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, 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
5,822,894 shares outstanding as of July 9, 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
June 30, 2003 3
Consolidated Balance Sheet as of December 31, 2002 4
Unaudited Consolidated Statements of Income and
Comprehensive Income for the quarter and six-month
periods ended June 30, 2003 and 2002 5-6
Unaudited Consolidated Statements of Cash Flows for the
six-month periods ended June 30, 2003 and 2002 7-8
Unaudited Consolidated Statement of Changes in Stockholders'
Equity for the six-month period ended June 30, 2002 9
Unaudited Consolidated Statement of Changes in Stockholders'
Equity for the six-month period ended June 30, 2003 10
Notes to Consolidated Financial Statements 11-15
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16-23
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 24-25
Item 4. Controls and Procedures 26
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 27
Item 2. Changes in Securities and Use of Proceeds 27
Item 3. Defaults Upon Senior Securities 27
Item 4. Submission of Matters to a Vote of Security Holders 27
Item 5. Other Information 27
Item 6. Exhibits and Reports on Form 8-K 28
Signatures 29
Certifications 30-33
Index to Exhibits 34-35
2
CONSOLIDATED BALANCE SHEET
FNB Corporation and subsidiaries
June 30, 2003
In Thousands, Except Share and Per Share Data
(Unaudited)
ASSETS
Cash and due from banks $ 28,625
Federal funds sold 8,700
Securities available-for-sale, at fair value 150,652
Securities held-to-maturity, at amortized cost (fair
value approximated $14,243) 13,650
Other investments at cost 5,999
Mortgage loans held for sale 28,023
Loans:
Commercial 87,552
Consumer 136,773
Real estate - commercial 238,025
Real estate - construction 61,642
Real estate - mortgage 211,587
Total loans, net of unearned income 735,579
Less allowance for loan losses 10,074
Loans, net 725,505
Bank premises and equipment, net 23,121
Other real estate owned 938
Goodwill 21,735
Core deposit intangibles 4,324
Other assets 22,692
Total assets $ 1,033,964
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand deposits $ 121,052
Interest-bearing demand and savings deposits 310,354
Time deposits 339,697
Certificates of deposit of $100,000 and over 99,668
Total deposits 870,771
Short term borrowings 7,404
Long term debt 50,803
Other liabilities 5,097
Total liabilities 934,075
Stockholders' equity:
Common stock, $5.00 par value, Authorized 25,000,000
shares; issued and outstanding 5,822,694 shares 29,113
Surplus 51,687
Unearned ESOP shares (31,297 shares) (489)
Retained earnings 16,629
Accumulated other comprehensive income (loss) 2,949
Total stockholders' equity 99,889
Total liabilities and stockholders' equity $ 1,033,964
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
Quarter and Six Months Ended June 30, 2003 and 2002
In Thousands, Except Share and Per Share Data
(Unaudited)
Quarter Ended Six Months Ended
June 30 June 30
2003 2002 2003 2002
Interest income:
Interest and fees on loans $ 11,835 12,212 23,763 24,634
Interest on securities:
Taxable 1,443 2,105 2,989 4,258
Nontaxable 295 404 608 826
Interest on federal funds sold and
short term investments 273 123 634 350
Total interest income 13,846 14,844 27,994 30,068
Interest expense:
Interest on interest-bearing
demand and savings deposits 538 823 1,080 1,667
Interest on time deposits 2,715 3,018 5,638 6,508
Interest on certificates of
deposit of $100,000 and over 886 1,139 1,771 2,101
Interest on federal funds purchased
and securities sold under
agreements to repurchase 18 33 30 54
Interest on long term debt 515 498 991 984
Total interest expense 4,672 5,511 9,510 11,314
Net interest income 9,174 9,333 18,484 18,754
Provision for loan losses 462 316 959 782
Net interest income after
provision for loan losses 8,712 9,017 17,525 17,972
Noninterest income:
Service charges on deposit accounts 1,216 705 2,362 1,319
Loan origination fees 1,837 442 3,281 979
Other service charges and fees 588 386 1,111 1,005
Other income 466 576 977 982
Gain on sale of bankcards - 1,206 - 1,206
Securities gains (losses), net 1 159 46 156
Total noninterest income 4,108 3,474 7,777 5,647
5
