with prior FRB approval) complementary to a financial activity and that does not pose substantial risk to the safety and soundness of an institution or to the financial system generally. In addition to these activities, a financial holding company may engage in those activities permissible for a bank holding company that has not elected to be treated as a financial holding company.


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For a bank holding company to be eligible for financial holding company status, all of its subsidiary U.S. depository institutions must be “well-capitalized” and “well-managed.” The FRB generally must deny expanded authority to any bank holding company with a subsidiary insured depository institution that received less than a satisfactory rating on its most recent CRA review as of the time it submits its request for financial holding company status. If, after becoming a financial holding company and undertaking activities not permissible for a bank holding company under the BHC Act, the company fails to continue to meet any of the requirements for financial holding company status, the company must enter into an agreement with the FRB to comply with all applicable capital and management requirements. If the company does not return to compliance within 180 days, the FRB may order the company to divest its subsidiary banks or the company may discontinue or divest investments in companies engaged in activities permissible only for a bank holding company that has elected to be treated as a financial holding company.
 
Activities and Acquisitions
 
The BHC Act requires a bank holding company to obtain the prior approval of the FRB before it:
 
  •     may acquire direct or indirect ownership or control of any voting shares of any bank or savings and loan association, if after such acquisition the bank holding company will directly or indirectly own or control more than five percent of any class of voting securities of the institution;
  •     or any of its subsidiaries, other than a bank, may acquire all or substantially all of the assets of any bank or savings and loan association; or
  •     may merge or consolidate with any other bank holding company.
 
The Interstate Banking Act generally permits bank holding companies to acquire banks in any state, and preempts all state laws restricting the ownership by a bank holding company of banks in more than one state. The Interstate Banking Act also permits:
 
  •     a bank to merge with an out-of-state bank and convert any offices into branches of the resulting bank if both states have not opted out of interstate branching;
  •     a bank to acquire branches from an out-of-state bank if the law of the state where the branches are located permits the interstate branch acquisition; and
  •     banks to establish and operate de novo interstate branches whenever the host state opts-in to de novo branching.
 
Bank holding companies and banks seeking to engage in transactions authorized by the Interstate Banking Act must be adequately capitalized and managed.
 
The Change in Bank Control Act prohibits a person, entity or group of persons or entities acting in concert, from acquiring “control” of a bank holding company or bank unless the FRB has been given prior notice and has not objected to the transaction. Under FRB regulations, the acquisition of 10% or more of a class of voting stock of a corporation would, under the circumstances set forth in the regulations, create a rebuttable presumption of acquisition of control of the corporation.
 
Transactions between FNBPA and its Respective Subsidiaries
 
Certain transactions (including loans and credit extensions from FNBPA) between FNBPA and the Corporation and/or its affiliates and subsidiaries are subject to quantitative and qualitative limitations, collateral requirements, and other restrictions imposed by statute and FRB regulation. Transactions subject to these restrictions are generally required to be made on an arms-length basis. These restrictions generally do not apply to transactions between FNBPA and its direct wholly-owned subsidiaries.


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Securities and Exchange Commission
 
The Corporation is also subject to regulation by the SEC by virtue of the Corporation’s status as a public company and due to the nature of the business activities of certain subsidiaries.
 
The Sarbanes-Oxley Act of 2002 (SOX) contains important requirements for public companies in the area of financial disclosure and corporate governance. In accordance with section 302(a) of SOX, written certifications by the Corporation’s Chief Executive Officer (CEO) and Chief Financial Officer (CFO) are required with respect to each of the Corporation’s 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 SOX, 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 Corporation’s 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 SEC’s 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 Corporation’s 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 Regency’s 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 Regency’s 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.


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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 certain 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 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 makes available on its website at www.fnbcorporation.com, 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 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 Corporation’s reproduction costs will be charged for any requested exhibits to these documents. The public may read and copy the materials the Corporation files with the SEC at the SEC’s Public Reference Room, located at 100 F Street, NE, Washington, D.C. 20549. The public may obtain information regarding the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The public may also read and copy the materials the Corporation files with the SEC by visiting the SEC’s website at www.sec.gov. The Corporation’s common stock is traded on the NYSE under the symbol “FNB”.
 
ITEM 1A.      RISK FACTORS
 
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 profitability with the risks associated with its business activities. The objective of risk management is not to eliminate risk, but to identify and accept risk and then manage risk effectively so as to optimize total shareholder value.


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The Corporation has identified five major categories of risk: credit risk, market risk, liquidity risk, operational risk and compliance risk. The Corporation more fully describes credit risk, market risk and liquidity risk, and the programs the Corporation’s management has implemented to address these risks, in the Market Risk section of Management’s 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 following discussion highlights specific risks that could affect the Corporation and its businesses. You should carefully consider each of the following risks and all of the other information set forth in this Report. Based on the information currently known, the Corporation believes that the following information identifies the most significant risk factors affecting the Corporation. However, the risks and uncertainties the Corporation faces are not limited to those described below. Additional risks and uncertainties not presently known or that the Corporation currently believes to be immaterial may also adversely affect its business.
 
If any of the following risks and uncertainties develop into actual events or if the circumstances described in the risks and uncertainties occur or continue to occur, these events or circumstances could have a material adverse affect on the Corporation’s business, financial condition or results of operations. These events could also have a negative affect on the trading price of the Corporation’s securities.
 
The Corporation’s results of operations are significantly affected by the ability of its borrowers to repay their loans.
 
Lending money is an essential part of the banking business. However, borrowers do not always repay their loans. The risk of non-payment is affected by:
 
  •     credit risks of a particular borrower;
  •     changes in economic and industry conditions;
  •     the duration of the loan; and
  •     in the case of a collateralized loan, uncertainties as to the future value of the collateral.
 
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 Management’s 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 borrower’s 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 Corporation’s 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 Corporation’s 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 as of the reporting date. The Corporation periodically determines the amount of its allowance for loan losses based upon consideration of several quantitative and qualitative factors including, but not limited to, the following:
 
  •     a regular review of the quality, mix and size of the overall loan portfolio;
  •     historical loan loss experience;
  •     evaluation of non-performing loans;


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  •     geographic concentration;
  •     assessment of economic conditions and their effects on the Corporation’s existing portfolio; and
  •     the amount and quality of collateral, including guarantees, securing loans.
 
For additional discussion relating to this matter, refer to the Allowance and Provision for Loan Losses section of Management’s Discussion and Analysis of Financial Condition and Results of Operations, which is included in Item 7 of this Report.
 
Changes in economic conditions and the composition of the Corporation’s loan portfolio could lead to higher loan charge-offs or an increase in the Corporation’s provision for loan losses and may reduce the Corporation’s net income.
 
Changes in national and regional economic conditions continue to impact the loan portfolios of the Corporation. For example, an increase in unemployment, a decrease in real estate values or changes in interest rates, as well as other factors, have weakened 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 Corporation’s products or services; borrowers may not be able to repay their loans; the value of the collateral securing the Corporation’s loans to borrowers may decline; and the quality of the Corporation’s 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.
 
The Corporation may continue to be adversely affected by the downturn in Florida real estate markets.
 
Many Florida real estate markets, including the markets in Orlando, Sarasota and Tampa, where the Corporation had operated loan production offices, continued to decline in value throughout 2009 and may continue to undergo further declines. The Corporation operates three commercial loan production offices in the Florida market and is therefore exposed to the further weakening real estate conditions in the Florida geographic region. During a period of prolonged general economic downturn in the Florida market, the Corporation may experience further increases in non-performing assets, net charge-offs and provisions for loan losses.
 
The Corporation’s 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 Corporation’s ability to raise additional capital, if needed, will depend on conditions in the capital markets at that time, which are outside of the Corporation’s control, and on the Corporation’s financial performance. Accordingly, there can be no assurance of the Corporation’s ability to expand its operations through internal growth and acquisitions could be materially impaired. As such, the Corporation may be forced to delay raising capital, issue shorter term securities than desired or bear an unattractive cost of capital, which could decrease profitability and significantly reduce financial flexibility.
 
In the event current sources of liquidity, including internal sources, do not satisfy the Corporation’s needs, the Corporation would be required to seek additional financing. The availability of additional financing will depend on a variety of factors such as market conditions, the general availability of credit, the overall availability of credit to the financial services industry, the Corporation’s credit ratings and credit capacity, as well as the possibility that lenders could develop a negative perception of the Corporation’s long- or short-term financial prospects if the Corporation incurs large credit losses or if the level of business activity decreases due to economic conditions.


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The actions of the U.S. Government for the purpose of stabilizing the financial markets, or market response to those actions, may not achieve the intended effect, and the Corporation’s results of operations could be adversely affected.
 
In response to the financial issues affecting the banking system and financial markets and going concern threats to investment banks and other financial institutions, the U.S. Congress enacted the EESA. The EESA provides the UST with the authority to establish the Troubled Asset Relief Program (TARP) to purchase from financial institutions up to $700 billion of residential or commercial mortgages and any securities, obligations or other instruments that are based on or related to such mortgages.
 
As part of the EESA, the UST has developed a CPP to purchase up to $250 billion in senior preferred stock from qualifying financial institutions. The CPP was designed to strengthen the capital and liquidity positions of viable institutions and to encourage banks and thrifts to increase lending to creditworthy borrowers. The EESA also increased the insurance coverage of deposit accounts to $250,000 per depositor. In a related action, the FDIC established a TLGP under which the FDIC provides a guarantee for newly-issued senior unsecured debt and non-interest bearing transaction deposit accounts at eligible insured institutions. For non-interest bearing transaction deposit accounts, a 10 basis point annual rate surcharge will be applied to deposit amounts in excess of $250,000. Although the Corporation was a participant in the CPP in 2009, the Corporation redeemed all of the preferred shares issued to the UST on September 9, 2009 and therefore is no longer a participant in the CPP. The Corporation has opted to participate in the TLGP.
 
The U.S. Congress or federal banking regulatory agencies could adopt additional regulatory requirements or restrictions in response to the threats to the financial system and such changes may adversely affect the operations of the Corporation and FNBPA.
 
The Corporation’s status as a holding company makes it dependent on dividends from its subsidiaries to meet its financial obligations and pay dividends to stockholders.
 
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 cash and the stock of its subsidiaries. Accordingly, the Corporation depends on dividends from its subsidiaries to meet its financial obligations and to pay dividends to stockholders. The Corporation’s 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 FNBPA is in an unsound or unsafe condition or that the payment would be an unsafe and unsound banking practice.
 
The Corporation’s results of operations may be adversely affected if asset valuations cause other-than-temporary impairment or goodwill impairment charges.
 
The Corporation may be required to record future impairment charges on its investment securities if they suffer declines in value that are considered other-than-temporary. Numerous factors, including lack of liquidity for re-sales of certain investment securities, absence of reliable pricing information for investment securities, adverse changes in business climate, adverse actions by regulators, or unanticipated changes in the competitive environment could have a negative effect on the Corporation’s investment portfolio in future periods. If an impairment charge is significant enough it could affect the ability of FNBPA to pay dividends to the Corporation, which could have a material adverse effect on the Corporation’s liquidity and its ability to pay dividends to stockholders and could also negatively impact its regulatory capital ratios and result in FNBPA not being classified as “well-capitalized” for regulatory purposes.


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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, OCC and 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, tax laws and accounting principles. Changes in regulations or the regulatory environment could adversely affect the banking and financial services industry as a whole and could limit the Corporation’s growth and the return to investors by restricting such activities as:
 
  •     the payment of dividends;
  •     mergers with or acquisitions of other institutions;
  •     investments;
  •     loans and interest rates;
  •     fees assessed for consumer deposit accounts;
  •     the provision of securities, insurance or trust services; and
  •     the types of non-deposit activities in which the Corporation’s financial institution subsidiaries may engage.
 
Adverse economic conditions in the Corporation’s market area may adversely impact its results of operations and financial condition.
 
The substantial portion of the Corporation’s business is concentrated in western and central Pennsylvania and eastern Ohio, which over recent years has been a slower growth market than other areas of the United States. As a result, FNBPA’s loan portfolio and results of operations may be adversely affected by factors that have a significant impact on the economic conditions in this market area. The local economies of this market area have historically been less robust than the economy of the nation as a whole and may not be subject to the same fluctuations as the national economy. Adverse economic conditions in this market area, including the loss of certain significant employers, could reduce its growth rate, affect its borrowers’ ability to repay their loans and generally affect the Corporation’s financial condition and results of operations. Furthermore, a downturn in real estate values in FNBPA’s market area could cause many of its loans to become inadequately collateralized.
 
The Corporation’s deposit insurance premiums could be substantially higher in the future which would have an adverse effect on the Corporation’s future earnings.
 
The FDIC insures deposits at FDIC-insured financial institutions, including FNBPA. The FDIC charges the insured financial institutions premiums to maintain the Deposit Insurance Fund at a certain level. Current economic conditions have increased bank failures and expectations for further failures, in which case the FDIC would pay all deposits of a failed bank up to the insured amount from the Deposit Insurance Fund. In December 2008, the FDIC adopted a rule that would increase premiums paid by insured institutions and make other changes to the assessment system. In December 2009, the FDIC required banks to pay their fourth quarter 2009 premiums plus prepay all of the 2010, 2011 and 2012 insurance premiums. On December 30, 2009, FNBPA prepaid $39.6 million in FDIC insurance premiums. Further increases and additional premium assessments in deposit insurance premiums could adversely affect the Corporation’s net income in the future.
 
The Corporation’s 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 Corporation’s customer relationship management, general ledger, deposit, loan and other systems. Although 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


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occur or, if they do occur, that they will be adequately addressed. The occurrence of any failures, interruptions or security breaches of the Corporation’s 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 Corporation’s financial condition and results of operations.
 
Certain provisions of the Corporation’s Articles of Incorporation and By-laws and Florida law may discourage takeovers.
 
