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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 March 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________to________
Commission file number 001-31940
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)
One F.N.B. Boulevard, Hermitage, PA 16148
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(724) 981-6000
- --------------------------------------------------------------------------------
(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
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X 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 April 30, 2004
----- -----------------------------
Common Stock, $0.01 Par Value 46,283,476 Shares
- ----------------------------- -----------------
F.N.B. CORPORATION
FORM 10-Q
March 31, 2004
INDEX
PAGE
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets 2
Consolidated Statements of Income 3
Consolidated Statements of Cash Flows 5
Consolidated Statement of Stockholders' Equity 6
Notes to Consolidated Financial Statements 7
Independent Accountants' Review Report 17
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 18
Item 3. Quantitative and Qualitative Disclosures About Market Risk 29
Item 4. Controls and Procedures 29
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 30
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities 30
Item 3. Defaults Upon Senior Securities 30
Item 4. Submission of Matters to a Vote of Security Holders 30
Item 5. Other Information 31
Item 6. Exhibits and Reports on Form 8-K 31
Signatures 32
1
F.N.B. CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DOLLARS IN THOUSANDS, EXCEPT PAR VALUES
MARCH 31, DECEMBER 31,
2004 2003
---------- ------------
UNAUDITED
----------
ASSETS
Cash and due from banks $ 90,889 $ 105,160
Interest bearing deposits with banks 440 1,152
Mortgage loans held for sale 2,865 1,435
Securities available for sale 983,941 878,667
Securities held to maturity (fair
value of $35,428 and $24,823) 34,242 24,030
Loans, net of unearned income of $29,720 and $31,646 3,240,065 3,259,197
Allowance for loan losses (46,227) (46,139)
---------- ----------
NET LOANS 3,193,838 3,213,058
---------- ----------
Premises and equipment 77,466 79,618
Goodwill 28,940 28,710
Other assets 222,815 225,344
Assets of discontinued operations -- 3,751,136
---------- ----------
TOTAL ASSETS $4,635,436 $8,308,310
========== ==========
LIABILITIES
Deposits:
Non-interest bearing $ 572,016 $ 592,795
Interest bearing 2,741,365 2,846,715
---------- ----------
TOTAL DEPOSITS 3,313,381 3,439,510
Other liabilities 65,162 58,096
Short-term borrowings 404,338 232,966
Long-term debt 602,511 584,808
Liabilities of discontinued operations -- 3,386,021
---------- ----------
TOTAL LIABILITIES 4,385,392 7,701,401
---------- ----------
STOCKHOLDERS' EQUITY
Common stock - $0.01 par value
Authorized - 500,000,000 shares
Issued - 46,354,632 and 46,354,673 shares 464 464
Additional paid-in capital 222,846 586,009
Retained earnings 15,096 11,532
Accumulated other comprehensive income 15,228 10,251
Deferred stock compensation (2,049) --
Treasury stock - 70,406 and 40,764 shares at cost (1,541) (1,347)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 250,044 606,909
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $4,635,436 $8,308,310
========== ==========
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
MARCH 31,
-----------------
2004 2003
------- -------
INTEREST INCOME
Loans, including fees $51,595 $57,780
Securities:
Taxable 9,495 7,267
Nontaxable 570 1,083
Dividends 314 413
Other 2 4
------- -------
TOTAL INTEREST INCOME 61,976 66,547
------- -------
INTEREST EXPENSE
Deposits 12,427 15,028
Short-term borrowings 1,111 1,541
Long-term debt 6,233 4,825
------- -------
TOTAL INTEREST EXPENSE 19,771 21,394
------- -------
NET INTEREST INCOME 42,205 45,153
Provision for loan losses 4,622 4,127
------- -------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 37,583 41,026
------- -------
NON-INTEREST INCOME
Service charges 8,056 8,425
Insurance commissions and fees 2,406 2,386
Securities commissions and fees 1,341 1,041
Trust 1,873 1,769
Gain on sale of securities 445 382
Gain on sale of loans 267 782
Gain on sale of branches 4,135 --
Other 2,246 2,147
------- -------
TOTAL NON-INTEREST INCOME 20,769 16,932
------- -------
58,352 57,958
------- -------
NON-INTEREST EXPENSE
Salaries and employee benefits 18,254 20,001
Net occupancy 2,714 2,909
Equipment 3,018 3,627
Other 10,625 10,752
------- -------
TOTAL NON-INTEREST EXPENSE 34,611 37,289
------- -------
INCOME BEFORE INCOME TAXES 23,741 20,669
Income taxes 7,519 6,060
------- -------
INCOME FROM CONTINUING OPERATIONS 16,222 14,609
Earnings from discontinued operations,
net of taxes of $4,388 -- 8,719
------- -------
NET INCOME $16,222 $23,328
======= =======
3
F.N.B. CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (CONTINUED)
DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA
UNAUDITED
THREE MONTHS ENDED
MARCH 31,
-------------------
2004 2003
-------- --------
NET INCOME PER COMMON SHARE:
Basic:
Continuing operations $ .35 $ .32
Discontinued operations -- .19
-------- --------
$ .35 $ .51
======== ========
Diluted:
Continuing operations $ .34 $ .31
Discontinued operations -- .19
-------- --------
$ .34 $ .50
======== ========
CASH DIVIDENDS PER COMMON SHARE $ .23 $ .21
======== ========
See accompanying Notes to Consolidated Financial Statements
4
F.N.B. CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
DOLLARS IN THOUSANDS
UNAUDITED
THREE MONTHS ENDED
----------------------
MARCH 31,
----------------------
2004 2003
--------- ---------
OPERATING ACTIVITIES
Net income from continuing operations $ 16,222 $ 14,609
Net income from discontinued operations -- 8,719
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 2,787 3,776
Provision for loan losses 4,622 4,127
Deferred taxes 1,952 2,221
Net gain on sale of securities (445) (382)
Net gain on sale of loans (267) (782)
Proceeds from sale of loans 27,018 38,255
Loans originated for sale (28,181) (32,057)
Net change in:
Interest receivable (3) (2,095)
Interest payable (6,066) (238)
Other, net 15,353 (33,760)
--------- ---------
Net cash flows from operating activities 32,992 2,393
--------- ---------
INVESTING ACTIVITIES
Net change in:
Interest bearing deposits with banks 712 (169)
Loans 14,567 47,986
Bank Owned Life Insurance (6,793) --
Securities available for sale:
Purchases (157,410) (275,957)
Sales 3,993 75,603
Maturities 58,147 70,806
Securities held to maturity:
Purchases (12,185) --
Maturities 1,955 678
Increase in premises and equipment (247) (853)
Cash paid in purchase business combinations,
net of cash acquired -- (150,200)
--------- ---------
Net cash flows from investing activities (97,261) (232,106)
--------- ---------
FINANCING ACTIVITIES
Net change in:
Non-interest bearing deposits, savings and NOW (101,293) 18,880
Time deposits (24,836) (18,323)
Short-term borrowings 171,372 63,569
Increase in long-term debt 21,582 157,999
Decrease in long-term debt (3,879) (9,918)
Purchase of treasury stock (9,000) (8,147)
Issuance of treasury stock 6,664 6,944
Cash dividends paid (10,612) (9,688)
--------- ---------
Net cash flows from financing activities 49,998 201,316