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (Continued)
FNB Corporation and subsidiaries
Quarter and Six Months Ended June 30, 2003 and 2002
In Thousands, Except Share and Per Share Data
(Unaudited)
Quarter Ended Six Months Ended
June 30 June 30
2003 2002 2003 2002
Noninterest expense:
Salaries and employee benefits $ 4,842 4,131 9,141 7,926
Occupancy and equipment expense,net 1,367 1,245 2,804 2,439
Cardholder/merchant processing 100 161 260 401
Supplies expense 174 239 378 428
Telephone expense 134 199 297 359
Amortization of core deposit
intangibles 239 534 480 534
Other expenses 1,527 1,174 3,103 2,875
Total noninterest expense 8,383 7,683 16,463 14,962
Income before income tax expense 4,437 4,808 8,839 8,657
Income tax expense 1,431 1,571 2,828 2,836
Net income $ 3,006 3,237 6,011 5,821
Other comprehensive income (loss),
net of income tax expense (benefit):
Gross unrealized gains (losses) on
available-for-sale securities 539 1,876 90 1,327
Less: Reclassification
adjustment for (gains)
losses included in
net income (1) (159) (46) (156)
Other comprehensive income 538 1,717 44 1,171
Comprehensive income $ 3,544 4,954 6,055 6,992
Basic earnings per share $ 0.52 0.56 1.04 1.01
Diluted earnings per share $ 0.51 0.55 1.03 1.00
Dividends declared per
share $ 0.17 0.17 0.34 0.34
Average number basic
shares outstanding 5,779,717 5,750,289 5,774,590 5,764,195
Average number diluted
shares outstanding 5,843,836 5,833,568 5,839,404 5,831,777
See accompanying notes to consolidated financial statements.
6
CONSOLIDATED STATEMENTS OF CASH FLOWS
FNB Corporation and subsidiaries
Six Months Ended June 30, 2003 and 2002
In Thousands
(Unaudited)
2003 2002
Cash flows from operating activities:
Net income $ 6,011 5,821
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 959 782
Depreciation and amortization of bank
premises and equipment 1,251 1,225
Amortization of core deposit intangibles 480 534
ESOP compensation 169 209
Stock awards compensation 119 81
Amortization of premiums and accretion
of discounts, net 644 365
Gain on sale of securities, net (46) (156)
Net (gain) loss on sale of fixed assets
and other real estate 16 (129)
Gain on sale of bankcard portfolio - (1,206)
Net decrease in mortgage loans held
for sale 6,248 4,281
Increase in other assets (1,063) (9,765)
Increase (decrease) in other liabilities 55 (14,897)
Net cash provided by (used in)
operating activities 14,843 (12,855)
Cash flows from investing activities:
Net (increase) decrease in federal funds sold 2,450 (11,540)
Net decrease in short term investments - 16,549
Proceeds from sales of securities available-
for-sale 6,353 1,343
Proceeds from calls and maturities of
securities available-for-sale 49,857 42,377
Proceeds from calls and maturities of
securities held-to-maturity 2,860 8,772
Purchase of securities available-for-sale (66,187) (44,910)
Purchase of securities held-to-maturity (430) (356)
Sale of bankcard portfolio - 10,266
Net increase in loans (45,182) (19,562)
Proceeds from sale of fixed assets and
other real estate owned 811 820
Recoveries on loans previously charged off 168 245
Bank premises and equipment expenditures (1,190) (1,243)
Net cash provided by (used in)
investing activities (50,490) 2,761
7
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
FNB Corporation and subsidiaries
Six Months Ended June 30, 2003 and 2002
In Thousands
(Unaudited)
2003 2002
Cash flows from financing activities:
Net increase in demand and savings deposits 35,305 40,454
Net decrease in time deposits and
certificates of deposit (10,222) (24,124)
Net decrease in federal funds purchased
and securities sold under agreements
to repurchase (667) (563)
Proceeds from issuance of trust preferred
securities 12,372 -
Net increase (decrease) in long term debt (100) 814
Principal payments on ESOP debt 232 (209)
Repurchase FNB Corporation stock (88) (1,408)
Stock options exercised 169 -
Dividends paid (1,970) (1,976)
Net cash provided by financing
activities 35,031 12,988
Net increase (decrease)in cash and due from banks (616) 2,894
Cash and due from banks at beginning of period 29,241 28,817
Cash and due from banks at end of period $ 28,625 31,711
See accompanying notes to consolidated financial statements.
