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, 2001
------------------------------------------------
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 0-8144
------
F.N.B. CORPORATION
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 25-1255406
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2150 Goodlette Road North, Naples, FL 34102
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(800) 262-7600
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(Registrant's telephone number, including area code)
One F.N.B. Boulevard, Hermitage, PA 16148
- -------------------------------------------------------------------------------
(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.
Yes X No
--- ---
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes No
--- ----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at April 30, 2001
----- -----------------------------
Common Stock, $2 Par Value 23,799,088 Shares
- -------------------------- -----------------
F.N.B. CORPORATION
FORM 10-Q
March 31, 2001
INDEX
PART I - FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Balance Sheet 2
Consolidated Income Statement 3
Consolidated Statement of Cash Flows 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosure of Market Risk 18
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
1
F.N.B. CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
Dollars in thousands, except par values
Unaudited
MARCH 31, DECEMBER 31,
2001 2000
------------- ------------
ASSETS
Cash and due from banks $ 141,332 $ 143,236
Interest bearing deposits with banks 3,449 1,843
Federal funds sold 175,409 35,961
Mortgage loans held for sale 7,106 1,042
Securities available for sale 435,262 436,441
Securities held to maturity (fair
value of $46,748 and $60,549) 46,080 60,522
Loans, net of unearned income
of $57,140 and $62,744 2,947,434 2,962,073
Allowance for loan losses (38,544) (38,737)
---------- ----------
NET LOANS 2,908,890 2,923,336
---------- ----------
Premises and equipment 107,709 107,987
Other assets 180,639 179,226
---------- ----------
TOTAL ASSETS $4,005,876 $3,889,594
========== ==========
LIABILITIES
Deposits:
Non-interest bearing $ 463,481 $ 461,386
Interest bearing 2,742,168 2,641,551
---------- ----------
TOTAL DEPOSITS 3,205,649 3,102,937
Other liabilities 72,979 65,152
Short-term borrowings 286,379 282,865
Long-term debt 113,052 116,698
---------- ----------
TOTAL LIABILITIES 3,678,059 3,567,652
---------- ----------
STOCKHOLDERS' EQUITY
Preferred stock - $10 par value
Authorized - 20,000,000 shares
Issued - 165,284 and 167,732 shares
Aggregate liquidation value -
$4,132 and $4,193 1,653 1,678
Common stock - $2 par value
Authorized - 100,000,000 shares
Issued - 22,728,497 and 22,716,035 shares 45,457 45,432
Additional paid-in capital 201,785 201,596
Retained earnings 77,373 76,054
Accumulated other comprehensive income 5,446 2,170
Treasury stock - 177,946 and 233,741
shares at cost (3,897) (4,988)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 327,817 321,942
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $4,005,876 $3,889,594
========== ==========
See accompanying Notes to Consolidated Financial Statements
2
F.N.B. CORPORATION AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENT
Dollars in thousands, except per share data
Unaudited
THREE MONTHS ENDED
MARCH 31,
----------------------
2001 2000
------- -------
INTEREST INCOME
Loans, including fees $64,724 $61,749
Securities:
Taxable 6,719 6,357
Nontaxable 399 487
Dividends 440 391
Other 1,519 182
------- -------
TOTAL INTEREST INCOME 73,801 69,166
------- -------
INTEREST EXPENSE
Deposits 29,144 24,827
Short-term borrowings 3,766 3,693
Long-term debt 1,976 1,776
------- -------
TOTAL INTEREST EXPENSE 34,886 30,296
------- -------
NET INTEREST INCOME 38,915 38,870
Provision for loan losses 2,101 2,973
------- -------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 36,814 35,897
------- -------
NON-INTEREST INCOME
Insurance commissions and fees 8,575 5,624
Service charges 5,743 5,559
Trust 1,197 1,070
Gain on sale of securities 32 40
Gain on sale of loans 905 221
Other 1,767 1,891
------- -------
TOTAL NON-INTEREST INCOME 18,219 14,405
------- -------
55,033 50,302
NON-INTEREST EXPENSES
Salaries and employee benefits 23,032 20,265
Net occupancy 2,696 2,401
Equipment 3,345 3,119
Merger related 283
Other 17,354 9,368
------- -------
TOTAL NON-INTEREST EXPENSES 46,710 35,153
------- -------
INCOME BEFORE INCOME TAXES 8,323 15,149
Income taxes 2,451 4,758
------- -------
NET INCOME $ 5,872 $10,391
======= =======
NET INCOME PER COMMON SHARE: *
Basic $.25 $.44
==== ====
Diluted $.24 $.43
==== ====
CASH DIVIDENDS PER COMMON SHARE * $.17 $.16
==== ====
* Restated to reflect a 5 percent stock dividend declared on April 23, 2001.
