UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT of 1934
For the quarterly period ended September 30, 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)
n/a
(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
7,274,403 shares of common stock, par value $5 per share, outstanding as of
October 22, 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
September 30, 2004 3
Consolidated Balance Sheet as of December 31, 2003 4
Unaudited Consolidated Statements of Income for the quarter
and nine-month periods ended September 30, 2004 and 2003 5
Unaudited Consolidated Statements of Cash Flows for the
nine-month periods ended September 30, 2004 and 2003 6-7
Unaudited Consolidated Statement of Changes in Stockholders'
Equity for the nine-month period ended September 30, 2003 8
Unaudited Consolidated Statement of Changes in Stockholders'
Equity for the nine-month period ended September 30, 2004 9
Notes to Consolidated Financial Statements 10-13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14-20
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 20
Item 4. Controls and Procedures 20-21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 22
Item 3. Defaults Upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits 22
Signatures 23
Index to Exhibits 24
2
Part I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEET
FNB Corporation and subsidiaries
September 30, 2004
In Thousands, Except Share and Per Share Data
(Unaudited)
ASSETS
Cash and due from banks $ 40,693
Federal funds sold -
Cash and cash equivalents 40,693
Securities available-for-sale, at fair value 152,012
Securities held-to-maturity, at amortized cost (fair
value approximated $6,473) 6,324
Other investments at cost 9,155
Mortgage loans held for sale 12,270
Loans, net of unearned income 1,086,535
Less allowance for loan losses 13,031
Loans, net 1,073,504
Bank premises and equipment, net 24,307
Other real estate owned 1,057
Goodwill 42,624
Core deposit intangibles 5,631
Other assets 26,598
Total assets $ 1,394,175
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand deposits $ 155,086
Interest-bearing demand and savings deposits 367,094
Time deposits 441,292
Certificates of deposit of $100,000 and over 153,608
Total deposits 1,117,080
FHLB advances 91,085
Trust preferred 27,836
Other borrowings 4,015
Other liabilities 5,871
Total liabilities 1,245,887
Stockholders' equity:
Common stock, $5.00 par value, Authorized 25,000,000
shares; issued and outstanding 7,274,403 shares 36,372
Surplus 82,886
Unearned ESOP shares (5,516 shares) (100)
Retained earnings 27,497
Accumulated other comprehensive income (loss) 1,633
Total stockholders' equity 148,288
Total liabilities and stockholders' equity $ 1,394,175
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
FHLB advances 96,546
Trust preferred 27,836
Other borrowings 6,064
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 Nine Months Ended September 30, 2004 and 2003
In Thousands, Except Share and Per Share Data
(Unaudited)
Quarter Ended Nine Months Ended
September 30 September 30
2004 2003 2004 2003
Interest income:
Interest and fees on loans $ 15,658 13,961 45,548 37,724
Interest on securities:
Taxable 1,927 1,538 5,505 4,527
Nontaxable 172 256 554 864
Interest on federal funds sold and
short term investments 166 387 429 1,021
Total interest income 17,923 16,142 52,036 44,136
Interest expense:
Interest on deposits 4,771 4,189 13,434 12,678
Interest on federal funds purchased
and securities sold under
agreements to repurchase 32 15 65 45
Interest on long term debt 1,019 914 3,064 1,905
Total interest expense 5,822 5,118 16,563 14,628
Net interest income 12,101 11,024 35,473 29,508
Provision for loan losses 753 587 2,293 1,546
Net interest income after
provision for loan losses 11,348 10,437 33,180 27,962
Noninterest income:
Service charges on deposit accounts 1,521 1,264 4,696 3,626
Loan origination fees 761 1,808 2,238 5,089
Other service charges and fees 643 568 1,900 1,679
Other income 636 640 1,839 1,617
Securities gains (losses), net 9 (4) 9 42
Total noninterest income 3,570 4,276 10,682 12,053
Noninterest expense:
Salaries and employee benefits $ 4,747 5,188 14,348 14,329
Occupancy and equipment expense, net 1,438 1,434 4,408 4,238
Cardholder/merchant processing 222 172 542 432
Supplies expense 204 219 624 597
Telephone expense 199 181 609 478
Amortization of core deposit
intangibles 346 333 1,040 813
Other expenses 1,958 1,770 5,829 4,873
Total noninterest expense 9,114 9,297 27,400 25,760
Income before income tax expense 5,804 5,416 16,462 14,255
Income tax expense 2,097 1,856 5,919 4,684
Net income $ 3,707 3,560 10,543 9,571
Basic earnings per share $ 0.51 0.53 1.46 1.57
Diluted earnings per share $ 0.51 0.52 1.44 1.55
Dividends declared per
share $ 0.19 0.18 0.55 0.52
Average number basic
shares outstanding 7,263,405 6,732,055 7,245,667 6,097,252
Average number diluted
shares outstanding 7,322,942 6,799,766 7,316,316 6,163,042
See accompanying notes to consolidated financial statements.
