UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT of 1934
For the quarterly period ended March 31, 2005
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
7,283,433 shares of common stock, par value $5 per share, outstanding as of
April 22, 2005
1
FNB CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Consolidated Balance Sheet as of
March 31, 2005 3
Consolidated Balance Sheet as of December 31, 2004 4
Unaudited Consolidated Statements of Income and
Comprehensive Income for the three-month periods ended
March 31, 2005 and 2004 5-6
Unaudited Consolidated Statements of Cash Flows for the
three-month periods ended March 31, 2005 and 2004 7
Unaudited Consolidated Statement of Changes in Stockholders'
Equity for the three-month period ended March 31, 2004 8
Unaudited Consolidated Statement of Changes in Stockholders'
Equity for the three-month period ended March 31, 2005 9
Notes to Consolidated Financial Statements 10-13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14-18
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 19
Item 4. Controls and Procedures 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 20
Item 3. Defaults Upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits 20
Signatures 21
Index to Exhibits 22-23
2
Part I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEET
FNB Corporation and subsidiaries
March 31, 2005
In Thousands, Except Share and Per Share Data
(Unaudited)
ASSETS
Cash and due from banks $ 37,182
Federal funds sold 3,250
Cash and cash equivalents 40,432
Securities available-for-sale, at fair value 146,009
Securities held-to-maturity, at amortized cost (fair
value approximated $3,337) 3,271
Other investments at cost 10,547
Mortgage loans held for sale 14,450
Loans, net of unearned income 1,106,892
Less allowance for loan losses 13,603
Loans, net 1,093,289
Bank premises and equipment, net 24,731
Other real estate owned 1,389
Goodwill 42,624
Core deposit intangibles 4,978
Other assets 26,196
Total assets $ 1,407,916
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand deposits $ 144,305
Interest-bearing demand and savings deposits 382,169
Time deposits 451,139
Certificates of deposit of $100,000 and over 156,701
Total deposits 1,134,314
FHLB advances 86,178
Trust preferred 27,836
Other borrowings 1,712
Other liabilities 6,394
Total liabilities 1,256,434
Stockholders' equity:
Common stock, $5.00 par value, authorized 25,000,000
shares; issued and outstanding 7,275,822 shares 36,379
Surplus 82,985
Retained earnings 32,453
Accumulated other comprehensive income (loss) (335)
Total stockholders' equity 151,482
Total liabilities and stockholders' equity $ 1,407,916
See accompanying notes to consolidated financial statements.
3
CONSOLIDATED BALANCE SHEET
FNB Corporation and subsidiaries
December 31, 2004
In Thousands, Except Share and Per Share Data
ASSETS
Cash and due from banks $ 37,786
Federal funds sold -
Cash and cash equivalents 37,786
Securities available-for-sale, at fair value 142,369
Securities held-to-maturity, at amortized cost (fair
value approximated $4,036) 3,939
Other investments at cost 10,424
Mortgage loans held for sale 10,905
Loans, net of unearned income 1,103,470
Less allowance for loan losses 13,165
Loans, net 1,090,305
Bank premises and equipment, net 23,976
Other real estate owned 1,269
Goodwill 42,624
Core deposit intangibles 5,284
Other assets 27,235
Total assets $ 1,396,116
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand deposits $ 139,863
Interest-bearing demand and savings deposits 385,088
Time deposits 444,567
Certificates of deposit of $100,000 and over 154,749
Total deposits 1,124,267
FHLB advances 86,380
Trust preferred 27,836
Other borrowings 3,325
Other liabilities 4,307
Total liabilities 1,246,115
Stockholders' equity:
Common stock, $5.00 par value, authorized 25,000,000
shares; issued and outstanding 7,274,937 shares 36,375
Surplus 82,955
Unearned ESOP shares (5,516 shares) (100)
Retained earnings 29,818
Accumulated other comprehensive income (loss) 953
Total stockholders' equity 150,001
Total liabilities and stockholders' equity $ 1,396,116
See accompanying notes to consolidated financial statements.
