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
OR
For the quarterly period ended June 30, 2003
[ ] 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
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____________________________
(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 31,2003
------- ---------------------------
Common Stock, $0.01 Par Value 46,197,706 Shares
F.N.B. CORPORATION AND SUBSIDIARIES
FORM 10-Q
June 30, 2003
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 13
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 14
Item 3. Quantitative and Qualitative Disclosure of Market Risk 24
Item 4. Controls and Procedures 24
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 2. Changes in Securities 25
Item 3. Defaults Upon Senior Securities 25
Item 4. Submission of Matters to a Vote of Security Holders 25
Item 5. Other Information 25
Item 6. Exhibits and Reports on Form 8-K 25
Signatures 27
Exhibits 28
-1-
F.N.B. CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Dollars in thousands, except par values and share data
Unaudited
June 30, December 31,
2003 2002
---------- -----------
ASSETS
Cash and due from banks $ 250,532 $ 246,802
Interest bearing deposits with banks 5,602 3,778
Federal funds sold 4,200 8,981
Mortgage loans held for sale 27,369 24,177
Securities available for sale 1,717,881 1,026,191
Securities held to maturity (fair
value of $46,269 and $50,517) 44,359 48,992
Loans, net of unearned income of $31,264
and $75,746 5,544,317 5,220,504
Allowance for loan losses (72,076) (68,406)
--------- ---------
NET LOANS 5,472,241 5,152,098
--------- ---------
Premises and equipment 205,397 163,709
Goodwill 190,304 88,425
Other assets 348,511 327,079
--------- ---------
TOTAL ASSETS $8,266,396 $7,090,232
========== ==========
LIABILITIES
Deposits:
Non-interest bearing $1,043,443 $ 924,090
Interest bearing 5,071,602 4,502,067
--------- ---------
TOTAL DEPOSITS 6,115,045 5,426,157
Other liabilities 90,892 99,052
Short-term borrowings 713,401 515,780
Long-term debt 591,183 450,647
Mandatorily redeemable capital securities
of subsidiary trusts 125,000 -
--------- ---------
TOTAL LIABILITIES 7,635,521 6,491,636
--------- ---------
STOCKHOLDERS' EQUITY
Preferred stock - $0.01 par value
Authorized - 20,000,000 shares
Issued - -0- and 118,025 shares
Aggregate liquidation value - $0.00 and $2,951 - 1
Common stock - $0.01 par value
Authorized - 500,000,000 shares
Issued - 46,354,886 and 44,162,460 shares 464 442
Additional paid-in capital 584,271 516,186
Retained earnings 27,040 73,363
Accumulated other comprehensive income 26,370 17,335
Treasury stock - 242,892 and 300,425 shares at cost (7,270) (8,731)
-------- ---------
TOTAL STOCKHOLDERS' EQUITY 630,875 598,596
-------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $8,266,396 $7,090,232
========== ==========
Note: The Balance Sheet at December 31, 2002 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 SIX MONTHS ENDED
June 30, June 30,
2003 2002 2003 2002
-------- -------- -------- --------
INTEREST INCOME
Loans, including fees $ 90,019 $ 93,103 $180,783 $185,722
Securities:
Taxable 16,290 10,195 27,502 20,196
Nontaxable 1,793 1,979 3,658 4,025
Dividends 784 459 1,419 1,108
Other 105 525 139 1,253
------- ------- ------- -------
TOTAL INTEREST INCOME 108,991 106,261 213,501 212,304
------- ------- ------- -------
INTEREST EXPENSE
Deposits 25,073 29,188 48,751 60,291
Short-term borrowings 2,639 3,188 4,712 5,717
Long-term debt 5,997 4,689 11,533 9,595
Capital securities of subsidiary trust 1,434 - 1,520 -
------ ------ ------- -------
TOTAL INTEREST EXPENSE 35,143 37,065 66,516 75,603
------ ------ ------- -------
NET INTEREST INCOME 73,848 69,196 146,985 136,701
Provision for loan losses 5,731 4,502 11,590 8,693
------ ------ ------- -------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 68,117 64,694 135,395 128,008
------ ------ ------- -------
NON-INTEREST INCOME
Service charges 13,499 11,663 25,923 22,285
Insurance premiums, commissions and fees 8,984 8,448 17,447 17,920
Securities commissions and fees 2,180 2,303 4,084 3,686
Trust 2,675 2,342 5,067 4,739
Gain on sale of securities 874 465 1,567 640
Gain on sale of mortgage loans 3,590 1,321 6,298 2,368
Other 3,558 3,521 7,010 6,369
------ ------ ------ ------
TOTAL NON-INTEREST INCOME 35,360 30,063 67,396 58,007
------- ------ ------- -------
103,477 94,757 202,791 186,015
------- ------ ------- -------
NON-INTEREST EXPENSES
Salaries and employee benefits 38,141 33,011 74,908 66,153
Net occupancy 5,397 4,403 10,448 8,797
Equipment 6,231 5,007 11,687 10,018
Merger - - 1,014 41,855
Other 18,074 17,560 35,324 35,388
------- ------- ------- -------
TOTAL NON-INTEREST EXPENSES 67,843 59,981 133,381 162,211
------- ------- ------- -------
INCOME BEFORE INCOME TAXES 35,634 34,776 69,410 23,804
Income taxes 10,978 10,827 21,426 8,738
------- ------- ------- ------
NET INCOME $ 24,656 $ 23,949 47,984 15,066
======== ======== ====== ======
NET INCOME PER COMMON SHARE: *
Basic $.54 $ .52 1.04 $ .33
==== ===== ==== =====
Diluted $.53 $ .51 1.02 $ .32
==== ===== ==== =====
CASH DIVIDENDS PER COMMON SHARE * $.24 $ .21 $ .45 $ .39
==== ===== ===== =====
* Prior period per share amounts have been restated to reflect the 5 percent
stock dividend declared on April 28, 2003.