8
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.
9
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FNB Corporation and subsidiaries
Six Months Ended June 30, 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 - - - 6,011 - 6,011
Cash dividends,
$0.34 per share - - - (1,970) - (1,970)
ESOP shares
allocated upon
loan repayment - 169 232 - - 401
Stock awards
issued 38 185 - - - 223
Stock options
exercised 52 117 - - - 169
Repurchase and
retirement of
common stock (15) (73) - - - (88)
Change in net
unrealized gains
(losses) on
securities
available-for-
sale, net of
tax effect of
$23 - - - - 44 44
Balances at
June 30, 2003 $29,113 51,687 (489) 16,629 2,949 $99,889
See accompanying notes to consolidated financial statements.
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FNB Corporation and subsidiaries
June 30, 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 sheets of FNB Corporation and subsidiaries
(referred to herein as "FNB", "the Corporation" or "the Company")
as of June 30, 2003; the consolidated statements of income, for the
three and six-months ended June 30, 2003 and 2002, and the
consolidated statements of changes in stockholders' equity, and the
consolidated statements of cash flows for the six-months ended
June 30, 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
The Company has a stock option plan for certain executives and directors
accounted for under the intrinsic value method in accordance with
Accounting Principles Board ("APB") 25. Because the exercise price of
the Company's employee/director stock options equals the market price
of the underlying stock on the date of grant, no compensation expense
is recognized. The effect of option shares on earnings per share
relates to the dilutive effect of the underlying options outstanding.
To the extent the granted exercise share price is less than the current
market price, ("in the money"), there is an economic incentive for the
shares to be exercised and an increase in the dilutive effect on
earnings per share.
In December 2002, the FASB issued FAS 148, "Accounting for Stock-
Based Compensation." This new standard provides alternative methods
of transition for a voluntary change to the fair value method of
accounting for stock-based compensation. In addition, the Statement
amends the disclosure requirements of FAS 123 to require prominent
11
disclosure in both annual and interim financial statements about the
method of accounting for stock-based compensation and the underlying
effect of the method used on reported results until exercised.
Assuming use of the fair value method of accounting for stock options,
pro forma net income and earnings per share for the three month and
six month periods ended June 30, 2003 and 2002 would have been
estimated as follows:
Quarter Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
Net income as reported $ 3,006 3,237 6,011 5,821
Less: Total stock-based employee
compensation expense determined
under fair value based method
for all awards, net of related
tax effects 35 32 72 56
$ 2,971 3,205 5,939 5,765
Earnings per share:
Basic as reported $ 0.52 0.56 1.04 1.01
Basic pro forma 0.51 0.56 1.03 1.00
Diluted as reported 0.51 0.55 1.03 1.00
Diluted pro forma 0.51 0.55 1.02 0.99
Basic average shares 5,780 5,750 5,775 5,764
Diluted average shares 5,844 5,834 5,839 5,832
(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,
2003 2002 2003 2002
Balance at beginning of period $ 9,794 9,030 9,466 8,827
Provisions for loan losses 462 316 959 782
Loan recoveries 110 188 168 245
Loan charge-offs (292) (222) (519) (542)
Balance at end of period $ 10,074 9,312 10,074 9,312
12
Nonperforming assets consist of the following:
June 30 December 31,
2003 2002
Nonaccrual loans $ 2,374 2,914
Other real estate owned 938 1,001
Loans past due over 90 days 552 596
Total nonperforming assets $ 3,864 4,511
There were no material commitments to lend additional funds to customers
whose loans were classified as nonperforming at June 30, 2003.
