10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended June 30, 2011

 

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

For the transition period from                  to                 

Commission file number 001-31940

 

 

F.N.B. CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

Florida   25-1255406
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)

 

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

 

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

 

 

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

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

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

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

 

Large Accelerated Filer  x    Accelerated Filer  ¨    Non-accelerated Filer  ¨    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  ¨    No  x

APPLICABLE ONLY TO CORPORATE ISSUERS:

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

 

Class

 

Outstanding at July 31, 2011

Common Stock, $0.01 Par Value   127,024,866 Shares

 

 

 


Table of Contents

F.N.B. CORPORATION

FORM 10-Q

June 30, 2011

INDEX

 

         PAGE  
PART I – FINANCIAL INFORMATION  
Item 1.  

Financial Statements

  
 

Consolidated Balance Sheets

     2   
 

Consolidated Statements of Income

     3   
 

Consolidated Statements of Stockholders’ Equity

     4   
 

Consolidated Statements of Cash Flows

     5   
 

Notes to Consolidated Financial Statements

     6   
Item 2.  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     43   
Item 3.  

Quantitative and Qualitative Disclosures About Market Risk

     62   
Item 4.  

Controls and Procedures

     62   
PART II – OTHER INFORMATION   
Item 1.  

Legal Proceedings

     63   
Item 1A.  

Risk Factors

     63   
Item 2.  

Unregistered Sales of Equity Securities and Use of Proceeds

     64   
Item 3.  

Defaults Upon Senior Securities

     64   
Item 5.  

Other Information

     64   
Item 6.  

Exhibits

     64   
Signatures      65   

 

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Table of Contents

F.N.B. CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

Dollars in thousands, except par value

 

     June 30,     December 31,  
     2011     2010  
     (Unaudited)        
  

 

 

   

Assets

    

Cash and due from banks

   $ 172,401      $ 115,556   

Interest bearing deposits with banks

     16,732        16,015   
  

 

 

   

 

 

 

Cash and Cash Equivalents

     189,133        131,571   

Securities available for sale

     820,847        738,125   

Securities held to maturity (fair value of $1,038,434 and $959,414)

     1,010,672        940,481   

Residential mortgage loans held for sale

     9,922        12,700   

Loans, net of unearned income of $45,019 and $42,183

     6,702,595        6,088,155   

Allowance for loan losses

     (109,224     (106,120
  

 

 

   

 

 

 

Net Loans

     6,593,371        5,982,035   

Premises and equipment, net

     126,061        115,956   

Goodwill

     567,378        528,720   

Core deposit and other intangible assets, net

     34,580        32,428   

Bank owned life insurance

     208,714        208,051   

Other assets

     296,485        269,848   
  

 

 

   

 

 

 

Total Assets

   $ 9,857,163      $ 8,959,915   
  

 

 

   

 

 

 

Liabilities

    

Deposits:

    

Non-interest bearing demand

   $ 1,267,554      $ 1,093,230   

Savings and NOW

     3,853,257        3,423,844   

Certificates and other time deposits

     2,276,408        2,129,069   
  

 

 

   

 

 

 

Total Deposits

     7,397,219        6,646,143   

Other liabilities

     103,492        97,951   

Short-term borrowings

     728,300        753,603   

Long-term debt

     221,061        192,058   

Junior subordinated debt

     203,941        204,036   
  

 

 

   

 

 

 

Total Liabilities

     8,654,013        7,893,791   

Stockholders’ Equity

    

Common stock – $0.01 par value

    

Authorized – 500,000,000 shares

    

Issued – 127,240,016 and 114,902,454 shares

     1,267        1,143   

Additional paid-in capital

     1,219,663        1,094,713   

Retained earnings

     16,348        6,564   

Accumulated other comprehensive loss

     (30,716     (33,732

Treasury stock – 215,117 and 155,369 shares at cost

     (3,412     (2,564
  

 

 

   

 

 

 

Total Stockholders’ Equity

     1,203,150        1,066,124   
  

 

 

   

 

 

 

Total Liabilities and Stockholders’ Equity

   $ 9,857,163      $ 8,959,915   
  

 

 

   

 

 

 

See accompanying Notes to Consolidated Financial Statements

 

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Table of Contents

F.N.B. CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

Dollars in thousands, except per share data

Unaudited

 

    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2011     2010     2011     2010  

Interest Income

       

Loans, including fees

  $ 85,189      $ 81,092      $ 169,899      $ 160,378   

Securities:

       

Taxable

    10,975        11,323        21,489        22,576   

Nontaxable

    1,882        1,819        3,829        3,710   

Dividends

    12        18        131        37   

Other

    97        109        178        206   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total Interest Income

    98,155        94,361        195,526        186,907   

Interest Expense

       

Deposits

    14,054        16,776        28,649        34,330   

Short-term borrowings

    1,634        2,031        3,467        4,162   

Long-term debt

    1,655        2,091        3,283        4,637   

Junior subordinated debt

    2,118        1,982        4,150        3,892   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total Interest Expense

    19,461        22,880        39,549        47,021   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net Interest Income

    78,694        71,481        155,977        139,886   

Provision for loan losses

    8,551        12,239        16,779        24,203   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net Interest Income After Provision for Loan Losses

    70,143        59,242        139,198        115,683   

Non-Interest Income

       

Impairment losses on securities

    —          (1,313     —          (9,539

Non-credit related losses on securities not expected to be sold (recognized in other comprehensive income)

    —          711        —          7,251   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net impairment losses on securities

    —          (602     —          (2,288

Service charges

    15,666        14,662        30,001        28,384   

Insurance commissions and fees

    3,664        3,849        7,810        8,173   

Securities commissions and fees

    2,130        1,771        4,102        3,328   

Trust fees

    3,947        3,188        7,657        6,346   

Gain on sale of securities

    38        47        92        2,437   

Gain on sale of residential mortgage loans

    376        808        1,143        1,375   

Bank owned life insurance

    1,372        1,247        2,604        2,312   

Other

    2,065        3,473        4,281        8,651   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total Non-Interest Income

    29,258        28,443        57,690        58,718   

Non-Interest Expense

       

Salaries and employee benefits

    36,528        33,392        74,910        66,517   

Net occupancy

    5,060        4,840        10,970        10,378   

Equipment

    4,925        4,606        9,400        9,139   

Amortization of intangibles

    1,805        1,679        3,601        3,366   

Outside services

    5,377        5,885        10,577        11,407   

FDIC insurance

    1,870        2,641        4,589        5,263   

Merger related

    161        —          4,307        —     

Other

    12,643        10,041        24,572        22,457   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total Non-Interest Expense

    68,369        63,084        142,926        128,527   
 

 

 

   

 

 

   

 

 

   

 

 

 

Income Before Income Taxes

    31,032        24,601        53,962        45,874   

Income taxes

    8,670        6,679        14,425        11,972   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net Income

  $ 22,362      $ 17,922      $ 39,537      $ 33,902   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net Income per Share – Basic