The Corporation’s 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 Corporation’s Board of Directors. In particular, the Corporation’s Articles of Incorporation and By-laws:
 
  •     currently classify its Board of Directors into three classes, so that stockholders elect only one-third of its Board of Directors each year (provided, however, that this classified structure will be phased out by 2011);
  •     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 Corporation’s 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 Corporation’s voting shares for stockholder amendments to its By-laws;
 
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 corporation’s disinterested directors. In 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 corporation’s disinterested stockholders.
 
These provisions of the Corporation’s 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 Corporation’s stockholders may consider such proposals desirable. Such provisions could also make it more difficult for third parties to remove and replace members of the Corporation’s 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 Corporation’s common stock, and may also inhibit increases in the trading price of the Corporation’s common stock that could result from takeover attempts.
 
The Corporation is exposed to risk of environmental liabilities with respect to properties to which it takes title.
 
Portions of the Corporation’s 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 emanating from the property. If the Corporation ever becomes subject to significant environmental liabilities, the Corporation’s business, financial condition, liquidity and results of operations could be materially and adversely affected.


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The Corporation’s key assets include its brand and reputation and the Corporation’s business may be affected by how it is perceived in the market place.
 
The Corporation’s brand and its attributes are key assets of the Corporation. The Corporation’s ability to attract and retain banking, insurance, consumer finance, wealth management, merchant banking and corporate clients is highly dependent upon the external perceptions of its level of service, trustworthiness, business practices and financial condition. Negative perceptions or publicity regarding these matters could damage the Corporation’s representation among existing customers and corporate clients, which could make it difficult for the Corporation to attract new clients and maintain existing ones. Adverse developments with respect to the financial services industry may also, by association, negatively impact the Corporation’s representation, or result in greater regulatory or legislative scrutiny or litigation against the Corporation. Although the Corporation monitors developments for areas of potential risk to its representation and brand, negative perceptions or publicity could materially and adversely affect the Corporation’s revenues and profitability.
 
ITEM 1B.      UNRESOLVED STAFF COMMENTS
 
NONE.
 
ITEM 2.      PROPERTIES
 
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. Additionally, the Corporation owns a two-story building in Hermitage, Pennsylvania that serves as its data processing and technology center.
 
The Community Banking segment has 224 offices, located in 31 counties in Pennsylvania and four counties in Ohio, of which 163 are owned and 61 are leased. Community Banking also leases its four loan production offices. The Consumer Finance segment has 57 offices, located in 18 counties in Pennsylvania, 16 counties in Tennessee and 14 counties in Ohio, of which one is owned and 56 are leased. The operating leases for the Community Banking and Consumer Finance segments expire at various dates through the year 2030 and generally include options to renew. 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 or a subsidiary acted as one or more of the following: a depository bank, 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 Corporation’s 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.
 
On December 29, 2009, FNBPA and Regency reached an agreement covering an action in which the plaintiffs alleged that FNBPA and Regency violated the Pennsylvania commercial code. The agreement contemplates settlement of the claims on a class wide basis and is subject to approval of the court. Under the terms of the settlement, FNBPA and Regency established a settlement fund for distribution to settlement class members on a pro


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rata basis and release certain deficiency balances owed by class members, in exchange for a complete release of all claims by the plaintiffs and the class. Attorney fees also will be paid out of the settlement fund. Class members will receive notice of the settlement agreement and be afforded an opportunity to opt out of the settlement class. The Corporation anticipates that the proposed settlement will be approved by the court, at the agreed upon terms. The Corporation recorded net expense of $1.1 million during 2009 associated with the proposed settlement.
 
ITEM 4.      SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
NONE.
 
EXECUTIVE OFFICERS OF THE REGISTRANT
 
The name, age and principal occupation for each of the executive officers of the Corporation as of December 31, 2009 is set forth below:
 
             
Name   Age   Principal Occupation
 
           
Stephen J. Gurgovits
    66     President and Chief Executive Officer of the Corporation;
Chairman and Chief Executive Officer of FNBPA
           
Vincent J. Calabrese
    47     Chief Financial Officer of the Corporation;
Senior Vice President of FNBPA
           
Vincent J. Delie
    45     Executive Vice President and Chief Revenue Officer of the Corporation;
President of FNBPA
           
Scott D. Free
    46     Treasurer and Vice President of the Corporation;
Treasurer and Senior Vice President of FNBPA
           
Gary L. Guerrieri
    49     Executive Vice President of FNBPA
           
Brian F. Lilly
    51     Executive Vice President and Chief Operating Officer of the Corporation;
Chief Administrative Officer of FNBPA
           
Louise C. Lowrey
    56     Executive Vice President of FNBPA
           
David B. Mogle
    59     Corporate Secretary and Vice President of the Corporation;
Secretary and Senior Vice President of FNBPA
           
James G. Orie
    51     Chief Legal Officer and Vice President of the Corporation;
Senior Vice President of FNBPA
           
Timothy G. Rubritz
    55     Corporate Controller and Senior Vice President of the Corporation
 
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 Corporation’s Board of Directors, subject in certain cases to the terms of an employment agreement between the officer and the Corporation.


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PART II.
 
ITEM 5.      MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
The Corporation’s common stock is listed on the 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 2009 and 2008. The table also shows dividends per share paid on the outstanding common stock during those periods. As of January 31, 2010, there were 12,735 holders of record of the Corporation’s common stock.
 
                         
    Low     High     Dividends  
 
Quarter Ended 2009
                       
March 31
  $ 5.14     $ 13.71     $ 0.12  
June 30
    5.74       9.31       0.12  
September 30
    5.86       8.07       0.12  
December 31
    6.32       7.45       0.12  
Quarter Ended 2008
                       
March 31
  $ 12.52     $ 16.50     $ 0.24  
June 30
    11.74       16.99       0.24  
September 30
    9.30       20.70       0.24  
December 31
    9.59       16.68       0.24  
 
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 2009.


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STOCK PERFORMANCE GRAPH
 
Comparison of Total Return on F.N.B. Corporation’s Common Stock with Certain Averages
 
The following five-year performance graph compares the cumulative total shareholder return (assuming reinvestment of dividends) on the Corporation’s 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, 2004, 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
 
Performance Graph


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ITEM 6.      SELECTED FINANCIAL DATA
Dollars in thousands, except per share data
 
                                         
Year Ended December 31   2009     2008     2007     2006     2005  
 
Total interest income
  $ 387,722     $ 409,781     $ 368,890     $ 342,422     $ 295,480  
Total interest expense
    121,179       157,989       174,053       153,585       108,780  
Net interest income
    266,543       251,792       194,837       188,837       186,700  
Provision for loan losses
    66,802       72,371       12,693       10,412       12,176  
Total non-interest income
    105,978       86,115       81,609       79,275       57,807  
Total non-interest expense
    255,339       222,704       165,614       160,514       155,226  
Net income
    41,111       35,595       69,678       67,649       55,258  
Net income available to common stockholders
    32,803       35,595       69,678       67,649       55,258  
                                         
At Year-End
                                       
Total assets
  $ 8,709,077     $ 8,364,811     $ 6,088,021     $ 6,007,592     $ 5,590,326  
Net loans
    5,744,706       5,715,650       4,291,429       4,200,569       3,698,340  
Deposits
    6,380,223       6,054,623       4,397,684       4,372,842       4,011,943  
Short-term borrowings
    669,167       596,263       449,823       363,910       378,978  
Long-term and junior subordinated debt
    529,588       695,636       632,397       670,921       662,569  
Total stockholders’ equity
    1,043,302       925,984       544,357       537,372       477,202  
                                         
Per Common Share
                                       
Basic earnings per share
  $ 0.32     $ 0.44     $ 1.16     $ 1.15     $ 0.99  
Diluted earnings per share
    0.32       0.44       1.15       1.14       0.98  
Cash dividends declared
    0.48       0.96       0.95       0.94       0.925  
Book value
    9.14       10.32       8.99       8.90       8.31  
                                         
Ratios
                                       
Return on average assets
    0.48 %     0.46 %     1.15 %     1.15 %     0.99 %
Return on average tangible assets
    0.57       0.55       1.25       1.25       1.07  
Return on average equity
    3.87       4.20       12.89       13.15       12.44  
Return on average tangible equity
    9.30       10.63       26.23       26.30       23.62  
Return on average tangible common equity
    8.74       10.63       26.23       26.30       23.62  
Dividend payout ratio
    149.50       219.91       82.45       81.84       94.71  
Average equity to average assets
    12.35       11.01       8.93       8.73       7.97  


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QUARTERLY EARNINGS SUMMARY (Unaudited)
Dollars in thousands, except per share data
 
                                 
Quarter Ended 2009   Dec. 31     Sept. 30     June 30     Mar. 31  
 
Total interest income
    $96,053       $96,533       $97,034       $98,102  
Total interest expense
    26,468       28,989       31,702       34,020  
Net interest income
    69,585       67,544       65,332       64,082  
Provision for loan losses
    25,924       16,455       13,909       10,514  
Gain on sale of securities
    30       154       66       278  
Impairment loss on securities
    (3,659 )     (3,291 )     (740 )     (203 )
Other non-interest income
    29,016       27,099       29,124       28,104  
Total non-interest expense
    65,781       62,321       66,265       60,972  
Net income
    4,556       10,306       10,598       15,651  
Net income available to common stockholders
    4,556       4,810       9,129       14,308  
                                 
Per Common Share
                               
Basic earnings per share
    $0.04       $0.04       $0.10       $0.16  
Diluted earnings per share
    0.04       0.04       0.10       0.16  
Cash dividends declared
    0.12       0.12       0.12       0.12  
 
                                 
Quarter Ended 2008   Dec. 31     Sept. 30     June 30     Mar. 31  
 
Total interest income
    $107,158       $108,801       $105,297       $88,525  
Total interest expense
    38,793       39,896       39,740       39,560  
Net interest income
    68,365       68,905       65,557       48,965  
Provision for loan losses
    51,298       6,514       10,976       3,583  
Gain on sale of securities
    6       33       41       754  
Impairment loss on securities
    (16,699 )     (24 )     (456 )     (10 )
Other non-interest income
    24,951       28,224       27,871       21,424  
Total non-interest expense
    58,416       57,911       62,014       44,363  
Net income (loss)
    (18,906 )     23,505       14,505       16,491  
                                 
Per Common Share
                               
Basic earnings (loss) per share
    $(0.21 )     $0.27       $0.17       $0.27  
Diluted earnings (loss) per share
    (0.21 )     0.27       0.17       0.27  
Cash dividends declared
    0.24       0.24       0.24       0.24  


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ITEM 7.      MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Management’s 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 Report are “forward-looking” within the meaning of the Private Securities Litigation Reform Act of 1995. Such 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 management’s 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 Corporation’s 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 Corporation’s consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (GAAP). 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 are based to a greater extent on estimates, assumptions and judgments of management 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 the Corporation values significant assets and liabilities in the consolidated financial statements and how the Corporation determines those values
 
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 management’s periodic evaluation of the adequacy of the allowance.


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Estimating the amount of the allowance for loan losses is based to a significant extent on the judgment and estimates of management regarding the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience and consideration of current economic trends and conditions, all of which may be susceptible to significant change.
 
Management’s 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 specific credit allocations for individual impaired loans are based on ongoing 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 underlying collateral and 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 borrower’s 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 acquisitions and expanding 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 qualitative factors 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; market uncertainty and illiquidity; 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 is particularly dependent on the judgment of management.
 
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 may adversely affect the Corporation’s 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 consist of debt securities and certain equity securities, comprise a significant portion of the Corporation’s consolidated balance sheet. Such securities can be classified as “trading,” “securities held to maturity” or “securities available for sale.”


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Securities are classified as trading securities when management intends to sell such securities in the near term and are carried at fair value, with unrealized gains (losses) reflected through the consolidated statement of income. The Corporation acquired securities in conjunction with the Omega acquisition that the Corporation classified as trading securities. The Corporation both acquired and sold these trading securities during the second quarter of 2008. As of December 31, 2009 and 2008, the Corporation did not hold any trading securities.
 
Securities held to maturity are comprised of debt securities, which were purchased with management’s 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 and OTTI, if any.
 
Securities that are not classified as trading or held to maturity are classified as available for sale. The Corporation’s 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 deemed to be temporary and unrealized losses deemed to be other-than-temporary and attributable to non-credit factors 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 credit-related other-than-temporary impairment (OTTI) 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.
 
The Corporation evaluates its investment securities portfolio for OTTI on a quarterly basis. Impairment is assessed at the individual security level. An investment security is considered impaired if the fair value of the security is less than its cost or amortized cost basis.
 
The Corporation’s OTTI evaluation process is performed in a consistent and systematic manner and includes an evaluation of all available evidence. Documentation of the process is extensive as necessary to support a conclusion as to whether a decline in fair value below cost or amortized cost is other-than-temporary and includes documentation supporting both observable and unobservable inputs and a rationale for conclusions reached.
 
This process considers factors such as the severity, length of time and anticipated recovery period of the impairment, recent events specific to the issuer, including investment downgrades by rating agencies and economic conditions of its industry, and the issuer’s financial condition, capital strength and near-term prospects. The Corporation also considers its intent to sell the security and whether it is more likely than not that the Corporation would be required to sell the security prior to the recovery of its amortized cost basis. Among the factors that are considered in determining the Corporation’s intent to sell the security or whether it is more likely than not that the Corporation would be required to sell the security is a review of its capital adequacy, interest rate risk position and liquidity.
 
The assessment of a security’s ability to recover any decline in fair value, the ability of the issuer to meet contractual obligations, and the Corporation’s intent and ability to retain the security require considerable judgment. The unrealized losses of $16.4 million on pooled TPS have been recognized on the balance sheet, however future charges to earnings could result if expected cash flows deteriorate.
 
Debt securities with credit ratings below AA at the time of purchase that are repayment-sensitive securities are evaluated using the guidance of ASC (Accounting Standards Codification) Topic 320, Investments - Debt Securities.
 