See accompanying Notes to Consolidated Financial Statements
3
F.N.B. CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Dollars in thousands
Unaudited
THREE MONTHS ENDED
MARCH 31,
----------------------
2001 2000
--------- ---------
OPERATING ACTIVITIES
Net income $ 5,872 $ 10,391
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 3,270 3,181
Provision for loan losses 2,101 2,973
Deferred taxes (1,330) 2,063
Net gain on sale of securities (32) (40)
Net gain on sale of loans (905) (221)
Proceeds from sale of loans 7,160 11,882
Loans originated for sale (12,319) (8,507)
Net change in:
Interest receivable 1,681 (328)
Interest payable 692 1,174
Other, net 5,423 (3,226)
--------- ---------
Net cash flows from operating activities 11,613 19,342
--------- ---------
INVESTING ACTIVITIES
Net change in:
Interest bearing deposits with banks (1,606) 333
Federal funds sold (139,448) (8,880)
Loans 12,451 (105,152)
Securities available for sale:
Purchases (41,407) (23,350)
Sales 8,620 12,561
Maturities 39,047 23,884
Securities held to maturity:
Purchases (250)
Maturities 14,441 3,739
Increase in premises and equipment (2,427) (3,525)
Net cash paid for mergers and acquisitions (2,495)
--------- ---------
Net cash flows from investing activities (112,824) (100,640)
--------- ---------
FINANCING ACTIVITIES
Net change in:
Non-interest bearing deposits, savings and NOW 45,478 54,643
Time deposits 57,234 80,215
Short-term borrowings 3,514 (57,385)
Increase in long-term debt 2,674 5,733
Decrease in long-term debt (6,320) (31,286)
Net issuance/acquisition of treasury stock 888 (2,528)
Cash dividends paid (4,161) (3,844)
--------- ---------
Net cash flows from financing activities 99,307 45,548
--------- ---------
NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS (1,904) (35,750)
Cash and due from banks at beginning of period 143,236 172,367
--------- ---------
CASH AND DUE FROM BANKS AT END OF PERIOD $ 141,332 $ 136,617
========= =========
See accompanying Notes to Consolidated Financial Statements
4
F.N.B. CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 2001
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements give
retroactive effect to the merger of OneSource Group, Inc. (OneSource), with and
into F.N.B. Corporation (the Corporation). The transaction was consummated on
January 26, 2001, and has been accounted for as a pooling-of-interests. The
accompanying unaudited financial statements are presented as if the merger had
been consummated for all the periods presented. The accompanying unaudited
consolidated financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included. For
further information, refer to the consolidated financial statements for the year
ended December 31, 2000 and footnotes thereto included in the Corporation's
Annual Report on Form 10-K.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions that affect the amounts reported in the financial statements. The
Corporation cautions that any forward looking statements contained in this
report, in a report incorporated by reference to this report or made by
management of the Corporation, involve risks and uncertainties and are subject
to change based upon various factors. Actual results could differ materially
from those expressed or implied.