  $ 0.18      $ 0.16      $ 0.32      $ 0.30   

Net Income per Share – Diluted

    0.18        0.16        0.32        0.30   

Cash Dividends per Share

    0.12        0.12        0.24        0.24   

See accompanying Notes to Consolidated Financial Statements

 

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F.N.B. CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Dollars in thousands, except per share data

Unaudited

 

     Compre-
hensive
Income
     Common
Stock
     Additional
Paid-In
Capital
    Retained
Earnings
    Accumulated
Other

Comprehensive
Loss
    Treasury
Stock
    Total  

Balance at January 1, 2011

      $ 1,143       $ 1,094,713      $ 6,564      $ (33,732   $ (2,564   $ 1,066,124   

Net income

   $ 39,537              39,537            39,537   

Change in other comprehensive income, net of tax

     3,016                3,016          3,016   
  

 

 

               

Comprehensive income

   $ 42,553                 
  

 

 

               

Common stock dividends ($0.24/share)

             (29,753         (29,753

Issuance of common stock

        124         123,180            (848     122,456   

Restricted stock compensation

           1,832              1,832   

Tax expense of stock-based compensation

           (62           (62
     

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2011

      $ 1,267       $ 1,219,663      $ 16,348      $ (30,716   $ (3,412   $ 1,203,150   
     

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at January 1, 2010

      $ 1,138       $ 1,087,369      $ (12,833   $ (30,633   $ (1,739   $ 1,043,302   

Net income

   $ 33,902              33,902            33,902   

Change in other comprehensive income, net of tax

     5,275                5,275          5,275   
  

 

 

               

Comprehensive income

   $ 39,177                 
  

 

 

               

Common stock dividends ($0.24/share)

             (27,584         (27,584

Issuance of common stock

        3         2,671            (778     1,896   

Restricted stock compensation

           1,418              1,418   

Tax expense of stock-based compensation

           (205           (205
     

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2010

      $ 1,141       $ 1,091,253      $ (6,515   $ (25,358   $ (2,517   $ 1,058,004   
     

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying Notes to Consolidated Financial Statements

 

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F.N.B. CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Dollars in thousands

Unaudited

 

     Six Months Ended  
     June 30,  
     2011     2010  

Operating Activities

    

Net income

   $ 39,537      $ 33,902   

Adjustments to reconcile net income to net cash flows provided by operating activities:

    

Depreciation, amortization and accretion

     11,867        15,238   

Provision for loan losses

     16,779        24,203   

Deferred taxes

     2,183        (1,457

Gain on sale of securities

     (92     (2,437

Other-than-temporary impairment losses on securities

     —          2,288   

Tax expense of stock-based compensation

     62        205   

Net change in:

    

Interest receivable

     1,312        866   

Interest payable

     (620     (923

Trading securities

     110,490        —     

Residential mortgage loans held for sale

     2,778        5,522   

Bank owned life insurance

     (638     (1,624

Other, net

     17,588        4,735   
  

 

 

   

 

 

 

Net cash flows provided by operating activities

     201,246        80,518   
  

 

 

   

 

 

 

Investing Activities

    

Net change in loans

     (226,196     (145,861

Securities available for sale:

    

Purchases

     (138,672     (261,012

Sales

     10,883        59,455   

Maturities

     162,150        163,233   

Securities held to maturity:

    

Purchases

     (299,545     (195,733

Maturities

     117,207        116,277   

Purchase of bank owned life insurance

     (26     (22

Increase in premises and equipment

     (6,843     (3,393

Net cash received in business combinations

     23,375        —     
  

 

 

   

 

 

 

Net cash flows used in investing activities

     (357,667     (267,056
  

 

 

   

 

 

 

Financing Activities

    

Net change in:

    

Non-interest bearing deposits, savings and NOW accounts

     288,317        144,500   

Time deposits

     (79,887     9,936   

Short-term borrowings

     (50,414     66,275   

Increase in long-term debt

     37,592        64,795   

Decrease in long-term debt

     (17,864     (183,838

Decrease in junior subordinated debt

     (95     (338

Net proceeds from issuance of common stock

     66,148        3,314   

Tax expense of stock-based compensation

     (62     (205

Cash dividends paid

     (29,752     (27,584
  

 

 

   

 

 

 

Net cash flows provided by financing activities

     213,983        76,855   
  

 

 

   

 

 

 

Net Increase in Cash and Cash Equivalents

     57,562        (109,683

Cash and cash equivalents at beginning of period

     131,571        310,550   
  

 

 

   

 

 

 

Cash and Cash Equivalents at End of Period

   $ 189,133      $ 200,867   
  

 

 

   

 

 

 

See accompanying Notes to Consolidated Financial Statements

 

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F.N.B. CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Dollars in thousands, except share data

(Unaudited)

June 30, 2011

BUSINESS

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

BASIS OF PRESENTATION

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

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

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

USE OF ESTIMATES

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

COMMON STOCK

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

 

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MERGERS AND ACQUISITIONS

On January 1, 2011, the Corporation completed its acquisition of Comm Bancorp, Inc. (CBI), a bank holding company based in Clarks Summit, Pennsylvania. On the acquisition date, CBI had $625,570 in assets, which included $445,271 in loans, and $561,796 in deposits. The transaction, valued at $75,547, resulted in the Corporation paying $17,202 in cash and issuing 5,940,742 shares of its common stock in exchange for 1,719,820 shares of CBI common stock. The assets and liabilities of CBI were recorded on the Corporation’s balance sheet at their fair values as of January 1, 2011, the acquisition date, and CBI’s results of operations have been included in the Corporation’s consolidated statement of income since that date. CBI’s banking affiliate, Community Bank and Trust Company, was merged into FNBPA on January 1, 2011. Based on a preliminary purchase price allocation, the Corporation recorded $38,658 in goodwill and $4,785 in core deposit intangible as a result of the acquisition. The Corporation has not yet finalized its determination of the fair values of certain acquired assets and liabilities and will adjust goodwill upon completion of the valuation process. None of the goodwill is deductible for income tax purposes.

Pending Acquisition

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

Acquired Loans

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

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

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

NEW ACCOUNTING STANDARDS

Comprehensive Income

In June 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-05, Comprehensive Income, with the intention of increasing the prominence of other comprehensive income in the financial statements. The FASB has eliminated the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity and will require it be presented either in a single continuous

 

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statement of comprehensive income or in two separate but consecutive statements. The single statement format would include the traditional income statement and the components and total other comprehensive income as well as total comprehensive income. In the two statement approach, the first statement would be the traditional income statement which would immediately be followed by a separate statement which includes the components of other comprehensive income, total other comprehensive income and total comprehensive income. These requirements should be applied retrospectively and are effective for the first interim or annual period beginning after December 15, 2011. Adoption of this standard is not expected to have a material effect on the financial statements, results of operations or liquidity of the Corporation.

Amendments to Fair Value Measurements

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

Troubled Debt Restructurings

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

Disclosure of Supplementary Pro Forma Information for Business Combinations

In December 2010, the FASB issued ASU No. 2010-29, Disclosure of Supplementary Pro Forma Information for Business Combinations, to address diversity in practice concerning pro forma revenue and earnings disclosure requirements for business combinations. This update specifies that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The update also expands the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination(s) included in the reported pro forma revenue and earnings. These requirements are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. Adoption of this standard did not have a material effect on the financial statements, results of operations or liquidity of the Corporation.