Goodwill and Other Intangible Assets
 
As a result of acquisitions, the Corporation has acquired goodwill and identifiable intangible assets. Goodwill represents the cost of acquired companies in excess of the fair value of net assets, including identifiable intangible assets, at the acquisition date. The Corporation’s recorded goodwill relates to value inherent in its Community Banking, Wealth Management and Insurance segments.


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The value of goodwill and other identifiable intangibles is dependent upon the Corporation’s ability to provide quality, cost-effective services in the face of competition. As such, these values are 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 Corporation’s inability to deliver cost effective services over sustained periods can lead to impairment in value which could result in additional expense and adversely impact earnings in future periods.
 
Other identifiable intangible assets such as core deposit intangibles and customer and renewal lists are amortized over their estimated useful lives.
 
The two-step impairment test is used to identify potential goodwill impairment and measure the amount of impairment loss to be recognized, if any. The first step compares the fair value of a reporting unit with its carrying amount. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired and the second step of the test is not necessary. If the carrying amount of a reporting unit exceeds its fair value, the second step is performed to measure impairment loss, if any. Under the second step, the fair value is allocated to all of the assets and liabilities of the reporting unit to determine an implied goodwill value. This allocation is similar to a purchase price allocation performed in purchase accounting. If the implied goodwill value of a reporting unit is less than the carrying amount of that goodwill, an impairment loss is recognized in an amount equal to that difference.
 
Determining fair values of a reporting unit, of its individual assets and liabilities, and also of other identifiable intangible assets requires considering market information that is publicly available as well as the use of significant estimates and assumptions. 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. Inputs used in determining fair values where significant estimates and assumptions are necessary include discounted cash flow calculations, market comparisons and recent transactions, projected future cash flows, discount rates reflecting the risk inherent in future cash flows, long-term growth rates and determination and evaluation of appropriate market comparables.
 
The Corporation performed an annual test of goodwill and other intangibles as of December 31, 2009, and concluded that the recorded value of goodwill was not impaired.
 
The Corporation’s total goodwill at December 31, 2009 was $528.7 million, of which $509.9 million relates to the Corporation’s Community Banking segment. The estimated fair value of this reporting unit is based on valuation techniques that the Corporation believes market participants would use, including discounted cash flows, peer company price-to-earnings and price-to-book multiples. During the fourth quarter of 2008 and 2009, the financial services industry and securities markets generally were adversely affected by significant declines in the values of nearly all asset classes. Given this volatility in the securities market, management considered the results of their discounted cash flows to a greater extent than the peer company market multiples. As of December 31, 2009, a decline of greater than 10.2% in the estimated fair value of the Community Banking segment may result in recorded goodwill being impaired. This decline equates to a decrease in the long-term growth rate of 2.9% or an increase in the discount rate of 2.0%. If current economic conditions continue resulting in a prolonged period of economic weakness, the Corporation’s business segments, including the Community Banking segment, may be adversely affected, which may result in impairment of goodwill and other intangibles in the future. Any resulting impairment loss could have a material adverse impact on the Corporation’s financial condition and its results of operations.
 
Income Taxes
 
The Corporation is subject to the income tax laws of the U.S., its states and other jurisdictions where it conducts business. The laws are complex and subject to different interpretations by the taxpayer and various taxing authorities. In determining the provision for income taxes, management must make judgments and estimates about the application of these inherently complex tax statutes, related regulations and case law. In the process of preparing the Corporation’s 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 management’s ongoing assessment of the facts and evolving case law.


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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 management’s assessments of realizable deferred tax assets.
 
On a quarterly basis, management assesses the reasonableness of the Corporation’s effective tax rate based on management’s 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 2009 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 community banking, consumer finance, wealth management and insurance. The Corporation also conducts leasing and merchant banking activities. The Corporation operates its community banking business through a full service branch network with offices in Pennsylvania and Ohio and loan production offices in Pennsylvania and Florida. The Corporation operates its wealth management and insurance businesses within the community banking branch network. It also conducts selected consumer finance business in Pennsylvania, Ohio and Tennessee.
 
In connection with the UST’s CPP, on January 9, 2009, the Corporation voluntarily issued to the UST 100,000 shares of Series C Preferred Stock and a warrant to purchase up to 1,302,083 shares of the Corporation’s common stock, for an aggregate purchase price of $100.0 million. The warrant, which is currently exercisable, has a ten-year term and an exercise price of $11.52.
 
On June 16, 2009, the Corporation completed a public offering of 24,150,000 shares of common stock at a price of $5.50 per share, including 3,150,000 shares of common stock purchased by the underwriters pursuant to an over-allotment option, which the underwriters exercised in full. The net proceeds of the offering after deducting underwriting discounts and commissions and offering expenses were $125.8 million. As a result of the completion of the public stock offering, the number of shares of the Corporation’s common stock purchasable upon exercise of the warrant issued to the UST has been reduced in half to 651,042 shares.
 
On September 9, 2009, the Corporation redeemed all of the 100,000 outstanding shares of its Series C Preferred Stock originally issued to the UST in conjunction with the CPP. Since receiving the CPP funds on January 9, 2009, the Corporation paid the UST $3.3 million in cash dividends on the preferred stock. Upon redemption, the difference of $4.3 million between the Series C Preferred Stock redemption amount and the recorded amount was charged to retained earnings as a non-cash deemed preferred stock dividend. This non-cash deemed preferred stock dividend had no impact on total equity, but reduced earnings per diluted common share by $0.04 in 2009. In total, CPP costs reduced earnings per diluted common share by $0.05 in 2009.
 
Because the Corporation issued preferred stock to the UST in January 2009, the Corporation is required to report net income available to common stockholders for the periods in which the preferred stock was outstanding. Net income available to common stockholders is calculated by subtracting the preferred stock dividends and discount amortization from net income.
 
On April 1, 2008, the Corporation completed the acquisition of Omega, a diversified financial services company with $1.8 billion in assets, and, on August 16, 2008, the Corporation completed the acquisition of IRGB, a


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bank holding company with $301.7 million in assets. The assets and liabilities of each of these acquired companies were recorded on the Corporation’s balance sheet at their fair values as of each of the acquisition dates, and their results of operations have been included in the Corporation’s consolidated statement of income since the respective acquisition dates.
 
Results of Operations
 
Year Ended December 31, 2009 Compared to Year Ended December 31, 2008
 
Net income for 2009 was $41.1 million compared to net income of $35.6 million for 2008. Net income available to common stockholders for 2009 was $32.8 million or $0.32 per diluted share, compared to net income available to common stockholders for 2008 of $35.6 million or $0.44 per diluted share. Net income available to common stockholders for 2009 included $8.3 million related to preferred stock dividends and discount amortization associated with the Corporation’s participation in the CPP. The increase in net income is a result of an increase of $14.8 million in net interest income, combined with an increase of $19.9 million in non-interest income and a decrease of $5.6 million in the provision for loan losses, partially offset by an increase of $32.6 million in non-interest expenses. These items are more fully discussed later in this section.
 
The Corporation’s return on average equity was 3.87% and its return on average assets was 0.48% for 2009, compared to 4.20% and 0.46%, respectively, for 2008.
 
In addition to evaluating its results of operations in accordance with GAAP, the Corporation routinely supplements its evaluation with an analysis of certain non-GAAP financial measures, such as return on average tangible equity, return on average tangible common equity and return on average tangible assets. The Corporation believes these non-GAAP financial measures provide information useful to investors in understanding the Corporation’s operating performance and trends, and facilitates comparisons with the performance of the Corporation’s peers. The non-GAAP financial measures the Corporation uses may differ from the non-GAAP financial measures other financial institutions use to measure their results of operations. The following tables


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summarize the Corporation’s non-GAAP financial measures for 2009 and 2008 derived from amounts reported in the Corporation’s financial statements (dollars in thousands):
 
                 
    Year Ended December 31,  
    2009     2008  
 
Return on average tangible equity:
               
Net income
  $ 41,111     $ 35,595  
Amortization of intangibles, net of tax
    4,607       4,187  
                 
    $ 45,718     $ 39,782  
                 
Average total stockholders’ equity
  $ 1,063,104     $ 847,417  
Less: Average intangibles
    (571,492 )     (473,228 )
                 
    $ 491,612     $ 374,189  
                 
Return on average tangible equity
    9.30 %     10.63 %
                 
Return on average tangible common equity:
               
Net income available to common stockholders
  $ 32,803     $ 35,595  
Amortization of intangibles, net of tax
    4,607       4,187  
                 
    $ 37,410     $ 39,782  
                 
Average total stockholders’ equity
  $ 1,063,104     $ 847,417  
Less: Average preferred stockholders’ equity
    (63,602 )      
Less: Average intangibles
    (571,492 )     (473,228 )
                 
    $ 428,010     $ 374,189  
                 
Return on average tangible common equity
    8.74 %     10.63 %
                 
Return on average tangible assets:
               
Net income
  $ 41,111     $ 35,595  
Amortization of intangibles, net of tax
    4,607       4,187  
                 
    $ 45,718     $ 39,782  
                 
Average total assets
  $ 8,606,188     $ 7,696,894  
Less: Average intangibles
    (571,492 )     (473,228 )
                 
    $ 8,034,696     $ 7,223,666  
                 
Return on average tangible assets
    0.57 %     0.55 %
                 


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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  
    2009     2008     2007  
          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
  $ 2,553     $ 8       0.33 %   $ 4,344     $ 89       2.04 %   $ 1,588     $ 78       4.89 %
Federal funds sold
    14,110       69       0.48       14,596       304       2.05       10,429       547       5.17  
Taxable investment securities (1)
    1,210,817       50,551       4.13       1,038,815       49,775       4.77       874,130       44,188       5.04  
Non-taxable investment securities (1)(2)
    188,627       10,857       5.76       181,957       10,225       5.62       165,406       8,795       5.32  
Loans (2)(3)
    5,831,176       332,587       5.69       5,410,022       355,426       6.57       4,305,158       319,940       7.43  
                                                                         
Total interest earning assets
    7,247,283       394,072       5.42       6,649,734       415,819       6.25       5,356,711       373,548       6.97  
                                                                         
Cash and due from banks
    342,573                       146,615                       113,314                  
Allowance for loan losses
    (107,015 )                     (67,962 )                     (52,346 )                
Premises and equipment
    120,747                       108,768                       84,106                  
Other assets
    1,002,600                       859,739                       553,599                  
                                                                         
    $ 8,606,188                     $ 7,696,894                     $ 6,055,384                  
                                                                         
Liabilities
                                                                       
Interest bearing liabilities:
                                                                       
Deposits:
                                                                       
Interest bearing demand
  $ 2,192,844       14,229       0.65     $ 1,849,808       26,307       1.42     $ 1,441,316       36,734       2.55  
Savings
    841,999       2,875       0.34       746,570       6,610       0.89       589,298       9,881       1.68  
Certificates and other time
    2,258,551       68,595       3.04       2,137,555       78,651       3.68       1,744,691       77,661       4.45  
Treasury management accounts
    472,628       4,596       0.96       373,200       7,771       2.05       266,726       12,150       4.49  
Other short-term borrowings
    114,341       3,924       3.38       143,154       5,259       3.61       147,439       7,285       4.87  
Long-term debt
    419,570       17,202       4.10       498,262       21,044       4.22       467,047       19,360       4.15  
Junior subordinated debt
    205,045       9,758       4.76       192,060       12,347       6.43       151,031       10,982       7.27  
                                                                         
Total interest bearing liabilities
    6,504,978       121,179       1.86       5,940,609       157,989       2.66       4,807,548       174,053       3.61  
                                                                         
Non-interest bearing demand
    940,808                       825,083                       634,537                  
Other liabilities
    97,298                       83,785                       72,830                  
                                                                         
      7,543,084                       6,849,477                       5,514,915                  
Stockholders’ equity
    1,063,104                       847,417                       540,469                  
                                                                         
    $ 8,606,188                     $ 7,696,894                     $ 6,055,384                  
                                                                         
Excess of interest earning assets over interest bearing liabilities
  $ 742,305                     $ 709,125                     $ 549,163                  
                                                                         
Net interest income (FTE)
            272,893                       257,830                       199,495          
Tax-equivalent adjustment
            6,350                       6,038                       4,658          
                                                                         
Net interest income
          $ 266,543                     $ 251,792                     $ 194,837          
                                                                         
Net interest spread
                    3.56 %                     3.60 %                     3.36 %
                                                                         
Net interest margin (2)
                    3.75 %                     3.88 %                     3.73 %
                                                                         
 
(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.


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Net Interest Income
 
Net interest income, which is the Corporation’s 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 2009, net interest income, which comprised 71.6% of net revenue (net interest income plus non-interest income) compared to 74.5% in 2008, was affected by the general level of interest rates, changes in interest rates, the shape of the yield curve, the level of non-accrual loans and changes in the amount and mix of interest earning assets and interest bearing liabilities.
 
Net interest income, on an FTE basis, increased $15.1 million or 5.8% from $257.8 million for 2008 to $272.9 million for 2009. Average interest earning assets increased $597.5 million or 9.0% and average interest bearing liabilities increased $564.4 million or 9.5% from 2008 due to organic loan and deposit growth and the Omega and IRGB acquisitions. The Corporation’s net interest margin decreased by 13 basis points from 2008 to 3.75% for 2009 as loan yields declined faster than deposit rates, reflecting the actions taken by the FRB to lower interest rates during the fourth quarter of 2008 combined with competitive pressures on deposit rates. Details on changes in tax equivalent net interest income attributed to changes in interest earning assets, interest bearing liabilities, yields and cost of funds are set forth in the preceding table.
 
