F.N.B. 10-K 2009
Documents found in this filing:
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2008
Commission file number 001-31940
(Exact name of registrant as specified in its charter)
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes o No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a small reporting company. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
The aggregate market value of the registrants outstanding voting common stock held by non-affiliates on June 30, 2008, determined using a per share closing price on that date of $11.78, as quoted on the New York Stock Exchange, was $956,311,874.
As of January 31, 2009, the registrant had outstanding 89,695,788 shares of common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement of F.N.B. Corporation to be filed pursuant to Regulation 14A for the Annual Meeting of Stockholders to be held on May 20, 2009 (Proxy Statement) are incorporated by reference into Part III, items 10, 11, 12, 13 and 14, of this Annual Report on Form 10-K. The Proxy Statement will be filed with the Securities and Exchange Commission on or before April 30, 2009.
Forward-Looking Statements: From time to time F.N.B. Corporation (the Corporation) has made and may continue to make written or oral forward-looking statements with respect to the Corporations outlook or expectations for earnings, revenues, expenses, capital levels, asset quality or other future financial or business performance, strategies or expectations, or the impact of legal, regulatory or supervisory matters on the Corporations business operations or performance. This Annual Report on Form 10-K (the Report) also includes forward-looking statements. With respect to all such forward-looking statements, see Cautionary Statement Regarding Forward-Looking Information in Item 7 of this Report.
The Corporation was formed in 1974 as a bank holding company. During 2000, the Corporation elected to become and remains a financial holding company under the Gramm-Leach-Bliley Act of 1999 (GLB Act). The Corporation has four reportable business segments: Community Banking, Wealth Management, Insurance and Consumer Finance. As of December 31, 2008, the Corporation had 225 Community Banking offices in Pennsylvania and Ohio and 58 Consumer Finance offices in those states and Tennessee. The Corporation, through its Community Banking affiliate, also had 6 commercial loan production offices in Pennsylvania and Florida and two mortgage loan production offices in Ohio and Tennessee as of that date.
On April 1, 2008, the Corporation completed its acquisition of Omega Financial Corporation (Omega), a diversified financial services company based in State College, Pennsylvania. On the acquisition date, Omega had $1.8 billion in assets, which included $1.1 billion in loans, and $1.3 billion in deposits. The all-stock transaction, valued at approximately $388.2 million, resulted in the Corporation issuing 25,362,525 shares of its common stock in exchange for 12,544,150 shares of Omega common stock. The assets and liabilities of Omega were recorded on the Corporations balance sheet at their fair values as of April 1, 2008, the acquisition date, and Omegas results of operations have been included in the Corporations consolidated statement of income since then. Omegas banking subsidiary, Omega Bank, was merged into First National Bank of Pennsylvania (FNBPA) on April 1, 2008.
On August 16, 2008, the Corporation completed its acquisition of Iron and Glass Bancorp, Inc. (IRGB), a bank holding company based in Pittsburgh, Pennsylvania. On the acquisition date, IRGB had $301.7 million in assets, which included $168.8 million in loans, and $252.3 million in deposits. The transaction, valued at $83.7 million, resulted in the Corporation paying $36.7 million in cash and issuing 3,176,990 shares of its common stock in exchange for 1,125,026 shares of IRGB common stock. The assets and liabilities of IRGB were recorded on the Corporations balance sheet at their fair values as of August 16, 2008, the acquisition date, and IRGBs results of operations have been included in the Corporations consolidated statement of income since then. IRGBs banking subsidiary, Iron and Glass Bank, was merged into FNBPA on August 16, 2008.
The Corporation, through its subsidiaries, provides a full range of financial services, principally to consumers and small- to medium-sized businesses in its market areas. The Corporations business strategy focuses primarily on providing quality, community-based financial services adapted to the needs of each of the markets it serves. The Corporation seeks to maintain its community orientation by providing local management with certain autonomy in decision-making, enabling them to respond to customer requests more quickly and to concentrate on transactions within their market areas. However, while the Corporation seeks to preserve some decision-making at a local level, it has established centralized legal, loan review and underwriting, accounting, investment, audit, loan operations and data processing functions. The centralization of these processes has enabled the Corporation to maintain consistent quality of these functions and to achieve certain economies of scale.
As of December 31, 2008, the Corporation had total assets of $8.4 billion, loans of $5.8 billion and deposits of $6.1 billion. See Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations, and Item 8, Financial Statements and Supplementary Data, of this Report.
On January 9, 2009, the Corporation received a $100.0 million investment as part of its voluntary participation in the United States Treasury Departments (U.S. Treasury) Capital Purchase Program (CPP) implemented pursuant to the Emergency Economic Stabilization Act (EESA) enacted on October 3, 2008.
The CPP is a voluntary program implemented by the U.S. Treasury in October 2008 and is available to qualifying financial institutions. As part of the transaction completed on January 9, 2009, the U.S. Treasury purchased 100,000 shares of the Corporations Fixed Rate Cumulative Perpetual Preferred Stock, Series C (Preferred Series C Stock) and a warrant to purchase up to 1,302,083 shares of the Corporations common stock, for an aggregate purchase price of $100.0 million. The Preferred Series C Stock pays a cumulative dividend of 5% per annum for the first five years and 9% per annum thereafter. The dividends on the Preferred Series C Stock are payable quarterly in arrears on February 15, May 15, August 15 and November 15 of each year. In the event dividends on the Preferred Series C Stock are not paid in full for six dividend periods, whether or not consecutive, the U.S. Treasury will have the right to elect two directors to the Corporations Board of Directors and such right shall end when all accrued and unpaid dividends have been paid in full. The warrant has a ten year term and an exercise price of $11.52 per share of the Corporations common stock. The uniform terms and conditions for all CPP participants are publicly available at the U.S. Treasury website at:
In addition, pursuant to the terms of the Securities Purchase Agreement, the Corporation adopted the U.S. Treasurys standards for executive compensation and corporate governance for the period during which the U.S. Treasury holds the equity issued pursuant to the Securities Purchase Agreement, including the common stock that may be issued pursuant to the warrant. However, the Securities Purchase Agreement and all related documents may be amended unilaterally by the U.S. Treasury to comply with the American Recovery and Reinvestment Act of 2009, which was signed into law by the President on February 17, 2009, and which amended the executive compensation and corporate governance standards previously set forth by the EESA and subsequent U.S. Treasury regulations. The U.S. Treasury is expected to issue regulations to comply with those standards, which generally apply to the Corporations top five most highly compensated employees, or senior executive officers, and extend in certain contexts to cover up to the next twenty most highly compensated employees.
The standards include (1) ensuring that incentive compensation for senior executive officers does not encourage unnecessary and excessive risks that threaten the value of the institution; (2) requiring the clawback of any bonus, retention award, or incentive compensation paid to a senior executive officer or any of the next twenty most highly compensated employees based on statements of earnings, revenues, gains, or other criteria that are later found to be materially inaccurate; (3) agreeing not to deduct for tax purposes executive compensation in excess of $500,000 for each senior executive officer; (4) prohibiting severance payments to a senior executive officer or any of the next five most highly compensated employees; (5) prohibiting the payment or accrual of any bonus, retention award, or incentive compensation to a senior executive officer (except for payments of long-term restricted stock, provided that the award does not vest while the U.S. Treasurys funds are outstanding and the award does not have a value greater than one third of the receiving employees total annual compensation); (6) prohibiting any compensation plan that encourages manipulation of the financial institutions reporting earnings to enhance the compensation of any of its employees; (7) requiring the establishment of a Board Compensation Committee comprised entirely of independent directors, for the purpose of reviewing employee compensation plans, which must meet at least semiannually to discuss and evaluate employee compensation plans in light of any risk posed by such plans to the financial institution; (8) requiring the chief executive officer and chief financial officer of the financial institution to file a written certification of compliance with these standards with its annual filings required under the securities laws; (9) adopting a company-wide policy regarding excessive or luxury expenditures; (10) permitting a separate, non-binding shareholder vote to approve compensation of executives as disclosed pursuant to the compensation disclosure rules of the Securities and Exchange Commission (SEC); and (11) allowing the U.S. Treasury Secretary to review bonuses, retention awards, and other compensation paid to a senior executive officer or any of the next twenty most highly compensated employees prior to February 17, 2009, to determine whether any such payment was inconsistent with the purposes of the TARP or was otherwise contrary to the public interest, and if so, to engage in negotiations with the financial institution and the receiving employee for appropriate reimbursement to the federal government.
The standards above do not apply to prohibit any bonus payment required to be paid pursuant to a valid written employment contract executed on or before February 11, 2009.
The executive compensation and corporate governance restrictions will apply so long as the U.S. Treasury owns any of the Corporations debt or equity securities acquired in connection with the transactions described herein, including the Preferred Series C Stock or any shares of the Corporations common stock issued upon exercise of the warrant; however, the restrictions will not apply during any period in which the U.S. Treasury only holds the warrant to purchase the Corporations common stock. Accordingly, the Corporation could be subject to these restrictions for an indefinite period of time. Further, the Securities Purchase Agreement and all related documents may be further amended unilaterally by the U.S. Treasury to the extent required to comply with any changes to the applicable federal statutes. Any such amendments may provide for additional executive compensation and corporate governance standards or modify the standards set forth above.
In addition to the following information relating to the Corporations business segments, information is contained in the Business Segments footnote in the Notes to Consolidated Financial Statements, which is included in Item 8 of this Report. As of December 31, 2008, the Community Banking segment consisted of a regional community bank. The Wealth Management segment, as of that date, consisted of a trust company, a registered investment advisor and a subsidiary that offered broker-dealer services through a third party networking arrangement with a non-affiliated licensed broker-dealer entity. The Insurance segment consisted of an insurance agency and a reinsurer as of that date. The Consumer Finance segment consisted of a multi-state consumer finance company as of that date.
The Corporations Community Banking segment consists of FNBPA, which offers services traditionally offered by full-service commercial banks, including commercial and individual demand, savings and time deposit accounts and commercial, mortgage and individual installment loans.
The goal of Community Banking is to generate high quality, profitable revenue growth through increased business with its current customers, attract new customer relationships through FNBPAs current branches and loan production offices and expand into new and existing markets through de novo branch openings, acquisitions and the establishment of additional loan production offices. Consistent with this strategy, on August 16, 2008, April 1, 2008 and May 26, 2006, the Corporation completed its acquisitions of IRGB, Omega and The Legacy Bank (Legacy), respectively. For information pertaining to these acquisitions, see the Mergers and Acquisitions footnote in the Notes to Consolidated Financial Statements, which is included in Item 8 of this Report. In addition, the Corporation considers Community Banking a fundamental source of revenue opportunity through the cross-selling of products and services offered by the Corporations other business segments.
As of December 31, 2008, the Corporation operates its Community Banking business through a network of 225 branches in Pennsylvania and Ohio, including eight branches acquired in the IRGB acquisition and 62 branches acquired in the Omega acquisition.
Community Banking also includes five commercial loan production offices in Florida, one commercial loan production office in Pennsylvania, one mortgage loan production office in Ohio and one mortgage loan production office in Tennessee. The underwriting for all loan production offices is centrally performed.
The lending philosophy of Community Banking is to establish high quality customer relationships while minimizing credit losses by following strict credit approval standards (which include independent analysis of realizable collateral value), diversifying its loan portfolio by industry and borrower and conducting ongoing review and management of the loan portfolio. Commercial loans are generally made to established businesses within the geographic market areas served by Community Banking.
No material portion of the loans or deposits of Community Banking has been obtained from a single or small group of customers, and the loss of any one customers loans or deposits or a small group of customers loans or deposits by Community Banking would not have a material adverse effect on the Community Banking segment
or on the Corporation. The substantial majority of the loans and deposits have been generated within the geographic market areas in which Community Banking operates.
The Corporations Wealth Management segment delivers comprehensive wealth management services to individuals, corporations and retirement funds as well as existing customers of Community Banking. Wealth Management provides services to individuals and businesses located within the Corporations geographic markets.
The Corporations Wealth Management operations are conducted through three subsidiaries of the Corporation. The Corporations trust subsidiary, First National Trust Company (FNTC), provides a broad range of personal and corporate fiduciary services, including the administration of decedent and trust estates. As of December 31, 2008, the market value of trust assets under management was approximately $2.1 billion. FNTC is required to maintain certain minimum capitalization levels in accordance with regulatory requirements. FNTC periodically measures its capital position to ensure all minimum capitalization levels are maintained.
The Corporations Wealth Management segment also includes two other wholly-owned subsidiaries. First National Investment Services Company, LLC offers a broad array of investment products and services for customers of Wealth Management through a networking relationship with a third-party licensed brokerage firm. F.N.B. Investment Advisors, Inc. (Investment Advisors), an investment advisor registered with the SEC, offers customers of Wealth Management objective investment programs featuring mutual funds, annuities, stocks and bonds.
No material portion of the business of Wealth Management has been obtained from a single or small group of customers, and the loss of any one customers business or the business of a small group of customers by Wealth Management would not have a material adverse effect on the Wealth Management segment or on the Corporation.
The Corporations Insurance segment operates principally through First National Insurance Agency, LLC (FNIA), which is a wholly-owned subsidiary of the Corporation. FNIA is a full-service insurance brokerage agency offering numerous lines of commercial and personal insurance through major carriers to businesses and individuals primarily within the Corporations geographic markets. The goal of FNIA is to grow revenue through cross-selling to existing clients of Community Banking and to gain new clients through its own channels.
The Corporations Insurance segment also includes a reinsurance subsidiary, Penn-Ohio Life Insurance Company (Penn-Ohio). Penn-Ohio underwrites, as a reinsurer, credit life and accident and health insurance sold by the Corporations lending subsidiaries. Additionally, FNBPA owns a direct subsidiary, First National Corporation, which offers title insurance products.
No material portion of the business of Insurance has been obtained from a single or small group of customers, and the loss of any one customers business or the business of a small group of customers by Insurance would not have a material adverse effect on the Insurance segment or on the Corporation.
The Corporations Consumer Finance segment operates through its wholly-owned subsidiary, Regency Finance Company (Regency), which is involved principally in making personal installment loans to individuals and purchasing installment sales finance contracts from retail merchants. Such activity is primarily funded through the sale of the Corporations subordinated notes at Regencys branch offices. The Consumer Finance segment operates in Pennsylvania, Ohio and Tennessee.
No material portion of the business of Consumer Finance has been obtained from a single or small group of customers, and the loss of any one customers business or the business of a small group of customers by Consumer Finance would not have a material adverse effect on the Consumer Finance segment or on the Corporation.
The Corporation also has seven other subsidiaries. F.N.B. Statutory Trust I and F.N.B. Statutory Trust II were established by the Corporation to issue trust preferred securities to third-party investors. As a result of the Omega acquisition, the Corporation acquired Omega Financial Capital Trust I and Sun Bancorp Statutory Trust I, which also issue trust preferred securities to third-party investors. Regency Consumer Financial Services, Inc. and FNB Consumer Financial Services, Inc. are the general partner and limited partner, respectively, of FNB Financial Services, LP, a company established to issue, administer and repay the subordinated notes through which loans in the Consumer Finance segment are funded. F.N.B. Capital Corporation, LLC (FNB Capital) offers financing options for small- to medium-sized businesses that need financial assistance beyond the parameters of typical commercial bank lending products. Certain financial information concerning these subsidiaries, along with the parent company and intercompany eliminations, are included in the Parent and Other category in the Business Segments footnote in the Notes to Consolidated Financial Statements, which is included in Item 8 of this Report.
The Corporation primarily operates in Pennsylvania and northeastern Ohio. This area is served by several major interstate highways and is located at the approximate midpoint between New York City and Chicago. The primary market area served by the Corporation also extends to the Great Lakes shipping port of Erie, the Pennsylvania state capital of Harrisburg and the Greater Pittsburgh International Airport. The Corporation also has five commercial loan production offices in Florida, one commercial loan production office in Pennsylvania one mortgage loan production office in Ohio and one mortgage loan production office in Tennessee. In addition to Pennsylvania and northeastern Ohio, the Corporations Consumer Finance segment also operates in northern and central Tennessee and central and southern Ohio.
The Corporations subsidiaries compete for deposits, loans and financial services business with a large number of other financial institutions, such as commercial banks, savings banks, savings and loan associations, credit life insurance companies, mortgage banking companies, consumer finance companies, credit unions and commercial finance and leasing companies, many of which have greater resources than the Corporation. In providing wealth and asset management services, as well as insurance brokerage and merchant banking products and services, the Corporations subsidiaries compete with many other financial services firms, brokerage firms, mutual fund complexes, investment management firms, merchant and investment banking firms, trust and fiduciary service providers and insurance agencies.
In Regencys market areas of Pennsylvania, Ohio and Tennessee, the active competitors include banks, credit unions and national, regional and local consumer finance companies, some of which have substantially greater resources than that of Regency. The ready availability of consumer credit through charge accounts and credit cards constitutes additional competition. In this market area, competition is based on the rates of interest charged for loans, the rates of interest paid to obtain funds and the availability of customer services.
The ability to access and use technology is an increasingly important competitive factor in the financial services industry. Technology is not only important with respect to delivery of financial services and protecting the security of customer information, but also in processing information. The Corporation and each of its subsidiaries must continually make technological investments to remain competitive in the financial services industry.
See the Mergers and Acquisitions footnote in the Notes to Consolidated Financial Statements, which is included in Item 8 of this Report.
As of January 31, 2009, the Corporation and its subsidiaries had 2,009 full-time and 488 part-time employees. Management of the Corporation considers its relationship with its employees to be satisfactory.
Government Supervision and Regulation
The following summary sets forth certain of the material elements of the regulatory framework applicable to bank holding companies and financial holding companies and their subsidiaries and to companies engaged in securities and insurance activities and provides certain specific information about the Corporation. The bank regulatory framework is intended primarily for the protection of depositors through the federal deposit insurance guarantee, and not for the protection of security holders. Numerous laws and regulations govern the operations of financial services institutions and their holding companies. To the extent that the following information describes statutory and regulatory provisions, it is qualified in its entirety by express reference to each of the particular statutory and regulatory provisions. A change in applicable statutes, regulations or regulatory policy may have a material effect on the business of the Corporation.