MERGERS AND ACQUISITIONS
On April 30, 2001, the Corporation completed its affiliation with
Citizens Community Bank of Florida (Citizens), a community bank headquartered in
Marco Island, Florida, with assets of $181.0 million. Under the terms of the
merger agreement, each outstanding share of Citizens common stock was converted
into .524 shares of the Corporation's common stock. A total of 1,775,244 shares
of the Corporation's common stock were issued. The transaction was accounted for
as a pooling-of-interests. Citizens operates as a division of the Corporation's
Florida banking affiliate, First National Bank of Florida.
On January 31, 2001 and January 5, 2001, the Corporation completed its
affiliations with Ostrowsky & Associates, Inc. (Ostrowsky) and James T. Blalock
(Blalock), independent insurance agencies in Cape Coral and Venice, Florida,
respectively. The transactions were accounted for as purchases. Both Ostrowsky
and Blalock are operating as divisions of Roger Bouchard Insurance, Inc.
(Bouchard), a wholly-owned subsidiary of the Corporation.
On January 26, 2001, the Corporation completed its affiliation with
OneSource, an independent insurance agency with offices in Clearwater and
Jacksonville, Florida. The transaction was accounted for as a
pooling-of-interests. OneSource is operating as a division of Bouchard.
The Corporation regularly evaluates the potential acquisition of, and
holds discussions with, various acquisition candidates and as a general rule the
Corporation publicly announces such acquisitions only after a definitive
agreement has been reached.
5
CHARTER CONSOLIDATION
During the first quarter of 2001, the Corporation completed its charter
consolidation plan which reduced the number of bank charters from eight to
three. The Corporation's five Florida banks were merged under First National
Bank of Florida and its two Pennsylvania banks were combined under First
National Bank of Pennsylvania. The Corporation had previously consolidated its
Ohio banks under a single charter, Metropolitan National Bank. In connection
with these charter consolidations, the trust operations of First National Bank
of Florida were consolidated into the Corporation's national trust company,
First National Trust Company. The Corporation incurred pre-tax consolidation
expense of $3.2 million arising from legal and accounting fees, consulting fees,
data processing conversion charges, early retirement, involuntary separation
and related benefit costs. Involuntary separation costs associated with 42
terminated employees totaled $1.4 million of the total consolidation expense.
These separation costs have been reflected within the income statement caption
salaries and employee benefits. The total amount of separation payments paid
during the first quarter was $1.0 million. The remaining separation costs will
be paid in accordance with the contractual terms of the employment and
compensation agreements of the terminated employees.
RESERVE FOR LEGAL EXPENSES
During the first quarter of 2001, the Corporation recorded a pre-tax
charge of approximately $4.0 million to cover estimated legal expenses
associated with five cases filed against one of the Corporation's subsidiary
banks. The plaintiffs allege that a third-party independent administrator
misappropriated funds from their individual retirement accounts held by the
subsidiary bank. The Corporation decided to establish the reserve as a result
of developments which occurred immediately prior to March 31, 2001. The
Corporation believes this reserve will be sufficient for all costs associated
with the litigation, including settlements and adverse judgements.
NEW ACCOUNTING STANDARD
Financial Accounting Standards Statement (FAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities," requires all derivatives to be
recorded on the balance sheet at fair value and establishes standard accounting
methodologies for hedging activities. The statement is effective for the
Corporation's fiscal year ending December 31, 2001. The adoption of this
statement did not have a material impact on the accompanying financial
statements.
PER SHARE AMOUNTS
Per share amounts have been adjusted for common stock dividends,
including the 5 percent stock dividend declared on April 23, 2001.
Basic earnings per share is calculated by dividing net income, adjusted
for preferred stock dividends declared, by the sum of the weighted average
number of shares of common stock outstanding.
Diluted earnings per common share is calculated by dividing net income
by the weighted average number of shares of common stock outstanding, assuming
conversion of outstanding convertible preferred stock from the beginning of the
year or date of issuance and the exercise of stock options and warrants. Such
adjustments to net income and the weighted average number of shares of common
stock are made only when such adjustments dilute earnings per share.
