SUMMARY

 

This summary highlights selected information from this proxy statement/prospectus. While this summary describes the material aspects of the merger, you should consider in your evaluation of the merger agreement and the merger that this summary does not contain all of the information that is important to you. We encourage you to read carefully this entire proxy statement/prospectus and its appendices in order to understand fully the merger. See “Where You Can Find More Information” on page 98. In this summary, we have included page references to direct you to a more detailed description of the matters described in this summary.

 

Throughout this proxy statement/prospectus, “we,” “us,” “our” or “IRGB” refers to Iron and Glass Bancorp, Inc., “IRGB Bank” refers to Iron and Glass Bank, “FNB” refers to F.N.B. Corporation, “FNB Bank” refers to First National Bank of Pennsylvania and “you” refers to the shareholders of IRGB. Also, we refer to the merger between IRGB and FNB as the “merger,” and the agreement and plan of merger dated as of February 14, 2008 between IRGB and FNB as the “merger agreement.”

 

IRGB provided the information contained in this proxy statement/prospectus with respect to IRGB, and FNB provided the information in this proxy statement/prospectus with respect to FNB.

 

The Parties

 

FNB and FNB Bank (Page 36)

 

FNB is an $8.0 billion diversified financial services holding company headquartered in Hermitage, Pennsylvania. FNB provides a broad range of financial services to its customers through FNB Bank and FNB’s insurance agency, consumer finance, trust company and merchant banking subsidiaries. FNB Bank has 212 banking offices in western and central Pennsylvania and eastern Ohio, one loan production office in each of Ohio, Pennsylvania and Tennessee and six loan production offices in Florida and maintains six insurance agency locations. Regency Finance, FNB’s consumer finance subsidiary, has 22 offices in Pennsylvania, 16 offices in Ohio and 16 offices in Tennessee. Another FNB subsidiary, First National Trust Company, has approximately $1.6 billion of assets under management. FNB Capital Corporation offers financing options for small- to medium-sized businesses that need financial assistance beyond the parameters of typical commercial bank lending products.

 

The principal executive offices of FNB and FNB Bank are located at One F.N.B. Boulevard, Hermitage, Pennsylvania 16148. FNB’s telephone number is (724) 981-6000 and FNB’s website address is www.fnbcorporation.com. The information on FNB’s website is not a part of this proxy statement/prospectus.

 

IRGB (Page 37)

 

We are a holding company for IRGB Bank, a Pennsylvania state-chartered bank and member of the Federal Reserve Bank of Cleveland. IRGB Bank’s principal sources of revenue arise from its portfolio of commercial mortgage, residential real estate and consumer loans, as well as interest earnings on investment securities and a variety of deposit services provided to customers through eight banking offices in the Southern and Western suburban areas of Pittsburgh, Pennsylvania.

 

Our mission is to provide clients with the highest level of financial service while recognizing and understanding their needs and opportunities. To accomplish our mission, we strive to recruit, train and retain quality employees who provide outstanding client service, help create profitable relationships and enhance long-term shareholder value. We have 37 years of increasing dividends.

 

Our principal executive office is located at 1114 East Carson Street, Pittsburgh, Pennsylvania 15203. Our telephone number is (412) 488-5200 and our website address is www.ironandglassbank.com. The information on our website is not part of this proxy statement/prospectus.

Our Special Meeting (Page 33)

 

This section contains information for our shareholders about the special meeting of shareholders we have called to consider the approval of the merger proposal and related matters.

 

General (Page 33)

 

This proxy statement/prospectus is being furnished to you for use at our special meeting and any adjournment or postponement of our special meeting.

 

When and Where Our Special Meeting Will Be Held (Page 33)

 

Our special meeting will be held on Thursday, July 31, 2008, at 10:00 a.m., prevailing time, at Le Mont Restaurant, 1114 Grandview Avenue, Pittsburgh, Pennsylvania, subject to any adjournment or postponement of our special meeting.

 

Matters to Be Considered (Page 33)

 

The purpose of our special meeting is to consider and vote upon:

 

 

Our shareholders must approve Proposal 1 for the merger to occur. If our shareholders fail to approve this proposal, the merger will not occur.

