1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT of 1934
For the quarterly period ended June 30, 2002
or
[] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 000-24141
FNB Corporation
(Exact name of registrant as specified in its charter)
Virginia 54-1791618
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
105 Arbor Drive, Christiansburg, Virginia 24068
(Address of principal executive offices) (Zip Code)
(540) 382-4951
(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. X Yes No
5,808,824 shares outstanding as of July 18, 2002
2
FNB CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Consolidated Balance Sheet as of
June 30, 2002 3
Consolidated Balance Sheet as of December 31, 2001 4
Unaudited Consolidated Statements of Income and
Comprehensive Income for the quarter and six-month
periods ended June 30, 2002 and 2001 5-6
Unaudited Consolidated Statements of Cash Flows for
the six-month periods ended June 30, 2002 and 2001 7-8
Unaudited Consolidated Statement of Changes in
Stockholders' Equity for the six-month period ended
June 30, 2001 9
Unaudited Consolidated Statement of Changes in
Stockholders' Equity for the six-month period ended
June 30, 2002 10
Notes to Consolidated Financial Statements 11-13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14-18
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 19-20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Changes in Securities and Use of Proceeds 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
Index to Exhibits 24
3
CONSOLIDATED BALANCE SHEET
FNB Corporation and subsidiaries
June 30, 2002
In Thousands, Except Share and Per Share Data
(Unaudited)
ASSETS
Cash and due from banks $ 31,711
Federal funds sold 20,550
Securities available-for-sale, at fair value 154,134
Securities held-to-maturity, at amortized cost (fair
value approximated $23,169) 22,369
Mortgage loans held for sale 9,645
Loans:
Commercial 78,740
Consumer 131,350
Real estate - commercial 203,182
Real estate - construction 42,747
Real estate - mortgage 201,998
Total loans, net of unearned income 658,017
Less allowance for loan losses 9,312
Loans, net 648,705
Bank premises and equipment, net 22,750
Other real estate owned 806
Goodwill 21,360
Core deposit intangibles 5,517
Other assets 22,226
Total assets $ 959,773
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand deposits 101,036
Interest-bearing demand and savings deposits 281,987
Time deposits 351,586
Certificates of deposit of $100,000 and over 88,508
Total deposits 823,117
Short term borrowings 7,900
Long term debt 33,632
Other liabilities 4,514
Total liabilities 869,163
Stockholders' equity:
Common stock, $5.00 par value, Authorized 25,000,000
shares; issued and outstanding 5,809,204 shares 29,046
Surplus 51,165
Unearned ESOP shares (64,790 shares) (930)
Retained earnings 9,281
Accumulated other comprehensive income (loss) 2,048
Total stockholders' equity 90,610
Total liabilities and stockholders' equity $ 959,773
See accompanying notes to consolidated financial statements.
4
CONSOLIDATED BALANCE SHEET
FNB Corporation and subsidiaries
December 31, 2001
In Thousands, Except Share and Per Share Data
ASSETS
Cash and due from banks $ 28,817
Federal funds sold 9,010
Short term investments 16,549
Securities available-for-sale, at fair value 151,352
Securities held-to-maturity, at amortized cost (fair
value approximated $31,526) 30,812
Mortgage loans held for sale 13,926
Loans:
Commercial 75,705
Consumer 130,072
Real estate - commercial 193,575
Real estate - construction 42,404
Real estate - mortgage 206,507
Total loans, net of unearned income 648,263
Less allowance for loan losses 8,827
Loans, net 639,436
Bank premises and equipment, net 22,732
Other real estate owned 1,420
Goodwill 19,797
Core deposit intangibles 7,500
Other assets 13,099
Total assets $ 954,450
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand deposits 96,466
Interest-bearing demand and savings deposits 246,103
Time deposits 369,283
Certificates of deposit of $100,000 and over 94,935
Total deposits 806,787
Short term borrowings 8,463
Long term debt 32,818
Other liabilities 19,749
Total liabilities 867,817
Stockholders' equity:
Common stock, $5.00 par value. Authorized 10,000,000
shares; issued and outstanding 5,539,117 shares 27,696
Surplus 47,481
Unearned ESOP shares (75,556 shares) (1,139)
Retained earnings 11,718
Accumulated other comprehensive income (loss) 877
Total stockholders' equity 86,633
Total liabilities and stockholders' equity $ 954,450
See accompanying notes to consolidated financial statements.