The following table provides 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 volume and rates paid for interest bearing liabilities for the periods indicated (in thousands):
 
                                                 
    2009 vs 2008     2008 vs 2007  
    Volume     Rate     Net     Volume     Rate     Net  
 
Interest Income
                                               
Interest bearing deposits with banks
  $ (26 )   $ (55 )   $ (81 )   $ 76     $ (65 )   $ 11  
Federal funds sold
    (10 )     (225 )     (235 )     167       (410 )     (243 )
Securities
    7,452       (6,044 )     1,408       8,771       (1,754 )     7,017  
Loans
    23,502       (46,341 )     (22,839 )     75,991       (40,505 )     35,486  
                                                 
      30,918       (52,665 )     (21,747 )     85,005       (42,734 )     42,271  
                                                 
                                                 
Interest Expense
                                               
Deposits:
                                               
Interest bearing demand
    4,426       (16,504 )     (12,078 )     7,050       (17,477 )     (10,427 )
Savings
    720       (4,455 )     (3,735 )     1,641       (4,912 )     (3,271 )
Certificates and other time
    4,547       (14,603 )     (10,056 )     15,641       (14,651 )     990  
Treasury management accounts
    1,693       (4,868 )     (3,175 )     3,754       (8,133 )     (4,379 )
Other short-term borrowings
    (404 )     (931 )     (1,335 )     (179 )     (1,847 )     (2,026 )
Long-term debt
    (3,241 )     (601 )     (3,842 )     1,313       371       1,684  
Junior subordinated debt
    790       (3,379 )     (2,589 )     2,769       (1,404 )     1,365  
                                                 
      8,531       (45,341 )     (36,810 )     31,989       (48,053 )     (16,064 )
                                                 
Net Change
  $ 22,387     $ (7,324 )   $ 15,063     $ 53,016     $ 5,319     $ 58,335  
                                                 
 
(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 $394.1 million in 2009 decreased by $21.7 million or 5.2% from 2008. Average interest earning assets of $7.2 billion for 2009 grew $597.5 million or 9.0% from the same period of 2008


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primarily driven by the Omega and IRGB acquisitions, which increased loans by $1.1 billion and $160.2 million, respectively, at the time of each acquisition. The yield on interest earning assets decreased 83 basis points to 5.42% for 2009 reflecting changes in interest rates as the FRB has lowered its federal funds target rate from 4.25% at the beginning of 2008 to a current range of 0.00% to 0.25%.
 
Interest expense of $121.2 million for 2009 decreased by $36.8 million or 23.3% from 2008. The rate paid on interest bearing liabilities decreased 80 basis points to 1.86% during 2009 reflecting changes in interest rates and a favorable shift in mix. Average interest bearing liabilities increased $564.4 million or 9.5% to average $6.5 billion for 2009. This growth was primarily attributable to the Omega and IRGB acquisitions combined with organic growth. The Omega and IRGB acquisitions increased deposits by $1.3 billion and $256.8 million, respectively, at the time of each acquisition. The Corporation also recognized organic average deposit and treasury management account growth of $279.7 million or 4.7% for 2009, compared to 2008, driven by success with ongoing marketing campaigns designed to attract new customers to the Corporation’s local approach to banking combined with customer preferences to keep funds in banks due to uncertainties in the market.
 
Provision for Loan Losses
 
The provision for loan losses is determined based on management’s 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 $66.8 million in 2009 decreased $5.6 million from 2008. In 2009, net charge-offs increased $34.3 million as allowances provided in 2008 were charged off in 2009, while the allowance for loan losses ended 2009 at $104.7 million, flat with December 31, 2008. The $66.8 million provision for loan losses for 2009 was comprised of $35.1 million relating to FNBPA’s Florida region, $6.7 million relating to Regency and $25.0 million relating to the remainder of the Corporation’s portfolio, which is predominantly in Pennsylvania. The increase in net charge-offs reflects continued weakness in the Corporation’s Florida portfolio, and, to a much lesser extent, the slowing economy in Pennsylvania. During 2009, net charge-offs were $66.9 million or 1.15% of average loans compared to $32.6 million or 0.60% of average loans for 2008. The net charge-offs for 2009 were comprised of $43.8 million or 15.80% of average loans relating to FNBPA’s Florida region, $6.3 million or 4.04% of average loans relating to Regency and $16.7 million or 0.30% of average loans relating to the remainder of the Corporation’s portfolio. For additional information, refer to the Allowance and Provision for Loan Losses section of this Management’s Discussion and Analysis.
 
Non-Interest Income
 
Total non-interest income of $106.0 million in 2009 increased $19.9 million or 23.1% from 2008. This increase resulted primarily from increases in both service charges and insurance commissions and fees reflecting organic growth and the impact of acquisitions combined with lower OTTI charges, a gain recognized on the sale of a building acquired in a previous acquisition and higher gains on the sale of residential mortgage loans. These items were partially offset by decreases in securities commissions and fees, trust fees, income from bank owned life insurance and gains on the sales of securities. These items are further explained in the following paragraphs.
 
Service charges on loans and deposits of $57.7 million for 2009 increased $3.0 million or 5.6% from 2008, reflecting organic growth as the Corporation took advantage of competitor disruption in the marketplace, with ongoing marketing campaigns designed to attract new customers to the Corporation’s local approach to banking. Additionally, the Corporation’s customer base expanded as a result of the Omega and IRGB acquisitions during 2008.
 
Insurance commissions and fees of $16.7 million for 2009 increased $1.1 million or 7.1% from 2008 primarily as a result of the acquisition of Omega during 2008.


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Securities commissions of $7.5 million for 2009 decreased by $0.7 million or 8.2% from 2008 primarily due to lower activity due to market conditions, partially offset by the impact of the acquisition of Omega during 2008.
 
Trust fees of $11.8 million in 2009 decreased by $0.3 million or 2.3% from 2008 due to the negative effect of market conditions on assets under management, partially offset by growth in assets under management resulting from the Omega acquisition during 2008.
 
Income from bank owned life insurance (BOLI) of $5.7 million for 2009 decreased by $0.7 million or 11.4% from 2008. This decrease was primarily attributable to death claims, lower yields and a $13.7 million withdrawal from the policy due to the unfavorable market conditions during 2009.
 
Gain on sale of residential mortgage loans of $3.1 million for 2009 increased by $1.2 million or 67.8% from 2008 due to a higher volume of loan sales resulting from increased loan refinancing in a lower rate environment. The Corporation sold $196.2 million of residential mortgage loans during 2009 compared to $117.8 million during 2008.
 
Gains on sales of securities of $0.5 million decreased $0.3 million or 36.7% from 2008. During 2009, the Corporation recognized a gain of $0.2 million relating to the acquisition of a company in which the Corporation owned stock. Additionally, the Corporation recognized a gain of $0.2 million relating to called securities during 2009. During 2008, most of the gain related to the Visa, Inc. initial public offering. The Corporation is a member of Visa USA since it issues Visa debit cards. As such, a portion of the Corporation’s ownership interest in Visa was redeemed in exchange for $0.7 million. This entire amount was recorded as gain on sale of securities in 2008 since the Corporation’s cost basis in Visa is zero.
 
Net impairment losses on securities of $7.9 million decreased by $9.3 million from 2008. Impairment losses on securities during 2009 consisted of $7.1 million related to investments in pooled TPS and $0.7 million related to investments in bank stocks, while impairment losses on securities during 2008 consisted of $16.0 million related to investments in pooled TPS and $1.2 million related to investments in bank stocks.
 
Other income of $10.9 million for 2009 increased $7.2 million or 191.2% from 2008. The primary items contributing to this increase were $1.0 million more in gains relating to payments received on impaired loans acquired in previous acquisitions, a gain of $0.8 million on the sale of a building acquired in a previous acquisition and an increase of $0.3 million in fees earned through an interest rate swap program for larger commercial customers who desire fixed rate loans while the Corporation benefits from a variable rate asset, thereby helping to reduce volatility in its net interest income. Additionally, impairment losses associated with the Corporation’s merchant banking subsidiary decreased by $2.9 million.
 
Non-Interest Expense
 
Total non-interest expense of $255.3 million in 2009 increased $32.6 million or 14.7% from 2008. This increase was primarily attributable to operating expenses resulting from the Omega and IRGB acquisitions in 2008 combined with increases in salaries and employee benefits, other real estate owned (OREO) expense and FDIC insurance.
 
Salaries and employee benefits of $126.9 million in 2009 increased $10.0 million or 8.6% from 2008. This increase was primarily attributable to the acquisitions of Omega and IRGB during 2008 combined with $1.1 million in additional pension expense during 2009 resulting from an increase in the actuarial valuation amount.
 
Combined net occupancy and equipment expense of $38.2 million in 2009 increased $4.0 million or 11.7% from the combined 2008 level, primarily due to the Omega and IRGB acquisitions during 2008.


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Amortization of intangibles expense of $7.1 million in 2009 increased $0.6 million or 10.0% from 2008 primarily due to higher intangible balances resulting from the Omega and IRGB acquisitions during 2008.
 
Outside services expense of $23.6 million in 2009 increased $2.7 million or 12.8% from 2008 primarily due to the Omega and IRGB acquisitions during 2008, combined with higher fees for professional services, including legal fees incurred for loan workout efforts.
 
FDIC insurance of $13.9 million for 2009 increased $13.0 million from 2008 due to a one-time special assessment of $4.0 million paid during 2009, combined with an increase in FDIC insurance premium rates for 2009 and FNBPA having utilized its FDIC insurance premium credits in prior periods.
 
State tax expense of $6.8 million in 2009 increased $0.3 million or 4.0% from 2008 primarily due to higher net worth based taxes resulting from the Corporation’s acquisitions of Omega and IRGB in 2008.
 
OREO expense of $6.2 million in 2009 increased $4.0 million from 2008, due to increased foreclosure activity and write-downs of OREO property, particularly in the Florida market, during 2009.
 
Advertising and promotional expense of $5.3 million in 2009 increased $0.7 million or 16.0% from 2008 due to increased advertising in connection with the Corporation’s efforts to attract new customers to the Corporation’s local approach to banking during a time of competitor disruption in the marketplace, combined with the Corporation’s acquisitions of Omega and IRGB in 2008.
 
The Corporation recorded merger-related expenses of $4.7 million in 2008 relating to the acquisitions of Omega and IRGB. No merger-related expenses were recorded during 2009. Information relating to the Corporation’s acquisitions 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 $27.4 million in 2009 increased $2.0 million or 7.8% from 2008. This increase reflects additional operating costs associated with the Corporation’s acquisitions of Omega and IRGB in 2008. Additionally, loan-related expense of $3.8 million in 2009 increased $0.8 million from 2008 primarily due to costs associated with the Florida commercial loan portfolio in 2009. Also, the Corporation recorded net expense of $1.1 million during 2009 associated with a litigation settlement.
 
Income Taxes
 
The Corporation’s income tax expense of $9.3 million for 2009 increased by $2.0 million or 28.1% from 2008. The effective tax rate of 18.4% for 2009 increased from 16.9% for the prior year, primarily due to higher pre-tax income for 2009. The income tax expense for 2009 and 2008 were favorably impacted by $0.4 million and $0.3 million, respectively, due to the resolution of previously uncertain tax positions. The lower effective tax rate also reflects benefits resulting from tax-exempt income on investments, loans and bank owned life 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, 2008 Compared to Year Ended December 31, 2007
 
Net income for 2008 was $35.6 million or $0.44 per diluted share, a decrease of $34.1 million or 48.9% from net income for 2007 of $69.7 million or $1.15 per diluted share. The decrease in net income is largely a result of an increase of $59.7 million in the provision for loan losses combined with $20.1 million of non-cash impairment charges relating to certain investments.
 
The Corporation’s return on average equity was 4.20% and its return on average assets was 0.46% for 2008, compared to 12.89% and 1.15%, respectively, for 2007.


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Net Interest Income
 
Net interest income, which is the Corporation’s major source of revenue, is the difference between interest income from earning assets and interest expense paid on liabilities. In 2008, net interest income, which comprised 74.5% of net revenue compared to 70.5% in 2007, 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 $58.3 million or 29.2% from $199.5 million for 2007 to $257.8 million for 2008. Average interest earning assets increased $1.3 billion or 24.1% and average interest bearing liabilities increased $1.1 billion or 23.6% from 2007 due to organic loan and deposit growth and the Omega and IRGB acquisitions. The Corporation’s net interest margin increased by 15 basis points from 2007 to 3.88% for 2008 as lower yields on interest earning assets were more than offset by lower rates paid on interest bearing liabilities.
 
Interest income, on an FTE basis, of $415.8 million in 2008, increased by $42.3 million or 11.3% from 2007. Average interest earning assets of $6.6 billion for the 2008 grew $1.3 billion or 24.1% from the same period of 2007 primarily driven by the Omega and IRGB acquisitions which added average loans of $860.8 million and $64.5 million, respectively, in 2008. The Corporation also recognized organic average loan growth of $179.6 million during 2008. The yield on interest earning assets decreased 72 basis points to 6.25% for 2008 reflecting changes in interest rates.
 
Interest expense of $158.0 million for 2008 decreased by $16.1 million or 9.2% from 2007. The rate paid on interest bearing liabilities decreased 95 basis points to 2.66% during 2008 reflecting changes in interest rates and a favorable shift in mix. Average interest bearing liabilities increased $1.1 billion or 23.6% to average $5.9 billion for 2008. This growth was primarily attributable to the Omega and IRGB acquisitions combined with organic growth. The Omega acquisition added $946.1 million in average deposits in 2008, while the IRGB acquisition added $99.3 million in average deposits in 2008. The Corporation also recognized organic average deposit growth of $103.8 million during 2008.
 