--------- ---------
NET (DECREASE) INCREASE IN CASH AND DUE FROM BANKS (14,271) (28,397)
Cash and due from banks at beginning of period 105,160 129,443
--------- ---------
CASH AND DUE FROM BANKS AT END OF PERIOD $ 90,889 $ 101,046
========= =========
See accompanying Notes to Consolidated Financial Statements
5
F.N.B. CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
DOLLARS IN THOUSANDS
UNAUDITED
Accumulated
Other
Compre- Additional Compre- Deferred
hensive Common Paid-In Retained hensive Stock Treasury
Income Stock Capital Earnings Income Compensation Stock
------- ------ ---------- -------- ------- ------------------ --------
Balance at December 31, 2003 $ 464 $ 586,009 $ 11,532 $10,251 $ (1,347)
Net income $16,222 16,222
Change in other comprehensive
income 6,874 6,874
-------
Comprehensive income $23,096
=======
Cash dividends declared -
$0.23 per share (10,612)
Purchase of common stock (9,000)
Issuance of common stock 55 (2,046) 8,806
Change in deferred stock
compensation $(2,049)
Spin-off of Florida operations (363,218) (1,897)
------ ---------- -------- ------- ------- --------
Balance at March 31, 2004 $ 464 $ 222,846 $ 15,096 $15,228 $(2,049) $ (1,541)
====== ========== ======== ======= ======= ========
See accompanying Notes to Consolidated Financial Statements
6
F.N.B. CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 2004
BUSINESS
F.N.B. Corporation (the Corporation) is a diversified financial services
company headquartered in Hermitage, Pennsylvania. The Corporation owns and
operates First National Bank of Pennsylvania, First National Trust Company,
First National Investment Services Company, F.N.B. Investment Advisors, Inc.,
First National Insurance Agency, Inc. and Regency Finance Company. It has full
service banking offices located in Pennsylvania and Ohio and consumer finance
operations in Pennsylvania, Ohio and Tennessee.
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts of the Corporation and its subsidiaries. The Corporation's consolidated
financial statements have historically included subsidiaries in which the
Corporation has a controlling financial interest. This requirement has been
applied to subsidiaries in which the Corporation has a majority voting interest.
Investments in companies in which the Corporation controls operating and
financing decisions (principally defined as owning a voting or economic interest
greater than 50%) are consolidated. In accordance with Financial Accounting
Standards Board Interpretation No. (FIN) 46, Consolidation of Variable Interest
Entities, an Interpretation of ARB No. 51, the Corporation considers a voting
rights entity to be a subsidiary and consolidates it if the Corporation has a
controlling financial interest in the entity. Variable interest entities are
consolidated if the Corporation is exposed to the majority of the variable
interest entity's expected losses and/or residual returns (i.e., the Corporation
is considered to be the primary beneficiary). All significant intercompany
balances and transactions have been eliminated. Certain reclassifications have
been made to the prior years' financial statements to conform to the current
year's presentation.
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 differ from those
estimates.
DISCONTINUED OPERATIONS
On January 1, 2004, the Corporation completed the spin-off of its Florida
operations into a separate, publicly traded company known as First National
Bankshares of Florida, Inc. (Bankshares). Effective January 1, 2004, the
Corporation transferred all of its Florida operations to Bankshares. At the same
time, the Corporation distributed all of the outstanding stock of Bankshares to
the Corporation's shareholders of record as of December 26, 2003. Shareholders
eligible for the distribution received one share of Bankshares common stock for
each outstanding share of the Corporation's common stock held. Immediately
following the distribution, the Corporation and its subsidiaries did not own any
shares of Bankshares common stock and Bankshares became an independent public
company.
7
The Corporation incurred approximately $49.7 million, including $10.5
million incurred by Bankshares, in restructuring expense during 2003 directly
attributable to the spin-off of Bankshares. These expenses consisted of a
prepayment penalty for refinancing Federal Home Loan Bank (FHLB) debt, early
retirement expenses, involuntary separation costs, professional fees and
miscellaneous other expenses. As of December 31, 2003, a liability of $12.3
million remained in connection with these expenses. This liability has been
reduced during the first quarter of 2004 as follows (in thousands):
Liability at December 31, 2003 $ 12,290
Liability at Bankshares (5,200)
Reduction in liability:
Early retirement expenses and involuntary
separation costs (985)
Professional fees (308)
Fixed asset and miscellaneous other expenses (421)
----------
Liability at March 31, 2004 $ 5,376
==========
This remaining liability of $5.4 million consists of $5.2 million in early
retirement expenses and involuntary separation costs, $187,000 in professional
fees and $28,000 in fixed asset write-downs and miscellaneous other expenses.
As a result of the spin-off, the Florida operations' 2003 earnings have
been reclassified as discontinued operations on the consolidated statement of
income, and assets and liabilities related to these discontinued operations have
been disclosed separately on the consolidated balance sheet for 2003.
EQUITY METHOD INVESTMENT
The Corporation accounts for its 15.2% ownership of the common stock of
Sun Bancorp, Inc. under the equity method. The carrying value of the
Corporation's investment in Sun Bancorp is adjusted for the Corporation's share
of Sun Bancorp's earnings and reduced by dividends received from Sun Bancorp.
Sun Bancorp, a bank holding company headquartered in Lewisburg, Pennsylvania, is
a publicly traded company under the stock symbol "SUBI" on the Nasdaq Stock
Market. The carrying value of the investment included in other assets was $23.3
million at March 31, 2004.
COMMON STOCK DIVIDEND
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
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
merger agreement has been reached.
DEBENTURES DUE TO A STATUTORY TRUST
During the first quarter of 2003, F.N.B. Statutory Trust I (Statutory
Trust), an unconsolidated subsidiary trust, issued $125.0 million of
Corporation-obligated mandatorily redeemable capital securities (capital
securities) holding solely junior subordinated debt securities of the
Corporation (debentures). 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
8
the Statutory Trust 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 three-month LIBOR plus 325 basis points.
The rate in effect at March 31, 2004 was 4.41%. 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 Stock
Series A and Preferred Stock Series B during 2003. In connection with the
redemption, the Corporation issued shares of its common stock out of treasury
stock in exchange 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 Stock Series A and Preferred Stock Series B,
respectively. As a result of the redemption, the Corporation no longer has any
shares of Preferred Stock.
