UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
------------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
----------------------- ---------------------
Commission file number 0-8144
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F.N.B. CORPORATION
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Florida 25-1255406
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2150 Goodlette Road North, Naples, FL 34102
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(239) 262-7600
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(Registrant's telephone number, including area code)
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes No
--- ----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at July 31, 2002
----- ----------------------------
Common Stock, $0.01 Par Value 43,787,351 Shares
- ----------------------------- -----------------
F.N.B. CORPORATION
FORM 10-Q
June 30, 2002
INDEX
PART I - FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Balance Sheets 2
Consolidated Statements of Income 3
Consolidated Statements of Cash Flows 4
Notes to Consolidated Financial Statements 5
Independent Accountants' Review Report 11
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosure of Market Risk 21
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 2. Changes in Securities 22
Item 3. Defaults Upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 23
Signatures 24
1
F.N.B. CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Dollars in thousands, except par values
Unaudited
JUNE 30, DECEMBER 31,
2002 2001
----------- ------------
ASSETS
Cash and due from banks $ 218,544 $ 246,781
Interest bearing deposits with banks 2,476 3,712
Federal funds sold 21,599 88,260
Mortgage loans held for sale 2,860 1,323
Securities available for sale 858,764 902,970
Securities held to maturity (fair
value of $53,213 and $51,770) 51,981 51,368
Loans, net of unearned income
of $43,637 and $50,063 5,093,416 4,814,435
Allowance for loan losses (67,799) (65,059)
---------- ----------
NET LOANS 5,025,617 4,749,376
---------- ----------
Premises and equipment 158,494 149,518
Goodwill 83,711 44,371
Other assets 325,186 250,704
---------- ----------
TOTAL ASSETS $6,749,232 $6,488,383
========== ==========
LIABILITIES
Deposits:
Non-interest bearing $ 906,065 $ 798,960
Interest bearing 4,424,259 4,300,116
---------- ----------
TOTAL DEPOSITS 5,330,324 5,099,076
Other liabilities 108,142 98,722
Short-term borrowings 407,157 375,754
Long-term debt 332,675 342,424
---------- ----------
TOTAL LIABILITIES 6,178,298 5,915,976
---------- ----------
STOCKHOLDERS' EQUITY
Preferred stock - $0.01 par value
Authorized - 20,000,000 shares
Issued - 131,498 and 147,033 shares
Aggregate liquidation value - $3,287 and $3,676 1 1
Common stock - $0.01 par value
Authorized - 500,000,000 shares
Issued - 44,151,236 and 41,781,837 shares 442 418
Additional paid-in capital 517,057 444,549
Retained earnings 46,418 119,256
Accumulated other comprehensive income 13,567 9,845
Treasury stock - 214,494 and 63,178 shares at cost (6,551) (1,662)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 570,934 572,407
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $6,749,232 $6,488,383
========== ==========
See accompanying Notes to Consolidated Financial Statements
2
F.N.B. CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Dollars in thousands, except per share data
Unaudited
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
2002 2001 2002 2001
-------- -------- -------- --------
INTEREST INCOME
Loans, including fees $ 93,103 $ 97,425 $185,722 $196,113
Securities:
Taxable 10,195 11,452 20,196 22,591
Nontaxable 1,979 1,783 4,025 3,457
Dividends 459 547 1,108 1,546
Other 525 1,805 1,253 3,719
-------- -------- -------- --------
TOTAL INTEREST INCOME 106,261 113,012 212,304 227,426
-------- -------- -------- --------
INTEREST EXPENSE
Deposits 29,188 43,762 60,291 90,648
Short-term borrowings 3,188 3,968 5,717 8,729
Long-term debt 4,689 4,341 9,595 8,332
-------- -------- -------- --------
TOTAL INTEREST EXPENSE 37,065 52,071 75,603 107,709
-------- -------- -------- --------
NET INTEREST INCOME 69,196 60,941 136,701 119,717
Provision for loan losses 4,502 3,452 8,693 7,893
-------- -------- -------- --------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 64,694 57,489 128,008 111,824
-------- -------- -------- --------
NON-INTEREST INCOME
Insurance premiums, commissions
and fees 11,145 8,481 22,068 17,056
Service charges 11,663 9,081 22,285 17,364
Trust 2,342 2,453 4,739 4,737
Gain on sale of securities 465 559 640 1,668
Gain on sale of loans 1,349 2,009 2,355 3,267
Other 3,099 2,107 5,920 4,085
-------- -------- -------- --------
TOTAL NON-INTEREST INCOME 30,063 24,690 58,007 48,177
-------- -------- -------- --------
94,757 82,179 186,015 160,001
-------- -------- -------- --------
NON-INTEREST EXPENSES
Salaries and employee benefits 33,011 28,779 66,153 57,845
Net occupancy 4,403 3,980 8,797 8,107
Equipment 5,007 4,755 10,018 9,483
Merger and consolidation related 3,274 41,855 6,805
Other 17,560 16,571 35,388 37,120
-------- -------- -------- --------
TOTAL NON-INTEREST EXPENSES 59,981 57,359 162,211 119,360
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 34,776 24,820 23,804 40,641
Income taxes 10,827 7,921 8,738 12,511
-------- -------- -------- --------
NET INCOME $ 23,949 $ 16,899 $ 15,066 $ 28,130
======== ======== ======== ========
NET INCOME PER COMMON SHARE: *
Basic $.54 $.41 $.34 $.68
==== ==== ==== ====
Diluted $.53 $.40 $.33 $.66
==== ==== ==== ====
CASH DIVIDENDS PER COMMON SHARE * $.22 $.17 $.41 $.33
==== ==== ==== ====
* Restated to reflect a 5 percent stock dividend declared on May 6, 2002.