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,
2003 2002
--------- ---------
OPERATING ACTIVITIES
Net income $ 47,984 $ 15,066
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 13,032 8,663
Provision for loan losses 11,590 8,693
Deferred taxes 3,398 (14,615)
Net gain on sale of securities (1,567) (640)
Net gain on sale of mortgage loans (6,298) (2,355)
Proceeds from sale of mortgage loans 294,750 95,496
Mortgage loans originated for sale (291,644) (94,678)
Net change in:
Interest receivable (1,357) 156
Interest payable (103) (2,996)
Other, net (24,414) 2,324
-------- --------
Net cash flows from operating activities 45,371 15,114
-------- --------
INVESTING ACTIVITIES
Net change in:
Interest bearing deposits with banks (1,824) 1,236
Federal funds sold 6,027 98,421
Loans (161,654) (177,454)
Securities available for sale:
Purchases (918,618) (177,649)
Sales 343,892 154,803
Maturities 354,217 166,808
Securities held to maturity:
Purchases - (6,141)
Maturities 4,633 5,528
Increase in premises and equipment (10,716) (15,713)
Increase in intangibles - (47,720)
Net cash paid for mergers and acquisitions (141,713) (50,761)
-------- ---------
Net cash flows from investing activities (525,756) (48,642)
-------- ---------
FINANCING ACTIVITIES
Net change in:
Non-interest bearing deposits, savings and NOW 334,969 148,248
Time deposits (127,582) (119,234)
Short-term borrowings 190,433 6,288
Increase in long-term debt 101,239 3,242
Decrease in long-term debt (115,203) (12,991)
Increase in capital securities of subsidiary trust 125,000 -
Net acquisition of treasury stock (3,997) (2,105)
Cash dividends paid (20,744) (18,157)
------- --------
Net cash flows from financing activities 484,115 5,291
------- --------
NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS 3,730 (28,237)
Cash and due from banks at beginning of period 246,802 246,781
-------- --------
CASH AND DUE FROM BANKS AT END OF PERIOD $ 250,532 $ 218,544
========= =========
See accompanying Notes to Consolidated Financial Statements
-4-
F.N.B. CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 2003
BUSINESS
F.N.B. Corporation (the Corporation) is a diversified financial
services company headquartered in Naples, Florida. The Corporation owns and
operates regional community banks, an insurance agency, a consumer finance
company and First National Trust Company. It has full service banking offices
located in Florida, Pennsylvania and Ohio and consumer finance operations in
Pennsylvania, Ohio and Tennessee.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the
Corporation and its subsidiaries. All significant inter-company balances and
transactions have been eliminated.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could materially differ from
those expressed or implied.
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.
COMMON STOCK DIVIDEND
On April 28, 2003, the Corporation declared a 5 percent common stock
dividend payable on May 31, 2003 to shareholders of record as of May 15, 2003.
As a result of the stock dividend, the Corporation issued 2,189,180 shares of
its common stock. The stock dividend increased additional paid in capital and
decreased retained earnings by $65.3 million. Prior period per share amounts
have been adjusted for common stock dividends, including the 5 percent stock
dividend declared on April 28, 2003.
MERGERS AND ACQUISITIONS
On March 31, 2003, the Corporation completed its business combination
with Charter Banking Corp. (Charter), a bank holding company headquartered in
Tampa, Florida, with assets of $795.6 million. In exchange for all of the
outstanding common stock of Charter, the Corporation paid $150.2 million.
The transaction, which was accounted for as a purchase, resulted in the
recognition of approximately $101.9 million in Goodwill and $1.1 million in Core
Deposit Intangibles. The transaction was funded primarily through the issuance
of $125.0 million of capital securities of a subsidiary trust and $25.2 million
from the Corporation's existing lines of credit with several major domestic
banks. Charter's banking subsidiary, Southern Exchange Bank, is expected to be
merged into the Corporation's existing subsidiary, First National Bank of
Florida, during the fourth quarter of 2003. The Corporation incurred and
paid merger related costs of $1.0 million in connection with its acquisition
of Charter. These costs were related to employment expenses.
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.
-5-
CAPITAL SECURITIES OF SUBSIDIARY TRUST
During the first quarter of 2003, $125.0 million of corporation-
obligated mandatorily redeemable capital securities (capital securities) of a
subsidiary trust holding solely junior subordinated debt securities of the
Corporation (debentures) were issued by F.N.B. Statutory Trust I
(Statutory Trust). The Corporation owns 100% of the common equity of the
Statutory Trust. The Statutory Trust was formed for the sole purpose of issuing
the capital securities and investing the proceeds from the sale of such capital
securities in the debentures. The debentures held by the Statutory Trust are
its sole assets. Distributions on the capital securities issued by the
Statutory Trust are payable quarterly at a rate per annum equal to the interest
rate being earned on the debentures held by the Statutory Trust and are recorded
as interest expense by the Corporation. The capital securities are subject to
mandatory redemption, in whole or in part, upon repayment of the debentures.
The capital securities bear interest at a floating rate per annum equal to the
3-month LIBOR plus 325 basis points. The rate in effect at June 30, 2003 was
4.35%. The Corporation has entered into agreements which, taken collectively,
fully and unconditionally guarantee the capital securities subject to the terms
of each of the guarantees.
The debentures held by the Statutory Trust qualify as Tier 1 capital
under Federal Reserve Board guidelines and are first redeemable, in whole or in
part, by the Corporation on or after March 31, 2008.
PREFERRED STOCK REDEMPTION
The Corporation completed the planned redemption of its Preferred
Series A and Preferred Series B stock during the second quarter of 2003. In
connection with the redemption, the Corporation issued shares of its common
stock out of treasury stock for the remaining outstanding preferred stock.
The Corporation issued 15,882 and 264,568 shares of its common stock for the
remaining 19,174 and 98,851 shares of Preferred Series A and Preferred Series B,
respectively.
NEW ACCOUNTING STANDARDS
FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others" was issued in November 2002. Interpretation 45 requires certain
guarantees to be recorded at fair value and applies to contracts or
indemnification agreements that contingently require the guarantor to make
payments to the guaranteed party based on changes in an underlying that is
related to an asset, liability, or an equity security of the guaranteed
party. In connection with the adoption of Interpretation 45, the Corporation
began recording a liability and an offsetting asset for the fair value of any
standby letters of credit it issues. The impact of the adoption of this new
accounting standard was not material to the financial condition or results of
operations of the Corporation.
