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, 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
7,268,697 shares outstanding as of July 23, 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
June 30, 2004 3
Consolidated Balance Sheet as of December 31, 2003 4
Unaudited Consolidated Statements of Income for the quarter
and six-month periods ended June 30, 2004 and 2003 5
Unaudited Consolidated Statements of Cash Flows for the
six-month periods ended June 30, 2004 and 2003 6-7
Unaudited Consolidated Statement of Changes in Stockholders'
Equity for the six-month period ended June 30, 2003 8
Unaudited Consolidated Statement of Changes in Stockholders'
Equity for the six-month period ended June 30, 2004 9
Notes to Consolidated Financial Statements 10-13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14-19
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 19
Item 4. Controls and Procedures 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Changes in Securities, Use of Proceeds and Issuer Repurchases
of Equity Securities 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
Index to Exhibits 24-25
2
Part I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEET
FNB Corporation and subsidiaries
June 30, 2004
In Thousands, Except Share and Per Share Data
(Unaudited)
ASSETS
Cash and due from banks $ 31,268
Federal funds sold 650
Cash and cash equivalents 31,918
Securities available-for-sale, at fair value 173,684
Securities held-to-maturity, at amortized cost (fair
value approximated $8,015) 7,852
Other investments at cost 9,330
Mortgage loans held for sale 11,228
Loans, net of unearned income 1,056,396
Less allowance for loan losses 12,590
Loans, net 1,043,806
Bank premises and equipment, net 25,091
Other real estate owned 987
Goodwill 42,624
Core deposit intangibles 5,978
Other assets 26,638
Total assets $ 1,379,136
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand deposits $ 147,593
Interest-bearing demand and savings deposits 387,295
Time deposits 444,243
Certificates of deposit of $100,000 and over 144,034
Total deposits 1,123,165
FHLB advances 74,890
Trust preferred 27,836
Other borrowings 2,950
Other liabilities 6,203
Total liabilities 1,235,044
Stockholders' equity:
Common stock, $5.00 par value, Authorized 25,000,000
shares; issued and outstanding 7,268,697 shares 36,343
Surplus 82,764
Unearned ESOP shares (11,033 shares) (200)
Retained earnings 25,172
Accumulated other comprehensive income (loss) 13
Total stockholders' equity 144,092
Total liabilities and stockholders' equity $ 1,379,136
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
Quarter and Six Months Ended June 30, 2004 and 2003
In Thousands, Except Share and Per Share Data
(Unaudited)
Quarter Ended Six Months Ended
June 30 June 30
2004 2003 2004 2003
Interest income:
Interest and fees on loans $ 14,995 11,835 29,890 23,763
Interest on securities:
Taxable 1,728 1,443 3,578 2,989
Nontaxable 180 295 382 608
Interest on federal funds sold and
short term investments 161 273 263 634
Total interest income 17,064 13,846 34,113 27,994
Interest expense:
Interest on deposits 4,421 4,139 8,663 8,489
Interest on federal funds purchased
and securities sold under
agreements to repurchase 18 18 33 30
Interest on long term debt 1,014 515 2,045 991
Total interest expense 5,453 4,672 10,741 9,510
Net interest income 11,611 9,174 23,372 18,484
Provision for loan losses 903 462 1,540 959
Net interest income after
provision for loan losses 10,708 8,712 21,832 17,525
Noninterest income:
Service charges on deposit accounts 1,654 1,216 3,175 2,362
Loan origination fees 899 1,837 1,477 3,281
Other service charges and fees 687 588 1,257 1,111
Other income 674 466 1,203 977
Securities gains (losses), net - 1 - 46
Total noninterest income 3,914 4,108 7,112 7,777
Noninterest expense:
Salaries and employee benefits $ 4,750 4,842 9,601 9,141
Occupancy and equipment expense, net 1,529 1,367 2,970 2,804
Cardholder/merchant processing 159 100 320 260
Supplies expense 193 174 420 378
Telephone expense 218 134 410 297
Amortization of core deposit
intangibles 347 240 694 480
Other expenses 2,059 1,526 3,871 3,103
Total noninterest expense 9,255 8,383 18,286 16,463
Income before income tax expense 5,367 4,437 10,658 8,839
Income tax expense 1,941 1,431 3,822 2,828
Net income $ 3,426 3,006 6,836 6,011
Basic earnings per share $ 0.47 0.52 0.94 1.04
Diluted earnings per share $ 0.47 0.51 0.93 1.03
Dividends declared per
share $ 0.18 0.17 0.36 0.34
Average number basic
shares outstanding 7,244,730 5,779,717 7,236,700 5,774,590
Average number diluted
shares outstanding 7,323,474 5,843,836 7,312,966 5,839,404
See accompanying notes to consolidated financial statements.
