UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT of 1934
For the quarterly period ended March 31, 2004
or
[] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 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)
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
7,254,010 shares outstanding as of May 3, 2004
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, 2004 3
Consolidated Balance Sheet as of December 31, 2003 4
Unaudited Consolidated Statements of Income for the
three-month periods ended March 31, 2004 and 2003 5
Unaudited Consolidated Statements of Cash Flows for the
three-month periods ended March 31, 2004 and 2003 6-7
Unaudited Consolidated Statement of Changes in Stockholders'
Equity for the three-month period ended March 31, 2003 8
Unaudited Consolidated Statement of Changes in Stockholders'
Equity for the three-month period ended March 31, 2004 9
Notes to Consolidated Financial Statements 10-13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14-17
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 18
Item 4. Controls and Procedures 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities and Use of Proceeds 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
Certifications 21-24
Index to Exhibits 25
2
CONSOLIDATED BALANCE SHEET
FNB Corporation and subsidiaries
March 31, 2004
In Thousands, Except Share and Per Share Data
(Unaudited)
ASSETS
Cash and due from banks $ 35,929
Federal funds sold 3,900
Cash and cash equivalents 39,829
Securities available-for-sale, at fair value 152,524
Securities held-to-maturity, at amortized cost (fair
value approximated $9,301) 9,003
Other investments at cost 9,532
Mortgage loans held for sale 10,600
Loans, net of unearned income 1,035,822
Less allowance for loan losses 12,413
Loans, net 1,023,409
Bank premises and equipment, net 25,056
Other real estate owned 1,267
Goodwill 42,624
Core deposit intangibles 6,324
Other assets 25,497
Total assets $ 1,345,665
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand deposits $ 139,940
Interest-bearing demand and savings deposits 370,470
Time deposits 420,801
Certificates of deposit of $100,000 and over 134,926
Total deposits 1,066,137
FHLB advances 91,691
Trust preferred 27,836
Other borrowings 8,405
Other liabilities 7,532
Total liabilities 1,201,601
Stockholders' equity:
Common stock, $5.00 par value, Authorized 25,000,000
shares; issued and outstanding 7,253,262 shares 36,266
Surplus 82,525
Unearned ESOP shares (16,816 shares) (246)
Retained earnings 23,053
Accumulated other comprehensive income (loss) 2,466
Total stockholders' equity 144,064
Total liabilities and stockholders' equity $ 1,345,665
See accompanying notes to consolidated financial statements.
3
CONSOLIDATED BALANCE SHEET
FNB Corporation and subsidiaries
December 31, 2003
In Thousands, Except Share and Per Share Data
ASSETS
Cash and due from banks $ 36,838
Federal funds sold 1,200
Securities available-for-sale, at fair value 173,641
Securities held-to-maturity, at amortized cost (fair
value approximated $10,009) 9,674
Other investments at cost 9,922
Mortgage loans held for sale 6,222
Loans, net of unearned income 999,888
Less allowance for loan losses 12,002
Loans, net 987,886
Other real estate owned 1,872
Bank premises and equipment, net 24,373
Goodwill 42,624
Core deposit intangibles 6,671
Other assets 25,888
Total assets $ 1,326,811
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand deposits $ 134,819
Interest-bearing demand and savings deposits 380,142
Time deposits 410,005
Certificates of deposit of $100,000 and over 123,836
Total deposits 1,048,802
Short term borrowings 39,595
Long term debt 90,851
Other liabilities 6,455
Total liabilities 1,185,703
Stockholders' equity:
Common stock, $5.00 par value. Authorized 25,000,000
shares; issued and outstanding 7,234,050 shares 36,170
Surplus 82,252
Unearned ESOP shares (22,333 shares) (345)
Retained earnings 21,203
Accumulated other comprehensive income (loss) 1,828
Total stockholders' equity 141,108
Total liabilities and stockholders' equity $ 1,326,811
See accompanying notes to consolidated financial statements.