5
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FNB Corporation and subsidiaries
Quarter and Six Months Ended June 30, 2002 and 2001
In Thousands, Except Share and Per Share Data
(Unaudited)
Quarter Ended Six Months Ended
June 30 June 30
2002 2001 2002 2001
Interest income:
Interest and fees on loans $ 12,212 10,059 24,634 19,557
Interest on securities:
Taxable 2,105 1,488 4,258 2,508
Nontaxable 404 482 826 969
Interest on short term investments 123 416 350 484
Total interest income 14,844 12,445 30,068 23,518
Interest expense:
Interest on interest-bearing
demand and savings deposits 823 1,052 1,667 1,992
Interest on time deposits 3,018 3,576 6,508 6,462
Interest on certificates of
deposit of $100,000 and over 1,139 1,075 2,101 2,074
Interest on short term borrowings 33 69 54 201
Interest on long term debt 498 276 984 816
Total interest expense 5,511 6,048 11,314 11,545
Net interest income 9,333 6,397 18,754 11,973
Provision for loan losses 316 285 782 655
Net interest income after
provision for loan losses 9,017 6,112 17,972 11,318
Noninterest income:
Service charges on deposit accounts 705 446 1,319 779
Loan origination fees 442 213 979 298
Other service charges and fees 386 411 1,005 793
Other income 576 192 982 341
Gain on sale of bankcards 1,206 - 1,206 -
Securities gains (losses), net 159 (5) 156 160
Total noninterest income 3,474 1,257 5,647 2,371
6
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (Continued)
FNB Corporation and subsidiaries
Quarter and Six Months Ended June 30, 2002 and 2001
In Thousands, Except Share and Per Share Data
(Unaudited)
Quarter Ended Six Months Ended
June 30 June 30
2002 2001 2002 2001
Noninterest expense:
Salaries and employee benefits 4,131 2,489 7,926 4,659
Occupancy and equipment expense,net 1,245 853 2,439 1,578
Cardholder/merchant processing 161 126 401 237
Supplies expense 239 187 428 338
Goodwill - 143 - 143
Other expenses 1,907 1,070 3,768 1,917
Total noninterest expense 7,683 4,868 14,962 8,872
Income before income tax expense 4,808 2,501 8,657 4,817
Income tax expense 1,571 670 2,836 1,296
Net income $ 3,237 1,831 5,821 3,521
Other comprehensive income (loss),
net of income tax expense (benefit):
Gross unrealized gains (losses) on
available-for-sale securities 1,876 (101) 1,327 710
Less: Reclassification
adjustment for (gains)
losses included in
net income (159) 5 (156) (160)
Other comprehensive income 1,717 (96) 1,171 550
Comprehensive income $ 4,954 1,735 6,992 4,071
Basic earnings per share $ 0.56 0.42 1.01 0.82
Diluted earnings per share $ 0.55 0.42 1.00 0.82
Dividends declared per
share $ 0.17 0.17 0.34 0.34
Average number basic
shares outstanding 5,750,289 4,373,346 5,764,195 4,287,269
Average number diluted
shares outstanding 5,833,568 4,389,493 5,831,777 4,295,526
See accompanying notes to consolidated financial statements.
7
CONSOLIDATED STATEMENTS OF CASH FLOWS
FNB Corporation and subsidiaries
Six Months Ended June 30, 2002 and 2001
In Thousands
(Unaudited)
2002 2001
Cash flows from operating activities:
Net income $ 5,821 3,521
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 782 655
Depreciation and amortization of bank
premises and equipment 1,225 868
Amortization of core deposit intangibles 534 -
ESOP compensation 209 186
Stock awards compensation 81 37
Amortization of premiums and accretion
of discounts, net 365 44
Gain on sale of securities, net (156) (160)
Net gain on sale of fixed assets and
other real estate (129) (1)
Gain on sale of bankcard portfolio (1,206) -
Net (increase) decrease in mortgage
loans held for sale 4,281 (9,299)
(Increase) decrease in other assets (9,765) (6,366)
Increase (decrease) in other liabilities (14,897) 216
Net cash used in operating
activities (12,855) (10,299)
Cash flows from investing activities:
Net increase in federal funds sold (11,540) (12,850)
Net decrease in short term investments 16,549 -
Proceeds from sales of securities available-
for-sale 1,343 16,816
Proceeds from calls and maturities of
securities available-for-sale 42,377 14,072
Proceeds from calls and maturities of
securities held-to-maturity 8,772 3,066
Purchase of securities available-for-sale (44,910) (59,914)
Purchase of securities held-to-maturity (356) -
Sale of bankcard portfolio 10,266 -
Acquisition of subsidiary - 2,243
Net increase in loans (19,562) (8,218)
Proceeds from sale of fixed assets and
other real estate owned 819 244
Recoveries on loans previously charged off 246 107
Bank premises and equipment expenditures (1,243) (3,388)
Net cash provided by (used in)
investing activities 2,761 (47,822)
8
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
FNB Corporation and subsidiaries
Six Months Ended June 30, 2002 and 2001
In Thousands
(Unaudited)
2002 2001
Cash flows from financing activities:
Net increase in demand and savings deposits 40,454 38,958
Net increase (decrease) in time deposits and
certificates of deposit (24,124) 73,471
Net decrease in federal funds purchased and
securities sold under agreements to
repurchase (563) (3,391)
Net increase (decrease) in other borrowed funds 814 (40,084)
Principal payments on ESOP debt (209) (186)
Dividends paid (1,960) (1,487)
Repurchase FNB Corporation stock (1,408) (543)
Dividends on unallocated ESOP shares (16) (26)
Net cash provided by
financing activities 12,988 66,712
Net increase in cash and due from banks 2,894 8,591
Cash and due from banks at beginning of period 28,817 12,325
Cash and due from banks at end of period $ 31,711 20,916
See accompanying notes to consolidated financial statements.