See accompanying Notes to Consolidated Financial Statements
3
F.N.B. CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Dollars in thousands
Unaudited
SIX MONTHS ENDED
JUNE 30,
---------------------
2002 2001
--------- ---------
OPERATING ACTIVITIES
Net income $ 15,066 $ 28,130
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 8,663 9,358
Provision for loan losses 8,693 7,893
Deferred taxes (14,615) (3,631)
Net gain on sale of securities (640) (1,668)
Net gain on sale of loans (2,355) (3,267)
Proceeds from sale of loans 15,477 25,524
Loans originated for sale (14,659) (14,329)
Net change in:
Interest receivable 156 2,180
Interest payable (2,996) (1,616)
Other, net 2,324 4,880
--------- ---------
Net cash flows from operating activities 15,114 53,454
--------- ---------
INVESTING ACTIVITIES
Net change in:
Interest bearing deposits with banks 1,236 (5,164)
Federal funds sold 98,421 (8,651)
Loans (177,454) 5,495
Securities available for sale:
Purchases (177,649) (398,938)
Sales 154,803 129,143
Maturities 166,808 163,058
Securities held to maturity:
Purchases (6,141) (7,861)
Maturities 5,528 37,583
Increase in premises and equipment (15,713) (6,604)
Increase in intangibles (47,720) (2,466)
Net cash paid for mergers and acquisitions (50,761) (2,545)
--------- ---------
Net cash flows from investing activities (48,642) (96,950)
--------- ---------
FINANCING ACTIVITIES
Net change in:
Non-interest bearing deposits, savings and NOW 148,248 25,344
Time deposits (119,234) (24,271)
Short-term borrowings 6,288 (1,385)
Increase in long-term debt 3,242 74,295
Decrease in long-term debt (12,991) (16,629)
Net issuance/(acquisition) of treasury stock (2,105) 618
Cash dividends paid (18,157) (15,123)
--------- ---------
Net cash flows from financing activities 5,291 42,849
--------- ---------
NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS (28,237) (647)
Cash and due from banks at beginning of period 246,781 207,940
--------- ---------
CASH AND DUE FROM BANKS AT END OF PERIOD $ 218,544 $ 207,293
========= =========
See accompanying Notes to Consolidated Financial Statements
4
F.N.B. CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 2002
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements give
retroactive effect to the merger of Promistar Financial Corporation with and
into F.N.B. Corporation (the Corporation). The transaction was consummated on
January 18, 2002, and has been accounted for as a pooling-of-interests. The
accompanying unaudited financial statements are presented as if the merger had
been consummated for all the periods presented. The accompanying unaudited
consolidated financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included. For
further information, refer to the consolidated financial statements for the year
ended December 31, 2001 and footnotes thereto included in the Corporation's
Current Report on Form 8-K filed with the Securities and Exchange Commission on
July 24, 2002.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions that affect the amounts reported in the financial statements. The
Corporation cautions that any forward looking statements contained in this
report, in a report incorporated by reference in this report or made by
management of the Corporation, involve risks and uncertainties and are subject
to change based upon various factors. Actual results could differ materially
from those expressed or implied.
COMMON STOCK DIVIDEND
On May 6, 2002, the Corporation declared a 5 percent common stock dividend
payable on May 31, 2002. As a result of the stock dividend, the Corporation
issued 2,095,789 shares of its common stock. The stock dividend increased
additional paid in capital by $66.6 million and decreased retained earnings by
$66.6 million.
MERGERS AND ACQUISITIONS
The Corporation regularly evaluates the potential acquisition of, and
holds discussions with, various acquisition candidates and as a general rule the
Corporation publicly announces such acquisitions only after a definitive
agreement has been reached.
MERGER AND CONSOLIDATION RELATED EXPENSES
The Corporation completed its affiliation with Promistar Financial
Corporation (Promistar) on January 18, 2002 and merged Promistar's wholly owned
subsidiary Promistar Bank into the Corporation's existing subsidiary, First
National Bank of Pennsylvania on February 20, 2002. In connection with this
transaction, the Corporation incurred pre- tax merger and consolidation expense
of $41.4 million. Of the total merger and consolidation expenses, involuntary
separation costs associated with terminated employees totaled $6.8 million,
early retirement and other employment related expenses totaled $7.8 million,
data processing conversion charges totaled $12.2 million, professional services
totaled $8.0 million, write-downs of impaired assets totaled $4.2 million and
other miscellaneous merger and consolidation expenses totaled $2.4 million. All
involuntary separation costs were paid during the first six months of 2002.
5
On January 31, 2002, the Corporation completed its affiliation with
Central Bank Shares, Inc. (Central), a bank holding company headquartered in
Orlando, Florida, with assets of more than $251.4 million. The transaction,
which was accounted for as a purchase, resulted in the recognition of
approximately $47.0 million of goodwill. The Corporation also incurred merger
related costs of $413,000 related to its affiliation with Central. These costs
related primarily to data processing conversion charges.
LOANS AND THE ALLOWANCE FOR LOAN LOSSES
Loans are reported at their outstanding principal adjusted for any
charge-offs and any deferred fees or costs on originated loans.
Interest income on loans is accrued on the principal amount
outstanding. It is the Corporation's policy to discontinue interest accruals
when principal or interest is due and has remained unpaid for 90 days or more
unless the loan is both well secured and in the process of collection. When a
loan is placed on non-accrual status, all unpaid interest is reversed. Payments
on non-accrual loans are generally applied to either principal or interest or
both, depending on management's evaluation of collectibility. Non-accrual loans
may not be restored to accrual status until all delinquent principal and
interest has been paid, or the loan becomes both well secured and in the process
of collection. Consumer installment loans are generally charged off against the
allowance for loan losses upon reaching 90 to 180 days past due, depending on
the installment loan type. Loan origination fees and related costs are deferred
and recognized over the life of the loans as an adjustment of yield.
The allowance for loan losses is based on management's evaluation of
potential losses in the loan portfolio, which includes an assessment of past
experience, current and anticipated future economic conditions, known and
inherent risks in the loan portfolio, the estimated value of underlying
collateral and residuals and changes in the composition of the loan portfolio.
Additions are made to the allowance through periodic provisions charged to
income and recovery of principal on loans previously charged off. Losses of
principal and/or residuals are charged to the allowance when the loss actually
occurs or when a determination is made that a loss is probable.
Impaired loans are identified and measured based on the present value
of expected future cash flows discounted at the loan's effective interest rate,
or at the loan's observable market price or at the fair value of the collateral
if the loan is collateral dependent. If the recorded investment in the loan
exceeds the measure of fair value, a valuation allowance is established as a
component of the allowance for loan losses. Impaired loans consist of
non-homogeneous loans, which based on the evaluation of current information and
events, management has determined that it is probable that the Corporation will
not be able to collect all amounts due according to the contractual terms of the
loan agreement. The Corporation evaluates all commercial and commercial real
estate loans which have been classified for regulatory reporting purposes,
including non-accrual and restructured loans, in determining impaired loans.
NEW ACCOUNTING STANDARDS
Financial Accounting Standards Statement (FAS) No. 142, "Goodwill and
Other Intangible Assets," requires that goodwill and intangible assets with
identifiable useful lives no longer be amortized, but instead tested for
impairment at least annually in accordance with the provisions of the Statement.