6
EARNINGS PER SHARE
The following tables set forth the computation of basic and diluted
earnings per share (in thousands, except per share data):
Three Months Ended
March 31,
------------------------
2001 2000
---------- ----------
Basic
Net income $ 5,872 $ 10,391
Less: Preferred stock dividends declared (77) (93)
---------- ----------
Earnings applicable to basic earnings per share $ 5,795 $ 10,298
========== ==========
Average common shares outstanding 23,645,169 23,427,408
========== ==========
Earnings per share $.25 $.44
==== ====
Three Months Ended
March 31,
------------------------
2001 2000
---------- ----------
Diluted
Earnings applicable to diluted earnings per share $ 5,872 $ 10,391
========== ==========
Average common shares outstanding 23,645,169 23,427,408
Series A convertible preferred stock 21,983 27,078
Series B convertible preferred stock 382,932 463,841
Net effect of dilutive stock options and stock
warrants based on the treasury stock method 360,197 412,853
---------- ----------
24,410,281 24,331,180
========== ==========
Earnings per share $.24 $.43
==== ====
CASH FLOW INFORMATION
Following is a summary of supplemental cash flow information (in
thousands):
Three Months Ended
March 31
-----------------------
2001 2000
---------- ----------
Cash paid for:
Interest $34,208 $29,111
Noncash Investing and Financing Activities:
Acquisition of real estate in settlement of loans 379 185
Loans granted in the sale of other real estate 485 175
7
COMPREHENSIVE INCOME
The components of comprehensive income, net of related tax, are as
follows (in thousands):
Three Months Ended
March 31,
--------------------
2001 2000
------- -------
Net income $ 5,872 $10,391
Other comprehensive income:
Unrealized gains on securities:
Unrealized holding gains (losses) arising
during the period 3,279 (1,287)
Less: reclassification adjustment for gains
included in net income (3) (25)
------- -------
Other comprehensive income 3,276 (1,312)
------- -------
Comprehensive income $ 9,148 $ 9,079
======= =======
BUSINESS SEGMENTS
The Corporation operates in three reportable segments: community banks,
insurance agencies and consumer finance. The Corporation's community bank
subsidiaries offer services traditionally offered by full-service commercial
banks, including commercial and individual demand and time deposit accounts and
commercial, mortgage and individual installment loans. In addition to
traditional banking products, the Corporation's community bank subsidiaries
offer trust services as well as various alternative products, including
securities brokerage and investment advisory services, mutual funds, insurance
and annuities. The Corporation's insurance agencies are full-service insurance
companies offering all lines of commercial and personal insurance through major
carriers. The Corporation's consumer finance subsidiary is involved in making
personal installment loans to individuals and purchasing installment sales
finance contracts from retail merchants. This activity is funded through the
sale of the Corporation's subordinated notes at the finance company's branch
offices. The following tables provide financial information for these segments
of the Corporation (in thousands). Other items shown in the tables below
represent the parent company, other non-bank subsidiaries and eliminations,
which are necessary for purposes of reconciling to the consolidated amounts.