 

At this time, our board of directors is unaware of any other matters, other than as set forth above, which may be presented for action at our special meeting. If other matters are properly presented, however, the persons named as proxies will vote in accordance with their judgment with respect to such matters.

 

Record Date; Shares Outstanding and Entitled to Vote (Page 33)

 

Our board of directors has fixed the close of business on June 6, 2008 as the record date for the determination of holders of our common stock entitled to notice of, and to vote at, our special meeting and any adjournment or postponement of our special meeting.

 

On the record date, 1,137,610 shares of our common stock were issued and outstanding and entitled to vote at our special meeting, held by approximately 297 holders of record. Each holder is entitled to cast one vote for each share of our common stock held on all matters that are properly submitted to our shareholders at our special meeting.

 

Quorum (Page 33)

 

The presence, in person or by properly executed proxy, of the holders of at least a majority of our outstanding shares of common stock on the record date is necessary to constitute a quorum at our special meeting. Abstentions will be counted for the purpose of determining whether a quorum is present. A quorum must be present in order for the vote on the merger proposal and the adjournment proposal to occur.

 

Based on the number of shares of our common stock issued and outstanding as of the record date, 568,806 shares of our common stock must be present in person or represented by proxy at our special meeting to constitute a quorum.

Shareholder Vote Required (Page 34)

 

Approve and Adopt the Merger Agreement.  The merger agreement must be adopted by an affirmative vote of a majority of the votes cast by all holders of our common stock entitled to vote thereon. Accordingly, we urge you to complete, date and sign the accompanying proxy card and return it promptly in the enclosed postage-paid envelope.

 

When considering our board of directors’ recommendation that you vote in favor of the approval and adoption of the merger agreement, you should be aware that certain of our executive officers and directors have interests in the merger that may be different from, or in addition to, your interests as a shareholder. See “Proposal No. 1 — Proposal to Approve and Adopt the Merger Agreement — Interests of Our Directors and Executive Officers in the Merger” beginning on page 62.

 

Discretionary Authority to Adjourn Our Special Meeting.  The affirmative vote of the holders of a majority of the votes cast by all holders of our common stock entitled to vote thereon is required to approve the proposal to grant discretionary authority to adjourn our special meeting if necessary to permit further solicitation of proxies for the merger proposal.

 

Dissenters Rights (Page 66)

 

Under the PBCL, you have the right to object to the merger and receive the fair value for your shares of our common stock in connection with the merger. See “Proposal No. 1 — Proposal to Approve and Adopt the Merger Agreement — Dissenters Rights of Dissenting Shareholders” beginning on page 66 for further information.

 

Director and Executive Officer Voting (Page 34)

 

As of the record date, our directors and executive officers and their affiliates beneficially own 80,187 shares of our common stock, or approximately 7.0% of the issued and outstanding shares of our common stock entitled to vote at our special meeting. This number includes options to purchase 9,625 shares of our common stock exercisable within ten days of the record date.

 

Proxies (Page 34)

 

Voting.  You should complete and return the proxy card accompanying this proxy statement/prospectus in order to ensure that your vote is counted at our special meeting and at any adjournment, postponement or continuation of our special meeting, regardless of whether you plan to attend our special meeting. If you sign and send in your proxy card and do not indicate how you want to vote, we will count your proxy card as a vote in favor of approval of the merger proposal and in favor of approval of the adjournment proposal.

 

If your shares of our common stock are held in the name of a bank, broker, nominee or other holder of record, you will receive instructions from the bank, broker, nominee or other holder of record that you must follow in order for your shares of our common stock to be voted.

 

Revocability.  You may revoke your proxy at any time before the vote is taken at our special meeting. If you have not voted through a bank, broker, nominee or other holder of record, you may revoke your proxy by:

 

 

However, simply attending our special meeting without voting will not revoke an earlier proxy.

 

Written notices of revocation and other communications regarding the revocation of your proxy should be addressed to:

 

Iron and Glass Bancorp, Inc.