FAS No. 142 also requires that intangibles with definite useful lives be
amortized over their respective estimated useful lives to the estimated residual
values, and reviewed for impairment in accordance with FAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." The Corporation adopted the new rules on accounting for goodwill and other
intangible assets in the first quarter of 2002. Application of the
non-amortization provisions of the Statement resulted in an increase in net
income of
6
$1.4 million, or $.04 per diluted share, during the first six months of 2002.
Diluted earnings per share for the first six months of 2002 was $.33 compared to
pro-forma diluted earnings per share for 2001 of $.70. The pro-forma earnings
per share gives effect to the non-amortization of goodwill in 2001. The
Corporation has completed its transition impairment test and concluded that
goodwill is not impaired.
PER SHARE AMOUNTS
Per share amounts have been adjusted for common stock dividends,
including the 5 percent stock dividend declared on May 6, 2002.
Basic earnings per share is calculated by dividing net income, adjusted
for declared dividends on preferred stock, by the weighted average number of
shares of common stock outstanding.
Diluted earnings per common share is calculated by dividing net income
by the weighted average number of shares of common stock outstanding, assuming
conversion of outstanding convertible preferred stock from the beginning of the
year or date of issuance and the exercise of stock options and warrants. Such
adjustments to net income and the weighted average number of shares of common
stock are made only when such adjustments dilute earnings per share.
EARNINGS PER SHARE
The following tables set forth the computation of basic and diluted
earnings per share (in thousands, except per share data):
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Basic
Net income $ 23,949 $ 16,899 $ 15,066 $ 28,130
Less: Preferred stock
dividends declared (64) (76) (131) (153)
---------- ---------- ---------- ----------
Earnings applicable to
basic earnings per share $ 23,885 $ 16,823 $ 14,935 $ 27,977
========== ========== ========== ==========
Average common shares
outstanding 43,957,743 41,348,780 43,870,873 41,321,275
========== ========== ========== ==========
Earnings per share $.54 $.41 $.34 $.68
==== ==== ==== ====
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Diluted
Earnings applicable to
diluted earnings per share $ 23,949 $ 16,899 $ 15,066 $ 28,130
========== ========== ========== ==========
Average common shares
outstanding 43,957,743 41,348,780 43,870,743 41,321,275
Series A convertible
preferred stock 16,429 19,583 16,429 19,583
Series B convertible
preferred stock 321,372 392,993 332,264 397,511
Net effect of dilutive stock
options and stock warrants
based on the treasury stock
method 805,128 674,221 755,659 573,654
---------- ---------- ---------- ----------
45,100,672 42,435,577 44,975,095 42,312,023
========== ========== ========== ==========
Earnings per share $.53 $.40 $.33 $.66
==== ==== ==== ====
7
CASH FLOW INFORMATION
Following is a summary of supplemental cash flow information (in
thousands):
Six Months Ended
June 30
----------------------
2002 2001
---------- ----------
Cash paid for:
Interest $78,599 $109,267
Income taxes 5,147 7,859
Noncash Investing and Financing Activities:
Acquisition of real estate in settlement of loans 2,283 1,502
Loans granted in the sale of other real estate 589 578
COMPREHENSIVE INCOME
The components of comprehensive income, net of related tax, are as
follows (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
2002 2001 2002 2001
--------- -------- ---------- --------
Net income $ 23,949 $ 16,899 $ 15,066 $28,130
Other comprehensive income:
Unrealized gains on securities:
Unrealized holding gains
(losses) arising
during the period 7,957 96 4,386 5,414
Less: reclassification
adjustment for gains
included in net income (181) (308) (664) (882)
--------- -------- -------- -------
Other comprehensive income 7,776 (212) 3,722 4,532
--------- -------- -------- -------
Comprehensive income $ 31,725 $ 16,687 $ 18,788 $32,662
========= ======== ======== =======
BUSINESS SEGMENTS
The Corporation operates in three reportable segments: community banks,
insurance agencies and consumer finance. The Corporation's community bank
subsidiaries offer services traditionally offered by full-service commercial
banks, including commercial and individual demand and time deposit accounts and
commercial, mortgage and individual installment loans. In addition to
traditional banking products, the Corporation's community bank subsidiaries
offer various alternative products, including securities brokerage and
investment advisory services, mutual funds, insurance and annuities. The
Corporation's insurance agencies are full-service insurance agencies offering
all lines of commercial and personal insurance through major carriers. The
Corporation's consumer finance subsidiary is primarily involved in making
personal installment loans to individuals, and approximately 15 percent of its
remaining volume is from the purchase of installment sales finance contracts
from retail merchants. This activity is funded through the sale of the
Corporation's subordinated notes at the finance company's branch offices. The
following tables provide financial information for these segments of the
Corporation (in thousands). Other items shown in the tables below represent the
parent company, other non-bank subsidiaries and eliminations, which are
necessary for purposes of reconciling to the consolidated amounts.