(5) Short Term Borrowings and Long Term Debt
Securities sold under agreements to repurchase (repurchase
agreements) at June 30, 2003 and December 31, 2002 were
collateralized by investment securities controlled by the Corporation
with a book value of $10,952 and $13,427, respectively.
Advances from the Federal Home Loan Bank of Atlanta totaled $22,967
and $23,067 on June 30, 2003 and December 31, 2002, respectively.
The interest rates on the advances as of June 30, 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 properties.
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 Community
Bankshares, Inc. shareholders. The loan proceeds are treated as
capital of FNB Corporation for regulatory purposes. In addition,
FNB Corporation borrowed $12,372 that matures on June 26, 2033.
Interest is payable quarterly at the three month LIBOR rate plus
3.10%. The rate may not exceed 11.75% prior to June 26, 2008, and
the borrowing may be repaid on or after this date without penalty.
Proceeds will be principally used to pay cash to Bedford
Bancshares, Inc. shareholders. The loan proceeds are treated as
capital of FNB Corporation for regulatory purposes.
(6) Recent Accounting Pronouncements
In April 2003, FASB issued FAS 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This new standard
amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives) and for
hedging activities FAS 133, "Accounting for Derivative Instruments
and Hedging Activities." The statement is effective for contracts
entered into or modified after June 30, 2003. Adoption of this
statement is not expected to have a material effect on the Company.
13
In April 2003, FASB issued FAS 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity." This new statement establishes standards for how an issuer
classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an
issuer classify a financial instrument that is (1) issued in the form
of shares that is mandatorily redeemable, (2) at inception embodies
an obligation to repurchase the issuer's equity, or is indexed to such
an obligation, and that requires or may require the issuer to settle
the obligation by transferring assets, or (3) embodies an unconditional
obligation, or a financial instrument other than an outstanding share
that embodies a conditional obligation, that the issuer must or may
settle by issuing a variable number of its equity shares provided
certain conditions are met; as a liability (or asset in some
circumstances). FAS 150 is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning
after June 15, 2003. Adoption of this statement is not expected to
have a material effect on the Company, as it has previously reported
its trust preferred securities as a liability.
(7) SEGMENT INFORMATION
The Corporation operates two business segments: community banking and
mortgage banking. These segments are primarily identified by the
products and services offered and the channels through which they are
offered. The banking segment consists of full-service banks that offer
customers traditional banking products and services through various
delivery channels. The Corporation's mortgage banking segment consists
of mortgage brokerage facilities that originate and sell mortgage
products. The accounting policies for each of the business segments
are the same as those of the Corporation described in Note 1.
YTD June 30, 2003
Community Mortgage Elimi-
Banking Banking Parent nations Total
Net interest income $ 18,425 412 (353) - 18,484
Provision for loan
losses 959 - - - 959
Net interest income
after provision
for loan losses 17,466 412 (353) - 17,525
Other income 4,473 3,304 6,356 (6,356) 7,777
Other expenses 14,477 1,483 6,859 (6,356) 16,463
Income (loss)
before income
taxes 7,462 2,233 (856) - 8,839
Income tax
(benefit) 2,374 759 (305) - 2,828
Net income $ 5,088 1,474 (551) - 6,011
Average assets $ 964,050 23,071 114,281 (107,442) 993,960
14
YTD June 30, 2002
Community Mortgage Elimi-
Banking Banking Parent nations Total
Net interest income $ 18,992 134 (372) - 18,754
Provision for loan
losses 782 - - - 782
Net interest income
after provision
for loan losses 18,210 134 (372) - 17,972
Other income 4,809 838 5,426 (5,426) 5,647
Other expenses 13,927 637 5,824 (5,426) 14,962
Income (loss)
before income
taxes 9,092 335 (770) - 8,657
Income tax
(benefit) 2,999* 114 (277) - 2,836
Net income $ 6,093 221 (493) - 5,821
Average assets $ 924,948 6,845 104,840 (98,654) 937,979
* Includes $796 non-recurring gain on sale of bankcard portfolio.
15
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 August 1, 2003.