5
CONSOLIDATED STATEMENTS OF CASH FLOWS
FNB Corporation and subsidiaries
Six Months Ended June 30, 2004 and 2003
In Thousands
(Unaudited)
2004 2003
Cash flows from operating activities:
Net income $ 6,836 6,011
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 1,540 959
Depreciation and amortization of bank
premises and equipment 1,332 1,251
Amortization of core deposit intangibles 694 480
ESOP compensation 121 169
Stock awards compensation 135 119
Amortization of premiums and accretion
of discounts, net 462 644
Gain on sale of securities, net - (46)
Net (gain) loss on sale of fixed assets
and other real estate (14) 16
Net decrease (increase) in mortgage loans
held for sale (5,006) 6,248
Decrease (increase) in other assets 273 (1,063)
Increase (decrease) in other liabilities (252) 55
Net cash provided by operating
activities 6,121 14,843
Cash flows from investing activities:
Proceeds from sales of securities available-
for-sale 127 6,353
Proceeds from calls and maturities of
securities available-for-sale 33,014 49,857
Proceeds from calls and maturities of
securities held-to-maturity 1,816 2,860
Purchase of securities available-for-sale (35,795) (66,187)
Purchase of securities held-to-maturity - (430)
Net increase in loans (58,126) (45,182)
Proceeds from sale of fixed assets and
other real estate owned 1,404 811
Recoveries on loans previously charged off 168 168
Bank premises and equipment expenditures (2,057) (1,190)
Net cash used in investing
activities (59,449) (52,940)
6
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
FNB Corporation and subsidiaries
Six Months Ended June 30, 2004 and 2003
In Thousands
(Unaudited)
2004 2003
Cash flows from financing activities:
Net increase in demand and savings deposits 19,927 35,305
Net increase (decrease) in time deposits and
certificates of deposit 54,436 (10,222)
Net decrease in FHLB advances (21,656) (100)
Proceeds from issuance of trust preferred
securities - 12,372
Net decrease in other borrowings (3,114) (667)
Principal payments on ESOP debt 145 232
Repurchase FNB Corporation stock - (88)
Stock options exercised 337 169
Dividends paid (2,867) (1,970)
Net cash provided by financing
activities 47,208 35,031
Net decrease in cash and cash equivalents (6,120) (3,066)
Cash and cash equivalents at beginning of period 38,038 40,391
Cash and cash equivalents at end of period $ 31,918 37,325
See accompanying notes to consolidated financial statements.
7
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.
8
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FNB Corporation and subsidiaries
Six Months Ended June 30, 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 - - - 6,836 - 6,836
Cash dividends,
$0.36 per share - - - (2,867) - (2,867)
ESOP shares
allocated upon
loan repayment - 121 145 - - 266
Stock awards
issued 43 184 - - - 227
Stock options
exercised 130 207 - - - 337
Change in net
unrealized gains
(losses) on
securities
available-for-
sale, net of
tax effect of
$(977) - - - - (1,815) (1,815)
Balances at
June 30, 2004 $36,343 82,764 (200) 25,172 13 $144,092
See accompanying notes to consolidated financial statements.