8
At or for the three months Community Insurance Finance All
ended June 30, 2002 Banks Agencies Company Other Consolidated
---------- ---------- ---------- --------- ------------
Interest income $ 99,922 $ 28 $ 6,939 $ (628) $ 106,261
Interest expense 34,461 27 1,662 915 37,065
Provision for loan losses 3,248 1,254 4,502
Non-interest income 16,397 7,203 422 6,041 30,063
Non-interest expense 45,471 5,534 3,105 4,939 59,049
Intangible amortization 821 57 31 23 932
Income tax expense (benefit) 10,057 641 476 (347) 10,827
Net income (loss) 22,261 972 833 (117) 23,949
Core operating earnings 22,261 972 833 (117) 23,949
Total assets 6,586,226 32,058 143,113 (12,165) 6,749,232
Goodwill 67,782 14,182 1,747 83,711
At or for the three months Community Insurance Finance All
ended June 30, 2001 Banks Agencies Company Other Consolidated
---------- ---------- ---------- --------- ------------
Interest income $ 106,231 $ 44 $ 6,948 $ (211) $ 113,012
Interest expense 49,786 64 2,191 30 52,071
Provision for loan losses 2,340 1,112 3,452
Non-interest income 15,256 6,409 447 2,578 24,690
Non-interest expense 43,298 5,211 3,016 1,461 52,986
Merger and consolidation
related expenses 1,237 2,037 3,274
Intangible amortization 678 198 31 192 1,099
Income tax expense 7,558 444 393 (474) 7,921
Net income (loss) 16,590 536 652 (879) 16,899
Core operating earnings 17,540 536 652 402 19,130
Total assets 5,998,214 28,936 145,585 37,563 6,210,298
Goodwill 16,611 14,517 1,871 32,999
9
At or for the six months Community Insurance Finance All
ended June 30, 2002 Banks Agencies Company Other Consolidated
---------- ---------- --------- -------- ------------
Interest income $ 199,381 $ 56 $ 13,809 $ (942) $ 212,304
Interest expense 70,779 55 3,377 1,392 75,603
Provision for loan losses 6,015 2,678 8,693
Non-interest income 31,006 15,359 901 10,741 58,007
Non-interest expense 89,249 11,192 6,201 11,945 118,587
Merger and consolidation
related expenses 22,250 126 19,479 41,855
Intangible amortization 1,588 73 62 46 1,769
Income tax expense (benefit) 13,166 1,610 833 (6,871) 8,738
Net income (loss) 27,340 2,485 1,433 (16,192) 15,066
Core operating earnings 43,235 2,485 1,516 (1,438) 45,798
Total assets 6,586,226 32,058 143,113 (12,165) 6,749,232
Goodwill 67,782 14,182 1,747 83,711
At or for the six months Community Insurance Finance All
ended June 30, 2001 Banks Agencies Company Other Consolidated
---------- ---------- --------- --------- ------------
Interest income $ 214,450 $ 99 $ 13,871 $ (994) $ 227,426
Interest expense 103,124 147 4,522 (84) 107,709
Provision for loan losses 5,672 2,221 7,893
Non-interest income 28,922 13,405 897 4,953 48,177
Non-interest expense 90,990 10,181 5,948 3,227 110,346
Merger and consolidation
related expenses 2,946 3,859 6,805
Intangible amortization 1,368 393 64 384 2,209
Income tax expense 11,984 1,132 755 (1,360) 12,511
Net income (loss) 27,288 1,651 1,258 (2,067) 28,130
Core operating earnings 31,771 1,651 1,258 479 35,159
Total assets 5,998,214 28,936 145,585 37,563 6,210,298
Goodwill 16,611 14,517 1,871 32,999
* For a description and reconciliation of core operating earnings refer to
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
10
Independent Accountants' Review Report
The Board of Directors
F.N.B. Corporation
We have reviewed the accompanying consolidated balance sheets of F.N.B.
Corporation and subsidiaries as of June 30, 2002 and 2001, and the related
consolidated statements of income for the three-month and six-month periods
ended June 30, 2002 and 2001, and the consolidated statements of cash flows for
the six-month periods ended June 30, 2002 and 2001. These financial statements
are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data, and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with auditing standards generally accepted in the United States,
which will be performed for the full year with the objective of expressing an
opinion regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying consolidated financial statements referred to above
for them to be in conformity with accounting principles generally accepted in
the United States.
We have previously audited, in accordance with audited standards generally
accepted in the United States, the consolidated balance sheet of F.N.B.
Corporation and subsidiaries as of December 31, 2001, and the related statements
of income, shareholders' equity, and cash flows for the year then ended (not
presented herein) and in our report dated May 6, 2002, we expressed an
unqualified opinion on those consolidated financial statements. In our opinion,
the information set forth in the accompanying consolidated balance sheet as of
December 31, 2001, is fairly stated, in all material respects, in relation to
the consolidated balance sheet from which it has been derived.
/s/ERNST & YOUNG LLP
Birmingham, Alabama
August 7, 2002
11
PART I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
FINANCIAL INFORMATION SUMMARY
Core operating earnings for the first six months of 2002 increased to
$45.8 million from $35.2 million for the first six months of 2001. Basic core
operating earnings per share were $1.04 and $.85 for the six months ended June
30, 2002 and 2001, respectively, while diluted core operating earnings per share
were $1.02 and $.83 for those same periods. Core operating earnings consist of
net income adjusted for non- recurring items. Net income was $15.1 million for
the first six months of 2002 compared to net income of $28.1 million for the
first six months of 2001. Diluted earnings per share were $.33 and $.66 for
those same periods, respectively.
The following consists of a reconciliation of net income to core
operating earnings (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Net income $ 23,949 $ 16,899 $ 15,066 $ 28,130
Merger and consolidation
related expenses, net of
income taxes 2,231 30,212 4,572
Other non-recurring items,
net of income taxes 520 2,457
---------- ---------- ---------- ----------
Core operating earnings $ 23,949 $ 19,130 $ 45,798 $ 35,159
========== ========== ========== ==========
Highlights for the first six months of 2002 include:
o A return on average assets of 1.38% and a return on average
equity of 16.21%, both based on core operating earnings.
o An increase of 25.4% or $9.9 million in fee income, which
consists of service charges, insurance premiums, commissions and
trust income.
o A 3.9% increase in average net interest earning assets and an
increase in the net interest margin to 4.69% compared to 4.36%
during the second quarter of 2001.
o Continued strong asset quality as non-performing assets as a
percentage of total assets decreased to .53%.
o Completion of affiliation with Promistar Financial Corporation on
January 18, 2002.
o Completion of affiliation with Central Bank Shares, Inc. on
January 31, 2002.