1114 East Carson Street

Pittsburgh, Pennsylvania 15203

Attention: Mary Kay Rossi, Secretary

 

If your shares are held in the name of a bank, broker, nominee or other holder of record, you should follow the instructions of the bank, broker, nominee or other holder of record regarding the revocation of proxies.

 

A proxy appointment will not be revoked by the death or incapacity of the shareholder executing the proxy unless notice of the death or incapacity is given to our corporate secretary before the shares of our common stock represented by such proxy are voted.

 

How Proxies are Counted.  All shares of our common stock represented by properly executed proxies received before or at our special meeting, and not revoked, will be voted in accordance with the instructions indicated in the proxies.

 

We will count a properly executed proxy marked “ABSTAIN” as present for purposes of determining the presence of a quorum.

 

Brokers may not vote shares of our common stock that they hold beneficially either for or against the approval of the merger proposal or the adjournment proposal without specific instructions from the person who beneficially owns those shares. Therefore, if your shares are held by a broker you must give your broker instructions on how to vote your shares.

 

Solicitation.  We will pay for the costs of our special meeting and for the mailing of this proxy statement/prospectus to our shareholders, as well as all other costs we incur in connection with the solicitation of proxies from our shareholders. However, FNB and we will share equally the cost of printing this proxy statement/prospectus and the filing fees paid to the SEC.

 

In addition to soliciting proxies by mail, our directors, officers and employees may solicit proxies by telephone or in person. Our directors, officers and employees will not be specially compensated for these activities. We also intend to request that brokers, banks, nominees and other holders of record solicit proxies from their principals, and we will reimburse the brokers, banks, nominees and other holders of record for certain expenses they incur for those activities.

 

Recommendation of Our Board of Directors (Page 35)

 

Our board of directors unanimously approved the merger agreement and the transactions contemplated by the merger agreement. Based on our reasons for the merger described in this proxy statement/prospectus, our board of directors believes that the merger is in our and your best interests. Accordingly, our board of directors unanimously recommends that our shareholders vote FOR approval of the merger proposal and FOR approval of the adjournment proposal. See “Proposal No. 1 — Proposal to Approve and Adopt the Merger Agreement — Our Reasons for the Merger” beginning on page 47, for a more detailed discussion of our board of directors’ recommendation.

 

Attending Our Special Meeting (Page 35)

 

If your shares are held in street name and you want to attend our special meeting, you must bring an account statement or letter from your holder of record showing that you were the beneficial owner of the shares on June 6, 2008, the record date for our special meeting.

The Merger

 

Certain Effects of the Merger (Pages 55 to 62)

 

Upon consummation of the merger:

 

 

 

 

Stock Options (Page 69)

 

The merger agreement provides that, at the effective time of the merger, each outstanding option to purchase our common stock will cease to represent a right to acquire our common stock and will be converted automatically into a right to acquire that number of shares of FNB common stock equal to the number of shares of our common stock subject to the option times the option ratio. The option ratio is the quotient determined by dividing the closing price of FNB common stock on the NYSE on the day prior to the effective time of the merger by the closing price of our common stock on the OTC Bulletin Board on the day prior to the effective time of the merger.

 

Opinion of Our Financial Advisor in Connection with the Merger (Pages 48 to 54)

 

KBW, our financial advisor in connection with the merger, delivered a written fairness opinion to our board of directors on February 14, 2008, the date the merger agreement was executed, that, as of February 14, 2008, and based upon and subject to the factors and assumptions set forth in its opinion, the merger consideration in the merger is fair, from a financial point of view, to the holders of shares of our common stock.

 

Appendix B to this proxy statement/prospectus sets forth the full text of the KBW opinion, which sets forth the assumptions KBW made, the procedures KBW followed, the matters KBW considered and the limitations on the review undertaken by KBW in connection with its opinion. KBW provided its opinion for the information and assistance of our board of directors in connection with its consideration of the merger. The KBW opinion is not a recommendation as to how you should vote with respect to the merger or any related matter. We encourage you to read the KBW opinion in its entirety.