The Corporation is a legal entity separate and distinct from its subsidiaries. As a financial holding company and a bank holding company, the Corporation is regulated under the Bank Holding Company Act of 1956, as amended (BHC Act), and is subject to inspection, examination and supervision by the Board of Governors of the Federal Reserve System (FRB). The Corporation is also subject to regulation by the SEC as a result of the Corporations status as a public company and due to the nature of the business activities of certain of the Corporations subsidiaries. The Corporations common stock is listed on the New York Stock Exchange (NYSE) under the trading symbol FNB and the Corporation is subject to the rules of the NYSE for listed companies.
The Corporations subsidiary bank (FNBPA) and trust company (FNTC) are organized as national banking associations, which are subject to regulation, supervision and examination by the Office of the Comptroller of the Currency (OCC). FNBPA is also subject to certain regulatory requirements of the Federal Deposit Insurance Corporation (FDIC), the FRB and other federal and state regulatory agencies, including requirements to maintain reserves against deposits, restrictions on the types and amounts of loans that may be granted and the interest that may be charged thereon, limitations on the types of investments that may be made, activities that may be engaged in and types of services that may be offered. In addition to banking laws, regulations and regulatory agencies, the Corporation and its subsidiaries are subject to various other laws and regulations and supervision and examination by other regulatory agencies, all of which directly or indirectly affect the operations and management of the Corporation and its ability to make distributions to its stockholders.
As a result of the GLB Act, which repealed or modified a number of significant statutory provisions, including those of the Glass-Steagall Act and the BHC Act which imposed restrictions on banking organizations ability to engage in certain types of activities, bank holding companies such as the Corporation now have broad authority to engage in activities that are financial in nature or incidental to such financial activity, including insurance underwriting and brokerage; merchant banking; securities underwriting, dealing and market-making; real estate development; and such additional activities as the FRB in consultation with the Secretary of the Treasury determines to be financial in nature or incidental thereto. A bank holding company may engage in these activities directly or through subsidiaries by qualifying as a financial holding company. A financial holding company may engage directly or indirectly in activities considered financial in nature, either de novo or by acquisition, provided the financial holding company gives the FRB after-the-fact notice of the new activities. The GLB Act also permits national banks, such as FNBPA, to engage in activities considered financial in nature through a financial subsidiary, subject to certain conditions and limitations and with the approval of the OCC.
As a regulated financial holding company, the Corporations relationships and good standing with its regulators are of fundamental importance to the continuation and growth of the Corporations businesses. The FRB, OCC, FDIC and SEC have broad enforcement powers and authority to approve, deny or refuse to act upon applications or notices of the Corporation or its subsidiaries to conduct new activities, acquire or divest businesses or assets or reconfigure existing operations. In addition, the Corporation, FNBPA and FNTC are subject to examination by various regulators, which results in examination reports (which are not publicly available) and ratings that can impact the conduct and growth of the Corporations businesses. These examinations consider not only compliance with applicable laws and regulations, including bank secrecy and anti-money laundering requirements, but also loan quality and administration, capital levels, asset quality and risk management ability
and performance, earnings, liquidity and various other factors, including, but not limited to, community reinvestment. An examination downgrade by any of the Corporations federal bank regulators could potentially result in the imposition of significant limitations on the activities and growth of the Corporation and its subsidiaries.
The FRB is the umbrella regulator of a financial holding company. In addition, a financial holding companys operating entities, such as its subsidiary broker-dealers, investment managers, merchant banking operations, investment companies, insurance companies and banks, are subject to the jurisdiction of various federal and state functional regulators.
There are numerous laws, regulations and rules governing the activities of financial institutions and bank holding companies. The following discussion is general in nature and seeks to highlight some of the more significant of these regulatory requirements, but does not purport to be complete or to describe all of the laws and regulations that apply to the Corporation and its subsidiaries.
Under the BHC Act, bank holding companies, including those that are also financial holding companies, are required to obtain the prior approval of the FRB before acquiring more than five percent of any class of voting stock of any non-affiliated bank. Pursuant to the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (Interstate Banking Act), a bank holding company may acquire banks located in states other than its home state without regard to the permissibility of such acquisitions under state law, but subject to any state requirement that the bank has been organized and operating for a minimum period of time, not to exceed five years, and the requirement that the bank holding company, after the proposed acquisition, controls no more than 10 percent of the total amount of deposits of insured depository institutions in the United States and no more than 30 percent or such lesser or greater amount set by state law of such deposits in that state.
Subject to certain restrictions, the Interstate Banking Act also authorizes banks to merge across state lines to create interstate banks. The Interstate Banking Act also permits a bank to open new branches in a state in which it does not already have banking operations if such state enacts a law permitting de novo branching. During 2008, the Corporation had one retail subsidiary national bank, FNBPA. FNBPA owns and operates eleven interstate branch offices within Ohio.
The FRB, the OCC and the FDIC issued substantially similar risk-based and leverage capital guidelines applicable to United States banking organizations. In addition, these regulatory agencies may from time to time require that a banking organization maintain capital above the minimum levels, whether because of its financial condition or actual or anticipated growth.
The FRBs risk-based guidelines are based on a three-tier capital framework. Tier 1 capital includes common stockholders equity and qualifying preferred stock, less goodwill and other adjustments. Tier 2 capital consists of preferred stock not qualifying as Tier 1 capital, mandatory convertible debt, limited amounts of subordinated debt, other qualifying term debt and the allowance for loan losses of up to 1.25 percent of risk-weighted assets. Tier 3 capital includes subordinated debt that is unsecured, fully paid, has an original maturity of at least two years, is not redeemable before maturity without prior approval by the FRB and includes a lock-in clause precluding payment of either interest or principal if the payment would cause the issuing banks risk-based capital ratio to fall or remain below the required minimum.
The Corporation, like other bank holding companies, currently is required to maintain Tier 1 capital and total capital (the sum of Tier 1, Tier 2 and Tier 3 capital) equal to at least 4.0% and 8.0%, respectively, of its total risk-weighted assets (including various off-balance-sheet items). Risk-based capital ratios are calculated by dividing Tier 1 and total capital by risk-weighted assets. Assets and off-balance sheet exposures are assigned to one of four categories of risk-weights, based primarily on relative credit risk. At December 31, 2008, the Corporations Tier 1 and total capital ratios under these guidelines were 9.69% and 11.13%, respectively. At December 31, 2008, the Corporation had $199.0 million of capital securities that qualified as Tier 1 capital and $10.5 million of subordinated debt that qualified as Tier 2 capital.
Bank holding companies and banks are also required to comply with minimum leverage ratio requirements. The leverage ratio is determined by dividing Tier 1 capital by adjusted average total assets (as defined for regulatory purposes). Although the stated minimum ratio is 100 to 200 basis points above three percent, banking organizations are required to maintain a ratio of at least five percent to be classified as well-capitalized. The Corporations leverage ratio at December 31, 2008 was 7.34%, and as such, the Corporation meets its leverage ratio requirements.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA), among other things, classifies insured depository institutions into five capital categories (well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized) and requires the respective federal regulatory agencies to implement systems for prompt corrective action for insured depository institutions that do not meet minimum capital requirements within such categories. FDICIA imposes progressively more restrictive constraints on operations, management and capital distributions, depending on the category in which an institution is classified. Failure to meet the capital guidelines could also subject a banking institution to capital-raising requirements, restrictions on its business and a variety of enforcement remedies, including the termination of deposit insurance by the FDIC, and in certain circumstances the appointment of a conservator or receiver. An undercapitalized bank must develop a capital restoration plan and its parent holding company must guarantee that banks compliance with the plan. The liability of the parent holding company under any such guarantee is limited to the lesser of five percent of the banks assets at the time it became undercapitalized or the amount needed to comply with the plan. Furthermore, in the event of the bankruptcy of the parent holding company, the obligation under such guarantee would take priority over the parents general unsecured creditors. In addition, FDICIA requires the various regulatory agencies to prescribe certain non-capital standards for safety and soundness relating generally to operations and management, asset quality and executive compensation and permits regulatory action against a financial institution that does not meet such standards.
The various regulatory agencies have adopted substantially similar regulations that define the five capital categories identified by FDICIA, using the total risk-based capital, Tier 1 risk-based capital and leverage capital ratios as the relevant capital measures. Such regulations establish various degrees of corrective action to be taken when an institution is considered undercapitalized. Under the regulations, a well-capitalized institution must have a Tier 1 risk-based capital ratio of at least six percent, a total risk-based capital ratio of at least ten percent and a leverage ratio of at least five percent and not be subject to a capital directive order. Under these guidelines, FNBPA was considered well-capitalized as of December 31, 2008.
The federal bank regulatory authorities risk based capital guidelines are based upon the 1998 Capital Accord of the Basel Committee on Banking Supervision, or Basel I. In 2004, federal bank regulators issued a proposed new framework for risk-based capital adequacy, sometimes referred to as Basel II. In July 2007, regulators announced their current plan for implementing the most advanced approach under Basel II for banks with over $250 billion in assets or over $10 billion in foreign exposure. In July 2008, regulators proposed rules allowing smaller financial institutions, such as the Corporation and its bank subsidiaries, to select between the current method of calculating risked-based capital (Basel I) and a standardized approach under Basel II. As proposed, the Basel II standardized approach would lower risk weightings for certain categories of assets (including mortgages) from the weightings reflected in Basel I, but unlike Basel I would require an explicit capital charge for operational risk. The comment period for this standardized approach proposal expired on October 27, 2008, but the rule has not yet been finalized. The Corporation and its subsidiaries have not determined whether they will elect to apply the Basel II standardized approach.
When determining the adequacy of an institutions capital, federal regulators must also take into consideration (a) concentrations of credit risk; (b) interest rate risk (when the interest rate sensitivity of an institutions assets does not match the sensitivity of its liabilities or its off-balance sheet position) and (c) risks from non-traditional activities, as well as an institutions ability to manage those risks. This evaluation is made as a part of the institutions regular safety and soundness examination. In addition, the Corporation, and any bank with significant trading activity, must incorporate a measure for market risk in their regulatory capital calculations.
The deposits of FNBPA are insured to the maximum extent permitted by the Deposit Insurance Fund, which is administered by the FDIC. Insured institutions are assigned to one of three capital groups which are based solely on the level of an institutions capital: well-capitalized, adequately capitalized and undercapitalized. There are also three supervisory groups generally based on an institutions CAMELS composite rating. Assessment rates for insured institutions are determined semi-annually by the FDIC and as of December 31, 2008 ranged from five basis points for well-capitalized and well-managed institutions with no substantial supervisory concerns to 43 basis points for undercapitalized institutions with substantial supervisory concerns.
In addition, all institutions with deposits insured by the FDIC are required to pay assessments to fund interest payments on bonds issued by the Financing Corporation, a mixed-ownership government corporation established to recapitalize a predecessor to the Deposit Insurance Fund. The assessment rate for the third quarter of 2008 was 0.0028% of insured deposits and is adjusted quarterly. These assessments will continue until the Financing Corporations bonds mature in 2019.
On October 7, 2008, the FDIC adopted a restoration plan designed to replenish the Deposit Insurance Fund over a period of five years and to increase the deposit insurance reserve ratio, which had decreased to 1.01% of insured deposits on June 30, 2008, to the statutory minimum of 1.15% of insured deposits by December 31, 2013. In order to implement the restoration plan, the FDIC proposes to change both its risk-based assessment system and its base assessment rates. Under the FDICs proposed restoration plan, new base assessment rates would increase in 2009. For the first quarter of 2009, rates would increase uniformly by 7 basis points. Beginning April 1, 2009, the rates would range from 10-14 basis points for Risk Category I institutions, such as FNBPA, to 45 basis points for Risk Category IV institutions. Changes to the risk-based assessment system would include increasing premiums for institutions that rely on excessive amounts of brokered deposits, including the Promontorys Certificate of Deposit Account Registry Services (CDARS), increasing premiums for excessive use of secured liabilities, including Federal Home Loan Bank (FHLB) advances, lowering premiums for smaller institutions with very high capital levels and adding financial ratios and debt issuer ratings to the premium calculations for banks with over $10 billion in assets, while providing a reduction for their unsecured debt.
Pursuant to the authority granted under the EESA, the Secretary of the Treasury created the CPP, enacted as part of the Troubled Asset Relief Program (TARP), under which the U.S. Treasury will invest up to $250 billion in senior preferred stock of qualifying U.S. banks and savings associations or their holding companies. Such financial institutions may issue senior preferred stock with a value equal to not less than 1% of risk-weighted assets and not more than the lesser of $25 billion or 3% of risk-weighted assets. The senior preferred stock will pay dividends at a rate of 5% per annum until the fifth anniversary of the investment and thereafter at a rate of 9% per annum. The senior preferred stock may not be redeemed for three years except with the proceeds from an offering of common stock or preferred stock qualifying as Tier 1 capital in an amount equal to not less than 25% of the amount of the senior preferred. After three years, the senior preferred may be redeemed at any time in whole or in part by the financial institution. No dividends may be paid on common stock unless dividends have been paid on the senior preferred stock. Until the third anniversary of the issuance of the senior preferred stock, the consent of the U.S. Treasury will be required for any increase in the dividends on the common stock or for any stock repurchases unless the senior preferred stock has been redeemed in its entirety or the U.S. Treasury has transferred the senior preferred stock to third parties. The senior preferred stock will not have voting rights other than the right to vote as a class on the issuance of any preferred stock ranking senior to such stock, any change in its terms, or any merger, exchange or similar transaction that would adversely affect its rights. The senior preferred stock will also have the right to elect two directors to the financial institutions Board of Directors if dividends have not been paid for six periods, whether or not consecutive. The senior preferred stock will be freely transferable and participating institutions will be required to file a shelf registration statement covering the senior preferred stock. The issuing institution must grant the Treasury piggyback registration rights with respect to the senior preferred stock. Prior to issuance, the financial institution and its senior executive officers must modify or terminate all benefit plans and arrangements to comply with EESA requirements. Senior executives must also waive any claims against the U.S. Treasury.
In connection with the issuance of the senior preferred stock, participating institutions must issue to the U.S. Treasury immediately exercisable 10-year warrants to purchase common stock with an aggregate market price equal to 15% of the amount of the senior preferred stock. The exercise price of the warrants will equal the market price of the common stock on the date of the investment. The U.S. Treasury may only exercise or transfer one-half of the warrants prior to the earlier of December 31, 2009 or the date the issuing financial institution has received proceeds equal to the senior preferred investment from one or more offerings of common or preferred stock qualifying as Tier 1 capital. The U.S. Treasury will not exercise voting rights with respect to any shares of common stock acquired through the exercise of the warrants. The financial institution must file a shelf registration statement covering the warrants and underlying common stock as soon as practicable after issuance and grant piggyback registration rights to the U.S. Treasury. The number of warrants will be reduced by one-half if the financial institution raises capital equal to the amount of the senior preferred through one or more offerings of common stock or preferred stock qualifying as Tier 1 capital. If the financial institution does not have sufficient authorized shares of common stock available to satisfy the warrants or their issuance otherwise requires shareholder approval, the financial institution must call a meeting of shareholders for that purpose as soon as practicable after the date of investment. The exercise price of the warrants will be reduced by 15% for each six months that lapse before shareholder approval is obtained subject to a maximum reduction of 45%.
The Corporation has elected to participate in the CPP and the details concerning the Corporations CPP participation are described under the Recent Developments caption in the Business section in Item 1 of this Report.
With respect to deposit insurance, the EESA authorizes the FDIC to increase the maximum deposit insurance amount up to $250,000 until December 31, 2009, and removes the statutory limits on the FDICs ability to borrow from the U.S. Treasury during this period. The FDIC has authorized the increase in the maximum deposit insurance amount. The FDIC, however, may not take the temporary increase in deposit insurance coverage into account when setting assessments. EESA allows financial institutions to treat any losses on certain sales or exchanges of the preferred stock of the Federal National Mortgage Association or Federal Home Loan Mortgage Corporation as an ordinary loss for tax purposes. In a related action, the FDIC established a Temporary Liquidity Guarantee Program (TLGP) under which the FDIC provides a guarantee for newly-issued senior unsecured debt and non-interest bearing transaction deposit accounts at eligible insured institutions. For non-interest bearing transaction deposit accounts, a 10 basis point annual rate surcharge will be applied to deposit amounts in excess of $250,000. The Corporation has elected to participate in the CPP and has opted to participate in the TLGP.
On February 10, 2009, the U.S. Treasury announced the Financial Stability Plan, a program designed to further strengthen the financial system through additional capital injections into banks, creation of a public-private investment fund to purchase troubled assets, establishment of guidelines for mortgage modification, and the expansion of a FRB lending program aimed at small businesses and communities.
The Administration is expected to move rapidly to develop and expound the details of the Financial Stability Plan. The current plan fact sheet indicates that major U.S. banking organizations (those with assets in excess of $100 billion) will be required to undergo a coordinated regulatory review which will include a comprehensive balance sheet stress test. In addition, the fact sheet indicates that the Financial Stability Plan will call for greater transparency, accountability, and conditionality for firms receiving assistance under the programs. However, it specifically provides that these new standards will apply going forward, and are not retroactive.
The TARP Reform and Accountability Act of 2009 modifies the restrictions on the Corporation with regard to standards for executive compensation and corporate governance for the period during which the U.S. Treasury holds the equity issued under the Securities Purchase Agreement, including the common stock which may be issued pursuant to the warrant, but not during any period during which the U.S. Treasury holds only warrants to purchase common stock of the Corporation. These standards generally apply to the top five most highly
compensated executives of the Corporation whose compensation is required to be disclosed under the Securities Exchange Act of 1934, and any regulations issued thereunder.