Statement of Financial Accounting Standards (FAS) No. 148, "Accounting
for Stock-Based Compensation - Transition and Disclosure" was issued in
December 2002. It provides alternative methods of accounting for stock-based
employee compensation. In addition, it amends disclosure requirements in both
annual and interim financial statements about the method of accounting for
stock-based compensation and the effect of the method used on reported results.
The Corporation continues to account for its stock-based compensation plans
under Opinion 25. Therefore, FAS 148 is not expected to have a material impact
on the Corporation's financial results.
-6-
FASB Interpretation No. 46, "Consolidation of Variable Interest Entities,
an Interpretation of ARB No. 51" was issued in January 2003. Interpretation 46
addresses consolidation by business enterprises of variable interest entities
which have certain characteristics. Interpretation 46 applies immediately to
variable interest entities created after January 31, 2003. It applies in
the first fiscal year or interim period beginning after June 15, 2003, to
variable interest entities in which an enterprise holds a variable interest
that is acquired before February 1, 2003. The Corporation has limited
partnership investments in affordable housing projects, for which it provides
funding as a limited partner and receives tax credit for any losses incurred by
the projects based on its partnership share. At June 30, 2003, the Corporation
had recorded investments in other assets on its balance sheet of approximately
$1.8 million associated with these investments. The Corporation currently
adjusts the carrying value of these investments for any losses incurred by the
limited partnership through earnings. While these entities may be considered
variable interest entities, the Corporation's interest in these entities were
acquired prior to February 1, 2003. The Corporation is completing its analysis
to determine whether these entities should be consolidated.
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. The following tables set forth
the computation of basic and diluted earnings per share (dollars in thousands,
except per share data):
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
---------- --------- --------- ----------
Basic
Net income $ 24,656 $ 23,949 $ 47,984 $ 15,066
Less: Preferred stock
dividends declared (8) (64) (62) (131)
--------- -------- -------- -------
Earnings applicable to
basic earnings per share $ 24,648 $ 23,885 $ 47,922 $ 14,935
========== ========= ========= =========
Average common shares outstanding 46,067,008 46,146,923 46,052,374 46,060,053
========== ========== ========== ==========
Earnings per share $.54 $ .52 $ 1.04 $ .32
==== ===== ====== =====
-7-
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
--------- --------- ---------- ---------
Diluted
Earnings applicable to
diluted earnings per share $ 24,656 $ 23,949 $ 47,984 $ 15,066
======== ========= ======== ========
Average common shares
outstanding 46,067,008 46,146,923 46,052,374 46,060,053
Series A convertible
preferred stock 15,735 17,250 15,735 17,250
Series B convertible
preferred stock 2,206 337,441 127,625 348,877
Net effect of dilutive stock
options and stock warrants
based on the treasury stock
method 802,811 788,238 692,554 738,095
---------- ---------- ---------- ----------
46,887,760 47,289,852 46,888,288 47,164,275
========== ========== ========== ==========
Earnings per share $.53 $.51 $ 1.02 $ .32
==== ==== ====== =====
STOCK-BASED COMPENSATION
In accordance with FAS 148, the following table shows pro-forma net
income and earnings per share assuming stock options had been expensed based
on the fair value of the options granted along with significant assumptions
used in the Black-Scholes option pricing model (dollars in thousands,
except per share data).
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
-------- -------- -------- ----------
Net income (as reported) $ 24,656 $ 23,949 $ 47,984 $ 15,066
Compensation expense, net of tax (505) (511) (1,010) (1,013)
------- ------- ------- -------
Pro forma net income 24,151 23,438 46,974 14,053
Earnings per share:
Basic .54 .52 1.04 .33
Basic pro forma .52 .51 1.02 .30
Diluted .53 .51 1.02 .32
Diluted pro forma .52 .50 1.00 .30
Assumptions
Risk-free interest rate 2.93% 3.92% 2.93% 3.92%
Dividend yield 2.95% 3.20% 2.95% 3.20%
Expected stock price volatility .21% .17% .21% .17%
Expected life (years) 5.00 5.00 5.00 5.00
Fair value of options granted $4.30 $4.56 $4.30 $4.56
-8-
CASH FLOW INFORMATION
Following is a summary of supplemental cash flow information
(in thousands):
Six Months Ended
June 30,
2003 2002
-------- --------
Cash paid for:
Interest $ 66,619 $ 78,599
Income taxes 8,981 5,147
Noncash Investing and Financing Activities:
Acquisition of real estate in settlement of loans 944 2,283
Loans granted in the sale of other real estate 10 589
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,
2003 2002 2003 2002
--------- -------- -------- ---------
Net income $ 24,656 $ 23,949 $ 47,984 $ 15,066
Other comprehensive income:
Unrealized gains on securities:
Unrealized holding gains
arising during the period 12,134 7,957 10,819 4,386
Less: reclassification
adjustment for gains
included in net income (707) (181) (1,784) (664)
------- ------- ------- -------
Other comprehensive income 11,427 7,776 9,035 3,722
------- ------- ------- -------
Comprehensive income $ 36,083 $ 31,725 $ 57,019 $18,788
======== ======== ======== =======
BUSINESS SEGMENTS
The Corporation operates in four reportable segments: community banks,
trust company, 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 trust
company provides a broad range of personal and corporate fiduciary services
including the administration of decedent and trust estates. 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 with approximately 15 percent of its volume being derived