 

Interests of Our Directors and Executive Officers in the Merger (Page 62)

 

In considering the recommendation of our board of directors that you vote FOR the merger proposal and FOR the adjournment proposal, you should be aware that certain of our executive officers and directors have interests in the merger that are different from, or in addition to, your interests as a shareholder. These interests relate to or arise from, among other things:

 

 

 

Conditions to the Merger (Page 75)

 

Currently, we expect to complete the merger in the third quarter of 2008. However, as more fully described in this proxy statement/prospectus and in the merger agreement, the completion of the merger depends on the satisfaction of a number of conditions or, where legally permissible, the waiver of those conditions. These conditions include, among others:

 

 

Neither FNB nor we can be certain when, or if, the conditions to the merger will be satisfied or waived, or that the merger will be completed.

 

Termination of the Merger Agreement (Page 76)

 

We may agree to terminate the merger agreement before completing the merger, even after our shareholders approve the merger proposal, if the termination is approved by our board of directors and the board of directors of FNB.

 

Either FNB or we may terminate the merger agreement, even after our shareholders approve the merger proposal, if certain conditions have not been met, such as:

 

 

 

FNB may terminate the merger agreement at any time prior to our special meeting if we have:

 

 

We may terminate the agreement at any time prior to our special meeting:

 

 

Except as provided below with respect to termination fees and expenses and the parties’ respective confidentiality obligations in the event the merger agreement is terminated by FNB or us, neither of us will have any liability or obligation other than liabilities or damages incurred by either of us as a result of our willful breach of any of our respective representations, warranties, covenants or agreements contained in the merger agreement.

 

Expenses; Termination Fee (Page 77)

 

The merger agreement provides that we will pay FNB a break-up fee of $3,750,000 if:

 

 

 

 

The merger agreement also provides that upon termination:

 

 

Material U.S. Federal Income Tax Consequences of the Merger (Page 78)

 

We intend for the merger to qualify as a reorganization within the meaning of Section 368(a) of the Code. In general, assuming that the merger so qualifies, each shareholder who receives solely shares of FNB common stock will not recognize gain or loss, while each shareholder who receives FNB common stock and cash generally will recognize gain, but not loss, for U.S. federal income tax purposes in an amount not exceeding the amount of cash received. In addition, our shareholders who receive solely cash in exchange for our shares in the merger will generally recognize gain or loss equal to the difference between the amount of cash received and their adjusted tax basis in our shares surrendered. The tax consequences of the merger to our shareholders may vary depending on their particular circumstances. We urge each of you to consult your own tax advisor with respect to the tax consequences of the merger.

 

Dividends (Page 66)

 

FNB paid cash dividends on its common stock totaling $0.95 per share for 2007. Based on the exchange ratio and FNB’s current annual dividend rate of $0.96 per share, holders of our common stock would experience an anticipated dividend at an annual rate of $4.80 per IRGB share, an increase of $3.60 per IRGB share per year. Although FNB has no current plan or intention to change its dividend rate, FNB’s board of directors may, subject to applicable law, change its dividend rate in the future. FNB’s ability to pay dividends on its common stock is subject to various legal and regulatory limitations.

 

Certain Differences in Rights of Shareholders (Page 84)

 

When the merger is completed, the rights of our shareholders who receive FNB common stock will be governed by Florida law and FNB’s articles of incorporation and bylaws rather than Pennsylvania law and our articles of incorporation and bylaws.

 

Future FNB Acquisitions (Page 29)

 

As part of its growth strategy, FNB may acquire other banks or financial services institutions to expand or strengthen its market position. Risks associated with this strategy are described in “Risk Factors.”

Comparative Market Prices and Dividends (Page 95)

 

FNB common stock is listed on the NYSE under the symbol “FNB.” Prices for our common stock are quoted on the OTC Bulletin Board under the symbol “IRGB.” The table on page 95 lists the quarterly price range of FNB common stock and our common stock since January 1, 2006 as well as the quarterly cash dividends we and FNB have paid. The following table shows the closing price of FNB common stock and our common stock as reported on February 14, 2008, the last trading day before FNB and we announced the merger, and on June 18, 2008, the last practicable trading day before the date of mailing of this proxy statement/prospectus. This table also shows the pro forma equivalent value of the merger consideration proposed for each share of our common stock, which we calculated by multiplying the closing price of FNB common stock on those dates by five (the exchange ratio in the merger).