The standards include (1) ensuring that incentive compensation for senior executives does not encourage unnecessary and excessive risks that threaten the value of the financial institution; and (2) required clawback of any bonus or incentive compensation paid to a senior executive based on statements of earnings, gains, or other criteria that are later proven to be materially inaccurate. In addition, during the period in which any obligation arising from the CPP remains outstanding, the standards shall also include (1) prohibition on making golden parachute payments to senior executives and the next five most highly-compensated employees of the Corporation, and (2) prohibition on paying or accruing any bonus, retention award, or incentive compensation, other than payment of long-term restricted stock meeting certain criteria, for certain employees of the financial institution. In the case of the Corporation, the latter prohibition shall apply to at least its five most highly-compensated employees. However, the prohibition does not apply retroactively to preexisting employment contracts.
The Corporation is required to establish a Board Compensation Committee comprised entirely of independent directors, which shall meet at least semiannually to review and evaluate employee compensation plans in light of the requirements. Finally, during the period in which any obligation arising from the CPP remains outstanding, the Corporation shall, in any proxy or consent or authorization for an annual or other meeting of the shareholders, permit a separate shareholder vote to approve the compensation of executives, but the vote shall not be binding on, and may not be construed as overruling a decision by, the board of directors.
The Community Reinvestment Act of 1977, or the CRA, requires depository institutions to assist in meeting the credit needs of their market areas consistent with safe and sound banking practices. Under the CRA, each depository institution is required to help meet the credit needs of its market areas by, among other things, providing credit to low- and moderate-income individuals and communities. Depository institutions are periodically examined for compliance with the CRA and are assigned ratings. In order for a financial holding company to commence any new activity permitted by the BHC Act, or to acquire any company engaged in any new activity permitted by the BHC Act, each insured depository institution subsidiary of the financial holding company must have received a rating of at least satisfactory in its most recent examination under the CRA. Furthermore, banking regulators take into account CRA ratings when considering approval of a proposed transaction.
In accordance with the GLB Act, federal banking regulators adopted rules that limit the ability of banks and other financial institutions to disclose non-public information about consumers to nonaffiliated third parties. These limitations require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to a nonaffiliated third party. The privacy provisions of the GLB Act affect how consumer information is transmitted through diversified financial companies and conveyed to outside vendors.
A major focus of governmental policy on financial institutions in recent years has been aimed at combating money laundering and terrorist financing. The USA Patriot Act of 2001, or the USA Patriot Act, substantially broadened the scope of United States anti-money laundering laws and regulations by imposing significant new compliance and due diligence obligations, creating new crimes and penalties and expanding the extra-territorial jurisdiction of the United States. The U.S. Treasury has issued a number of regulations that apply various requirements of the USA Patriot Act to financial institutions such as FNBPA. These regulations require financial institutions to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering and terrorist financing and to verify the identity of their customers. Failure of a financial institution to maintain and implement adequate programs to combat money laundering and terrorist financing, or to comply with all of the relevant laws or regulations, could have serious legal and reputational consequences for the institution.
The United States has instituted economic sanctions which affect transactions with designated foreign countries, nationals and others. These are typically known as the OFAC rules because they are administered by the U.S. Treasury Office of Foreign Assets Control (OFAC). The OFAC-administered sanctions target countries in various ways. Generally, however, they contain one or more of the following elements: (i) restrictions on trade with or investment in a sanctioned country, including prohibitions against direct or indirect imports from and exports to a sanctioned country, and prohibitions on U.S. persons engaging in financial transactions which relate to investments in, or providing investment-related advice or assistance to, a sanctioned country; and (ii) a blocking of assets in which the government or specially designated nationals of the sanctioned country have an interest, by prohibiting transfers of property subject to U.S. jurisdiction (including property in the possession or control of U.S. persons). Blocked assets (e.g., property and bank deposits) cannot be paid out, withdrawn, set off or transferred in any manner without a license from OFAC. Failure to comply with these sanctions could have serious legal and reputational consequences for the institution.
FNBPA is subject to many federal consumer protection statutes and regulations including the Truth in Lending Act, Truth in Savings Act, Equal Credit Opportunity Act, Fair Housing Act, Real Estate Settlement Procedures Act and Home Mortgage Disclosure Act. Among other things, these acts:
The Corporations primary source of funds for cash distributions to its stockholders, and funds used to pay principal and interest on its indebtedness, is dividends received from FNBPA. FNBPA is subject to federal laws and regulations governing its ability to pay dividends to the Corporation. FNBPA is subject to various regulatory policies and requirements relating to the payment of dividends, including requirements to maintain capital above regulatory minimums. Additionally, FNBPA requires prior approval of the OCC for the payment of a dividend if the total of all dividends declared in a calendar year would exceed the total of its net income for the year combined with its retained net income for the two preceding years. The appropriate federal regulatory agency may determine under certain circumstances that the payment of dividends would be an unsafe or unsound practice and prohibit payment thereof. In addition to dividends from FNBPA, other sources of parent company liquidity for the Corporation include cash and short-term investments, as well as dividends and loan repayments from other subsidiaries.
In addition, the ability of the Corporation and FNBPA to pay dividends may be affected by the various minimum capital requirements and the capital and non-capital standards established under FDICIA and the terms of the CPP, as described above. The right of the Corporation, its stockholders and its creditors to participate in any distribution of the assets or earnings of the Corporations subsidiaries is further subject to the prior claims of creditors of the respective subsidiaries.
According to FRB policy, a financial or bank holding company is expected to act as a source of financial strength to each of its subsidiary banks and to commit resources to support each such subsidiary. Consistent with the
source of strength policy, the FRB has stated that, as a matter of prudent banking, a bank holding company generally should not maintain a rate of cash dividends unless its net income available to common stockholders has been sufficient to fully fund the dividends and the prospective rate of earnings retention appears to be consistent with the Corporations capital needs, asset quality and overall financial condition. This support may be required at times when a bank holding company may not be able to provide such support. Similarly, under the cross-guarantee provisions of the Federal Deposit Insurance Act, in the event of a loss suffered or anticipated by the FDIC either as a result of default of a banking subsidiary or related to FDIC assistance provided to a subsidiary in danger of default, the other banks that are members of the FDIC may be assessed for the FDICs loss, subject to certain exceptions.
In addition, if FNBPA was no longer well-capitalized and well-managed within the meaning of the BHC Act and FRB rules (which take into consideration capital ratios, examination ratings and other factors), the expedited processing of certain types of FRB applications would not be available to the Corporation. Moreover, examination ratings of 3 or lower, unsatisfactory ratings, lower capital ratios below well-capitalized levels, regulatory concerns regarding management, controls, assets, operations or other factors can all potentially result in practical limitations on the ability of a bank or bank holding company to engage in new activities, grow, acquire new businesses, repurchase its stock or pay dividends or continue to conduct existing activities.
The Corporation is also subject to regulation by the SEC by virtue of the Corporations status as a public company and due to the nature of the business activities of certain subsidiaries.
The Sarbanes-Oxley Act of 2002 contains important requirements for public companies in the area of financial disclosure and corporate governance. In accordance with section 302(a) of the Sarbanes-Oxley Act, written certifications by the Corporations Chief Executive Officer and Chief Financial Officer are required with respect to each of the Corporations quarterly and annual reports filed with the SEC. These certifications attest that the applicable report does not contain any untrue statement of a material fact. The Corporation also maintains a program designed to comply with Section 404 of the Sarbanes-Oxley Act, which includes the identification of significant processes and accounts, documentation of the design of process and entity level controls and testing of the operating effectiveness of key controls. See Item 9A, Controls and Procedures, of this Report for the Corporations evaluation of its disclosure controls and procedures.
Investment Advisors is registered with the SEC as an investment advisor and, therefore, is subject to the requirements of the Investment Advisors Act of 1940 and the SECs regulations thereunder. The principal purpose of the regulations applicable to investment advisors is the protection of investment advisory clients and the securities markets, rather than the protection of creditors and stockholders of investment advisors. The regulations applicable to investment advisors cover all aspects of the investment advisory business, including limitations on the ability of investment advisors to charge performance-based or non-refundable fees to clients, record-keeping, operating, marketing and reporting requirements, disclosure requirements, limitations on principal transactions between an advisor or its affiliates and advisory clients, as well as other anti-fraud prohibitions. The Corporations investment advisory subsidiary also may be subject to certain state securities laws and regulations.
Additional legislation, changes in or new rules promulgated by the SEC and other federal and state regulatory authorities and self-regulatory organizations or changes in the interpretation or enforcement of existing laws and rules, may directly affect the method of operation and profitability of Investment Advisors. The profitability of Investment Advisors could also be affected by rules and regulations that impact the business and financial communities in general, including changes to the laws governing taxation, antitrust regulation, homeland security and electronic commerce.
Under various provisions of the federal and state securities laws, including in particular those applicable to broker-dealers, investment advisors and registered investment companies and their service providers, a determination by a court or regulatory agency that certain violations have occurred at a company or its affiliates can result in a limitation of permitted activities and disqualification to continue to conduct certain activities.
Investment Advisors is also subject to rules and regulations promulgated by the Financial Industry Regulatory Authority (FINRA), among others. The principal purpose of these regulations is the protection of clients and the securities markets, rather than the protection of stockholders and creditors.
Regency is subject to regulation under Pennsylvania, Tennessee and Ohio state laws that require, among other things, that it maintain licenses in effect for consumer finance operations for each of its offices. Representatives of the Pennsylvania Department of Banking, the Tennessee Department of Financial Institutions and the Ohio Division of Consumer Finance periodically visit Regencys offices and conduct extensive examinations in order to determine compliance with such laws and regulations. Additionally, the FRB, as umbrella regulator of the Corporation pursuant to the GLB Act, may conduct an examination of Regencys offices or operations. Such examinations include a review of loans and the collateral therefor, as well as a check of the procedures employed for making and collecting loans. Additionally, Regency is subject to certain federal laws that require that certain information relating to credit terms be disclosed to customers and, in certain instances, afford customers the right to rescind transactions.
FNIA is subject to licensing requirements and extensive regulation under the laws of the Commonwealth of Pennsylvania and the various states in which FNIA conducts business. These laws and regulations are primarily for the benefit of policyholders. In all jurisdictions, the applicable laws and regulations are subject to amendment or interpretation by regulatory authorities. Generally, such authorities are vested with relatively broad discretion to grant, renew and revoke licenses and approvals and to implement regulations. Licenses may be denied or revoked for various reasons, including the violation of such regulations or the conviction of certain crimes. Possible sanctions that may be imposed for violation of regulations include the suspension of individual employees, limitations on engaging in a particular business for a specified period of time, revocation of licenses, censures and fines.
Penn-Ohio is subject to examination on a triennial basis by the Arizona Department of Insurance. Representatives of the Arizona Department of Insurance periodically determine whether Penn-Ohio has maintained required reserves, established adequate deposits under a reinsurance agreement and complied with reporting requirements under the applicable Arizona statutes.
FNB Capital is subject to regulation and examination by the FRB and is subject to rules and regulations issued by FINRA.
The operations of the Corporation and its subsidiaries are affected not only by general economic conditions, but also by the policies of various regulatory authorities. In particular, the FRB regulates monetary policy and interest rates in order to influence general economic conditions. These policies have a significant influence on overall growth and distribution of loans, investments and deposits and affect interest rates charged on loans or paid for time and savings deposits. FRB monetary policies have had a significant effect on the operating results of all financial institutions in the past and may continue to do so in the future.
The Corporation maintains a website at www.fnbcorporation.com. The Corporation makes available on its website, free of charge, its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K (and amendments to any of the foregoing) as soon as practicable after such reports are filed with or furnished to the SEC. These reports are available on the Corporations website at www.fnbcorporation.com and are also available to stockholders, free of charge, upon written request to F.N.B. Corporation, Attn: David B. Mogle, Corporate Secretary, One F.N.B. Boulevard, Hermitage, PA
16148. A fee to cover the Corporations reproduction costs will be charged for any requested exhibits to these documents. The public may read and copy the materials the Corporation files with the SEC at the SECs Public Reference Room, located at 100 F Street, NE, Washington, D.C. 20549. The public may obtain information regarding the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The public may also read and copy the materials the Corporation files with the SEC by visiting the SECs website at www.sec.gov. The Corporations common stock is traded on the NYSE under the symbol FNB. The Corporation filed the certifications of its Chief Executive Officer (CEO) and Chief Financial Officer (CFO) required pursuant to Section 302 of the Sarbanes Oxley Act of 2002 with respect to its Annual Report on Form 10-K for 2007 with the SEC as exhibits to that Report and has filed certifications required by Section 302 of that Act with respect to this Annual Report on Form 10-K as exhibits to this Report. The Corporations CEO submitted the required annual CEO Certification, without qualification, regarding the NYSEs corporate governance listing standards to the NYSE within 30 days of the 2008 annual shareholders meeting. The Corporations Code of Business Conduct and Ethics, the Charters of its Audit, Compensation, Corporate Governance and Nominating Committees and the Corporations Corporate Governance Guidelines are available on the Corporations website and in printed form upon request.
As a financial services organization, the Corporation takes on a certain amount of risk in every business decision and activity. For example, every time FNBPA opens an account or approves a loan for a customer, processes a payment, hires a new employee, or implements a new computer system, FNBPA and the Corporation incur a certain amount of risk. As an organization, the Corporation must balance revenue generation and profitability with the risks associated with its business activities. Risk management is not about eliminating risks, but about identifying and accepting risks and then effectively managing them so as to optimize total shareholder value.
The Corporation has identified five major categories of risk: credit risk, market risk, liquidity risk, operational risk and compliance risk. Credit risk, market risk and liquidity risk, and the program implemented by management to address these risks, are more fully discussed in the Market Risk section of Managements Discussion and Analysis of Financial Condition and Results of Operations, which is included in Item 7 of this Report. Operational risk arises from inadequate information systems and technology, weak internal control systems or other failed internal processes or systems, human error, fraud or external events. Compliance risk relates to each of the other four major categories of risk listed above, but specifically addresses internal control failures that result in non-compliance with laws, rules, regulations or ethical standards.
The key to effective risk management is to be proactive in identifying, measuring, evaluating and monitoring risk on an ongoing basis. Risk management practices support decision-making, improve the success rate for new initiatives, and strengthen the markets confidence in the Corporation and its affiliates.
The Corporations risk management process is supported through a governance structure involving its Board of Directors and senior management. The Corporations Risk Committee, which is comprised of various members of the Board of Directors, helps insure that business decisions within the organization are executed within the Corporations desired risk profile. The Risk Committee has the following key roles:
Additionally, FNBPA has a Risk Management Committee comprised of senior management to provide more day-to-day oversight to specific areas of risk with respect to the level of risk and risk management structure. The Risk Management Committee reports on a regular basis to the Corporations Risk Committee regarding the enterprise risk profile of the Corporation and other relevant risk management issues. The Corporations audit function performs an independent assessment of the internal control environment. Moreover, the Corporations audit function plays a critical role in risk management, testing the operation of internal control systems and reporting findings to management and to the Corporations Audit Committee. Both the Corporations Risk
Committee and FNBPAs Risk Management Committee regularly assess the Corporations enterprise-wide risk profile and provide guidance on actions needed to address key risk issues.
The following are the most significant risk factors that affect the Corporation. These risk factors are also discussed further in other parts of this Report.
Recent negative developments in the financial services industry and U.S. and global credit markets may adversely impact the Corporations results of operations.
The recent national and global economic downturn has resulted in unprecedented levels of financial market volatility which may depress the market value of financial institutions, limit access to capital or have a material adverse effect on the financial condition or results of operations of banking companies. In addition, the possible duration and severity of the adverse economic cycle is unknown and may exacerbate the Corporations exposure to credit risk. The U.S. Treasury and the FDIC have initiated programs to address economic stabilization, yet the efficacy of these programs in stabilizing the economy and the banking system at large are uncertain. Details as to the Corporations future participation in or access to such programs and their subsequent impact on the Corporation also remain uncertain.
The competition for deposits has increased significantly due to liquidity concerns at many financial institutions. Stock prices of bank holding companies, like the Corporation, have been negatively affected by the current condition of the financial markets, as has the Corporations ability, if needed, to raise capital or borrow in the debt markets compared to recent years. As a result, financial institution regulatory agencies are expected to be very aggressive in responding to concerns and trends regarding lending and funding practices and liquidity standards identified in examinations, including issuing many formal enforcement actions. Negative developments in the financial services industry and the impact of potential new legislation and regulations in response to those developments could negatively impact the Corporations business by restricting its operations, including its ability to originate or sell loans or raise additional capital, and could adversely impact the Corporations financial performance.
The Corporations results of operations are affected by the monetary and fiscal policies of the federal government and the regulatory policies of governmental authorities. A significant component of the Corporations earnings is its net interest income, which is the difference between the income from interest earning assets, such as loans, and the expense of interest bearing liabilities, such as deposits. A change in market interest rates could adversely affect the Corporations earnings if market interest rates change such that the interest the Corporation pays on deposits and borrowings increases faster or decreases more slowly than the interest it collects on loans and investments. Consequently, the business of the Corporation, along with that of other financial institutions, generally is sensitive to interest rate fluctuations.
The Corporations results of operations are significantly affected by the ability of its borrowers to repay their loans.
Lending money is an essential part of the banking business. However, borrowers do not always repay their loans. The risk of non-payment is affected by:
Generally, commercial/industrial, construction and commercial real estate loans present a greater risk of non-payment by a borrower than other types of loans. For additional information, see the Lending Activity section of Managements Discussion and Analysis of Financial Condition and Results of Operations, which is included in Item 7 of this Report. In addition, consumer loans typically have shorter terms and lower balances with higher yields compared to real estate mortgage loans, but generally carry higher risks of default. Consumer loan collections are
dependent on the borrowers continuing financial stability, and thus are more likely to be affected by adverse personal circumstances. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount that can be recovered on these loans.
The Corporations financial condition and results of operations would be adversely affected if its allowance for loan losses is not sufficient to absorb actual losses.
There is no precise method of predicting loan losses. The Corporation can give no assurance that its allowance for loan losses is or will be sufficient to absorb actual loan losses. Excess loan losses could have a material adverse effect on the Corporations financial condition and results of operations. The Corporation attempts to maintain an appropriate allowance for loan losses to provide for estimated losses inherent in its loan portfolio as of the reporting date. The Corporation periodically determines the amount of its allowance for loan losses based upon consideration of several quantitative and qualitative factors including, but not limited to, the following:
For additional discussion relating to this matter, refer to the Allowance and Provision for Loan Losses section of Managements Discussion and Analysis of Financial Condition and Results of Operations, which is included in Item 7 of this Report.