12
FIRST SIX MONTHS OF 2002 AS COMPARED TO FIRST SIX MONTHS OF 2001:
The following table provides information regarding the average balances
and yields and rates on interest earning assets and interest bearing liabilities
(dollars in thousands):
Six Months Ended June 30 2002 2001
----------------------------- ----------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
---------- -------- ------ ---------- -------- ------
Assets
Interest earning assets:
Interest bearing deposits
with banks $ 7,665 $ 77 2.01% $ 4,742 $ 81 3.42%
Federal funds sold 131,966 1,177 1.78 148,572 3,638 4.90
Securities:
Taxable 734,560 21,028 5.77 769,229 23,801 6.24
Non-taxable (1) 195,920 6,349 6.48 158,772 5,637 7.10
Loans (1) (2) 4,935,971 186,565 7.62 4,606,780 197,479 8.64
---------- -------- ---------- --------
Total interest
earning assets 6,006,082 215,196 7.22 5,688,095 230,636 8.18
---------- -------- ---------- --------
Cash and due from banks 196,662 175,392
Allowance for loan losses (67,421) (57,704)
Premises and equipment 154,338 139,934
Other assets 384,986 234,671
---------- ----------
$6,674,647 $6,180,388
========== ==========
Liabilities
Interest bearing liabilities:
Deposits:
Interest bearing demand $1,023,549 $ 4,608 0.91 $ 815,349 $ 8,304 2.05
Savings 1,062,197 7,838 1.49 1,032,729 12,947 2.53
Other time 2,317,730 47,845 4.16 2,372,744 69,397 5.90
Short-term borrowings 400,097 5,717 2.88 326,229 8,729 5.40
Long-term debt 339,783 9,595 5.65 310,987 8,332 5.36
---------- -------- ---------- --------
Total interest
bearing liabilities 5,143,356 75,603 2.96 4,858,038 107,709 4.47
---------- -------- ---------- --------
Non-interest bearing,
demand deposits 861,571 716,287
Other liabilities 99,869 94,969
---------- ----------
6,104,796 5,669,294
---------- ----------
Stockholders' equity 569,851 511,094
---------- ----------
$6,674,647 $6,180,388
========== ==========
Net interest earning assets $ 862,726 $ 830,057
========== ==========
Net interest income $ 139,593 $122,927
========= ========
Net interest spread 4.26% 3.71%
===== =====
Net interest margin (3) 4.69% 4.36%
===== =====
(1) The amounts are reflected on a fully taxable equivalent basis using the
federal statutory tax rate of 35% adjusted for certain federal tax
preferences.
(2) Average balance includes non-accrual loans. Loans consist of average
total loans less average unearned income. The amount of loan fees
included in interest income on loans is immaterial.
(3) Net interest margin is calculated by dividing the difference between
total interest earned and total interest paid by average interest
earning assets.
13
Net interest income, the Corporation's primary source of earnings, is
the amount by which interest and fees generated by interest earning assets,
primarily loans and securities, exceed interest expense on deposits and borrowed
funds. During the six months ended June 30, 2002, net interest income, on a
fully taxable equivalent basis, totaled $139.6 million, as compared to $122.9
million for the six months ended June 30, 2002. Net interest income consisted of
interest income of $215.2 million and interest expense of $75.6 million for the
first six months of 2002 compared to $230.6 million and $107.7 million for each,
respectively, for the first six months of 2001. The yield on interest earning
assets decreased by 96 basis points and the rate paid on interest bearing
liabilities decreased by 151 basis points. Net interest margin increased from
4.36% at June 30, 2001 to 4.69% at June 30, 2002. Although the net interest
margin has increased over the same period last year, there is a possibility that
margin compression could arise, as further discussed within the "Liquidity and
Interest Rate Sensitivity" section of this report.
The following table sets forth certain information regarding changes in
net interest income attributable to changes in the volumes and rates of interest
earning assets and interest bearing liabilities for the six months ended June
30, 2002 as compared to the six months ended June 30, 2001 (in thousands):
Volume Rate Net
------- ------- -------
Interest Income
Interest bearing deposits with banks $ (12) $ 8 $ (4)
Federal funds sold (367) (2,094) (2,461)
Securities:
Taxable (1,038) (1,735) (2,773)
Non-taxable 1,136 (424) 712
Loans 16,737 (27,651) (10,914)
------- ------- -------
16,456 (31,896) (15,440)
------- ------- -------
Interest Expense
Deposits:
Interest bearing demand 3,138 (6,834) (3,696)
Savings 381 (5,490) (5,109)
Other time (1,571) (19,981) (21,552)
Short-term borrowings 2,839 (5,851) (3,012)
Long-term debt 797 466 1,263
------- ------- -------
5,584 (37,690) (32,106)
------- ------- -------
Net Change $10,872 $ 5,794 $16,666
======= ======= =======
The amount of change not solely due to rate or volume changes was
allocated between the change due to rate and the change due to volume based on
the net size of the rate and volume changes.
Interest income on loans, on a fully taxable equivalent basis,
decreased 5.5% from $197.5 million for the six months ended June 30, 2001 to
$186.6 million for the six months ended June 30, 2002. This decrease was solely
related to yield as the Corporation experienced favorable loan volumes as
average loans increased by $329.2 million.
Interest expense on deposits decreased $30.4 million or 33.5% for the
six months ended June 30, 2002, compared to the same period of 2001, despite an
increase in average interest bearing deposits of 4.3% over this same period. The
average balances in interest bearing demand deposits and savings deposits
increased by $208.2 million and $29.5 million, respectively, while the average
balance in time deposits decreased by $55.0 million. The Corporation continued
to successfully generate non-interest bearing deposits as such deposits
increased by $145.3 million or 20.3% from June 30, 2001 to June 30, 2002. The
average balance in short-term borrowings increased by $73.9 million as average
repurchase agreements increased $36.2 million and average short-term
subordinated
14
notes increased $31.4 million during the second quarter of 2002. Interest
expense on long-term debt increased $1.3 million from June 30, 2001 as average
long-term debt increased $28.8 million.
The provision for loan losses charged to operations is a direct result
of management's analysis of the adequacy of the allowance for loan losses which
takes into consideration factors, including qualitative factors, relevant to the
collectibility of the existing portfolio. The provision for loan losses was $8.7
million for the first six months of 2002, as compared to $7.9 million for the
first six months of 2001. The allowance for loan losses as a percentage of total
loans was 1.33% at June 30, 2002 and 1.24% at June 30, 2001.
Non-interest income increased 20.4% from $48.2 million during the first
six months of 2001 to $58.0 million during the first six months of 2002. This
increase was primarily attributable to the Corporation's continued
transformation to a diversified financial services company. The Corporation has
dedicated significant resources to expanding traditional banking services and
generating insurance commissions and fees, investment service charges and trust
fees. Insurance premiums, commissions and fees, service charges and trust income
increased $9.9 million or 25.4% compared with the first six months of 2001.
These higher levels of fee income are attributable to growth in insurance,
expanded banking services and the Corporation's continued focus on providing a
wide array of wealth management services, such as annuities, mutual funds and
trust services. Other non-interest income increased by $1.5 million as the
Corporation increased its investment in Bank Owned Life Insurance by $50.0
million. This increase was partially offset by decreases of $1.0 million in
gains on sale of securities and $912,000 in gains on sale of loans.
Total non-interest expenses increased $42.9 million from $119.4 million
during the first six months of 2001 to $162.2 million during the first six
months of 2002. This increase was primarily attributable to non-recurring items.
