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, 2003
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 24073
(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
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). X Yes No
5,807,913 shares outstanding as of April 10, 2003
1
FNB CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Consolidated Balance Sheet as of
March 31, 2003 3
Consolidated Balance Sheet as of December 31, 2002 4
Unaudited Consolidated Statements of Income and
Comprehensive Income for the three-month periods
ended March 31, 2003 and 2002 5-6
Unaudited Consolidated Statements of Cash Flows for the
three-month periods ended March 31, 2003 and 2002 7-8
Unaudited Consolidated Statement of Changes in Stockholders'
Equity for the three-month period ended March 31, 2002 9
Unaudited Consolidated Statement of Changes in Stockholders'
Equity for the three-month period ended March 31, 2003 10
Notes to Consolidated Financial Statements 11-13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14-16
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 17-18
Item 4. Controls and Procedures 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities and Use of Proceeds 20
Item 3. Defaults Upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
Certifications 22-25
Index to Exhibits 26
2
CONSOLIDATED BALANCE SHEET
FNB Corporation and subsidiaries
March 31, 2003
In Thousands, Except Share and Per Share Data
(Unaudited)
ASSETS
Cash and due from banks $ 33,882
Federal funds sold 2,900
Securities available-for-sale, at fair value 137,625
Securities held-to-maturity, at amortized cost (fair
value approximated $15,957) 15,355
Other investments at cost 5,544
Mortgage loans held for sale 25,045
Loans:
Commercial 78,716
Consumer 133,966
Real estate - commercial 233,592
Real estate - construction 57,143
Real estate - mortgage 211,633
Total loans, net of unearned income 715,050
Less allowance for loan losses 9,794
Loans, net 705,256
Bank premises and equipment, net 23,211
Other real estate owned 947
Goodwill 21,735
Core deposit intangibles 4,564
Other assets 21,962
Total assets $ 998,026
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand deposits $ 115,334
Interest-bearing demand and savings deposits 292,937
Time deposits 346,558
Certificates of deposit of $100,000 and over 95,480
Total deposits 850,309
Short term borrowings 6,814
Long term debt 38,465
Other liabilities 5,529
Total liabilities 901,117
Stockholders' equity:
Common stock, $5.00 par value, Authorized 25,000,000
shares; issued and outstanding 5,807,913 shares 29,040
Surplus 51,383
Unearned ESOP shares (37,081 shares) (534)
Retained earnings 14,609
Accumulated other comprehensive income (loss) 2,411
Total stockholders' equity 96,909
Total liabilities and stockholders' equity $ 998,026
See accompanying notes to consolidated financial statements.
3
CONSOLIDATED BALANCE SHEET
FNB Corporation and subsidiaries
December 31, 2002
In Thousands, Except Share and Per Share Data
ASSETS
Cash and due from banks $ 29,241
Federal funds sold 11,150
Securities available-for-sale, at fair value 141,888
Securities held-to-maturity, at amortized cost (fair
value approximated $16,681) 16,075
Other investments at cost 5,320
Mortgage loans held for sale 34,271
Loans:
Commercial 76,665
Consumer 133,304
Real estate - commercial 225,316
Real estate - construction 49,186
Real estate - mortgage 207,190
Total loans, net of unearned income 691,661
Less allowance for loan losses 9,466
Loans, net 682,195
Bank premises and equipment, net 23,201
Other real estate owned 1,001
Goodwill 21,735
Core deposit intangibles 4,804
Other assets 21,550
Total assets $ 992,431
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand deposits $ 104,710
Interest-bearing demand and savings deposits 291,391
Time deposits 358,273
Certificates of deposit of $100,000 and over 91,314
Total deposits 845,688
Short term borrowings 8,071
Long term debt 38,531
Other liabilities 5,042
Total liabilities 897,332
Stockholders' equity:
Common stock, $5.00 par value. Authorized 25,000,000
shares; issued and outstanding 5,807,508 shares 29,038
Surplus 51,289
Unearned ESOP shares (49,490 shares) (721)
Retained earnings 12,588
Accumulated other comprehensive income (loss) 2,905
Total stockholders' equity 95,099
Total liabilities and stockholders' equity $ 992,431
See accompanying notes to consolidated financial statements.