Changes in economic conditions and the composition of the Corporations loan portfolio could lead to higher loan charge-offs or an increase in the Corporations provision for loan losses and may reduce the Corporations net income.
Changes in national and regional economic conditions could impact the loan portfolios of the Corporation. For example, an increase in unemployment, a decrease in real estate values or increases in interest rates, as well as other factors, could weaken the economies of the communities the Corporation serves. Weakness in the market areas served by the Corporation could depress its earnings and consequently its financial condition because customers may not want or need the Corporations products or services; borrowers may not be able to repay their loans; the value of the collateral securing the Corporations loans to borrowers may decline; and the quality of the Corporations loan portfolio may decline. Any of the latter three scenarios could require the Corporation to charge-off a higher percentage of its loans and/or increase its provision for loan losses, which would reduce its net income.
The Corporations continued pace of growth may require it to raise additional capital in the future, but that capital may not be available when it is needed.
The Corporation is required by federal and state regulatory authorities to maintain adequate levels of capital to support its operations (see the Government Supervision and Regulation section included in Item 1 of this Report). As a financial holding company, the Corporation seeks to maintain capital sufficient to meet the well-capitalized standard set by regulators. The Corporation anticipates that its current capital resources will satisfy its capital requirements for the foreseeable future. The Corporation may at some point, however, need to raise additional capital to support continued growth, whether such growth occurs internally or through acquisitions.
The Corporations ability to raise additional capital, if needed, will depend on conditions in the capital markets at that time, which are outside of the Corporations control, and on its financial performance. Accordingly, there can be no assurance of the Corporations ability to expand its operations through internal growth and acquisitions could be materially impaired.
Many Florida real estate markets, including the markets in Orlando, Fort Myers, Sarasota and Tampa, where the Corporation has loan production offices, declined in value throughout 2008 and may continue to undergo further declines. The Corporation operates five commercial loan production offices in the Florida market and is therefore exposed to the weakening real estate conditions in the Florida geographic region. During a period of prolonged general economic downturn in the Florida market, the Corporation may experience a reduction in loan origination activity in that market and further increases in non-performing assets, net charge-offs and provisions for loan losses.
Recent developments in the mortgage market have increased the volatility of the Corporations stock price and may affect the Corporations ability to originate loans as well as the profitability of loans in the Corporations pipeline.
The mortgage lending industry has experienced a significant increase in delinquencies. The decline in credit quality is most noteworthy among subprime lenders. Generally, the Corporation has not originated residential mortgage loans with FICO credit scores below 620, except for a minimal number of loans that were related to the Corporations obligation under the CRA. Recent reports of credit quality, financial solvency and other problems among subprime lenders have increased volatility in the stock market. If the subprime segment continues to have problems in the future and/or credit quality problems spread to other industry segments, including lenders who make reduced documentation loans to prime credit quality borrowers, there could be a prolonged decrease in the demand for the Corporations loans in the secondary market, adversely affecting the Corporations earnings and negatively impacting the price of the Corporations common stock.
The Corporations success is dependent, in part, on the continued service of its executive officers. The loss of the service of one or more of these executive officers could have a negative impact on the Corporations business because of their skills, relationships in the banking community and years of industry experience and the difficulty of promptly finding qualified replacement executive officers.
The actions of the U.S. Government for the purpose of stabilizing the financial markets, or market response to those actions, may not achieve the intended effect, and the Corporations results of operations could be adversely affected.
In response to the financial issues affecting the banking system and financial markets and going concern threats to investment banks and other financial institutions, the U.S. Congress recently enacted the EESA. The EESA provides the U.S. Secretary of the Treasury with the authority to establish the TARP to purchase from financial institutions up to $700 billion of residential or commercial mortgages and any securities, obligations or other instruments that are based on or related to such mortgages, that in each case was originated or issued on or before March 14, 2008, as well as any other financial instrument that the U.S. Secretary of the Treasury, after consultation with the Chairman of the FRB, determines the purchase of which is necessary to promote financial market stability. As of the date hereof, the U.S. Treasury has determined not to purchase troubled assets under the program.
As part of the EESA, the U.S. Treasury has developed a CPP to purchase up to $250 billion in senior preferred stock from qualifying financial institutions. The CPP was designed to strengthen the capital and liquidity positions of viable institutions and to encourage banks and thrifts to increase lending to creditworthy borrowers. The EESA also increases the insurance coverage of deposit accounts to $250,000 per depositor. In a related action, the FDIC established a TLGP under which the FDIC provides a guarantee for newly-issued senior unsecured debt and non-interest bearing transaction deposit accounts at eligible insured institutions. For non-interest bearing transaction deposit accounts, a 10 basis point annual rate surcharge will be applied to deposit amounts in excess of $250,000. The Corporation has elected to participate in the CPP and has opted to participate in the TLGP.
The U.S. Congress or federal banking regulatory agencies could adopt additional regulatory requirements or restrictions in response to the threats to the financial system and such changes may adversely affect the operations
of the Corporation and FNBPA. In addition, the EESA may not have the intended beneficial impact on the financial markets or the banking industry. To the extent the market does not respond favorably to the TARP or the program does not function as intended, the Corporations prospects and results of operations could be adversely affected.
Because of the Corporations participation in U.S. Treasurys CPP, the Corporation is subject to several restrictions including restrictions on its ability to declare or pay dividends and repurchase its shares as well as restrictions on its executive compensation.
Pursuant to the terms of the Securities Purchase Agreement with the U.S. Treasury, the Corporations ability to declare or pay dividends on any of its shares is limited. Specifically, the Corporation is unable to declare dividend payments on common, junior preferred or pari passu preferred shares if it is in arrears on the dividends on the Series C preferred stock. Further, without U.S. Treasury approval, the Corporation is not permitted to increase the quarterly rate of dividends on its common stock to more than $0.24 per share until the third anniversary of the investment unless all of the Series C preferred stock has been redeemed or transferred by U.S. Treasury. In addition, the Corporations ability to repurchase its shares is restricted. The consent of the U.S. Treasury generally is required for the Corporation to make any stock repurchase until the third anniversary of the investment by U.S. Treasury unless all of the Series C preferred stock has been redeemed or transferred by U.S. Treasury to a third party. Further, common, junior preferred or pari passu preferred shares may not be repurchased if the Corporation is in arrears on the Series C preferred stock dividends.
In addition, pursuant to the terms of the Securities Purchase Agreement, the Corporation adopted the U.S. Treasurys standards for executive compensation and corporate governance for the period during which the U.S. Treasury holds the equity issued pursuant to the Securities Purchase Agreement, including the common stock which may be issued pursuant to the warrant. These standards generally apply to the Corporations CEO, CFO and the three next most highly compensated senior executive officers. The standards include (1) ensuring that incentive compensation for senior executives does not encourage unnecessary and excessive risks that threaten the value of the financial institution; (2) required clawback of any bonus or incentive compensation paid to a senior executive based on statements of earnings, gains or other criteria that are later proven to be materially inaccurate; (3) prohibition on making golden parachute payments to senior executives; and (4) agreement not to deduct for tax purposes executive compensation in excess of $500,000 for each senior executive. In particular, the change to the deductibility limit on executive compensation may increase the overall cost of the Corporations compensation programs in future periods.
The executive compensation and corporate governance restrictions will apply so long as the U.S. Treasury owns any of the Corporations debt or equity securities acquired in connection with the transactions described herein, including the Series C preferred stock, the warrant or any shares of the Corporations common stock issued upon exercise of the warrant. Accordingly, the Corporation could be subject to these restrictions for an indefinite period of time. Further, the Securities Purchase Agreement and all related documents may be amended unilaterally by the U.S. Treasury to the extent required to comply with any changes to the applicable federal statutes. Any such amendments may provide for additional executive compensation and corporate governance standards or modify the existing standards set forth above.
The Corporations status as a holding company makes it dependent on dividends from its subsidiaries to meet its financial obligations and pay dividends to shareholders.
The Corporation is a holding company and conducts almost all of its operations through its subsidiaries. The Corporation does not have any significant assets other than the stock of its subsidiaries. Accordingly, the Corporation depends on dividends from its subsidiaries to meet its financial obligations and to pay dividends to shareholders. The Corporations right to participate in any distribution of earnings or assets of its subsidiaries is subject to the prior claims of creditors of such subsidiaries. Under federal law, FNBPA is limited in the amount of dividends it may pay to the Corporation without prior regulatory approval. Also, bank regulators have the authority to prohibit FNBPA from paying dividends if the bank regulators determine FNBPA is in an unsound or unsafe condition or that the payment would be an unsafe and unsound banking practice. As a participant in the CPP, the Corporation may not pay dividends except as permitted by the Securities Purchase Agreement and the other operative documents evidencing the investment of the U.S. Treasury in the Corporation.
The Corporations financial condition may be adversely affected if it is unable to attract sufficient deposits to fund its anticipated loan growth.
The Corporation funds its loan growth primarily through deposits. To the extent that the Corporation is unable to attract and maintain sufficient levels of deposits to fund its loan growth, the Corporation would be required to raise additional funds through public or private financings. The Corporation can give no assurance that it would be able to obtain these funds on terms that are favorable to the Corporation.
The Corporations results of operations may be adversely affected if asset valuations cause other-than-temporary impairment or goodwill impairment charges.
The Corporation may be required to record future impairment charges on its investment securities if they suffer declines in value that are considered other-than-temporary. Numerous factors, including lack of liquidity for re-sales of certain investment securities, absence of reliable pricing information for investment securities, adverse changes in business climate, adverse actions by regulators, or unanticipated changes in the competitive environment could have a negative effect on the Corporations investment portfolio in future periods. If an impairment charge is significant enough it could affect the ability of FNBPA to upstream dividends to the Corporation, which could have a material adverse effect on the Corporations liquidity and its ability to pay dividends to shareholders and could also negatively impact its regulatory capital ratios and result in FNBPA not being classified as well-capitalized for regulatory purposes.
Management regularly reviews and updates the Corporations internal controls, disclosure controls and procedures, and corporate governance policies and procedures. However, any system of controls, even those well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of the Corporations controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on the Corporations business, results of operations and financial condition.
The Corporation could experience significant difficulties and complications in connection with its growth and acquisition strategy.
The Corporation has grown significantly through acquisitions over the last few years and may seek to continue to grow by acquiring financial institutions and branches as well as non-depository entities engaged in permissible activities for its financial institution subsidiaries. However, the market for acquisitions is highly competitive. The Corporation may not be as successful in the future as it has been in the past in identifying financial institution and branch acquisition candidates, integrating acquired institutions or preventing deposit erosion at acquired institutions or branches.
As part of its acquisition strategy, the Corporation may acquire additional banks and non-bank entities that it believes provide a strategic fit with its business. To the extent that the Corporation is successful with this strategy, there can be no assurance that the Corporation will be able to manage this growth adequately and profitably. For example, acquiring any bank or non-bank entity will involve risks commonly associated with acquisitions, including:
In addition to acquisitions, FNBPA may expand into additional communities or attempt to strengthen its position in its current markets by undertaking additional de novo branch openings or establishing additional loan
production offices. Based on experience, the Corporation believes that it generally takes up to three years for new banking facilities to achieve operational profitability due to the impact of organizational and overhead expenses and the start-up phase of generating loans and deposits. To the extent that FNBPA undertakes additional de novo branch openings or establishes additional loan production offices, FNBPA is likely to continue to experience the effects of higher operating expenses relative to operating income from the new banking facilities, which may have an adverse effect on the Corporations net income, earnings per share, return on average equity and return on average assets.
The Corporation may encounter unforeseen expenses, as well as difficulties and complications in integrating expanded operations and new employees without disruption to its overall operations. Following each acquisition, the Corporation must expend substantial resources to integrate the entities. The integration of non-banking entities often involves combining different industry cultures and business methodologies. The failure to integrate successfully the entities the Corporation acquires into its existing operations may adversely affect its results of operations and financial condition.
The Corporation could be adversely affected by changes in the law, especially changes in the regulation of the banking industry.
The Corporation and its subsidiaries operate in a highly regulated environment and are subject to supervision and regulation by several governmental agencies, including the FRB, the OCC and the FDIC. Regulations are generally intended to provide protection for depositors, borrowers and other customers rather than for investors. The Corporation is subject to changes in federal and state law, regulations, governmental policies, tax laws and accounting principles. Changes in regulations or the regulatory environment could adversely affect the banking and financial services industry as a whole and could limit the Corporations growth and the return to investors by restricting such activities as:
In addition, legislation may change present capital and other regulatory requirements, which could restrict the Corporations activities and require the Corporation to raise additional capital. Further, the Securities Purchase Agreement and all related documents that the Corporation entered into in connection with the CPP may be amended unilaterally by the U.S. Treasury to the extent required to comply with any changes to the applicable federal statutes. Any such amendment may impose additional restrictions or obligations on the Corporation.
The Corporation faces substantial competition in all areas of its operations from a variety of different competitors. The Corporation may not be able to compete effectively in its markets, which could adversely affect the Corporations results of operations. The banking and financial services industry in each of the Corporations market areas is highly competitive. The competitive environment is a result of:
The Corporation competes for loans, deposits and customers with various bank and non-bank financial service providers, many of which are larger in terms of total assets and capitalization, have greater access to the capital markets and offer a broader array of financial services than the Corporation. Competition with such
institutions may cause the Corporation to increase its deposit rates or decrease its interest rate spread on loans it originates.
Adverse economic conditions in the Corporations market area may adversely impact its results of operations and financial condition.
The substantial portion of the Corporations historical business is concentrated in western Pennsylvania and eastern Ohio, which over recent years has become a slower growth market than other areas of the United States. As a result, FNBPAs loan portfolio and results of operations may be adversely affected by factors that have a significant impact on the economic conditions in this market area. The local economies of this market area have historically been less robust than the economy of the nation as a whole and may not be subject to the same fluctuations as the national economy. Adverse economic conditions in this market area, including the loss of certain significant employers, could reduce its growth rate, affect its borrowers ability to repay their loans and generally affect the Corporations financial condition and results of operations. Furthermore, a downturn in real estate values in FNBPAs market area could cause many of its loans to become inadequately collateralized.
Recent negative developments in the financial industry and the domestic and international credit markets may adversely affect the Corporations operations and stock price.
Negative developments in the latter half of 2007 and 2008 in the subprime mortgage market and the securitization markets for such loans have resulted in uncertainty in the financial markets in general with the expectation of the general economic downturn continuing well into 2009. As a result of this credit crunch, commercial as well as consumer loan portfolio performances have deteriorated at many institutions and the competition for deposits and quality loans has increased significantly. In addition, the values of real estate collateral supporting many commercial loans and home mortgages have declined and may continue to decline. Bank and bank holding company stock prices have been negatively affected, and the ability of banks and bank holding companies to raise capital or borrow in the debt markets has become more difficult compared to recent years. As a result, there is a potential for new federal or state laws and regulations regarding lending and funding practices and liquidity standards, and bank regulatory agencies are expected to be very aggressive in responding to concerns and trends identified in developments in the financial industry and the domestic and international credit markets, and the impact of new legislation in response to those developments, may negatively impact the Corporations operations by restricting its business operations, including its ability to originate or sell loans, and adversely impact the Corporations financial performance or stock price.
The Corporations deposit insurance premiums could be substantially higher in the future which would have an adverse effect on the Corporations future earnings.
The FDIC insures deposits at FDIC-insured financial institutions, including FNBPA. The FDIC charges the insured financial institutions premiums to maintain the Deposit Insurance Fund at a certain level. Current economic conditions have increased bank failures and expectations for further failures, in which case the FDIC would pay all deposits of a failed bank up to the insured amount from the Deposit Insurance Fund. In December 2008, the FDIC adopted a rule that would increase premiums paid by insured institutions and make other changes to the assessment system. Increases in deposit insurance premiums could adversely affect the Corporations net income.
With recent increased concerns about bank failures, customers increasingly are concerned about the extent to which their deposits are insured by the FDIC. Customers may withdraw deposits in an effort to ensure that the amount they have on deposit with the Corporation is fully insured. Decreases in deposits may adversely affect the Corporations funding costs and net income.
The Corporation relies heavily on communications and information systems to conduct its business. Any failure, interruption or breach in security of these systems could result in failures or disruptions in the Corporations customer relationship management, general ledger, deposit, loan and other systems. Although the Corporation has policies and procedures designed to prevent or limit the effect of the failure, interruption or security breach of these information systems, there can be no assurance that any such failures, interruptions or security breaches will not occur or, if they do occur, that they will be adequately addressed. The occurrence of any failures, interruptions or security breaches of the Corporations information systems could damage its reputation, result in a loss of customer business, subject it to additional regulatory scrutiny, or expose it to civil litigation and possible financial liability, any of which could have a material adverse effect on the Corporations financial condition and results of operations.
The Corporations business and financial performance could be adversely affected, directly or indirectly, by natural disasters, terrorist activities or international hostilities.
The likelihood or impact of natural disasters, terrorist activities, pandemics and international hostilities cannot be predicted. However, an event resulting from any of these threats could impact the Corporation directly (for example, by causing significant damage to its facilities or preventing it from conducting its business in the ordinary course), or could impact the Corporation indirectly through a direct impact on its borrowers, depositors, other customers, suppliers or other counterparties. The Corporation also could suffer adverse consequences to the extent that natural disasters, terrorist activities or international hostilities affect the economy and financial and capital markets generally. These types of impacts could lead, for example, to an increase in delinquencies, bankruptcies or defaults that could result in the Corporation experiencing higher levels of non-performing assets, net charge-offs and provisions for loan losses.
The Corporations ability to mitigate the adverse consequences of such occurrences is, in part, dependent on the quality of its contingency planning, including its ability to anticipate the nature of any such event that occurs. The adverse impact of natural disasters or terrorist activities also could be increased to the extent that there is a lack of preparedness on the part of national or regional emergency responders or on the part of other organizations and businesses with which the Corporation deals, particularly those on which it depends.