The Corporation recognized pre-tax merger and consolidation related or other
non-recurring charges of $42.7 million during the first six months of 2002,
compared to pre-tax merger and consolidation related and other non-recurring
charges of $10.8 million for the same period of 2001. Excluding these items,
non-interest expenses totaled $119.6 million for the first six months of 2002
and $108.6 million for the first six months of 2001. This increase of 10.0%
includes the additional operating costs reflected in 2002 related to the
purchase acquisition of FNH Corporation in August of 2001 and Central Bank
Shares, Inc. in January of 2002.
The Corporation's income tax was $8.7 million for the first six months
of 2002 compared to expense of $12.5 million for the same period of 2001. The
effective tax rate of 36.7% for the six months ended June 30, 2002 was higher
than the 35.0% federal statutory tax rate due to a higher level of
non-deductible merger expenses incurred in 2002.
SECOND QUARTER OF 2002 AS COMPARED TO SECOND QUARTER OF 2001
During the second quarter of 2002, net interest income increased $8.3
million, or 13.5%, over the second quarter of 2001. Total interest income
decreased $6.8 million, or 6.0%, primarily the result of a decrease in interest
income on loans of $4.3 million. Total interest expense decreased $15.0 million,
or 28.8%, primarily due to a decrease of $14.6 million in interest expense on
deposits, despite an increase in the average balance of deposits.
The provision for loan losses totaled $4.5 million for the second
quarter of 2002, as compared to $3.5 million for the second quarter of 2001.
15
Non-interest income increased 21.8% during the second quarter of 2002
compared to the same period of 2001, primarily due to a $5.1 million or 25.7%
increase in insurance premiums, commissions and fees, service charges and trust
income. These higher levels of fee income are attributable to growth in
insurance, increases in deposits and the Corporation's continued expansion into
annuity and mutual fund sales and trust services. Continued expansion of
insurance commissions is dependent on insurance carriers continuing to offer
workmen's compensation coverage in our market areas. Gains on the sale of loans
and securities decreased $754,000 during this same period.
Non-interest expenses increased by $2.6 million or 4.6% during the
second quarter of 2002, compared to the second quarter of 2001. Salaries and
employee benefits increased by $4.2 million during the second quarter of 2002,
as compared to the second quarter of 2001, due to normal annual salary
adjustments, business expansion, and the purchase of FNH Corporation and Central
Bank Shares, Inc. During the second quarter of 2001, the Corporation incurred
merger and consolidation related expenses of $3.3 million.
LIQUIDITY AND INTEREST RATE SENSITIVITY
The Corporation's goal in liquidity management is to meet the cash flow
requirements of depositors and borrowers as well as the operating cash needs of
the Corporation, with cost-effective funding. The Corporate Asset/Liability
Committee (ALCO), which includes members of executive management, reviews
liquidity on a periodic basis and approves significant changes in strategies
which affect balance sheet or cash flow positions. The Board of Directors has
established an Asset/Liability Policy in order to achieve and maintain earnings
performance consistent with long-term goals while maintaining acceptable levels
of interest rate risk, a "well-capitalized" balance sheet and adequate levels of
liquidity. This policy designates the ALCO as the body responsible for meeting
this objective.
Liquidity sources from assets include payments from loans and
investments as well as the ability to securitize or sell loans and investment
securities. Liquidity sources from liabilities are generated primarily through
growth in core deposits, and to a lesser extent, the use of wholesale sources
which include federal funds purchased, repurchase agreements and public
deposits. In addition, the banking affiliates have the ability to borrow funds
from the Federal Home Loan Bank (FHLB). FHLB advances are a competitively priced
and reliable source of funds. The Corporation has significant FHLB borrowing
capacity available for both general and contingency funding purposes. As of June
30, 2002, outstanding advances were $304.1 million, or 4.5% of total assets
while FHLB availability was $1.3 billion, or 19.0% of total assets. The
Corporation anticipates funding earning assets through the utilization of FHLB
advances.
The principal source of cash for the parent company is dividends from
its subsidiaries. The parent also has approved lines of credit with several
major domestic banks totaling $90.0 million, of which $15.0 million was used as
of June 30, 2002. The Corporation also issues subordinated debt on a regular
basis and has access to the Federal Reserve Bank as well as access to the
capital markets.
The ALCO regularly monitors various liquidity ratios and forecasts of
cash position. Management believes the Corporation has sufficient liquidity
available to meet its normal operating and contingency funding cash needs.
The financial performance of the Corporation is at risk from interest
rate fluctuations. This interest rate risk arises due to differences between the
amount of interest earning assets and interest bearing liabilities subject to
repricing over a period of time, the difference between the change in various
interest rates and the embedded options in certain financial instruments. The
Corporation utilizes an asset/liability model to support its balance sheet
strategies. The Corporation uses gap
16
analysis, net interest income simulations and the economic value of equity to
measure its interest rate risk.
The gap analysis below measures the interest rate risk of the
Corporation by comparing the difference between the amount of interest earning
assets and interest bearing liabilities subject to repricing over a period of
time. The cumulative one-year gap ratio was 1.11 at June 30, 2002, as compared
to 1.05 at June 30, 2001. A ratio of more than one indicates a higher level of
repricing assets over repricing liabilities over the next twelve months,
assuming the current interest rate environment.