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FNB Corporation and subsidiaries
June 30, 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 June 30, 2004; the consolidated statements of income for the three
and six-months ended June 30, 2004 and 2003, and the consolidated
statements of changes in stockholders' equity, and the consolidated
statements of cash flows for the six-months ended June 30, 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
10
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, 2004 and 2003 would have been estimated as
follows:
Quarter Ended Six Months Ended
June 30, June 30,
2004 2003 2004 2003
Net Income, as reported $ 3,426 3,006 6,836 6,011
Add: Compensation expense
related to stock grants
included in net income,
net of tax 55 54 87 78
Deduct: Compensation expense
related to stock plans using
fair value accounting, net of
tax 91 95 151 150
Net Income, on a pro forma basis $ 3,390 2,965 6,773 5,939
Basic earnings per share -
As reported $0.47 0.52 0.94 1.04
Pro forma 0.47 0.51 0.94 1.03
Diluted earnings per share -
As reported $0.47 0.51 0.93 1.03
Pro forma 0.46 0.51 0.93 1.02
(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:
11
Quarter Ended Six Months Ended
June 30, June 30,
2004 2003 2004 2003
Balance at beginning of period $ 12,413 9,794 12,002 9,466
Provisions for loan losses 903 462 1,540 959
Loan recoveries 76 110 168 168
Loan charge-offs (802) (292) (1,120) (519)
Balance at end of period $ 12,590 10,074 12,590 10,074
Nonperforming assets consist of the following:
June 30 December 31,
2004 2003
Nonaccrual loans $ 3,110 3,142
Other real estate owned 987 1,872
Loans past due over 90 days 1,447 437
Total nonperforming assets $ 5,544 5,451
There were no material commitments to lend additional funds to customers
whose loans were classified as nonperforming at June 30, 2004.
(5) Short Term Borrowings and Long Term Debt
Securities sold under agreements to repurchase (repurchase agreements)
at June 30, 2004 and December 31, 2003 were collateralized by
investment securities controlled by the Corporation with a book
value of $7,627 and $8,671, respectively.
Advances from the Federal Home Loan Bank of Atlanta totaled $74,890
and $96,546 on June 30, 2004 and December 31, 2003, respectively.
The interest rates on the advances as of June 30, 2004 range from
1.7 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.
12
(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.
YTD June 30, 2004
Community Mortgage Elimi-
Banking Banking Parent nations Total
Net interest income $ 23,600 372 (600) - 23,372
Provision for loan
losses 1,506 34 - - 1,540
Net interest income
after provision
for loan losses 22,094 338 (600) - 21,832
Other income 5,643 1,469 7,301 (7,301) 7,112
Other expenses 16,807 1,576 7,204 (7,301) 18,286
Income (loss)
before income
taxes 10,930 231 (503) - 10,658
Income tax
(benefit) 3,925 81 (184) - 3,822
Net income $ 7,005 150 (319) - 6,836
Average assets $ 1,337,788 23,596 173,151 (183,333) 1,351,202
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
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.
Critical Accounting Policies
The Company's financial position and results of operations are affected by
management's application of accounting policies, including estimates,
assumptions and judgments made to arrive at the carrying value of assets and
liabilities and amounts reported for revenues and expenses. Different
assumptions in the application of these policies could result in material
changes in the Company's consolidated financial position and/or consolidated
results of operations. The Company considers its policies regarding the
allowance for loan losses and valuing intangible assets associated with
mergers and acquisitions to be its most critical accounting policies, because
they require many of management's most subjective and complex judgments.
Understanding the Company's accounting policies is fundamental to
understanding its consolidated financial position and consolidated results of
operations. Accordingly, the Company's significant accounting policies are
discussed in detail in Note 1 in the "Notes to Consolidated Financial
Statements" in the 2003 Annual Report on Form 10-K filed with the Securities
and Exchange Commission.
The Company has developed appropriate policies and procedures for assessing
the adequacy of the allowance for loan losses, recognizing that this process
requires a number of assumptions and estimates with respect to its loan
portfolio. The Company's assessments may be impacted in future periods by
changes in economic conditions, the impact of regulatory examinations and the
discovery of information with respect to borrowers which were not known by
14
management at the time of the issuance of the consolidated financial
statements. For additional discussion concerning the Company's allowance for
loan losses and related matters, see "Loans and Allowance for Loan Losses,"
Note (6) in the "Notes to Consolidated Financial Statements" in the 2003
Annual Report on Form 10-K filed with the Securities and Exchange Commission.
The Company's growth in business, profitability and market share over the past
several years has been enhanced significantly by mergers and acquisitions. To
account for mergers and acquisitions the Company uses SFAS No. 141, "Business
Combinations," which allows only the use of the purchase method of accounting.
For purchase acquisitions, the Company is required to record the assets
acquired, including identified intangible assets, and liabilities assumed at
their fair value, which in many instances involves estimates based on third
party valuations, such as appraisals, or internal valuations based on
discounted cash flow analyses or other valuation techniques. The
determination of the useful lives of intangible assets is subjective, as is
the appropriate amortization period for such intangible assets. In addition,
purchase acquisitions typically result in goodwill, which is subject to
ongoing periodic impairment testing based on the fair value of net assets
acquired compared to the carrying value of goodwill. Changes in merger
multiples, the overall interest rate environment, or the continuing operations
of the acquisition targets could have a significant impact on the periodic
impairment testing. For additional discussion concerning the Company's
intangible assets and merger/acquisition activities see "Goodwill and Other
Intangible Assets," Note (16) and "Mergers and Acquisitions," Note (23) in the
"Notes to Consolidated Financial Statements" in the 2003 Annual Report on Form
10-K filed with the Securities and Exchange Commission.