4
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FNB Corporation and subsidiaries
Three Months Ended March 31, 2003 and 2002
In Thousands, Except Share and Per Share Data
(Unaudited)
Three Months Ended
March 31
2003 2002
Interest income:
Interest and fees on loans $ 11,928 12,422
Interest on securities:
Taxable 1,546 2,153
Nontaxable 313 422
Interest on federal funds sold and
short term investments 361 227
Total interest income 14,148 15,224
Interest expense:
Interest on interest-bearing
demand and savings deposits 542 844
Interest on time deposits 2,923 3,490
Interest on certificates of
deposit of $100,000 and over 885 962
Interest on federal funds purchased
and securities sold under
agreements to repurchase 12 21
Interest on long term debt 476 486
Total interest expense 4,838 5,803
Net interest income 9,310 9,421
Provision for loan losses 497 466
Net interest income after
provision for loan losses 8,813 8,955
Noninterest income:
Service charges on deposit accounts 1,146 614
Loan origination fees 1,444 537
Other service charges and fees 523 619
Other income 511 406
Securities gains (losses), net 45 (3)
Total noninterest income 3,669 2,173
5
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (Continued)
FNB Corporation and subsidiaries
Three Months Ended March 31, 2003 and 2002
In Thousands, Except Share and Per Share Data
(Unaudited)
Three Months Ended
March 31
2003 2002
Noninterest expense:
Salaries and employee benefits 4,299 3,795
Occupancy and equipment expense,net 1,437 1,194
Cardholder/merchant processing 160 240
Supplies expense 204 189
Telephone expense 163 160
Amortization of core deposit
intangibles 240 268
Other expenses 1,577 1,433
Total noninterest expense 8,080 7,279
Income before income tax expense 4,402 3,849
Income tax expense 1,397 1,265
Net income $ 3,005 2,584
Other comprehensive income (loss),
net of income tax expense (benefit):
Gross unrealized gains (losses) on
available-for-sale securities (449) (549)
Less: Reclassification
adjustment for (gains)
losses included in
net income (45) 3
Other comprehensive income (494) (546)
Comprehensive income $ 2,511 2,038
Basic earnings per share $ 0.52 0.45
Diluted earnings per share $ 0.51 0.44
Dividends declared per
share $ 0.17 0.17
Average number basic
shares outstanding 5,769,406 5,778,257
Average number diluted
shares outstanding 5,836,050 5,827,270
See accompanying notes to consolidated financial statements.
6
CONSOLIDATED STATEMENTS OF CASH FLOWS
FNB Corporation and subsidiaries
Three Months Ended March 31, 2003 and 2002
In Thousands
(Unaudited)
2003 2002
Cash flows from operating activities:
Net income $ 3,005 2,584
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 497 466
Depreciation and amortization of bank
premises and equipment 636 628
Amortization of core deposit intangibles 240 268
ESOP compensation 87 209
Stock awards compensation 37 39
Amortization of premiums and accretion
of discounts, net 289 122
(Gain) loss on sale of securities, net (45) 3
Net gain on sale of fixed assets and
other real estate (12) (129)
Net decrease in mortgage loans held
for sale 9,226 6,339
Increase in other assets (189) (3,788)
Increase (decrease) in other liabilities 487 (13,579)
Net cash provided by (used in)
operating activities 14,258 (6,838)
Cash flows from investing activities:
Net (increase) decrease in federal funds sold 8,250 (11,390)
Net decrease in short term investments - 16,549
Proceeds from sales of securities available-
for-sale 6,318 1,343
Proceeds from calls and maturities of
securities available-for-sale 30,240 7,020
Proceeds from calls and maturities of
securities held-to-maturity 1,151 2,974
Purchase of securities available-for-sale (33,512) (1,991)
Purchase of securities held-to-maturity (430) -
Net increase in loans (23,921) (5,224)
Proceeds from sale of fixed assets and
other real estate owned 371 124
Recoveries on loans previously charged off 58 57
Bank premises and equipment expenditures (646) (534)
Net cash provided by (used in)
investing activities (12,121) 8,928
7
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
FNB Corporation and subsidiaries
Three Months Ended March 31, 2003 and 2002
In Thousands
(Unaudited)
2003 2002
Cash flows from financing activities:
Net increase in demand and savings deposits 12,170 18,033
Net decrease in time deposits and
certificates of deposit (7,549) (20,620)
Net decrease in federal funds purchased
and securities sold under agreements
to repurchase (1,257) (472)
Net increase (decrease) in long term debt (66) 1,385
Principal payments on ESOP debt 187 (209)
Repurchase FNB Corporation stock (6) (1,026)
Stock options exercised 9 -
Dividends paid (984) (1,004)
Net cash provided by (used in)
financing activities 2,504 (3,913)
Net increase (decrease)in cash and due from banks 4,641 (1,823)
Cash and due from banks at beginning of period 29,241 28,817
Cash and due from banks at end of period $ 33,882 26,994
See accompanying notes to consolidated financial statements.