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

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

 

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

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

SECURITIES

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

Securities Available For Sale:

 

     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized

Losses
    Fair Value  

June 30, 2011

          

U.S. Treasury and other U.S. government agencies and corporations

   $ 332,046       $ 1,329       $ (91   $ 333,284   

Residential mortgage-backed securities:

          

Agency mortgage-backed securities

     234,465         6,683         —          241,148   

Agency collateralized mortgage obligations

     184,665         2,320         —          186,985   

Non-agency collateralized mortgage obligations

     34         1         —          35   

States of the U.S. and political subdivisions

     43,910         1,048         (1     44,957   

Collateralized debt obligations

     19,288         —           (12,683     6,605   

Other debt securities

     6,859         —           (913     5,946   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total debt securities

     821,267         11,381         (13,688     818,960   

Equity securities

     1,593         332         (38     1,887   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 822,860       $ 11,713       $ (13,726   $ 820,847   
  

 

 

    

 

 

    

 

 

   

 

 

 

December 31, 2010

          

U.S. Treasury and other U.S. government agencies and corporations

   $ 299,861       $ 1,395       $ (688   $ 300,568   

Residential mortgage-backed securities:

          

Agency mortgage-backed securities

     205,443         6,064         —          211,507   

Agency collateralized mortgage obligations

     146,977         1,081         (192     147,866   

Non-agency collateralized mortgage obligations

     37         1         —          38   

States of the U.S. and political subdivisions

     57,830         934         (26     58,738   

Collateralized debt obligations

     19,288         —           (13,314     5,974   

Other debt securities

     12,989         —           (1,744     11,245   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total debt securities

     742,425         9,475         (15,964     735,936   

Equity securities

     1,867         381         (59     2,189   
  

 

 

    

 

 

    

 

 

   

 

 

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

 

 

    

 

 

    

 

 

   

 

 

 

 

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Securities Held To Maturity:

 

     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair Value  

June 30, 2011

          

U.S. Treasury and other U.S. government agencies and corporations

   $ 4,666       $ 229       $ —        $ 4,895   

Residential mortgage-backed securities:

          

Agency mortgage-backed securities

     758,325         26,724         (1,556     783,493   

Agency collateralized mortgage obligations

     62,673         609         (164     63,118   

Non-agency collateralized mortgage obligations

     28,347         243         (908     27,682   

States of the U.S. and political subdivisions

     152,574         3,383         (311     155,646   

Collateralized debt obligations

     2,502         —           (508     1,994   

Other debt securities

     1,585         25         (4     1,606   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 1,010,672       $ 31,213       $ (3,451   $ 1,038,434   
  

 

 

    

 

 

    

 

 

   

 

 

 

December 31, 2010

          

U.S. Treasury and other U.S. government agencies and corporations

   $ 4,925       $ 212       $ —        $ 5,137   

Residential mortgage-backed securities:

          

Agency mortgage-backed securities

     688,575         23,878         (3,079     709,374   

Agency collateralized mortgage obligations

     71,102         511         (889     70,724   

Non-agency collateralized mortgage obligations

     33,950         328         (1,331     32,947   

States of the U.S. and political subdivisions

     137,210         1,735         (1,630     137,315   

Collateralized debt obligations

     3,132         —           (778     2,354   

Other debt securities

     1,587         18         (42     1,563   
  

 

 

    

 

 

    

 

 

   

 

 

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

 

 

    

 

 

    

 

 

   

 

 

 

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

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

 

     Three Months Ended      Six Months Ended  
     June 30,      June 30,  
     2011      2010      2011     2010  

Gross gains

   $ 38       $ 47       $ 288      $ 2,437   

Gross losses

     —           —           (196     —     
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 38       $ 47       $ 92      $ 2,437   
  

 

 

    

 

 

    

 

 

   

 

 

 

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

 

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

 

     Available for Sale      Held to Maturity  
     Amortized
Cost
     Fair
Value
     Amortized
Cost
     Fair
Value
 

Due in one year or less

   $ 40,243       $ 40,720       $ 6,339       $ 6,438   

Due from one to five years

     289,370         290,091         16,728         17,443   

Due from five to ten years

     12,671         12,996         36,047         36,875   

Due after ten years

     59,819         46,985         102,213         103,385   
  

 

 

    

 

 

    

 

 

    

 

 

 
     402,103         390,792         161,327         164,141   

Residential mortgage-backed securities:

           

Agency mortgage-backed securities

     234,465         241,148         758,325         783,493   

Agency collateralized mortgage obligations

     184,665         186,985         62,673         63,118   

Non-agency collateralized mortgage obligations

     34         35         28,347         27,682   

Equity securities

     1,593         1,887         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 822,860       $ 820,847       $ 1,010,672       $ 1,038,434   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

At June 30, 2011 and December 31, 2010, securities with a carrying value of $705,270 and $651,299, respectively, were pledged to secure public deposits, trust deposits and for other purposes as required by law. Securities with a carrying value of $576,986 and $676,083 at June 30, 2011 and December 31, 2010, respectively, were pledged as collateral for short-term borrowings.

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

Securities available for sale:

 

     Less than 12 Months     Greater than 12 Months     Total  
     Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
 

June 30, 2011

               

U.S. Treasury and other U.S. government agencies and corporations

   $ 57,646       $ (91   $ —         $ —        $ 57,646       $ (91

States of the U.S. and political subdivisions

     1,193         (1     —           —          1,193         (1

Collateralized debt obligations

     —           —          6,605         (12,683     6,605         (12,683

Other debt securities

     —           —          5,946         (913     5,946         (913

Equity securities

     28         (1     636         (37     664         (38
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
   $ 58,867       $ (93   $ 13,187       $ (13,633   $ 72,054       $ (13,726
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

December 31, 2010

               

U.S. Treasury and other U.S. government agencies and corporations

   $ 117,140       $ (688   $ —         $ —        $ 117,140       $ (688

Residential mortgage-backed securities:

               

Agency collateralized mortgage obligations

     22,616         (192     —           —          22,616         (192

States of the U.S. and political subdivisions

     3,322         (26     —           —          3,322         (26

Collateralized debt obligations

     —           —          5,974         (13,314     5,974         (13,314

Other debt securities

     4,024         (62     7,221         (1,682     11,245         (1,744

Equity securities

     —           —          648         (59     648         (59
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

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

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

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Securities held to maturity:

 

     Less than 12 Months     Greater than 12 Months     Total  
     Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
 

June 30, 2011

               

Residential mortgage-backed securities:

               

Agency mortgage-backed securities

   $ 180,079       $ (1,556   $ —         $ —        $ 180,079       $ (1,556

Agency collateralized mortgage obligations

     27,885         (164     —           —          27,885         (164

Non-agency collateralized mortgage obligations

     —           —          9,395         (908     9,395         (908

States of the U.S. and political subdivisions

     16,519         (311     —           —          16,519         (311

Collateralized debt obligations

     —           —          1,994         (508     1,994         (508

Other debt securities

     —           —          1,324         (4     1,324         (4
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
   $ 224,483       $ (2,031   $ 12,713       $ (1,420   $ 237,196       $ (3,451
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