The following Pro Forma Combined Condensed Balance Sheet reflects FNB's
acquisition of Bedford using the latest audited financial statements of each;
December 31, 2002 as to FNB and September 30, 2002 as to Bedford.
Adjustments to reflect the transaction and adjust assets and liabilities
acquired to estimated fair values are reflected as "Bedford Adjustments."
The following Pro Forma Combined Condensed Statement of Income reflects
the combined operations of FNB and Bedford using the latest audited
financial statements of each and reflecting the acquisition as though it
occurred at the beginning of 2002, with amortization of estimated purchase
adjustments and the financing cost of the transaction reflected as
16
"Bedford Adjustments" for a full twelve month period of operations. All
adjustments have been made using FNB's market value at the date of
announcement of the transaction and an 80%/20% allocation of the purchase
price to stock/cash consideration. It should be noted that per the Definitive
Agreement, the final exchange ratio will adjust within fixed parameters
at closing and the mix of consideration may fluctuate.
17
FNB CORPORATION (FNB)
Pro Forma Combined Condensed Balance Sheet
At Year-End 2002 (1)
(Dollars in thousands)
Selected Balance Sheet Data
FNB Bedford
Corp- Banc- Bedford
oration shares Adjust- FNB &
(FNB) (Bedford) ments Bedford
Assets:
Cash and due from
banks $ 29,241 6,803 - 36,044
Interest-bearing
deposits with
banks - 8,865 - 8,865
Federal funds sold
and securities
purchased with
resale agreements
or similar
arrangements 11,150 - - 11,150
Securities
available-for-
sale 141,888 13,589 (19)(2) 155,458
Securities
held-to-
maturity 16,075 502 - 16,577
Other investments
at cost 5,320 2,600 - 7,920
Mortgage loans
held for sale 34,271 - - 34,271
Loans and leases,
net of unearned
income 691,661 220,828 4,115 (3) 916,604
Allowance for
loan and lease
losses 9,466 1,194 - 10,660
Loans and
leases, net 682,195 219,634 4,115 905,944
Premises and equip-
ment, net 23,201 1,239 839 (4) 25,279
Other real estate
owned 1,001 26 - 1,027
Goodwill 21,735 - 22,717 (5) 44,452
Core deposit
intangibles 4,804 - 5,400 (6) 10,204
Other assets 21,550 2,356 798 (7) 24,704
Total assets $ 992,431 255,614 33,850 1,281,895
18
Selected Balance Sheet Data (Continued)
FNB Bedford
Corp- Banc- Bedford
oration shares Adjust- FNB &
(FNB) (Bedford) ments Bedford
Liabilities and stock-
holders' equity:
Deposits $ 845,688 177,214 3,072 (8) 1,025,974
Short-term borrowed
funds 8,071 - - 8,071
Long-term debt 38,531 52,000 14,328 (9) 104,859
Accounts payable
and other
liabilities 5,042 1,838 - 6,880
Total liabilities 897,332 231,052 17,400 1,145,784
Stockholders' equity:
Common stock 29,038 201 6,319 (10) 35,558
Additional paid-
in-capital 51,289 10,089 24,403 (11) 85,781
Retained earnings 12,588 14,570 (14,570)(12) 12,588
Unearned ESOP
shares and
compensation (721) (320) 320 (13) (721)
Treasury stock
account - - - -
Net unrealized
(depreciation)
appreciation on
securities
available-
for-sale 2,905 22 (22)(14) 2,905
Total stock-
holders'
equity 95,099 24,562 16,450 136,111
Total liabilities
and stockholders'
equity $ 992,431 255,614 33,850 1,281,895
Footnotes:
(1) For FNB Corporation year ending December 31, 2002; for Bedford
Bancshares fiscal year ending September 30, 2002.
(2) (-$19) Fair value adjustment.
(3) ($4,115) Fair value adjustment.
(4) ($839) Fair value adjustment on premises.
(5) ($22,717) Recording of goodwill.
(6) ($5,400) Estimated value of core deposit intangibles.
(7) ($798) Fair value federal taxes payable adjustment.
(8) ($3,072) Fair value adjustment.