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 as well as select financial
service centers in Florida. 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 three months Community Banks Trust Insurance Finance All
ended June 30, 2003 Pennsylvania Florida Company Agencies Company Other Consolidated
------------ ------- ------- --------- ------- ------ ------------
Interest income $ 58,348 $ 43,961 $ 2 $ 80 $ 7,065 $ (465) $ 108,991
Interest expense 20,826 11,867 5 14 1,263 1,168 35,143
Provision for loan losses 2,519 1,828 - - 1,384 - 5,731
Non-interest income 11,576 8,772 4,962 7,561 442 2,047 35,360
Non-interest expense 27,840 23,376 4,440 6,034 3,167 2,986 67,843
Intangible amortization 492 252 3 81 - 20 848
Income tax expense (benefit) 5,445 5,199 192 640 604 (1,102) 10,978
Net income (loss) 13,294 10,463 327 953 1,089 (1,470) 24,656
Total assets 4,428,660 3,634,830 6,022 35,393 148,408 13,083 8,266,396
Total loans 3,126,894 2,324,439 - - 138,759 (45,775) 5,544,317
Goodwill 21,832 153,691 - 12,972 1,809 - 190,304
Total deposits 3,385,192 2,741,165 - - - (11,312) 6,115,045
At or for the three months Community Banks Trust Insurance Finance All
ended June 30, 2002 Pennsylvania Florida Company Agencies Company Other Consolidated
------------ ------- ------- --------- ------- ----- ------------
Interest income $ 62,182 $ 37,740 $ 2 $ 28 $ 6,939 $ (630) $ 106,261
Interest expense 22,425 12,036 - 27 1,662 915 37,065
Provision for loan losses 1,902 1,346 - - 1,254 - 4,502
Non-interest income 10,644 5,753 4,719 7,203 422 1,322 30,063
Non-interest expense 27,733 18,559 4,370 5,591 3,136 592 59,981
Intangible amortization 597 224 2 57 31 21 932
Income tax expense (benefit) 6,160 3,897 137 641 476 (484) 10,827
Net income (loss) 14,608 7,653 214 972 833 (331) 23,949
Total assets 4,024,493 2,561,733 5,055 32,058 143,113 (17,220) 6,749,232
Total loans 3,114,091 1,890,245 - - 134,864 (45,784) 5,093,416
Goodwill 15,970 51,812 - 14,182 1,747 - 83,711
Total deposits 3,302,673 2,041,174 - - - (13,523) 5,330,324
-10-
At or for the six months Community Banks Trust Insurance Finance All
ended June 30, 2003 Pennsylvania Florida Company Agencies Company Other Consolidated
------------ -------- ------- -------- ------- ------- ------------
Interest income $ 118,187 $ 81,989 $ 2 $ 135 $ 14,136 $ (948) $ 213,501
Interest expense 41,437 21,816 9 30 2,709 515 66,516
Provision for loan losses 5,256 3,560 - - 2,774 - 11,590
Non-interest income 24,915 13,869 9,362 14,851 910 3,489 67,396
Non-interest expense 56,475 42,896 8,615 12,000 6,285 7,110 133,381
Intangible amortization 984 477 3 162 - 43 1,669
Merger expense - - - - - 1,014 1,014
Income tax expense (benefit) 11,967 9,026 280 1,194 1,188 (2,229) 21,426
Net income (loss) 27,967 18,560 460 1,761 2,093 (2,857) 47,984
Total assets 4,428,660 3,634,830 6,022 35,393 148,408 13,083 8,266,396
Total loans 3,126,894 2,324,439 - - 138,759 (45,775) 5,544,317
Goodwill 21,832 153,691 - 12,972 1,809 - 190,304
Total deposits 3,385,192 2,741,165 - - - (11,312) 6,115,045
At or for the six months Community Banks Trust Insurance Finance All
ended June 30, 2002 Pennsylvania Florida Company Agencies Company Other Consolidated
------------ ------- ------- --------- --------- -------- ------------
Interest income $ 125,277 $ 74,104 $ 2 $ 56 $ 13,809 $ (944) $ 212,304
Interest expense 46,740 24,039 - 55 3,377 1,392 75,603
Provision for loan losses 3,404 2,611 - - 2,678 - 8,693
Non-interest income 19,812 11,194 8,559 15,359 901 2,182 58,007
Non-interest expense 72,802 40,285 8,421 11,265 6,389 23,049 162,211
Intangible amortization 1,206 382 3 73 62 43 1,769
Merger expense 18,226 4,024 680 - 126 18,799 41,855
Income tax expense (benefit) 7,154 6,012 81 1,610 833 (6,952) 8,738
Net income (loss) 14,989 12,351 59 2,485 1,433 (16,251) 15,066
Total assets 4,024,493 2,561,733 5,055 32,058 143,113 (17,220) 6,749,232
Total loans 3,114,091 1,890,245 - - 134,864 (45,784) 5,093,416
Goodwill 15,970 51,812 - 14,182 1,747 - 83,711
Total deposits 3,302,673 2,041,174 - - - (13,523) 5,330,324
-11-
SUBSEQUENT EVENTS
On July 10, 2003, the Corporation announced a plan to divide the existing
Corporation into two separate public companies by spinning off the operations
known principally as First National Bank of Florida to existing shareholders
through a tax-free dividend. Under the plan, a new bank holding company will
be established with headquarters located in Naples, Florida. It is anticipated
that shareholders will receive one share of common stock in the newly formed
Florida holding company for each share they own in F.N.B. Corporation. The
newly formed holding company will own and operate First National Bank of
Florida, Roger Bouchard Insurance, Inc. and the Florida operations of the
First National Trust Company.
It is anticipated the remaining segments of the Corporation will continue
to operate as F.N.B. Corporation with headquarters being relocated to Hermitage,
Pennsylvania. The Corporation will retain and operate First National Bank of
Pennsylvania, Regency Finance Company, Gelvin, Jackson & Starr Inc. insurance
agency, and the Pennsylvania operations of the First National Trust Company.
The Corporation estimates it will incur a pre-tax restructuring charge of
approximately $30 million to $35 million during the third and fourth quarter of
2003 as a result of the reorganization. The restructuring charge will consist
primarily of early retirement and other employment related expenses, involuntary
separation costs associated with terminated employees, professional services
and write-down of impaired assets. In addition, the Corporation expects to
incur a prepayment penalty on refinancing its Federal Home Loan Debt of
approximately $20.7 million during the third quarter of 2003. The plan,
pending favorable ruling from the Internal Revenue Service and all other
necessary regulatory approval, is expected to be consummated in January 2004.