Provision for Loan Losses
 
The provision for loan losses of $72.4 million in 2008 increased $59.7 million from 2007 due to higher net charge-offs, additional specific reserves and increased allocations for a weaker economic environment. The significant increases primarily reflect continued deterioration in the Corporation’s Florida market, and, to a much lesser extent, the slowing economy in Pennsylvania. The $72.4 million provision for loan losses for 2008 was comprised of $32.0 million relating to FNBPA’s Florida region, $5.7 million relating to Regency and $34.7 million relating to the remainder of the Corporation’s portfolio, which is predominantly in Pennsylvania. During 2008, net charge-offs were $32.6 million or 0.60% of average loans compared to $12.5 million or 0.29% of average loans for 2007. The net charge-offs for 2008 were comprised of $15.0 million or 5.02% of average loans relating to FNBPA’s Florida region, $5.8 million or 3.78% of average loans relating to Regency and $11.8 million or 0.24% of average loans relating to the remainder of the Corporation’s portfolio. For additional information, refer to the Allowance and Provision for Loan Losses section of this Management’s Discussion and Analysis.
 
Non-Interest Income
 
Total non-interest income of $86.1 million in 2008 increased $4.5 million or 5.5% from 2007. This increase resulted primarily from increases in all major fee businesses reflecting organic growth and the impact of acquisitions, partially offset by decreases in gain on sale of securities, impairment loss on securities and other non-interest income.
 
Service charges on loans and deposits of $54.7 million for 2008 increased $13.9 million or 34.0% from 2007, reflecting organic growth and the expansion of the Corporation’s customer base as a result of the Omega and


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IRGB acquisitions during 2008. Insurance commissions and fees of $15.6 million for 2008 increased $1.6 million or 11.3% from 2007 primarily as a result of the acquisition of Omega during 2008 partially offset by a decrease in contingent fee income. Securities commissions of $8.1 million for 2008 increased by $1.8 million or 28.5% from 2007 primarily due to the acquisition of Omega during 2008 and an increase in annuity revenue due to the declining interest rate environment, partially offset by lower activity due to market conditions. Trust fees of $12.1 million in 2008 increased by $3.5 million or 41.0% from 2007 due to growth in assets under management resulting from the Omega acquisition during 2008 combined with increases in estate accounts, partially offset by the negative effect of market conditions on assets under management. Income from BOLI of $6.4 million for 2008 increased by $2.3 million or 55.6% from 2007. This increase was primarily attributable to the Omega and IRGB acquisitions in 2008 combined with increases in crediting rates paid on the insurance policies. Gain on sale of residential mortgage loans of $1.8 million for 2008 increased by $0.1 million or 6.4% from 2007 due to higher volume and increased prices on mortgage sales in 2008, partially offset by a loss on the sale of student loans during 2007. Gain on sale of securities of $0.8 million decreased $0.3 million or 27.8% from 2007 as management did not sell as many equity securities during 2008 due to unfavorable market prices in the bank stock portfolio. During 2008, most of the gain related to the Visa, Inc. initial public offering. The Corporation is a member of Visa USA since it issues Visa debit cards. As such, a portion of the Corporation’s ownership interest in Visa was redeemed in exchange for $0.7 million. This entire amount was recorded as gain on sale of securities since the Corporation’s cost basis in Visa is zero. Impairment loss on securities of $17.2 million increased by $17.1 million from 2007 due to impairment losses during 2008 of $16.0 million related to investments in pooled TPS and $1.2 million related to investments in bank stocks. Other income of $3.8 million for 2008 decreased $1.3 million or 25.2% from 2007. The primary reason for this decrease was due to a $3.4 million impairment loss primarily relating to two mezzanine loans made by the Corporation’s merchant banking subsidiary, with $2.1 million related to a Florida-based company and the other $1.0 million related to a company with substantial exposure to the automobile industry. These decreases were partially offset by an increase of $2.6 million in swap fee income during 2008.
 
Non-Interest Expense
 
Total non-interest expense of $222.7 million in 2008 increased $57.1 million or 34.5% from 2007. This increase was primarily attributable to operating expenses resulting from the Omega and IRGB acquisitions in 2008.
 
Salaries and employee benefits of $116.8 million in 2008 increased $29.6 million or 33.9% from 2007. This increase was primarily attributable to the acquisitions of Omega and IRGB during 2008 combined with normal annual compensation and benefit increases, additional costs associated with the transition of the Corporation’s senior leadership and higher accrued expense for the Corporation’s long-term restricted stock program. The Corporation’s full-time equivalent employees increased 33.4% from 1,762 at December 31, 2007 to 2,350 at December 31, 2008, primarily due to the Omega and IRGB acquisitions. The Corporation also recorded $1.1 million in additional expense relating to the retirement of an executive during the second quarter of 2008. Additionally, 2007 included a credit of $1.6 million relating to the restructuring of the Corporation’s postretirement benefit plan. Combined net occupancy and equipment expense of $34.2 million in 2008 increased $6.5 million or 23.5% from the combined 2007 level, primarily due to the Omega and IRGB acquisitions during 2008. Amortization of intangibles expense of $6.4 million in 2008 increased $2.0 million or 46.2% from 2007 primarily due to higher intangible balances resulting from the Omega and IRGB acquisitions during 2008. Outside services expense of $20.9 million in 2008 increased $5.0 million or 31.1% from 2007 primarily due to the Omega and IRGB acquisitions during 2008, combined with higher fees for professional services. State tax expense of $6.6 million in 2008 increased $1.1 million or 20.2% from 2007 primarily due to higher net worth based taxes resulting from the Corporation’s acquisitions of Omega and IRGB in 2008. Advertising and promotional expense of $4.6 million in 2008 increased $1.7 million or 57.5% from 2007 due to increased advertising in connection with the Corporation’s acquisitions of Omega and IRGB in 2008. The Corporation recorded merger-related expenses of $4.7 million in 2008 relating to the acquisitions of Omega and IRGB compared to $0.2 million in 2007. Information relating to the Corporation’s acquisitions 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 $26.3 million in 2008 increased $5.1 million or 24.0% from 2007. This increase was primarily due to additional operating costs associated


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with the Corporation’s acquisitions of Omega and IRGB in 2008. Additionally, OREO expense of $2.1 million in 2008 increased $1.6 million from 2007 due to increased foreclosure activity and write-downs of OREO property.
 
Income Taxes
 
The Corporation’s income tax expense of $7.2 million for 2008 decreased by $21.2 million or 74.6% from 2007. The effective tax rate of 16.9% for 2008 declined from 29.0% for the prior year, primarily due to lower pre-tax income for 2008. The income tax expense for 2008 and 2007 were favorably impacted by $0.3 million and $0.9 million, respectively, due to the resolution of previously uncertain tax positions. The lower effective tax rate also reflects benefits resulting from tax-exempt income on investments, loans and bank owned life 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.
 
Liquidity
 
The Corporation’s 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 Management 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. The Board of Directors of the Corporation has also established a Contingency Funding Policy to address liquidity crisis conditions. These policies designate 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 Corporation’s Treasury Department.
 
The principal sources of the parent company’s liquidity are its strong existing cash resources plus dividends it receives from its subsidiaries. These dividends may be impacted by the parent’s or its subsidiaries’ capital needs, statutory laws and regulations, corporate policies, contractual restrictions, profitability and other factors. Cash on hand at the parent at December 31, 2009 was $74.9 million, up from $66.8 million at December 31, 2008, as the Corporation took a number of actions to bolster its cash position. On January 9, 2009, the Corporation completed the sale of 100,000 shares of newly issued Series C Preferred Stock valued at $100.0 million as part of the UST’s CPP. The Corporation redeemed the Series C Preferred Stock on September 9, 2009. Additionally, on January 21, 2009, the Corporation’s Board of Directors elected to reduce the common stock dividend rate from $0.24 to $0.12 per quarter, thus reducing 2009’s liquidity needs by approximately $43.1 million. Finally, on June 16, 2009, the Corporation completed a common stock offering that raised $125.8 million in total capital, $98.0 million of which has been invested in FNBPA. The parent also may draw on an approved line of credit with a major domestic bank. This unused line was $15.0 million as of December 31, 2009 and $25.0 million as of December 31, 2008. During 2009, a $25.0 million committed line of credit was negotiated with a major domestic bank on behalf of Regency. At December 31, 2009, $10.0 million was outstanding. In addition, the Corporation also issues subordinated notes through Regency on a regular basis. Subordinated note growth for 2009 was $36.2 million or 23.7%, with one customer accounting for $16.3 million of such growth.
 
FNBPA generates liquidity from its normal business operations. 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. Liquidity sources from liabilities are generated primarily through the 224 banking offices of FNBPA in the form of deposits and treasury management accounts. The Corporation also has access to reliable and cost-effective wholesale sources of liquidity. Short-term and long-term funds can be acquired to help fund normal business operations as well as serve as contingency funding in the event that the Corporation would be faced with a liquidity crisis.
 
The liquidity position of the Corporation continues to be strong as evidenced by its ability to generate strong growth in deposits and treasury management accounts. As a result, the Corporation is less reliant on capital


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markets funding as witnessed by its ratio of total deposits and treasury management accounts to total assets of 79.4% and 77.3% as of December 31, 2009 and 2008, respectively. Over this time period, growth in deposits and treasury management accounts was $447.7 million or 6.9%. The Corporation had unused wholesale credit availability of $2.9 billion or 33.2% of total assets at December 31, 2009 and $2.7 billion or 32.0% of total assets at December 31, 2008. These sources include the availability to borrow from the FHLB, the FRB, correspondent bank lines and access to certificates of deposit issued through brokers. During 2009, the Corporation expanded its borrowing capacity at the FRB by approximately $342.0 million by pledging loans as collateral. Further, the Corporation’s election not to opt out of the FDIC’s TLGP resulted in $140.0 million of increased funding availability which expired on October 31, 2009. Finally, the Corporation’s ratio of unpledged securities to total securities improved to 16.9% at December 31, 2009 compared to 4.4% at December 31, 2008.
 
In addition, the ALCO regularly monitors various liquidity ratios and forecasts of the Corporation’s liquidity 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 susceptible to current and future impairment charges on holdings in its investment portfolio. The Securities footnote, in the Notes to Consolidated Financial Statements, which is included in Item 8 of this Report, discusses the impairment charges taken during both 2009 and 2008 relating to the pooled TPS and bank stock portfolios. The Securities footnote also discusses the ongoing process management utilizes to determine whether impairment exists.
 
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 Corporation’s financial instruments, cash flows and net interest income. The ALCO is responsible for market risk management which involves 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 Corporation uses derivative financial instruments for interest rate risk management purposes 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. EVE’s long-term horizon helps identify changes in optionality and longer-term positions. However, EVE’s 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


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rates of interest. In these simulations, the Corporation’s 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 on a periodic basis. Reviewing these various measures provides the Corporation with a comprehensive view of its interest rate 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 IEA and IBL as of December 31, 2009 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
  $ 1,354,740     $ 864,683     $ 352,612     $ 557,842     $ 3,129,877  
Investments
    245,534       131,279       163,042       257,706       797,561  
                                         
      1,600,274       995,962       515,654       815,548       3,927,438  
                                         
Interest Bearing Liabilities (IBL)
                                       
Non-maturity deposits
    1,655,113                         1,655,113  
Time deposits
    130,138       233,946       341,223       587,243       1,292,550  
Borrowings
    629,980       46,168       57,654       92,830       826,632  
                                         
      2,415,231       280,114       398,877       680,073       3,774,295  
                                         
Period Gap
  $ (814,957 )   $ 715,848     $ 116,777     $ 135,475     $ 153,143  
                                         
Cumulative Gap
  $ (814,957 )   $ (99,109 )   $ 17,668     $ 153,143          
                                         
                                         
IEA/IBL (Cumulative)
    0.66       0.96       1.01       1.04          
                                         
Cumulative Gap to IEA
    (10.9 )%     (1.3 )%     0.2 %     2.0 %        
                                         
 
The cumulative twelve-month IEA to IBL ratio changed to 1.04 for December 31, 2009 from 1.08 for December 31, 2008.
 
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 product’s rate is estimated to increase by 50% as much as the market rates, then 50% of the account balance was placed in this category. The current allocation is representative of the estimated sensitivities for a +/- 100 basis point change in market rates.
 
The 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, 2009.


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The following table presents an analysis of the potential sensitivity of the Corporation’s net interest income and EVE to changes in interest rates:
 
                           
                ALCO
 
December 31   2009     2008     Guidelines  
 
Net interest income change (12 months):
                         
+ 200 basis points
    (1.1 )%     (0 .3) %     +/−5.0 %
+ 100 basis points
    (0.4 )%     0 .2 %     +/−5.0 %
− 100 basis points
    (1.9 )%     (2 .4) %     +/−5.0 %
                           
Economic value of equity:
                         
+ 200 basis points
    (5.9 )%     (0 .1) %      
+ 100 basis points
    (2.3 )%     1 .1 %      
− 100 basis points
    (0.9 )%     6 .3 %      
 
The Corporation has a relatively neutral interest rate risk position. The Corporation has maintained a relatively stable net interest margin despite the recent market rate volatility.
 
During 2009, the ALCO utilized several strategies to maintain the Corporation’s interest rate risk position at a relatively neutral level. For example, the Corporation successfully achieved growth in longer-term certificates of deposit. On the lending side, the Corporation regularly sells long-term fixed-rate residential mortgages to the secondary market and has been successful in the origination of commercial loans with short-term repricing characteristics. Total variable and adjustable-rate loans increased from 54.6% of total loans as of December 31, 2008 to 57.4% of total loans as of December 31, 2009. The investment portfolio is used, in part, to improve the Corporation’s interest rate risk position. The average life of the investment portfolio is relatively low at 2.6 years at December 31, 2009 versus 2.7 years at December 31, 2008. Finally, the Corporation has made use of interest rate swaps to lessen its interest rate risk position. The $185.9 million in notional swap principal originated in 2009 accounted for the majority of the increase in adjustable loans during 2009. For additional information regarding interest rate swaps, see the Derivative Instruments footnote in the Notes to Consolidated Financial Statements, which is included in Item 8 of this Report.
 
