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 September 30, 2002
or
[] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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
5,746,066 shares outstanding as of October 10, 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
September 30, 2002 3
Consolidated Balance Sheet as of December 31, 2001 4
Unaudited Consolidated Statements of Income and
Comprehensive Income for the quarter and nine-month
periods ended September 30, 2002 and 2001 5-6
Unaudited Consolidated Statements of Cash Flows for the nine-
month periods ended September 30, 2002 and 2001 7-8
Unaudited Consolidated Statement of Changes in Stockholders'
Equity for the nine-month period ended September 30, 2001 9
Unaudited Consolidated Statement of Changes in Stockholders'
Equity for the nine-month period ended September 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
Item 4. Controls and Procedures 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 2. Changes in Securities and Use of Proceeds 22
Item 3. Defaults Upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
Certifications 24-27
Index to Exhibits 28
3
CONSOLIDATED BALANCE SHEET
FNB Corporation and subsidiaries
September 30, 2002
In Thousands, Except Share and Per Share Data
(Unaudited)
ASSETS
Cash and due from banks $ 33,148
Federal funds sold 7,100
Securities available-for-sale, at fair value 168,136
Securities held-to-maturity, at amortized cost (fair
value approximated $18,380) 17,690
Mortgage loans held for sale 23,203
Loans:
Commercial 78,545
Consumer 134,437
Real estate - commercial 218,135
Real estate - construction 42,387
Real estate - mortgage 206,934
Total loans, net of unearned income 680,438
Less allowance for loan losses 9,575
Loans, net 670,863
Bank premises and equipment, net 23,065
Other real estate owned 1,007
Goodwill 21,735
Core deposit intangibles 5,072
Other assets 21,942
Total assets $ 992,961
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand deposits 114,675
Interest-bearing demand and savings deposits 278,714
Time deposits 358,341
Certificates of deposit of $100,000 and over 87,718
Total deposits 839,448
Short term borrowings 21,225
Long term debt 33,565
Other liabilities 5,603
Total liabilities 899,841
Stockholders' equity:
Common stock, $5.00 par value, Authorized 25,000,000
shares; issued and outstanding 5,804,447 shares 29,022
Surplus 51,038
Unearned ESOP shares (52,381 shares) (721)
Retained earnings 10,977
Accumulated other comprehensive income (loss) 2,804
Total stockholders' equity 93,120
Total liabilities and stockholders' equity $ 992,961
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 Nine Months Ended September 30, 2002 and 2001
In Thousands, Except Share and Per Share Data
(Unaudited)
Quarter Ended Nine Months Ended
September 30 September 30
2002 2001 2002 2001
Interest income:
Interest and fees on loans $ 12,465 10,111 37,099 29,668
Interest on securities:
Taxable 2,104 1,751 6,362 4,259
Nontaxable 373 443 1,199 1,412
Interest on short term investments 225 120 575 604
Total interest income 15,167 12,425 45,235 35,943
Interest expense:
Interest on interest-bearing
demand and savings deposits 856 975 2,523 2,967
Interest on time deposits 3,145 3,727 9,653 10,189
Interest on certificates of
deposit of $100,000 and over 990 1,160 3,091 3,234
Interest on short term borrowings 30 39 84 240
Interest on long term debt 529 116 1,513 932
Total interest expense 5,550 6,017 16,864 17,562
Net interest income 9,617 6,408 28,371 18,381
Provision for loan losses 224 285 1,006 940
Net interest income after
provision for loan losses 9,393 6,123 27,365 17,441
Noninterest income:
Service charges on deposit accounts 810 460 2,129 1,239
Loan origination fees 736 382 1,715 680
Other service charges and fees 401 439 1,406 1,232
Other income 435 225 1,417 566
Gain on sale of bankcards - - 1,206 -
Securities gains (losses), net 135 10 291 170
Total noninterest income 2,517 1,516 8,164 3,887
6
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (Continued)
FNB Corporation and subsidiaries