9
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FNB Corporation and subsidiaries
Six Months Ended June 30, 2001
In thousands, except per share data
(Unaudited)
Accumu-
lated
Other
Unearned Compre-
Common ESOP Retained hensive
Stock Surplus Shares Earnings Income Total
Balances at
December 31, 2000 $20,224 25,037 (1,374) 8,004 51 $51,942
Net Income - - - 3,521 - 3,521
Cash dividends,
$0.34 per share - - - (1,487) - (1,487)
ESOP shares
allocated upon
loan repayment - - 186 - - 186
Stock awards
issued 2 6 - - - 8
Repurchase and
retirement of
common stock (164) (379) - - - (543)
Change in net
unrealized gains
(losses) on
securities
available-for-
sale, net of
tax effect of
$283 - - - - 550 550
Stock issued
to purchase
Southwest
Virginia
Savings Bank 1,464 3,496 - - - 4,960
Fair value of
options
resulting from
merger - 317 - - - 317
Unearned shares-
Southwest
Virginia
Savings Bank
ESOP - - (183) - - (183)
Balances at
June 30, 2001 $21,526 28,477 (1,371) 10,038 601 $59,271
See accompanying notes to consolidated financial statements.
10
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FNB Corporation and subsidiaries
Six Months Ended June 30, 2002
In thousands, except per share data
(Unaudited)
Accumu-
lated
Other
Unearned Compre-
Common ESOP Retained hensive
Stock Surplus Shares Earnings Income Total
Balances at
December 31, 2001 $27,696 47,481 (1,139) 11,718 877 $86,633
Net Income - - - 5,821 - 5,821
Cash dividends,
$0.34 per share - - - (1,960) - (1,960)
6% Stock dividend 1,649 4,633 - (6,282) - -
Cash payment for
fractional shares
on 6% stock
dividend - - - (16) - (16)
ESOP shares
allocated upon
loan repayment - - 209 - - 209
Stock awards
issued 31 129 - - - 160
Stock options
exercised 1 (32) - - - (31)
Repurchase and
retirement of
common stock (344) (1,085) - - - (1,429)
Change in net
unrealized gains
(losses) on
securities
available-for-
sale, net of
tax effect of
$603 - - - - 1,171 1,171
Adjustment related
to purchase of
Salem Community
Bankshares, Inc. 13 39 - - - 52
Balances at
June 30, 2002 $29,046 51,165 (930) 9,281 2,048 $90,610
See accompanying notes to consolidated financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FNB Corporation and subsidiaries
June 30, 2002 and 2001
In Thousands, Except Percent and Share Data
(Unaudited)
(1) Basis of Presentation
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments necessary to present fairly
the consolidated balance sheets of FNB Corporation and subsidiaries
(referred to herein as "FNB", "the Corporation" or "the Company")
as of June 30, 2002; the consolidated statements of income, for the
three and six-months ended June 30, 2002 and 2001, and the
consolidated statements of changes in stockholders' equity, and the
consolidated statements of cash flows for the six-months ended
June 30, 2002 and 2001.