NEW ACCOUNTING STANDARDS
Financial Accounting Standards Statement (FAS) 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 under
Accounting Principles Board (APB) Opinion 25, Accounting for Stock Issued to
Employees. Therefore, FAS 148 is not expected to have a material impact on the
Corporation's financial condition or results of operations.
FIN 46, Consolidation of Variable Interest Entities, an Interpretation of
ARB No. 51, was issued in January 2003 and amended in December 2003. FIN 46
addresses consolidation by business enterprises of variable interest entities
which have certain characteristics. FIN 46 applies immediately to variable
interest entities created after January 31, 2003. It applies in the first fiscal
year or interim period beginning after December 15, 2003, to variable interest
entities in which an enterprise holds a variable interest that was 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. The Corporation's interest in these entities were acquired
prior to February 1, 2003. At March 31, 2004, the Corporation had recorded
investments in other assets on its balance sheet of approximately $2.6 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. The Corporation determined that it is not the
primary beneficiary of these partnerships and will not consolidate them.
Additionally, the Corporation determined that it is not the primary beneficiary
of Statutory Trust and will not consolidate it.
FAS 146, Accounting for Costs Associated with Exit or Disposal Activities,
was issued in June 2002 and requires that a liability for a cost associated with
an exit or disposal activity be recognized when the liability is incurred. FAS
146 also establishes that fair value is the objective for initial measurement of
the liability. The provisions of FAS 146 became effective for the Corporation on
January 1, 2003. The costs incurred in connection with the spin-off of
Bankshares were accounted for in accordance with the provisions of FAS 146.
9
The American Institute of Certified Public Accountants issued Statement of
Position (SOP) 03-3, Accounting for Certain Loans or Debt Securities Acquired in
a Transfer, in December 2003. SOP 03-3 addresses accounting for differences
between contractual cash flows and cash flows expected to be collected from an
investors initial investment in loans or debt securities acquired in a transfer
if those differences are attributable, at least in part, to credit quality. SOP
03-3 does not apply to loans originated by the entity. The provisions of SOP
03-3 are effective for loans acquired in fiscal years beginning after December
31, 2004. The Corporation is currently assessing the impact of this new
standard.
SUBSEQUENT EVENTS
In March 2004, Regency Finance Company (Regency), a subsidiary of the
Corporation, entered into a definitive agreement with The Modern Finance
Company, an affiliate of Thaxton Group, Inc., headquartered in South Carolina,
to purchase eight consumer finance offices in the greater Columbus, Ohio region.
This acquisition will add approximately $7.0 million in net loan outstandings to
Regency's portfolio. The transaction closed on April 30, 2004.
On April 20, 2004, Omega Financial Corporation and Sun Bancorp, Inc.
jointly announced that Omega Financial Corporation has agreed to acquire Sun
Bancorp, Inc. Under the terms of the agreement, Sun Bancorp shareholders will be
entitled to receive either 0.664 shares of Omega Financial common stock for each
share of Sun Bancorp common stock or $23.25 in cash for each share held, subject
to a pro rata allocation such that 20% of Sun Bancorp common stock shall be paid
in cash and 80% shall be in the form of Omega Financial common stock. The
Corporation currently owns 1,090,122 shares of Sun Bancorp common stock.
On May 6, 2004, the Corporation announced that it had signed a definitive
merger agreement to acquire Slippery Rock Financial Corporation (Slippery
Rock)(OTC BB: SRCK), a bank holding company headquartered in Slippery Rock,
Pennsylvania with $335.0 million in assets, in a stock and cash transaction
valued at $78.5 million. Under the terms of the merger agreement, shareholders
of Slippery Rock may elect to receive $28.00 in cash or 1.41 shares of the
Corporation's common stock for each share of Slippery Rock common stock. The
merger agreement allocation procedures provide for the exchange of 15 percent of
Slippery Rock shares for cash and the remaining Slippery Rock shares exchanged
for the Corporation's common stock.
SECURITIES
Following is a summary of the fair value of securities available for sale
(in thousands):
MARCH 31, DECEMBER 31,
2004 2003
-------- --------
U.S. Treasury and other U.S. Government
agencies and corporations $158,190 $124,163
Mortgage-backed securities of U.S.
Government agencies 706,742 634,669
States of the U.S. and political subdivisions 36,900 42,408
Other debt securities 35,970 32,299
-------- --------
Total debt securities 937,802 833,539
Equity securities 46,139 45,128
-------- --------
$983,941 $878,667
======== ========
10
Following is a summary of the amortized cost of securities held to
maturity (in thousands):
MARCH 31, DECEMBER 31,
2004 2003
--------- -----------
U.S. Treasury and other U.S. Government
agencies and corporations $ 2,729 $ 3,761
States of the U.S. and political subdivisions 28,352 17,105
Other debt securities 3,161 3,164
------- -------
$34,242 $24,030
======= =======
DEPOSITS
Following is a summary of deposits (in thousands):
MARCH 31, DECEMBER 31,
2004 2003
---------- ----------
Non-interest bearing $ 572,016 $ 592,795
Savings and NOW 1,442,464 1,513,526
Certificates and other time deposits 1,298,901 1,333,189
---------- ----------
$3,313,381 $3,439,510
========== ==========
Total deposits decreased $126.1 million from December 31, 2003 to March
31, 2004, partially due to $40.0 million in deposits sold as the Corporation
divested two branches in non-strategic locations during February 2004. In
addition, the Corporation allowed the run-off of certain higher cost deposits
during the first quarter of 2004.
BORROWINGS
Following is a summary of short-term borrowings (in thousands):
MARCH 31, DECEMBER 31,
2004 2003
---------- ----------
Securities sold under repurchase agreements $ 124,395 $ 81,444
Federal funds purchased 138,865 865
Federal Home Loan Bank advances 6,000 6,000
Subordinated notes 134,846 144,006
Other short-term borrowings 232 651
---------- ----------
$ 404,338 $ 232,966
========== ==========
Following is a summary of long-term debt (in thousands):
MARCH 31, DECEMBER 31,
2004 2003
-------- -----------
Federal Home Loan Bank advances $442,656 $425,141
Debentures due to Statutory Trust 128,866 128,866
Subordinated notes 30,701 30,517
Other long-term debt 288 284
-------- --------
$602,511 $584,808
======== ========
The Corporation's banking subsidiary has available credit with the FHLB of
$1.5 billion, of which $448.7 million was used as of March 31, 2004. These
advances are secured by residential real estate loans and FHLB stock and are
scheduled to mature in various amounts periodically through the year 2012.