8
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FNB Corporation and subsidiaries
Three Months Ended March 31, 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 - - - 2,584 - 2,584
Cash dividends,
$0.17 per share - - - (988) - (988)
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 6 29 - - - 35
Stock options
exercised - (33) - - - (33)
Repurchase and
retirement of
common stock (257) (776) - - - (1,033)
Change in net
unrealized gains
(losses) on
securities
available-for-
sale, net of
tax effect of
$(628) - - - - (1,220) (1,220)
Adjustment related
to purchase of
Salem Community
Bankshares, Inc. 10 30 - - - 40
Balances at
March 31, 2002 $29,104 51,364 (930) 7,016 (343) $86,211
See accompanying notes to consolidated financial statements.
9
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FNB Corporation and subsidiaries
Three Months Ended March 31, 2003
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, 2002 $29,038 51,289 (721) 12,588 2,905 $95,099
Net Income - - - 3,005 - 3,005
Cash dividends,
$0.17 per share - - - (984) - (984)
ESOP shares
allocated upon
loan repayment - 87 187 - - 274
Stock awards
issued 1 5 - - - 6
Stock options
exercised 2 7 - - - 9
Repurchase and
retirement of
common stock (1) (5) - - - (6)
Change in net
unrealized gains
(losses) on
securities
available-for-
sale, net of
tax effect of
($254) - - - - (494) (494)
Balances at
March 31, 2003 $29,040 51,383 (534) 14,609 2,411 $96,909
See accompanying notes to consolidated financial statements.
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FNB Corporation and subsidiaries
March 31, 2003 and 2002
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 sheet of FNB Corporation and subsidiaries
(referred to herein as "FNB", "the Corporation" or "the Company")
as of March 31, 2003; the consolidated statements of income, the
consolidated statements of changes in stockholders' equity, and the
consolidated statements of cash flows for the three-months ended
March 31, 2003 and 2002.
The consolidated balance sheet as of December 31, 2002 has been
extracted from the audited financial statements included in the
Company's 2002 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
2002 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. 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.
11
(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:
Three Months Ended
March 31,
2003 2002
Balance at beginning of period $ 9,466 8,827
Provisions for loan losses 497 466
Loan recoveries 58 57
Loan charge-offs (227) (320)
Balance at end of period $ 9,794 9,030
Nonperforming assets consist of the following:
March 31 December 31,
2003 2002
Nonaccrual loans $ 2,319 2,914
Other real estate owned 947 1,001
Loans past due over 90 days 336 596
Total nonperforming assets $ 3,602 4,511
There were no material commitments to lend additional funds to customers
whose loans were classified as nonperforming at March 31, 2003.
(5) Short Term Borrowings and Long Term Debt
Securities sold under agreements to repurchase (repurchase
agreements) at March 31, 2003 and December 31, 2002 were
collateralized by investment securities controlled by the Corporation
with a book value of $11,994 and $13,427, respectively.