8
At or for the three months Community Insurance Finance All
ended March 31, 2001 Banks Agencies Company Other Consolidated
---------- ---------- ---------- --------- ------------
Interest income $ 67,761 $ 55 $ 6,923 $ (938) $ 73,801
Interest expense 33,060 83 2,331 (588) 34,886
Provision for loan losses 1,001 1,100 2,101
Non-interest income 9,905 6,996 450 868 18,219
Non-interest expense 35,188 4,970 2,932 3,000 46,090
Intangible amortization 392 195 33 620
Income tax expense (credit) 2,378 688 362 (977) 2,451
Net income 5,647 1,115 615 (1,505) 5,872
Core operating earnings 9,180 1,115 615 (240) 10,670
Total assets 3,831,533 28,368 147,277 (1,302) 4,005,876
At or for the three months Community Insurance Finance All
ended March 31, 2000 Banks Agencies Company Other Consolidated
---------- ---------- ---------- --------- ------------
Interest income $ 63,913 $ 26 $ 6,014 $ (787) $ 69,166
Interest expense 29,136 30 1,642 (512) 30,296
Provision for loan losses 2,013 960 2,973
Non-interest income 8,349 4,979 351 726 14,405
Non-interest expense 28,191 3,425 2,697 373 34,686
Intangible amortization 393 63 11 467
Income tax expense 3,872 535 373 (22) 4,758
Net income 8,657 952 682 100 10,391
Core operating earnings 8,657 952 682 100 10,391
Total assets 3,690,524 15,186 121,739 (62,122) 3,765,327
* Core operating earnings exclude consolidation expenses of $2.1 million and
merger-related and other non-recurring costs of $2.7 million, on an after-tax
basis, for the three months ended March 31, 2001.
9
PART I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
FINANCIAL INFORMATION SUMMARY
Core operating earnings for the first three months of 2001 increased to
$10.7 million from $10.4 million for the first three months of 2000. Basic core
operating earnings per share were $.45 and $.44 for the three months ended March
31, 2001 and 2000, respectively, while diluted core operating earnings per share
were $.44 and $.43 for those same periods. Core operating earnings consist of
net income adjusted for non- recurring items. Non-recurring items incurred
during the first three months of 2001 included charter consolidation expenses of
$2.1 million and merger related and other non-recurring costs of $2.7 million,
net of tax. Including these costs, net income was $5.9 million for the first
three months of 2001, resulting in diluted earnings per share of $.24. There
were no non-recurring items during the first three months of 2000. Highlights
for the first three months of 2001 include:
o A return on average assets of 1.11% and a return on average
equity of 13.31%, both based on core operating earnings.
o An increase in non-interest income of $3.8 million, including a
26.6% or $3.3 million increase in fee income, which consists of
service charges, insurance commissions and trust income.
o A 5.9% increase in average earning assets.
o Continued strong asset quality.
o Completion of affiliations with Ostrowsky & Associates, Inc.,
James T. Blalock and OneSource Group, Inc.
o Completion of consolidation of charters which is expected to
increase after- tax earnings on an annualized basis by
approximately $2.9 million, or $0.12 per share, by the year 2002.
10
FIRST THREE MONTHS OF 2001 AS COMPARED TO FIRST THREE MONTHS OF 2000:
The following table provides information regarding the average balances
and yields and rates on interest earning assets and interest bearing liabilities
(dollars in thousands):
Three Months Ended March 31 2001 2000
---------------------------- ----------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
---------- -------- ------ ---------- -------- ------
Assets
Interest earning assets:
Interest bearing deposits
with banks $ 4,205 $ 69 6.56% $ 3,307 $ 61 7.38%
Federal funds sold 106,698 1,450 5.44 8,507 121 5.69
Securities:
Taxable 431,089 6,719 6.32 405,442 6,357 6.31
Non-taxable (1) 62,892 1,055 6.71 70,394 1,133 6.44
Loans (1) (2) 2,946,414 65,058 8.95 2,866,645 62,024 8.70
---------- -------- ---------- --------
Total interest
earning assets 3,551,298 74,351 8.49 3,354,295 69,696 8.36
---------- -------- ---------- --------
Cash and due from banks 118,972 125,068
Allowance for loan losses (39,118) (37,102)
Premises and equipment 108,115 106,246
Other assets 176,510 155,223
---------- ----------
$3,915,777 $3,703,730
========== ==========
Liabilities
Interest bearing liabilities:
Deposits:
Interest bearing demand $ 522,158 $ 2,733 2.12 $ 493,177 $ 2,540 2.07
Savings 795,911 5,824 2.97 768,338 5,436 2.85
Other time 1,363,229 20,587 6.12 1,269,136 16,851 5.34
Short-term borrowings 276,794 3,766 5.52 284,368 3,693 5.22
Long-term debt 116,002 1,976 6.81 111,424 1,776 6.38
---------- -------- ---------- --------
Total interest
bearing liabilities 3,074,094 34,886 4.60 2,926,443 30,296 4.16
---------- -------- ---------- --------
Non-interest bearing
demand deposits 449,368 425,562
Other liabilities 67,199 59,939
---------- ----------
3,590,661 3,411,944
---------- ----------
Stockholders' equity 325,116 291,786
---------- ----------
$3,915,777 $3,703,730
========== ==========
Net interest earning assets $ 477,204 $ 427,852
========== ==========
Net interest income $ 39,465 $ 39,400
======== ========
Net interest spread 3.89% 4.20%
===== =====
Net interest margin (3) 4.51% 4.72%
===== =====
(1) The amounts are reflected on a fully taxable equivalent basis using the
federal statutory tax rate of 35% adjusted for certain federal tax
preferences.