4
CONSOLIDATED STATEMENTS OF INCOME
FNB Corporation and subsidiaries
Three Months Ended March 31, 2004 and 2003
In Thousands, Except Share and Per Share Data
(Unaudited)
Three Months Ended
March 31
2004 2003
Interest income:
Interest and fees on loans $ 14,895 11,928
Interest on securities:
Taxable 1,850 1,546
Nontaxable 202 313
Interest on federal funds sold and
short term investments 102 361
Total interest income 17,049 14,148
Interest expense:
Interest on deposits 4,242 4,350
Interest on federal funds purchased
and securities sold under
agreements to repurchase 15 12
Interest on long term debt 1,031 476
Total interest expense 5,288 4,838
Net interest income 11,761 9,310
Provision for loan losses 637 497
Net interest income after
provision for loan losses 11,124 8,813
Noninterest income:
Service charges on deposit accounts 1,521 1,146
Loan origination fees 578 1,444
Other service charges and fees 570 523
Other income 529 511
Securities gains (losses), net - 45
Total noninterest income 3,198 3,669
Noninterest expense:
Salaries and employee benefits $ 4,851 4,299
Occupancy and equipment expense,net 1,441 1,437
Cardholder/merchant processing 161 160
Supplies expense 227 204
Telephone expense 192 163
Amortization of core deposit
intangibles 347 240
Other expenses 1,812 1,577
Total noninterest expense 9,031 8,080
Income before income tax expense 5,291 4,402
Income tax expense 1,881 1,397
Net income $ 3,410 3,005
Basic earnings per share $ 0.47 0.52
Diluted earnings per share $ 0.47 0.51
Dividends declared per
share $ 0.18 0.17
Average number basic
shares outstanding 7,228,670 5,769,406
Average number diluted
shares outstanding 7,302,458 5,836,050
See accompanying notes to consolidated financial statements.
5
CONSOLIDATED STATEMENTS OF CASH FLOWS
FNB Corporation and subsidiaries
Three Months Ended March 31, 2004 and 2003
In Thousands
(Unaudited)
2004 2003
Cash flows from operating activities:
Net income $ 3,410 3,005
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 637 497
Depreciation and amortization of bank
premises and equipment 655 636
Amortization of core deposit intangibles 347 240
ESOP compensation 90 87
Stock awards compensation 51 37
Amortization of premiums and accretion
of discounts, net 243 289
Gain on sale of securities, net - (45)
Net gain on sale of fixed assets and
other real estate (44) (12)
Net (increase) decrease in mortgage loans
held for sale (4,378) 9,226
(Increase) decrease in other assets 59 (189)
Increase in other liabilities 1,077 487
Net cash provided by operating
activities 2,147 14,258
Cash flows from investing activities:
Proceeds from sales of securities available-
for-sale - 6,318
Proceeds from calls and maturities of
securities available-for-sale 22,496 30,240
Proceeds from calls and maturities of
securities held-to-maturity 668 1,151
Purchase of securities available-for-sale (261) (33,512)
Purchase of securities held-to-maturity - (430)
Net increase in loans (36,603) (23,921)
Proceeds from sale of fixed assets and
other real estate owned 1,004 371
Recoveries on loans previously charged off 92 58
Bank premises and equipment expenditures (1,342) (646)
Net cash used in investing
activities (13,946) (20,371)
6
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
FNB Corporation and subsidiaries
Three Months Ended March 31, 2004 and 2003
In Thousands
(Unaudited)
2004 2003
Cash flows from financing activities:
Net increase (decrease) in demand and
savings deposits (4,551) 12,170
Net increase (decrease) in time deposits and
certificates of deposit 21,886 (7,549)
Net decrease in FHLB advances (4,855) (8,137)
Net increase in other borrowings 2,341 6,814
Principal payments on ESOP debt 99 187
Repurchase FNB Corporation stock - (6)
Stock options exercised 230 9
Dividends paid (1,560) (984)
Net cash provided by financing
activities 13,590 2,504
Net increase (decrease) in cash and cash equivalents 1,791 (3,609)
Cash and cash equivalents at beginning of period 38,038 40,391
Cash and cash equivalents at end of period $ 39,829 36,782
See accompanying notes to consolidated financial statements.
7
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.
8
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FNB Corporation and subsidiaries
Three Months Ended March 31, 2004
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, 2003 $36,170 82,252 (345) 21,203 1,828 $141,108
Net Income - - - 3,410 - 3,410
Cash dividends,
$0.18 per share - - - (1,560) - (1,560)
ESOP shares
allocated upon
loan repayment - 90 99 - - 189
Stock awards
issued 9 40 - - - 49
Stock options
exercised 87 143 - - - 230
Change in net
unrealized gains
(losses) on
securities
available-for-
sale, net of
tax effect of
$344 - - - - 638 638
Balances at
March 31, 2004 $36,266 82,525 (246) 23,053 2,466 $144,064
See accompanying notes to consolidated financial statements.
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FNB Corporation and subsidiaries
March 31, 2004 and 2003
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 March 31, 2004; 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, 2004 and 2003.