The consolidated balance sheet as of December 31, 2001 has been
extracted from the audited financial statements included in the
Company's 2001 annual report to stockholders. Financial statements
and notes are presented in accordance with the instructions for Form
10-Q. The information contained in the footnotes included in FNB's
2001 Annual Report on Form 10-K should be referred to in connection
with the reading of these unaudited interim consolidated financial
statements.
Interim financial performance is not necessarily indicative of
performance for the full year.
(2) Use of Estimates
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
(3) Changes in Significant Accounting Policies
Effective January 1st, 2002, the Company adopted the provisions of
Statement of Financial Accounting Standards 142, which requires that
goodwill no longer be amortized to earnings, but instead be reviewed
for impairment. This change provides investors with greater
transparency regarding the economic value of goodwill and its impact
on earnings. During 2002, the Company will perform the required
impairment tests of goodwill and indefinite lived intangible assets
in accordance with the new standard.
12
(4) Allowance for Loan Losses and Impaired Loans
A loan is considered impaired when, based on management's judgment, the
Corporation will probably not be able to collect all amounts due
according to the contractual terms of the loan. In making such
assessment, management considers the individual strength of borrowers,
the strength of particular industries, the payment history of individual
loans, the value and marketability of collateral and general economic
conditions. The Corporation's methodology for evaluating the
collectibility of a loan after it is deemed to be impaired does not
differ from the methodology used for nonimpaired loans.
A summary of the changes in the allowance for loan losses (including
allowances for impaired loans) follows:
Quarter Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
Balance at beginning of period $ 9,030 5,828 8,827 5,670
Reserve acquired through merger - 791 - 791
Provisions for loan losses 316 285 782 655
Additional reserve for branch
loans purchased - - - 188
Loan recoveries 188 59 245 107
Loan charge-offs (222) (277) (542) (725)
Balance at end of period $ 9,312 6,686 9,312 6,686
Nonperforming assets consist of the following:
June 30 December 31,
2002 2001
Nonaccrual loans $ 2,757 2,815
Other real estate owned 806 1,420
Total nonperforming assets $ 3,563 4,235
There were no material commitments to lend additional funds to customers
whose loans were classified as nonperforming at June 30, 2002.
(5) Short Term Borrowings and Long Term Debt
Securities sold under agreements to repurchase (repurchase
agreements) at June 30, 2002 and December 31, 2001 were
collateralized by investment securities controlled by the Corporation
with a book value of $12,971 and $11,620, respectively.
Advances from the Federal Home Loan Bank of Atlanta totaled $18,168
and $18,269 on June 30, 2002 and December 31, 2001, respectively. The
interest rates on the advances as of June 30, 2002 range from 4.7
13
to 7.3 percent and have maturity dates through June 7, 2010. The
advances are collateralized under a blanket floating lien agreement
whereby the Corporation gives a blanket pledge of residential first
mortgage loans for 1-4 units.
FNB Corporation participated in a pool of subordinated debt securities
issued by FNB Corporation and other financial institutions to a trust
in a method generally referred to as trust preferred financing. FNB
Corporation borrowed $15,464 that matures on December 18, 2031.
Interest is payable quarterly at the three month LIBOR rate plus 3.60%.
The rate may not exceed 12.5% prior to December 18, 2006, and the
borrowing may be repaid on or after this date without penalty.
Proceeds were principally used to pay cash to Salem Bank & Trust
shareholders. The loan proceeds are treated as capital of FNB
Corporation for regulatory purposes.
14
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a discussion of factors that significantly affected the
financial condition and results of operations of FNB Corporation, a bank
holding company, and its wholly owned subsidiaries (collectively, the
"Corporation"). This discussion should be read in connection with the
consolidated financial statements, statistical disclosures and other financial
information presented herein. All amounts presented are denoted in thousands
except per share and percentage data.
Forward Looking Information
This report contains forward-looking statements with respect to the financial
condition, results of operations and business of FNB. These forward-looking
statements involve risks and uncertainties and are based on the beliefs and
assumptions of the management of the Corporation, and on the information
available to management at the time that these disclosures were prepared.
Factors that may cause actual results to differ materially from those
contemplated by such forward-looking statements include, among others, the
following possibilities: (1) competitive pressures between depository and
other financial institutions may increase significantly; (2) changes in the
interest rate environment may reduce margins; (3) general economic conditions,
either nationally or regionally, may be less favorable than expected,
resulting in, among other things, a deterioration in credit quality and/or a
reduced demand for credit; (4) legislative or regulatory changes, including
changes in accounting standards, may adversely affect the businesses in which
the Corporation is engaged; (5) costs or difficulties related to the
integration of the businesses of the Corporation and its merger partners may
be greater than expected; (6) expected cost savings associated with mergers
may not be fully realized or realized within the expected time frame; (7)
deposit attrition, customer loss or revenue loss following mergers may be
greater than expected; (8) competitors may have greater financial resources
and develop products that enable such competitors to compete more successfully
than the Corporation; and (9) adverse changes may occur in the securities
markets.
Mergers and Acquisitions
On March 23, 2001, First National Bank, the Corporation's wholly-owned
subsidiary acquired two Wachovia Bank branches in southwest Virginia that were
merged into First National Bank. In addition, on May 2, 2001, SWVA
Bankshares, Inc. and its subsidiary, Southwest Virginia Savings Bank, F.S.B.,
Roanoke, Virginia, was acquired. Southwest was renamed FNB-Southwest. Salem
Community Bankshares (SCB)and its subsidiary, Salem Bank and Trust, National
Association, Salem, Virginia were acquired on December 31, 2001. These two
banks merged on May 6, 2002 into a single charter with the name "FNB Salem
Bank and Trust, National Association." The acquisitions were all recorded
under the "purchase" method of accounting; therefore, the results of their
operations are only included in the accompanying financial statements from
the respective dates of acquisition.
15
Sale of Bankcard Portfolio
In the second quarter, the Corporation sold its bankcard portfolio ($9.1
million in balances) and realized a pre-tax gain of $1,206 and an after-tax
gain of $796. The bankcard portfolio was sold because the Corporation did not
have enough volume to achieve the desired level of profitability and provide
enough options for customers. The Corporation will continue to issue cards
under the FNB brand. The card portfolio will be serviced and managed by a
high-volume card issuer enabling the Corporation to re-deploy capital while
providing a more diverse and competitive credit card product line to its
customer base.
Pro Forma Financial Information
The following unaudited proforma financial information shows the effect on FNB
Corporation as of June 30, 2002, with the Wachovia Bank branches, Salem
Community Bankshares, Inc., Southwest Virginia Savings Bank F.S.B. removed,
and excluding the effect of the bankcard sale to make it comparable
with June 30, 2001.
June 30, 2002
Less
June 30, Acquisitions Acquisitions June 30,
2002 & Bankcard & Bankcard 2001
Net interest income $ 18,754 5,944 12,810 11,973
Provision loan loss 782 226 556 655
Noninterest income 5,647 2,358 3,289 2,371
Noninterest expense 14,962 4,774 10,188 8,872
Income before taxes 8,657 3,302 5,355 4,817
Taxes 2,836 1,252 1,584 1,296
Net income $ 5,821 2,050 3,771 3,521
Net Income
Net income for the second quarter was $3,237 and basic earnings per share were
$.56. Excluding the gain on the bankcard sale, earnings were $2,441 and
earnings per share were $.42. This compares to $1,831 and $.42 in the second
quarter, 2001. Year-to-date net income was $5,821 and basic earnings per
share were $1.01. Excluding the gain on the bankcard sale, earnings were
$5,025 and basic earnings per share were $.87. This compares to $3,521 and
$.82 last year. The increase in net income in both quarters was primarily due
to acquisitions, an improved margin and higher noninterest revenues.
Net Interest Income
The principal source of earnings for the Corporation is net interest income.
Net interest income is the amount of interest earned on interest-bearing
assets, less the amount of interest paid on deposits and other interest-
bearing liabilities. Net interest income before provision for loan losses and
net interest margin respectively were $9,333 and 4.46% in the second quarter,
2002 compared to $6,397 and 4.26% in the second quarter, 2001. Net interest
income and margin for year-to-date June 30, 2002 were $18,754 and 4.49%
respectively compared to $11,973 and 4.39% for the same period last year.
16
Acquisitions accounted for $2,658 of the $2,936 increase in net interest
income in the second quarter and $6,096 of the $6,781 increase in the first
six months. The remainder of the increase is due primarily to an improved
margin as the cost of deposits dropped more than the yield on loans in the
declining rate environment. Growth in net interest income due to volume
excluding acquisitions was small as loans grew .4% from June 30, 2001 to
June 30, 2002.
Provision for Loan Losses
The provision for loan losses was $316 in the second quarter, 2002 compared to
$285 in the same quarter last year, and $782 for the first six months of 2002
compared to $655 for the same period last year. Net charge-offs were $34 in
the second quarter compared to $218 last year and $297 for the first six
months compared to $618 last year. The allowance for loan losses is $9,312
and 1.42% of loans at June 30, 2002 compared to $6,686 and 1.40% of loans at
June 30 of last year. The change of $2,626 is due primarily to acquisitions.
Noninterest Income
Noninterest income, which includes service charges on deposit accounts, loan
origination and service release fees on mortgage loans sold, other service
charges, other income and net securities gains (losses), was $3,474 in the
second quarter, 2002 compared to $1,257 in the second quarter of last year for
a difference of $2,216. This is primarily due to the bankcard sale ($1,206),
mergers ($609), higher mortgage revenue of $155 due to the low interest rate
environment and resultant high level of refinancing activity and higher
securities gains ($164). Year-to-date June 30, 2002 noninterest income was
$5,647, up $3,276 from the same period prior year for primarily the same
reasons: bankcard sale ($1,206), mergers ($1,209) and higher loan origination
fees ($428). In addition, the Corporation realized $93 more revenue from
trust and investment sales.
Noninterest Expense
Noninterest expense, consisting of salaries and employee benefits, occupancy
costs, cardholder processing costs, supplies, and other expenses was $7,683 in
the second quarter, 2002 compared to $4,868 for the three months ending June
30, 2001. Acquisitions accounted for $2,151 of the $2,815 increase. The
remainder was due primarily to expansion of the revenue producing secondary
market function, incentives designed to enhance performance, additional
expenses related to the new core processing system installed last year, and
expense relating to a profit performance study by an outside consultant.
Expenses for year-to-date June 30, 2002 are $14,962 compared to $8,872 for the
same period last year. Acquisitions accounted for approximately $4,891 of the
$6,090 increase. The remaining expenses are up for the same reasons discussed
above.
Income Taxes
Income tax expense as a percentage of pre-tax income for year-to-date June 30
was 32.7% this year versus 26.9% last year. This is due to a lower percentage
of tax-free investments in the acquired banks and the continued decline of
tax-free investments in First National Bank.
17
Decisions as to which securities to purchase are based on taxable equivalent
yields for specific durations. The Corporation has increased its investment
in taxable securities because they have provided higher taxable-equivalent
yields for the desired timeframes than have non-taxable securities.
Balance Sheet
Total assets of the Corporation increased $5,323, from $954,450 at December
31, 2001 to $959,773 at June 30, 2002 due primarily to loan growth, offset in
part by the payment in January of the cash portion of the consideration to the
stockholders of SCB approximating $13,500.
Total loans grew $18,814 or 2.9% excluding the $9,060 sale of the bankcard
portfolio. The growth occurred in the consumer and commercial real estate
categories. Real estate mortgage loans declined by $4,509 due in part to
refinancing and sale of mortgage loans that were held in the portfolio.
Federal funds sold are $11,540 over year-end and are unusually high primarily
due to the temporary seasonal increase in municipal deposits. Short-term
investments are down to zero from year end's $16,549 due primarily to the
payment in January of the cash portion to SCB shareholders discussed above.
Securities are down $5,661 as some of proceeds from sales were invested in
bank owned life insurance (BOLI). Investment in BOLI increased $10,874 and
was done to enhance yields. Mortgages held for sale balances dropped $4,281.
Secondary mortgage activity is still high, but the mortgage pipeline
fluctuates daily.
Goodwill increased $1,563 and core deposit intangible balances declined by
$1,983. At December 31, 2001, core deposit intangibles were estimated at
$7,500 pending a core deposit study. An outside firm specializing in
quantifying these intangibles completed this study and the difference was
reclassified to goodwill. Core deposit intangibles are being amortized over
a 10-year period on an accelerated basis.
Total deposits were $823,117 at the end of June 30, 2002 compared to $806,787
at December 31, 2001. Core noninterest-bearing and interest-bearing demand
and savings deposits increased a strong 11.8%. Time deposits dropped 5.2%.
Other liabilities declined by $15,235 due to the payment of the cash
consideration to SCB shareholders, which was recorded as a liability at year-
end.
Stockholders' Equity
Stockholders' equity was up $3,977 to $90,610 at June 30, 2002 from $86,633 at
December 31, 2001. This was principally the result of earnings of $5,821 and
an increase in the market value of securities available for sale of $1,171.
These increases were partially offset by cash dividends of $1,960 and stock
repurchases of $1,429. A stock dividend of 6% was also recorded in the equity
section by increasing common stock and surplus by $6,282 and reducing
undivided profits by the same amount.
18
Past Due Loans and Nonperforming Assets
Loans past due 90 days and over at June 30, 2002 on which interest was still
accruing totaled $227 compared to $1,031 at December 31, 2001. Nonaccrual
loans and other real estate owned was $3,563 compared to $4,235 at December
31, 2001. Expressed as a percent of total loans, nonaccrual and other real
estate declined from .68% to .54%.
Included in nonaccruals is $765 related to a customer in the nursing home and
assisted living industry. Total loans extended to this relationship includes
$2,680. Management has reached agreement with the borrower and his related
interests to collateralize the unsecured and undersecured debt with properly
margined real estate. Deeds of trust have been executed and recorded and on
time payments are being made in accordance with the loan agreement.
19
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The effective management of market risk is essential to achieving the
Corporation's strategic financial objectives. As a financial institution, the
Corporation's most significant market risk exposure is interest rate risk.
The primary objective of interest rate risk management is to minimize the
effect that changes in interest rates have on net interest income. This is
accomplished through active management of asset and liability portfolios with
a focus on the strategic pricing of asset and liability accounts and
management of maturity mixes for assets and liabilities. The goal of these
activities is the development of appropriate maturity and repricing
opportunities in the Corporation's portfolios of assets and liabilities that
will produce consistent net interest income during periods of changing
interest rates. The Corporation's Asset Liability Management Committee and
boards monitor loan, investment and liability portfolios to ensure
comprehensive management of interest rate risk.
The asset/liability management process is designed to achieve relatively
stable net interest margins and assure liquidity by coordinating the volumes,
maturities or repricing opportunities of earning assets, deposits and borrowed
funds. It is the responsibility of the above Committee to determine and
achieve the most appropriate volume and mix of earning assets and interest-
bearing liabilities, as well as ensure an adequate level of liquidity and
capital, within the context of corporate performance goals. The Committee
also sets policy guidelines and establishes long-term strategies with respect
to interest rate risk exposure and liquidity. The Committee meets regularly
to review interest rate risk and liquidity positions in relation to present
and prospective market and business conditions, and adopts funding and balance
sheet management strategies that are intended to ensure that the potential
impact on earnings and liquidity as a result of fluctuations in interest rates
is within acceptable standards.
The majority of assets and liabilities of financial institutions are
monetary in nature and differ greatly from most commercial and industrial
companies that have significant investments in fixed assets and inventories.
Fluctuations in interest rates and actions of the Board of Governors of the
Federal Reserve System ("FRB") to regulate the availability and cost of
credit have a greater effect on a financial institution's profitability than
do the effects of higher costs for goods and services. Through its balance
sheet management function, the Corporation is positioned to respond to
changing interest rates and inflationary trends.
Management uses interest sensitivity simulation analysis ("Simulation") to
measure the sensitivity of projected earnings to changes in interest rates.
Simulation takes into account the current contractual agreements that the
Corporation has made with its customers on deposits, borrowings, loans,
investments and any commitments to enter into those transactions. Management
monitors the Corporations' interest sensitivity by means of a computer model
that incorporates the current volumes, average rates and scheduled maturities
and payments of asset and liability portfolios, together with multiple
scenarios of projected prepayments, repricing opportunities and anticipated
volume growth. Using this information, the model projects earnings based on
projected portfolio balances under multiple interest rate scenarios. This
level of detail is needed to simulate the effect that changes in interest
20
rates and portfolio balances may have on the earnings of the Corporation.
This method is subject to the accuracy of the assumptions that underlie the
process, however, it provides a better illustration of the sensitivity of
earnings to changes in interest rates than other analyses such as static or
dynamic gap.
The asset/liability management process requires a number of key assumptions.
Management determines the most likely outlook for the economy and interest
rates by analyzing external factors, including published economic projections
and data, the effects of likely monetary and fiscal policies as well as any
enacted or prospective regulatory changes. The Corporations' current and
prospective liquidity position, current balance sheet volumes and projected
growth, accessibility of funds for short-term needs and capital maintenance
are also considered. This data is combined with various interest rate
scenarios to provide management with information necessary to analyze interest
sensitivity and to aid in the development of strategies to reach performance
goals.
The following table shows the effect that the indicated changes in interest
rates would have on net interest income projected for the next twelve
months using the interest simulation model. Key assumptions in the
preparation of the table include prepayment speeds of mortgage-related assets,
cash flows, changes in market conditions, loan volumes and pricing, deposit
sensitivity, customer preferences and capital plans. The resulting change in
net interest income reflects the level of sensitivity that net interest income
has in relation to changing interest rates.