11
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. 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 (in thousands, except per share data):
Three Months Ended
March 31,
---------------------------
2004 2003
------------ ------------
BASIC
Net income from continuing operations $ 16,222 $ 14,609
Net income from discontinued operations -- 8,719
Less: Preferred stock dividends declared -- (54)
------------ ------------
Earnings applicable to basic earnings per share $ 16,222 $ 23,274
============ ============
Average common shares outstanding 46,173,243 46,043,113
============ ============
Basic earnings per share:
From continuing operations $ .35 $ .32
From discontinued operations -- .19
------------ ------------
Net income $ .35 $ .51
============ ============
Three Months Ended
March 31,
-------------------------
2004 2003
----------- -----------
DILUTED
Net income from continuing operations $ 16,222 $ 14,609
Net income from discontinued operations -- 8,719
----------- -----------
Earnings applicable to diluted earnings per share $ 16,222 $ 23,328
=========== ===========
Average common shares outstanding 46,173,243 46,043,113
Convertible preferred stock -- 273,263
Net effect of dilutive stock options
based on the treasury stock method 894,360 579,063
----------- -----------
47,067,603 46,895,439
=========== ===========
Diluted earnings per share:
From continuing operations $ .34 $ .31
From discontinued operations -- .19
----------- -----------
Net income $ .34 $ .50
=========== ===========
12
STOCK-BASED COMPENSATION
In accordance with FAS 148, the following table shows pro forma net income
and earnings per share assuming stock-based compensation had been expensed based
on the fair value of the compensation granted along with significant assumptions
used in the Black-Scholes option pricing model (dollars in thousands, except per
share data):
Three Months Ended
March 31,
-------------------------
2004 2003
---------- ----------
Net income from continuing operations $ 16,222 $ 14,609
Stock-based employee compensation cost
included in net income from continuing
operations, net of tax 224 --
Stock-based employee compensation cost
determined if the fair value method had
been applied to all awards, net of tax (855) (749)
---------- ----------
Pro forma net income from continuing operations $ 15,591 $ 13,860
========== ==========
Earnings per share:
Basic $ .35 $ .32
Basic pro forma .34 .30
Diluted $ .34 $ .31
Diluted pro forma .33 .30
Assumptions:
Risk-free interest rate 3.86% 2.93%
Dividend yield 4.16% 2.95%
Expected stock price volatility .25% .21%
Expected life (years) 5.00 5.00
Fair value of options granted $ 11.79 $ 11.79
As a result of the Corporation's spin-off of its Florida operations, the
Corporation developed a methodology designed to adjust the number and exercise
price of outstanding F.N.B. Corporation stock options immediately following the
completion of the spin-off for the purpose of preserving the equivalent value of
these stock options that existed as of the close of business on December 31,
2003. As of March 31, 2004, the Corporation had options outstanding to purchase
2,166,868 shares of common stock at an average price of $11.18 per share.
During the first quarter of 2004, the Corporation issued 107,285
restricted shares of common stock to key employees and directors of the
Corporation under its 2001 Incentive Plan. Under this program, shares awarded to
management are earned, in part, by delivering certain financial performance
results when compared to peers. The rewards are earned over a four-year period.
The unvested portion of these awards, totaling $2.0 million at March 31, 2004,
is reflected as deferred stock compensation in the stockholders' equity section
of the Corporation's balance sheet.
13
RETIREMENT AND OTHER POSTRETIREMENT BENEFIT PLANS
The pension expense for the defined benefit plans includes the following
components (in thousands):
Three Months Ended
March 31,
--------------------------
2004 2003
-------- --------
Service cost $ 955 $ 888
Interest cost 1,560 1,467
Expected return on plan assets (1,671) (1,373)
Net amortization 223 232
-------- --------
Net periodic cost $ 1,067 $ 1,214
======== ========
Net periodic postretirement benefit cost includes the following components
(in thousands):
Three Months Ended
March 31,
--------------------------
2004 2003
------- --------
Service cost $ 82 $ 73
Interest cost 99 91
One time charge for voluntary retirement -- 37
Net amortization 34 25
-------- --------
Net periodic cost $ 215 $ 226
======== ========
The Corporation sponsors retirement plans for the benefit of its
employees. In conjunction with the spin-off of its Florida operations, a portion
of the obligations associated with these plans was transferred to Bankshares. Of
the December 31, 2003 obligations reported in the Retirement Plans footnote in
the Corporation's 2003 Annual Report on Form 10-K, $88.1 million of the $98.7
million accumulated benefit obligation and $101.7 of the $114.0 million
projected benefit obligation remained with the Corporation after the spin-off.
The fair value of plan assets, which was $84.9 million at December 31, 2003,
remained entirely with the Corporation. Of the $11.0 million of pension expense
for the year ended December 31, 2003, $8.0 million was attributable to
continuing operations. With respect to the Other Postretirement Benefit Plans
footnote in the Corporation's 2003 Annual Report on Form 10-K, these obligations
remained entirely with the Corporation after the spin-off and the related
postretirement benefit cost was entirely attributable to continuing operations.
The Corporation's subsidiaries participate in a qualified 401(k) defined
contribution plan under which eligible employees may contribute a percentage of
their salary. The Corporation matches 50 percent of an eligible employee's
contribution on the first 6 percent that the employee defers. Employees are
generally eligible to participate upon completing 90 days of service and having
attained age 21. Employer contributions become 20 percent vested when an
employee has completed one year of service, and vest at a rate of 20 percent per
year thereafter. The Corporation's contribution expense was $313,000 for the
three months ended March 31, 2004.
14
CASH FLOW INFORMATION
Following is a summary of supplemental cash flow information (in
thousands):
Three Months Ended
March 31,
------------------------
2004 2003
-------- --------
Cash paid for:
Interest $ 25,837 $ 21,632
Taxes 3,609
Noncash Investing and Financing Activities:
Acquisition of real estate in settlement of loans 939 405
Loans granted in the sale of other real estate -- 10
Spin-off of Florida operations 365,115 --
COMPREHENSIVE INCOME
The components of comprehensive income, net of related tax, are as follows
(in thousands):
Three Months Ended
March 31,
------------------------
2004 2003
-------- --------
Net income from continuing operations $ 16,222 $ 14,609
Net income from discontinued operations -- 8,719
Other comprehensive income:
Unrealized gains on securities:
Unrealized holding gains (losses)
arising during the period 7,009 (1,857)
Less: reclassification adjustment for
gains included in net income (303) (535)
Minimum pension liability adjustment 168 --
-------- --------
Other comprehensive income 6,874 (2,392)
-------- --------
Comprehensive income $ 23,096 $ 20,936
======== ========
BUSINESS SEGMENTS
The Corporation operates in four reportable segments: community banking,
wealth management, insurance and consumer finance. The Corporation's community
banking subsidiary offers 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 subsidiary
offers various alternative products, including securities brokerage and
investment advisory services, mutual funds, insurance and annuities. Wealth
Management provides a broad range of personal and corporate fiduciary services
including the administration of decedent and trust estates. The Corporation's
insurance agency is a full-service insurance agency 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. 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.
15
At or for the three months Community Wealth Consumer All
ended March 31, 2004 Banking Management Insurance Finance Other Consolidated
---------- ---------- ---------- ---------- ---------- ------------
Interest income $ 55,273 $ 2 $ 5 $ 7,085 $ (389) $ 61,976
Interest expense 17,016 3 -- 1,196 1,556 19,771
Provision for loan losses 3,000 -- -- 1,622 -- 4,622
Non-interest income 15,677 3,401 1,327 431 (67) 20,769
Non-interest expense, excluding
intangible amortization 26,896 2,458 1,028 3,200 510 34,092
Intangible amortization 492 1 26 -- -- 519
Income tax expense (benefit) 7,522 352 122 574 (1,051) 7,519
Net income (loss) 16,024 589 156 924 (1,471) 16,222
Total assets 4,482,297 5,011 6,898 141,744 (514) 4,635,436
Goodwill 24,332 -- 2,799 1,809 -- 28,940
At or for the three months Community Wealth Consumer All
ended March 31, 2004 Banking Management Insurance Finance Other Consolidated
---------- ---------- ---------- ---------- ---------- ------------
Interest income $ 59,838 $ -- $ 15 $ 7,071 $ (377) $ 66,547
Interest expense 20,611 -- 3 1,443 (663) 21,394
Provision for loan losses 2,737 -- -- 1,390 -- 4,127
Non-interest income 13,339 2,932 1,056 468 (863) 16,932
Non-interest expense, excluding
intangible amortization 28,142 2,612 942 3,118 1,932 36,746
Intangible amortization 492 1 29 -- 21 543
Income tax expense (benefit) 6,522 -- 49 583 (1,094) 6,060
Net income (loss) from
continuing operations 14,673 319 48 1,005 (1,436) 14,609
Total assets from continuing
operations 4,264,385 3,841 9,997 145,552 19,874 4,443,649
Goodwill from continuing
operations 21,832 -- 4,252 1,809 -- 27,893
16
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 (F.N.B. Corporation) as of March 31, 2004, and the
related consolidated statements of income for the three-month periods ended
March 31, 2004 and 2003, and the consolidated statements of cash flows for the
three-month periods ended March 31, 2004 and 2003, and the consolidated
statement of stockholders' equity for the three months ended March 31, 2004.
These financial statements are the responsibility of the management of F.N.B.
Corporation.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data, and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with auditing standards generally accepted in the United States,
which will be performed for the full year with the objective of expressing an
opinion regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying consolidated financial statements referred to above
for them to be in conformity with accounting principles generally accepted in
the United States.
We have previously audited, in accordance with audited standards generally
accepted in the United States, the consolidated balance sheet of F.N.B.
Corporation as of December 31, 2003, and the related statements of income,
shareholders' equity, and cash flows for the year then ended (not presented
herein) and in our report dated February 24, 2004, 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, 2003, is fairly stated, in all material respects, in relation to
the consolidated balance sheet from which it has been derived.
/s/ERNST & YOUNG LLP
Pittsburgh, Pennsylvania
May 7, 2004
17
PART I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
FINANCIAL INFORMATION SUMMARY
On January 1, 2004, the Corporation completed the spin-off of its Florida
operations into a separate, publicly traded company. As a result of the
spin-off, the Florida operations' 2003 earnings have been reclassified to
discontinued operations in the consolidated statement of income, and assets and
liabilities related to these discontinued operations have been disclosed
separately on the consolidated balance sheet for 2003. Net income was $16.2
million for the first three months of 2004 compared to net income from
continuing operations of $14.6 million for the first three months of 2003.
Diluted earnings per share were $.34 for the first three months of 2004 compared
to diluted earnings from continuing operations of $.31 for the first three
months of 2003. Net income for the first three months of 2004 included an
after-tax gain on the sale of two branches of $2.7 million.
Common comparative ratios for results of operations include the return on
average assets and the return on average equity. The Corporation's return on
average assets was 1.41% for the first quarter of 2004, while its return on
average equity was 26.77% for the same period.
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 2003 Annual Report on Form 10-K filed
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.
18
FIRST THREE MONTHS OF 2004 AS COMPARED TO FIRST THREE MONTHS OF 2003:
The following table provides information regarding the average balances
and yields and rates on interest earning assets and interest bearing liabilities
(dollars in thousands):
Three Months Ended March 31 2004 2003
--------------------------------------- -----------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
---------- -------- ------ ---------- -------- -----
ASSETS
Interest earning assets:
Interest bearing deposits
with banks $ 661 $ 2 1.22% $ 1,199 $ 4 1.35%
Federal funds sold 86 -- -- 39 -- --
Securities:
Taxable 916,331 9,725 4.27 554,053 6,827 5.00
Non-taxable (1) 70,290 965 5.52 140,338 2,323 6.71
Loans (1) (2) 3,262,547 51,882 6.40 3,213,937 58,108 7.33
---------- -------- ---------- --------
Total interest
earning assets 4,249,915 62,574 5.91 3,909,566 67,262 6.98
---------- -------- ---------- --------
Cash and due from banks 97,223 94,037
Allowance for loan losses (47,190) (47,432)
Premises and equipment 78,719 85,133
Assets of discontinued
operations -- 2,807,959
Other assets 252,377 276,667
---------- ----------
$4,631,044 $7,125,930
========== ==========
LIABILITIES
Interest bearing liabilities:
Deposits:
Interest bearing demand $ 775,107 $ 1,201 0.62 $ 668,629 $ 1,125 0.68
Savings 698,544 1,058 0.61 489,208 888 0.74
Other time 1,306,219 10,168 3.13 1,565,841 13,015 3.37
Repurchase agreements 117,081 243 0.83 119,970 284 0.96
Other short-term borrowings 265,481 868 1.32 105,346 1,257 4.84
Long-term debt 586,386 6,233 4.28 432,713 4,825 4.52
---------- -------- ---------- --------
Total interest
bearing liabilities 3,748,818 19,771 2.12 3,381,707 21,394 2.57
---------- -------- ---------- --------
Non-interest bearing,
demand deposits 569,571 546,038
Liabilities of discontinued
operations -- 2,529,974
Other liabilities 68,917 60,853
---------- ----------
4,387,306 6,518,572
---------- ----------
STOCKHOLDERS' EQUITY 243,738 607,358
---------- ----------
$4,631,044 $7,125,930
========== ==========
Net interest earning assets $ 501,097 $ 527,859
========== ==========
Net interest income $ 42,803 $ 45,868
======== ========
Net interest spread 3.79% 4.41%
==== ====
Net interest margin (3) 4.04% 4.76%
==== ====
(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.
19
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 three months ended March
31, 2004 as compared to the three months ended March 31, 2003 (in thousands):
Volume Rate Net
------- ------- -------
INTEREST INCOME
Interest bearing deposits with banks $ (2) $ -- $ (2)
Securities 2,729 (1,189) 1,540
Loans 843 (7,069) (6,226)
------- ------- -------
3,570 (8,258) (4,688)
------- ------- -------
INTEREST EXPENSE
Deposits:
Interest bearing demand 170 (94) 76
Savings 288 (118) 170
Other time (1,992) (855) (2,847)
Repurchase agreements (6) (35) (41)
Other short-term borrowings 746 (1,135) (389)
Long-term debt 1,656 (248) 1,408
------- ------- -------
862 (2,485) (1,623)
------- ------- -------
NET CHANGE $ 2,708 $(5,773) $(3,065)
======= ======= =======
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.
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. Net interest income, on a fully taxable equivalent basis, totaled $42.8
million for the first three months of 2004, as compared to $45.9 million for the
first three months of 2003. Net interest income consisted of interest income of
$62.6 million and interest expense of $19.8 million for the first three months
of 2004 compared to $67.3 million and $21.4 million for each, respectively, for
the first three months of 2003. The Corporation's net interest margin decreased
72 basis points to 4.04% for the three months ended March 31, 2004 as compared
to 4.76% for the three months ended March 31, 2003.
During 2003, in order to help revive economic growth, the Federal Reserve
Board reduced its target federal funds rate to the lowest level in nearly 45
years. During the first and second quarter of 2003, concerns about continued
economic weakness and possible disinflation drove mid-term and long-term
treasury yields down significantly. This, in turn, sparked the refinancing of
mortgages in the Corporation's loan and mortgage-backed securities portfolios.
Thus, the lower interest rate levels experienced during 2003 contributed to the
decline in net interest margin as the yield on earning assets declined by more
than the rate on interest bearing liabilities. The impact of future rate changes
on the Corporation's net income is discussed further within the "Liquidity and
Interest Rate Sensitivity" section.
Total interest income, on a fully taxable equivalent basis, decreased $4.7
million or 7.0% for the first three months of 2004, as compared to the first
three months of 2003. This decrease was the result of lower yield, partially
offset by higher average earning assets. The impact of the lower yield was $8.3
million while the impact of higher average earning assets was $3.6 million. The
decrease in yield was caused
20
primarily by loan refinancing activity and scheduled repricing of adjustable
rate loans to lower market rates, coupled with accelerated prepayments of
mortgage-backed securities. Average earning assets increased by $340.3 million
or 8.7% from the first quarter of 2003 to the first quarter of 2004. This strong
growth was fueled by an increase of $292.2 million in average investment
securities coupled with an increase of $48.6 million in average loan
outstandings. Strong growth in commercial loans was partially offset by a
continued decrease in indirect loans, as the Corporation continues to
de-emphasize its indirect lending business, and a continued run-off of the lease
portfolio as the Corporation ceased originations of leases in 2000.
Total interest expense decreased $1.6 million or 7.6% for the first three
months of 2004, as compared to the first three months of 2003. This decrease was
driven primarily by the lower rate paid on interest bearing liabilities,
partially offset by an increase in average interest bearing liabilities to fund
the growth in earning assets. The impact of a lower rate paid was $4.2 million
while the impact of higher average interest bearing liabilities was $2.6
million. The decrease in rates paid was driven primarily by actions taken by the
Corporation to reduce rates paid on deposits and a reduction in the cost of
debt, which was the result of the early retirement of FHLB borrowings during the
second half of 2003. Average balances for total deposits and repurchase
agreements, other short-term borrowings and long-term debt increased by $128.3
million, $108.7 million and $153.7 million, respectively, for the quarter ended
March 31, 2004 as compared to March 31, 2003.
The provision for loan losses was $4.6 million for the first three months
of 2004, as compared to $4.1 million for the first three months of 2003. The
allowance for loan losses as a percentage of total loans was 1.43% at March 31,
2004 and 1.46% at March 31, 2003.
Total non-interest income was $20.8 million for the first three months of
2004, as compared to $16.9 million for the same period of 2003. The first
quarter of 2004 included a gain on the sale of two branches totaling $4.1
million. The Corporation's fee income from insurance and wealth management
activities increased 8.4% to $5.6 million for the three months ended March 31,
2004 as compared to the three months ended March 31, 2003. Contingent fee income
from insurance operations and increased sales of annuities and mutual funds
through the branch network contributed to the higher fee income in 2004.
Total non-interest expense was $34.6 million for the first three months of
2004, as compared to $37.3 million for the first three months of 2003. In
concert with the spin-off of its Florida operations, the Corporation initiated a
cost reduction initiative in the third quarter of 2003 and completed it by
December 31, 2003. As a result of this cost reduction initiative, the
Corporation realized an expense reduction of $2.7 million, or 7.2%, for the
first quarter of 2004, as compared to the first quarter of 2003. The resulting
efficiency ratio for the first three months of 2004 was 53.6%, which included a
benefit of 3.7% from the gain on the sale of branches.
The Corporation's income tax was $7.5 million for the first three months
of 2004 compared to $6.1 million for the same period of 2003. The effective tax
rate of 31.7% for the three months ended March 31, 2004 was lower than the 35.0%
federal statutory tax rate due to the tax benefits resulting from tax-exempt
instruments and excludable dividend income.
21
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. Liquidity is centrally managed on
a daily basis by treasury personnel. In addition, 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.
The Corporation continues to originate mortgage loans for resale in the
secondary market rather than keeping these loans in the portfolio. Proceeds from
the sale of mortgage loans totaled $27.0 million for the first quarter of 2004.
Liquidity sources from liabilities are generated primarily through growth in
deposits. As of March 31, 2004, deposits comprised 75.6% of total liabilities.
To a lesser extent, the Corporation also makes use of wholesale sources which
include federal funds purchased, repurchase agreements and public deposits. In
addition, the banking affiliate has the ability to borrow funds from the FHLB.
FHLB advances are a competitively priced and reliable source of funds. The
Corporation has made limited use of FHLB advances and has a large reserve
available for contingency funding purposes. As of March 31, 2004, outstanding
advances were $448.7 million, or 9.7% of total assets, while FHLB availability
was $1.5 billion, or 31.5% of total assets.
The Corporation has repurchased shares of its common stock for re-issuance
under various employee benefit plans and the Corporation's dividend reinvestment
plan since 1991. In addition, the Corporation has repurchased shares for
specific re-issuance in connection with certain business combinations accounted
for as purchase transactions. During the first quarter of 2004 and 2003, the
Corporation purchased 442,844 and 294,739 treasury shares totaling $9.0 million
and $8.1 million, respectively, and re-issued 413,202 and 300,505 treasury
shares totaling $6.8 million and $8.6 million, respectively.
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 $103.0 million, which were unused as of March 31, 2004.
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.
22
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 (EVE) to measure its interest rate risk.
The following gap analysis 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 maturing
over a one year period was .91 at March 31, 2004, as compared to 1.03 at March
31, 2003. A ratio of less than one indicates a higher level of repricing
liabilities over repricing assets over the next twelve months, assuming the
current interest rate environment.
Following is the gap analysis as of March 31, 2004 (dollars in thousands):
Within 2-3 4-6 7-12 Total
1 Month Months Months Months 1 Year
----------- ----------- ----------- ----------- -----------
INTEREST EARNING ASSETS (IEA)
Loans $ 675,279 $ 194,558 $ 239,703 $ 432,310 $ 1,541,850
Investments 50,603 38,556 70,984 129,653 289,796
----------- ----------- ----------- ----------- -----------
725,882 233,114 310,687 561,963 1,831,646
INTEREST BEARING LIABILITIES (IBL)
Non-maturity deposits $ 626,572 $ 626,572
Time deposits 95,080 $ 108,967 $ 240,131 $ 457,633 901,811
Borrowings 295,113 139,865 26,996 20,162 482,136
----------- ----------- ----------- ----------- -----------
1,016,765 248,832 267,127 477,795 2,010,519
GAP:
Period $ (290,883) $ (15,718) $ 43,560 $ 84,168 $ (178,873)
=========== =========== =========== =========== ===========
Cumulative $ (290,883) $ (306,601) $ (263,041) $ (178,873)
========== =========== =========== ===========
IEA/IBL (CUMULATIVE) 0.71 0.76 0.83 0.91
=========== =========== =========== ===========
CUMULATIVE GAP TO IEA (15.88) (16.74) (14.36) (9.77)
=========== =========== =========== ===========
The allocation of non-maturity deposits to the one-month maturity bucket
is based on the estimated sensitivity of each product to changes in market
rates. For example, if a product's rate is estimated to increase by 50% as much
as the market rates, then 50% of the account balance was placed in this bucket.
Net interest income simulations explicitly measure the exposure to
earnings from changes in market rates of interest. The Corporation's current
financial position is combined with assumptions regarding future business to
calculate net interest income under varying hypothetical interest rate
scenarios. EVE is defined as the present value of assets minus the present value
of liabilities at a point in time. Changes in EVE help to identify optionality
and long-term mismatches in the balance sheet. Like gap, EVE is a static measure
that does not include new business.
23
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 versus if rates remained unchanged:
MARCH 31,
----------------
2004 2003
----- ----
Net interest income change (12 months):
- 100 basis points (3.8)% (2.5)%
+ 200 basis points (0.8)% 1.4 %
Economic value of equity:
- 100 basis points (3.5)% (7.0)%
+ 200 basis points (8.1)% 0.5 %
The above measures show the impact created by the continued decrease in
interest rates into 2004. Should rates decline by an additional large amount,
the net interest margin would compress due to a limited ability to lower certain
deposit rates. Such a rate change might also spur additional loan refinancing
and mortgage-backed security prepayments at those lower rates. At this point in
the rate cycle, the ALCO does not feel substantially lower rates are probable.
As previously discussed, the lower interest rates during 2003 resulted in the
refinancing of certain loans and the prepayment of certain securities. The
replacement of those instruments has effectively lengthened the duration of
assets. In addition, there has been a movement of deposit balances from time
deposits to non-maturity deposits. This movement reflects depositors' preference
for liquidity during periods of low interest rates. These combined balance sheet
changes have made substantially higher interest rates less beneficial to net
interest income.
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. While these measures are within the limits set
forth in the Corporation's Asset/Liability Policy, the ALCO is implementing
strategies to help neutralize the effect of higher interest rates. For example,
the Corporation continues to sell fixed-rate mortgages to help manage interest
rate risk.
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.
24
LOANS
Following is a summary of loans (in thousands):
MARCH 31, DECEMBER 31,
2004 2003
---------- -----------
Real estate:
Residential $1,340,170 $1,348,399
Commercial 787,464 766,967
Construction 43,170 40,795
Installment loans to individuals:
Direct 234,808 253,507
Indirect 397,847 423,123
Commercial, financial and agricultural 453,466 440,775
Lease financing 12,860 17,277
Unearned income (29,720) (31,646)
---------- ----------
$3,240,065 $3,259,197
========== ==========
The Corporation's loan portfolio is well-diversified, with a significant
portion of the portfolio being made up of loans secured by real estate.
Residential, commercial and construction loans secured by real estate accounted
for 67.0% of the loan portfolio at March 31, 2004.
Total loans decreased $19.1 million from the first three months in 2003 to
the first three months in 2004. While commercial and commercial real estate
loans increased by $33.2 million or 2.7%, residential real estate loans
decreased by $5.9 million as the Corporation continues to sell fixed-rate
mortgages. In addition, installment loans to individuals decreased $44.0 million
as the Corporation continues to de-emphasize its focus on the indirect lending
business. Lease financing receivables decreased $4.4 million as the Corporation
ceased originating automobile leases in 2000.
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 to 180 days or
more depending on the loan type unless the loan is both well-secured and in the
process of collection. When a loan is placed on non-accrual status, all unpaid
interest is reversed. Non-accrual loans may not be restored to accrual status
until all delinquent principal and interest has been paid. 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.
Commercial loan charge-offs, either in whole or in part, are generally made as
soon as facts and circumstances raise a serious doubt as to the collectibility
of all or a portion of the principal. 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.
25
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 (2003 information based on
continuing operations)(dollars in thousands):
MARCH 31, DECEMBER 31,
2004 2003
--------- ------------
Non-performing assets:
Non-accrual loans $24,018 $ 22,449
Restructured loans 5,826 5,719
------- --------
Total non-performing loans 29,844 28,168
Other real estate owned 3,354 3,109
------- --------
Total non-performing assets $33,198 $ 31,277
======= ========
Asset quality ratios:
Non-performing loans as percent of total loans .92% .86%
Non-performing assets as percent of total assets .72% .69%
Non-performing assets increased $1.9 million from December 31, 2003. As
such, non-performing assets to total assets increased from .69% at December 31,
2003 to .72% at March 31, 2004. This increase was directly related to the
addition of two credits totaling $4.6 million during the first quarter of 2004.
These credits are collateralized and related losses are not expected.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses consists of an allocated and an unallocated
component. Management's analysis of the allocated portion 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.
The unallocated portion of the allowance is determined based on
management's assessment of 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.
This determination inherently involves a higher degree of uncertainty and
considers current risk factors that may not have yet occurred in the
Corporation's historical loss factors used to determine the allocated component
of the allowance, and it recognizes that knowledge of the portfolio may be
incomplete.