OCC Bulletin 2000-16 mandates that banks have their asset/liability models independently validated on a periodic basis. The Corporation’s Asset/Liability Management Policy states that the model will be validated at least every three years. A leading asset/liability consulting firm issued a report as of December 31, 2009 after conducting a validation of the model for FNBPA. The model was given an “Excellent” rating, which according to the consultant, indicates that the overall model implementation meets FNBPA’s earnings performance assessment and interest rate risk analysis needs.
 
However, the Corporation recognizes that all asset/liability models have some inherent shortcomings. Furthermore, asset/liability models require certain assumptions to 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 Corporation’s experience, business plans and available industry data. While management believes such assumptions to be reasonable, there can be no assurance that modeled results will be achieved.
 
Risk Management
 
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 market’s confidence in the Corporation and its affiliates.
 
The Corporation supports its risk management process through a governance structure involving its Board of Directors and senior management. The Corporation’s Risk Committee, which is comprised of various members


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of the Board of Directors, helps insure that management executes business decisions within the Corporation’s desired risk profile. The Risk Committee has the following key roles:
 
  •     facilitate the identification, assessment and monitoring of risk across the Corporation;
  •     provide support and oversight to the Corporation’s businesses; and
  •     identify and implement risk management best practices, as appropriate.
 
FNBPA has a Risk Management Committee comprised of senior management to provide day-to-day oversight to specific areas of risk with respect to the level of risk and risk management structure. FNBPA’s Risk Management Committee reports on a regular basis to the Corporation’s Risk Committee regarding the enterprise risk profile of the Corporation and other relevant risk management issues.
 
The Corporation’s audit function performs an independent assessment of the internal control environment. Moreover, the Corporation’s audit function plays a critical role in risk management, testing the operation of internal control systems and reporting findings to management and to the Corporation’s Audit Committee. Both the Corporation’s Risk Committee and FNBPA’s Risk Management Committee regularly assess the Corporation’s enterprise-wide risk profile and provide guidance on actions needed to address key risk issues.
 
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, 2009 (in thousands):
 
                                         
    Within
                After
       
    1 Year     1-3 Years     3-5 Years     5 Years     Total  
 
Deposits without a stated maturity
  $ 4,175,207     $     $     $     $ 4,175,207  
Certificates and other time deposits
    1,279,383       651,007       266,416       8,210       2,205,016  
Operating leases
    5,118       8,295       5,517       15,472       34,402  
Long-term debt
    206,580       115,727       1,310       1,260       324,877  
                                         
    $ 5,666,288     $ 775,029     $ 273,243     $ 24,942     $ 6,739,502  
                                         
 
The following table sets forth the amounts and expected maturities of commitments to extend credit and standby letters of credit as of December 31, 2009 (in thousands):
 
                                         
    Within
                After
       
    1 Year     1-3 Years     3-5 Years     5 Years     Total  
 
Commitments to extend credit
  $ 1,227,105     $ 47,414     $ 19,712     $ 117,634     $ 1,411,865  
Standby letters of credit
    44,755       29,182       13,793       187       87,917  
                                         
    $ 1,271,860     $ 76,596     $ 33,505     $ 117,821     $ 1,499,782  
                                         
 
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 Corporation’s primary market area of Pennsylvania and northeastern Ohio. The portfolio also consists of commercial loans in Florida, which totaled $243.9 million or 4.2% of total loans as of December 31, 2009 compared to $294.2 million or 5.1% of total loans as of December 31, 2008. In addition, the portfolio contains consumer


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finance loans to individuals in Pennsylvania, Ohio and Tennessee, which totaled $162.0 million or 2.8% of total loans as of December 31, 2009.
 
Following is a summary of loans (in thousands):
 
                                         
December 31   2009     2008     2007     2006     2005  
 
Commercial
  $ 3,234,738     $ 3,173,941     $ 2,232,860     $ 2,111,752     $ 1,613,960  
Direct installment
    985,746       1,070,791       941,249       926,766       890,288  
Residential mortgages
    605,219       638,356       465,881       490,215       485,542  
Indirect installment
    527,818       531,430       427,663       461,214       493,740  
Consumer lines of credit
    408,469       340,750       251,100       254,054       262,969  
Other
    87,371       65,112       25,482       9,143       2,548  
                                         
    $ 5,849,361     $ 5,820,380     $ 4,344,235     $ 4,253,144     $ 3,749,047  
                                         
 
Commercial is comprised of both commercial real estate loans and commercial and industrial loans. Direct installment is comprised of fixed-rate, closed-end consumer loans for personal, family or household use, such as home equity loans and automobile loans. Residential mortgages consist of conventional and jumbo mortgage loans for non-commercial properties. Indirect installment is comprised of loans written by third parties, primarily automobile loans. Consumer lines of credit includes home equity lines of credit (HELOC) and consumer lines of credit that are either unsecured or secured by collateral other than home equity. Other is comprised primarily of commercial leases, mezzanine loans and student loans.
 
Total loans were essentially unchanged at $5.8 billion for both the periods ended December 31, 2009 and 2008. However, the Corporation saw a favorable shift in the loan mix as commercial and consumer lines of credit increased by 1.9% and 19.9%, respectively, while direct installment, residential mortgages and indirect installment declined 7.9%, 5.2% and 0.7%, respectively. Additionally, other increased by 34.2%, primarily due to an increase of $20.6 million in commercial leases.
 
Total loans at December 31, 2008 increased by $1.5 billion or 34.0% to $5.8 billion as compared to December 31, 2007. This growth primarily relates to the acquisitions of Omega and IRGB, which added loans of $1.1 billion and $168.8 million, respectively, at the time of each acquisition, combined with organic growth.
 
The composition of the Florida loan portfolio consisted of the following as of December 31, 2009: unimproved residential land (13.0%), unimproved commercial land (23.5%), improved land (3.7%), income producing commercial real estate (35.1%), residential construction (7.6%), commercial construction (13.3%), commercial and industrial (2.5%) and owner-occupied (1.3%). The weighted average loan-to-value ratio for this portfolio was 76.8% and 73.7% as of December 31, 2009 and 2008, respectively.
 
The majority of the Corporation’s loan portfolio consists of commercial loans, which is comprised of both commercial real estate loans and commercial and industrial loans. As of December 31, 2009 and 2008, commercial real estate loans were $2.1 billion and $2.0 billion, or 35.4% and 34.3% of total loans, respectively. As of December 31, 2009, approximately 47.0% of the commercial real estate loans are owner-occupied, while the remaining 53.0% are non-owner-occupied. As of December 31, 2009 and 2008, the Corporation had construction loans of $184.1 million and $176.7 million, respectively, representing 3.1% and 3.0% of total loans, respectively. As of December 31, 2009 and 2008, there were no concentrations of loans relating to any industry in excess of 10% of total loans.


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Following is a summary of the maturity distribution of certain loan categories based on remaining scheduled repayments of principal as of December 31, 2009 (in thousands):
 
                                 
    Within
    1-5
    Over
       
    1 Year     Years     5 Years     Total  
 
Commercial
  $ 235,867     $ 861,948     $ 2,136,923     $ 3,234,738  
Residential mortgages
    752       26,573       577,894       605,219  
                                 
    $ 236,619     $ 888,521     $ 2,714,817     $ 3,839,957  
                                 
 
The total amount of loans due after one year includes $2.8 billion with floating or adjustable rates of interest and $836.3 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 Assets
 
Non-performing loans include non-accrual loans and restructured loans. Non-accrual loans represent loans for 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. Non-performing assets also include debt securities on which OTTI has been taken in the current or prior periods.
 
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. 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 has been paid and the ultimate collectibility of the remaining principal and interest is reasonably assured.
 
Non-performing loans are closely monitored on an ongoing basis as part of the Corporation’s 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 on non-accrual and restructured loans are recognized when appropriate.
 
Following is a summary of non-performing assets (dollars in thousands):
 
                                         
December 31   2009     2008     2007     2006     2005  
 
Non-accrual loans
  $ 133,891     $ 139,607     $ 29,211     $ 24,636     $ 28,100  
Restructured loans
    11,624       3,872       3,288       3,314       4,800  
                                         
Total non-performing loans
    145,515       143,479       32,499       27,950       32,900  
Other real estate owned (OREO)
    21,367       9,177       8,052       5,948       6,337  
                                         
Total non-performing loans and OREO
    166,882       152,656       40,551       33,898       39,237  
Non-performing investments
    4,825       10,456                    
                                         
Total non-performing assets
  $ 171,707     $ 163,112     $ 40,551     $ 33,898     $ 39,237  
                                         
Non-performing loans/total loans
    2.49 %     2.47 %     0.75 %     0.66 %     0.88 %
Non-performing loans + OREO/ total loans + OREO
    2.84 %     2.62 %     0.93 %     0.80 %     1.04 %
Non-performing assets/total assets
    1.97 %     1.95 %     0.67 %     0.56 %     0.70 %
 
The increase in non-performing loans from 2007 to 2008 is primarily a result of the significant deterioration in Florida, and to a much lesser extent, the slowing economy in Pennsylvania.


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Following is a summary of loans 90 days or more past due on which interest accruals continue (dollars in thousands):
 
                                         
December 31   2009   2008   2007   2006   2005
 
Loans 90 days or more past due
  $ 12,471     $ 13,677     $ 7,173     $ 5,171     $ 5,316  
As a percentage of total loans
    0.21 %     0.23 %     0.17 %     0.12 %     0.14 %
 
The following tables provide additional information relating to non-performing loans for the Corporation’s core portfolios (dollars in thousands):
 
                                 
    FNBPA (PA)   FNBPA (FL)   Regency   Total
 
December 31, 2009
                               
Non-performing loans
  $ 66,160     $ 71,737     $ 7,618     $ 145,515  
Other real estate owned (OREO)
    9,836       10,341       1,190       21,367  
Total past due loans
    52,493             5,416       57,909  
Non-performing loans/total loans
    1.22 %     29.41 %     4.70 %     2.49 %
Non-performing loans + OREO/ total loans + OREO
    1.39 %     32.28 %     5.40 %     2.84 %
December 31, 2008
                               
Non-performing loans
  $ 45,458     $ 93,116     $ 4,905     $ 143,479  
Other real estate owned (OREO)
    7,054       1,138       985       9,177  
Total past due loans
    51,458             5,613       57,071  
Non-performing loans/total loans
    0.85 %     31.65 %     3.10 %     2.47 %
Non-performing loans + OREO/ total loans + OREO
    0.98 %     31.91 %     3.70 %     2.62 %
 
FNBPA (PA) reflects FNBPA’s total portfolio excluding the Florida portfolio which is presented separately.
 
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   2009     2008     2007     2006     2005  
 
Gross interest income:
                                       
Per contractual terms
  $ 8,788     $ 6,408     $ 2,378     $ 2,046     $ 3,179  
Recorded during the year
    698       347       362       458       528  
 
Allowance and Provision for Loan Losses
 
The allowance for loan losses represents management’s estimate of probable loan losses inherent in the loan portfolio at a specific point in time. This estimate includes losses associated with specifically identified loans, as well as estimated probable credit losses inherent in the remainder of the loan portfolio. Additions are made to the allowance through both periodic provisions charged to income and recoveries of losses previously incurred. Reductions to the allowance occur as loans are charged off. Management evaluates the adequacy of the allowance at least quarterly, and in doing so relies on various factors including, but not limited to, assessment of historical loss experience, delinquency and non-accrual trends, portfolio growth, underlying collateral coverage and current economic conditions. This evaluation is subjective and requires material estimates that may change over time.
 
The components of the allowance for loan losses represent estimates based upon ASC Topic 450, Contingencies, and ASC Topic 310, Receivables. ASC Topic 450 applies to homogeneous loan pools such as consumer installment, residential mortgages and consumer lines of credit, as well as commercial loans that are not


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individually evaluated for impairment under ASC Topic 310. ASC Topic 310 is applied to commercial loans that are individually evaluated for impairment.
 
Under ASC Topic 310, a loan is impaired when, based upon current information and events, it is probable that the loan will not be repaid according to its original contractual terms, including both principal and interest. Management performs individual assessments of impaired loans to determine the existence of loss exposure and, where applicable, the extent of loss exposure based upon the present value of expected future cash flows available to pay the loan, or based upon the fair value of the collateral less estimated selling costs where a loan is collateral dependent.
 
In estimating loan loss contingencies, management considers numerous factors, including historical charge-off rates and subsequent recoveries. Management also considers, but is not limited to, qualitative factors that influence the Corporation’s credit quality, such as delinquency and non-performing loan trends, changes in loan underwriting guidelines and credit policies, as well as the results of internal loan reviews. Finally, management considers the impact of changes in current local and regional economic conditions in the markets that the Corporation serves. Assessment of relevant economic factors indicates that the Corporation’s primary markets historically tend to lag the national economy, with local economies in the Corporation’s primary market areas also improving or weakening, as the case may be, but at a more measured rate than the national trends. Regional economic factors influencing management’s estimate of reserves include uncertainty of the labor markets in the regions the Corporation serves and a contracting labor force due, in part, to productivity growth and industry consolidations. Homogeneous loan pools are evaluated using similar criteria that are based upon historical loss rates for various loan types. Historical loss rates are adjusted to incorporate changes in existing conditions that may impact, both positively or negatively, the degree to which these loss histories may vary. This determination inherently involves a high degree of uncertainty and considers current risk factors that may not have occurred in the Corporation’s historical loan loss experience.
 
During the fourth quarter of 2009, the Corporation updated the allowance methodology to place a greater emphasis on losses realized within the past two years. The previous methodology relied a rolling 15 quarter experience method. This change did not have a material impact on the 2009 provision and allowance, but could indicate higher provisions in future periods if higher losses are experienced.
 
During the fourth quarter of 2008, the Corporation began applying its methodology for establishing the allowance for loan losses to the Pennsylvania and Florida loan portfolios separately instead of continuing to evaluate the portfolios on a combined basis. This decision was based on the fact that the two loan portfolios have different risk characteristics and that the Florida economic environment was deteriorating at an accelerated rate in the fourth quarter of 2008.
 