(2) Average balance includes non-accrual loans. Loans consist of average
total loans less average unearned income. The amount of loan fees
included in interest income on loans is immaterial.
(3) Net interest margin is calculated by dividing the difference between
total interest earned and total interest paid by average interest
earning assets.
11
Net interest income, the Corporation's primary source of earnings, is
the amount by which interest and fees generated by interest earning assets,
primarily loans and securities, exceed interest expense on deposits and borrowed
funds. During the first three months of 2001, net interest income, on a fully
taxable equivalent basis, totaled $39.5 million, as compared to $39.4 million
for the first three months of 2000. Net interest income consisted of interest
income of $74.4 million and interest expense of $34.9 million for the first
three months of 2001 compared to $69.7 million and $30.3 million for each,
respectively, for the first three months of 2000. Net interest margin decreased
from 4.72% at March 31, 2000 to 4.51% at March 31, 2001. The yield on total
interest earning assets increased by 13 basis points and the rate paid on
interest bearing liabilities increased by 44 basis points. Although the
Corporation has experienced margin compression, net interest income has risen as
earning assets increased by 5.8%. There is a possibility that the compression
could continue, as further discussed within the "Liquidity and Interest Rate
Sensitivity" section of this report.
The following table sets forth certain information regarding changes in
net interest income attributable to changes in the volumes and rates of interest
earning assets and interest bearing liabilities for the three months ending
March 31, 2001 as compared to the three months ending March 31, 2000 (in
thousands):
Volume Rate Net
------- ------- -------
Interest Income
Interest bearing
deposits with banks $ 14 $ (6) $ 8
Federal funds sold 1,334 (5) 1,329
Securities:
Taxable 353 9 362
Non-taxable (129) 51 (78)
Loans 1,493 1,541 3,034
------- ------- -------
3,065 1,590 4,655
------- ------- -------
Interest Expense
Deposits:
Interest bearing demand 137 56 193
Savings 179 209 388
Other time 1,258 2,478 3,736
Short-term borrowings (63) 136 73
Long-term debt 76 124 200
------- ------- -------
1,587 3,003 4,590
------- ------- -------
Net Change $ 1,478 $(1,413) $ 65
======= ======= =======
The amount of change not solely due to rate or volume changes was
allocated between the change due to rate and the change due to volume based on
the net size of the rate and volume changes.
Interest income on loans, on a fully taxable equivalent basis,
increased 4.9% from $62.0 million for the three months ended March 31, 2000 to
$65.1 million for the three months ended March 31, 2001. This increase was the
result of an increase in average loans of 2.8% and an increase of 25 basis
points in the average yield over the same period last year.