Advances from the Federal Home Loan Bank of Atlanta totaled $23,001
and $23,067 on March 31, 2003 and December 31, 2002, respectively.
The interest rates on the advances as of March 31, 2003 range from
3.6 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.
12
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 Community
Bankshares, Inc. shareholders. The loan proceeds are treated as
capital of FNB Corporation for regulatory purposes.
13
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 may contain forward-looking statements with respect to the
financial condition, results of operations and business of the Corporation.
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) competitors may have greater
financial resources and develop products that enable such competitors to
compete more successfully than the Corporation; and (7) adverse changes may
occur in the securities markets.
Pending Acquisitions
On March 21, 2003, FNB Corporation (the "Company") announced that it had
executed an Agreement and Plan of Merger, dated as of March 20, 2003, between
the Company and Bedford Bancshares, Inc. ("Bedford"), pursuant to which
Bedford will merge with and into the Company, with Bedford Federal Savings
Bank, FSB, Bedford's subsidiary, becoming a wholly-owned subsidiary of the
Company.
Under the terms of the transaction, Bedford shareholders will receive from
0.8066 to 0.9135 shares of Company common stock, or the equivalent cash value
per share, for each outstanding share of Bedford common stock. The exchange
will float between the Company's per share market value of $26.00 to $30.00
and will be fixed outside of that range. Approximately 20% of the total
consideration will be cash, subject to election procedures set forth in the
Merger Agreement. The Merger is expected to close during the second half of
2003, pending receipt of all requisite regulatory approvals and the approval
of the shareholders of the Company and Bedford.
Information on pro forma financial statements relating to the prospective
merger is incorporated by reference to the S-4 filed on April 24, 2003 under
the heading "Unaudited Pro Forma Combined Condensed Financial Statements".
14
Net Income
Net income for the first quarter 2003 was $3,005 compared to $2,584 in the
same quarter last year, an increase of 16.3%. Basic earnings per share
increased 15.6%, from $.45 to $.52 for the same period. This increase was due
to higher noninterest revenues, partially offset by lower net interest income
and higher noninterest expense.
Net Interest Income
Net interest income currently provides over 70% of the revenue of the
Corporation. 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 $9,310 and 4.25% for the
three months ending March 31, 2003 compared to $9,421 and 4.53% as of March
31, 2002. The reduction in net interest income and margin was due primarily
to a decline in yields on loans relative to deposits in a lower rate
environment (-$809). Loan yields dropped 86 basis points while the cost of
interest-bearing deposits dropped only 62 basis points. Further reductions in
deposit costs are limited because many products are close to pricing floors.
The decline in net interest income due to rates was partially offset by growth
in earning assets ($455) and a favorable change in the percent composition of
the deposit base from higher cost certificates of deposit and individual
retirement accounts to lower-cost transaction account balances ($243).
Provision for Loan Losses
The provision for loan losses was up slightly, from $466 in the first quarter
of last year to $497 this year primarily due to loan growth. Net charge-offs
were down from $263 last year to $169 this year. The allowance as a percent
of loans was $1.37% at March 31, 2003 compared to 1.37% at December 31, 2002
and 1.38% at March 31, 2002.
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 $3,669 in the
first quarter 2003 compared to $2,173 in the first quarter of last year for a
difference of $1,496. This increase was primarily due to higher mortgage
origination revenue of $907 due to the low interest rate environment and
resultant high level of refinancing activity plus the establishment of a
wholesale mortgage operation. The remainder was due to revenue realized from
the successful launch of a new "Overdraft Privilege" product in October 2002
and higher revenue from bank owned life insurance resulting from an increased
investment in this product in March 2002.
Noninterest Expense
Noninterest expense, consisting of salaries and employee benefits, occupancy
and equipment costs, cardholder and merchant processing, supplies and other
expenses were $8,080 in the first quarter 2003 compared to $7,279 for the
three months ended March 31, 2002, an increase of $801. The increase was due
primarily to expenses associated with growth in the secondary mortgage
function and the new "Overdraft Privilege" product ($445). Excluding these
expenses, noninterest expense growth was 5%. The remainder of the increases
was spread among many categories including higher benefit costs, building
maintenance and service contract expense.