In evaluating its Florida loan portfolio at that time, the Corporation increased the allowance to address the heightened level of inherent risk in that portfolio given the significant deterioration in that market. In applying the methodology to this portfolio, the Corporation utilized quantitative loss factors provided by the OCC based on a prior recession. The OCC-supplied rates are more appropriate than historical loss history due to the limited age and relatively small size of the portfolio; furthermore, all non-performing loans within this pool have been evaluated for impairment under ASC Topic 310. The combined impact of the significant deterioration in the Florida market and separately evaluating the Florida loan portfolio utilizing these quantitative factors was a $12.3 million increase in the Corporation’s allowance for loan losses for the Florida loan portfolio at December 31, 2008, with the predominant factor being the impact of the significant deterioration in the Florida market.
 
The Corporation also increased qualitative allocations to address increased inherent risk associated with its Florida loans including, but not limited to, current levels and trends of the Florida portfolio, collateral valuations, charge-offs, non-performing assets, delinquency, risk rating migration, competition, legal and regulatory issues and local economic trends. The combined impact of the significant deterioration in the Florida market and separately evaluating the Florida loan portfolio utilizing these qualitative factors was a $2.3 million increase in the Corporation’s allowance for loan losses for the Florida loan portfolio at December 31, 2008.


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Following is a summary of changes in the allowance for loan losses (dollars in thousands):
 
                                         
Year Ended December 31   2009     2008     2007     2006     2005  
 
Balance at beginning of period
  $ 104,730     $ 52,806     $ 52,575     $ 50,707     $ 50,467  
Additions due to acquisitions
    16       12,150       21       3,035       4,996  
Reductions due to branch sales
                            (59 )
Charge-offs:
                                       
Commercial
    (52,850 )     (21,578 )     (3,327 )     (2,813 )     (3,480 )
Direct installment
    (8,907 )     (8,382 )     (7,351 )     (6,502 )     (8,671 )
Residential mortgages
    (1,288 )     (573 )     (297 )     (902 )     (967 )
Indirect installment
    (3,881 )     (2,833 )     (2,181 )     (2,778 )     (3,959 )
Consumer lines of credit
    (1,444 )     (1,240 )     (1,373 )     (1,026 )     (1,379 )
Other
    (1,297 )     (1,308 )     (684 )     (659 )     (1,251 )
                                         
Total charge-offs
    (69,667 )     (35,914 )     (15,213 )     (14,680 )     (19,707 )
Recoveries:
                                       
Commercial
    912       1,326       481       821       650  
Direct installment
    1,024       1,030       1,241       1,523       988  
Residential mortgages
    69       181       158       187       145  
Indirect installment
    625       638       683       345       757  
Consumer lines of credit
    122       121       117       126       145  
Other
    22       21       50       99       149  
                                         
Total recoveries
    2,774       3,317       2,730       3,101       2,834  
Net charge-offs
    (66,893 )     (32,597 )     (12,483 )     (11,579 )     (16,873 )
Provision for loan losses
    66,802       72,371       12,693       10,412       12,176  
                                         
Balance at end of period
  $ 104,655     $ 104,730     $ 52,806     $ 52,575     $ 50,707  
                                         
Net loan charge-offs/average loans
    1.15 %     0.60 %     0.29 %     0.29 %     0.46 %
Allowance for loan losses/total loans
    1.79 %     1.80 %     1.22 %     1.24 %     1.35 %
Allowance for loan losses/non-performing loans
    71.92 %     72.99 %     162.48 %     188.10 %     154.12 %
 
The national trends in the economy and real estate market deteriorated during 2008, and the deterioration accelerated significantly in the fourth quarter of 2008. These trends were particularly evident in the Florida market where excess inventory built up, new construction slowed dramatically and credit markets stopped functioning normally. With economic activity turning negative across all sectors of the economy, sales activity in the Florida real estate market virtually ceased during the fourth quarter of 2008. The significant deterioration in the Florida market during the fourth quarter of 2008 also reflected increased stress on borrowers’ cash flow streams and increased stress on guarantors characterized by significant reductions in their liquidity positions.
 
During 2009, activity throughout the Florida marketplace increased across various asset classes as price points had been reduced to levels that generated interest from buyers. The Corporation experienced increased activity and levels of interest in condominiums and developed residential lots. In addition, the Corporation also experienced increased interest in land as a number of clients pursued sales opportunities for further development.


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The following tables provide additional information relating to the provision and allowance for loan losses for the Corporation’s core portfolios (dollars in thousands):
 
                                 
    FNBPA (PA)     FNBPA (FL)     Regency     Total  
 
At or for the Year Ended December 31, 2009
                               
Provision for loan losses
  $ 25,045     $ 35,090     $ 6,667     $ 66,802  
Allowance for loan losses
    78,061       19,789       6,805       104,655  
Net charge-offs
    16,744       43,807       6,342       66,893  
Net charge-offs/average loans
    0.30 %     15.80 %     4.04 %     1.15 %
Allowance for loan losses/total loans
    1.43 %     8.11 %     4.20 %     1.79 %
Allowance for loan losses/non-performing loans
    117.99 %     27.59 %     89.33 %     71.92 %
At or for the Year Ended December 31, 2008
                               
Provision for loan losses
  $ 34,694     $ 32,035     $ 5,642     $ 72,371  
Allowance for loan losses
    69,745       28,506       6,479       104,730  
Net charge-offs
    11,795       15,049       5,753       32,597  
Net charge-offs/average loans
    0.24 %     5.02 %     3.78 %     0.60 %
Allowance for loan losses/total loans
    1.30 %     9.69 %     4.10 %     1.80 %
Allowance for loan losses/non-performing loans
    153.43 %     30.61 %     132.09 %     72.99 %
 
FNBPA (PA) reflects FNBPA’s total portfolio excluding the Florida portfolio which is presented separately.
 
During 2009, the Corporation was able to reduce its Florida land-related portfolio including OREO by $46.9 million or 31.2%, reducing total land-related exposure including OREO to $103.2 million at December 31, 2009. In addition, the condominium portfolio exposure is down $17.1 million since December 31, 2008 to stand at $0.1 million. Including OREO, the condominium portfolio was reduced by $12.8 million during 2009, representing a 74.3% decline since December 31, 2008. Including OREO, the condominium portfolio stands at $4.4 million at December 31, 2009. These reductions are consistent with the Corporation’s objective to reduce this exposure in the Florida portfolio.
 
The allowance for loan losses was $104.7 million at both December 31, 2009 and 2008. For 2009, net charge-offs totaled $66.9 million compared to $32.6 million during 2008, an increase of $34.3 million due to continued economic deterioration in Florida, and to some extent, the slowing economy in Pennsylvania. The total net charge-offs for 2009 include $43.8 million related to the Florida loan portfolio. Additionally, during 2009, the Corporation provided $35.1 million to the reserve related to Florida, bringing the total allowance for loan losses for the Florida portfolio to $19.8 million or 8.11% of total loans in that portfolio.
 
The allowance for loan losses as a percentage of non-performing loans decreased slightly from 72.99% as of December 31, 2008 to 71.92% as of December 31, 2009. While the allowance for loan losses remained constant at $104.7 million, non-performing loans increased $2.0 million or 1.4% over the same period. The reduction in the allowance coverage of non-performing loans relates to the nature of the loans that were added to non-performing status which were supported to a large extent by real estate collateral at current valuations and therefore did not require a 100% reserve allocation given the estimated loss exposure on the loans.
 
The allowance for loan losses ended 2009 flat with 2008 as specific reserves established in 2008 on several sizable Florida credits were released when the credits were charged down during 2009. The allowance for loan losses at December 31, 2009 included $19.8 million or 18.9% of the total related to the Corporation’s Florida loan portfolio. Net charge-offs increased $34.3 million or 105.2%, with the Florida loan portfolio comprising $28.8 million of that total increase.


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The allowance for loan losses increased $51.9 million during 2008 representing a 98.3% increase in reserves for loan losses between December 31, 2007 and December 31, 2008, due to higher net charge-offs, additional specific reserves and increased allocations for a weaker environment. The significant increase primarily reflects continued deterioration in Florida, and to a much lesser extent, the slowing economy in Pennsylvania. The allowance for loan losses at December 31, 2008 included $28.5 million or 27.2% of the total relating to the Corporation’s Florida loan portfolio. Net charge-offs increased $20.1 million or 161.1% reflecting higher loan charge-offs, including $15.0 million in charge-offs in the Florida market during 2008.
 
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 during 2007.
 
At December 31, 2009 and 2008, there were $8.0 million and $16.1 million of loans, respectively, that were impaired loans acquired and have no associated allowance for loan losses as they were accounted for in accordance with ASC Topic 310-30, Receivables - Loans and Debt Securities Acquired with Deteriorated Credit Quality.
 
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 Corporation’s credit quality, such as the local and regional economies that the Corporation serves. Assessment of relevant economic factors indicates that the Corporation’s primary markets historically tend to lag the national economy, with local economies in the Corporation’s market areas also improving or weakening, as the case may be, but at a more measured rate than the national trends. Regional economic factors influencing management’s estimate of reserves include uncertainty of the labor markets in the regions the Corporation serves and a contracting labor force due, in part, to productivity growth and industry consolidations. 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
 
    2009     Loans     2008     Loans     2007     Loans     2006     Loans     2005     Loans  
 
Commercial
  $ 71,789       55 %   $ 76,071       55 %   $ 32,607       51 %   $ 30,813       50 %   $ 27,112       43 %
Direct installment
    14,707       17       14,022       18       11,387       21       11,445       22       11,631       24  
Residential mortgages
    4,204       10       3,659       11       2,621       11       3,068       11       2,958       13  
Indirect installment
    6,204       9       5,012       9       3,766       10       4,649       11       6,324       13  
Consumer lines of credit
    4,176       7       4,851       6       2,310       6       2,343       6       2,486       7  
Other
    3,575       2       1,115       1       115       1       257             196        
                                                                                 
    $ 104,655       100 %   $ 104,730       100 %   $ 52,806       100 %   $ 52,575       100 %   $ 50,707       100 %
                                                                                 
 
The amount of the allowance allocated to commercial loans decreased in 2009 due to the release of specific reserves on certain Florida loans in conjunction with the $43.8 million in charge-offs within that portfolio that occurred during 2009.


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The amount of the allowance allocated to commercial loans increased in 2008 primarily due to increased asset quality deterioration and allocations for a weaker environment, primarily a result of the continued deterioration in the Florida market with $28.5 million of the commercial allowance for the Florida portfolio.
 
The amount of the allowance 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 a developer relationship in the Florida market.
 
The amount of the allowance 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.
 
Investment Activity
 
Investment activities serve to enhance net interest income 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 fair 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 OTTI is deemed to have occurred or a change in the Corporation’s intent and ability to hold the securities to maturity.
 
As of December 31, 2009, securities totaling $715.3 million and $775.3 million were classified as available for sale and held to maturity, respectively. During 2009, securities available for sale increased by $233.1 million and securities held to maturity decreased by $68.6 million from December 31, 2008. This change in the mix between available for sale and held to maturity securities is a result of management’s decision to increase the allocation in available for sale securities with short duration securities.


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The following table indicates the respective maturities and weighted-average yields of securities as of December 31, 2009 (dollars in thousands):
 
                 
          Weighted
 
          Average
 
    Amount     Yield  
 
Obligations of U.S. Treasury and other U.S. Government agencies:
               
Maturing after one year but within five years
  $ 247,781       2.27 %
Maturing after ten years
    10,061       2.05  
States of the U.S. and political subdivisions:
               
Maturing within one year
    7,766       2.90  
Maturing after one year but within five years
    34,785       5.30  
Maturing after five years but within ten years
    37,904       5.94  
Maturing after ten years
    116,676       6.16  
Collateralized debt obligations:
               
Maturing after ten years
    8,414       2.86  
Other debt securities:
               
Maturing within one year
    25       4.82  
Maturing after ten years
    12,023       5.13  
Residential mortgage-backed securities:
               
Agency mortgage-backed securities
    892,647       4.30  
Agency collateralized mortgage obligations
    70,771       2.37  
Non-agency collateralized mortgage obligations
    49,045       5.03  
Equity securities
    2,732       5.25  
                 
Total
  $ 1,490,630       4.07  
                 
 
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 Corporation’s primary source of funds is deposits. Those deposits are provided by businesses, municipalities and individuals located within the markets served by the Corporation’s Community Banking subsidiary.
 
Total deposits increased $0.3 billion to $6.4 billion at December 31, 2009 compared to December 31, 2008, primarily as a result of an increase in transaction accounts, which is comprised of non-interest bearing, savings and NOW accounts (which includes money market deposit accounts), which was partially offset by a decline in certificates of deposit. The increase in transaction accounts is a result of the Corporation’s ability to capitalize on competitor disruption in the marketplace, with ongoing marketing campaigns designed to attract new customers to the Corporation’s local approach to banking. Certificates of deposit are down by design reflecting the Corporation’s continuing strategy to focus on growing transaction accounts.
 
Short-term borrowings, made up of treasury management accounts (also referred to as securities sold under repurchase agreements), federal funds purchased, subordinated notes and other short-term borrowings, increased by $72.9 million to $669.2 million at December 31, 2009 compared to December 31, 2008. This increase


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is the result of increases of $122.1 million, $26.9 million and $9.9 million in treasury management accounts, subordinated notes and other short-term borrowings, respectively, partially offset by a decrease of $86.0 million in federal funds purchased. The increase in treasury management accounts is the result of the Corporation’s strong growth in new commercial client relationships.
 
Treasury management accounts are the largest component of short-term borrowings. The treasury management accounts have next day maturities. At December 31, 2009 and 2008, treasury management accounts represented 80.2% and 69.6%, respectively, of total short-term borrowings.
 