Overview
The Corporation's earnings are up this year through June 30 due to the merger
of Bedford Federal Savings Bank (Bedford) and the inclusion of their results
in the financials effective August 1, 2003. The increase in earnings from the
Bedford acquisition was partially offset by a decline in earnings resulting
from reduced secondary market mortgage loan volume as well as a lower net
interest margin.
With the recent rise in rates, secondary market production decreased from last
year but was up considerably from the prior quarter. It is expected that
revenues from the secondary market operation will increase this year as we
take advantage of the opportunities in the newer markets of Hilton Head, South
Carolina and Raleigh, North Carolina. The net interest margin is expected to
widen as the Federal Reserve raises interest rates. The impact of a narrowed
margin on net interest income was partially offset by strong growth in loans
and deposits.
FNB's integration of Bedford continued in the second quarter. Operations have
been consolidated where possible to reduce costs. Bedford assets and
liabilities are being transitioned to include more commercial bank loan and
deposit products in order to better serve our existing customers, attract new
customers and boost revenue. A seasoned banking executive native to the
Roanoke/Salem market has been hired to continue to take full advantage of the
growth potential in that market.
Mergers and Acquisitions
On August 1, 2003, the Corporation acquired Bedford Bancshares, Inc. and its
subsidiary, Bedford Federal Savings Bank. 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 became a subsidiary of FNB Corporation and was recorded under
15
the "purchase" method of accounting. Because it was recorded under the
"purchase" method of accounting, 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 second quarter and year to date
June 30, 2004 so as to make it comparable with the same periods of the prior
year. In addition to results presented in accordance with generally
accepted accounting principles ("GAAP"), this discussion presents selected
financial information excluding the impact of the recent Bedford acquisition.
These "non-GAAP financial measures" are reconciled to their most comparable
GAAP counterparts in the tables immediately below. Management feels that
the presentation of these non-GAAP financial measures provides useful
information to investors about the Corporation because it allows investors
to see the impact of general economic trends on the Corporation's financial
condition and results of operations with the offsetting impact of the
acquisition. Management also uses these non-GAAP measures to analyze change
in performance on a comparable basis.
Second
Second Quarter Second
Quarter 2004 Quarter
2004 Bedford Excluding 2003
Reported Impact Bedford Reported
Net interest
income $ 11,611 2,249 9,362 9,174
Provision for
loan loss 903 - 903 462
Noninterest
income 3,914 293 3,621 4,108
Noninterest
expense 9,255 1,268 7,987 8,383
Income before
taxes 5,367 1,274 4,093 4,437
Taxes 1,941 550 1,391 1,431
Net income $ 3,426 724 2,702 3,006
First Half
First Half 2004 First Half
2004 Bedford Excluding 2003
Reported Impact Bedford Reported
Net interest
income $ 23,372 4,585 18,787 18,484
Provision for
loan loss 1,540 150 1,390 959
Noninterest
income 7,112 588 6,524 7,777
Noninterest
expense 18,286 2,649 15,637 16,463
Income before
taxes 10,658 2,374 8,284 8,839
Taxes 3,822 1,034 2,788 2,828
Net income $ 6,836 1,340 5,496 6,011
16
Net Income
Net income for the second quarter of 2004 was $3,426 compared to $3,006 in the
same quarter last year for an increase of $420 or 14.0%. The acquisition of
Bedford accounted for $724 of net income for the quarter. Excluding Bedford,
net income declined primarily due to lower net income in the secondary market
function. Basic earnings per share for the second quarter of 2004 was $.47
compared to $.52 in the same quarter of last year. This decline was partly
due to lower net income in the secondary mortgage line of business.
Year-to-date June 30, 2004 net income was $6,836 compared to $6,011 last year
for an increase of $825 or 13.7%. Bedford accounted for $1,340 of the
increase and net income from the community-banking sector was up $577. These
increases were offset primarily by a decline in earnings in the secondary
market line of business. Year-to-date basic earnings per share were $.94
through June 30, 2004 compared to $1.04 through the same period last year due
to secondary mortgage.