5
CONSOLIDATED STATEMENTS OF CASH FLOWS
FNB Corporation and subsidiaries
Nine Months Ended September 30, 2004 and 2003
In Thousands
(Unaudited)
2004 2003
Cash flows from operating activities:
Net income $ 10,543 9,571
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 2,293 1,546
Depreciation and amortization of bank
premises and equipment 2,015 1,906
Amortization of core deposit intangibles 1,040 813
ESOP compensation 178 243
Stock awards compensation 193 209
Amortization of premiums and accretion
of discounts, net 632 1,117
Gain on sale of securities, net (9) (42)
Net gain on sale of fixed assets and
other real estate (71) (85)
Net decrease (increase) in mortgage loans
held for sale (6,048) 18,491
Increase in other assets (601) (2,053)
Increase (decrease) in other liabilities (584) 1,370
Net cash provided by operating
activities 9,581 33,086
Cash flows from investing activities:
Proceeds from sales of securities available-
for-sale 9,676 13,585
Proceeds from calls and maturities of
securities available-for-sale 47,645 71,674
Proceeds from calls and maturities of
securities held-to-maturity 3,342 4,361
Purchase of securities available-for-sale - (98,300)
Purchase of securities held-to-maturity (35,795) (430)
Net cash acquired from purchase of subsidiary - 9,605
Net increase in loans (89,178) (48,031)
Proceeds from sale of fixed assets and
other real estate owned 2,220 1,250
Recoveries on loans previously charged off 382 333
Bank premises and equipment expenditures (2,399) (1,789)
Net cash used in investing
activities (64,107) (47,742)
6
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
FNB Corporation and subsidiaries
Nine Months Ended September 30, 2004 and 2003
In Thousands
(Unaudited)
2004 2003
Cash flows from financing activities:
Net increase in demand and savings deposits 7,220 18,058
Net increase (decrease) in time deposits and
certificates of deposit 61,058 (11,440)
Net increase (decrease) in FHLB advances (5,461) 6,673
Proceeds from issuance of trust preferred
securities - 12,372
Net decrease in other borrowings (2,049) (1,640)
Principal payments on ESOP debt 245 375
Repurchase FNB Corporation stock - (94)
Stock options exercised 417 181
Dividends paid (4,249) (3,017)
Net cash provided by financing
activities 57,181 21,468
Net increase in cash and cash equivalents 2,655 6,812
Cash and cash equivalents at beginning of period 38,038 40,391
Cash and cash equivalents at end of period $ 40,693 47,203
See accompanying notes to consolidated financial statements.
7
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FNB Corporation and subsidiaries
Nine Months Ended September 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 - - - 9,571 - 9,571
Cash dividends,
$0.52 per share - - - (3,017) - (3,017)
ESOP shares
allocated upon
loan repayment - 243 375 - - 618
Stock awards
issued 49 219 - - - 268
Stock options
exercised 55 126 - - - 181
Repurchase and
retirement of
common stock (16) (78) - - - (94)
Acquisition of
subsidiary 7,011 30,288 - - - 37,299
Change in net
unrealized gains
(losses) on
securities
available-for-
sale, net of
tax effect of
$(581) - - - - (1,127) (1,127)
Balances at
September 30, 2003 $36,137 82,087 (346) 19,142 1,778 $138,798
See accompanying notes to consolidated financial statements.
8
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FNB Corporation and subsidiaries
Nine Months Ended September 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 - - - 10,543 - 10,543
Cash dividends,
$0.55 per share - - - (4,249) - (4,249)
ESOP shares
allocated upon
loan repayment - 178 245 - - 423
Stock awards
issued 48 193 - - - 241
Stock options
exercised 154 263 - - - 417
Change in net
unrealized gains
(losses) on
securities
available-for-
sale, net of
tax effect of
$(105) - - - - (195) (195)
Balances at
September 30, 2004 $36,372 82,886 (100) 27,497 1,633 $148,288
See accompanying notes to consolidated financial statements.
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FNB Corporation and subsidiaries
September 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 September 30, 2004; the consolidated statements of income for the
three and nine-months ended September 30, 2004 and 2003, and the
consolidated statements of changes in stockholders' equity and the
consolidated statements of cash flows for the nine-months ended
September 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.
(a) Reclassification of Financial Statement Presentation
Certain reclassifications have been made to the December 31,
2003 Balance Sheet to conform with the September 30, 2004
Balance Sheet presentation. Such reclassifications had no
effect on net income as previously reported.
(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.
10
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
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 nine
month periods ended September 30, 2004 and 2003 would have been
estimated as follows:
Quarter Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
Net Income, as reported $ 3,707 3,560 10,543 9,571
Add: Compensation expense
related to stock grants
included in net income,
net of tax 38 59 125 137
Deduct: Compensation expense
related to stock plans using
fair value accounting, net of
tax (68) (94) (219) (235)
Net Income, on a pro forma basis $ 3,677 3,525 10,450 9,473
Basic earnings per share -
As reported $0.51 0.53 1.46 1.57
Pro forma 0.51 0.52 1.44 1.55
Diluted earnings per share -
As reported $0.51 0.52 1.44 1.55
Pro forma 0.50 0.52 1.43 1.54
(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 Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
Balance at beginning of period $ 12,590 10,074 12,002 9,466
Reserve acquired through merger - 1,382 - 1,382
Provisions for loan losses 753 587 2,293 1,546
Loan recoveries 214 165 382 333
Loan charge-offs (526) (531) (1,646) (1,050)
Balance at end of period $ 13,031 11,677 13,031 11,677
Nonperforming assets consist of the following:
September 30 December 31,
2004 2003
Nonaccrual loans $ 3,077 3,142
Other real estate owned 1,057 1,872
Loans past due over 90 days 888 437
Total nonperforming assets $ 5,022 5,451
There were no material commitments to lend additional funds to customers
whose loans were classified as nonperforming at September 30, 2004.
(5) Debt
Securities sold under agreements to repurchase (repurchase agreements)
at September 30, 2004 and December 31, 2003 were collateralized by
investment securities controlled by the Corporation with a book
value of $7,358 and $8,671, respectively.
Advances from the Federal Home Loan Bank of Atlanta totaled $91,085
and $96,546 on September 30, 2004 and December 31, 2003, respectively.
The interest rates on the advances as of September 30, 2004 range from
2.0 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 September 30, 2004
Community Mortgage Elimi-
Banking Banking Parent nations Total
Net interest income $ 35,737 671 (935) - 35,473
Provision for loan
losses 2,218 75 - - 2,293
Net interest income
after provision
for loan losses 33,519 596 (935) - 33,180
Other income 8,451 2,231 10,762 (10,762) 10,682
Other expenses 24,958 2,341 10,863 (10,762) 27,400
Income (loss)
before income
taxes 17,012 486 (1,036) - 16,462
Income tax
(benefit) 6,110 171 (362) - 5,919
Net income $ 10,902 315 (674) - 10,543
Average assets $ 1,338,780 30,264 173,221 (178,676) 1,363,589
YTD September 30, 2003
Community Mortgage Elimi-
Banking Banking Parent nations Total
Net interest income $ 29,454 704 (650) - 29,508
Provision for loan
losses 1,546 - - - 1,546
Net interest income
after provision
for loan losses 27,908 704 (650) - 27,962
Other income 6,957 5,096 9,685 (9,685) 12,053
Other expenses 22,670 2,584 10,191 (9,685) 25,760
Income (loss)
before income
taxes 12,195 3,216 (1,156) - 14,255
Income tax
(benefit) 3,993 1,093 (402) - 4,684
Net income $ 8,202 2,123 (754) - 9,571
Average assets $ 1,038,050 27,254 128,738 (120,956) 1,073,086
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
management at the time of the issuance of the consolidated financial
14
statements. For additional discussion concerning the Company's allowance for
loan losses and related matters, see Note 6 "Loans and Allowance for Loan
Losses," 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 Note 16 "Goodwill and
Other Intangible Assets," and Note 23 "Mergers and Acquisitions," 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 were up over last year through September 30 due to
the merger of Bedford Federal Savings Bank (Bedford) and higher net income in
the community banking segment due to growth in loans, deposits, and revenue
from other product lines. Bedford's earnings were included in the
Corporation's earnings starting in August 2003 effective with the consummation
of the merger. The increase in earnings due to the Bedford acquisition and
the community-banking segment was partially offset by a decline in earnings
resulting from reduced secondary market mortgage loan volume and a reduced
margin.
The Corporation will close its mortgage loan production office in Hilton Head,
South Carolina (the "Office") before the end of 2004. The Office was
successful in generating a significant amount of mortgage loans, but did not
meet business plan expectations for secondary market mortgage loan financings.
The portfolio mortgage loans originated by that Office competed for funding
with loans originated in the Company's core Virginia markets where loan demand
is strong. The Corporation expects to realize earnings benefits in 2005 from
a reduction in operating expenses associated with the closure of this Office
and from continuing revenue from the Office's loan portfolio.
The net interest margin widened from the prior quarter due to recent rate
hikes by the Federal Reserve and management anticipates that the net interest
margin will widen further if the Federal Reserve continues to raise rates.
The impact of a narrowed margin for the year on net interest income was
partially offset by strong growth in loans and deposits. The economies of the
markets that the Corporation serves continue to be strong as evidenced by this
growth.
Mergers and Acquisitions
On August 1, 2003, the Corporation acquired Bedford Bancshares, Inc. and its
subsidiary, Bedford Federal Savings Bank. Bedford Bancshares, Inc.
15
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
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).
Non-GAAP Financial Information; Exclusion of Bedford Acquisition
The following unaudited financial information shows the results of FNB
Corporation, excluding the impact of the Bedford acquisition. In addition to
results presented in accordance with generally accepted accounting principles
("GAAP"), this discussion also includes "non-GAAP financial measures":
specifically, the 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 without the impact
of the acquisition. Management also uses these non-GAAP measures to analyze
change in performance on a comparable basis.
3rd 3rd
3rd 3rd Qtr 3rd Aug & Qtr
Qtr Qtr 2004 Qtr Sept 2003 Chnge Chnge
2004 2004 Excl. 2003 2003 Excl. As Excl.
Rptd Bdfrd Bdfrd Rptd Bdfrd Bdfrd Rptd Bdfrd
Net
Interest
Income $12,101 2,135 9,966 11,024 1,820 9,204 1,077 762
Provision
For
Loan Loss 753 150 603 587 75 512 166 91
Non-
Interest
Income 3,570 445 3,125 4,276 110 4,166 (706) (1,041)
Non-
Interest
Expense 9,114 1,255 7,859 9,297 818 8,479 (183) (620)
Income
Before
Taxes 5,804 1,175 4,629 5,416 1,037 4,379 388 250
Taxes 2,097 512 1,585 1,856 431 1,425 241 160
Net
Income $ 3,707 663 3,044 3,560 606 2,954 147 90
16
YTD YTD
YTD YTD Sept YTD Aug & Sept
Sept Sept 2004 Sept Sept 2003 Chnge Change
2004 2004 Excl. 2003 2003 Excl. As Excl.
Rptd Bdfrd Bdfrd Rptd Bdfrd Bdfrd Rptd Bedford
Net
Interest
Income $35,473 6,720 28,753 29,508 1,820 27,688 5,965 1,065
Provision
For
Loan Loss 2,293 300 1,993 1,546 75 1,471 747 522
Non-
Interest
Income 10,682 1,033 9,649 12,053 110 11,943 (1,371) (2,294)
Non-
Interest
Expense 27,400 3,904 23,496 25,760 818 24,942 1,640 (1,446)
Income
Before
Taxes 16,462 3,549 12,913 14,255 1,037 13,218 2,207 (305)
Taxes 5,919 1,546 4,373 4,684 431 4,253 1,235 120
Net
Income $10,543 2,003 8,540 9,571 606 8,965 972 (425)
Net Income
Net income for the third quarter of 2004 was $3,707 compared to $3,560 in the
same quarter last year for an increase of $147 or 4.1% due primarily to growth
in the community banking segment, partially offset by lower earnings in the
secondary market segment. Basic earnings per share for the third quarter of
2004 was $.51 compared to $.53 in the same quarter of last year.
Year-to-date September 30, 2004 net income was $10,543 compared to $9,571 last
year for an increase of $972 or 10.2%. Excluding Bedford, earnings were down
$425. Higher net income in the community-banking segment was more than offset
by a decline in earnings in the secondary market mortgage line of business.
Year-to-date September 30 basic earnings per share declined from $1.57 last
year to $1.46 this year due largely to lower secondary market mortgage volume.
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 $12,101 for the three
months ending September 30, 2004 compared to $11,024 for the same period last
year, for an increase of $1,077. Excluding Bedford, net interest income was
up $762 due primarily to an increase in volume and favorable shifts in product
mix as average loan volume increased and lower-yielding investments declined.
The net interest margin declined from 4.00% to 3.85% for the three months
ending September 30, 2004 compared to the same period last year; however, it
improved to 3.85% in the third quarter from 3.78% in the second quarter of
2004 as the Corporation benefited from recent rate increases by the Federal
Reserve.
17
Year-to-date September 30, 2004 net interest income was $35,473 compared to
$29,508 last year for an increase of $5,965. Excluding Bedford, net interest
income was up $1,065. Growth in loans and deposits and favorable shifts in
product mix from lower-yielding investments to higher-yielding loans, and from
higher to lower cost deposits accounted for an increase in net interest income
of $1,896. This favorable variance was partially offset by a decline due to
rates accounting for $831, as the decrease in loan yields outpaced the
decrease in deposit costs. Reduction in deposit costs were limited because
many deposit products were near pricing floors.
Provision for Loan Losses
The provision for loan losses for the third quarter of 2004 was $753 compared
to $587 in the same quarter of 2003, and $2,293 through year-to-date September
2004 compared to $1,546 last year. The provision is up due to higher net
charge-offs, higher loan volume and the addition of Bedford. Net charge-offs
were $1,264 through September 30 of this year versus $717 last year.
Expressed as a percent of average year-to-date loans, net charge-offs are .16%
compared to .12% last year. The allowance for loan losses as a percent of
loans, net of unearned was 1.20% at September 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 $706, from $4,276 in the third quarter
2003 to $3,570 in the third quarter of 2004. Excluding Bedford, noninterest
income declined $1,041. This was due to lower secondary market mortgage
revenue of $1,031 due to a tapering off of mortgage loan re-financings and to
lower gains on sales of other real estate. Secondary market mortgage volume
is down approximately 50%. This decline in secondary market mortgage revenue
and other gains on sales of real estate was partially offset by higher service
charge income and higher revenue from trust/sales of investment products.
Year-to-date September 30 noninterest revenue declined by $1,371, from $12,053
last year to $10,682 this year. Excluding Bedford, noninterest revenue
declined by $2,294. This was due primarily to lower secondary market revenue
($2,851) and lower gains on sales of other real estate, partially offset by
higher service charges, revenue from trust/investment products and revenue on
a non-yield related loan fee.
Noninterest Expense
Noninterest expense, consisting of salaries and employee benefits, occupancy
and equipment costs, checkcard and merchant processing, supplies and other
expenses were $9,114 in the third quarter of 2004 compared to $9,297 for the
same period last year, for a decrease of $183. Excluding Bedford, noninterest
expenses were down $620. This decline was largely due to the decline in
secondary mortgage business 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 September 30, 2004 noninterest expense was $27,400 or $1,640 over
same period last year's noninterest expense of $25,760. Excluding the Bedford
acquisition, noninterest expense was $1,446 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.
18
Income Taxes
Income tax expense as a percentage of pre-tax income was 35.9% through the
third quarter of 2004 compared to 32.9% for the same period last year. The
increase was due to an increase in the Corporation's Federal 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.
Balance Sheet
Total assets of the Corporation grew 5.1% or $67,364 from $1,326,811 at
December 31, 2003 to $1,394,175 at September 30, 2004 due primarily to strong
loan growth.
Total securities and other investments declined $25,746 to fund the excess
growth in loans over the growth in deposits.
Total loans are up 8.7% or $86,648 for the nine-month period ended September
30, 2004. Loans grew from $999,888 at December 31, 2003 to $1,086,536 at
September 30, 2004. The largest growth occurred in the construction and real
estate mortgage loan categories. The office in Hilton Head, South Carolina
also contributed to this growth.
Mortgage loans held for sale balances increased from $6,222 at December 31,
2003 to $12,270 at September 30, 2004, an increase of $6,048, as mortgage re-
financing volume has picked up since the end of the year.
Total deposits grew a strong $68,278 million or 6.5%, from $1,048,802 at
December 31, 2003 to $1,117,080 at September 30, 2004. Strong growth occurred
in certificate of deposit/individual retirement account balances due to
special promotions.
Federal Home Loan Bank (FHLB) advances dropped $5,461 from December 31, 2003
to September 30, 2004. FHLB advances are used to manage the net funds
position of the Corporation by either securing advances or paying down
advances depending on the net change in loans, deposits and securities.
Liquidity
Liquidity is the ability to provide sufficient cash flow to meet financial
commitments and to fund additional loan demand or withdrawal of existing
deposits. Liquidity trends are monitored monthly and projections are updated
quarterly and tested under multiple stress conditions. Primary sources of
liquidity include customer-based core deposits and cash generated by
operations. Even though the Corporation's loan to deposit ratio is 98%, the
Corporation has access to funding sources to meet unexpected liquidity needs
in the form of available borrowings from the Federal Home Loan Bank and
Federal funds lines (currently, both sources provide $239 million of available
borrowing capacity) and the National CD market.
19
Stockholder's Equity
Stockholders' equity increased $7,180, from $141,108 at December 31, 2003 to
$148,288 at September 30, 2004, primarily due to earnings of $10,543 net of
cash dividends of $4,249.
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
$5,022 on September 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 .46% compared to .54% at year-end and are 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 the Corporation
since December 31, 2003. For information regarding the Corporation's market
risk, refer to the 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 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 the Corporation to disclose material information otherwise
required to be set forth in our periodic reports.
20
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.
21
Part II OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
None
Item 2. UNREGISTERED SALES OF EQUITY 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
See index to exhibits
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 November 3, 2004 s/William P. Heath, Jr.
William P. Heath, Jr.
President & Chief Executive Officer
(principal executive officer)
Date November 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) Articles of Incorporation and Bylaws
(3)(i)(a) 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 Restatement of 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 FNB Corporation 2000 Incentive Stock Plan, filed with the
Commission as part of the 2000 proxy statement on Schedule 14A on
April 3, 2000, is incorporated by reference.
(10)B Form of FNB Corporation Non-Qualified Stock Option Agreement for
Non-Employee Director.
(10)C Form of FNB Corporation Restricted Stock Agreement for Employee.
(10)D Form of FNB Corporation Incentive Stock Option Agreement for
Employee.
31(A) Certification by Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
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.
24