15
Income Taxes
Income tax expense as a percentage of pre-tax income as of March 31, 2003 was
31.7% versus 32.9% for the same period last year. This is due to a higher
investment in tax-free bank owned life insurance (BOLI).
Balance Sheet
Total assets of the Corporation increased from $992,431 at December 31, 2002
to $998,026 at March 31, 2003. This increase was due primarily to loan growth
and higher cash and due from bank balances, largely offset by decreases in fed
funds sold and other investments.
Cash and due from bank balances are up $4,641 at March 31, 2003 compared to
December 31, 2002. These balances fluctuate considerably from day to day
depending on deposit activity and clearing balances with other banks. The
average cash and due from bank balance for the quarter was lower than
December 31, 2002 and lower than the fourth quarter average, 2002.
Total loans grew 3.0% or $23,389 since year-end, from $691,661 to $715,050.
The growth occurred principally in the commercial real estate and construction
categories ($16,233) and consumer real estate category ($4,443). The
Corporation is experiencing good growth in residential construction and other
real estate projects. Demand has improved recently as we moved past the
winter months.
Fed funds sold and other investments declined $8,250 and $4,759, respectively,
to fund the growth in loans. Mortgages held for sale balances are down from
$34,271 at year-end to $25,045 at March 31, 2003. These balances tend to
fluctuate on a day-to-day basis. Total monthly mortgage production in the
secondary mortgage area continues to be strong.
Total deposits grew from $845,688 at December 31, 2002 to $850,309 at March
31, 2003. Lower-cost core noninterest-bearing and interest-bearing demand and
savings deposits grew a strong 3.1% (12.4% annualized) or $12,170. Higher
cost time deposits and certificates of deposits over $100,000 (CDs)had a net
decline of $7,519 due to highly competitive pricing in our markets. The
Corporation attempts to price CDs so the excess funds provided can be invested
profitability in the investment portfolio.
Stockholders' Equity
Stockholders' equity increased $1,810, from $95,099 at December 31, 2002 to
$96,909 at March 31, 2003 due primarily to earnings net of dividends ($2,021).
This increase was partially offset by a $494 decline in the market value of
securities available for sale.
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
$3,602 at March 31, 2003 compared to $4,511 at December 31, 2001. Expressed
as a percent of total loans, nonperforming assets declined from .65% to .50%.
This decrease is attributable to the satisfactory resolution of several
nonaccrual loans on the books at December 31, 2002 and no major additions to
nonaccruals this year.
16
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
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.
17
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% 2.24%
+ 2.00 1.48
+ 1.00 0.75
- 1.00 -0.66
- 2.00 -1.62
- 3.00 -2.65
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 February 28, 2003 the Corporations'
sensitivity to changes in interest rates were within management's targets.
18
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.
19
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
20
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 April 30, 2003 s/Samuel H. Tollison
Samuel H. Tollison
President & Chief Executive Officer
Date April 30, 2003 s/Daniel A. Becker
Daniel A. Becker
Senior Vice President & Chief Financial Officer
21
CERTIFICATIONS
I, Samuel H. Tollison, 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 officer 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 officer 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
22
6. The registrant's other certifying officer 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: April 30, 2003 s/Samuel H. Tollison
Samuel H. Tollison
President & Chief Executive Officer
23
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 officer 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 officer 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
24
6. The registrant's other certifying officer 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: April 30, 2003 s/Daniel A. Becker
Daniel A. Becker
Senior Vice President & Chief Financial Officer
25
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.
(2)C Merger agreement dated March 20, 2003 between FNB Corporation
and Bedford Bancshares, Inc.
(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.
(3)(iii) Registrant's Bylaws
(10) Material Contracts
(10)A First Amendment to Consulting and Noncompetition Agreement dated
December 23, 1999, between Samuel H. Tollison and FNB Corporation,
filed with the Commission as Exhibit (10)B on Form 10-K for the
year ended December 31, 1999, is incorporated herein by
reference.
(10)B 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)C 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)D 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.
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