Certain provisions of the Corporations Articles of Incorporation and By-laws and Florida law may discourage takeovers.
The Corporations Articles of Incorporation and By-laws contain certain anti-takeover provisions that may discourage or may make more difficult or expensive a tender offer, change in control or takeover attempt that is opposed by the Corporations Board of Directors. In particular, the Corporations Articles of Incorporation and By-laws:
Under Florida law, the approval of a business combination with a stockholder owning 10% or more of the voting shares of a corporation requires the vote of holders of at least two-thirds of the voting shares not owned by such stockholder, unless the transaction is approved by a majority of the corporations disinterested directors. In addition, Florida law generally provides that shares of a corporation that are acquired in excess of certain specified
thresholds will not possess any voting rights unless the voting rights are approved by a majority of the corporations disinterested stockholders.
These provisions of the Corporations Articles of Incorporation and By-laws and of Florida law could discourage potential acquisition proposals and could delay or prevent a change in control, even though a majority of the Corporations stockholders may consider such proposals desirable. Such provisions could also make it more difficult for third parties to remove and replace members of the Corporations Board of Directors. Moreover, these provisions could diminish the opportunities for stockholders to participate in certain tender offers, including tender offers at prices above the then-current market price of the Corporations common stock, and may also inhibit increases in the trading price of the Corporations common stock that could result from takeover attempts.
The Corporations success depends, in large part, on its ability to continue to attract and retain key people. Competition for the best people in most activities engaged in by the Corporation can be intense and the Corporation may not be able to hire people or to retain them. The unexpected loss of services of one or more of the Corporations key personnel could have a material adverse impact on the Corporations business because of their skills, knowledge of the Corporations market, years of industry experience and the difficulty of promptly finding qualified replacement personnel.
The Corporation is exposed to risk of environmental liabilities with respect to properties to which it takes title.
Portions of the Corporations loan portfolio are secured by real property. In the course of its business, the Corporation may own or foreclose and take title to real estate, and could be subject to environmental liabilities with respect to these properties. The Corporation may be held liable to a governmental entity or to third parties for property damage, personal injury, investigation and clean-up costs incurred by these parties in connection with environmental contamination, or may be required to investigate or clean up hazardous or toxic substances, or chemical releases at a property. The costs associated with investigation or remediation activities could be substantial. In addition, as the owner or former owner of a contaminated site, the Corporation may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from the property. If the Corporation ever becomes subject to significant environmental liabilities, the Corporations business, financial condition, liquidity and results of operations could be materially and adversely affected.
If the Corporation is unable to redeem the Series C preferred stock after five years, its cost of capital will increase substantially.
If the Corporation is unable to redeem the Series C preferred stock prior to January 9, 2014, the cost of this capital will increase substantially on that date, from 5% per annum to 9% per annum. Depending on the Corporations financial condition at the time, this increase in the annual dividend rate on the Series C preferred stock could have a material negative effect on its liquidity.
The Securities Purchase Agreement between the Corporation and the U.S. Treasury limits the Corporations ability to pay dividends on and repurchase its common stock.
The Purchase Agreement between the Corporation and the U.S. Treasury provides that prior to the earlier of (i) January 9, 2012 and (ii) the date on which all of the shares of the Series C preferred stock have been redeemed by the Corporation or transferred by the U.S. Treasury to third parties, the Corporation may not, without the consent of the U.S. Treasury, (a) increase the quarterly rate of cash dividends on its common stock to more than $0.24 per share or (b) subject to limited exceptions, redeem, repurchase or otherwise acquire shares of its common stock or preferred stock other than the Series C preferred stock or trust preferred securities. In addition, the Corporation is unable to pay any dividends on its common stock unless it is current in its dividend payments on the Series C preferred stock. These restrictions could have a negative effect on the value of the Corporations common stock. Moreover, holders of the Corporations common stock are entitled to receive dividends only when, as and if declared by the Board of Directors. Although the Corporation has historically paid cash dividends on its common
stock, it is not required to do so and its Board of Directors could reduce or eliminate its common stock dividend in the future.
The Series C preferred stock reduces the net income available to the Corporations common stockholders and earnings per common share, and the warrant the Corporation issued to the U.S. Treasury may be dilutive to holders of the Corporations common stock.
The dividends declared and the accretion of discount on the Series C preferred stock will reduce the net income available to common stockholders and the Corporations earnings per common share. Additionally, the ownership interest of the existing holders of the Corporations common stock will be diluted to the extent the warrant is exercised. The shares of common stock underlying the warrant represent approximately 1.5% of the shares of the Corporations common stock outstanding as of December 31, 2008. Although the U.S. Treasury has agreed not to vote any of the shares of common stock it receives upon exercise of the warrant, a transferee of any portion of the warrant or of any shares of common stock acquired upon exercise of the warrant is not bound by this restriction.
The Corporation owns a six-story building in Hermitage, Pennsylvania that serves as its headquarters, executive and administrative offices. It shares this facility with Community Banking and Wealth Management.
The Community Banking offices are located in 24 counties in Pennsylvania and 4 counties in Ohio. Community Banking also has commercial loan production offices located in 5 counties in Florida and one county in Pennsylvania and a mortgage loan production office located in one county in Tennessee. Wealth Management operates in existing Community Banking offices. The Consumer Finance offices are located in 17 counties in Pennsylvania, 16 counties in Tennessee and 13 counties in Ohio. The Insurance offices are located in 6 counties in Pennsylvania. At December 31, 2008, the Corporations subsidiaries owned 169 of the Corporations properties and leased 126 properties under operating leases expiring at various dates through the year 2046. For additional information regarding the lease commitments, see the Premises and Equipment footnote in the Notes to Consolidated Financial Statements, which is included in Item 8 of this Report.
The Corporation and its subsidiaries are involved in various pending and threatened legal proceedings in which claims for monetary damages and other relief are asserted. These actions include claims brought against the Corporation and its subsidiaries where the Corporation acted as one or more of the following: a depository bank, lender, underwriter, fiduciary, financial advisor, broker or was engaged in other business activities. Although the ultimate outcome for any asserted claim cannot be predicted with certainty, the Corporation believes that it and its subsidiaries have valid defenses for all asserted claims. Reserves are established for legal claims when losses associated with the claims are judged to be probable and the amount of the loss can be reasonably estimated.
Based on information currently available, advice of counsel, available insurance coverage and established reserves, the Corporation does not anticipate, at the present time, that the aggregate liability, if any, arising out of such legal proceedings will have a material adverse effect on the Corporations consolidated financial position. However, the Corporation cannot determine whether or not any claims asserted against it will have a material adverse effect on its consolidated results of operations in any future reporting period. It is possible, in the event of unexpected future developments, that the ultimate resolution of these matters, if unfavorable, may have a material adverse effect on the Corporations consolidated results of operations for a particular period.
The name, age, position with the Corporation and principal occupation for the last five years of each of the executive officers of the Corporation as of December 31, 2008 is set forth below:
There are no family relationships among any of the above executive officers, and there is no arrangement or understanding between any of the above executive officers and any other person pursuant to which he was selected as an officer. The executive officers are elected by and serve at the pleasure of the Corporations Board of Directors.
As previously disclosed in the Corporations Current Report on Form 8-K filed on February 11, 2009, the Board of Directors of the Corporation appointed Stephen J. Gurgovits, who served as President and Chief Executive Officer of the Corporation from 2004 to 2008, to serve in those positions on an interim basis following the resignation of Robert V. New, Jr. as President, Chief Executive Officer and a Director of the Corporation.
The Corporations common stock is listed on the New York Stock Exchange (NYSE) under the symbol FNB. The accompanying table shows the range of high and low sales prices per share of the common stock as reported by the NYSE for 2008 and 2007. The table also shows dividends per share paid on the outstanding common stock during those periods. As of January 31, 2009, there were 12,664 holders of record of the Corporations common stock.
The information required by this Item 5 with respect to securities authorized for issuance under equity compensation plans is set forth in Part III, Item 12 of this Report.
The Corporation did not purchase any of its own equity securities during the fourth quarter of 2008.
The Corporations ability to make future payments of dividends on its common stock may be materially limited by the provisions of the Securities Purchase Agreement and the operative documents that the Corporation entered into in connection with the CPP. See Item 1A, Risk Factors, for additional information.
Comparison of Total Return on F.N.B. Corporations Common Stock with Certain Averages
The following five-year performance graph compares the cumulative total shareholder return (assuming reinvestment of dividends) on the Corporations common stock (u) to the NASDAQ Bank Index (n) and the Russell 2000 Index (5). This stock performance graph assumes $100 was invested on December 31, 2003, and the cumulative return is measured as of each subsequent fiscal year end.
F.N.B. Corporation Five-Year Stock Performance
Total Return, Including Stock and Cash Dividends
Dollars in thousands, except per share data
QUARTERLY EARNINGS SUMMARY (Unaudited)
Dollars in thousands, except per share data
Managements discussion and analysis represents an overview of the consolidated results of operations and financial condition of the Corporation. This discussion and analysis should be read in conjunction with the consolidated financial statements and notes presented in Item 8 of this Report. Results of operations for the periods included in this review are not necessarily indicative of results to be obtained during any future period.
Certain statements in this Report are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995, which statements generally can be identified by the use of forward-looking terminology, such as may, will, expect, estimate, anticipate, believe, target, plan, project or continue or the negatives thereof or other variations thereon or similar terminology, and are made on the basis of managements current plans and analyses of the Corporation, its business and the industry in which it operates as a whole. These forward-looking statements are subject to risks and uncertainties, including, but not limited to, economic conditions, competition, interest rate sensitivity and exposure to regulatory and legislative changes. The above factors in some cases have affected, and in the future could affect, the Corporations financial performance and could cause actual results to differ materially from those expressed in or implied by such forward-looking statements. The Corporation does not undertake to publicly update or revise its forward-looking statements even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized.
Application of Critical Accounting Policies
The Corporations consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles. Application of these principles requires management to make estimates, assumptions and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. These estimates, assumptions and judgments are based on information available as of the date of the consolidated financial statements; accordingly, as this information changes, the consolidated financial statements could reflect different estimates, assumptions and judgments. Certain policies inherently are based to a greater extent on estimates, assumptions and judgments of management and, as such, have a greater possibility of producing results that could be materially different than originally reported.
The most significant accounting policies followed by the Corporation are presented in the Summary of Significant Accounting Policies footnote in the Notes to Consolidated Financial Statements, which is included in Item 8 of this Report. These policies, along with the disclosures presented in the Notes to Consolidated Financial Statements, provide information on how significant assets and liabilities are valued in the consolidated financial statements and how those values are determined.
Management views critical accounting policies to be those which are highly dependent on subjective or complex judgments, estimates and assumptions, and where changes in those estimates and assumptions could have a significant impact on the consolidated financial statements. Management currently views the determination of the allowance for loan losses, securities valuation, goodwill and other intangible assets and income taxes to be critical accounting policies.
The allowance for loan losses addresses credit losses inherent in the existing loan portfolio and is presented as a reserve against loans on the consolidated balance sheet. Loan losses are charged off against the allowance for loan losses, with recoveries of amounts previously charged off credited to the allowance for loan losses. Provisions for loan losses are charged to operations based on managements periodic evaluation of the adequacy of the allowance.
Estimating the amount of the allowance for loan losses is based to a significant extent on the judgment and estimates of management regarding the amount and timing of expected future cash flows on impaired loans,
estimated losses on pools of homogeneous loans based on historical loss experience and consideration of current economic trends and conditions, all of which may be susceptible to significant change.
Managements assessment of the adequacy of the allowance for loan losses considers individual impaired loans, pools of homogeneous loans with similar risk characteristics and other risk factors concerning the economic environment. The allowance established for individual impaired loans reflects expected losses resulting from analyses developed through specific credit allocations for individual loans. The specific credit allocations are based on regular analyses of all loans over a fixed dollar amount where the internal credit rating is at or below a predetermined classification. These analyses involve a high degree of judgment in estimating the amount of loss associated with specific impaired loans, including estimating the amount and timing of future cash flows, current market value of the loan and collateral values. Independent loan review results are evaluated and considered in estimating reserves as well as other qualitative risk factors that may affect the loan. The evaluation of this component of the allowance requires considerable judgment in order to estimate inherent loss exposures.
Pools of homogeneous loans with similar risk characteristics are also assessed for probable losses. A loss migration and historical charge-off analysis is performed quarterly and loss factors are updated regularly based on actual experience. This analysis examines historical loss experience, the related internal ratings of loans charged off and considers inherent but undetected losses within the portfolio. Inherent but undetected losses may arise due to uncertainties in economic conditions, delays in obtaining information, including unfavorable information about a borrowers financial condition, the difficulty in identifying triggering events that correlate to subsequent loss rates and risk factors that have not yet manifested themselves in loss allocation factors. The Corporation has grown through acquisitions and expanding the geographic footprint in which it operates. As a result, historical loss experience data used to establish loss estimates may not precisely correspond to the current portfolio. Also, loss data representing a complete economic cycle is not available for all sectors. Uncertainty surrounding the strength and timing of economic cycles also affects estimates of loss. The historical loss experience used in the migration and historical charge-off analysis may not be representative of actual unrealized losses inherent in the portfolio.
Management also evaluates the impact of various qualitative factors which pose additional risks that may not adequately be addressed in the analyses described above. Such factors could include: levels of, and trends in, consumer bankruptcies, delinquencies, impaired loans, charge-offs and recoveries; trends in volume and terms of loans; effects of any changes in lending policies and procedures, including those for underwriting, collection, charge-off and recovery; experience, ability and depth of lending management and staff; national and local economic trends and conditions; industry and geographic conditions; concentrations of credit such as, but not limited to, local industries, their employees or suppliers; or any other common risk factor that might affect loss experience across one or more components of the portfolio. The determination of this component of the allowance is particularly dependent on the judgment of management.
There are many factors affecting the allowance for loan losses; some are quantitative, while others require qualitative judgment. Although management believes its process for determining the allowance adequately considers all of the factors that could potentially result in credit losses, the process includes subjective elements and may be susceptible to significant change. To the extent actual outcomes differ from management estimates, additional provisions for loan losses could be required that could adversely affect the Corporations earnings or financial position in future periods.
The Allowance and Provision for Loan Losses section of this financial review includes a discussion of the factors driving changes in the allowance for loan losses during the current period.
Investment securities, which consist of debt securities and certain equity securities, comprise a significant portion of the Corporations consolidated balance sheet. Such securities can be classified as Trading, Securities Held to Maturity or Securities Available for Sale. As of December 31, 2008 and 2007, the Corporation did not hold any trading securities.
Securities held to maturity are comprised of debt securities, which were purchased with managements positive intent and ability to hold such securities until their maturity. Such securities are carried at cost, adjusted for related amortization of premiums and accretion of discounts through interest income from securities.
Securities that are not classified as trading or held to maturity are classified as available for sale. The Corporations available for sale securities portfolio is comprised of debt securities and marketable equity securities. Such securities are carried at fair value with net unrealized gains and losses deemed to be temporary reported separately as a component of other comprehensive income, net of tax. Realized gains and losses on the sale of available for sale securities and other-than-temporary impairment (OTTI) charges are recorded within non-interest income in the consolidated statement of income. Realized gains and losses on the sale of securities are determined using the specific-identification method.
The investment securities portfolio is evaluated for OTTI on a quarterly basis. Impairment is assessed at the individual security level. An investment security is considered impaired if the fair value of the security is less than its cost or amortized cost basis.
The Corporations OTTI evaluation process is performed in a consistent and systematic manner and includes an evaluation of all available evidence. Documentation of the process is extensive as necessary to support a conclusion as to whether a decline in fair value below cost or amortized cost is other-than-temporary and includes documentation supporting both observable and unobservable inputs and a rationale for conclusions reached.
This process considers factors such as the severity, length of time and anticipated recovery period of the impairment, recent events specific to the issuer, including investment downgrades by rating agencies and economic conditions of its industry, and the issuers financial condition, capital strength and near-term prospects. 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, or until maturity. Among the factors that are considered in determining the Corporations intent and ability to retain the security is a review of its capital adequacy, interest rate risk position and liquidity.
The assessment of a securitys ability to recover any decline in fair value, the ability of the issuer to meet contractual obligations, and the Corporations intent and ability to retain the security 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 Financial Accounting Standards Board Statement (FAS) 115, Accounting for Certain Investments in Debt and Equity Securities and the related guidance of Emerging Issues Task Force (EITF) 99-20, Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held by a Transferor in Securitized Financial Assets, as amended by FASB Staff Position (FSP) EITF 99-20-1. All other securities are required to be evaluated under FAS 115 and related implementation guidance.
As a result of acquisitions, the Corporation has acquired goodwill and identifiable intangible assets. Goodwill represents the cost of acquired companies in excess of the fair value of net assets, including identifiable intangible assets, at the acquisition date. The Corporations recorded goodwill relates to value inherent in its Community Banking, Wealth Management and Insurance segments.
The value of goodwill and other identifiable intangibles is dependent upon the Corporations ability to provide quality, cost-effective services in the face of competition. As such, these values are supported ultimately by revenue that is driven by the volume of business transacted. A decline in earnings as a result of a lack of growth or the Corporations inability to deliver cost effective services over sustained periods can lead to impairment in value which could result in additional expense and adversely impact earnings in future periods.
Other identifiable intangible assets such as core deposit intangibles and customer and renewal lists are amortized over their estimated useful lives.
The two-step impairment test is used to identify potential goodwill impairment and measure the amount of impairment loss to be recognized, if any. The first step compares the fair value of a reporting unit with its carrying
amount. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired and the second step of the test is not necessary. If the carrying amount of a reporting unit exceeds its fair value, the second step is performed to measure impairment loss, if any. Under the second step, the fair value is allocated to all of the assets and liabilities of the reporting unit to determine an implied goodwill value. This allocation is similar to a purchase price allocation performed in purchase accounting. If the implied goodwill value of a reporting unit is less than the carrying amount of that goodwill, an impairment loss is recognized in an amount equal to that excess.
Determining fair values of a reporting unit, of its individual assets and liabilities, and also of other identifiable intangible assets requires considering market information that is publicly available as well as the use of significant estimates and assumptions. These estimates and assumptions could have a significant impact on whether or not an impairment charge is recognized and also the magnitude of any such charge. Inputs used in determining fair values where significant estimates and assumptions are necessary include discounted cash flow calculations, market comparisons and recent transactions, projected future cash flows, discount rates reflecting the risk inherent in future cash flows, growth rates and determination and evaluation of appropriate market comparables.
The Corporation performed an annual test of goodwill and other intangibles as of September 30, 2008, and concluded that the recorded values were not impaired. Additionally, due to market conditions surrounding the banking industry, the Corporation updated its impairment analysis as of December 31, 2008, and concluded that the recorded values were not impaired.
The Corporations total goodwill at December 31, 2008 was $528.3 million, of which $509.2 million relates to the Corporations Community Banking segment. The estimated fair value of this reporting unit is based on valuation techniques that the Corporation believes market participants would use including peer company price-to-earnings and price-to-book multiples. During the fourth quarter of 2008, the financial services industry and securities markets generally were adversely affected by significant declines in the values of nearly all asset classes. If current economic conditions continue resulting in a prolonged period of economic weakness, the Corporations business segments, including the Community Banking segment, may be adversely affected, which may result in impairment of goodwill and other intangibles in the future. As of December 31, 2008, a decline of greater than 15.4% in the estimated fair value of the Community Banking segment may result in recorded goodwill being impaired. Any resulting impairment loss could have a material adverse impact on the Corporations financial condition and its results of operations.
The Corporation is subject to the income tax laws of the U.S., its states and other jurisdictions where it conducts business. The laws are complex and subject to different interpretations by the taxpayer and various taxing authorities. In determining the provision for income taxes, management must make judgments and estimates about the application of these inherently complex tax statutes, related regulations and case law. In the process of preparing the Corporations tax returns, management attempts to make reasonable interpretations of the tax laws. These interpretations are subject to challenge by the taxing authorities based on audit results or to change based on managements ongoing assessment of the facts and evolving case law.
The Corporation establishes a valuation allowance when it is more likely than not that the Corporation will not be able to realize a benefit from its deferred tax assets, or when future deductibility is uncertain. Periodically, the valuation allowance is reviewed and adjusted based on managements assessments of realizable deferred tax assets.
On a quarterly basis, management assesses the reasonableness of the Corporations effective tax rate based on managements current best estimate of net income and the applicable taxes for the full year. Deferred tax assets and liabilities are assessed on an annual basis, or sooner, if business events or circumstances warrant.
The New Accounting Standards footnote in the Notes to Consolidated Financial Statements, which is included in Item 8 of this Report, discusses new accounting pronouncements adopted by the Corporation in 2008 and the expected impact of accounting pronouncements recently issued or proposed but not yet required to be adopted.
The Corporation is a diversified financial services company headquartered in Hermitage, Pennsylvania. Its primary businesses include community banking, consumer finance, wealth management and insurance. The Corporation also conducts leasing and merchant banking activities. The Corporation operates its community banking business through a full service branch network with offices in Pennsylvania and Ohio and loan production offices in Pennsylvania, Ohio, Florida and Tennessee. The Corporation operates its wealth management and insurance businesses within the community banking branch network. It also conducts selected consumer finance business in Pennsylvania, Ohio and Tennessee.
On April 1, 2008, the Corporation completed the acquisition of Omega, a diversified financial services company with $1.8 billion in assets, and on August 16, 2008, the Corporation completed the acquisition of IRGB, a bank holding company with $301.7 million in assets. The assets and liabilities of each of these acquired companies were recorded on the Corporations balance sheet at their fair values as of each of the acquisition dates, and their results of operations have been included in the Corporations consolidated statement of income since then.
The economic environment made 2008 another challenging year for the banking industry, particularly in the lending business. The Corporations practice of conservative underwriting has helped it to substantially avoid the types of losses from certain loans, such as subprime residential mortgages, which have recently impacted other financial institutions. As a result of the challenging economic environment, the Corporation took decisive action to build its loan loss reserve to address the Florida loan portfolio. Additionally, the Corporation demonstrated its capability to win business in its marketplace by realizing some organic growth in loans, deposits and treasury management accounts in the challenging economic environment.
During 2008, the Corporation recorded total impairment charges of $20.6 million. These impairment charges consisted of $16.0 million related to investments in pooled trust preferred securities, $1.2 million related to investments in bank stocks and $3.4 million related to investments made by the Corporations merchant banking subsidiary.
The Corporations investments in pooled trust preferred securities had a cost basis of $40.6 million and a fair value of $17.9 million as of December 31, 2008. This portfolio consists of 13 securities representing interests in various trusts collateralized by debt issued by over 500 financial institutions. Management has concluded that it is probable that there has been an adverse change in estimated cash flows for eight of the 13 securities, which management deemed to be other-than-temporarily impaired in accordance with generally accepted accounting principles. This conclusion is based on the trend in new deferrals by the underlying issuing banks and the expectation for additional deferrals and defaults in the future, negative changes in credit ratings, whether the security is currently deferring interest on the tranche that the Corporation owns and expected continued weakness in the U.S. economy. These eight securities were written down to $10.5 million, or 39.6% of the $26.4 million cost basis. After the impairment write-downs, the Corporation held 13 pooled trust preferred securities with an adjusted cost basis of $24.6 million and a fair value of $17.9 million as of December 31, 2008.
The $1.2 million OTTI charge for bank stocks relates to securities that have been in an unrealized loss position for between three and 12 months. In accordance with generally accepted accounting principles, management has deemed these impairments to be other than temporary given the low likelihood that they will recover in value in the foreseeable future. At year end, the Corporation held 31 bank stocks with an adjusted cost basis of $3.6 million and a fair value of $3.5 million.
The impairment charge for the merchant banking subsidiary primarily relates to two investments, with $2.1 million related to a Florida-based company and $1.0 million related to a company with substantial exposure to
the automobile industry. As of December 31, 2008, the portfolio of investments for the merchant banking subsidiary was $16.1 million with positions in nine companies.
Results of Operations
Year Ended December 31, 2008 Compared to Year Ended December 31, 2007
Net income for 2008 was $35.6 million or $0.44 per diluted share, a decrease of $34.1 million or 48.9% from net income for 2007 of $69.7 million or $1.15 per diluted share. The decrease in net income is largely a result of an increase of $59.7 million in the provision for loan losses combined with $20.1 million of non-cash impairment charges relating to certain investments. These items are more fully discussed later in this section.
The Corporations return on average equity was 4.20%, its return on average tangible equity (net income less amortization of intangibles, net of tax, divided by average equity less average intangibles) was 10.63%, its return on average assets was 0.46% and its return on average tangible assets (net income less amortization of intangibles, net of tax, divided by average assets less average intangibles) was 0.55% for 2008, as compared to 12.89%, 26.23%, 1.15% and 1.25%, respectively, for 2007.
The following table provides information regarding the average balances and yields earned on interest earning assets and the average balances and rates paid on interest bearing liabilities (dollars in thousands):
Net interest income, which is the Corporations major source of revenue, is the difference between interest income from earning assets (loans, securities and federal funds sold) and interest expense paid on liabilities (deposits, treasury management accounts and short- and long-term borrowings). In 2008, net interest income, which comprised 74.5% of net revenue (net interest income plus non-interest income) as compared to 70.5% in 2007, was affected by the general level of interest rates, changes in interest rates, the shape of the yield curve and changes in the amount and mix of interest earning assets and interest bearing liabilities.
Net interest income, on an FTE basis, increased $58.3 million or 29.2% from $199.5 million for 2007 to $257.8 million for 2008. Average interest earning assets increased $1.3 billion or 24.1% and average interest bearing liabilities increased $1.1 billion or 23.6% from 2007 due to organic loan and deposit growth and the Omega and IRGB acquisitions. The Corporations net interest margin increased by 15 basis points from 2007 to 3.88% for 2008 as lower yields on interest earning assets were more than offset by lower rates paid on interest bearing liabilities. Details on changes in tax equivalent net interest income attributed to changes in interest earning assets, interest bearing liabilities, yields and cost of funds can be found in the preceding table.
The following table sets forth certain information regarding changes in net interest income attributable to changes in the average volumes and yields earned on interest earning assets and the average volume and rates paid for interest bearing liabilities for the periods indicated (in thousands):
Interest income, on an FTE basis, of $415.8 million in 2008 increased by $42.3 million or 11.3% from 2007. Average interest earning assets of $6.6 billion for the 2008 grew $1.3 billion or 24.1% from the same period of 2007 primarily driven by the Omega and IRGB acquisitions which added average loans of $860.8 million and $64.5 million, respectively, in 2008. The Corporation also recognized organic average loan growth of $179.6 million during 2008. The yield on interest earning assets decreased 72 basis points to 6.25% for 2008 reflecting changes in interest rates.
Interest expense of $158.0 million for 2008 decreased by $16.1 million or 9.2% from 2007. The rate paid on interest bearing liabilities decreased 95 basis points to 2.66% during 2008 reflecting changes in interest rates and a favorable shift in mix. Average interest bearing liabilities increased $1.1 billion or 23.6% to average $5.9 billion for 2008. This growth was primarily attributable to the Omega and IRGB acquisitions combined with organic growth. The Omega acquisition added $946.1 million in average deposits in 2008, while the IRGB acquisition added $99.3 million in average deposits in 2008. The Corporation also recognized organic average deposit growth of $103.8 million during 2008.
The provision for loan losses is determined based on managements estimates of the appropriate level of allowance for loan losses needed to absorb probable losses inherent in the existing loan portfolio, after giving consideration to charge-offs and recoveries for the period.
The provision for loan losses of $72.4 million in 2008 increased $59.7 million from 2007 due to higher net charge-offs, additional specific reserves and increased allocations for a weaker economic environment. The significant increases primarily reflect continued deterioration in the Corporations Florida market, and to a much lesser extent, the slowing economy in Pennsylvania. In 2008, net charge-offs were $32.6 million or 0.60% of average loans compared to $12.5 million or 0.29% of average loans in 2007. Net charge-offs related to the Corporations Florida market were $15.0 million or 5.02% of average loans in that market, while the net charge-offs relating to the Pennsylvania market (which excludes the Florida portfolio and includes the Regency portfolio) equaled $17.5 million or 0.34% of average loans in that market.
Non-performing loans were $143.7 million at December 31, 2008, an increase of $111.0 million from December 31, 2007. The majority of this increase is attributed to Florida, which accounted for $84.0 million or 75.7% of the total increase, with the Corporations remaining non-performing loans up $27.0 million or 24.3% of the total increase. At December 31, 2008, non-performing loans in the Corporations Florida market were $93.1 million, while non-performing loans in the Pennsylvania market were $50.6 million. The ratio of non-performing loans and other real estate owned (OREO) to total loans and OREO was 2.62% at December 31, 2008, compared to 0.94% at December 31, 2007. The ratio of non-performing loans and OREO to total loans and OREO related to the Corporations Florida market was 31.91% at December 31, 2008 compared to 1.06% relating to the Pennsylvania market.
At December 31, 2008, the ratio of the allowance for loan losses to total loans was 1.80%, a 58 basis point increase from 1.22% at the end of 2007. For the Florida portfolio, this ratio equaled 9.69% at year-end 2008 and 1.38% for the Pennsylvania portfolio. At December 31, 2008, the allowance for loan losses covered 72.88% of non-performing loans, compared to 161.59% at December 31, 2007. For the Florida portfolio, this ratio was 30.61% at December 31, 2008 and 150.68% for the Pennsylvania portfolio.
For additional information, refer to the Allowance and Provision for Loan Losses section of this financial review.
Total non-interest income of $86.1 million in 2008 increased $4.5 million or 5.5% from 2007. This increase resulted primarily from increases in all major fee businesses reflecting organic growth and the impact of acquisitions, partially offset by decreases in gain on sale of securities, impairment loss on securities and other non-interest income.
Service charges on loans and deposits of $54.7 million for 2008 increased $13.9 million or 34.0% from 2007, reflecting organic growth and the expansion of the Corporations customer base as a result of the Omega and IRGB acquisitions during 2008.
Insurance commissions and fees of $15.6 million for 2008 increased $1.6 million or 11.3% from 2007 primarily as a result of the acquisition of Omega during 2008 partially offset by a decrease in contingent fee income.
Securities commissions of $8.1 million for 2008 increased by $1.8 million or 28.5% from 2007 primarily due to the acquisition of Omega during 2008 and an increase in annuity revenue due to the declining interest rate environment, partially offset by lower activity due to market conditions.
Trust fees of $12.1 million in 2008 increased by $3.5 million or 41.0% from 2007 due to growth in assets under management resulting from the Omega acquisition during 2008 combined with increases in estate accounts, partially offset by the negative effect of market conditions on assets under management.
Income from bank owned life insurance of $6.4 million for 2008 increased by $2.3 million or 55.6% from 2007. This increase was primarily attributable to the Omega and IRGB acquisitions in 2008 combined with increases in crediting rates paid on the insurance policies.
Gain on sale of mortgage loans of $1.8 million for 2008 increased by $0.1 million or 6.4% from 2007 due to higher volume and increased prices on mortgage sales in 2008, partially offset by a loss on the sale of student loans during 2007.
Gain on sale of securities of $0.8 million decreased $0.3 million or 27.8% from 2007 as management did not sell as many equity securities during 2008 due to unfavorable market prices in the bank stock portfolio. During 2008, most of the gain related to the Visa, Inc. initial public offering. The Corporation is a member of Visa USA since it issues Visa debit cards. As such, a portion of the Corporations ownership interest in Visa was redeemed in exchange for $0.7 million. This entire amount was recorded as gain on sale of securities since the Corporations cost basis in Visa is zero.
Impairment loss on securities of $17.2 million increased by $17.1 million from 2007 due to impairment losses during 2008 of $16.0 million related to investments in pooled trust preferred securities and $1.2 million related to investments in bank stocks.
Other income of $3.8 million for 2008 decreased $1.3 million or 25.2% from 2007. The primary reason for this decrease was due to a $3.4 million impairment loss primarily relating to two mezzanine loans made by the Corporations merchant banking subsidiary, with $2.1 million related to a Florida-based company and the other $1.0 million related to a company with substantial exposure to the automobile industry. These decreases were partially offset by an increase of $2.6 million in swap fee income during 2008.
Total non-interest expense of $222.7 million in 2008 increased $57.1 million or 34.5% from 2007. This increase was primarily attributable to operating expenses resulting from the Omega and IRGB acquisitions in 2008.
Salaries and employee benefits of $116.8 million in 2008 increased $29.6 million or 33.9% from 2007. This increase was primarily attributable to the acquisitions of Omega and IRGB during 2008 combined with normal annual compensation and benefit increases, additional costs associated with the transition of the Corporations senior leadership and higher accrued expense for the Corporations long-term restricted stock program. The Corporations full-time equivalent employees increased 33.4% from 1,762 at December 31, 2007 to 2,350 at December 31, 2008, primarily due to the Omega and IRGB acquisitions. The Corporation also recorded $1.1 million in additional expense relating to the retirement of an executive during the second quarter of 2008. Additionally, 2007 included a credit of $1.6 million relating to the restructuring of the Corporations postretirement benefit plan.
Combined net occupancy and equipment expense of $34.2 million in 2008 increased $6.5 million or 23.5% from the combined 2007 level, primarily due to the Omega and IRGB acquisitions during 2008.
Amortization of intangibles expense of $6.4 million in 2008 increased $2.0 million or 46.2% from 2007 primarily due to higher intangible balances resulting from the Omega and IRGB acquisitions during 2008.
Outside services expense of $20.9 million in 2008 increased $5.0 million or 31.1% from 2007 primarily due to the Omega and IRGB acquisitions during 2008, combined with higher fees for professional services.
State tax expense of $6.6 million in 2008 increased $1.1 million or 20.2% from 2007 primarily due to higher net worth based taxes resulting from the Corporations acquisitions of Omega and IRGB in 2008.
Advertising and promotional expense of $4.6 million in 2008 increased $1.2 million or 57.5% from 2007 due to increased advertising in connection with the Corporations acquisitions of Omega and IRGB in 2008.
The Corporation recorded merger-related expenses of $4.7 million in 2008 relating to the acquisitions of Omega and IRGB compared to $0.2 million in 2007. Information relating to the Corporations acquisitions is discussed in the Mergers and Acquisitions footnote in the Notes to Consolidated Financial Statements, which is included in Item 8 of this Report.
Other non-interest expenses of $25.6 million in 2008 increased $6.2 million or 32.1% from 2007. This increase was primarily due to additional operating costs associated with the Corporations acquisitions of Omega and IRGB in 2008. Additionally, OREO expense of $2.1 million in 2008 increased $1.6 million from 2007 due to increased foreclosure activity and write-downs of OREO property.
The Corporations income tax expense of $7.2 million for 2008 decreased by $21.2 million or 74.6% from 2007. The effective tax rate of 16.9% for 2008 declined from 29.0% for the prior year, primarily due to lower pre-tax income for 2008. The income tax expense for 2008 and 2007 were favorably impacted by $0.3 million and $0.9 million, respectively, due to the resolution of previously uncertain tax positions. The lower effective tax rate also reflects benefits resulting from tax-exempt income on investments, loans and bank owned life insurance. Both periods tax rates are lower than the 35.0% federal statutory tax rate due to the tax benefits primarily resulting from tax-exempt instruments and excludable dividend income.
Net income for 2007 was $69.7 million or $1.15 per diluted share, an increase of $2.0 million or 3.0% from net income for 2006 of $67.6 million or $1.14 per diluted share. The increase in net income is a result of several factors, including loan growth, recurring fee income and controlling expenses, as well as the full year impact of the Legacy acquisition. Additionally, the 2007 income taxes were favorably impacted by $0.9 million due to the expiration of an uncertain tax position.
The Corporations return on average equity was 12.89%, its return on average tangible equity was 26.23%, its return on average assets was 1.15% and its return on tangible assets was 1.25% for 2007, as compared to 13.15%, 26.30%, 1.15% and 1.25%, respectively, for 2006.