The consolidated balance sheet as of December 31, 2003 has been
extracted from the audited financial statements included in the
Company's 2003 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
2003 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) Stock Options
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
disclosure in both annual and interim financial statements about the
10
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
periods ended March 31, 2004 and 2003 would have been estimated as
follows:
Quarter Ended March 31, 2004 2003
Net Income, as reported $ 3,410 3,005
Add: Compensation expense
related to stock grants
included in net income,
net of tax 33 24
Deduct: Compensation expense
related to stock plans using
fair value accounting, net of
tax 60 55
Net Income, on a pro forma basis $ 3,383 2,974
Basic earnings per share -
As reported $0.47 0.52
Pro forma 0.47 0.52
Diluted earnings per share -
As reported $0.47 0.51
Pro forma 0.46 0.51
(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,
2004 2003
Balance at beginning of period $ 12,002 9,466
Provisions for loan losses 637 497
Loan recoveries 92 58
Loan charge-offs (318) (227)
Balance at end of period $ 12,413 9,794
11
Nonperforming assets consist of the following:
March 31 December 31,
2004 2003
Nonaccrual loans $ 4,556 3,142
Other real estate owned 1,267 1,872
Loans past due over 90 days 489 437
Total nonperforming assets $ 6,312 5,451
There were no material commitments to lend additional funds to customers
whose loans were classified as nonperforming at March 31, 2004.
(5) Short Term Borrowings and Long Term Debt
Securities sold under agreements to repurchase (repurchase agreements)
at March 31, 2004 and December 31, 2003 were collateralized by
investment securities controlled by the Corporation with a book
value of $8,213 and $8,671, respectively.
Advances from the Federal Home Loan Bank of Atlanta totaled $91,691
and $96,546 on March 31, 2004 and December 31, 2003, respectively.
The interest rates on the advances as of March 31, 2004 range from
1.3 to 7.3 percent and have maturity dates through January 28, 2013.
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 were principally used to pay cash to Bedford Bancshares,
Inc. shareholders. The loan proceeds are treated as capital of FNB
Corporation for regulatory purposes.
(6) 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 of the
Annual Report included in Form 10-K for December 31, 2003.
12
YTD March 31, 2004
Community Mortgage Elimi-
Banking Banking Parent nations Total
Net interest income $ 11,906 154 (299) - 11,761
Provision for loan
losses 624 13 - - 637
Net interest income
after provision
for loan losses 11,282 141 (299) - 11,124
Other income 2,634 564 3,482 (3,482) 3,198
Other expenses 8,237 748 3,528 (3,482) 9,031
Income (loss)
before income
taxes 5,679 (43) (345) - 5,291
Income tax
(benefit) 2,030 (15) (134) - 1,881
Net income $ 3,649 (28) (211) - 3,410
Average assets $ 1,312,598 18,067 171,583 (170,596) 1,331,652
YTD March 31, 2003
Community Mortgage Elimi-
Banking Banking Parent nations Total
Net interest income $ 9,246 239 (175) - 9,310
Provision for loan
losses 497 - - - 497
Net interest income
after provision
for loan losses 8,749 239 (175) - 8,813
Other income 2,203 1,466 3,116 (3,116) 3,669
Other expenses 7,236 634 3,326 (3,116) 8,080
Income (loss)
before income
taxes 3,716 1,071 (385) - 4,402
Income tax
(benefit) 1,171 364 (138) - 1,397
Net income $ 2,545 707 (247) - 3,005
Average assets $ 961,308 23,521 112,906 (111,643) 986,092
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, percentages or data as otherwise specified.
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, but are
not limited to, 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.
Mergers and Acquisitions
On August 1, 2003, the Corporation acquired Bedford Bancshares, Inc. and its
subsidiary, Bedford Federal Savings Bank, FSB. Bedford Bancshares, Inc.
shareholders received 1.403 million shares of FNB Corporation stock and $11.5
million cash. Bedford Bancshares, Inc. was liquidated and Bedford Federal
Savings Bank, FSB (Bedford) became a subsidiary of FNB Corporation, therefore
the results of its operations are only included in the accompanying financial
statements from the date of acquisition (August 1, 2003).
Proforma Financial Information
The following unaudited pro-forma financial information shows the effect of
FNB Corporation with Bedford excluded in the first quarter of 2004 so as to
make it comparable with the first quarter of 2003.
14
First Qtr.