December 31, 2010

               

Residential mortgage-backed securities:

               

Agency mortgage-backed securities

   $ 156,544       $ (3,079   $ —         $ —        $ 156,544       $ (3,079

Agency collateralized mortgage obligations

     39,074         (889     —           —          39,074         (889

Non-agency collateralized mortgage obligations

     2,551         (12     10,739         (1,319     13,290         (1,331

States of the U.S. and political subdivisions

     47,125         (1,415     2,319         (215     49,444         (1,630

Collateralized debt obligations

     —           —          2,354         (778     2,354         (778

Other debt securities

     —           —          1,288         (42     1,288         (42
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

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

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

As of June 30, 2011, securities with unrealized losses for less than 12 months include 4 investments in U.S. Treasury and other U.S. government agencies and corporations, 17 investments in residential mortgage-backed securities (15 investments in agency mortgage-backed securities and 2 investments in agency collateralized mortgage obligations (CMOs)), 15 investments in states of the U.S. and political subdivisions and 1 investment in an equity security. Securities with unrealized losses of greater than 12 months include 2 investments in residential mortgage-backed securities (non-agency CMOs), 13 investments in collateralized debt obligations (CDOs), 5 investments in other debt securities and 2 investments in equity securities as of June 30, 2011. The Corporation does not intend to sell the debt securities and it is not more likely than not the Corporation will be required to sell the securities before recovery of their amortized cost basis.

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

Other-Than-Temporary Impairment

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

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

 

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

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

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

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

For debt securities, the Corporation also considers the payment structure of the debt security, the likelihood of the issuer being able to make future payments, failure of the issuer of the security to make scheduled interest and principal payments, whether the Corporation has made a decision to sell the security and whether the Corporation’s cash or working capital requirements or contractual or regulatory obligations indicate that the debt security will be required to be sold before a forecasted recovery occurs. For equity securities, the Corporation also considers its intent and ability to retain the security for a period of time sufficient to allow for a recovery in fair value. Among the factors that the Corporation considers in determining its intent and ability to retain the security is a review of its capital adequacy, interest rate risk position and liquidity. The assessment of a security’s ability to recover any decline in fair value, the ability of the issuer to meet contractual obligations, the Corporation’s intent and ability to retain the security, and whether it is more likely than not the Corporation will be required to sell the security before recovery of its amortized cost basis require considerable judgment.

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

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

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

 

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that current defaults would have no recovery;

 

   

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

 

   

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

 

   

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

 

   

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

 

   

whether the security is currently deferring interest; and

 

   

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

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

The Corporation’s portfolio of trust preferred CDOs consists of 13 pooled issues and five single issue securities. One of the pooled issues is a senior tranche; the remaining 12 are mezzanine tranches. At June 30, 2011, the 13 pooled TPS had an estimated fair value of $8,599 while the single-issuer TPS had an estimated fair value of $7,271. The Corporation has concluded from the analysis performed at June 30, 2011 that it is probable that the Corporation will collect all contractual principal and interest payments on all of its single-issuer and pooled TPS sufficient to recover the amortized cost basis of the securities.

The Corporation did not record any impairment losses on securities for the six months ended June 30, 2011. The Corporation recognized net impairment losses on securities of $2,288 for the six months ended June 30, 2010 due to the write-down of securities that the Corporation deemed to be other-than-temporarily impaired.

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

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

 

     June 30,
2011
    December 31,
2010
 

Beginning balance of the amount related to credit loss for which a portion of OTTI was recognized in other comprehensive income

   $ (18,332   $ (16,051

Additions related to credit loss for securities with previously recognized OTTI

     —          (2,235

Additions related to credit loss for securities with initial OTTI

     —          (46
  

 

 

   

 

 

 

Ending balance of the amount related to credit loss for which a portion of OTTI was recognized in other comprehensive income

   $ (18,332   $ (18,332
  

 

 

   

 

 

 

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

 

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Table of Contents

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

 

Deal Name

   Class    Current
Par
Value
     Amortized
Cost
     Fair
Value
     Unrealized
Loss
    Lowest
Credit

Ratings
   Number of
Issuers

Currently
Performing
     Actual
Defaults
(as a
percent of
original
collateral)
     Actual
Deferrals
(as a
percent of
original
collateral)
     Projected
Recovery
Rates on
Current
Deferrals
(1)
     Expected
Defaults
(%) (2)
 

Pooled TPS:

                               

P1

   C1    $ 5,500       $ 2,266       $ 1,044       $ (1,222   C      42         20         19         37         10   

P2

   C1      4,889         2,746         780         (1,966   C      41         14         20         31         12   

P3

   C1      5,561         4,218         1,494         (2,724   C      51         12         6         18         14   

P4

   C1      3,994         2,852         860         (1,992   C      51         15         9         34         13   

P5

   MEZ      483         358         197         (161   C      16         19         13         63         11   

P6

   MEZ      1,909         1,087         589         (498   C      21         17         19         35         9   

P7

   B3      2,000         726         302         (424   C      21         29         9         34         9   

P8

   B1      3,028         2,386         816         (1,570   C      50         14         22         38         13   

P9

   C      5,048         756         154         (602   C      33         14         32         41         14   

P10

   C      507         461         84         (377   C      50         13         14         29         11   

P11

   C      2,010         787         114         (673   C      41         15         16         29         12   

P12

   A4L      2,000         645         171         (474   C      25         16         23         51         13   
     

 

 

    

 

 

    

 

 

    

 

 

      

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total OTTI

        36,929         19,288         6,605         (12,683        442         16         16         36         12   
     

 

 

    

 

 

    

 

 

    

 

 

      

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

P13 (3)

   SNR      2,384         2,502         1,994         (508   BBB      18         13         16         37         9   
     

 

 

    

 

 

    

 

 

    

 

 

      

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Not OTTI

        2,384         2,502         1,994         (508        18         13         16         37         9   
     

 

 

    

 

 

    

 

 

    

 

 

      

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Pooled TPS

      $ 39,313       $ 21,790       $ 8,599       $ (13,191        460         16         16         36         12   
     

 

 

    

 

 

    

 

 

    

 

 

      

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Single Issuer TPS:

                               

S1

      $ 2,000       $ 1,948       $ 1,612       $ (336   BB+      1               

S2

        2,000         1,912         1,641         (271   BBB+      1               

S3

        2,000         2,000         1,917         (83   B+      1               

S4

        1,000         999         777         (222   BB+      1               

S5

        1,300         1,328         1,324         (4   BB+      1               
     

 

 

    

 

 

    

 

 

    

 

 

      

 

 

             

Total Single Issuer TPS

      $ 8,300       $ 8,187       $ 7,271       $ (916        5               
     

 

 

    

 

 

    

 

 

    

 

 

      

 

 

             

Total TPS

      $ 47,613       $ 29,977       $ 15,870       $ (14,107        465               
     

 

 

    

 

 

    

 

 

    

 

 

      

 

 

             

 

(1) Some current deferrals will cure at rates varying from 10% to 90% after five years.
(2) Expected future defaults as a percent of remaining performing collateral.
(3) Excess subordination represents the additional defaults in excess of both current and projected defaults that the CDO can absorb before the bond experiences any credit impairment. The P13 security had excess subordination as a percent of current collateral of 60.77% as of June 30, 2011.