Following is a summary of selected information relating to treasury management accounts (dollars in thousands):
 
                         
    2009     2008     2007  
 
Balance at year-end
  $ 536,784     $ 414,705     $ 276,552  
Maximum month-end balance
    551,779       433,411       291,200  
Average balance during year
    472,628       373,200       266,726  
Weighted average interest rates:
                       
At end of year
    0.84 %     1.20 %     3.71 %
During the year
    0.97       2.08       4.56  
 
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 for 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 Corporation’s capital position.
 
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 TPS. As of December 31, 2009, the Corporation has issued 24,150,000 common shares in a public equity offering.
 
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. From time to time, the Corporation issues shares initially acquired by the Corporation as treasury stock under its various benefit plans. 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 Management’s Discussion and Analysis of Financial Condition and Results of Operations, which is included in Item 7 of this Report.


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ITEM 8.      FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
Management’s Report on F.N.B. Corporation’s Internal Control Over Financial Reporting - Reporting at a Bank Holding Company Level
 
February 26, 2010
 
F.N.B. Corporation’s (the Company) internal control over financial reporting is a process effected by the board of directors, management, and other personnel, designed to provide reasonable assurance regarding the preparation of reliable financial statements in accordance with U.S. generally accepted accounting principles. An entity’s 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 entity; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles and the instructions to the Consolidated Financial Statements for Bank Holding Companies (Form FR Y-9C) (FR Y-9C instructions), and that receipts and expenditures of the entity are being made only in accordance with authorizations of management and the board of directors; and (3) provide reasonable assurance regarding prevention, or timely detection and correction of unauthorized acquisition, use, or disposition of the entity’s assets that could have a material effect on the financial statements.
 
Management is responsible for establishing and maintaining effective internal control over financial reporting. Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2009 based on the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control - Integrated Framework. Based on that assessment, management concluded that, as of December 31, 2009 the Company’s internal control over financial reporting is effective based on the criteria established in Internal Control - Integrated Framework.
 
F.N.B. Corporation
 
     
/s/Stephen J. Gurgovits
   
   
By: Stephen J. Gurgovits
President and Chief Executive Officer
   
     
     
/s/Vincent J. Calabrese    
   
By: Vincent J. Calabrese
Chief Financial Officer
   


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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, 2009 and 2008, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2009. These financial statements are the responsibility of the Company’s 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, 2009 and 2008, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2009, in conformity with U.S. generally accepted accounting principles.
 
As discussed in footnote 2 to the consolidated financial statements, during 2009 F.N.B. Corporation changed its method of accounting for other than temporary impairment of investments, in accordance with Financial Accounting Standards Board Statement No, 115-2 and 124-2, Recognition and Presentation of Other-Than-Temporary Impairments (codified in ASC 320-10 and 928-205), 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 (codified in ASC 740-10).
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), F.N.B. Corporation’s internal control over financial reporting as of December 31, 2009, 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, 2010 expressed an unqualified opinion thereon.
 
/s/Ernst & Young LLP
 
Pittsburgh, Pennsylvania
February 26, 2010


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Report of Independent Registered Public Accounting Firm
 
The Board of Directors and Stockholders
F.N.B. Corporation
 
We have audited F.N.B. Corporation’s internal control over financial reporting as of December 31, 2009, 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. Corporation’s 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 Report of Management. Our responsibility is to express an opinion on the company’s 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 company’s 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 management’s assessment and our audit were conducted to also meet the reporting requirements of Section 112 of the Federal Deposit Insurance Corporation Improvement Act (FDICIA), management’s assessment and our audit of F.N.B. Corporation’s 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 company’s 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 company’s 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, 2009, 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, 2009 and 2008, and the related statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2009, of F.N.B. Corporation and our report dated February 26, 2010 expressed an unqualified opinion thereon.
 
/s/Ernst & Young LLP
 
Pittsburgh, Pennsylvania
February 26, 2010


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F.N.B. Corporation and Subsidiaries
Consolidated Balance Sheets
Dollars in thousands, except par values
 
                 
    December 31  
    2009     2008  
 
Assets
               
Cash and due from banks
  $ 305,163     $ 169,224  
Interest bearing deposits with banks
    5,387       2,979  
Securities available for sale
    715,349       482,270  
Securities held to maturity (fair value of $796,537 and $851,251)
    775,281       843,863  
Residential mortgage loans held for sale
    12,754       10,708  
Loans, net of unearned income of $38,173 and $33,962
    5,849,361       5,820,380  
Allowance for loan losses
    (104,655 )     (104,730 )
                 
Net Loans
    5,744,706       5,715,650  
Premises and equipment, net
    117,921       122,599  
Goodwill
    528,710       528,278  
Core deposit and other intangible assets, net
    39,141       46,229  
Bank owned life insurance
    205,447       217,737  
Other assets
    259,218       225,274  
                 
Total Assets
  $ 8,709,077     $ 8,364,811  
                 
Liabilities
               
Deposits:
               
Non-interest bearing demand
  $ 992,298     $ 919,539  
Savings and NOW
    3,182,909       2,816,628  
Certificates and other time deposits
    2,205,016       2,318,456  
                 
Total Deposits
    6,380,223       6,054,623  
Other liabilities
    86,797       92,305  
Short-term borrowings
    669,167       596,263  
Long-term debt
    324,877       490,250  
Junior subordinated debt
    204,711       205,386  
                 
Total Liabilities
    7,665,775       7,438,827  
Stockholders’ Equity
               
Common stock - $0.01 par value
               
Authorized - 500,000,000 shares
               
Issued - 114,214,951 and 89,726,592 shares
    1,138       894  
Additional paid-in capital
    1,087,369       953,200  
Retained earnings
    (12,833 )     (1,143 )
Accumulated other comprehensive loss
    (30,633 )     (26,505 )
Treasury stock - 103,256 and 26,440 shares at cost
    (1,739 )     (462 )
                 
Total Stockholders’ Equity
    1,043,302       925,984  
                 
Total Liabilities and Stockholders’ Equity
  $ 8,709,077     $ 8,364,811  
                 
 
See accompanying Notes to Consolidated Financial Statements


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F.N.B. Corporation and Subsidiaries
Consolidated Statements of Income
Dollars in thousands, except per share data
 
                         
    Year Ended December 31  
    2009     2008     2007  
 
Interest Income
                       
Loans, including fees
  $ 329,841     $ 352,687     $ 318,015  
Securities:
                       
Taxable
    50,527       49,742       44,128  
Nontaxable
    7,131       6,686       5,828  
Dividends
    146       274       294  
Other
    77       392       625  
                         
Total Interest Income
    387,722       409,781       368,890  
Interest Expense
                       
Deposits
    85,699       111,568       124,276  
Short-term borrowings
    8,520       13,030       19,435  
Long-term debt
    17,202       21,044       19,360  
Junior subordinated debt
    9,758       12,347       10,982  
                         
Total Interest Expense
    121,179       157,989       174,053  
                         
Net Interest Income
    266,543       251,792       194,837  
Provision for loan losses
    66,802       72,371       12,693  
                         
Net Interest Income After Provision for Loan Losses
    199,741       179,421       182,144  
Non-Interest Income
                       
Impairment losses on securities
    (25,232 )     (17,189 )     (118 )
Non-credit related losses on securities not expected to be sold (recognized in other comprehensive income)
    17,339              
                         
Net impairment losses on securities
    (7,893 )     (17,189 )     (118 )
Service charges
    57,736       54,691       40,827  
Insurance commissions and fees
    16,672       15,572       13,994  
Securities commissions and fees
    7,460       8,128       6,326  
Trust
    11,811       12,095       8,577  
Bank owned life insurance
    5,677       6,408       4,117  
Gain on sale of mortgage loans
    3,061       1,824       1,715  
Gain on sale of securities
    528       834       1,155  
Other
    10,926       3,752       5,016  
                         
Total Non-Interest Income
    105,978       86,115       81,609  
Non-Interest Expense
                       
Salaries and employee benefits
    126,865       116,819       87,219  
Net occupancy
    20,258       17,888       14,676  
Equipment
    17,991       16,357       13,061  
Amortization of intangibles
    7,088       6,442       4,406  
Outside services
    23,587       20,918       15,956  
FDIC insurance
    13,881       898       516  
State taxes
    6,813       6,550       5,451  
Other real estate owned
    6,183       2,138       521  
Telephone
    5,255       5,336       4,035  
Advertising and promotional
    5,321       4,589       2,914  
Insurance claims paid
    2,528       2,768       2,309  
Merger related
          4,724       210  
Other
    19,569       17,277       14,340  
                         
Total Non-Interest Expense
    255,339       222,704       165,614  
                         
Income Before Income Taxes
    50,380       42,832       98,139  
Income taxes
    9,269       7,237       28,461  
                         
Net Income
    41,111       35,595       69,678  
Preferred stock dividends and discount amortization
    8,308              
                         
Net Income Available to Common Stockholders
  $ 32,803     $ 35,595     $ 69,678  
                         
Net Income per Common Share
                       
Basic
  $ 0.32     $ 0.44     $ 1.16  
                         
Diluted
  $ 0.32     $ 0.44     $ 1.15  
                         
Cash Dividends Paid per Common Share
  $ 0.48     $ 0.96     $ 0.95  
                         
 
See accompanying Notes to Consolidated Financial Statements


61


Table of Contents

F.N.B. Corporation and Subsidiaries
Consolidated Statements of Stockholders’ Equity
Dollars in thousands
 
                                                                 
                                  Accumu-
             
                                  lated
             
                                  Other
             
    Compre-
                Additional
          Compre-
             
    hensive
    Preferred
    Common
    Paid-In
    Retained
    hensive
    Treasury
       
    Income     Stock     Stock     Capital     Earnings     Income     Stock     Total  
 
Balance at January 1, 2007
          $     $ 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 ASC Topic 740, net of tax
                                    (1,174 )                     (1,174 )
                                                                 
Balance at December 31, 2007
                  602       508,891       42,426       (6,738 )     (824 )     544,357  
Net income
  $ 35,595                               35,595                       35,595  
Change in other comprehensive income (loss)
    (19,767 )                                     (19,767 )             (19,767 )
                                                                 
Comprehensive income
  $ 15,828                                                          
                                                                 
Common dividends declared: $0.96/share
                                    (78,283 )                     (78,283 )
Issuance of common stock
                    292       441,403       (275 )             362       441,782  
Restricted stock compensation
                            2,049                               2,049  
Tax benefit of stock-based compensation
                            857                               857  
Adjustment to initially apply Revised ASC Topic 715
                                    (606 )                     (606 )
                                                                 
Balance at December 31, 2008
                  894       953,200       (1,143 )     (26,505 )     (462 )     925,984  
Net income
  $ 41,111                               41,111                       41,111  
Change in other comprehensive income (loss)
    (4,128 )                                     (4,128 )             (4,128 )
                                                                 
Comprehensive income
  $ 36,983                                                          
                                                                 
Cash dividends declared:
                                                               
Preferred stock
                                    (3,333 )                     (3,333 )
Common stock: $0.48/share
                                    (49,042 )                     (49,042 )
Issuance of preferred stock (CPP)
            100,000                                               100,000  
Repurchase of preferred stock (CPP)
            (100,000 )                                             (100,000 )
Issuance of warrant/discount (CPP)
            (4,441 )             4,441                                
Adjust warrant/discount valuation (CPP)
            (282 )             282                                
Capitalize issuance costs (CPP)
            (252 )                     1                       (251 )
Amortization of CPP discount
            4,975                       (4,975 )                      
Issuance of common stock
                    244       127,829       (15 )             (1,277 )     126,781  
Restricted stock compensation
                            1,775                               1,775  
Tax expense of stock-based compensation
                            (158 )                             (158 )
Adoption of Revised ASC Topic 320
                                    4,563                       4,563  
                                                                 
Balance at December 31, 2009
          $     $ 1,138     $ 1,087,369     $ (12,833 )   $ (30,633 )   $ (1,739 )   $ 1,043,302  
                                                                 
 
See accompanying Notes to Consolidated Financial Statements


62


Table of Contents

F.N.B. Corporation and Subsidiaries
Consolidated Statements of Cash Flows
Dollars in thousands
 
                         
    Year Ended December 31  
    2009     2008     2007  
 
Operating Activities
                       
Net income
  $ 41,111     $ 35,595     $ 69,678  
Adjustments to reconcile net income to net cash flows provided by operating activities:
                       
Depreciation, amortization and accretion
    25,858       20,970       13,433  
Provision for loan losses
    66,802       72,371       12,693  
Deferred income taxes
    (9,463 )     (10,998 )     3,080  
Gain on sale of securities
    (528 )     (834 )     (1,155 )
Other-than-temporary impairment losses on securities
    7,893       17,189       118  
Tax expense (benefit) of stock-based compensation
    158       (857 )     (635 )
Net change in:
                       
Interest receivable
    2,619       4,171       117  
Interest payable
    (3,782 )     (320 )     (3,095 )
Residential mortgage loans held for sale
    (2,046 )     (5,071 )     (1,682 )
Trading securities
          264,416        
Bank owned life insurance
    (1,395 )     (4,648 )     (2,494 )
Other, net
    (11,421 )     (15,047 )     9,767  
                         
Net cash flows provided by operating activities
    115,806       376,937       99,825  
                         
Investing Activities
                       
Net change in:
                       
Interest bearing deposits with banks
    (2,407 )     4,126       990  
Loans
    (119,902 )     (271,604 )     (108,119 )
Securities available for sale:
                       
Purchases
    (529,780 )     (345,885 )     (265,278 )
Sales
    812       2,521       3,162  
Maturities
    289,996       221,255       158,805  
Securities held to maturity:
                       
Purchases
    (179,898 )     (302,794 )     (87,600 )
Maturities
    247,352       149,762       195,454  
Purchase of bank owned life insurance
    (16 )            
Withdrawal/surrender of bank owned life insurance
    13,700              
Increase in premises and equipment
    (7,997 )     (14,194 )     (2,761 )
Acquisitions, net of cash acquired
    47       57,412        
                        </