First Qtr. 2004
2004 Bedford Excluding First Qtr.
Reported Impact Bedford 2003 Reported
Net interest
income $ 11,761 2,336 9,425 9,310
Provision for
loan loss 637 150 487 497
Noninterest
income 3,198 295 2,903 3,669
Noninterest
expense 9,031 1,381 7,650 8,080
Income before
taxes 5,291 1,100 4,191 4,402
Taxes 1,881 484 1,397 1,397
Net income $ 3,410 616 2,794 3,005
Net Income
Net income for the first quarter of 2004 was $3,410 compared to $3,005 in the
same quarter last year for an increase of $405 or 13.5%. The acquisition of
Bedford accounted for $616 of the net income for the quarter net of reduction
in noninterest income. Basic earnings per share for the first quarter of 2004
was $.47 compared to $.52 in the same quarter of last year. This decline was
due largely to lower noninterest revenue.
Net Interest Income
Net interest income currently provides almost 80% 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 was up $2,451, from
$9,310 for the three months ending March 31, 2003 to $11,761 for the three
months ending March 31, 2004. The net interest margin declined from 4.25% to
3.93% for the same period. Bedford accounted for 2,336 of the $2,451 increase
in net interest income. Excluding Bedford, net interest income was up $397
due to volume largely due to an 8.9% growth in the loan portfolio. Net
interest income was also favorably impacted by $240 due primarily to a shift
in the deposit mix averages, from higher cost certificates of deposit and IRAs
to lower cost checking accounts and other transaction deposit accounts. These
favorable variances were largely offset by a $522 reduction in net interest
income due to rates. Excluding Bedford, the average yield on loans declined
58 basis points whereas the cost of deposits declined by only 35 basis points.
Further reductions in deposit costs are limited because many deposit products
are near pricing floors.
The decline in the margin was primarily attributable to the reduced spread
between the loans and deposits discussed above plus the acquisition of
Bedford. Bedford's product line has a lower margin. Plans are in place to
expand this product line to include the broad array of products the
Corporation has to offer.
A summary of the changes impacting net interest income is shown below.
15
Change in
Net Interest Income ($)
Acquisition of Bedford 2,336
Favorable shift in product mix, primarily
to lower cost deposits 240
Growth in the balance sheet, primarily
loans 397
Greater decline in earning asset yields
relative to cost of funds (522)
Change in net interest income 1Q04/1Q03 2,451
Provision for Loan Losses
The provision for loan losses for the first quarter 2004 was $637, up $140
over the same quarter last year primarily due to Bedford. The provision for
loan losses, when expressed as a percentage of year-to-date average loans
outstanding, was .25% this year compared to .28% last year. Net charge-offs
were $226 compared to $169. Net charge-offs to average year-to-date loans
outstanding were .09% compared to .10% last year. The allowance for loan
losses as a percent of loans, net of unearned was the same at 1.20% at March
31, 2004 and December 31, 2003.
Noninterest Income
Noninterest income, which includes service charges on deposit accounts, loan
origination income and service release fees on mortgage loans sold, other
service charges, investment group fees and commissions, sundry income and net
securities gains (losses) declined by $471, from $3,669 in the first quarter
2003 to $3,198 in the first quarter of 2004. Excluding Bedford, noninterest
income declined $766. This was due to lower mortgage loan origination revenue
of $866 resulting from a temporary rise in rates in the fourth quarter of 2003
and a tapering off of mortgage loan re-financings. Secondary mortgage loan
volume declined from $88 million in the first quarter 2003 to $49 million in
the first quarter 2004. This decline in mortgage revenue was offset in part
by higher service charge income primarily from the "Overdraft Privilege"
product which was introduced in Bedford in February 2004.
Noninterest Expense
Noninterest expense, consisting of salaries and employee benefits, occupancy
and equipment costs, checkcard and merchant processing, supplies and other
expenses were $9,031 in the first quarter of 2004 compared to $8,080 for the
three months ending March 31, 2003 for an increase of $951. Excluding
Bedford, which accounted for $1,381 of the increase, noninterest expense was
down $430 or 5.6%. This decline was largely due to the secondary mortgage
area as reduced volume resulted in lower commissions and incentives. In
addition, the Corporation began realizing economies from the Bedford merger as
Bedford was converted to the Corporation's core processor and some
administrative functions were centralized. The remainder of the decrease in
expense was spread among several categories to include lower depreciation
expense as items become fully depreciated, lower losses and charge-offs, lower
consulting expense and lower expenditures on outside training.