 

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Table of Contents

States of the U.S. and Political Subdivisions

The Corporation’s municipal bond portfolio of $197,531 as of June 30, 2011 is highly rated with an average rating of AA and 99.7% of the portfolio rated A or better. General obligation bonds comprise 100% of the portfolio. Geographically, these support the Corporation’s footprint as 77.6% of the securities are from municipalities located throughout Pennsylvania. The average holding size of the securities in the municipal bond portfolio is $936. Finally, this portfolio is supported by underlying insurance as 83.6% of the securities have credit support.

Non-Agency CMOs

The Corporation purchased $161,151 of non-agency CMOs from 2003 through 2005. These securities, which are classified as held to maturity, have a book value of $28,347 at June 30, 2011. Paydowns during the first six months of 2011 amounted to $5,604, an annualized paydown rate of 33.0%. At the time of purchase, these securities were all rated AAA, with an original average loan-to-value (LTV) ratio of 66.1% and original credit score of 724. At origination, the credit support, or the amount of loss the collateral pool could absorb before the AAA securities would incur a credit loss, ranged from 2.0% to 7.0%. The current credit support range is now 3.2% to 20.1%, due to paydowns and good credit performance through the first half of 2008. Beginning in the second half of 2008, national delinquencies, an early warning sign of potential default, began to accelerate on the collateral pools. The slight upward trend of the rate of delinquencies throughout 2010 continued into the first quarter of 2011 and have leveled off during the second quarter. All CMO holdings are current with regards to principal and interest.

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

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

 

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Table of Contents

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

 

                                 Subordination Data  
                   Credit Rating      Credit Support %      Delinquency %                                            
Security    Original
Year
     Book
Value
     S&P      Moody’s      Original      Current      .
30
Day
     60
Day
     90
Day
     %
Foreclosure
     %
OREO
     %
Bankruptcy
     %
Total
Delinquency
     %
LTV
     Credit
Score
 

1

     2003       $ 3,247         AAA         n/a         2.5         5.8         1.4         0.1         0.6         0.8         0.0         0.5         3.4         52.1         738   

2

     2003         2,265         AAA         n/a         4.3         16.3         2.0         1.2         5.0         2.6         0.3         1.2         12.2         56.0         710   

3

     2003         1,519         AAA         n/a         2.0         6.5         0.6         0.5         1.5         1.3         0.2         1.1         5.1         47.3         742   

4

     2003         1,522         AAA         n/a         2.7         18.2         0.8         0.0         1.6         2.2         0.0         1.1         5.7         50.4         n/a   

5

     2004         3,720         AAA         Baa2         7.0         20.1         0.9         1.2         2.0         7.0         1.2         0.8         13.0         55.8         689   

6

     2004         2,631         AA+         n/a         5.3         10.4         0.6         0.0         2.4         3.1         0.0         1.9         8.0         46.5         734   

7

     2004         1,260         n/a         A1-         2.5         8.5         0.0         1.1         0.0         4.8         0.0         0.0         5.9         56.0         736   

8

     2004         1,881         AAA         Baa2         4.4         9.3         1.3         0.5         0.5         2.6         0.5         1.1         6.5         55.1         733   

9

     2005         6,518         CCC         Caa1         5.1         5.0         3.6         2.1         12.2         5.4         0.5         2.5         26.2         65.5         706   

10

     2005         3,784         CCC         B3         4.7         3.2         3.5         2.2         3.8         9.1         1.2         1.6         21.4         65.8         726   
     

 

 

          

 

 

    

 

 

                         

 

 

    

 

 

 
      $ 28,347               4.1         9.5                              57.3         719   
     

 

 

          

 

 

    

 

 

                         

 

 

    

 

 

 

 

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Table of Contents

FEDERAL HOME LOAN BANK STOCK

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

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

At June 30, 2011 and December 31, 2010, the Corporation’s FHLB stock totaled $26,057 and $26,564, respectively, and is included in other assets on the balance sheet. The Corporation accounts for the stock in accordance with ASC Topic 325, which requires the investment to be carried at cost and evaluated for impairment based on the ultimate recoverability of the par value.

The Corporation periodically evaluates its FHLB investment for possible impairment based on, among other things, the capital adequacy of the FHLB and its overall financial condition. The Federal Housing Finance Agency, the regulator of the FHLB, requires it to maintain a total capital-to-assets ratio of at least 4.0%. At March 31, 2011, the FHLB’s capital ratio of 8.1% exceeded the regulatory requirement. Failure by the FHLB to meet this regulatory capital requirement would require an in-depth analysis of other factors including:

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

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

LOANS

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

 

     June 30,
2011
     December 31,
2010
 

Commercial

   $ 3,776,287       $ 3,337,992   

Direct installment

     1,039,270         1,002,725   

Residential mortgages

     676,574         622,242   

Indirect installment

     535,191         514,369   

Consumer lines of credit

     542,470         493,881   

Commercial leases

     93,273         79,429   

Other

     39,530         37,517   
  

 

 

    

 

 

 
   $ 6,702,595       $ 6,088,155   
  

 

 

    

 

 

 

 

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Table of Contents

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

Unearned income on loans was $45,019 and $42,183 at June 30, 2011 and December 31, 2010, respectively.

The loan portfolio consists principally of loans to individuals and small- and medium-sized businesses within the Corporation’s primary market area of Pennsylvania and northeastern Ohio. The portfolio also includes commercial loans in Florida, which totaled $180,232 or 2.7% of total loans as of June 30, 2011 compared to $195,281 or 3.2% of total loans as of December 31, 2010. In addition, the portfolio contains consumer finance loans to individuals in Pennsylvania, Ohio, Tennessee and Kentucky, which totaled $163,150 or 2.4% of total loans as of June 30, 2011 compared to $162,805 or 2.7% of total loans as of December 31, 2010.

The composition of the Corporation’s commercial loan portfolio in Florida consisted of the following as of June 30, 2011: unimproved residential land (7.9%), unimproved commercial land (18.5%), improved land (3.2%), income producing commercial real estate (50.8%), residential construction (6.2%), commercial construction (12.1%) and owner-occupied (1.3%). The weighted average loan-to-value ratio for this portfolio based on most recent appraisals was 81.7% as of June 30, 2011.

The majority of the Corporation’s loan portfolio consists of commercial loans. As of June 30, 2011 and December 31, 2010, commercial real estate loans were $2,353,519 and $2,115,492, or 35.1% and 34.7% of total loans, respectively. As of June 30, 2011, approximately 49.0% of the commercial real estate loans were owner-occupied, while the remaining 51.0% were non-owner-occupied. As of June 30, 2011 and December 31, 2010, the Corporation had commercial construction loans of $225,614 and $202,018, respectively, representing 3.4% and 3.3%, respectively, of total loans for those periods.