On July 1, 2003, the Corporation completed its business combination
with Lupfer-Frakes Insurance, (Lupfer) an independent insurance agency located
in Central Florida. The Corporation paid cash for in exchange for all of the
outstanding common stock of Lupfer. The transaction, which was accounted for
as a purchase, resulted in the recognition of approximately $7.7 million in
goodwill and $1.3 million in customer and renewal lists.
-12-
Independent Accountants' Review Report
The Board of Directors
F.N.B. Corporation
We have reviewed the accompanying consolidated balance sheet of F.N.B.
Corporation and subsidiaries (Company) as of June 30, 2003, the consolidated
statements of income for the three-month and six-month periods ended June 30,
2003 and 2002, and the consolidated statements of cash flows for the six-month
periods ended June 30, 2003 and 2002. 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, 2002, and the related
consolidated statements of income, shareholders' equity, and cash flows for the
year then ended (not presented herein) and in our report dated May 22, 2003,
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, 2002, 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, 2003
-13-
PART I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
FINANCIAL INFORMATION SUMMARY
Net income was $48.0 million for the first six months of 2003 compared
to net income of $15.1 million for the first six months of 2002. Diluted
earnings per share were $1.02 for the first six months of 2003 compared to
$.32 for the six months ended June 30, 2002. During the six months ended
June 30, 2003 and 2002, the Corporation incurred after-tax merger expenses of
approximately $700,000 and $30.2 million or $.02 and $.64 per diluted share,
respectively. Net income for the three months ended June 30, 2003 was
$24.7 million, or $.53 per diluted share, compared to $23.9 million, or $.51
per diluted share, for the three months ended June 30, 2002. Results of
operations for the second quarter of 2003 include Charter Banking Corp.
(Charter), which was acquired by the Corporation on March 31, 2003. Prior
period per share amounts have been adjusted for the 5 percent stock dividend
declared on April 28, 2003.
Highlights for the three and six months ended June 30, 2003 include:
Net income of $24.7 million or $.53 per diluted share for the three
months ended June 30, 2003.
A return on average assets of 1.20% and a return on average equity of
16.13% for the three months ended June 30, 2003.
Non-interest income as a percentage of total revenues grew to 32.4%
for the three months ended June 30, 2003.
An increase of 10.4% or $2.6 million over the three months ended
June 30, 2002, in fee income, which consists of service charges,
insurance premiums, commissions and trust revenues.
A 3.7% increase in average net interest earning assets over the six
months ended June 30, 2002.
Continued strong asset quality as non-performing assets as a percentage
of total assets was .47% as of June 30, 2003.
A decline in net interest margin from 4.69% at June 30, 2002 to 4.38%
at June 30, 2003.
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 2002 Annual Report on Form 10-K/A
filed with the Securities and Exchange Commission. The Corporation considers
its policies on the accounting for the allowance for loan losses, loans held
for sale and goodwill to be critical accounting policies. These policies
require the use of estimates, judgments 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.
-14-
FIRST SIX MONTHS OF 2003 AS COMPARED TO FIRST SIX MONTHS OF 2002:
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,
2003 2002
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
------------ --------- -------- -------- -------- -------
Assets
Interest earning assets:
Interest bearing deposits
with banks $ 4,429 $ 19 .87% $ 7,665 $ 77 2.03%
Federal funds sold 20,142 120 1.19 131,966 1,177 1.80
Securities:
Taxable 1,255,433 27,154 4.36 734,560 21,028 5.77
Non-taxable (1) 218,488 7,319 6.76 195,920 6,349 6.53
Loans (1) (2) 5,377,705 181,423 6.80 4,935,971 186,565 7.62
--------- -------- --------- --------
Total interest
earning assets 6,876,197 216,035 6.34 6,006,082 215,196 7.23
--------- -------- --------- --------
Cash and due from banks 198,438 196,662
Allowance for loan losses (70,991) (67,421)
Premises and equipment 182,935 154,338
Other assets 480,550 384,986
--------- ---------
$7,667,129 $6,674,647
========== ==========
Liabilities
Interest bearing liabilities:
Deposits:
Interest bearing demand $1,170,455 $ 4,355 .75 $1,023,549 $ 4,608 .91
Savings 1,302,734 7,614 1.18 1,062,197 7,838 1.49
Other time 2,335,023 36,782 3.18 2,317,730 47,845 4.16
Short-term borrowings 568,404 4,712 1.67 400,097 5,717 2.88
Long-term debt 537,995 11,533 4.32 339,783 9,595 5.69
Capital securities of
subsidiary trust 66,582 1,520 4.60
--------- ------- --------- -------
Total interest
bearing liabilities 5,981,193 66,516 2.24 5,143,356 75,603 2.97
--------- ------- --------- -------
Non-interest bearing,
demand deposits 972,233 861,571
Other liabilities 103,376 99,869
--------- ---------
7,056,802 6,104,796
--------- ---------
Stockholders' equity 610,327 569,851
--------- ---------
$7,667,129 $6,674,647
========== ==========
Net interest earning assets $ 895,004 $ 862,726
========= ==========
Net interest income $149,519 $ 139,593
======== =========
Net interest spread 4.10% 4.26%
==== ====
Net interest margin (3) 4.38% 4.69%
== ==== ====
(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.
-15-
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, 2003, net interest income, on a
fully taxable equivalent basis, totaled $149.5 million, as compared to $139.6
million for the six months ended June 30, 2002. Net interest income consisted
of interest income of $216.0 million and interest expense of $66.5 million for
the first six months of 2003 compared to $215.2 million and $75.6 million for
each, respectively, for the first six months of 2002. The yield on interest
earning assets decreased by 89 basis points and the rate paid on interest
bearing liabilities decreased by 72 basis points. Net interest margin declined
from 4.69% at June 30, 2002 to 4.38% at June 30, 2003. The decline in the
margin can be attributed to the acquisition of Charter, which reduced the
Corporation's margin for the six months ended June 30, 2003 by 7 basis points,
and the acceleration of prepayments and repricing of interest earning assets.