Quarter and Nine Months Ended September 30, 2002 and 2001
In Thousands, Except Share and Per Share Data
(Unaudited)
Quarter Ended Nine Months Ended
September 30 September 30
2002 2001 2002 2001
Noninterest expense:
Salaries and employee benefits 4,224 2,607 12,150 7,266
Occupancy and equipment expense,net 1,275 961 3,714 2,539
Cardholder/merchant processing 175 131 576 368
Supplies expense 213 173 641 511
Amortization of Goodwill and Core
Deposit Intangibles 267 149 801 292
Other expenses 1,892 1,196 5,126 3,113
Total noninterest expense 8,046 5,217 23,008 14,089
Income before income tax expense 3,864 2,422 12,521 7,239
Income tax expense 1,186 659 4,022 1,955
Net income $ 2,678 1,763 8,499 5,284
Other comprehensive income (loss),
net of income tax expense (benefit):
Gross unrealized gains (losses) on
available-for-sale securities 891 1,194 2,218 1,904
Less: Reclassification
adjustment for (gains)
losses included in
net income (135) (10) (291) (170)
Other comprehensive income 756 1,184 1,927 1,734
Comprehensive income $ 3,434 2,947 10,426 7,018
Basic earnings per share $ 0.47 0.40 1.48 1.22
Diluted earnings per share $ 0.46 0.39 1.46 1.21
Dividends declared per
share $ 0.17 0.17 0.51 0.51
Average number basic
shares outstanding 5,750,556 4,467,526 5,759,599 4,348,015
Average number diluted
shares outstanding 5,836,690 4,521,002 5,833,433 4,371,511
See accompanying notes to consolidated financial statements.
7
CONSOLIDATED STATEMENTS OF CASH FLOWS
FNB Corporation and subsidiaries
Nine Months Ended September 30, 2002 and 2001
In Thousands
(Unaudited)
2002 2001
Cash flows from operating activities:
Net income $ 8,499 5,284
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 1,006 940
Depreciation and amortization of bank
premises and equipment 1,833 1,390
Amortization of core deposit intangibles 801 -
ESOP compensation 418 372
Stock awards compensation 122 46
Amortization of premiums and accretion
of discounts, net 540 132
Gain on sale of securities, net (291) (170)
Net gain on sale of fixed assets and
other real estate (119) (2)
Gain on sale of bankcard portfolio (1,206) -
Net increase in mortgage loans held
for sale (9,277) (6,080)
(Increase) decrease in other assets 906 (6,402)
Increase (decrease) in other liabilities (13,729) 342
Net cash used in operating
activities (10,497) (4,148)
Cash flows from investing activities:
Net (increase) decrease in federal funds sold 1,910 (5,200)
Net decrease in short term investments 16,549 -
Proceeds from sales of securities available-
for-sale 5,718 20,809
Proceeds from calls and maturities of
securities available-for-sale 64,599 26,962
Proceeds from calls and maturities of
securities held-to-maturity 13,223 4,875
Purchase of securities available-for-sale (84,176) (71,369)
Purchase of securities held-to-maturity (356) -
Sale of bankcard portfolio 10,266 -
Acquisition of subsidiary - 2,243
Net increase in loans (43,273) (14,865)
Proceeds from sale of fixed assets and
other real estate owned 1,354 402
Recoveries on loans previously charged off 829 132
Bank premises and equipment expenditures (2,166) (4,098)
Change in bank owned life insurance (10,874) -
Net cash used in investing
activities (26,397) (40,109)
8
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
FNB Corporation and subsidiaries
Nine Months Ended September 30, 2002 and 2001
In Thousands
(Unaudited)
2002 2001
Cash flows from financing activities:
Net increase in demand and savings deposits 50,820 46,248
Net increase (decrease) in time deposits and
certificates of deposit (18,159) 59,589
Net increase (decrease) in short-term
borrowing 12,762 (3,927)
Net increase (decrease) in other borrowed funds 747 (39,132)
Principal payments on ESOP debt (418) (372)
Dividends paid (2,958) (2,294)
Repurchase FNB Corporation stock (1,569) (1,142)
Net cash provided by
financing activities 41,225 58,970
Net increase in cash and due from banks 4,331 14,713
Cash and due from banks at beginning of period 28,817 12,325
Cash and due from banks at end of period $ 33,148 27,038
See accompanying notes to consolidated financial statements.