CREDIT QUALITY

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

Non-performing loans include non-accrual and restructured loans. Past due loans are reviewed on a monthly basis to identify loans for non-accrual status. The Corporation places a loan on non-accrual status and discontinues interest accruals generally when principal or interest is due and has remained unpaid for 90 to 180 days depending on the loan type. When a loan is placed on non-accrual status, all unpaid interest recognized in the current year is reversed and interest accrued in prior years is charged to the allowance for loan losses. Non-accrual loans may not be restored to accrual status until all delinquent principal and interest have been paid and the ultimate collectibility of the remaining principal and interest is reasonably assured. 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.

Following is a summary of non-performing assets:

 

     June 30,
2011
     December 31,
2010
 

Non-accrual loans

   $ 107,091       $ 115,589   

Restructured loans

     20,146         19,705   
  

 

 

    

 

 

 

Total non-performing loans

     127,237         135,294   

Other real estate owned (OREO)

     35,793         32,702   
  

 

 

    

 

 

 

Total non-performing loans and OREO

     163,030         167,996   

Non-performing investments

     6,605         5,974   
  

 

 

    

 

 

 

Total non-performing assets

   $ 169,635       $ 173,970   
  

 

 

    

 

 

 

 

19


Table of Contents
     June 30,
2011
    December 31,
2010
 

Asset quality ratios:

    

Non-performing loans as a percent of total loans

     1.90     2.22

Non-performing loans + OREO as a percent of total loans + OREO

     2.42     2.74

Non-performing assets as a percent of total assets

     1.72     1.94

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

 

     30-89 Days
Past Due
     >90 Days Past
Due and

Still Accruing
     Non-Accrual      Total
Past Due
     Current      Total
Loans
 

June 30, 2011

                 

Commercial

   $ 14,152       $ 10,060       $ 97,174       $ 121,386       $ 3,654,901       $ 3,776,287   

Direct installment

     8,528         2,458         3,586         14,572         1,024,698         1,039,270   

Residential mortgages

     12,192         2,775         3,832         18,799         657,775         676,574   

Indirect installment

     4,297         260         908         5,465         529,726         535,191   

Consumer lines of credit

     857         479         851         2,187         540,283         542,470   

Commercial leases

     1,339         78         740         2,157         91,116         93,273   

Other

     45         5         —           50         39,480         39,530   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 41,410       $ 16,115       $ 107,091       $ 164,616       $ 6,537,979       $ 6,702,595   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2010

                 

Commercial

   $ 17,101       $ 3,020       $ 106,724       $ 126,845       $ 3,211,147       $ 3,337,992   

Direct installment

     8,603         2,496         3,285         14,384         988,341         1,002,725   

Residential mortgages

     9,127         2,144         3,272         14,543         607,699         622,242   

Indirect installment

     5,659         394         750         6,803         507,566         514,369   

Consumer lines of credit

     1,581         571         588         2,740         491,141         493,881   

Commercial leases

     1,551         9         970         2,530         76,899         79,429   

Other

     —           —           —           —           37,517         37,517   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

 

Pass

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

Special Mention

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

Substandard

  

in general, the condition of the borrower has significantly deteriorated and the performance of

the loan could further deteriorate if deficiencies are not corrected

Doubtful

  

in general, the condition of the borrower has significantly deteriorated and the collection in full

of both principal and interest is highly questionable or improbable

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

 

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Table of Contents

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

 

     Commercial Loan Credit Quality Categories  
      Pass      Special
Mention
     Substandard      Doubtful      Total  
June 30, 2011               

Commercial – PA

   $ 3,293,685       $ 114,414       $ 182,169       $ 5,787       $ 3,596,055   

Commercial – FL

     78,207         16,545         85,480         —           180,232   

Commercial leases

     91,937         518         818         —           93,273   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 3,463,829       $ 131,477       $ 268,467       $ 5,787       $ 3,869,560   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2010

              

Commercial – PA

   $ 2,887,682       $ 80,409       $ 170,714       $ 3,906       $ 3,142,711   

Commercial – FL

     83,444         38,664         73,173         —           195,281   

Commercial leases

     77,945         505         979         —           79,429   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

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

 

     Consumer Loan Credit Quality by Payment Status  
      Performing      Non-Performing      Total  

June 30, 2011

        

Direct installment

   $ 1,027,412       $ 11,858       $ 1,039,270   

Residential mortgages

     662,749         13,825         676,574   

Indirect installment

     534,211         980         535,191   

Consumer lines of credit

     541,402         1,068         542,470   

Other

     39,530         —           39,530   

December 31, 2010

        

Direct installment

   $ 991,921       $ 10,804       $ 1,002,725   

Residential mortgages

     608,642         13,600         622,242   

Indirect installment

     513,619         750         514,369   

Consumer lines of credit

     493,075         806         493,881   

Other

     37,517         —           37,517   

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

 

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Table of Contents

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

 

     Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Average
Recorded
Investment
     Interest
Income
Recognized
 

At or For the Six Months Ended June 30, 2011

              

With no specific allowance recorded:

              

Commercial

   $ 65,121       $ 85,778       $ —         $ 63,828       $ 55   

Direct installment

     11,858         12,172         —           11,689         132   

Residential mortgages

     13,825         14,182         —           14,297         142   

Indirect installment

     980         1,039         —           865         4   

Consumer lines of credit

     1,068         1,070         —           1,137         4   

Commercial leases

     740         740         —           912         —     

Other

     —           —           —           —           —     

With a specific allowance recorded:

              

Commercial

     33,627         33,765         8,440         35,460         22   

Direct installment

     —           —           —           —           —     

Residential mortgages

     —           —           —           —           —     

Indirect installment

     —           —           —           —           —     

Consumer lines of credit

     —           —           —           —           —     

Commercial leases

     —           —           —           —           —     

Other

     —           —           —           —           —     

Total:

              

Commercial

     98,748         119,543         8,440         99,288         77   

Direct installment

     11,858         12,172         —           11,689         132   

Residential mortgages

     13,825         14,182         —           14,297         142   

Indirect installment

     980         1,039         —           865         4   

Consumer lines of credit

     1,068         1,070         —           1,137         4   

Commercial leases

     740         740         —           912         —     

Other

     —           —           —           —           —     

 

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Table of Contents
     Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Average
Recorded
Investment
     Interest
Income
Recognized
 

At or For the Year Ended December 31, 2010

              

With no specific allowance recorded:

              

Commercial

   $ 70,832       $ 95,725       $ —         $ 81,394       $ 98   

Direct installment

     4,542         4,669         —           5,613         77   

Residential mortgages

     8,032         8,055         —           8,233         260   

Indirect installment

     750         1,930         —           833         —     

Consumer lines of credit

     589         604         —           584         —     

Commercial leases

     979         979         —           749         —     

Other

     —           —           —           —           —     

With a specific allowance recorded:

              