Net Interest Income
Net interest income currently provides 77% 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 $11,611 for the three
months ending June 30, 2004 compared to $9,174 for the same period last year,
for an increase of $2,437. The net interest margin declined from 4.09% to
3.78% for the same period. The Bedford acquisition accounted for most of the
increase in net interest income. Excluding Bedford, net interest income rose
$532 due to an increase in loan and deposit volume. Year-to-date average
loan balances increased 8.6%. This increase due to volume was offset in part
by a decrease in net interest income of $344 due to a decline in loan and
investment yields relative to deposit costs. 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.
Year-to-date June 30, 2004 net interest income was $23,372 compared to $18,484
last year for an increase of $4,888. Bedford accounted for $4,585 of the
increase. Excluding Bedford, net interest income increased $303, due to
growth in loans and deposits and a shift in average balances from higher cost
certificates of deposits to lower cost transaction accounts. This resulted in
additional net interest income of $1,167. The favorable variance due to
volume and shift in deposit mix was offset in part (-$864) by the effect of a
more substantial decline in the rates earned on loans and investments relative
to the interest paid on deposits as discussed above.
Provision for Loan Losses
The provision for loan losses for the second quarter of 2004 was $903 compared
to $462 in the same quarter of 2003, and $1,540 through year-to-date June 2004
compared to $959 last year. The provision is up due to higher net charge-offs
and the addition of Bedford. Net charge-offs were $952 through June 30 of
this year versus $351 last year. Expressed as a percent of average year-to-
date loans, net charge-offs are .18% compared to .10% last year. The
17
allowance for loan losses as a percent of loans, net of unearned was 1.19% at
June 30, 2004 compared to 1.20% at 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 $194, from $4,108 in the second quarter
2003 to $3,914 in the second quarter of 2004. Excluding Bedford, noninterest
income declined $487. This was due to lower mortgage loan origination revenue
of $938 resulting from a rise in rates and a tapering off of mortgage loan
re-financings. Secondary market mortgage volume is down approximately 30%.
This decline in mortgage revenue was offset in part by higher service charge
income, higher revenue from the trust operation and investment products and a
non-yield related loan fee.
Year-to-date June 30 noninterest income declined from $7,777 last year to
$7,112 this year. Excluding Bedford, noninterest income declined by $1,253.
This was due primarily to lower secondary market revenue ($1,804), partially
offset by higher services charges, revenue from trust/investment products and
non-yield related loan fee as discussed above.
Noninterest Expense
Noninterest expense, consisting of salaries and employee benefits, occupancy
and equipment costs, checkcard and merchant processing, supplies and other
expenses were $9,255 in the second quarter of 2004 compared to $8,383 for the
same period last year, for an increase of $872. Excluding Bedford, which
accounted for $1,268 of the increase, noninterest expense was down $396 or
4.7%. 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.
Year-to-date June 30, 2004 noninterest expense was $18,286 or $1,823 over same
period last year's noninterest expense of $16,463. Excluding the Bedford
acquisition, noninterest expense was $15,637 or $826 below last year. This
was due primarily to lower commissions and incentives due largely to reduced
volume in the secondary market function and realized economies from the
Bedford merger as discussed above.
Income Taxes
Income tax expense as a percentage of pre-tax income was 35.9% in the second
quarter of 2004 compared to 32.0% for the same period last year. The increase
was due to an increase in the Corporation's marginal tax rate from 34% to 35%,
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.
18
Balance Sheet (change from December 31, 2003 to June 30, 2004)
Total assets of the Corporation grew 3.9% or $52,325 from $1,326,811 at
December 31, 2003 to $1,379,136 at June 30, 2004 due primarily to strong loan
growth.
Total loans are up 5.7% or $56,508 for the six-month period. Loans grew from
$999,888 at December 31, 2003 to $1,056,396 at June 30, 2004. All major loan
categories grew; however, the largest growth occurred in the real estate
construction and mortgage categories.
Cash and due from bank balances declined by $5,570. These balances tend to
fluctuate considerably from day to day. Average daily balances in 2003 from
August 1 when Bedford was acquired are within $1.0 million of the June 30,
2004 year-to-date average.
Mortgage loans held for sale balances increased from $6,222 to $11,228 or
$5,006 as mortgage re-financing volume has picked up since the end of the
year.