 

 

The market price of FNB common stock may change at any time. Consequently, the total dollar value of the FNB common stock that you will be entitled to receive as a result of the merger may be significantly higher or lower than its current value. We urge you to obtain a current market quotation for FNB common stock. No assurance can be given as to the future price of FNB common stock.

 

Questions and Additional Information (Page 35)

 

If you have more questions about the merger or how to submit your proxy card, or if you need additional copies of this proxy statement/prospectus or the enclosed proxy card, please call Michael J. Hagan, our President and Chief Executive Officer, at (412) 488-5200.

 

Set forth below are highlights from FNB’s consolidated financial data as of and for the years ended December 31, 2003 through 2007 and FNB’s unaudited consolidated financial data as of and for the three months ended March 31, 2007 and 2008. FNB’s results of operations for the three months ended March 31, 2007 and 2008 are not necessarily indicative of FNB’s results of operations for the full year of 2008. FNB management prepared the unaudited information on the same basis as it prepared FNB’s audited consolidated financial statements. In the opinion of FNB’s management, this information reflects all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of this data for these periods. You should read this information in conjunction with FNB’s consolidated financial statements and related notes included in FNB’s Annual Report on Form 10-K for the year ended December 31, 2007 and FNB’s Quarterly Report on Form 10-Q for the three months ended March 31, 2008 which are incorporated by reference in this proxy statement/prospectus and from which this information is derived. See “Where You Can Find More Information” on page 98.

 

Selected Consolidated Historical Financial Data of FNB

 

 

 

 

Set forth below are highlights from IRGB’s consolidated financial data as of and for the years ending December 31, 2003 through December 31, 2007 and IRGB’s unaudited consolidated financial data as of and for the three months ended March 31, 2007 and 2008. The results of operations for the three months ended March 31, 2007 and 2008 are not necessarily indicative of the results of operations of IRGB for the full year. IRGB management prepared the unaudited information on the same basis as it prepared IRGB’s audited consolidated financial statements. In the opinion of IRGB’s management, this information reflects all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of this data for these periods. See “Where You Can Find More Information” on page 98 and Index to IRGB Financial Statements on page F-1.

 

Selected Consolidated Historical Financial Data of IRGB

 

 

The following table sets forth information about FNB’s financial condition and results of operations, including per share data and financial ratios, after giving effect to the April 1, 2008 merger of Omega Financial Corporation, or Omega, with and into FNB and the merger of IRGB with and into FNB. This information is called pro forma financial information in this proxy statement/prospectus. The table shows the information as if the mergers had become effective on March 31, 2008, in the case of balance sheet data, and on January 1, 2007, in the case of income statement data. This pro forma information assumes that the mergers are accounted for using the purchase method of accounting and represents a current estimate based on available information about FNB’s, Omega’s and IRGB’s results of operations. See “Accounting Treatment” on page 78.

 

The pro forma financial information includes adjustments to record the assets and liabilities of Omega and IRGB at their estimated fair values and is subject to further adjustment as additional information becomes available and as further analyses are completed. This table should be read in conjunction with, and is qualified in its entirety by, the historical financial statements, including the notes thereto, of IRGB, Omega and FNB included in or incorporated by reference in this proxy statement/prospectus. See “Where You Can Find More Information” on page 98.

 

The pro forma financial information, while helpful in illustrating the combined financial condition and results of operations of IRGB, Omega and FNB once the merger with IRGB is completed under a particular set of assumptions, does not reflect the impact of possible revenue enhancements, expense efficiencies and asset dispositions, among other possibilities, and post-merger integration costs that may occur as a result of the merger and, accordingly, does not attempt to predict future results. The pro forma financial information also does not necessarily reflect what the combined historical results of operations of IRGB, Omega and FNB would have been had they been merged during these periods.