Consistent with the industry, the Corporation expects to continue to experience
modest margin compression throughout the remainder of 2003 as interest earning
assets reprice downward at a faster pace than interest bearing liabilities.
The impact of future rate changes on the Corporation's net interest income is
discussed further 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, 2003 as compared to the six months ended June 30, 2002
(in thousands):
Volume Rate Net
-------- ------- -------
Interest Income
Interest bearing deposits with banks $ (25) $ (33) $ (58)
Federal funds sold (756) (301) (1,057)
Securities:
Taxable 9,347 (3,221) 6,126
Non-taxable 743 227 970
Loans 25,393 (30,535) (5,142)
------ ------- ------
34,702 (33,863) 839
------ ------- ------
Interest Expense
Deposits:
Interest bearing demand 1,124 (1,377) (253)
Savings 2,757 (2,981) (224)
Other time 362 (11,425) (11,063)
Short-term borrowings 7,710 (8,715) (1,005)
Long-term debt 3,300 (1,362) 1,938
Capital securities 1,520 - 1,520
------ ------- -------
16,773 (25,860) (9,087)
------ ------- -------
Net Change $17,929 $ (8,003) $ 9,926
======= ======== =======
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 2.8% from $186.6 million for the six months ended June 30, 2002 to
$181.4 million for the six months ended June 30, 2003. This decrease was solely
related to yield as the Corporation's average loans increased by $441.7 million.
The yield on loans decreased by 82 basis points from 7.62% to 6.80%.
Interest expense on deposits decreased $11.5 million or 19.1% for the
six months ended June 30, 2003, compared to the same period of 2002, despite an
increase in average interest bearing deposits of 9.2% over this same period.
-16-
The average balances in interest bearing demand deposits and savings deposits
increased by $146.9 million and $240.5 million, respectively, while the
average balance in time deposits increased by $17.3 million. The Corporation
continued to successfully generate non-interest bearing deposits as the average
balance of such deposits increased by $110.7 million or 12.8% from June 30, 2002
to June 30, 2003. The average balance in short-term borrowings increased by
$168.3 million as average repurchase agreements, federal funds purchased and
short-term subordinated notes increased $53.6 million, $54.3 million and $21.8
million, respectively. Interest expense on long-term debt increased $1.9
million from June 30, 2002 as average long-term debt increased $198.2 million.
In addition, the Corporation incurred $1.5 million in expense on its capital
securities of subsidiary trust which were issued March 31, 2003.
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 $11.6 million for the first six months of 2003, as compared to $8.7 million
for the first six months of 2002. The allowance for loan losses as a percentage
of total loans was 1.30% at June 30, 2003 and 1.31% at December 31, 2002.
Non-interest income increased 16.2% to $67.4 million during the first
six months of 2003 from $58.0 million during the first six months of 2002. The
increase in non-interest income was primarily due to an increase in deposit fees
and service charges and gains on the sale of mortgage loans originated for sale.
Deposit fees and service charges increased 16.3% as compared to the same
period of 2002 due to deposit volume growth as well as fee increases. Service
charges for the six months ended June 30, 2003 include $1.5 million in fees from
signature based transactions on debit cards. A recent settlement between two
major debit card issuers and retailers will result in future reductions of these
fees beginning in the third quarter of 2003. Securities commissions and fees
increased 10.8% to $4.1 million as compared to $3.7 million during the first
six months of 2002. The Corporation recorded $6.3 million in gains on the sale
of mortgage loans, a $3.9 million increase over the $2.4 million recorded
during the same period of 2002. Income from insurance commissions and fees
declined 2.6%, reflecting the loss of commissions on the Professional Employee
Organization or employee leasing business.
Total non-interest expenses decreased $28.8 million from $162.2 million
during the first six months of 2002 to $133.4 million during the first six
months of 2003, a direct result of the Corporation recognizing pre-tax merger
expenses of $41.9 million and $1.0 million during the same periods. Salaries
and employee benefits were $74.9 million for the six months ended June 30, 2003,
a 13.2% increase as compared to the six months ended June 30, 2002. The
increase is due to annual employee salary increases, commissions paid to
mortgage loan originators, higher defined benefit retirement and employee
health care costs and the inclusion of Charter's results of operations from the
date of acquisition.
The Corporation's income tax expense was $21.4 million for the first
six months of 2003 compared to an income tax expense of $8.7 million for the
same period of 2002. The effective tax rate of 30.9% for the six months ended
June 30, 2003 was lower than the 35.0% federal statutory tax rate due to non-
taxable interest and dividend income.
SECOND QUARTER OF 2003 AS COMPARED TO SECOND QUARTER OF 2002
During the second quarter of 2003, net interest income increased $4.7
million, or 6.7%, over the second quarter of 2002. Total interest income
increased $2.7 million, or 2.6%. Total interest expense decreased $1.9 million,
or 5.2%, primarily due to a decrease of $4.1 million in interest expense on
deposits, despite an increase in the average balance of deposits.
-17-
The provision for loan losses totaled $5.7 million for the second
quarter of 2003, as compared to $4.5 million for the second quarter of 2002.
Non-interest income increased 17.6% during the second quarter of 2003
compared to the same period of 2002, primarily due to a $2.3 million increase
in the gain on sale of mortgage loans. Deposit fees and service charges
increased 15.7% to $13.5 million for the three months ended June 30, 2003 from
$11.7 million for the same period last year. Service charges for the second
quarter of 2003 include $715,000 in fees from signature based transactions on
debit cards.
Non-interest expenses increased by $7.9 million or 13.1% during the
second quarter of 2003, compared to the second quarter of 2002. Salaries and
employee benefits increased $5.1 million during the second quarter of 2003, as
compared to the second quarter of 2002, due to normal annual salary adjustments,
and the purchase of Charter.
The Corporation's income tax expense was $11.0 million for the second
quarter of 2003 compared to an income tax expense of $10.8 million for the same
period of 2002. The effective tax rate of 30.8% for the second quarter of 2003
was lower than the 35.0% federal statutory tax rate due to non-taxable interest
and dividend income.