19
(9) ($14,328) Fair value adjustment on borrowings ($3,370) plus cash
consideration paid to Bedford shareholders ($9,696) plus cash payment
for investment banking, legal fees and employee contracts of $1,262.
Cash consideration equals 2,003,560 Bedford shares times .8136 exchange
ratio (exchange ratio per agreement at FNB stock price of $29.74) times
20% cash times $29.74 value of FNB stock equals $9,696. $3,370 plus
$9,696 plus $1,262 equals $14,328.
(10) ($6,319) Elimination of Bedford common stock (-$201) plus recording FNB
stock issuance at par for the Bedford transaction (2,003,560 Bedford
shares times exchange ratio of .8136 times 80% stock equals 1,304,077
shares of FNB stock times $5 par equals $6,520). $6,520 minus $201
equals $6,319.
(11) ($24,403) Elimination of Bedford paid-in-capital (-$10,089) plus
recording FNB stock issuance at market ($29.74) less par of $5.00 or
$24.74 (1,304,077 FNB shares times $24.74 equals $32,263 plus recording
of the fair value of the options $2,229. -$10,089 plus $32,263 plus
$2,229 equals $24,403.
(12) (-$14,570) Elimination of Bedford retained earnings.
(13) ($320) Elimination of Bedford ESOP. Bedford's ESOP will be paid out at
consumation date.
(14) (-$22) Elimination of Bedford unrealized appreciation on securities
available-for-sale Securities written to fair value.
FNB CORPORATION (FNB)
Pro Forma Combined Condensed Statement of Income
Year Ending 2002 (1)
(Dollars in thousands)
FNB Bedford
Corp- Banc- Bedford
oration shares Adjust- FNB &
(FNB) (Bedford) ments Bedford
Interest income $ 59,618 15,612 (2,567)(2) 72,663
Interest expense 22,196 7,888 (2,394)(3) 27,690
Net interest income 37,422 7,724 (173) 44,973
Provision for loan
losses 1,369 295 - 1,664
Noninterest income 11,545 1,843 - 13,388
Noninterest expense 31,282 4,570 1,071 (4) 36,923
Income before taxes 16,316 4,702 (1,243) 19,775
Income taxes 5,225 1,763 (91)(5) 6,897
Net income $ 11,091 2,939 (1,152) 12,878
Based on FNB stock
closing price at March
21, 2003 (date of
announcement)($29.74)
Weighted average common
shares outstanding for:
Basic earnings per
share 5,758,490 1,978,563 1,287,794 7,046,284
Fully diluted
earnings per
share 5,833,190 2,056,536 1,338,545 7,171,735
Per common share data:
Basic earnings per
common share $ 1.93 N/A N/A 1.83
Fully diluted
earnings per common
share $ 1.90 N/A N/A 1.80
20
Footnotes:
(1) For FNB Corporation year ending December 31, 2002; for Bedford
Bancshares fiscal year ending September 30, 2002.
(2) (-$2,567) Fair value amortization of loans and investments.
(3) (-$2,394) Fair value amortization of certificates of deposit and
borrowings (-$2,876) plus cost of trust preferred borrowings to pay cash
consideration of the merger ($482-rate of 4.40% which is current libor
of 1.25% plus 3.15%). -$2,876 plus $482 equals -$2,394.
(4) ($1,071) Amortization of estimated core deposit intangibles on an
accelerated basis over 10 years ($976) plus amortization of fair value
adjustment on buildings over remaining life of buildings ($95). $976
plus $95 equals $1,071.
(5) (-$91) Taxes on net of fair value amortizations. Core deposit
intangible amortization considered non deductible.
Net Income
Net income for second quarter 2003 was $3,006 compared to $3,237 in the same
quarter last year. Earnings per share were $.52 compared to $.56. In the
second quarter 2002, 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. Excluding this non-recurring gain, net income for the quarter was up
$565 or 23.1% and earnings per share were up $.10 or 22.8%.
Year-to-date June net income was $6,011 compared to $5,821 and earnings per
share were $1.04 compared to $1.01. Excluding the bankcard gain, net income
and earnings per share were up 19.6% and 19.3% respectively.