SELECTED CONSOLIDATED UNAUDITED PRO FORMA FINANCIAL INFORMATION

 

 

See Notes to Selected Consolidated Unaudited Pro Forma Financial Information

 

See Notes to Selected Consolidated Unaudited Pro Forma Financial Information

 

See Notes to Selected Consolidated Unaudited Pro Forma Financial Information

NOTES TO SELECTED CONSOLIDATED UNAUDITED PRO FORMA FINANCIAL INFORMATION

 

 

The preceding tables set forth information about FNB’s financial condition and results of operations, including per share data and financial ratios, after giving effect to the April 1, 2008 merger of Omega Financial Corporation (“Omega”) with and into FNB and the merger of IRGB with and into FNB. This information is called pro forma financial information in this proxy statement/prospectus. The table shows the information as if the mergers had become effective on March 31, 2008, in the case of balance sheet data, and on January 1, 2007, in the case of income statement data.

 

The estimated purchase price of $82.8 million for IRGB is based on a 45% cash payout at $75.00 per share and a 55% conversion of shares into FNB common stock using an exchange ratio of 5.0. The per share price value for FNB common stock was $14.99, which was the average of the closing prices of FNB common stock for the period commencing four trading days before, and ending four trading days after February 15, 2008, the date of the announcement of the merger agreement.

 

The merger will be accounted for using the purchase method of accounting; accordingly, FNB’s cost to acquire us will be allocated to the assets acquired, including identifiable intangible assets, and liabilities assumed from us at their respective fair values on the date the merger is completed. This table should be read in conjunction with, and is qualified in its entirety by, the historical financial statements, including the notes thereto, of IRGB and FNB included in or incorporated by reference in this proxy statement/prospectus. See “Where You Can Find More Information” on page 98.

 

The selected consolidated unaudited pro forma financial information includes estimated adjustments to record our assets and liabilities at their respective fair values and represents management’s estimates based on available information. The pro forma adjustments included herein may be revised as additional information becomes available and as additional analyses are performed. The final allocation of the purchase price will be determined after the merger is completed and after completion of a final analysis to determine the fair values of our tangible, and identifiable intangible, assets and liabilities as of the closing date. Accordingly, the final purchase accounting adjustments and integration charges may be materially different from the pro forma adjustments presented in this proxy statement/prospectus. Increases or decreases in the fair value of the net assets, commitments, contracts and other items of IRGB compared to the information shown in this proxy statement/prospectus may change the amount of the purchase price allocated to goodwill and other assets and liabilities and may impact the statement of income due to adjustments in yield and/or amortization of the adjusted assets or liabilities.

 

The selected consolidated unaudited pro forma financial information presented in this proxy statement/prospectus does not necessarily indicate the results of operations or the combined financial position that would have resulted had the merger been completed at the beginning of the applicable period presented, does not reflect the impact of possible revenue enhancements, expense efficiencies or asset dispositions, and is not indicative of the results of operations in future periods or the future financial position of the combined company.

 

 

The selected consolidated unaudited pro forma financial information for the merger includes the pro forma balance sheet as of March 31, 2008 assuming the merger was completed on March 31, 2008. The pro forma income statements for the three months ended March 31, 2008 and the year ended December 31, 2007 were prepared assuming the merger was completed on January 1, 2007.

 

IRGB

 

The selected consolidated unaudited pro forma financial information reflects the issuance of 3,035,241 shares of FNB common stock with an aggregate value of $45.5 million and the conversion of approximately 61,804 shares underlying IRGB stock options with a value of approximately $2.3 million at

March 31, 2008. All IRGB stock options are vested and will be converted into FNB stock options at the time of the merger. Common stock used in the exchange was valued as discussed in Note 1 above.

 

The allocation of the purchase price follows (in thousands):

 

 

The pro forma adjustments included in the selected consolidated unaudited pro forma financial information are as follows:

 

(A) Adjustment to record the cash consideration paid for the transaction.

 

(B) Adjustment to record the current fair value of our loan portfolio based on current interest rates. The adjustment will be recognized over the estimated remaining life of the loan portfolio. The impact of the adjustment was to decrease interest income by approximately $0.2 million and $0.6 million for the three months ended March 31, 2008 and the year ended December 31, 2007, respectively.