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) and the Federal Reserve Bank. 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, 2003, outstanding advances
were $663.7 million, or 8.03% of total assets while FHLB availability was $1.1
billion, or 14.0% of total assets.
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 $98.0 million, of which $24.0 million was used as
of June 30, 2003. The Corporation also issues subordinated debt on a regular
basis and has 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 Corporation continued to expand its activities in originating
mortgage loans for resale in the secondary market as the decline in mortgage
interest rates resulted in an increase in origination volumes. Originations
of mortgage loans totaled $291.6 million for the first six months of 2003.
-18-
Core deposits grew $610.1 million during the first six months of 2003 providing
the primary source of financing for the Corporation's lending and investing
activities. Core deposits acquired through the acquisition of Charter totaled
$391.4 million. In addition to funds from the growth in core deposits, the
Corporation utilized long-term FHLB advances to finance the purchase of certain
investment securities.
The Corporation repurchases shares of its common stock for re-issuance
under various employee benefit plans and the Corporation's dividend reinvestment
plan. During the second quarter of 2003, the Corporation purchased treasury
shares totaling $12.2 million and received $7.7 million upon issuance. In
addition, the Corporation completed its plan to repurchase shares of its common
stock to be issued in connection with the redemption of its Series A and
Series B preferred stock during the second quarter of 2003. The Corporation
used its existing lines of credit with several major domestic banks to purchase
treasury shares totaling $8.1 million which were reissued for the redemption of
the preferred stock.
During the third quarter of 2003, the Corporation will refinance
approximately $220 million of its higher-cost, adjustable FHLB advances to
fixed-rate, fixed maturity advances at lower long-term rates. The advances
are scheduled to mature periodically through 2011 and have a weighted average
interest rate of 5.10% at June 30, 2003. These advances will be replaced with
FHLB advances maturing periodically through 2008 with a weighted average
interest rate of 3.62%. The refinancing, which will result in a pre-tax
prepayment penalty of approximately $20.7 million, will result in approximately
$3.3 million in annual savings.
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 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 ratio of rate sensitive assets to rate sensitive liabilities
repricing over a one year period was 1.21 at June 30, 2003, as compared to
1.11 at June 30, 2002. 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, 2003 (in thousands):
Within 4-12 1-5 Over
3 Months Months Years 5 years Total
-------- -------- ----------- ---------- -------
Interest Earning Assets
Interest bearing deposits
with banks $ 5,499 $ 103 $ 5,602
Federal funds sold 4,200 4,200
Securities 197,805 546,880 $ 778,400 $ 239,155 1,762,240
Loans, net of unearned 1,853,746 1,239,077 2,216,233 262,630 5,571,686
---------- ---------- ---------- ---------- ----------
2,061,250 1,786,060 2,994,633 501,785 7,343,728
Other assets 922,668 922,668
---------- ----------
$2,061,250 $1,786,060 $2,994,633 $1,424,453 $8,266,396
========== ========== ========== ========== ==========
-19-
Interest Bearing Liabilities
Deposits:
Interest checking $ 362,251 $ 934,249 $1,296,500
Savings 471,134 911,537 1,382,671
Time deposits 466,126 $1,078,026 $ 844,296 3,983 2,392,431
Borrowings 651,957 139,973 265,250 372,404 1,429,584
---------- ---------- ---------- ---------- ----------
1,951,468 1,217,999 1,109,546 2,222,173 6,501,186
Other liabilities 1,134,335 1,134,335
Stockholders' equity 630,875 630,875
---------- ---------- ---------- ---------- ----------
$1,951,468 $1,217,999 $1,109,546 $3,987,383 $8,266,396
========== ========== ========== ========== ==========
Period Gap $ 109,782 $ 568,061 $1,885,087 $(2,562,930)
========== ========= ========== ===========
Cumulative Gap $ 109,782 $ 677,843 $2,562,930
========== ========== ==========
Cumulative Gap as a Percent
of Earnings Assets 1.49% 9.23% 34.90%
==== ==== =====
Rate Sensitive Assets/Rate Sensitive
Liabilities (Cumulative) 1.06 1.21 1.60 1.13
==== ==== ==== ====
Net interest income simulations measure the exposure to short-term
earnings from changes in market rates of interest in a more rigorous and dynamic
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,
2003 2002
------- ------
Net interest income change (12 months):
- 100 bp shock vs. stable rate (4.9)% 0.3 %
+ 200 bp shock vs. stable rate 2.8 % 1.3 %
Economic value of equity:
- 100 bp shock vs. stable rate (13.1)% (3.9)%
+ 200 bp shock vs. stable rate 6.8 % 1.0 %
The preceding measures indicate that the ALCO has developed a more
asset-sensitive interest rate risk position due to the general expectation that
short-term market interest rates will rise. An asset-sensitive position means
that income should be higher if rates increase and lower if rates decline
versus income under stable rates. This position resulted mainly from the
emphasis of adjustable-rate loans and an increase in non-maturity deposits
(which are generally less rate-sensitive than other funding sources). In the
table above, the risk of declining rates has increased due to the limited
ability to lower certain deposit rates further and an increase in mortgage-
related assets.
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
-20-
liabilities and the expected life of non-maturity deposits. Because these
assumptions are inherently uncertain, actual results will differ from simulated
results. In addition, the preceding measures assumed no change in asset/
liability compositions. Thus, the measures do not reflect the effects
of refinancing the FHLB advances or other actions the ALCO may undertake in
response to such changes in market rates of interest.
Changes in the interest rate environment can cause significant
fluctuations in the market value of mortgage loans originated for resale in the
secondary market. The Corporation utilizes forward loan commitments on mortgage
loans to offset the risk of decreases in the market values of the loans as a
result of increases in interest rates. At June 30, 2003, the Corporation had
$21.1 million in forward sales commitments.