Following is the gap analysis as of June 30, 2002 (in thousands):
Within 4-12 1-5 Over
3 Months Months Years 5 years Total
---------- ---------- ---------- ----------- ----------
Interest Earning Assets
Interest bearing deposits
with banks $ 2,276 $ 200 $ 2,476
Federal funds sold 21,599 21,599
Securities 57,618 227,546 $ 428,061 $ 197,520 910,745
Loans, net of unearned 1,455,880 1,086,738 2,107,719 445,939 5,096,276
---------- ---------- ---------- ----------- ----------
1,537,373 1,314,484 2,535,780 643,459 6,031,096
Other assets 718,136 718,136
---------- ---------- ---------- ----------- ----------
$1,537,373 $1,314,484 $2,535,780 $ 1,361,595 $6,749,232
========== ========== ========== =========== ==========
Interest Bearing Liabilities
Deposits:
Interest checking $ 237,183 $ 834,054 $1,071,237
Savings 408,598 686,448 1,095,046
Time deposits 535,785 $1,040,190 $ 677,663 4,338 2,257,976
Borrowings 304,805 43,591 43,251 348,185 739,832
---------- ---------- ---------- ----------- ----------
1,486,371 1,083,781 720,914 1,873,025 5,164,091
Other liabilities 1,014,207 1,014,207
Stockholders' equity 570,934 570,934
---------- ---------- ---------- ----------- ----------
$1,486,371 $1,083,781 $ 720,914 $ 3,458,166 $6,749,232
========== ========== ========== =========== ==========
Period Gap $ 51,002 $ 230,703 $1,814,866 $(2,096,571)
========== ========== ========== ===========
Cumulative Gap $ 51,002 $ 281,705 $2,096,571
========== ========== ==========
Cumulative Gap as a Percent
of Total Assets 0.76% 4.17% 31.06%
========== ========== ==========
Rate Sensitive Assets/Rate Sensitive
Liabilities (Cumulative) 1.03 1.11 1.64 1.17
========== ========= ========== ==========
17
Net interest income simulations measure the exposure to short-term
earnings from changes in market rates of interest in a more rigorous and
explicit fashion. The Corporation's current financial position is combined with
assumptions regarding future business to calculate net interest income under
varying hypothetical interest rate scenarios. The economic value of equity (EVE)
measures the Corporation's long-term earnings exposure from changes in market
rates of interest. EVE is defined as the present value of assets minus the
present value of liabilities at a point in time. A decrease in EVE due to a
specified rate change indicates a decline in the long-term earnings capacity of
the balance sheet assuming that the rate change remains in effect over the life
of the balance sheet. The following table presents an analysis of the potential
sensitivity of the Corporation's annual net interest income and EVE to sudden
and sustained changes in market rates:
JUNE 30,
--------------------
2002 2001
-------- --------
Net interest income change (12 months):
- 100 basis points 0.3 % (1.2)%
+ 200 basis points 1.3 % (0.3)%
Economic value of equity:
- 100 basis points (3.9)% (2.9)%
+ 200 basis points 1.0 % (2.7)%
The preceding measures assumed no change in asset/liability
compositions. Thus, the measures do not reflect actions the ALCO may undertake
in response to such changes in interest rates. The disclosed measures are within
the limits set forth in the Corporation's Asset/Liability Policy.
The computation of the prospective effects of hypothetical interest
rate changes requires numerous assumptions regarding characteristics of new
business and the behavior of existing positions. These business assumptions are
based upon the Corporation's experience, business plans and published industry
experience. Key assumptions employed in the model include asset prepayment
speeds, the relative price sensitivity of certain assets and liabilities and the
expected life of non-maturity deposits. Because these assumptions are inherently
uncertain, actual results will differ from simulated results.
CAPITAL RESOURCES
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 $200.0 million shelf registration with the
Securities and Exchange Commission. The Corporation may, from time to time,
issue any combination of common stock, preferred stock, debt securities or trust
preferred securities in one or more offerings up to a total dollar amount of
$200.0 million. Capital management is a continuous process. Both the Corporation
and its banking affiliates are subject to various regulatory capital
requirements administered by the federal banking agencies. (See the "Regulatory
Matters" section of this report).
18
LOANS
Following is a summary of loans (dollars in thousands):
JUNE 30, DECEMBER 31,
2002 2001
------------ ------------
Real estate:
Residential $1,869,955 $1,777,403
Commercial 1,328,798 1,282,944
Construction 281,850 227,868
Installment loans to individuals 817,970 774,932
Commercial, financial and agricultural 743,530 672,639
Lease financing 94,950 128,712
Unearned income (43,637) (50,063)
---------- ----------
$5,093,416 $4,814,435
========== ==========
NON-PERFORMING ASSETS
Non-performing assets include non-performing loans and other real
estate owned. Non-performing loans include non-accrual loans and restructured
loans. Non-accrual loans represent loans on which interest accruals have been
discontinued. It is the Corporation's policy to discontinue interest accruals
when principal or interest is due and has remained unpaid for 90 days or more
unless the loan is both well secured and in the process of collection. When a
loan is placed on non-accrual status, all unpaid interest is reversed.
Non-accrual loans may not be restored to accrual status until all delinquent
principal and interest has been paid or the loan becomes both well secured and
in the process of collection. Consumer installment loans are generally charged
off against the allowance for loan losses upon reaching 90 to 180 days past due,
depending on the installment loan type. Restructured loans are loans in which
the borrower has been granted a concession on the interest rate or the original
repayment terms due to financial distress.
Non-performing loans are closely monitored on an ongoing basis as part
of the Corporation's loan review and work-out process. The potential risk of
loss on these loans is evaluated by comparing the loan balance to the fair value
of any underlying collateral or the present value of projected future cash
flows. Losses are recognized where appropriate. Other real estate owned includes
a $1.0 million property which is subject to litigation. Should the outcome be
adverse, the value of the property will be impaired.
Following is a summary of non-performing assets (dollars in thousands):
JUNE 30, DECEMBER 31,
2002 2001
----------- ------------
Non-performing assets:
Non-accrual loans $20,982 $21,350
Restructured loans 6,168 5,578
------- -------
Total non-performing loans 27,150 26,928
Other real estate owned 5,192 4,375
------- -------
Total non-performing assets $32,342 $31,303
======= =======
Asset quality ratios:
Non-performing loans as percent of total loans .53% .56%
Non-performing assets as percent of total assets .48% .48%
19
CRITICAL ACCOUNTING POLICIES
The Corporation's significant accounting policies are described in the
"Notes to Consolidated Financial Statements" under "Summary of Significant
Accounting Policies" in the Corporation's 2001 Annual Report on Form 8-K filed
on July 24, 2002 with the Securities and Exchange Commission. The Corporation
considers its policy on the accounting for the allowance for loan losses to be a
critical accounting policy. This policy requires the use of estimates and
strategic or economic assumptions that may prove inaccurate or subject to
variations and may significantly affect the Corporation's reported results and
financial position for the period or in future periods. Changes in underlying
factors, assumptions, or estimates in any of these areas could have a material
impact on the Corporation's future financial condition and results of
operations.
ALLOWANCE FOR LOAN LOSSES
Management's analysis of the allowance for loan losses includes the
evaluation of the loan portfolio based upon the Corporation's internal loan
grading system, evaluation of portfolio industry concentrations and the
historical loss experience of the remaining balances of the various homogeneous
loan pools which comprise the loan portfolio. Specific factors used in the
internal loan grading system include the previous loan loss experience with the
customer, the status of past due interest and principal payments on the loan,
the collateral position and residual value of the loan, the quality of financial
information supplied by the borrower and the general financial condition of the
borrower. Management also assesses historical loss on the remaining portfolio
segments in conjunction with the current status of economic conditions, loan
loss trends, delinquency and non-accrual trends, credit administration,
portfolio growth, concentrations of credit risk and other factors, including
regulatory guidance in determining the adequacy of the allowance. This
determination inherently involves a higher degree of uncertainty and considers
current risk factors that may not have yet manifested themselves in the
Corporation's historical loss factors used to determine the adequacy of the
allowance, and it recognizes that knowledge of the portfolio may be incomplete.