4
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FNB Corporation and subsidiaries
Three Months Ended March 31, 2005 and 2004
In Thousands, Except Share and Per Share Data
(Unaudited)
Three Months Ended
March 31
2005 2004
Interest income:
Interest and fees on loans $ 16,723 14,895
Interest on securities:
Taxable 1,706 1,850
Nontaxable 123 202
Interest on federal funds sold and
short term investments 196 102
Total interest income 18,748 17,049
Interest expense:
Interest on deposits 5,172 4,242
Interest on federal funds purchased
and securities sold under
agreements to repurchase 21 15
Interest on long term debt 1,182 1,031
Total interest expense 6,375 5,288
Net interest income 12,373 11,761
Provision for loan losses 646 637
Net interest income after
provision for loan losses 11,727 11,124
Noninterest income:
Service charges on deposit accounts 1,348 1,521
Loan origination fees 702 578
Other service charges and fees 848 570
Other income 1,276 529
Total noninterest income 4,174 3,198
Noninterest expense:
Salaries and employee benefits $ 4,823 4,851
Occupancy and equipment expense,net 1,518 1,441
Cardholder/merchant processing 191 161
Supplies expense 208 227
Telephone expense 190 192
Amortization of core deposit
intangibles 306 347
Other expenses 2,227 1,812
Total noninterest expense 9,463 9,031
Income before income tax expense 6,438 5,291
Income tax expense 2,420 1,881
Net income $ 4,018 3,410
5
CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME (Continued)
Three Months Ended
March 31
2005 2004
Other comprehensive income (loss),
net of income tax expense (benefit):
Gross unrealized gains (losses) on
available-for-sale securities (1,288) 638
Less: Reclassification adjustment
for (gains) losses included in
net income - -
Other comprehensive income (1,288) 638
Comprehensive income $ 2,730 4,048
Basic earnings per share $ 0.55 0.47
Diluted earnings per share $ 0.55 0.47
Dividends declared per
share $ 0.19 0.18
Average number basic
shares outstanding 7,275,018 7,228,670
Average number diluted
shares outstanding 7,332,460 7,309,974
See accompanying notes to consolidated financial statements.
6
CONSOLIDATED STATEMENTS OF CASH FLOWS
FNB Corporation and subsidiaries
Three Months Ended March 31, 2005 and 2004
In Thousands
(Unaudited)
2005 2004
Cash flows from operating activities:
Net income $ 4,018 3,410
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 646 637
Depreciation and amortization of bank
premises and equipment 642 655
Amortization of core deposit intangibles 306 347
ESOP compensation 15 90
Stock awards compensation 48 51
Amortization of premiums and accretion
of discounts, net 132 243
Net gain on sale of fixed assets and
other real estate (821) (44)
Net increase in mortgage loans held
for sale (3,545) (4,378)
Decrease in other assets 1,697 59
Increase in other liabilities 2,087 1,077
Net cash provided by operating
activities 5,225 2,147
Cash flows from investing activities:
Proceeds from calls and maturities of
securities available-for-sale 5,214 22,496
Proceeds from calls and maturities of
securities held-to-maturity 666 668
Purchase of securities available-for-sale (11,089) (261)
Net increase in loans (3,981) (36,603)
Proceeds from sale of fixed assets and
other real estate owned 1,374 1,004
Recoveries on loans previously charged off 46 92
Bank premises and equipment expenditures (1,765) (1,342)
Net cash used in investing
activities (9,535) (13,946)
Cash flows from financing activities:
Net increase (decrease) in demand and
savings deposits 1,523 (4,551)
Net increase in time deposits and certificates
of deposit 8,524 21,886
Net decrease in FHLB advances (202) (4,855)
Net increase (decrease) in other borrowings (1,613) 2,341
Principal payments on ESOP debt 100 99
Stock options exercised 7 230
Dividends paid (1,383) (1,560)
Net cash provided by financing
activities 6,956 13,590
Net increase in cash and cash equivalents 2,646 1,791
Cash and cash equivalents at beginning of period 37,786 38,038
Cash and cash equivalents at end of period $ 40,432 39,829
See accompanying notes to consolidated financial statements.
7
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FNB Corporation and subsidiaries
Three Months Ended March 31, 2004
In thousands, except per share data
(Unaudited)
Accumu-
lated
Other
Unearned Compre-
Common ESOP Retained hensive
Stock Surplus Shares Earnings Income Total
Balances at
December 31, 2003 $36,170 82,252 (345) 21,203 1,828 $141,108
Net Income - - - 3,410 - 3,410
Cash dividends,
$0.18 per share - - - (1,560) - (1,560)
ESOP shares
allocated upon
loan repayment - 90 99 - - 189
Stock awards
issued 9 40 - - - 49
Stock options
exercised 87 143 - - - 230
Change in net
unrealized gains
(losses) on
securities
available-for-
sale, net of
tax effect of
$344 - - - - 638 638
Balances at
March 31, 2004 $36,266 82,525 (246) 23,053 2,466 $144,064
See accompanying notes to consolidated financial statements.
8
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FNB Corporation and subsidiaries
Three Months Ended March 31, 2005
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, 2004 $36,375 82,955 (100) 29,818 953 $150,001
Net Income - - - 4,018 - 4,018
Cash dividends,
$0.19 per share - - - (1,383) - (1,383)
ESOP shares
allocated upon
loan repayment - 15 100 - - 115
Stock awards
issued 2 10 - - - 12
Stock options
exercised 2 5 - - - 7
Change in net
unrealized gains
(losses) on
securities
available-for-
sale, net of
tax effect of
$(664) - - - - (1,288) (1,288)
Balances at
March 31, 2005 $36,379 82,985 - 32,453 (335) $151,482
See accompanying notes to consolidated financial statements.
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FNB Corporation and subsidiaries
March 31, 2005 and 2004
In Thousands, Except Percent and Share Data
(Unaudited)
(1) Basis of Presentation
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments necessary to present fairly
the consolidated balance sheets of FNB Corporation and subsidiaries
(referred to herein as "FNB", the "Corporation" or the "Company")
as of March 31, 2005; the consolidated statements of income for the
three months ended March 31, 2005 and 2004, and the consolidated
statements of changes in stockholders' equity and the consolidated
statements of cash flows for the three months ended March 31, 2005 and
2004.
..
The consolidated balance sheet as of December 31, 2004 has been
extracted from the audited financial statements included in the
Company's 2004 annual report to shareholders. 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
2004 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 optioned 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
options to be exercised and an increase in the potential dilutive effect
on earnings per share due to the increased probability that these
options will be exercised.
10
Assuming use of the fair value method of accounting for stock options,
pro forma net income and earnings per share for the three month periods
ended March 31, 2005 and 2004 are estimated to be as follows:
Three Months Ended
March 31,
2005 2004
Net Income, as reported $ 4,018 3,410
Add: Compensation expense
related to stock grants
included in net income,
net of tax 31 33
Deduct: Compensation expense
related to stock plans using
fair value accounting, net of
tax (63) (60)
Net Income, on a pro forma basis $ 3,986 3,383
Basic earnings per share -
As reported $ 0.55 0.47
Pro forma 0.55 0.47
Diluted earnings per share -
As reported $ 0.55 0.47
Pro forma 0.54 0.46
(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
Three Months Ended
March 31,
2005 2004
Balance at beginning of period $ 13,165 12,002
Provisions for loan losses 646 637
Loan recoveries 46 92
Loan charge-offs (254) (318)
Balance at end of period $ 13,603 12,413
Nonperforming assets consist of the following:
March 31, December 31,
2005 2004
Nonaccrual loans $ 2,663 3,534
Other real estate owned 1,389 1,269
Loans past due over 90 days 342 747
Total nonperforming assets $ 4,394 5,550
There were no material commitments to lend additional funds to customers
whose loans were classified as nonperforming at March 31, 2005.
(5) Debt
Securities sold under agreements to repurchase (repurchase agreements)
at March 31, 2005 and December 31, 2004 were collateralized by
investment securities controlled by the Corporation with a book
value of $6,841 and $7,060, respectively.
Advances from the Federal Home Loan Bank of Atlanta totaled $86,178
and $86,380 on March 31, 2005 and December 31, 2004, respectively. The
interest rates on the advances as of March 31, 2005 range from 2.2 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.
In 2001, 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.
In 2003, 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.
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, 2004.
YTD March 31, 2005
Community Mortgage Elimi-
Banking Banking Parent nations Total
Net interest income $ 12,648 116 (391) - 12,373
Provision for loan
losses 642 4 - - 646
Net interest income
after provision
for loan losses 12,006 112 (391) - 11,727
Other income 3,471 702 4,429 (4,428) 4,174
Other expenses 8,781 617 4,493 (4,428) 9,463
Income (loss)
before income
taxes 6,696 197 (455) - 6,438
Income tax
(benefit) 2,347 69 4 - 2,420
Net income $ 4,349 128 (459) - 4,018
Average assets $ 1,388,883 14,578 177,947 (178,425) 1,402,983
YTD March 31, 2004
Community Mortgage Elimi-
Banking Banking Parent nations Total
Net interest income $ 11,973 87 (299) - 11,761
Provision for loan
losses 635 2 - - 637
Net interest income
after provision
for loan losses 11,338 85 (299) - 11,124
Other income 2,650 548 3,482 (3,482) 3,198
Other expenses 8,425 560 3,528 (3,482) 9,031
Income (loss)
before income
taxes 5,563 73 (345) - 5,291
Income tax
(benefit) 1,990 25 (134) - 1,881
Net income $ 3,573 48 (211) - 3,410
Average assets $ 1,321,316 9,349 171,583 (170,596) 1,331,652
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 "FNB"). 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 data,
percentages or 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 FNB. These
forward-looking statements involve risks and uncertainties and are based on
the beliefs and assumptions of management of FNB, 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 FNB is engaged; (5) competitors may have greater financial
resources and develop products that enable such competitors to compete more
successfully than FNB; and (6) adverse changes may occur in the securities
markets.
Critical Accounting Policies
FNB's significant accounting policies are set forth in Note 1 in the "Notes to
Consolidated Financial Statements" in the 2004 Annual Report on Form 10-K
filed with the Securities and Exchange Commission. FNB'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 FNB's consolidated financial
position and/or consolidated results of operations. FNB 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 FNB's accounting policies is
fundamental to understanding its consolidated financial position and
consolidated results of operations.
FNB 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. FNB's assessments may be impacted in future periods by changes in
economic conditions, regulatory examinations and the discovery of information
with respect to borrowers that is not currently known. For additional
discussion concerning FNB's allowance for loan losses and related matters,
see Note 6, "Loans and Allowance for Loan Losses" of the Notes to
Consolidated Financial Statements in the 2004 Annual Report on Form 10-K filed
with the Securities and Exchange Commission.
14
FNB'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 FNB follows Statement of Financial
Accounting Standards SFAS No. 141, "Business Combinations," which allows
only the use of the purchase method of accounting.
For purchase acquisitions, FNB 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 FNB's valuation of
intangible assets and merger/acquisition activities, see Note 16, "Goodwill
and Other Intangibles," and Note 23, "Mergers and Acquisitions" in the 2004
Annual Report on Form 10-K filed with the Securities and Exchange Commission.
Overview
Net income for first quarter 2005 was $4,018, up 17.8% over the $3,410
reported in first quarter 2004. This increase was due to strong revenue
growth in both the community banking and secondary market mortgage banking
segments, expense savings from the closing of the Hilton Head office in
November 2004 and net favorable non-recurring items amounting to $174 (after
tax) due primarily to a gain from an exchange of real estate. The non-
recurring items are explained in more detail under "Net Income" in the next
heading below.
Loan balances grew 6.9% and deposit balances grew 6.4% from March 31, 2004 to
March 31, 2005. Secondary market mortgage volume was up 50% from the same
quarter last year.
The net interest margin was 3.90% in the first quarter 2005. This was up from
3.87% in the fourth quarter 2004 due primarily to increases in the prime rate,
but down from the 3.93% in the first quarter 2004. Even though FNB has more
assets than liabilities that will re-price upward immediately if rates rise,
improvement in the margin will continue to be a challenge because of rising
deposit costs due to increases in interest rates. Rising interest rates have
primarily impacted shorter maturities where FNB has large blocks of
certificate of deposit/IRA balances. In addition, competition has been strong
for these funds, which means FNB must maintain low margins to maintain their
deposits.
FNB is in the process of implementing many initiatives that management expects
to have a positive impact on performance going forward. These include more
fully utilizing a customer relationship management system that was recently
implemented to promote growth of products to existing customers, expanding its
Private Banking line of business and identifying and positioning branches in
locations that are most convenient to existing and prospective clients.
Net Income
Net income increased 17.8%, from $3,410 in first quarter 2004 to $4,018 in
first quarter 2005. Basic earnings per share were up from $.47 to $.55 or
15
17.1% for the same period. Earnings were up due to strong revenue growth in
both the community banking and secondary market mortgage banking segments,
expense savings from the closing of the Hilton Head office and net favorable
non-recurring items amounting to $174. These non-recurring items include a
gain from an exchange of real estate related to the relocation of the Forest
branch in Bedford County ($524 after tax), partially offset by a deferred tax
adjustment ($163) and a customer deposit adjustment resulting from an error
that occurred at an affiliate bank prior to such bank being acquired by FNB
($187 after tax).
Net Interest Income
Net interest income currently provides 75% of the revenue of FNB. 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 increased 5.2% or $612,
from $11,761 for the three months ending March 31, 2004 to $12,373 for the
three months ending March 31, 2005. The net interest margin declined from
3.93% to 3.90% for the same period.
Net interest income was up $659 due to growth in loans and deposits. Average
loan balances grew 9.1% and average deposit balances grew 6.9%. Net interest
income was also enhanced by $129 due to a net favorable change in the
composition of the balance sheet (product mix). Higher-yielding average loan
balances increased from 83.5% of earning assets in the first quarter of 2004
to 86.3% in the first quarter of 2005 and lower-yielding investment balances
declined accordingly. This was offset in part by an unfavorable change in
deposit mix as lower cost transaction account balances declined as a
percentage of total deposits and higher-cost certificate of deposit/IRA
balances increased. These favorable volume and net favorable product mix
variances were offset in part by a $176 reduction in net interest income due
to rates as the average rate paid on deposits and other borrowings increased
slightly more than the yield on earnings assets.
Provision for Loan Losses
The provision for loan losses for the first quarter 2005 was $646 compared to
$637 in the first quarter of 2004. Net charge-offs and net charge-offs to
average year-to-date loans were $208 and .07% in the first quarter 2005
compared to $226 and .09% for the same quarter last year.
The allowance for loan losses as a percent of loans, net of unearned income
increased from 1.20% at March 31, 2004 to 1.23% at March 31, 2005. The
allowance percentage increased due to some credit downgrades. These loans are
fully secured and no losses are anticipated.
Noninterest Income
Noninterest income, which includes service charges on deposit accounts,
secondary market mortgage revenue, trust and fees from investment products,
other service charges, sundry income and net securities gains (losses)
increased by $976, from $3,198 in the first quarter 2004 to $4,174 in the
first quarter 2005. This was due primarily to an $807 pre-tax gain from an
exchange of real estate related to the relocation of the Forest branch in
Bedford County. In addition, revenues from the secondary market mortgage
segment were up $124 due to a 50% increase in secondary market mortgage volume
and revenues from the securities division that sells investment products were
up $145.
16
Noninterest Expense
Noninterest expense, consisting of salaries and employee benefits, occupancy
and equipment costs, checkcard and merchant processing, supplies and other
expenses was up $432, from $9,031 in the first quarter 2004 to $9,463 in the
first quarter 2005. This was due primarily to a $288 pre-tax customer deposit
adjustment resulting from an error that occurred at an affiliate bank prior to
such bank being acquired by FNB. In addition, expenses were up due to merit
increases in salaries, higher expenses in the secondary market mortgage
segment and higher expenses incurred to produce the higher revenues in the
securities division discussed under noninterest income above, and higher
losses incurred on the overdraft protection product. These higher expenses
were offset in part by savings resulting from the closing of the Hilton Head
office in November 2004.
Income Taxes
Income tax expense as a percentage of pre-tax income was 37.6% in the first
quarter 2005 compared to 35.6% in the first quarter 2004. The increase in the
effective tax rate was primarily due to a deferred tax adjustment amounting to
$163 and the decline of nontaxable interest on investment securities,
partially offset by lower state income taxes resulting from converting an
affiliate from a savings and loan to a bank in December 2004. A bank in
Virginia pays a franchise tax instead of state income taxes.
Decisions as to which securities to purchase are based on taxable equivalent
yields for specific terms. FNB 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 FNB grew .8%, or $11,800, from $1,396,116 at December 31, 2004
to $1,407,916 at March 31, 2005. This growth occurred primarily in the
categories of investments and loans and was funded principally by deposits.
Federal funds sold and securities available for sale grew $3,250 and $3,640
respectively from December 31, 2004 to March 31, 2005 due to excess funds
available from the growth in deposits exceeding the growth in loans.
Loan balances were relatively flat from December 31, 2004 to March 31, 2005.
Loans grew .3% or $3,422, from $1,103,470 at year-end 2004 to $1,106,892 at
the end of March 2005. Growth in commercial loans of $6,229 and real estate-
construction of $4,074 was largely offset by a decline in real estate
commercial loans of $7,910.
Mortgage loans held for sale balances increased from $10,905 at December 31,
2004 to $14,450 at December 31, 2005, for an increase of $3,545 due to an
upswing in secondary market mortgage volume since the end of 2004.
Total deposits grew .9% or $10,047, from $1,124,267 at December 31, 2004 to
$1,134,314 at March 31, 2005. Core transaction balances grew $1,523 and
certificate of deposit/Individual Retirement Account balances grew $8,524.
Liquidity and Capital Resources
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. FNB has in place an
17
action plan to help ensure adequate liquidity should any of these scenarios
occur.
In the first quarter, liquidity improved as the net cash flow from operations
of $5,225 plus net cash flow from financing activities of $6,956 (primarily
from deposit growth) exceeded the growth in loans, resulting in a net addition
of liquid funds in the form of cash and equivalents and securities of $7,855.
The loan to deposit ratio dropped from 98.2% at December 31, 2004 to 97.6% at
March 31, 2005.
FNB's targeted key internal ratios are currently well within the guidelines
established by management (loans to funding sources are less than 80%, pledged
to total securities are less than 50%, external funding is less than 18% and
core deposits to assets are greater than 60%). Primary sources of liquidity
include customer-based core deposits and cash generated by operations. Even
though FNB's loan to deposit ratio is above peers, FNB has access to funding
sources to meet anticipated liquidity needs in the form of available
borrowings from the Federal Home Loan Bank and Federal Funds lines (at March
31, 2005, both sources would provide $241 million of additional borrowing
capacity), other external sources amounting to $20 million and the national CD
market. Testing of these sources through periodic usage is performed to
ensure availability when needed.
Stockholders' Equity
Stockholders' equity increased $1,481 from December 31, 2004 to March 31,
2005, primarily due to earnings of $4,018 largely offset by cash dividends
paid of $1,383 and a decrease of $1,288 in net tax effected unrealized gains
on securities available for sale.
Nonperforming Assets
Nonperforming assets, which consist of loans past due 90 days and over on
which interest is still accruing, other real estate and nonaccrual loans
declined $1,156, from $5,550 at December 31, 2004 to $4,394 at March 31, 2005.
Expressed as a percent of loans net of unearned plus other real estate, these
balances declined from .50% to .40% for the same period and are in line with
peer averages.
Contractual Obligations
As of March 31, 2005, there have been no material changes outside the ordinary
course of business to the contractual obligations disclosed in "Management's
Discussion and Analysis" in FNB's Annual Report to Shareholders for the year
ended December 31, 2004.
Off-Balance Sheet Arrangements
As of March 31, 2005, there have been no material changes to the off-balance
sheet arrangements disclosed in "Management's Discussion and Analysis" in
FNB's Annual Report to Shareholders for the year ended December 31, 2004.
Recent Accounting Pronouncements
There have been no additional accounting pronouncements by the Financial
Accounting Standards Board relevant to FNB beyond those previously described
in FNB's Annual Report to Shareholders for the year ended December 31. 2004.
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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, 2004. 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, 2004.
Item 4. CONTROLS AND PROCEDURES
We have carried out an evaluation, under the supervision and the participation
of our management, including our President and Chief Executive Officer (our
"CEO") and our Executive Vice President and Chief Financial Officer (our
"CFO"), of the effectiveness of our disclosure controls and procedures (as
defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934, as amended (the "Exchange Act")) as of the end of the period covered by
this report. Based upon that evaluation, our CEO and CFO concluded that our
disclosure controls and procedures are effective in providing reasonable
assurance that (a) the information required to be disclosed by us in the
reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the Securities
and Exchange Commission's rules and forms, and (b) such information is
accumulated and communicated to our management, including our CEO and CFO, as
appropriate to allow timely decisions regarding required disclosure.
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.
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.
19
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
20
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FNB Corporation
Date May 6, 2005 s/William P. Heath, Jr.
William P. Heath, Jr.
President & Chief Executive Officer
(principal executive officer)
Date May 6, 2005 s/Daniel A. Becker
Daniel A. Becker
Executive Vice President &
Chief Financial Officer
(principal financial and accounting
officer)
21
INDEX TO EXHIBITS
Exhibit # Description
Plan of Merger
(2)(a) Merger Agreement dated March 20, 2003 between FNB Corporation
and Bedford Bancshares, Inc., incorporated by reference to
Exhibit (2)C to Form 10-Q for the quarter ended March 31, 2003.
Articles of Incorporation & Bylaws
(3)(i)(a) Registrant's Articles of Incorporation, incorporated by
reference to Exhibit 3.1 to Form 10-K for the year ended
December 31, 1996.
(3)(i)(b) Articles of Amendment to Articles of Incorporation, incorporated
by reference to Exhibit 3.3 to Registration Statement on Form
S-4 dated September 13, 2000.
(3)(i)(c) Articles of Amendment to Articles of Incorporation, incorporated
by reference to Exhibit (3)(i)(c) to Form 10-Q for the quarter
ended June 30, 2002.
(3)(ii) Registrant's Restatement of Bylaws (as amended through January
27, 2005), incorporated by reference to Exhibit (3)(ii) to Form
10-K for the year ended December 31, 2004.
Material Contracts
(10)A* FNB Corporation 2000 Incentive Stock Plan, incorporated by
reference to Appendix to Proxy Statement on Schedule 14A filed
April 3, 2000.
(10)B* Form of FNB Corporation Non-Qualified Stock Option Agreement for
Non-Employee Director, incorporated by reference to Exhibit (10)B
to Form 10-Q for the quarter ended September 30, 2004.
(10)C* Form of FNB Corporation Restricted Stock Agreement for Employee,
incorporated by reference to Exhibit (10)C to Form 10-Q for the
quarter ended September 30, 2004.
(10)D* Form of FNB Corporation Incentive Stock Option Agreement for
Employee, incorporated by reference to Exhibit (10)D to Form
10-Q for the quarter ended September 30, 2004.
(10)E* Employment Agreement dated June 2, 2003 between FNB Corporation
and William P. Heath, Jr., incorporated by reference to Exhibit
(10)E to Form 10-Q for the quarter ended June 30, 2003.
(10)F* First Amendment, dated December 16, 2004, to the Employment
Agreement dated June 2, 2003 between FNB Corporation and William
P. Heath, Jr., incorporated by reference to Exhibit (10)F to
Form 10-K for the year ended December 31, 2004.
(10)G* Base Salaries for Named Executive Officers, incorporated by
reference to Exhibit (10)G to Form 10-K for the year ended
December 31, 2004.
22
(10)H* Non-exempt Directors Annual Compensation, incorporated by
reference to Exhibit (10)H to Form 10-K for the year ended
December 31, 2004.
(10)I* Director Retirement Plan, incorporated by reference to
Exhibit (10)I to Form 10-K for the year ended December 31,
2004.
(10)J* FNB Corporation Severance Pay Plan, incorporated by reference
to Exhibit (10)J to Form 10-K for the year ended December 31,
2004.
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.
______________________________________________
*Denotes management contract.
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