Commercial

     37,532         39,250         10,313         38,070         —     

Direct installment

     6,262         6,340         626         4,503         275   

Residential mortgages

     5,568         5,568         557         4,252         246   

Indirect installment

     —           —           —           —           —     

Consumer lines of credit

     217         217         22         138         9   

Commercial leases

     —           —           —           —           —     

Other

     —           —           —           —           —     

Total:

              

Commercial

     108,364         134,975         10,313         119,464         98   

Direct installment

     10,804         11,009         626         10,116         352   

Residential mortgages

     13,600         13,623         557         12,485         506   

Indirect installment

     750         1,930         —           833         —     

Consumer lines of credit

     806         821         22         722         9   

Commercial leases

     979         979         —           749         —     

Other

     —           —           —           —           —     

ALLOWANCE FOR LOAN LOSSES

The allowance for loan losses represents management’s estimate of probable loan losses inherent in the loan portfolio at a specific point in time. This estimate includes losses associated with specifically identified loans, as well as estimated probable credit losses inherent in the remainder of the loan portfolio. Additions are made to the allowance through both periodic provisions charged to income and recoveries of losses previously incurred. Reductions to the allowance occur as loans are charged off. Management evaluates the adequacy of the allowance at least quarterly, and in doing so relies on various factors including, but not limited to, assessment of historical loss experience, delinquency and non-accrual trends, portfolio growth, underlying collateral coverage and current economic conditions. This evaluation is subjective and requires material estimates that may change over time.

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

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

 

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Table of Contents

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

At June 30, 2011 and December 31, 2010, there were $17,804 and $3,626 of loans, respectively, that were impaired loans acquired with no associated allowance for loan losses as they were accounted for in accordance with ASC Topic 310-30, Receivables – Loans and Debt Securities Acquired with Deteriorated Credit Quality.

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

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2011     2010     2011     2010  

Balance at beginning of period

   $ 107,612      $ 109,592      $ 106,120      $ 104,655   

Charge-offs

     (7,570     (8,636     (14,903     (16,285

Recoveries

     631        845        1,228        1,467   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net charge-offs

     (6,939     (7,791     (13,675     (14,818

Provision for loan losses

     8,551        12,239        16,779        24,203   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 109,224      $ 114,040      $ 109,224      $ 114,040   
  

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for loan losses to:

        

Total loans, net of unearned income

         1.63     1.91

Non-performing loans

         85.84     76.19

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

 

     Balance at
Beginning
of Period
     Charge-Offs     Recoveries      Provision
for Loan
Losses
     Balance at
End of
Period
 

Commercial

   $ 76,408       $ (3,739   $ 189       $ 5,100       $ 77,958   

Direct installment

     14,767         (2,274     205         2,217         14,915   

Residential mortgages

     4,514         (169     23         112         4,480   

Indirect installment

     5,761         (604     156         392         5,705   

Consumer lines of credit

     4,612         (422     44         562         4,796   

Commercial leases

     1,254         (120     13         126         1,273   

Other

     296         (242     1         42         97   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 
   $ 107,612       $ (7,570   $ 631       $ 8,551       $ 109,224   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

 

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Table of Contents

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

 

     Balance at
Beginning of
Period
     Charge-Offs     Recoveries      Provision
for Loan
Losses
     Balance at
End of
Period
 

Commercial

   $ 74,606       $ (7,028   $ 329       $ 10,051       $ 77,958   

Direct installment

     14,941         (4,502     434         4,042         14,915   

Residential mortgages

     4,578         (407     31         278         4,480   

Indirect installment

     5,941         (1,537     294         1,007         5,705   

Consumer lines of credit

     4,743         (818     87         784         4,796   

Commercial leases

     1,070         (205     30         378         1,273   

Other

     241         (406     23         239         97   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 
   $ 106,120       $ (14,903   $ 1,228       $ 16,779       $ 109,224   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

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

 

     Allowance      Loans Outstanding  
     Individually
Evaluated  for
Impairment
     Collectively
Evaluated  for
Impairment
     Loans      Individually
Evaluated  for
Impairment
     Collectively
Evaluated  for
Impairment
 

Commercial

   $ 8,440       $ 69,518       $ 3,776,287       $ 115,156       $ 3,661,131   

Direct installment

     —           14,915         1,039,270         —           1,039,270   

Residential mortgages

     —           4,480         676,574         —           676,574   

Indirect installment

     —           5,705         535,191         —           535,191   

Consumer lines of credit

     —           4,796         542,470         —           542,470   

Commercial leases

     —           1,273         93,273         —           93,273   

Other

     —           97         39,530         —           39,530   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 8,440       $ 100,784       $ 6,702,595       $ 115,156       $ 6,587,439   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

BORROWINGS

Following is a summary of short-term borrowings:

 

     June 30,
2011
     December 31,
2010
 

Securities sold under repurchase agreements

   $ 563,196       $ 611,902   

Federal funds purchased

     20,000         —     

Subordinated notes

     135,104         131,458   

Other short-term borrowings

     10,000         10,243   
  

 

 

    

 

 

 
   $ 728,300       $ 753,603   
  

 

 

    

 

 

 

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

 

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Table of Contents

Following is a summary of long-term debt:

 

     June 30,
2011
     December 31,
2010
 

Federal Home Loan Bank advances

   $ 137,052       $ 118,700   

Subordinated notes

     74,233         72,745   

Other subordinated debt

     9,168         —     

Convertible debt

     608         613   
  

 

 

    

 

 

 
   $ 221,061       $ 192,058   
  

 

 

    

 

 

 

The Corporation’s banking affiliate has available credit with the FHLB of $2,016,214 of which $137,052 was used as of June 30, 2011. These advances are secured by loans collateralized by 1-4 family mortgages and FHLB stock and are scheduled to mature in various amounts periodically through the year 2019. Effective interest rates paid on these advances range from 0.99% to 4.79% for both the six months ended June 30, 2011 and the year ended December 31, 2010.

JUNIOR SUBORDINATED DEBT

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

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

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

 

     F.N.B.
Statutory
Trust I
    F.N.B.
Statutory
Trust II
    Omega
Financial
Capital Trust I
    Sun  Bancorp
Statutory
Trust I
 

Trust preferred securities

   $ 125,000      $ 21,500      $ 36,000      $ 16,500   

Common securities

     3,866        665        1,114        511   

Junior subordinated debt

     128,866        22,165        35,899        17,011   

Stated maturity date

     3/31/33        6/15/36        10/18/34        2/22/31   

Interest rate

     3.56     1.90     2.47     10.20
    

 

 

variable;

LIBOR plus

325 basis points

  

  

  

   

 

 

variable;

LIBOR plus

165 basis points

  

  

  

   

 
 

variable;

LIBOR plus
219 basis points

  

  
  

 

 

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Table of Contents

DERIVATIVE INSTRUMENTS

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

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

At June 30, 2011, the Corporation was party to 169 swaps with customers with notional amounts totaling approximately $570,268 and 169 swaps with derivative counterparties with notional amounts totaling approximately $570,268. The following table presents the fair value of the Corporation’s derivative financial instruments as well as their classification on the balance sheet:

 