 

(C) Adjustment to fair value for loans deemed impaired in accordance with Statement of Position 03-3.

 

(D) Adjustment to record core deposit intangible assets based on estimated fair values. Management is studying the nature, amount and amortization method of various possible identified intangibles. The adjustments reflected herein are based on current assumptions and valuations, which are subject to change. For purposes of the pro forma adjustments shown here, the estimated fair value of the core deposit intangible is $5.8 million. FNB estimates that the core deposit intangibles will be amortized on an accelerated basis over ten years. Material changes to these estimated fair values and estimated useful lives are possible once FNB completes its analyses. The net impact of the adjustment was to increase non-interest expense by approximately $0.3 million and $1.0 million for the three months ended March 31, 2008 and the year ended December 31, 2007, respectively.

 

(E) Adjustment to write-off historical goodwill and record goodwill created as a result of the merger.

 

(F) Adjustment to record the deferred tax asset created as a result of the fair value adjustments using FNB’s statutory tax rate of 35%.

 

(G) Adjustment to fair value of time deposit liabilities based on current interest rates for similar instruments. The adjustment will be recognized over the estimated remaining term of the related deposit liability. The impact of the adjustment was to decrease interest expense by approximately $0.5 million and $2.0 million for the three months ended March 31, 2008 and the year ended December 31, 2007, respectively.

 

(H) Adjustment to fair value of outstanding long-term debt instruments. The adjustment will be recognized over the remaining life of the debt instruments. The impact of the adjustment was to decrease interest expense by $0.1 million and $0.3 million for the three months ended March 31, 2008 and the year ended December 31, 2007, respectively.

 

(I) Adjustment to reflect the liability for incremental direct costs associated with the merger, net of the tax benefit. These costs include accountant and attorney fees, investment banker services, payout of vendor and employee contracts and severance payments to our displaced personnel. These liabilities have been recorded pursuant to EITF 95-3, “Recognition of Liabilities in Connection with a Purchase Business Combination.” The tax benefits of accounting and attorneys fees and investment banker services have not yet been determined.

 

(J) Adjustment to eliminate our historical shareholders’ equity; the adjustment reflects the issuance of FNB common stock and the conversion of our stock options into FNB stock options.

 

(K) Adjustment to record the tax effect of the pro forma adjustments using FNB’s statutory tax rate of 35%.

 

(L) Weighted average shares were calculated using the historical weighted average shares outstanding of IRGB and FNB, adjusted using the exchange ratio, to the equivalent shares of FNB common stock, for the year ended December 31, 2007 and the three months ended March 31, 2008. Earnings per share data have been computed based on the combined historical income of IRGB and FNB and the impact of purchase accounting adjustments.

 

Omega

 

The pro forma adjustments for Omega are as follows:

 

The adjustments to fair value loans, deposits and borrowings as of March 31, 2008 were $1.6 million, $6.2 million and $0.5 million, respectively.

 

The impact of the Omega fair value adjustments for the three months ended March 31, 2008 on loans was to decrease interest income by $0.7 million and on deposits and borrowings was to decrease interest expense by $1.9 million. The impact of the Omega fair value adjustment on the core deposit intangible was to increase non-interest expense by $1.6 million for the three months ended March 31, 2008.

 

The impact of the Omega fair value adjustments for the year ended December 31, 2007 on loans was to decrease interest income by $2.8 million and on deposits and borrowings was to decrease interest expense by $7.5 million. The impact of the Omega fair value adjustment on the core deposit intangible was to increase non-interest expense by $6.2 million for the year ended December 31, 2007.

 

 

In connection with the merger, a plan is being developed to integrate FNB’s and our operations. The total integration costs have not yet been determined and have not been included in the pro forma adjustments. The specific details of these plans will continue to be refined over the next several months. Currently, FNB’s merger integration team is assessing the two companies’ operations, including information systems, premises, branch offices, equipment, benefit plans, service contracts, product offerings and personnel to determine optimum strategies to realize additional cost savings.