26
Following is a summary of changes in the allowance for loan losses and
selected ratios (dollars in thousands):
Three Months Ended
March 31,
--------------------
2004 2003
------- --------
Balance at beginning of period $46,139 $ 46,992
Charge-offs (5,081) (5,012)
Recoveries 547 518
------- --------
Net charge-offs (4,534) (4,494)
Provision for loan losses 4,622 4,127
------- --------
Balance at end of period $46,227 $ 46,625
======= ========
Allowance for loan losses to:
Total loans, net of unearned income 1.43% 1.46%
Non-performing loans 154.90% 170.29%
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, provide stability to current
operations and promote public confidence.
The Corporation has an existing registration statement for the
Corporation's subordinated notes which are issued through its finance company,
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 trust preferred securities in one or more offerings.
Quantitative measures established by regulators to ensure capital adequacy
require the Corporation and its banking subsidiary 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 December 31, 2003, the Corporation and its banking subsidiary have
been categorized by the various regulators as "well capitalized" under the
regulatory framework for prompt corrective action. As of March 31, 2004, the
Corporation and its banking subsidiary meet all capital adequacy requirements to
which they are subject.
27
Following are capital ratios as of March 31, 2004 for the Corporation
(dollars in thousands):
Well Capitalized Minimum Capital
Actual Requirements Requirements
------------------------ ------------------------ ------------------------
Amount Ratio Amount Ratio Amount Ratio
--------- ----- --------- ----- --------- -----
Total Capital $ 373,680 11.7% $ 320,880 10.0% $ 256,704 8.0%
(to risk-weighted assets)
Tier 1 Capital 274,697 8.6% 192,528 6.0% 128,352 4.0%
(to risk-weighted assets)
Tier 1 Capital 274,697 6.0% 228,767 5.0% 183,014 4.0%
(to average assets)
The Corporation and its banking subsidiary are subject to various
regulatory capital requirements administered by the federal banking agencies.
Failure to meet minimum capital requirements can initiate certain mandatory, and
possibly additional discretionary actions by regulators that, if undertaken,
could have a direct material effect of the Corporation's financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Corporation and its banking subsidiary 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 subsidiary's capital amounts and
classifications are also subject to qualitative judgements by the regulators
about 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 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 its
forward-looking statements even if experience or future changes make it clear
that any projected results expressed or implied therein will not be realized.
28
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT 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.
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. The Corporation's Chief
Executive Officer (CEO) and Chief Financial Officer (CFO) have concluded that
the Corporation's disclosure controls and procedures (as defined in Rules 13a -
15(e) and 15d - 15(e) under the Securities and Exchange Act of 1934, as
amended), based on their evaluation of these controls and procedures as of the
end of the period covered by this Form 10-Q, are effective at the reasonable
assurance level as discussed below to ensure that information required to be
disclosed by the Corporation in the reports it files under the Securities
Exchange Act of 1934, as amended, is recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the
Securities and Exchange Commission and that such information is accumulated and
communicated to the Corporation's management, including its principal executive
officer and principal financial officer, as appropriate to allow timely
decisions regarding required disclosure.
LIMITATIONS ON THE EFFECTIVENESS OF CONTROLS. The Corporation's
management, including the CEO and CFO, does not expect that the Corporation's
disclosure controls and internal controls will prevent all errors and all fraud.
A control system, no matter how well conceived and operated, can provide only
reasonable, not absolute assurance that the objectives of the control system are
met. Because of the inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance that all control issues and instances
of fraud, if any, within the Corporation have been detected. These inherent
limitations include the realities that judgements in decision-making can be
faulty, and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management override of the
controls.
CHANGES IN INTERNAL CONTROLS. Our CEO and CFO have evaluated the changes
to the Corporation's internal controls over financial reporting that occurred
during our fiscal quarter ended March 31, 2004, as required by paragraph (d) of
Rules 13a - 15 and 15d - 15 under the Securities Exchange Act of 1934, as
amended and have concluded that there were no such changes that materially
affected, or are reasonably likely to materially affect, our internal controls
over financial reporting.
29
PART II
ITEM 1. LEGAL PROCEEDINGS
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 that is
subject to litigation. Should the outcome of the pending or threatened
lawsuits be adverse, the value of the property will be impaired and other
costs may be incurred. Management, after consultation with outside legal
counsel, does not at the present time anticipate the ultimate 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, USE OF PROCEEDS AND ISSUER PURCHASES OF
EQUITY SECURITIES
ISSUER PURCHASES OF EQUITY SECURITIES
Total Number
of Shares Maximum Number
Purchased of Shares that
as Part of May yet be
Total Publicly Purchased
Number Average Announced Under the
of Shares Price Paid Plans or Plans or
Month Ending Purchased Per Share Programs Programs
- ----------------- --------- ---------- ------------ --------------
January 31, 2004 346,000 $19.69 N/A N/A
February 29, 2004 46,844 $21.44 N/A N/A
March 31, 2004 50,000 $22.48 N/A N/A
All shares were purchased through the open-market, and are not part of a
publicly announced purchase plan. It has been the Corporation's practice
to fund its employee benefits through share purchases. This practice may
be discontinued at the Corporation's discretion.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
30
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 26, 2004 to be considered at the 2005 Annual Meeting of
Shareholders.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1. Rule 13a-14(a)/15(d) - 14(a) Certification of Chief Executive
Officer. (filed herewith).
31.2. Rule 13a-14(a)/15(d) - 14(a) Certification of Chief Financial
Officer. (filed herewith).
32.1. Section 1350 Certification of Chief Executive Officer. (filed
herewith).
32.2. Section 1350 Certification of Chief Financial Officer. (filed
herewith).
(b) Reports on Form 8-K
The Corporation has filed the following Current Reports on Form 8-K
during the quarter ended March 31, 2004:
January 9, 2004 - Items 2 and 7. The Corporation announced that it
has completed the spin-off of its Florida operations through the
distribution to shareholders of all of the outstanding shares of
stock of First National Bankshares of Florida, Inc. (Bankshares). As
a result of the spin-off, Bankshares is now an independent,
separately traded, public company.
January 22, 2004 - Items 7 and 12. The Corporation reported its
issuance of a press release announcing its financial results for the
quarter ended and year ended December 31, 2003.
The Corporation has filed the following Current Reports on Form 8-K
after March 31, 2004:
April 19, 2004 - Items 7 and 12. The Corporation reported its
issuance of a press release announcing its financial results for the
quarter ended March 31, 2004.
May 6, 2004 - Items 5 and 7. The Corporation announced that it has
signed a definitive merger agreement to acquire all of the
outstanding shares of Slippery Rock Financial Corporation. The
acquisition, subject to regulatory approval, is expected to close
during the fourth quarter of 2004.
31
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: May 10, 2004 /s/Stephen J. Gurgovits
-------------------------------------
Stephen J. Gurgovits
President and Chief Executive Officer
(Principal Executive Officer)
Dated: May 10, 2004 /s/ Brian F. Lilly
-------------------------------------
Brian F. Lilly
Chief Financial Officer
(Principal Financial Officer)
32