Total deposits grew a strong $74,363 million or 7.1%, from $1,048,802 at
December 31, 2003 to June 30, 2004. Strong growth occurred in certificate of
deposit/individual retirement account balances due to special promotions.
Federal Home Loan Bank (FHLB) advances dropped $21,656 from December 31, 2003
to June 30, 2004 as these borrowings were paid down using primarily the excess
funds provided by the growth in deposits over the growth in loans.
Stockholder's Equity
Stockholders' equity increased $2,984, from $141,108 at December 31, 2003 to
$144,092 at March 31, 2004 primarily due to earnings of $6,836 net of cash
dividends of $2,867 and a decrease of $1,815 in net tax effected unrealized
gains on securities available for sale. This decline in unrealized gains was
due to a rise in interest rates since year-end which resulted in a lower value
of the fixed-rate securities held in the available for sale investment
portfolio.
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
$5,544 on June 30, 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
..52% compared to .54% at year-end and well below peer averages.
Recent Accounting Pronouncements
There have been no additional accounting pronouncements by the Financial
Accounting Standards Board relevant to the Corporation beyond those previously
described in the Corporation's Annual Report to Shareholders for the year
ended December 31, 2003.
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.
19
Item 4. CONTROLS AND PROCEDURES
We maintain a system of internal controls and procedures that is designed to
provide reasonable assurance that material information is accumulated and
communicated to management on a timely basis, in particular during the
periods in which our quarterly and annual reports are being prepared. As
required, management, including our Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of the design and operation of
our disclosure controls and procedures as of the end of the period covered by
this report. Based on this evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures were
operating effectively to ensure that information required to be disclosed by
FNB Corporation in reports that it files or submits under the Securities
Exchange Act of 1934, as amended, is recorded, summarized and reported within
the time periods specified in the rules and forms of the Securities and
Exchange Commission.
Because of the inherent limitations in all control systems, no evaluation of
controls can provide absolute assurance that our disclosure controls and
procedures will detect or uncover every situation involving the failure of
persons within FNB Corporation to disclose material information otherwise
required to be set forth in our periodic reports.
Our management is also responsible for establishing and maintaining adequate
internal controls over financial reporting and control of our assets to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. No changes in our
internal control over financial reporting or control of assets occurred during
the most recent fiscal quarter that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting or control over our assets.
20
Part II OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
None
Item 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER REPURCHASES
OF EQUITY SECURITIES
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 11, 2004, at 2:00 p.m. The shareholders voted on
two items, with results as indicated:
(1) To elect two Class I Directors to serve until the 2006
Annual Meeting of Shareholders; four Class II Directors to
serve until the 2007 Annual Meeting of Shareholders; and one
Class III Director to serve until the 2005 Annual Meeting of
Shareholders:
No. of Shares No. of Shares
Director Voted For Withheld
Class I:
Hugh H. Bond 5,953,960 118,103
William P. Heath, Jr. 5,913,723 158,340
Class II:
Kendall O. Clay 5,874,559 197,505
Harold K. Neal 5,919,863 152,200
Charles W. Steger 5,959,697 112,366
Jon T. Wyatt 5,955,794 116,269
Class III:
Raymond D. Smoot, Jr. 5,960,903 111,161
(2) To ratify the selection by the Audit Committee of the
Board of Directors of Brown Edwards & Company, L.L.P.,
independent certified public accountants, as auditors of the
Corporation for 2004:
Number of
No. of Shares No. of Shares Number of Broker
Voted For Voted Against Abstentions Non-Votes
5,961,240 109,367 1,185 -
21
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 April 29, 2004 relating to a
press release commenting on first quarter 2004 performance, and
announcing the appointment of Dr. Raymond D. Smoot, Jr. as a
director, and approval by the Board of Directors of a 2004 second
quarter cash dividend.
22
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 3, 2004 s/William P. Heath, Jr.
William P. Heath, Jr.
President & Chief Executive Officer
(principal executive officer)
Date August 3, 2004 s/Daniel A. Becker
Daniel A. Becker
Executive Vice President &
Chief Financial Officer
(principal financial and accounting
officer)
23
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.
31(A) Certification by Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
24
31(B) Certification by Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32 Certification by Chief Executive Officer and Chief Financial
Officer, as required by Section 906 of the Sarbanes-Oxley Act of
2002.
25