The increase in net income excluding the bankcard gain for both the quarter
and year-to-date were up primarily 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 $9,174 and 4.09% for the three months ending June 30, 2003
compared to $9,333 and 4.46% for the same period last year. The reduction in
net interest income and margin was due primarily to a sharper decline in
yields on loans and investments relative to deposits in a declining rate
environment. Net interest income was impacted negatively by $1,055 due to
lower rates. Loan yields dropped 87 basis points while the cost of interest-
bearing deposits dropped only 57 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 which impacted net interest income by a positive $608 and a
favorable change in the percent composition (mix) of the deposit base from
higher cost certificates of deposit and individual retirement accounts to
lower-cost transaction account balances. Net interest income was impacted
positively by $288 due to this change in deposit mix.
Year-to-date June 30 net interest income before provision for loan losses and
net interest margin respectively were $18,484 and 4.17% compared to $18,754
and 4.49% for the same period last year. The decline was due to the same
reasons discussed above in the second quarter. Net interest income was
unfavorably impacted by $1,866 due to rates, favorably by $1,064 due to growth
21
and favorably by $532 due to a change in deposit mix to lower cost transaction
deposits.
Provision for Loan Losses
The provision for loan losses increased from $316 in the second quarter of
2002 to $462 in the second quarter of this year, and from $782 in the first
six months of 2002 to $959 this year due to loan growth. Net charge-offs were
up slightly from $297 in the first six months of last year to $351 for year-
to-date June of this year. Net charge-offs as a percent of average loans were
..09% last year compared to .10% this year.
The allowance as a percent of loans remained the same at 1.37% at June 30,
2003 as it was at year-end 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 $4,108 in the
second quarter of 2003 compared to $3,474 in the second quarter of last year
for a difference of $634. Excluding the gain on the bankcard sale,
noninterest income was up $1,840 or 81.1%. This increase was primarily due to
higher mortgage revenue of $1,395 due to the low interest rate environment and
resultant high level of refinancing activity plus the establishment of a
wholesale mortgage operation. Mortgage volume increased from $29 million in
the second quarter of last year to $133 million this year. The remainder of
the increase in noninterest income was due primarily to revenue realized from
the successful launch of a new "Overdraft Privilege" product in October 2002.
Year-to-date June 30, 2003 noninterest income was $7,777 compared to $5,647
for the same period last year. Excluding the bankcard sale, noninterest
income increased $3,336. This increase was due primarily to mortgage volume
and the "Overdraft Privilege" product discussed above.
Noninterest Expense
Noninterest expense, consisting of salaries and employee benefits, occupancy
and equipment costs, cardholder and merchant processing, supplies and other
expenses increased $700, from $7,683 in the second quarter 2002 to $8,383 for
the three months ended June 30, 2003. Most of this increase ($587) was due to
expenses associated with growth in the secondary mortgage function and the new
"Overdraft Privilege" product. Excluding these expenses, noninterest expense
growth was 1.5%.
Year-to-date June 30 noninterest expense increased $1,501, from $14,962 last
year to $16,463 this year. Of this amount, $1,032 was due to the growth of
the mortgage function and the new overdraft product. The remainder of the
increase was due to higher benefit costs, partially offset by lower bankcard
expense due to the sale of the bankcard portfolio and one-time merger expenses
incurred last year.
Income Taxes
Income tax expense as a percentage of pre-tax income as of June 30, 2003 was
32.0% versus 32.8% for the same period last year. This was primarily due to a
higher investment in tax-free bank owned life insurance (BOLI).
22
Balance Sheet
Total assets of the Corporation increased 4.2% from $992,431 at December 31,
2002 to $1,033,964 as loans grew on the asset side, and deposits and long-term
debt expanded on the liability side. These categories are discussed in more
detail below.
Total loans grew 6.3% or $43,918 since year-end, from $691,661 to $735,579.
The growth occurred principally in the commercial and commercial real estate
categories.