Following is a summary of changes in the allowance for loan losses and
selected ratios (dollars in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
2002 2001 2002 2001
-------- -------- -------- --------
Balance at beginning of period $ 66,281 $ 57,920 $65,059 $57,124
Addition from acquisition 1,389
Charge-offs (5,010) (5,105) (10,267) (9,409)
Recoveries 2,026 683 2,925 1,342
-------- -------- ------- -------
Net charge-offs (2,984) (4,422) (7,342) (8,067)
Provision for loan losses 4,502 3,452 8,693 7,893
-------- -------- ------- -------
Balance at end of period $ 67,799 $ 56,950 $67,799 $56,950
======== ======== ======= =======
Allowance for loan losses to:
Total loans, net of unearned income 1.33% 1.24%
Non-performing loans 249.72% 224.14%
20
REGULATORY MATTERS
Quantitative measures established by regulators to ensure capital
adequacy require the Corporation and its banking subsidiaries to maintain
minimum amounts and ratios of total and tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined) and of tier 1 capital to
average assets (as defined).
As of March 31, 2002, the Corporation and each of its banking
subsidiaries have been categorized as "well capitalized" under the regulatory
framework for prompt corrective action. Management believes, as of June 30,
2002, that the Corporation and each of its banking subsidiaries are all "well
capitalized". Following are capital ratios as of June 30, 2002 for the
Corporation (dollars in thousands):
Well Capitalized Minimum Capital
Actual Requirements Requirements
----------------- ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
--------- ------- --------- ------- --------- -------
Total Capital $519,886 10.4% $502,197 10.0% $401,757 8.0%
(to risk-weighted assets)
Tier 1 Capital 455,079 9.1% 301,318 6.0% 200,879 4.0%
(to risk-weighted assets)
Tier 1 Capital 455,079 6.9% 330,809 5.0% 246,647 4.0%
(to average assets)
The Corporation and its banking subsidiaries are subject to various
regulatory capital requirements administered by federal and state banking
agencies. Failure to meet minimum capital requirements can initiate certain
mandatory or discretionary actions by regulators that, if undertaken, could have
a direct material effect on the Corporation's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Corporation and its banking subsidiaries must meet specific capital
guidelines that involve quantitative measures of assets, liabilities and certain
off-balance sheet items as calculated under regulatory accounting practices. The
Corporation's and banking subsidiaries' capital amounts and classifications are
also subject to qualitative judgments by the regulators about components, risk
weightings and other factors.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK.
The information called for by this item is provided under the caption
"Liquidity and Interest Rate Sensitivity" under Item 2 - Management's Discussion
and Analysis of Financial Condition and Results of Operations.
21
PART II
Item 1. Legal Proceedings
During the first quarter of 2001, the Corporation established a legal
reserve of approximately $4.0 million associated with individual
retirement accounts at one of its banking subsidiaries. Various cases
have been filed in the 20th Judicial Circuit and for Lee County,
Florida, naming the subsidiary of the Corporation as a co-defendant.
The plaintiffs alleged that a third-party independent administrator
misappropriated funds from their individual retirement accounts held
with the banking subsidiary. As of July 31, 2002, the Corporation has
settled all of the asserted claims except one, at an aggregate cost to
the Corporation of $2.6 million. The Corporation believes the remaining
reserve will be sufficient for all costs associated with the
litigation, including all unasserted claims, settlements and adverse
judgements.
The Corporation and persons to whom the Corporation may have
indemnification obligations, in the normal course of business, are
subject to various pending and threatened lawsuits in which claims for
monetary damages are asserted. Management, after consultation with
outside legal counsel, does not at the present time anticipate the
ultimate aggregate liability, arising out of such pending and
threatened lawsuits will have a material adverse effect on the
Corporation's financial position. At the present time, management is
not in a position to determine whether any pending or threatened
litigation will have a material adverse effect on the Corporation's
results of operation in any future reporting period.
Item 2. Changes in Securities
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of shareholders of F.N.B. Corporation was held May
6, 2002. Proxies were solicited pursuant to Section 14(a) of the
Securities and Exchange Act of 1934 and there was no solicitation in
opposition to the Corporation's solicitations.
All of the Corporation's nominees for directors as listed in the proxy
statement were elected with the following vote:
Votes Votes
"For" Withheld
------------ -------------
G. Scott Baton 27,855,658 318,810
Alan C. Bomstein 27,852,696 321,771
James S. Lindsay 27,871,712 302,756
Edward J. Mace 27,876,214 298,254
Peter Mortensen 27,740,535 433,933
Harry F. Radcliffe 27,843,179 331,289
Gary L. Tice 27,783,840 390,627
Earl K. Wahl, Jr. 27,857,695 316,772
22
Item 5. Other Information
The Secretary of the Corporation must receive written notice of any
proposal submitted by a shareholder of the Corporation for
consideration at the Annual Meeting of Shareholders on or prior to the
date which is 120 days prior to the date on which the Corporation first
mailed its proxy materials for the prior year's Annual Meeting of
Shareholders. Accordingly, any shareholder proposal must be submitted
to the Corporation by November 25, 2002 to be considered at the 2003
Annual Meeting of Shareholders.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Employment Agreement between F.N.B. Corporation and
Thomas E. Fahey. (filed herewith).
15 Letter Re: Unaudited Interim Financial Information
99.1 Certification pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
(b) Reports on Form 8-K
A report on Form 8-K, dated July 24, 2002, was filed by the
Corporation. The Form 8-K included Audited Consolidated
Financial Statements for the three years ended December 31,
2001, 2000, and 1999 with Report of Independent Auditors and
Management's Discussion and Analysis giving effect to the
merger of the Corporation and Promistar Financial Corporation
on a pooling-of- interests basis.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
F.N.B. Corporation
------------------------------------------
(Registrant)
Dated: August 14, 2002 /s/Gary L. Tice
----------------------- -------------------------------------------
Gary L. Tice
President and Chief Executive Officer
(Principal Executive Officer)
Dated: August 14, 2002 /s/Thomas E. Fahey
----------------------- -------------------------------------------
Thomas E. Fahey
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
24