Net interest income, which is the Corporations major source of revenue, is the difference between interest income from earning assets and interest expense paid on liabilities. In 2007, net interest income, which comprised 70.5% of net revenue as compared to 70.4% in 2006, was affected by the general level of interest rates, changes in interest rates, the shape of the yield curve and changes in the amount and mix of interest earning assets and interest bearing liabilities.
Net interest income, on an FTE basis, increased $6.7 million or 3.5% from $192.8 million for 2006 to $199.5 million for 2007. Average interest earning assets increased $160.6 million or 3.1% and average interest bearing liabilities increased $150.8 million or 3.2% from 2006 due to organic commercial loan and deposit growth and the Legacy acquisition. The Corporations net interest margin increased by 2 basis points from 2006 to 3.73% for 2007 as higher rates on interest earning assets were partially offset by increased rates paid on interest bearing liabilities and lower balances of non-interest bearing demand deposits.
Interest income, on an FTE basis, of $373.5 million in 2007, increased by $27.2 million or 7.9% from 2006. This increase was caused by an improvement in the yield on interest earning assets of 30 basis points to 6.97%
for 2007 and an increase in average interest earning assets of $160.6 million or 3.1% from 2006. The increase in average interest earning assets was driven by an increase of $245.2 million in average loans, partially offset by a decrease of $71.9 million in average investment securities. The increase in average loans was a result of a combination of organic growth and the Legacy acquisition while the decrease in average investment securities partially funded loan growth.
Interest expense of $174.1 million for 2007 increased by $20.5 million or 13.3% from 2006. This increase was primarily attributable to an increase of 32 basis points in the Corporations cost of funds to 3.61% for 2007. Also, average interest bearing liabilities increased $150.8 million or 3.2% to $4.8 billion for 2007. This growth was primarily attributable to a combined increase of $146.3 million or 7.8% in the core deposit categories of average interest bearing demand deposit and savings, a $53.7 million or 25.2% increase in average treasury management accounts and an increase in average certificates and other time deposits of $14.9 million or 0.9%. Average interest bearing demand, savings and certificates and other time deposits increased due to organic growth resulting from an expanded suite of deposit products designed to attract and retain customers and from the Legacy acquisition. Average treasury management accounts increased primarily due to the implementation of a strategic initiative to increase and expand commercial deposit relationships. The average balance for junior subordinated debt owed to unconsolidated subsidiary trusts also increased by $8.7 million or 6.1% for 2007 due to the issuance of $21.5 million of new debt in mid-2006 to partially finance the Legacy acquisition. Partially offsetting these increases was a decline in average long-term debt of $75.2 million or 13.9% from 2006.
The provision for loan losses is determined based on managements estimates of the appropriate level of allowance for loan losses needed to absorb probable losses inherent in the existing loan portfolio, after giving consideration to charge-offs and recoveries for the period.
The provision for loan losses of $12.7 million in 2007 increased $2.3 million or 21.9% from 2006 primarily due to actions taken during late 2007 relating to one developer relationship in the Florida market. These actions included the charge-off of $0.9 million relating to one project and the recording of a specific reserve of $2.0 million relating to a second project. Additionally, the Corporation transferred the remaining $1.7 million relating to the first project to other real estate owned and transferred the entire $8.2 million balance of the second project to non-accrual status. In 2007, net charge-offs totaled $12.5 million or 0.29% of average loans compared to $11.6 million or 0.29% of average loans in 2006. The ratio of non-performing loans to total loans was 0.75% at December 31, 2007, compared to 0.66% at December 31, 2006, and the ratio of non-performing assets to total assets was 0.67% and 0.57%, respectively, at these same dates. For additional information, refer to the Allowance and Provision for Loan Losses section of this financial review.
Total non-interest income of $81.6 million in 2007 increased $2.3 million or 2.9% from 2006. This increase resulted primarily from increases in all major fee businesses except for insurance-related fees, partially offset by decreases in gain on sale of securities and other non-interest income.
Service charges on loans and deposits of $40.8 million for 2007 increased $0.8 million or 1.9% from 2006, reflecting expansion of the Corporations customer base as a result of the Legacy acquisition in 2006 and also due to higher activity in check card and business demand deposit account fees. Insurance commissions and fees were $14.0 million for 2007, which remained stable compared to 2006 as growth in the book of business was offset by lower commissions. As a result of a soft renewal market in the insurance industry, many account renewal commissions have declined due to lower premiums charged by insurance carriers. Securities commissions of $6.3 million for 2007 increased by $1.5 million or 30.0% from 2006 levels primarily due to higher organic annuity and securities sales. Trust fees of $8.6 million in 2007 increased by $0.8 million or 10.2% from 2006 due to growth in assets under management resulting from organic growth in overall trust assets, higher equity valuations and the Legacy acquisition in 2006. Gain (loss) on sale of securities of $1.2 million decreased $0.6 million or 35.9% from 2006 as management did not sell any equity securities during the second half of 2007 due to unfavorable market prices in the bank stock portfolio. Gain on sale of mortgage loans of $1.7 million for 2007 increased by $0.1 million
or 6.7% from 2006 due to an increase in mortgage origination volume in 2007. Income from bank owned life insurance of $4.1 million for 2007 increased by $0.7 million or 22.2% from 2006 due to a combination of a higher crediting rate in 2007 and the Legacy acquisition in 2006. Other income of $5.0 million for 2007 decreased $0.8 million or 13.6% from 2006. The primary reason for this decrease was $0.8 million in lower gains on settlements of impaired loans acquired in previous acquisitions. In 2006, the Corporation recognized gains on settlements of impaired loans of $1.3 million compared to $0.5 million in 2007. The Corporation also recognized a loss of $0.5 million in 2007 on the sale of a building acquired in a previous merger. Offsetting these decreases was a $0.4 million increase in customer swap fee income.
Total non-interest expense of $165.6 million in 2007 increased $5.1 million or 3.2% from 2006. This increase was primarily attributable to operating expenses resulting from the Legacy acquisition in 2006.
Salaries and employee benefits of $87.2 million in 2007 increased $3.6 million or 4.3% from 2006. This increase was primarily attributable to normal annual compensation and benefit increases, additional costs associated with the employees retained from the Corporations acquisition of Legacy in 2006, higher commission expense tied to growth in securities commission revenue and an increase in stock compensation expense related to the issuance of restricted stock, partially offset by lower expense due to the amendment to the Corporations pension and postretirement benefit plans and lower medical expenses. Combined net occupancy and equipment expense of $27.7 million in 2007 increased $0.2 million or 0.6% from the combined 2006 level. This increase was primarily due to additional operating costs associated with the Corporations acquisition of Legacy in 2006, the opening of a new branch in 2006 and several new loan production offices in 2006 and 2007, partially offset by lower depreciation on equipment. Amortization of intangibles expense of $4.4 million in 2007 increased $0.3 million or 6.2% from 2006 due to the amortization of additional core deposit and other intangibles as a result of the Corporations acquisition of Legacy in 2006. State taxes of $5.5 million in 2007 increased $0.8 million or 16.4% from 2006 primarily due to higher net worth based taxes resulting from the Corporations acquisition of Legacy in 2006. Advertising and promotional expense of $2.9 million in 2007 increased $0.1 million or 2.4% from 2006 due to the Corporations acquisition of Legacy in 2006. The Corporation recorded merger-related expenses of $0.2 million in 2007 relating to the then-pending acquisition of Omega and $0.6 million in 2006 related to costs incurred as a result of the acquisition of Legacy. The acquisition of Omega is discussed in the Mergers and Acquisitions footnote in the Notes to Consolidated Financial Statements, which is included in Item 8 of this Report. Other non-interest expenses of $35.4 million in 2007 increased $0.9 million or 2.5% from 2006. This increase was primarily due to additional operating costs associated with the Corporations acquisition of Legacy in 2006 and higher fees for outside professional services.
The Corporations income tax expense of $28.5 million for 2007 decreased by $1.1 million or 3.6% from 2006. The effective tax rate of 29.0% for 2007 declined from 30.4% for the prior year. The income tax expense for 2007 was favorably impacted by $0.9 million due to the expiration of an uncertain tax position. The lower effective tax rate also reflects benefits resulting from tax-exempt income on investments, loans and bank owned life insurance. Both periods tax rates are lower than the 35.0% federal statutory tax rate due to the tax benefits primarily resulting from tax-exempt instruments and excludable dividend income.
The Corporations goal in liquidity management is to satisfy the cash flow requirements of depositors and borrowers as well as the operating cash needs of the Corporation with cost-effective funding. The Board of Directors of the Corporation has established an Asset/Liability Policy in order to achieve and maintain earnings performance consistent with long-term goals while maintaining acceptable levels of interest rate risk, a well-capitalized balance sheet and adequate levels of liquidity. The Board of Directors of the Corporation has also established a Contingency Funding Policy to address liquidity crisis conditions. These policies designate the Corporate Asset/Liability Committee (ALCO) as the body responsible for meeting these objectives. The ALCO, which includes members of executive management, reviews liquidity on a periodic basis and approves significant
changes in strategies that affect balance sheet or cash flow positions. Liquidity is centrally managed on a daily basis by the Corporations Treasury Department.
The principal sources of the parent companys liquidity are its strong existing cash resources plus dividends it receives from its subsidiaries. These dividends may be impacted by the parents or the subsidiaries capital needs, statutory laws and regulations, corporate policies, contractual restrictions and other factors. Cash on hand at the parent at December 31, 2008 was $66.8 million, up from $21.7 million at December 31, 2007, as the Corporation took a number of actions to bolster its cash position. On January 21, 2009, the Corporations Board of Directors elected to reduce the common stock dividend from $0.24 to $0.12 per quarter, thus reducing 2009s liquidity needs by approximately $43.1 million. The parent also may draw on approved guidance lines of credit with two major domestic banks. These lines were unused and totaled $40.0 million and $90.0 million, respectively, as of December 31, 2008 and December 31, 2007. In addition, the Corporation also issues subordinated notes on a regular basis. Finally, on January 9, 2009, the Corporation completed the sale of 100,000 shares of newly issued preferred stock valued at $100.0 million as part of the U.S. Treasurys CPP. These funds will complement the Corporations already well-capitalized position and strengthen its ability to meet its customers needs.
The Corporations bank subsidiary generates liquidity from its normal business operations. Liquidity sources from assets include payments from loans and investments as well as the ability to securitize, pledge or sell loans, investment securities and other assets. Liquidity sources from liabilities are generated primarily through the 225 banking offices of FNBPA in the form of deposits and treasury management accounts. The Corporation also has access to reliable and cost-effective wholesale sources of liquidity. Short-term and long-term funds can be acquired to help fund normal business operations as well as serve as contingency funding in the event that the Corporation would be faced with a liquidity crisis.
The recent financial market crisis, which began in 2007, escalated in the second half of 2008 and resulted in the U.S. Treasury, FRB and FDIC intervening with a number of programs designed to provide direct liquidity, capital or increased deposit insurance to the U.S. financial system. The Corporation has voluntarily elected to participate in a number of these programs, including the previously mentioned U.S. Treasurys CPP program and the FDICs TLGP.
The liquidity position of the Corporation generally improved over the course of 2008. Its strong branch network was able to grow deposits and treasury management accounts. As a result, the Corporation is less reliant on capital markets funding as witnessed by growth in its ratio of total deposits and treasury management accounts to total assets to 77.3% from 76.8% as of December 31, 2008 and December 31, 2007, respectively. The Corporation had unused wholesale credit availability of $2.2 billion or 26.8% of total assets at December 31, 2008 and $1.9 billion or 31.2% of total assets at December 31, 2007. These sources include the availability to borrow from the FHLB, the FRB, correspondent bank lines and access to certificates of deposit issued through brokers. The Corporation took a number of actions to bolster liquidity throughout 2008. These actions included a $200.0 million increase in federal fund lines, increased brokered CD capacity and becoming a participant in CDARS. Further, the Corporations election not to opt out of the FDICs TLGP resulted in $140.0 million of increased funding availability.
The ALCO regularly monitors various liquidity ratios and forecasts of its liquidity position. Management believes the Corporation has sufficient liquidity available to meet its normal operating and contingency funding cash needs.
Market risk refers to potential losses arising from changes in interest rates, foreign exchange rates, equity prices and commodity prices. The Corporation is susceptible to current and future impairment charges on holdings in its investment portfolio. The Securities footnote, in the Notes to Consolidated Financial Statements, which is included in Item 8 of this Report, discusses the impairment charges taken during the fourth quarter of 2008 relating to the pooled trust preferred securities and bank stock portfolios. The Securities footnote also discusses the ongoing process management utilizes to determine whether impairment exists.
The Corporation is primarily exposed to interest rate risk inherent in its lending and deposit-taking activities as a financial intermediary. To succeed in this capacity, the Corporation offers an extensive variety of financial products to meet the diverse needs of its customers. These products sometimes contribute to interest rate risk for the Corporation when product groups do not complement one another. For example, depositors may want short-term deposits while borrowers desire long-term loans.
Changes in market interest rates may result in changes in the fair value of the Corporations financial instruments, cash flows and net interest income. The ALCO is responsible for market risk management: devising policy guidelines, risk measures and limits, and managing the amount of interest rate risk and its effect on net interest income and capital. The Corporation uses derivative financial instruments for interest rate risk management purposes and not for trading or speculative purposes.
Interest rate risk is comprised of repricing risk, basis risk, yield curve risk and options risk. Repricing risk arises from differences in the cash flow or repricing between asset and liability portfolios. Basis risk arises when asset and liability portfolios are related to different market rate indexes, which do not always change by the same amount. Yield curve risk arises when asset and liability portfolios are related to different maturities on a given yield curve; when the yield curve changes shape, the risk position is altered. Options risk arises from embedded options within asset and liability products as certain borrowers have the option to prepay their loans when rates fall while certain depositors can redeem their certificates of deposit early when rates rise.
The Corporation uses a sophisticated asset/liability model to measure its interest rate risk. Interest rate risk measures utilized by the Corporation include earnings simulation, economic value of equity (EVE) and gap analysis.
Gap analysis and EVE are static measures that do not incorporate assumptions regarding future business. Gap analysis, while a helpful diagnostic tool, displays cash flows for only a single rate environment. EVEs long-term horizon helps identify changes in optionality and longer-term positions. However, EVEs liquidation perspective does not translate into the earnings-based measures that are the focus of managing and valuing a going concern. Net interest income simulations explicitly measure the exposure to earnings from changes in market rates of interest. In these simulations, the Corporations current financial position is combined with assumptions regarding future business to calculate net interest income under various hypothetical rate scenarios. The ALCO reviews earnings simulations over multiple years under various interest rate scenarios on a periodic basis. Reviewing these various measures provides the Corporation with a comprehensive view of its interest rate profile.
The following gap analysis compares the difference between the amount of interest earning assets (IEA) and interest bearing liabilities (IBL) subject to repricing over a period of time. A ratio of more than one indicates a higher level of repricing assets over repricing liabilities for the time period. Conversely, a ratio of less than one indicates a higher level of repricing liabilities over repricing assets for the time period.
The following table presents the amounts of IEA and IBL as of December 31, 2008 that are subject to repricing within the periods indicated (dollars in thousands):
The cumulative twelve-month IEA to IBL ratio changed to 1.08 for December 31, 2008 from 1.03 for December 31, 2007.
The allocation of non-maturity deposits to the one-month maturity category is based on the estimated sensitivity of each product to changes in market rates. For example, if a products rate is estimated to increase by 50% as much as the market rates, then 50% of the account balance was placed in this category. The current allocation is representative of the estimated sensitivities for a +/- 100 basis point change in market rates.
The measures were calculated using rate shocks, representing immediate rate changes that move all market rates by the same amount. The variance percentages represent the change between the net interest income or EVE calculated under the particular rate shock versus the net interest income or EVE that was calculated assuming market rates as of December 31, 2008.
The following table presents an analysis of the potential sensitivity of the Corporations net interest income and EVE to changes in interest rates:
The Corporations overall level of interest rate risk is considered to be relatively low and stable. This is evidenced by a relatively stable net interest margin despite the recent market rate volatility. The Corporation has a relatively neutral interest rate risk position.
During 2008, the ALCO utilized several strategies to maintain the Corporations interest rate risk position at a relatively neutral level. For example, the Corporation successfully achieved growth in longer-term certificates of deposit. On the lending side, the Corporation regularly sells long-term fixed-rate residential mortgages to the
secondary market and has been successful in the origination of commercial loans with short-term repricing characteristics. Total variable and adjustable-rate loans increased from 49.5% of total loans as of December 31, 2007 to 55.9% of total loans as of December 31, 2008. The investment portfolio is used, in part, to improve the Corporations interest rate risk position. The average life of the investment portfolio is relatively low at 2.4 years. Finally, the Corporation has made use of interest rate swaps to lessen its interest rate risk position. For additional information regarding interest rate swaps, see the Interest Rate Swaps footnote in the Notes to Consolidated Financial Statements, which is included in Item 8 of this Report.
The Corporation recognizes that asset/liability models such as those used by the Corporation to measure its interest rate risk are based on methodologies that may have inherent shortcomings. Furthermore, asset/liability models require certain assumptions to be made, such as prepayment rates on interest earning assets and pricing impact on non-maturity deposits, which may differ from actual experience. These business assumptions are based upon the Corporations experience, business plans and published industry experience. While management believes such assumptions to be reasonable, there can be no assurance that modeled results will be achieved.
Contractual Obligations, Commitments and Off-Balance Sheet Arrangements
The following table sets forth contractual obligations of principal that represent required and potential cash outflows as of December 31, 2008 (in thousands):
The following table sets forth the amounts and expected maturities of commitments to extend credit and standby letters of credit as of December 31, 2008 (in thousands):
Commitments to extend credit and standby letters of credit do not necessarily represent future cash requirements because while the borrower has the ability to draw upon these commitments at any time, these commitments often expire without being drawn upon. For additional information relating to commitments to extend credit and standby letters of credit, see the Commitments, Credit Risk and Contingencies footnote in the Notes to Consolidated Financial Statements, which is included in Item 8 of this Report.