Income Taxes
Income tax expense as a percentage of pre-tax income was 35.5% in the first
quarter of 2004 compared to 31.7% for the same period last year. The increase
was due to an increase in the Corporation's marginal tax rate from 34% to 35%,
16
the non-deductibility of the amortization of core deposit intangibles
resulting from the acquisition of Bedford, the accrual of state income taxes
on Bedford because it is a savings and loan instead of a bank (this is in lieu
of a bank franchise tax) and the decline of nontaxable interest on investment
securities as a percentage of income before income taxes.
Decisions as to which securities to purchase are based on taxable equivalent
yields for specific terms. The Corporation has increased its investments in
certain taxable securities, which had higher yields than nontaxable securities
when measured on a taxable equivalent basis.
Balance Sheet (change from December 31, 2003 to March 31, 2004)
Total assets of the Corporation grew 1.4% or $18,854 from $1,326,811 at
December 31, 2003 to $1,345,665 at March 31, 2004 due primarily to loan
growth, partially offset by a decline in the investment portfolio.
Total loans are up 3.6% or $35,934 for the quarter. Loans grew from $999,888
at December 31, 2003 to $1,035,822 at March 31, 2004. All major loan
categories grew; however, the largest growth occurred in the commercial and
real estate construction categories.
Securities and other investments declined $22,178 due to calls and pay-downs.
These proceeds were used to fund the growth in loans. Mortgage loans held for
sale balances increased $4,378 as re-financing activity has picked up since
the end of the year.
Total deposits grew $17,335 or 1.7% (6.6% annualized), from $1,048,802 to
$1,066,137. Strong growth occurred in certificate of deposit/individual
retirement account balances due to special promotions. Lower cost
noninterest-bearing demand balances grew a strong 3.8% (15.1% annualized).
Federal Home Loan Bank (FHLB) advances dropped $4,855 and other borrowings
increased by $2,341 for a net decline of $2,514. These borrowings fluctuate
considerably from period to period as they are used to manage changes in the
Corporation's fund position resulting from daily swings in net investment,
loan and deposit balances.
Stockholders' Equity
Stockholders' equity increased $2,956, from $141,108 at December 31, 2003 to
$144,064 at March 31, 2004 primarily due to earnings of $3,410 net of cash
dividends of $1,560 and an increase of $638 in net tax effected unrealized
gains on securities available for sale.
Nonperforming Assets
Nonperforming assets which consist of loans past due 90 days and over on which
interest is still accruing, other real estate and nonaccrual loans totaled
$6,312 on March 31, 2004 compared to $5,451 at December 31, 2003. Expressed
as a percent of loans net of unearned plus other real estate, these balances
are .61% and .54% for March 31, 2004 and December 31, 2003 respectively. This
increase was due primarily to two loans which are expected to be resolved by
the end of the next quarter with minimal losses.
17
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in market risks faced by FNB Corporation
since December 31, 2003. For information regarding FNB Corporation's market
risk, refer to FNB Corporation's Annual Report on Form 10-K for the year ended
December 31, 2003.
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.
18
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:
A report on form 8-K was filed on January 30, 2004 (with a
Date of Report of January 30, 2004) disclosing under Item 12
a press release commenting on 2003 performance, approval by
the Board of Directors of a 2004 first quarter cash dividend
and the record and meeting dates for the 2004 annual meeting
of shareholders.
19
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 May 5, 2004 s/William P. Heath, Jr.
William P. Heath, Jr.
President & Chief Executive Officer
Date May 5, 2004 s/Daniel A. Becker
Daniel A. Becker
Senior Vice President & Chief Financial Officer
20
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) (paragraph omitted pursuant to SEC Release Nos. 33-8238 and
34-47986)
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
21
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: May 5, 2004 s/William P. Heath, Jr.
William P. Heath, Jr.
President & Chief Executive Officer
22
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) (paragraph omitted pursuant to SEC Release Nos. 33-8238 and
34-47986)
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
23
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: May 5, 2004 s/Daniel A. Becker
Daniel A. Becker
Senior Vice President & Chief Financial Officer
24
INDEX TO EXHIBITS
Exhibit # Description
(2) Plan of Merger
(2)A Merger agreement dated 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 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)B 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)C Employment agreement dated June 2, 2003 between FNB Corporation
and William P. Heath, Jr., filed with the Commission as exhibit
(10)E on Form 10-Q for the quarter ended June 30, 2003, is
incorporated herein by reference.
(10)D Separation agreement dated October 10, 2003 between FNB
Corporation and Peter A. Seitz, filed with the Commission as
exhibit (10)E on Form 10-K for the year ended December 31,
2003, is incorporated herein by reference.
25