    

Balance

Sheet

Location

   June 30,
2011
     December 31,
2010
 

Interest Rate Products:

        

Asset derivatives

   Other assets    $ 29,333       $ 25,631   

Liability derivatives

   Other liabilities      29,326         25,043   

The following table presents the effect of the Corporation’s derivative financial instruments on the income statement:

 

    

Income

Statement

Location

   Six Months Ended
June  30,
 
        2011     2010  

Interest rate products

   Other income    $ (582   $ (288

The Corporation has agreements with each of its derivative counterparties that contain a provision where if the Corporation defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Corporation could also be declared in default on its derivative obligations. The Corporation also has agreements with certain of its derivative counterparties that contain a provision if the Corporation fails to maintain its status as a well capitalized institution, then the counterparty could terminate the derivative positions and the Corporation would be required to settle its obligations under the agreements. Certain of the Corporation’s agreements with its derivative counterparties contain provisions where if a material or adverse change occurs that materially changes the Corporation’s creditworthiness in an adverse manner the Corporation may be required to fully collateralize its obligations under the derivative instrument.

Interest rate swap agreements generally require posting of collateral by either party under certain conditions. As of June 30, 2011, the fair value of counterparty derivatives in a net liability position, which includes accrued interest but excludes any adjustment for non-performance risk related to these agreements, was $30,123. At June 30, 2011, the Corporation has posted collateral with derivative counterparties with a fair value of $28,449, of which none is cash collateral. Additionally, if the Corporation had breached its agreements with its derivative counterparties it would be required to settle its obligations under the agreements at the termination value and would be required to pay an additional $1,674 in excess of amounts previously posted as collateral with the respective counterparty.

 

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Table of Contents

The Corporation has entered into interest rate lock commitments to originate residential mortgage loans held for sale and forward commitments to sell residential mortgage loans to secondary market investors. These arrangements are considered derivative instruments. The fair values of the Corporation’s rate lock commitments to customers and commitments with investors at June 30, 2011 are not material.

COMMITMENTS, CREDIT RISK AND CONTINGENCIES

The Corporation has commitments to extend credit and standby letters of credit that involve certain elements of credit risk in excess of the amount stated in the consolidated balance sheet. The Corporation’s exposure to credit loss in the event of non-performance by the customer is represented by the contractual amount of those instruments. The credit risk associated with loan commitments and standby letters of credit is essentially the same as that involved in extending loans to customers and is subject to normal credit policies. Since many of these commitments expire without being drawn upon, the total commitment amounts do not necessarily represent future cash flow requirements.

Following is a summary of off-balance sheet credit risk information:

 

     June 30,
2011
     December 31,
2010
 

Commitments to extend credit

   $ 1,782,204       $ 1,550,256   

Standby letters of credit

     108,432         101,185   

At June 30, 2011, funding of 78.5% of the commitments to extend credit was dependent on the financial condition of the customer. The Corporation has the ability to withdraw such commitments at its discretion. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Based on management’s credit evaluation of the customer, collateral may be deemed necessary. Collateral requirements vary and may include accounts receivable, inventory, property, plant and equipment and income-producing commercial properties.

Standby letters of credit are conditional commitments issued by the Corporation that may require payment at a future date. The credit risk involved in issuing letters of credit is quantified on a quarterly basis, through the review of historical performance of the Corporation’s portfolios and allocated as a liability on the Corporation’s balance sheet.

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.

STOCK INCENTIVE PLANS

Restricted Stock

The Corporation issues restricted stock awards, consisting of both restricted stock and restricted stock units, to key employees under its Incentive Compensation Plans (Plans). The grant date fair value of the restricted stock awards is equal to the price of the Corporation’s common stock on the grant date. For the six months ended June 30, 2011 and 2010, the Corporation issued 384,847 and 500,707 restricted stock awards with aggregate weighted average grant date fair values of $3,887 and $3,890, respectively, under these Plans. As of June 30, 2011, the Corporation had available up to 2,418,983 shares of common stock to issue under these Plans.

 

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Table of Contents

Under the Plans, more than half of the restricted stock awards granted to management are earned if the Corporation meets or exceeds certain financial performance results when compared to its peers. These performance-related awards are expensed ratably from the date that the likelihood of meeting the performance measure is probable through the end of a four-year vesting period. The service-based awards are expensed ratably over a three-year vesting period. The Corporation also issues discretionary service-based awards to certain employees that vest over five years.

The unvested restricted stock awards are eligible to receive cash dividends or dividend equivalents which are ultimately used to purchase additional shares of stock. Any additional shares of stock received as a result of cash dividends are subject to forfeiture if the requisite service period is not completed or the specified performance criteria are not met. These awards are subject to certain accelerated vesting provisions upon retirement, death, disability or in the event of a change of control as defined in the award agreements.

Share-based compensation expense related to restricted stock awards was $1,780 and $1,418 for the six months ended June 30, 2011 and 2010, the tax benefit of which was $623 and $496, respectively.

The following table summarizes certain information concerning restricted stock awards:

 

     Six Months Ended June 30,  
     2011      2010  
     Awards     Weighted
Average
Grant
Price
     Awards     Weighted
Average
Grant
Price
 

Unvested awards outstanding at beginning of period

     1,309,489      $ 8.52         854,440      $ 10.57   

Granted

     384,847        10.10         500,707        7.77   

Vested

     (171,446     13.59         (95,281     15.05   

Forfeited

     (1,397     9.20         (32,008     9.21   

Dividend reinvestment

     31,860        10.17         32,427        8.30   
  

 

 

      

 

 

   

Unvested awards outstanding at end of period

     1,553,353        8.39         1,260,285        9.09   
  

 

 

      

 

 

   

The total fair value of awards vested was $1,761 and $698 for the six months ended June 30, 2011 and 2010, respectively.

As of June 30, 2011, there was $6,933 of unrecognized compensation cost related to unvested restricted stock awards including $207 that is subject to accelerated vesting under the Plan’s immediate vesting upon retirement provision for awards granted prior to the adoption of ASC Topic 718, Compensation – Stock Compensation, on January 1, 2006. The components of the restricted stock awards as of June 30, 2011 are as follows:

 

     Service-
Based

Awards
     Performance-
Based
Awards
     Total  

Unvested awards

     563,747         989,606         1,553,353   

Unrecognized compensation expense

   $ 2,315       $ 4,618       $ 6,933   

Intrinsic value

   $ 5,835       $ 10,242       $ 16,077   

Weighted average remaining life (in years)

     2.21         2.67         2.50   

Stock Options

The Corporation did not grant stock options during the six months ended June 30, 2011 or 2010. All outstanding stock options were granted at prices equal to the fair market value at the date of the grant, are primarily exercisable within ten years from the date of the grant and were fully vested as of January 1, 2006. The Corporation issues shares of treasury stock or authorized but unissued shares to satisfy stock options exercised. Shares issued upon the exercise of stock options were 8,389 for the six months ended June 30, 2011. No stock options were exercised during the six months ended June 30, 2010.

 

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Table of Contents

The following table summarizes certain information concerning stock option awards:

 

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