Fed funds sold, securities and other investments grew $4,568 by the net change
in funds provided by deposits, borrowings and equity over asset growth
(increase in loans net of a decline of $6,248 in mortgage loans held for
sale). Mortgage loans held for sale 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 $25,083, from $845,688 at December 31, 2002 to $870,771 at
June 30, 2003. Lower-cost core noninterest-bearing and interest-bearing
demand and savings deposits grew 8.9% (17.8% annualized) or $35,305. Higher
cost time deposits and certificates of deposit over $100,000 (CDs) had a net
decline of $10,222 due to highly competitive pricing in our market. The
Corporation attempts to price CDs so the excess funds provided can be invested
profitability in the investment portfolio.
Long Term Debt
Long term debt increased by $12,272 primarily due to the issuance of $12,372
of trust preferred stock via participation in a trust-preferred pool. These
funds will substantially be used to pay the cash portion of the consideration
to the stockholders of Bedford.
Stockholders' Equity
Stockholders' equity increased $4,790, from $95,099 at December 31, 2002 to
$99,889 at June 30, 2003 due primarily to earnings net of dividends ($4,041).
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
$3,864 at June 30, 2003 compared to $4,511 at December 31, 2002. Expressed as
a percent of total loans, nonperforming assets declined from .65% to .52%.
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.
23
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.
24
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% 5.30%
+ 2.00 3.57
+ 1.00 2.09
- 1.00 -2.04
- 2.00 -4.01
- 3.00 -5.70
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 April 30, 2003 the Corporations'
sensitivity to changes in interest rates were within management's targets.
25
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.
26
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 13, 2003, at 2:00 p.m., for the following purpose:
(1) To elect three Class I directors to serve until the 2005
Annual Meeting of Shareholders:
A total of 4,855,560 shares of a possible 5,811,883 shares or 83.5
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
Beverley E. Dalton 4,844,838 10,722 --
Daniel D. Hamrick 4,837,025 18,535 --
Steven D. Irvin 4,848,859 6,701 --
(2) 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 2003:
No. of Shares
No. of Shares Voted Against Number of
Voted For or Withheld Abstentions
4,813,847 38,119 3,594
Item 5. Other Information
None
27
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits:
See index to exhibits
(B) Reports on Form 8-K:
A report on form 8-K was filed on April 25, 2003 (with a Date
of Report of April 25, 2003) disclosing under Item 9 the
following information, which is intended to be furnished under
Item 12, "Results of Operations and Financial Condition," is
instead being furnished under Item 9, "Regulation FD
Disclosure."
On April 25, 2003, FNB Corporation issued a press release
commenting on 2003 first quarter performance, the proposed
affiliation with Bedford Bancshares, Inc. and approval by the
Board of Directors of a 2003 second quarter cash dividend.
A report on Form 8-K was filed on May 15, 2003 (with a Date
of Report of May 15, 2003) disclosing under Item 5 the
appointment of new FNB Corporation Chief Executive Officer,
William (Bill) P. Heath, Jr.
A report on Form 8-K was filed on June 30, 2003 (with a Date
of Report of June 25, 2003) disclosing under Item 5 that
shareholders of FNB Corporation and Bedford Bancshares, Inc.
voted to approve the merger of FNB and Bedford.
28
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 4, 2003 s/William P. Heath, Jr.
William P. Heath, Jr.
President & Chief Executive Officer
Date August 4, 2003 s/Daniel A. Becker
Daniel A. Becker
Senior Vice President & Chief Financial Officer
29
CERTIFICATIONS
I, William P. Heath, 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 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
30
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: August 4, 2003 s/William P. Heath, Jr.
William P. Heath, Jr.
President & Chief Executive Officer
31
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
32
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: August 4, 2003 s/Daniel A. Becker
Daniel A. Becker
Senior Vice President & Chief Financial Officer
33
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. filed with the Commission as
Exhibit (2)C on Form 10-Q for the quarter ended March 31, 2003,
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.
(3)(iii) Registrant's Amended Bylaws, filed with the Commission as exhibit
(3)(iii) on Form 10-Q for the quarter ended March 31, 2003, is
incorporated herein by reference.
(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.
34
(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.
(10)E Employment agreement dated June 2, 2003 between FNB Corporation
and William P. Heath, Jr.
35