LOANS
Following is a summary of loans (in thousands):
June 30, December 31,
2003 2002
----------- ------------
Real estate:
Residential $2,083,353 $1,947,529
Commercial 1,641,193 1,465,903
Construction 323,204 287,560
Installment loans to individuals 829,449 910,868
Commercial, financial and agricultural 660,777 620,489
Lease financing 37,605 63,901
Unearned income (31,264) (75,746)
--------- ---------
$5,544,317 $5,220,504
========== ==========
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.
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.
-21-
Following is a summary of non-performing assets (dollars in thousands):
June 30, December 31,
2003 2002
--------- ------------
Non-performing assets:
Non-accrual loans $27,980 $22,294
Restructured loans 6,099 5,915
-------- -----------
Total non-performing loans 34,079 28,209
Other real estate owned 4,592 4,729
-------- -----------
Total non-performing assets $38,671 $32,938
======= =======
Asset quality ratios:
Non-performing loans as percent of total loans .61% .54%
Non-performing assets as percent of total assets .47% .46%
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,
2003 2002 2003 2002
------- ------- ------- -------
Balance at beginning of period $71,200 $66,281 $68,406 $65,059
Addition from acquisition 2,506 1,389
Charge-offs (5,861) (5,010) (12,202) (10,267)
Recoveries 1,006 2,026 1,776 2,925
------- ------- ------- -------
Net charge-offs (4,855) (2,984) (10,426) ( 7,342)
Provision for loan losses 5,731 4,502 11,590 8,693
------- ------- ------- -------
Balance at end of period $72,076 $67,799 $72,076 $67,799
======= ======= ======= =======
Allowance for loan losses to:
Total loans, net of unearned income 1.30% 1.33%
Non-performing loans 211.50% 249.72%
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CAPITAL RESOURCES AND REGULATORY MATTERS
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. Capital
management is a continuous process. The Corporation has an existing
registration statement for the Corporation's subordinated notes which are issued
through its finance company subsidiary, Regency Finance Company (Regency). The
net proceeds from the issuance of the subordinated notes are used to finance
Regency's lending and purchasing activities. In addition, 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 capital securities of a
subsidiary trust in one or more offerings.
Both the Corporation and its banking affiliates are subject to various
regulatory capital requirements administered by the federal banking agencies.
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, 2003, 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,
2003, that the Corporation and each of its banking subsidiaries are all "well
capitalized". Following are capital ratios as of June 30, 2003 for the
Corporation (dollars in thousands):
Well Capitalized Minimum Capital
Actual Requirements Requirements
Amount Ratio Amount Ratio Amount Ratio
-------- ------ -------- ----- -------- ------
Tier 1 Capital (Leverage) $518,501 6.5% $398,936 5.0% $319,148 4.0%
(to average assets)
Total Capital 593,434 10.3% 579,252 10.0% 463,402 8.0%
(to risk-weighted assets)
Tier 1 Capital 518,501 9.0% 347,551 6.0% 231,701 4.0%
(to risk-weighted assets)
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 and its banking subsidiaries' capital
amounts and classifications are also subject to qualitative judgments by the
regulators regarding components, risk weightings and other factors.
IMPORTANT NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-Q are "forward-looking" within the
meaning of the Private Securities Litigation Reform Act of 1995, which
statements generally can be identified by the use of forward-looking
terminology, such as "may," "will," "expect," "estimate," "anticipate," believe,
" target," "plan," "project," or "continue" or the negatives thereof or other
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variations thereon or similar terminology, and are made on the basis of
management's plans and current analyses of the Corporation, its business and the
industry as a whole. These forward-looking statements are subject to risks and
uncertainties, including, but not limited to, economic conditions, competition,
interest rate sensitivity and exposure to regulatory and legislative changes.
The above factors, in some cases, have affected, and in the future could affect,
the Corporation's financial performance and could cause actual results
to differ materially from those expressed or implied in such forward-looking
statements. The Corporation does not undertake to publicly update or revise it
forward-looking statements even if experience or future changes make it clear
that any projected results expressed or implied therein will not be realized.
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 June 30, 2003. There have been no significant changes in the
Corporation's internal controls over financial reporting since the date of the
evaluation.
PART II
Item 1. Legal Proceedings
The Corporation established a litigation reserve in 2001 by recording a pre-tax
charge of approximately $4.0 million to cover estimated legal expenses
associated with five cases filed against one of its subsidiary banks. The
plaintiffs alleged that a third-party independent administrator misappropriated
funds from their individual retirement accounts held by the subsidiary bank.
As of June 30, 2003, the Corporation has settled all of these asserted claims
at an aggregate cost to the Corporation of approximately $3.5 million. The
Corporation believes the remaining reserve will be sufficient for all costs
associated with the litigation, including legal costs, 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.
Other real estate owned includes a property which is subject to litigation.
Should the outcome be adverse, the value of the property will be impaired and
other costs may be increased. 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.
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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 April 28,
2003. 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 34,719,286 370,509
Alan C. Bomstein 34,684,101 405,694
David A. Straz, Jr. 34,737,720 352,075
William J. Strimbu 34,737,720 352,075
Archie O. Wallace, Esq. 34,722,319 367,476
R. Benjamin Wiley 34,724,834 364,961
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 19, 2003 to be
considered at the 2004 Annual Meeting of Shareholders.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
15 Letter Re: Unaudited Interim Financial Information
31 Certifications pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002.
32 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
The Corporation filed the following reports on Form 8-K during
the second quarter of 2003:
June 30, 2003 - The Corporation reported its issuance of a
press release announcing the signing of a definitive
agreement to acquire Lupfer-Frakes Insurance Agency.
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April 15, 2003 - The Corporation reported its issuance of a
press release announcing its financial results for the
quarter and year ended March 31, 2003.
April 1, 2003 - The Corporation reported its issuance of a
press release announcing that it had completed the
acquisition of Charter Banking Corp., the holding company
for Southern Exchange Bank based in Tampa, Florida.
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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, 2003 /s/Gary L. Tice
------------------------------------
Gary L. Tice
President and Chief Executive Officer
(Principal Executive Officer)
Dated: August 14, 2003 /s/Thomas E. Fahey
------------------------------------
Thomas E. Fahey
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
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