INTEREST SENSITIVITY SIMULATION ANALYSIS
Annualized Hypothetical
Change in Prime Percentage Change in
Rate Over 12 Months Net Interest Income
+ 3.00% 1.28%
+ 2.00 0.94
+ 1.00 0.49
- 1.00 - 0.46
- 2.00 - 0.72
- 3.00 - 0.83
Management has established parameters for asset/liability management which
prescribe a maximum impact on net interest income, net income or market
value of equity resulting from a change in interest rates over twelve months,
and from a 100 and 200 basis point instant change referred to as "interest
rate shock." It is management's ongoing objective to effectively manage the
impact of changes in interest rates and minimize the resulting effect on
earnings and market value of equity. At June 30, 2002 the Corporations'
sensitivity to changes in interest rates were within management's targets.
21
Part II OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of shareholders of FNB Corporation was held at
Custom Catering, Inc., 902 Patrick Henry Drive, Blacksburg,
Virginia on May 14, 2002, at 2:00 p.m., for the following purpose:
(1) To elect four Class III directors to serve until the 2004
Annual Meeting for Shareholders, two Class I directors to serve
until the 2002 Annual Meeting of Shareholders;
A total of 4,729,739 shares of a possible 5,869,346 shares or 80.6
percent of eligible shares were voted. The following information
is provided to disclose the number of votes for, against or
withheld, and abstentions for each director:
No. of Shares
No. of Shares Voted Against Number of
Director Voted For or Withheld Abstentions
Douglas Covington 4,636,394 93,345 --
F. Courtney Hoge 4,638,398 91,341 --
Walter A. Hunt 4,638,398 91,341 --
Clark Owen, Jr. 4,637,665 92,074 --
B. L. Rakes 4,634,828 94,911 --
Carl E. Tarpley, Jr. 4,614,735 115,004 --
(2) To approve an amendment to the Amended Articles of
Incorporation to increase the number of authorized shares from
10,000,000 to 25,000,000:
22
No. of Shares
No. of Shares Voted Against Number of
Voted For or Withheld Abstentions
4,599,660 113,670 16,409
(3) To ratify the selection by the Audit/Compliance Committee of
the Board of Directors of Brown Edwards & Company, L.L.P.,
independent certified public accountants, as auditors of the
Corporation for 2002:
No. of Shares
No. of Shares Voted Against Number of
Voted For or Withheld Abstentions
4,709,555 12,564 7,620
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits:
See index to exhibits
(B) Reports on Form 8-K:
None
23
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.
FNB Corporation
Date August 9, 2002 by: s/J. Daniel Hardy, Jr.
J. Daniel Hardy, Jr.
President & Chief Executive Officer
Date August 9, 2002 by: s/Daniel A. Becker
Daniel A. Becker
Senior Vice President & Chief Financial Officer
24
INDEX TO EXHIBITS
Exhibit # Description
(2) Plan of Merger
(2)A Merger agreement dated July 31, 2001 between FNB Corporation and
Salem Community Bankshares, Inc. filed with the Commission as
Exhibit (2)D on Form 10-Q for the quarter ended June 30, 2001, is
incorporated herein by reference.
(2)B Amendment to merger agreement dated August 7, 2001 between FNB
Corporation and Salem Community Bankshares, Inc. filed with the
Commission as exhibit (2)E on Form 10-Q for the quarter ended
June 30, 2001, is incorporated herein by reference.
(3)(i)(a) Articles of Incorporation
Registrant's Articles of Incorporation, filed with the Commission
as exhibit 3.1 to the Annual Report on Form 10-K for the year
ended December 31, 1996, is incorporated herein by reference.
(3)(i)(b) Articles of Amendment to Articles of Incorporation, incorporated
herein by reference to Exhibit 3.3 of Registrant's
Registration Statement on Form S-4 dated September 13, 2000.
(3)(i)(c) Articles of Amendment to Articles of Incorporation
(3)(ii) Registrant's Amended Bylaws, filed with the Commission as exhibit
(3)(iii) on Form 10-Q for the quarter ended June 30, 2001, is
incorporated herein by reference.
(10) Material Contracts
(10)A Employment agreement dated April 1, 2002 between FNB Corporation
and Julian D. Hardy, Jr.
(10)B Employment agreement dated April 1, 2002 between FNB Corporation
and Peter A. Seitz.
(10)C Employment agreement dated April 1, 2002 between FNB Corporation
and Litz H. Van Dyke.