9
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FNB Corporation and subsidiaries
Nine Months Ended September 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 - - - 5,284 - 5,284
Cash dividends,
$0.51 per share - - - (2,258) - (2,258)
ESOP shares
allocated upon
loan repayment - - 372 - - 372
Stock awards
issued 26 59 - - - 85
Repurchase and
retirement of
common stock (321) (821) - - - (1,142)
Change in net
unrealized gains
(losses) on
securities
available-for-
sale, net of
tax effect of
$893 - - - - 1,734 1,734
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 - - (137) - - (137)
Balances at
September 30, 2001 $21,393 28,088 (1,139) 11,030 1,785 $61,157
See accompanying notes to consolidated financial statements.
10
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FNB Corporation and subsidiaries
Nine Months Ended September 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 - - - 8,499 - 8,499
Cash dividends,
$0.51 per share - - - (2,942) - (2,942)
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 - - 418 - - 418
Stock awards
issued 37 133 - - - 170
Stock options
exercised 3 (22) - - - (19)
Repurchase and
retirement of
common stock (376) (1,226) - - - (1,602)
Change in net
unrealized gains
(losses) on
securities
available-for-
sale, net of
tax effect of
$993 - - - - 1,927 1,927
Adjustment related
to purchase of
Salem Community
Bankshares, Inc. 13 39 - - - 52
Balances at
September 30, 2002 $29,022 51,038 (721) 10,977 2,804 $93,120
See accompanying notes to consolidated financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FNB Corporation and subsidiaries
September 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 September 30, 2002; the consolidated statements of income, for the
three and nine-months ended September 30, 2002 and 2001, and the
consolidated statements of changes in stockholders' equity, and the
consolidated statements of cash flows for the nine-months ended
September 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 performed the required impairment
tests of goodwill and indefinite lived intangible assets in accordance
with the new standard and determined that no impairment exists.
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 Nine Months Ended
Sept 30, Sept 30,
2002 2001 2002 2001
Balance at beginning of period $ 9,312 6,686 8,827 5,670
Reserve acquired through merger - - - 791
Provisions for loan losses 224 285 1,006 940
Additional reserve for branch
loans purchased - - - 188
Loan recoveries 584 25 829 132
Loan charge-offs (545) (341) (1,087) (1,066)
Balance at end of period $ 9,575 6,655 9,575 6,655
Nonperforming assets consist of the following:
Sept 30 December 31,
2002 2001
Nonaccrual loans $ 2,365 2,815
Other real estate owned 1,007 1,420
Loans past due over 90 days 354 1,031
Total nonperforming assets $ 3,726 5,266
There were no material commitments to lend additional funds to customers
whose loans were classified as nonperforming at September 30, 2002.
(5) Short Term Borrowings and Long Term Debt
Securities sold under agreements to repurchase (repurchase
agreements) at September 30, 2002 and December 31, 2001 were
collateralized by investment securities controlled by the Corporation
with a book value of $14,099 and $11,620, respectively.
Advances from the Federal Home Loan Bank of Atlanta totaled $32,031
and $18,269 on September 30, 2002 and December 31, 2001, respectively.
13
The interest rates on the advances as of September 30, 2002 range from
2.2 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.
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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 First Union Bank branches in southwest Virginia that
were merged into First National Bank. In addition, on May 2, 2001, Southwest
Virginia 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
Nonrecurring Item
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.
The following unaudited proforma financial information shows the effect of FNB
Corporation as of September 30, 2002 with the First Union Bank branches, Salem
Community Bankshares, Inc., Southwest Virginia Savings Bank F.S.B. and the
effect of the bankcard sale adjusted to make it comparable with September 30,
2001.
Sept 30, 2002
Less
Sept 30, Acquisitions Acquisitions Sept 30,
2002 & Bankcard & Bankcard 2001
Net interest income $ 28,371 8,145 20,226 18,381
Provision loan loss 1,006 538 468 940
Noninterest income 8,164 2,793 5,371 3,887
Noninterest expense 23,008 6,532 16,476 14,089
Income before taxes 12,521 3,868 8,653 7,239
Taxes 4,022 1,495 2,527 1,955
Net income $ 8,499 2,373 6,126 5,284
Net Income
Net income for the third quarter was $2,678 and basic earnings per share were
$.47. This compares to $1,763 or $.40 in the third quarter, 2001. Year-to-
date net income was $8,499 and basic earnings per share were $1.48. Excluding
the gain on the bankcard sale, earnings were $7,703 and basic earnings per
share were $1.34. This compares to $5,284 and $1.22 last year. The increase
in net income in both periods was primarily due to acquisitions, an improved
margin, improved credit quality 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 $9,617 and 4.42% in the third quarter, 2002
compared to $6,408 and 4.13% in the third quarter, 2001. Net interest income
and margin for year-to-date September 30, 2002 were $28,371 and 4.47%
respectively compared to $18,381 and 4.29% for the same period last year.