 

Three Months Ended March 31, 2008 Compared to Three Months Ended March 31, 2007

 

The following discussion of our results of operations and financial condition should be read in conjunction with our financial statements included elsewhere in this proxy statement/prospectus.

 

Overview

 

Our net income for the quarter ended March 31, 2008 was $592,982, or $.53 per basic share, compared to net income of $825,883, or $.74 per basic share, for the quarter ended March 31, 2007. This decrease was primarily due to an increase in non-interest expense. Our stockholders’ equity at March 31, 2008 increased to $39,598,650 or $35.46 per share, from $37,065,207, or $33.15 per share at March 31, 2007.

 

Liquidity and Capital Resources

 

Our primary sources of cash during the quarter ended March 31, 2008 were interest earned on loans and investment securities, loan repayments and proceeds from maturing investment securities. At March 31, 2008, we had outstanding loans of $166,975,904, net of our allowance for loan losses and unearned income, and commitments to fund new loans of $24,790,915. We expect that these requirements will be funded from the sources described above.

 

The following table shows selected ratios for the period or at the date indicated:

 

 

Results of Operations

 

Interest Income and Expense

 

Total interest income decreased to $4,408,325 for the first quarter of 2008 from $4,445,768 in the first quarter of 2007. Interest and fees on loans decreased in the first quarter of 2008 due to a decrease in the yield earned on our portfolio which more than offset a slight increase in loans outstanding. Interest income earned on investment securities and federal funds sold decreased due to a decrease in the amount of investment securities owned and federal funds sold in the portfolio.

 

Interest expense on deposits increased for the first quarter of 2008. Interest expense on deposits increased primarily because of higher balances in interest-bearing deposit accounts.

 

Provision for Loan Losses

 

The provision for loan losses is charged to earnings to bring the total allowance to a level deemed appropriate by management and is based upon historical experience, the volume and type of lending we conduct, industry standards, the amount of non-performing loans, general economic conditions, particularly as they related to our market areas and other factors related to the collectibility of our loan portfolio. The provision for both the first quarter of 2008 and 2007 was $60,000.

Non-Interest Income

 

Non-interest income decreased to $374,018 for the first quarter of 2008 from $382,188 for the first quarter of 2007. The decrease is primarily due to a decrease in fees earned on deposit account service charges.

 

Non-Interest Expense

 

Non-interest expense increased to $1,988,944 for the first quarter of 2008 from $1,739,329 for the first quarter of 2007. This increase was primarily attributable to the merger expenses we paid during the first quarter of 2008.

 

Income Taxes

 

Our income tax provision for the first quarter of 2008 was $223,000, an effective rate of 27.3%, compared to $320,000, an effective rate of 27.9%, for the first quarter of 2007.

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that could be material to investors.

 

Contractual Obligations or Other Commercial Commitments

 

The following table summarizes our material contractual obligations in effect at March 31, 2008 and the timing and effect that such commitments are expected to have on our liquidity and capital requirements in future periods:

 

 

Year Ended December 31, 2007 Compared to Year Ended December 31, 2006

 

The following discussion of our results of operations and financial condition should be read in conjunction with our financial statements for the years ended December 31, 2007 and 2006 included elsewhere in this proxy statement/prospectus.

 

Overview

 

Our net income for the year ended December 31, 2007 was $3,518,355, or $3.15 per basic share, compared to net income of $3,758,671, or $3.37 per basic share, for the year ended December 31, 2006. This decrease was primarily due to a decline in net interest income. Our shareholders’ equity increased to $39,479,000 at December 31, 2007, or $35.35 per share, from $36,389,403, or $32.56 per share, at December 31, 2006.

 

Liquidity and Capital Resources

 

Our primary sources of cash during 2007 were interest earned on loans and investment securities, loan repayments and proceeds from maturing investment securities. At December 31, 2007, we had outstanding loans of $163,403,601, net of allowance for loan losses and unearned income and commitments to fund new loans of $33,140,786. We expect that these requirements will be funded from the sources described above.

The following table shows selected ratios for the period or at the date indicated: