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 September 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
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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
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(Address of principal executive offices) (Zip Code)
(239) 262-7600
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(Registrant's telephone number, including area code)
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(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 October 31,2002
----- ------------------------------
Common Stock, $0.01 Par Value 43,718,671 Shares
- ----------------------------- -----------------
F.N.B. CORPORATION
FORM 10-Q
September 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 12
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosure of Market Risk 22
Item 4. Controls and Procedures 22
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 2. Changes in Securities 23
Item 3. Defaults Upon Senior Securities 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 24
Signatures 25
Certifications 26
F.N.B. CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Dollars in thousands, except par values
Unaudited
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------ ------------
ASSETS
Cash and due from banks $ 242,737 $ 246,781
Interest bearing deposits with banks 5,541 3,712
Federal funds sold 4,562 88,260
Mortgage loans held for sale 8,009 1,323
Securities available for sale 955,084 902,970
Securities held to maturity (fair
value of $44,595 and $51,770) 49,755 51,368
Loans, net of unearned income of $41,181
and $50,063 5,201,140 4,814,435
Allowance for loan losses (68,365) (65,059)
---------- ----------
NET LOANS 5,132,775 4,749,376
---------- ----------
Premises and equipment 166,041 149,518
Goodwill 81,486 40,479
Other assets 335,406 254,596
---------- ----------
TOTAL ASSETS $6,981,396 $6,488,383
========== ==========
LIABILITIES
Deposits:
Non-interest bearing $ 899,962 $ 798,960
Interest bearing 4,449,347 4,300,116
---------- ----------
TOTAL DEPOSITS 5,349,309 5,099,076
Other liabilities 105,803 98,722
Short-term borrowings 476,526 375,754
Long-term debt 466,108 342,424
---------- ----------
TOTAL LIABILITIES 6,397,746 5,915,976
---------- ----------
STOCKHOLDERS' EQUITY
Preferred stock - $0.01 par value
Authorized - 20,000,000 shares
Issued - 124,025 and 147,033 shares
Aggregate liquidation value - $3,101
and $3,676 1 1
Common stock - $0.01 par value
Authorized - 500,000,000 shares
Issued - 44,173,520 and 41,781,837 shares 442 418
Additional paid-in capital 517,179 444,549
Retained earnings 59,342 119,256
Accumulated other comprehensive income 18,353 9,845
Treasury stock - 398,190 and
63,178 shares at cost (11,667) (1,662)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 583,650 572,407
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $6,981,396 $6,488,383
========== ==========
Note: The Balance Sheet at December 31, 2001 has been derived from the audited
financial statements at that date.
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 NINE MONTHS ENDED
September 30, September 30,
------------------ ---------------------
2002 2001 2002 2001
--------- -------- -------- ----------
INTEREST INCOME
Loans, including fees $ 94,710 $ 96,944 $280,432 $293,057
Securities:
Taxable 10,136 11,818 30,332 34,409
Nontaxable 2,026 1,997 6,051 5,454
Dividends 580 603 1,688 2,149
Other 144 1,187 1,397 4,906
-------- -------- -------- --------
TOTAL INTEREST INCOME 107,596 112,549 319,900 339,975
-------- -------- -------- --------
INTEREST EXPENSE
Deposits 27,803 40,631 88,094 131,279
Short-term borrowings 2,593 3,305 8,310 11,158
Long-term debt 5,196 5,224 14,791 14,432
-------- -------- -------- --------
TOTAL INTEREST EXPENSE 35,592 49,160 111,195 156,869
-------- -------- -------- --------
NET INTEREST INCOME 72,004 63,389 208,705 183,106
Provision for loan losses 4,835 4,097 13,528 11,990
-------- -------- -------- --------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 67,169 59,292 195,177 171,116
-------- -------- -------- --------
NON-INTEREST INCOME
Insurance premiums, commissions
and fees 9,801 8,812 31,869 25,868
Service charges 12,178 9,860 34,463 27,224
Trust 2,323 2,396 7,062 7,133
Gain on sale of securities 1,001 90 1,641 1,758
Gain on sale of loans 1,336 1,404 3,691 4,671
Other 3,448 2,653 9,368 6,738
-------- -------- -------- --------
TOTAL NON-INTEREST INCOME 30,087 25,215 88,094 73,392
-------- -------- -------- --------
97,256 84,507 283,271 244,508
-------- -------- -------- --------
NON-INTEREST EXPENSES
Salaries and employee benefits 34,181 29,540 100,334 87,385
Net occupancy 4,470 4,267 13,267 12,374
Equipment 5,662 4,760 15,680 14,243
Merger and consolidation related 1,077 41,855 7,882
Other 17,926 16,434 53,314 53,554
-------- -------- -------- --------
TOTAL NON-INTEREST EXPENSES 62,239 56,078 224,450 175,438
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 35,017 28,429 58,821 69,070
Income taxes 10,886 9,039 19,624 21,550
-------- -------- -------- --------
NET INCOME $ 24,131 $ 19,390 $ 39,197 $ 47,520
======== ======== ======== ========
NET INCOME PER COMMON SHARE: *
Basic $.55 $.45 $.89 $1.13
==== ==== ==== =====
Diluted $.54 $.44 $.87 $1.11
==== ==== ==== =====
CASH DIVIDENDS PER COMMON SHARE* $.22 $.19 $.63 $ .52
==== ==== ==== =====
* 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
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
2002 2001
--------- ---------
OPERATING ACTIVITIES
Net income $ 39,197 $ 47,520
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 14,596 13,874
Provision for loan losses 13,528 11,990
Deferred taxes (11,255) (4,611)
Net gain on sale of securities (1,641) (1,758)
Net gain on sale of loans (3,691) (4,671)
Proceeds from sale of loans 15,477 37,529
Loans originated for sale (18,472) (21,392)
Net change in:
Interest receivable 813 1,745
Interest payable (2,976) (2,060)
Other, net (15,477) (35,415)
---------- ----------
Net cash flows from operating activities 30,099 42,751
---------- ----------
INVESTING ACTIVITIES
Net change in:
Interest bearing deposits with banks (1,829) (6,698)
Federal funds sold 115,458 61,328
Loans (289,659) (49,999)
Securities available for sale:
Purchases (387,300) (414,672)
Sales 213,366 140,240
Maturities 229,514 240,589
Securities held to maturity:
Purchases (6,018) (10,927)
Maturities 7,643 40,305
Increase in premises and equipment (27,705) (11,992)
Increase in intangibles (47,730) (15,830)
Net cash (paid) received for mergers and acquisitions (50,761) 20,738
--------- ---------
Net cash flows from investing activities (245,021) (6,918)
--------- ---------
FINANCING ACTIVITIES
Net change in:
Non-interest bearing deposits, savings and NOW 183,177 (108,328)
Time deposits (135,178) 6,027
Short-term borrowings 75,657 31,699
Increase in long-term debt 137,633 76,843
Decrease in long-term debt (13,949) (21,432)
Net acquisition of treasury stock (8,630) (227)
Cash dividends paid (27,832) (23,464)
--------- ---------
Net cash flows from financing activities 210,878 (38,882)
---------- ----------
NET DECREASE IN CASH AND DUE FROM BANKS (4,044) (3,049)
Cash and due from banks at beginning of period 246,781 207,940
--------- ---------
CASH AND DUE FROM BANKS AT END OF PERIOD $ 242,737 $ 204,891
========= =========
See accompanying Notes to Consolidated Financial Statements
4
F.N.B. CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 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. Per share amounts have been
adjusted for common stock dividends, including the 5 percent stock dividend
declared on May 6, 2002. 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
5
million and other miscellaneous merger and consolidation expenses totaled $2.4
million. As of September 30, 2002, $1.2 million in merger and consolidation
expenses remained to be paid. All involuntary separation costs were paid during
the first six months of 2002.
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 $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.
On August 23, 2002, the Corporation announced plans to consolidate its
community banking affiliate Metropolitan National Bank into First National
Bank of Pennsylvania. The Corporation anticipates incurring approximately
$550,000 in consolidation costs during the fourth quarter associated with the
transactions.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with current
year presentation. The reclassification had no impact on total assets,
liabilities, stockholders' equity, net income or cash flows.
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 be 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 be reviewed for impairment in accordance with FAS No. 144. The
Corporation adopted the new rules on accounting for goodwill and other
intangible assets in the first quarter of 2002. The Corporation has completed
its transition impairment test and concluded that goodwill is not impaired.
A reconciliation of previously reported net income and earnings per share to the
amounts adjusted for the exclusion of goodwill amortization net of the related
tax effect follows:
(In thousands, except per share amounts)
Three Nine
Months Months
Ended Ended
September 30, September 30, Year Ended December 31,
2001 2001 2001 2000 1999
--------- -------- ------- -------- --------
Net Income $ 19,390 $ 47,520 $52,985 $ 61,908 $ 61,145
Add: Goodwill
Amortization
Net of Tax 521 1,569 2,353 1,815 1,772
--------- --------- ------- -------- --------
Adjusted Net Income 19,911 49,089 55,338 63,723 62,917
========= ========= ======= ======== ========
6
Basic Earnings Per Common Share:
Net Income $ .45 $ 1.13 $ 1.25 $ 1.44 $ 1.42
Add: Goodwill Amortization
Net of Tax .01 .04 .06 .04 .04
-------- -------- -------- ------- ------
Adjusted Net Income .46 1.17 1.31 1.48 1.46
======== ======== ======== ======= ======
Diluted Earnings Per Common Share:
Net Income $ .44 $ 1.11 $ 1.23 $ 1.42 $ 1.39
Add: Goodwill Amortization
Net of Tax .01 .04 .05 .04 .04
------ -------- ------- ------- ------
Adjusted Net Income .45 1.15 1.28 1.46 1.43
====== ======== ======= ======= ======
The FASB's Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets (FAS 144),
became effective for the Corporation on January 1, 2002. The adoption of this
standard had no impact on the Corporation's results of operations or financial
condition.
In October 2002, the FASB issued FASB Statement No. 147, "Acquisitions of
Certain Financial Institutions" (FAS 147). The provisions of Statement 147 are
effective October 1, 2002. FAS 147 provides guidance on the accounting for the
acquisition of a financial institution, which had previously been addressed in
FASB Statement No. 72, "Accounting for Certain Acquisitions of Banking or Thrift
Institutions." In addition, FAS 147 amends the scope of FAS 144 to include
long-term customer-relationship intangible assets of financial institutions. The
Corporation is evaluating the impact of the adoption of FAS 147. The adoption of
this standard is not anticipated to have a material impact on the Corporation's
results of operations or financial condition.
EARNINGS PER SHARE
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 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.
7
The following tables set forth the computation of basic and diluted
earnings per share (in thousands, except per share data):
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Basic
Net income $ 24,131 $ 19,390 $ 39,197 $ 47,520
Less: Preferred stock
dividends declared (60) (72) (191) (225)
---------- ---------- ---------- ----------
Earnings applicable to
basic earnings per share $ 24,071 $ 19,318 $ 39,006 $ 47,295
========== ========== ========== ==========
Average common shares
outstanding 43,804,464 42,599,903 43,867,205 41,755,054
========== ========== ========== ==========
Earnings per share $.55 $.45 $.89 $1.13
==== ==== ==== =====
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
2002 2001 2002 2001
---------- ---------- --------- -----------
Diluted
Earnings applicable to
diluted earnings per share $ 24,131 $ 19,390 $ 39,197 $ 47,520
========== ========== ========== ==========
Average common shares
outstanding 43,804,464 42,599,903 43,867,205 41,755,054
Series A convertible
preferred stock 16,260 19,518 16,260 19,518
Series B convertible
preferred stock 299,046 371,330 321,070 388,688
Net effect of dilutive stock
options and stock warrants
based on the treasury stock
method 638,988 728,219 714,195 631,971
---------- ---------- ---------- ----------
44,758,758 43,718,970 44,918,730 42,795,231
========== ========== ========== ==========
Earnings per share $.54 $.44 $.87 $1.11
==== ==== ==== =====
CASH FLOW INFORMATION
Following is a summary of supplemental cash flow information (in
thousands):
Nine Months Ended
September 30
2002 2001
-------- --------
Cash paid for:
Interest $114,171 $158,929
Income taxes 15,290 20,474
Noncash Investing and Financing Activities:
Acquisition of real estate in settlement of loans 2,309 2,538
Loans granted in the sale of other real estate 631 2,864
8
COMPREHENSIVE INCOME
The components of comprehensive income, net of related tax, are as
follows (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- ---------------------
2002 2001 2002 2001
--------- -------- -------- --------
Net income $ 24,131 $ 19,390 $ 39,197 $47,520
Other comprehensive income:
Unrealized gains on securities:
Unrealized holding gains
(losses) arising
during the period 5,777 10,695 10,739 16,078
Less: reclassification
adjustment for gains
included in net income (991) (285) (2,231) (1,136)
--------- -------- -------- -------
Other comprehensive income 4,786 10,410 8,508 14,942
--------- -------- -------- -------
Comprehensive income $ 28,917 $ 29,800 $ 47,705 $62,462
========= ======== ======== =======
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.
9
At or for the nine months Community Insurance Finance All
ended September 30, 2002 Banks Agencies Company Other Consolidated
---------- ---------- ---------- --------- ------------
Interest income $ 300,612 $ 131 $ 20,748 $(1,591) $ 319,900
Interest expense 104,486 78 5,012 1,619 111,195
Provision for loan losses 9,596 3,932 13,528
Non-interest income 48,102 21,908 1,306 16,778 88,094
Non-interest expense 135,712 16,690 9,252 18,219 179,873
Merger and consolidation
related expenses 22,250 126 19,479 41,855
Intangible amortization 2,409 151 93 69 2,722
Income tax expense (benefit) 23,792 2,035 1,323 (7,526) 19,624
Net income (loss) 50,470 3,084 2,315 (16,672) 39,197
Core operating earnings 66,365 3,084 2,397 (1,917) 69,929
Total assets 6,787,065 31,242 142,061 21,028 6,981,396
Goodwill 67,710 12,060 1,716 81,486
At or for the nine months Community Insurance Finance All
ended September 30, 2001 Banks Agencies Company Other Consolidated
--------- ---------- ---------- --------- ------------
Interest income $ 320,205 $ 155 $ 20,713 $ (1,098) $ 339,975
Interest expense 150,052 207 6,485 125 156,869
Provision for loan losses 8,657 3,333 11,990
Non-interest income 44,946 19,993 1,314 7,139 73,392
Non-interest expense 134,536 15,441 8,960 5,234 164,171
Merger and consolidation
related expenses 4,374 3,508 7,882
Intangible amortization 2,128 586 95 576 3,385
Income tax expense (credit) 20,419 1,634 1,173 (1,676) 21,550
Net income (loss) 44,985 2,280 1,981 (1,726) 47,520
Core operating earnings 49,486 2,280 1,981 1,655 55,402
Total assets 6,241,360 29,146 142,691 53,724 6,466,921
Goodwill 21,224 12,190 1,840 35,254
* For a description and reconciliation of core operating earnings refer to
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
10
At or for the three months Community Insurance Finance All
ended September 30, 2002 Banks Agencies Company Other Consolidated
---------- ---------- ---------- --------- ------------
Interest income $ 101,231 $ 75 $ 6,939 $ (649) $ 107,596
Interest expense 33,707 23 1,635 227 35,592
Provision for loan losses 3,581 1,254 4,835
Non-interest income 17,096 6,549 405 6,037 30,087
Non-interest expense 46,463 5,498 3,051 6,274 61,286
Intangible amortization 821 78 31 23 953
Income tax expense (benefit) 10,626 425 490 (655) 10,886
Net income (loss) 23,130 599 882 (480) 24,131
Core operating earnings 23,130 599 882 (480) 24,131
Total assets 6,787,065 31,242 142,061 21,028 6,981,396
Goodwill 67,710 12,060 1,716 81,486
At or for the three months Community Insurance Finance All
ended September 30, 2001 Banks Agencies Company Other Consolidated
---------- ---------- ---------- --------- ------------
Interest income $ 105,755 $ 56 $ 6,842 $ (104) $ 112,549
Interest expense 46,928 60 1,963 209 49,160
Provision for loan losses 2,985 1,112 4,097
Non-interest income 16,024 6,588 417 2,186 25,215
Non-interest expense 43,546 5,260 3,012 2,007 53,825
Merger and consolidation
related expenses 1,428 (351) 1,077
Intangible amortization 760 193 31 192 1,176
Income tax expense 8,435 502 418 (316) 9,039
Net income (loss) 17,697 629 723 341 19,390
Core operating earnings 17,715 629 723 1,176 20,243
Total assets 6,241,360 29,146 142,691 53,724 6,466,921
Goodwill 21,224 12,190 1,840 35,254
* For a description and reconciliation of core operating earnings refer to
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
11
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 September 30, 2002 and 2001, and the related
consolidated statements of income for the three-month and nine-month periods
ended September 30, 2002 and 2001, and the consolidated statements of cash flows
for the nine-month periods ended September 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 auditing 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
November 11, 2002
12
PART I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
FINANCIAL INFORMATION SUMMARY
Net income was $39.2 million for the first nine months of 2002 compared to
net income of $47.5 million for the first nine months of 2001. Diluted earnings
per share were $.87 and $1.11 for those same periods, respectively. Core
operating earnings for the first nine months of 2002 increased to $69.9 million
from $55.4 million for the first nine months of 2001. Basic core operating
earnings per share were $1.59 and $1.32 for the nine months ended September 30,
2002 and 2001, respectively, while diluted core operating earnings per share
were $1.56 and $1.29 for those same periods. Core operating earnings consist of
net income adjusted for non-recurring items.
The following consists of a reconciliation of net income to core
operating earnings (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Net income $ 24,131 $ 19,390 $ 39,197 $ 47,520
Merger and consolidation
related expenses, net of
income taxes 853 30,212 5,425
Other non-recurring items,
net of income taxes 520 2,457
---------- ---------- ---------- ----------
Core operating earnings $ 24,131 $ 20,243 $ 69,929 $ 55,402
========== ========== ========== ==========
Highlights for the first nine months of 2002 include:
o A return on average assets of .78% and a return on average equity
of 9.12%, both based on net income.
o A return on average assets of 1.39% and a return on average
equity of 16.32%, both based on core operating earnings.
o An increase of 21.9% or $13.2 million in fee income, which
consists of service charges, insurance premiums, commissions and
trust income.
o A 3.2% increase in average net interest earning assets and an
increase in the net interest margin to 4.71% compared to 4.39%
for the nine months ended September 30, 2001.
o Continued strong asset quality as non-performing assets as a
percentage of total assets was .48%.
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.
o Completion of affiliation with Blackwood Insurance Agency on
October 1, 2002.
13
FIRST NINE MONTHS OF 2002 AS COMPARED TO FIRST NINE 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):
Nine Months Ended September 2002 2001
----------------------------- ----------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
---------- -------- ------ ---------- -------- ------
Assets
Interest earning assets:
Interest bearing deposits
with banks $ 5,869 $ 80 1.82% $ 6,134 $ 191 4.15%
Federal funds sold 98,509 1,317 1.78 139,407 4,715 4.51
Securities:
Taxable 741,533 31,721 5.72 784,534 36,120 6.16
Non-taxable (1) 194,123 9,526 6.54 167,242 8,796 7.01
Loans (1) (2) 5,005,771 281,677 7.52 4,630,644 295,005 8.52
---------- --------- ----------- --------
Total interest
earning assets 6,045,805 324,321 7.17 5,727,961 344,827 8.05
---------- --------- ---------- --------
Cash and due from banks 194,917 175,985
Allowance for loan losses (68,142) (57,823)
Premises and equipment 156,791 140,607
Other assets 392,404 247,391
---------- ----------
$6,721,775 $6,234,121
========== ==========
Liabilities
Interest bearing liabilities:
Deposits:
Interest bearing demand $1,036,512 $ 6,843 0.88 $ 823,978 $ 11,149 1.81
Savings 1,084,013 12,264 1.51 1,041,831 19,001 2.44
Other time 2,295,913 68,987 4.02 2,356,564 101,129 5.74
Short-term borrowings 402,810 8,310 2.76 334,293 11,158 4.46
Long-term debt 357,997 14,791 5.51 329,499 14,432 5.84
---------- -------- ---------- --------
Total interest
bearing liabilities 5,177,245 111,195 2.87 4,886,165 156,869 4.29
---------- --------- ---------- --------
Non-interest bearing,
demand deposits 867,152 727,670
Other liabilities 104,609 95,043
---------- ----------
6,149,006 5,708,878
---------- ----------
Stockholders' equity 572,769 525,243
---------- ----------
$6,721,775 $6,234,121
========== ==========
Net interest earning assets $ 868,560 $ 841,796
========== ==========
Net interest income $ 213,126 $187,958
========= ========
Net interest spread 4.30% 3.76%
===== =====
Net interest margin (3) 4.71% 4.39%
===== =====
(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.
14
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 nine months ended September 30, 2002, net interest income, on
a fully taxable equivalent basis, totaled $213.1 million, as compared to $187.9
million for the nine months ended September 30, 2001. Net interest income
consisted of interest income of $324.3 million and interest expense of $111.2
million for the first nine months of 2002 compared to $344.8 million and $156.9
million for each, respectively, for the first nine months of 2001. The yield on
interest earning assets decreased by 88 basis points and the rate paid on
interest bearing liabilities decreased by 142 basis points. Net interest margin
increased from 4.39% at September 30, 2001 to 4.71% at September 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 nine months ended
September 30, 2002 as compared to the nine months ended September 30, 2001 (in
thousands):
Volume Rate Net
------- ------- -------
Interest Income
Interest bearing deposits with banks $ (8) $ (103) $ (111)
Federal funds sold (1,109) (2,289) (3,398)
Securities:
Taxable (1,910) (2,489) (4,399)
Non-taxable 1,252 (522) 730
Loans 29,694 (43,022) (13,328)
------- ------- -------
27,919 (48,425) (20,506)
------- ------- -------
Interest Expense
Deposits:
Interest bearing demand 4,341 (8,647) (4,306)
Savings 801 (7,538) (6,737)
Other time (2,542) (29,600) (32,142)
Short-term borrowings 3,312 (6,160) (2,848)
Long-term debt 1,036 (677) 359
------- -------- -------
6,948 (52,622) (45,674)
------- ------- -------
Net Change $20,971 $ 4,197 $25,168
======= ======= =======
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 4.5% from $295.0 million for the nine months ended September 30, 2001
to $281.7 million for the nine months ended September 30, 2002. This decrease
was solely related to yield as the Corporation experienced favorable loan
volumes as average loans increased by $375.1 million.
Interest expense on deposits decreased $43.2 million or 32.9% for the
nine months ended September 30, 2002, compared to the same period of 2001,
despite an increase in average interest bearing deposits of 4.6% over this same
period. The average balances in interest bearing demand deposits and savings
deposits increased by $212.5 million and $42.2 million, respectively, while the
average balance in time deposits decreased by $60.7 million. The Corporation
continued to successfully generate non-interest bearing deposits as such
deposits increased by $139.5 million or 19.2% from September 30, 2001 to
September 30, 2002, of which $57.7 million was through acquisitions. The average
balance
15
in short-term borrowings increased by $68.5 million as average repurchase
agreements increased $35.1 million and average short-term subordinated notes
increased $31.3 million during the third quarter of 2002. Interest expense on
long-term debt increased $1.6 million from September 30, 2001 as average
long-term debt increased $28.5 million.
The provision for loan losses charged to operations is determined based
upon 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 $13.5 million for the first nine months of 2002, as compared to $12.0
million for the first nine months of 2001. The allowance for loan losses as a
percentage of total loans was 1.31% at September 30, 2002 and 1.23% at September
30, 2001.
Non-interest income increased 20.0% from $73.4 million during the first
nine months of 2001 to $88.1 million during the first nine 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 $13.2 million or 21.9% compared with the first nine 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 $2.6 million as the
Corporation increased its investment in Bank Owned Life Insurance by $57.6
million.
Total non-interest expenses increased $49.0 million from $175.4 million
during the first nine months of 2001 to $224.4 million during the first nine
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 nine months of 2002,
compared to pre-tax merger and consolidation related and other non-recurring
charges of $11.9 million for the same period of 2001. Excluding these items,
non-interest expenses totaled $181.8 million for the first nine months of 2002
and $163.5 million for the first nine months of 2001. This increase of 11.2%
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 $19.6 million for the first nine
months of 2002 compared to expense of $21.5 million for the same period of 2001.
The effective tax rate of 33.4% for the nine months ended September 30, 2002 was
lower than the 35.0% federal statutory tax rate due to non-taxable interest and
dividend income.
THIRD QUARTER OF 2002 AS COMPARED TO THIRD QUARTER OF 2001
During the third quarter of 2002, net interest income increased $8.6
million, or 13.6%, over the third quarter of 2001. Total interest income
decreased $5.0 million, or 4.4%, primarily the result of a reduction in yield
from 7.94% in the third quarter of 2001 to 7.06% in the current quarter, offset
by $416.0 million increase in earning assets. Total interest expense decreased
$13.6 million, or 27.6%, primarily due to a decrease of $12.8 million in
interest expense on deposits, despite a $367.5 million increase in the average
balance of deposits.
The provision for loan losses totaled $4.8 million for the third
quarter of 2002, as compared to $4.1 million for the third quarter of 2001.
16
Non-interest income increased $4.9 million or 19.3% during the third
quarter of 2002 compared to the same period of 2001, primarily due to a $3.2
million or 15.4% 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. The
Corporation's insurance commissions from workmen's compensation, provided
specifically to employee leasing companies, have declined and are not expected
to return to historical levels as insurance carriers have discontinued providing
coverage to this market segment. Annual gross commissions from this line of
insurance totaled $2.5 million. Gains on the sale of loans and securities
increased $843,000 during this same period.
Non-interest expenses increased by $6.2 million or 11.0% during the
third quarter of 2002, compared to the third quarter of 2001. Salaries and
employee benefits increased by $4.6 million during the third quarter of 2002, as
compared to the third quarter of 2001, due to an increase in benefit costs,
relocation costs, business expansion, and the purchase of Central Bank Shares,
Inc.
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
September 30, 2002, outstanding advances were $447.1 million, or 6.4% of total
assets while FHLB availability was $1.2 billion, or 17.6% 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 $81.0 million, of which $15.0 million was used as
of September 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
17
embedded options in certain financial instruments. The Corporation utilizes an
asset/liability model to support its balance sheet strategies. The Corporation
uses gap 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 1.12 at September 30, 2002, as
compared to 1.04 at September 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 September 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 $ 5,441 $ 100 $ 5,541
Federal funds sold 4,562 4,562
Securities 79,490 236,870 $ 496,706 $ 191,773 1,004,839
Loans, net of unearned 1,539,350 1,039,927 2,119,564 510,308 5,209,149
---------- ---------- ---------- ---------- ----------
1,628,843 1,276,897 2,616,270 702,081 6,224,091
Other assets 757,305 757,305
---------- ---------- ---------- ---------- ----------
$1,628,843 $1,276,897 $2,616,270 $1,459,386 $6,981,396
========== ========== ========== ========== ==========
Interest Bearing Liabilities
Deposits:
Interest checking $ 188,265 $ 881,069 $1,069,334
Savings 421,372 716,609 1,137,981
Time deposits 460,317 $1,078,872 $ 698,176 4,667 2,242,032
Borrowings 373,729 60,367 84,644 423,894 942,634
---------- ---------- ---------- ---------- ----------
1,443,683 1,139,239 782,820 2,026,239 5,391,981
Other liabilities 1,005,765 1,005,765
Stockholders' equity 583,650 583,650
---------- ---------- ---------- ---------- ----------
$1,443,683 $1,139,239 $ 782,820 $3,615,654 $6,981,396
========== ========== ========== ========== ==========
Period Gap $ 185,160 $ 137,658 $1,833,450 $(1,324,158)
========== ========== ========== ==========
Cumulative Gap $ 185,160 $ 322,818 $2,156,268
========== ========== ==========
Cumulative Gap as a Percent
of Total Assets 2.65% 4.62% 30.89%
========== ========== =========
Rate Sensitive Assets/Rate
Sensitive Liabilities
(Cumulative) 1.13 1.12 1.64 1.15
========== ========= ========= ==========
18
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:
SEPTEMBER 30,
-------------------------
2002 2001
-------- --------
Net interest income change (12 months):
- 100 basis points (1.0)% (1.2)%
+ 200 basis points 1.3 % (0.7)%
Economic value of equity:
- 100 basis points (6.0)% (3.4)%
+ 200 basis points .1 % (1.0)%
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).
19
LOANS
Following is a summary of loans (dollars in thousands):
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------ ------------
Real estate:
Residential $1,949,516 $1,777,403
Commercial 1,367,109 1,282,944
Construction 302,449 227,868
Installment loans to individuals 824,291 774,932
Commercial, financial and agricultural 720,352 672,639
Lease financing 78,606 128,712
Unearned income (41,183) (50,063)
---------- ----------
$5,201,140 $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. 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. 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. Other real estate owned includes a $1.0
million property which has been subject to litigation. The Corporation
currently has an agreement of sale, with the sale anticipated to occur in the
fourth quarter of 2002. No additional loss is anticipated.
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.
Following is a summary of non-performing assets (dollars in thousands):
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------ ------------
Non-performing assets:
Non-accrual loans $23,119 $21,350
Restructured loans 5,188 5,578
------- -------
Total non-performing loans 28,307 26,928
Other real estate owned 5,236 4,375
------- -------
Total non-performing assets $33,543 $31,303
======= =======
Asset quality ratios:
Non-performing loans as percent of total loans .54% .56%
Non-performing assets as percent of total assets .48% .48%
20
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 Nine Months Ended
September 30, September 30,
------------------ -----------------
2002 2001 2002 2001
-------- -------- ------- --------
Balance at beginning of period $ 67,799 $ 56,950 $65,059 $57,124
Addition from acquisition 3,400 1,389 3,400
Charge-offs (5,410) (5,986) (15,677) (15,395)
Recoveries 1,141 877 4,066 2,219
-------- -------- ------- -------
Net charge-offs (4,269) (5,109) (11,611) (13,176)
Provision for loan losses 4,835 4,097 13,528 11,990
-------- -------- ------- --------
Balance at end of period $ 68,365 $ 59,338 $68,365 $59,338
======== ======== ======= =======
Allowance for loan losses to:
Total loans, net of unearned income 1.31% 1.23%
Non-performing loans 241.51% 199.73%
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
21
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 June 30, 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 September 30,
2002, that the Corporation and each of its banking subsidiaries are all "well
capitalized". Following are capital ratios as of September 30, 2002 for the
Corporation (dollars in thousands):
Well Capitalized Minimum Capital
Actual Requirements Requirements
----------------- ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
--------- ------- --------- ------- --------- -------
Tier 1 Capital (Leverage) $462,137 6.9% $334,772 5.0% $267,818 4.0%
(to average assets)
Total Capital 532,206 10.4% 511,629 10.0% 409,303 8.0%
(to risk-weighted assets)
Tier 1 Capital 462,137 9.0% 306,977 6.0% 204,651 4.0%
(to risk-weighted assets)
The Corporation and its banking subsidiaries are subject to various
regulatory capital requirements administered by federal 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.
ITEM 4. Controls and Procedures.
An evaluation was performed under the supervision and with the
participation of the Corporation's management, including the Chief Executive
Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of the
design and operation of the Corporation's disclosure controls and procedures.
Based on that evaluation, the Corporation's management, including the CEO and
CFO, concluded that the Corporation's disclosure controls and procedures were
effective as of September 30, 2002. There have been no significant changes in
the Corporation's internal controls over financial reporting since December 31,
2001.
22
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 October 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
Not applicable
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.
23
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
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
None
24
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: November 14, 2002 /s/Gary L. Tice
---------------------------------- -----------------------------------
Gary L. Tice
President and Chief Executive Officer
(Principal Executive Officer)
Dated: November 14, 2002 /s/Thomas E. Fahey
--------------------------------- -----------------------------------
Thomas E. Fahey
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
25
CERTIFICATIONS
I, Gary L. Tice, certify that:
1. I have reviewed this quarterly report on Form 10-Q of F.N.B. Corporation
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: November 14, 2002 /s/Gary L. Tice
-----------------------
Gary L. Tice
President and
Chief Executive Officer
26
I, Thomas E. Fahey, certify that:
1. I have reviewed this quarterly report on Form 10-Q of F.N.B. Corporation
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: November 14, 2002 /s/Thomas E. Fahey
-----------------------
Thomas E. Fahey
Executive Vice President and
Chief Financial Officer
27