Acquisitions accounted for $2,332 of the $3,209 increase in net interest
income in the third quarter and $8,428 of the $9,990 increase in the first
16
nine months. The remainder of the increase was due to an improved margin
primarily attributed to a drop in deposit costs relative to loan yields. The
cost of interest-bearing deposits dropped more than 41 basis points relative
to the yield on loans in the declining rate environment from the third quarter
and year-to-date of last year to this year. In addition, the margin improved
as lower cost checking, savings and money market deposits grew and the more
expensive certificate of deposit balances declined.
Provision for Loan Losses
The provision for loan losses was $224 in the third quarter, 2002 compared to
$285 in the same quarter last year, and $1,006 for the first nine months of
2002 compared to $940 for the same period last year. Excluding acquisitions,
the provision is down from last year's same quarter and year-to-date due to
lower net charge-offs. There was a net recovery of $39 in the third quarter,
2002 compared to net charge-offs of $322 in the third quarter of last year.
Net charge-offs were $259 through September of this year compared to $941 in
the first nine months of last year. The net recovery in the third quarter was
due to one large credit and amounted to $558. The allowance for loan losses
is $9,575 and 1.41% of loans at September 30, 2002 compared to $$6,655 and
1.38% of loans at September 30 of last year. The change of $2,927 is due
primarily to acquisitions. Management feels the higher reserve percentage is
prudent in light of the uncertain economy.
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 $2,517 in the
third quarter, 2002 compared to $1,516 in the third quarter of last year for a
difference of $1,001. This is primarily due to mergers ($492), higher
mortgage revenue of $240 due to the low interest rate environment and
resultant high level of refinancing activity, income from recently acquired
bank owned life insurance ($159) and higher securities gains ($120). Year to
date September 30, 2002 noninterest income was $8,164, up $4,277 from the same
period prior year due to: the bankcard sale ($1,206), mergers ($1,701),
higher loan origination fees ($648), income from bank owned life insurance
($222) and higher trust and securities division revenue ($127).
Noninterest Expense
Noninterest expense, consisting of salaries and employee benefits, occupancy
and equipment costs, cardholder and merchant processing, supplies and other
expenses was $8,046 in the third quarter, 2002 compared to $5,217 for the
three months ending September 30, 2001. Acquisitions accounted for $1,808 of
the $2,829 increase. The remainder was due primarily to expansion of the
revenue producing secondary market function, higher employee incentives
designed to enhance performance, higher hospitalization costs and other
benefit expenses and expense relating to a profit performance study by an
outside consultant. Expenses for year-to-date September 30, 2002 are $23,008
compared to $14,089 for the same period last year. Acquisitions accounted for
approximately $6,699 of the $8,919 increase. The remaining expenses are up
17
for the same reasons discussed above for the quarter. In addition, the
Corporation converted to a new core processor last year. The additional
ongoing expenses relating to this conversion were incurred for a full year in
2002 and a partial year in 2001.
Income Taxes
Income tax expense as a percentage of pre-tax income for year-to-date
September 30 was 32.1% this year versus 27.1% 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.
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 $38,511, from $954,450 at December
31, 2001 to $992,961 at September 30, 2002 due primarily to loan growth.
Total loans grew $32,175 or 5.0%. Excluding the $9,060 sale of the bankcard
portfolio, total loans grew $41,235 or 6.3%. The growth occurred principally
in the commercial real estate category ($24,560) and consumer category
($13,425).
Short-term investments are down to zero from the year-end balance of $16,549
due primarily to the payment in January of the cash portion to Salem Community
Bankshares shareholders. Mortgages held for sale balances increased $9,277
due to higher volume of secondary market mortgage activity resulting from a
lower rate environment.
Goodwill increased $1,938 and core deposit intangible balances declined by
$2,428. 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. Other assets increased $8,843 due
primarily to an additional $10,874 investment in bank owned life insurance
(BOLI), which has a high taxable equivalent yield.