The loan portfolio consists principally of loans to individuals and small- and medium-sized businesses within the Corporations primary market area of Pennsylvania and northeastern Ohio. In addition, the portfolio contains consumer finance loans to individuals in Pennsylvania, Ohio and Tennessee, which totaled $158.0 million or 2.7% of total loans as of December 31, 2008. The Corporation also operates commercial loan production offices in Pennsylvania and Florida and mortgage loan production offices in Ohio and Tennessee. The Corporation had commercial loans in Florida totaling $294.2 million or 5.1% of total loans as of December 31, 2008.
Following is a summary of loans (in thousands):
Total loans at December 31, 2008 increased by $1.5 billion or 33.8% to $5.8 billion as compared to December 31, 2007. This growth primarily relates to the acquisitions of Omega and IRGB, which added loans of $1.1 billion and $168.8 million, respectively, at the time of each acquisition, combined with organic growth.
Total loans at December 31, 2007 increased by $91.1 million or 2.1% to $4.3 billion as compared to December 31, 2006. During this period, the commercial loan segment grew by $121.1 million due to the Corporations focus on growth in the Florida market as well as the Pittsburgh and Harrisburg, Pennsylvania markets.
The Corporation had commercial loans in Florida totaling $294.2 million or 5.1% of total loans as of December 31, 2008, which was comprised of the following: unimproved residential land (20.9%), unimproved commercial land (22.7%), improved land (7.0%), income producing commercial real estate (26.8%), residential construction (9.8%), commercial construction (9.5%), commercial and industrial (2.2%) and owner-occupied (1.1%). The weighted average loan-to-value ratio for this portfolio is 73.7% as of December 31, 2008.
The majority of the Corporations loan portfolio consists of commercial loans, which is comprised of both commercial real estate loans and commercial and industrial loans. As of December 31, 2008 and 2007, commercial real estate loans were $2.0 billion and $1.4 billion, respectively, or 34.3% and 32.1% of total loans. As of December 31, 2008, approximately 46.0% of the commercial real estate loans are owner occupied, while the remaining 54.0% are non-owner occupied. As of December 31, 2008 and 2007, the Corporation had construction loans of $269.8 million and $201.2 million, respectively. As of December 31, 2008 and 2007, there were no concentrations of loans relating to any industry in excess of 10% of total loans.
Following is a summary of the maturity distribution of certain loan categories based on remaining scheduled repayments of principal as of December 31, 2008 (in thousands):
The total amount of loans due after one year includes $2.6 billion with floating or adjustable rates of interest and $868.5 million with fixed rates of interest.
For additional information relating to lending activity, see the Loans footnote in the Notes to Consolidated Financial Statements, which is included in Item 8 of this Report.
Non-performing loans include non-accrual loans and restructured loans. Non-accrual loans represent loans on which interest accruals have been discontinued. Restructured loans are loans in which the borrower has been granted a concession on the interest rate or the original repayment terms due to financial distress, and for which interest accruals have also been discontinued.
The Corporation discontinues interest accruals when principal or interest is due and has remained unpaid for 90 to 180 days depending on the loan type, unless the loan is both well secured and in the process of collection. When a loan is placed on non-accrual status, all unpaid interest is reversed. Non-accrual loans may not be restored to accrual status until all delinquent principal and interest have been paid and the borrower demonstrates sufficient repayment performance.
Non-performing loans are closely monitored on an ongoing basis as part of the Corporations loan review and work-out process. The potential risk of loss on these loans is evaluated by comparing the loan balance to the fair value of any underlying collateral or the present value of projected future cash flows. Losses are recognized when appropriate.
Following is a summary of non-performing loans (dollars in thousands):
Non-performing loans at December 31, 2008 included $93.1 million relating to the Corporations Florida loan portfolio, representing 64.8% of total non-performing loans. At December 31, 2008, the Florida non-performing loans were 31.65% of total loans in that market, while the Pennsylvania non-performing loans were 0.92% of total loans in that market.
Following is a table showing the amounts of contractual interest income and actual interest income related to non-accrual and restructured loans (in thousands):
Following is a summary of loans 90 days or more past due on which interest accruals continue (dollars in thousands):
Allowance and Provision for Loan Losses
The allowance for loan losses represents managements estimate of probable loan losses inherent in the loan portfolio at a specific point in time. This estimate includes losses associated with specifically identified loans, as well as estimated probable credit losses inherent in the remainder of the loan portfolio. Additions are made to the allowance through both periodic provisions charged to income and recoveries of losses previously incurred. Reductions to the allowance occur as loans are charged off. Management evaluates the adequacy of the allowance at least quarterly, and in doing so relies on various factors including, but not limited to, assessment of historical loss experience, delinquency and non-accrual trends, portfolio growth, underlying collateral coverage and current economic conditions. This evaluation is subjective and requires material estimates that may change over time.
During the fourth quarter of 2008, the Corporation developed a separate methodology for determining the allowance for loan losses related to its Florida loan portfolio. The Florida methodology is very similar to the methodology used for the Pennsylvania loan portfolio, however it specifically analyzes all of the aforementioned risks and how they directly relate to the Corporations Florida loans including, but not limited to, current levels and
trends of the portfolio composition, collateral, charge-offs, non-performing assets, delinquency, risk rating migration, competition, legal and regulatory issues and local economic trends.
The components of the allowance for loan losses represent estimates based upon FAS 5, Accounting for Contingencies, and FAS 114, Accounting by Creditors for Impairment of a Loan. FAS 5 applies to homogeneous loan pools such as consumer installment, residential mortgages and consumer lines of credit, as well as commercial loans that are not individually evaluated for impairment under FAS 114. FAS 114 is applied to commercial loans that are individually evaluated for impairment.
Under FAS 114, a loan is impaired when, based upon current information and events, it is probable that the loan will not be repaid according to its 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 estimated realizable collateral where a loan is collateral dependent. The majority of loans less than $250,000 are excluded from FAS 114 individual impairment analysis and are collectively evaluated by management to estimate reserves for loan losses inherent in those loans in accordance with FAS 5.
In estimating loan loss contingencies, management applies historical loan loss rates and also considers, but is not limited to, how the loss rates may be impacted by changes in current economic conditions, delinquency and non-performing loan trends, changes in loan underwriting guidelines and credit policies, as well as the results of internal loan reviews. Homogeneous loan pools are evaluated using similar criteria that are based upon historical loss rates of various loan types. Historical loss rates are adjusted to incorporate changes in existing conditions that may impact, both positively or negatively, the degree to which these loss histories may vary. This determination inherently involves a high degree of uncertainty and considers current risk factors that may not have occurred in the Corporations historical loan loss experience.
Following is a summary of changes in the allowance for loan losses (dollars in thousands):
The installment category in the above table includes direct installment, consumer lines of credit and indirect installment loans. The other category in the above table includes lease financing.
For the year ended December 31, 2008, net charge-offs related to the Corporations Florida market were $15.0 million or 5.02% of average loans in that market, while the net charge-offs relating to the Pennsylvania market were $17.5 million or 0.34% of average loans in that market. As of December 31, 2008, the allowance for loan losses as a percentage of total loans relating to the Corporations Florida market was 9.69%, while the allowance for loan losses as a percentage of total loans relating to the Pennsylvania market was 1.38%. As of December 31, 2008, the allowance for loans losses as a percentage of non-performing loans relating to the Corporations Florida market was 30.61%, while the allowance for loan losses as a percentage of non-performing loans relating to the Pennsylvania market was 150.68%.
At December 31, 2008 and 2007, there were $16.1 million and $3.2 million of loans, respectively, that were impaired loans acquired and have no associated allowance for loan losses as they were accounted for in accordance with American Institute of Certified Public Accountants Statement of Position (SOP) 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer.
The allowance for loan losses increased $51.9 million during 2008 representing a 98.3% increase in reserves for loan losses between December 31, 2007 and December 31, 2008, due to higher net charge-offs, additional specific reserves and increased allocations for a weaker environment. The significant increase primarily reflects continued deterioration in Florida, and to a much lesser extent, the slowing economy in Pennsylvania. The allowance for loan losses at December 31, 2008 included $28.5 million, or 27.2% of the total, relating to the Corporations Florida loan portfolio. Net charge-offs increased $20.1 million or 161.1% reflecting higher loan charge-offs, including $15.0 million in charge-offs in the Florida market during 2008.
The allowance for loan losses increased $0.2 million during 2007 representing a 0.4% increase in reserves for loan losses between December 31, 2006 and December 31, 2007. Net charge-offs increased $0.9 million or 7.8% reflecting higher commercial loan charge-offs, including $0.9 million relating to a Florida loan, and higher residential mortgage loan charge-offs, partially offset by lower installment loan charge-offs. These actions included the charge-off of $0.9 million relating to one project and the recording of another specific reserve of $2.0 million relating to a second project during 2007.
Management considers numerous factors when estimating reserves for loan losses, including historical charge-off rates and subsequent recoveries. Consideration is given to the impact of changes in qualitative factors that influence the Corporations credit quality, such as the local and regional economies that the Corporation serves. Assessment of relevant economic factors indicates that the Corporations primary markets historically tend to lag the national economy, with local economies in the Corporations 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 managements estimate of reserves include uncertainty of the labor markets in the regions the Corporation serves and a contracting labor force due, in part, to productivity growth and industry consolidations. Credit risk and loss exposures are evaluated using a combination of historical loss experience and an analysis of the rate at which delinquent loans ultimately result in charge-offs to estimate credit quality migration and expected losses within the homogeneous loan pools.
Following is a summary of the allocation of the allowance for loan losses (dollars in thousands):
The amount allocated to commercial loans increased in 2008 primarily due to increased asset quality deterioration and allocations for a weaker environment, primarily a result of the continued deterioration in the Florida market with $28.5 million of the commercial allowance for the Florida portfolio.
The amount allocated to commercial loans increased in 2007 due to a combination of the increased loan balance and the additional $2.0 million in specific reserves recorded in relation to a developer relationship in the Florida market.
The amount allocated to commercial loans increased in 2006 due to the increased loan balance while the amount allocated to indirect installment loans decreased due to an improvement in credit quality as a result of improved underwriting guidelines and a planned run-off in loan balances.
Investment activities serve to enhance net interest income while supporting interest rate sensitivity and liquidity positions. Securities purchased with the intent and ability to retain until maturity are categorized as securities held to maturity and carried at amortized cost. All other securities are categorized as securities available for sale and are recorded at fair value. Securities, like loans, are subject to similar interest rate and credit risk. In addition, by their nature, securities classified as available for sale are also subject to fair value risks that could negatively affect the level of liquidity available to the Corporation, as well as stockholders equity. A change in the value of securities held to maturity could also negatively affect the level of stockholders equity if there was a decline in the underlying creditworthiness of the issuers and an OTTI is deemed to have occurred or a change in the Corporations intent and ability to hold the securities to maturity.
As of December 31, 2008, securities totaling $482.3 million and $843.9 million were classified as available for sale and held to maturity, respectively. During 2008, securities available for sale increased by $123.8 million and securities held to maturity increased by $176.3 million from December 31, 2007, primarily as a result of the acquisitions of Omega and IRGB.
The following table indicates the respective maturities and weighted-average yields of securities as of December 31, 2008 (dollars in thousands):
The weighted average yields for tax-exempt securities are computed on a tax equivalent basis using the federal statutory tax rate of 35.0%. The weighted average yields for securities available for sale are based on amortized cost.
For additional information relating to investment activity, see the Securities footnote in the Notes to Consolidated Financial Statements, which is included in Item 8 of this Report.
As a bank holding company, the Corporations primary source of funds is deposits. Those deposits are provided by businesses, municipalities and individuals located within the markets served by the Corporations Community Banking subsidiary.
Total deposits increased $1.7 billion to $6.1 billion at December 31, 2008, compared to December 31, 2007, primarily as a result of the Corporations acquisitions of Omega and IRGB, which added deposits of $1.3 billion and $252.3 million, respectively, at the time of each acquisition.
Short-term borrowings, made up of treasury management accounts, federal funds purchased, subordinated notes and other short-term borrowings, increased by $146.4 million to $596.3 million at December 31, 2008 compared to December 31, 2007. This increase is the result of increases of $138.2 million and $26.0 million in treasury management accounts and federal funds purchased, respectively, partially offset by a decrease of $17.7 million in subordinated notes. The increase in treasury management accounts is the result of the Corporations acquisition of Omega combined with continued strong growth in new client relationships.
Treasury management accounts are the largest component of short-term borrowings. The treasury management accounts have next day maturities. At December 31, 2008 and 2007, treasury management accounts represented 69.6% and 61.5%, respectively, of total short-term borrowings.
Following is a summary of selected information relating to treasury management accounts (dollars in thousands):
For additional information relating to deposits and short-term borrowings, see the Deposits and Short-Term Borrowings footnotes in the Notes to Consolidated Financial Statements, which is included in Item 8 of this Report.
The access to, and cost of, funding for new business initiatives, including acquisitions, the ability to engage in expanded business activities, the ability to pay dividends, the level of deposit insurance costs and the level and nature of regulatory oversight depend, in part, on the Corporations capital position.
The assessment of capital adequacy depends on a number of factors such as asset quality, liquidity, earnings performance, changing competitive conditions and economic forces. The Corporation seeks to maintain a strong capital base to support its growth and expansion activities, to provide stability to current operations and to promote public confidence.
The Corporation has an effective shelf registration statement filed with the SEC. Pursuant to this registration statement, the Corporation may, from time to time, issue and sell in one or more offerings any combination of common stock, preferred stock, debt securities or trust preferred securities having a total dollar value up to $200.0 million. As of December 31, 2008, the Corporation has not issued any such stock or securities under this shelf registration.
Capital management is a continuous process. Both the Corporation and FNBPA are subject to various regulatory capital requirements administered by federal banking agencies. For additional information, see the Regulatory Matters footnote in the Notes to the Consolidated Financial Statements, which is included in Item 8 of this Report. From time to time, the Corporation issues shares initially acquired by the Corporation as treasury stock under its various benefit plans. The Corporation may continue to grow through acquisitions, which can potentially impact its capital position. The Corporation may issue additional common stock in order maintain its well-capitalized status.
In late 2005, the four federal banking agencies, the OCC, FRB, FDIC and Office of Thrift Supervision, published an interagency advance notice of proposed rulemaking regarding potential revisions to the existing risk-based capital framework. These changes would apply to banks, bank holding companies and savings associations. The Corporation will continue to monitor these potential changes to the risk-based capital standards and will make the necessary changes to ensure that it remains well-capitalized.
The information called for by this item is provided in the Market Risk section of Managements Discussion and Analysis of Financial Condition and Results of Operations, which is included in Item 7 of this Report.
F.N.B. Corporation (the Corporation) is responsible for the preparation, integrity and fair presentation of the consolidated financial statements included in this Annual Report. The consolidated financial statements and notes included in this Annual Report have been prepared in conformity with United States generally accepted accounting principles (U.S. GAAP).
We, as management of the Corporation, are responsible for establishing and maintaining effective internal control over financial reporting that is designed to produce reliable financial statements in conformity with U.S. GAAP. The system of internal control over financial reporting as it relates to the financial statements is evaluated for effectiveness by management and tested for reliability through a program of internal audits. Actions are taken to correct potential deficiencies as they are identified. Any system of internal control, no matter how well designed, has inherent limitations, including the possibility that a control can be circumvented or overridden and misstatements due to error or fraud may occur and not be detected. Also, because of changes in conditions, internal control effectiveness may vary over time. Accordingly, even an effective system of internal control will provide only reasonable assurance with respect to financial statement preparation.
Management assessed the Corporations system of internal control over financial reporting as of December 31, 2008 in relation to criteria set forth for effective internal control over financial reporting as described in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management concluded that as of December 31, 2008, the Corporations internal control over financial reporting is effective and meets the criteria of the Internal Control Integrated Framework. Ernst & Young LLP, independent registered public accounting firm, has issued an audit report on the Corporations internal control over financial reporting.
The Board of Directors and Stockholders
We have audited the accompanying consolidated balance sheets of F.N.B. Corporation and subsidiaries as of December 31, 2008 and 2007, and the related consolidated statements of income, shareholders equity, and cash flows for each of the three years in the period ended December 31, 2008. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of F.N.B. Corporation and subsidiaries at December 31, 2008 and 2007, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2008, in conformity with U.S. generally accepted accounting principles.
As discussed in footnotes 1 and 2 to the consolidated financial statements, F.N.B. Corporation changed its method of accounting for defined benefit pension and other postretirement plans as of December 31, 2006, in accordance with Financial Accounting Standards Board Statement No, 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans, and adopted the provisions of Staff Accounting Bulletin No, 108. Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements in 2006, and changed its method of accounting for uncertain tax positions on January 1, 2007, in accordance with FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), F.N.B. Corporations internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 25, 2009, expressed an unqualified opinion thereon.
/s/Ernst & Young LLP
February 25, 2009
The Board of Directors and Stockholders
We have audited F.N.B. Corporations internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). F.N.B. Corporations management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Report of Management. Our responsibility is to express an opinion on the companys internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because managements assessment and our audit were conducted to also meet the reporting requirements of Section 112 of the Federal Deposit Insurance Corporation Improvement Act (FDICIA), managements assessment and our audit of F.N.B. Corporations internal control over financial reporting included controls over the preparation of financial statements in accordance with the instructions for the preparation of Consolidated Financial Statements for Bank Holding Companies (Form FR Y-9C). A companys internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, F.N.B Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of F.N.B. Corporation as of December 31, 2008 and 2007, and the related consolidated statements of income, stockholders equity, and cash flows for each of the three years in the period ended December 31, 2008, and our report dated February 25, 2009 expressed an unqualified opinion thereon.
/s/Ernst & Young LLP
February 25, 2009
F.N.B. Corporation and Subsidiaries
Consolidated Balance Sheets
Dollars in thousands, except par values
See accompanying Notes to Consolidated Financial Statements
F.N.B. Corporation and Subsidiaries
Consolidated Statements of Income
Dollars in thousands, except per share data