Total deposits were $839,448 at the end of September 30, 2002 compared to
$806,787 at December 31, 2001. Lower cost core noninterest-bearing and
interest-bearing demand and savings deposits increased a strong 14.8%. Higher
cost time deposits dropped and certificates of deposits $100,000 and over
dropped 3.9%. This contributed to a higher margin as discussed above under
net interest income.
Short-term borrowings increased by $12,762 as the Corporation took advantage
of the steep upward slope in the yield curve and borrowed short-term funds
from the Federal Home Loan Bank(FHLB)and invested them in slightly higher
duration securities with higher yields. Interest rate risk is small as the
duration in these securities is estimated to be less than one year.
18
Other liabilities declined by $14,146 due to the payment of the cash
consideration to Salem Community Bankshares shareholders, which was recorded
as a liability at year-end.
Stockholders' Equity
Stockholders' equity was up $6,487 to $93,120 at September 30, 2002 from
$86,633 at December 31, 2001. This was principally the result of earnings of
$8,499 and an increase in the market value of securities available for sale of
$1,927. These increases were partially offset by cash dividends of $2,942 and
stock repurchases of $1,602. 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.
Nonperforming Assets
Nonperforming assets which consist of loans past due 90 days and over on which
interest was still accruing, other real estate and nonaccrual loans totaled
$3,726 compared to $5,266 at December 31, 2001. Expressed as a percent of
total loans, nonperforming assets declined from .81% to .55%. This decrease
is due partially to the satisfactory settlement of nonaccrual loans amounting
to $765 related to a customer in the nursing home and assisted living
industry.
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% -0.66%
+ 2.00 -0.41
+ 1.00 -0.23
- 1.00 0.06
- 2.00 0.18
- 3.00 -0.11
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 September 30, 2002 the Corporations'
sensitivity to changes in interest rates were within management's targets.
21
Item 4. CONTROLS AND PROCEDURES
We maintain a system of internal controls and procedures designed to provide
reasonable assurance as to the reliability of our published financial
statements and other disclosures included in this report. Within the 90-day
period prior to the date of this report, we evaluated the effectiveness of
the design and operation of our disclosure controls and procedures pursuant
to Rule 13a-14 of the Securities Exchange Act of 1934. Based upon that
evaluation, our Chief Executive Officer and our Principal Financial Officer
concluded that our disclosure controls and procedures are effective in timely
alerting them to material information relating to FNB Corporation (including
its consolidated subsidiaries) required to be included in this quarterly
report on Form 10-Q.
There have been no significant changes in our internal controls or in other
factors which could significantly affect internal controls subsequent to the
date that we carried out our evaluation.
22
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
None
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 October 31, 2002 s/J. Daniel Hardy, Jr.
J. Daniel Hardy, Jr.
President & Chief Executive Officer
Date October 31, 2002 s/Daniel A. Becker
Daniel A. Becker
Senior Vice President & Chief Financial Officer
24
CERTIFICATIONS
I, J. Daniel Hardy, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of FNB
Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present in
all material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's
internal controls; and
25
6. The registrant's other certifying officers and I have indicated
in this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: October 31, 2002 s/J. Daniel Hardy, Jr.
J. Daniel Hardy, Jr.
President & Chief Executive Officer
26
CERTIFICATIONS
I, Daniel A. Becker., certify that:
1. I have reviewed this quarterly report on Form 10-Q of FNB
Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present in
all material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's
internal controls; and
27
6. The registrant's other certifying officers and I have indicated
in this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: October 31, 2002 s/Daniel A. Becker
Daniel A. Becker
Senior Vice President & Chief Financial Officer
28
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, filed with
the Commission as exhibit (3)(i)(c) on Form 10-Q for the quarter
ended June 30, 2002, is incorporated herein by reference.
(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., filed with the Commission as exhibit
(10)A on Form 10-Q for the quarter ended June 30, 2002, is
incorporated herein by reference.
(10)B Employment agreement dated April 1, 2002 between FNB Corporation
and Peter A. Seitz, filed with the Commission as exhibit (10)B
on Form 10-Q for the quarter ended June 30, 2002, is incorporated
herein by reference.
(10)C Employment agreement dated April 1, 2002 between FNB Corporation
and Litz H. Van Dyke, filed with the Commission as exhibit (10)C
on Form 10-Q for the quarter ended June 30, 2002, is incorporated
herein by reference.