Interest expense on deposits increased $4.3 million or 17.4% for the
three months ended March 31, 2001, compared to the same period of 2000, as
average interest bearing deposits rose 6.0% over this period. The average
balances in time deposits, savings deposits and interest bearing demand deposits
increased by $94.1 million, $27.6 million and $29.0 million, respectively. The
average balance in non-interest bearing demand deposits increased by $23.8
million. Despite a $7.6 million decrease in average short- term borrowings,
interest expense on short-term borrowings increased $73,000 for these same
periods due to a 30 basis point increase in the rate paid on the borrowings.
12
Additionally, interest expense on long-term debt increased $200,000 from March
31, 2000 due to a $4.6 million increase in average long-term debt and an
increase in the rate paid of 43 basis points.
The provision for loan losses charged to operations is a direct result
of management's analysis of the adequacy of the allowance for loan losses which
takes into consideration factors, including qualitative factors, relevant to the
collectibility of the existing portfolio. The provision for loan losses was $2.1
million for the first three months of 2001, as compared to $3.0 million for the
first three months of 2000. The decrease reflects the Corporation's continued
strong asset quality. The allowance for loan losses as a percentage of total
loans was 1.31% at March 31, 2001 and 1.30% at March 31, 2000.
Non-interest income increased 26.5% from $14.4 million during the first
three months of 2000 to $18.2 million during the first three months of 2001.
Insurance commissions and fees, service charges and trust income increased $3.3
million or 26.6% over the first three months of 2000. These higher levels of fee
income are attributable to growth in insurance, increases in deposits and the
Corporation's continued expansion into annuity and mutual fund sales and trust
services.
Total non-interest expenses increased 32.9% from $35.2 million during
the first three months of 2000 to $46.7 million during the first three months of
2001. This increase was primarily attributable to non-recurring items during the
first quarter of 2001, including consolidation expenses of $3.2 million, a $4.0
million legal reserve related to a defalcation by a third-party IRA
administrator and merger related costs of $283,000 (see Notes to Consolidated
Financial Statements). Excluding these items, non-interest expenses totaled
$39.2 million for the first quarter of 2001. In addition to the previously
mentioned non-recurring items, non-interest expenses increased due to the
insurance agency purchases that were consummated in January of 2001.
The Corporation's income tax expense was $2.5 million for the first
three months of 2001 compared to $4.8 million for the same period of 2000. The
effective tax rate of 29.4% for the three months ended March 31, 2001 was lower
than the 35.0% federal statutory tax rate due to the tax benefits resulting from
tax-exempt instruments and excludable dividend income.
LIQUIDITY AND INTEREST RATE SENSITIVITY
The Corporation monitors its liquidity position on an ongoing basis to
assure that it is able to meet the need for funds at all times. Given the
monetary nature of its assets and liabilities and the source of liquidity
provided by the available for sale securities portfolio, the Corporation has
sufficient sources of funds available as needed to meet its routine, operational
cash needs.
Additionally, the Corporation has external sources of funds available
should it desire to use them. These include approved lines of credit with
several major domestic banks, of which $70.0 million was unused at March 31,
2001. To further meet its liquidity needs, the Corporation also has access to
the Federal Home Loan Bank and the Federal Reserve Bank, as well as other
funding sources.
13
The financial performance of the Corporation is at risk from interest
rate fluctuations. This interest rate risk arises due to differences between the
amount of interest-earning assets and interest-bearing liabilities subject to
repricing over a period of time, the difference between the change in various
interest rates and the embedded options in certain financial instruments. The
Board of Directors has established an Asset/Liability Policy in order to achieve
and maintain earnings performance consistent with long-term goals while
maintaining acceptable levels of interest rate risk, a "well-capitalized"
balance sheet and adequate levels of liquidity. This policy designates the
Asset/Liability Committee (ALCO) as the body responsible for meeting this
objective. The Corporation utilizes an asset/liability model to support its
balance sheet strategies. The Corporation uses gap analysis, net interest income
simulations and the economic value of equity to measure its interest rate risk.
The gap analysis which follows measures the interest rate risk of the
Corporation by comparing the difference between the amount of interest-earning
assets and interest- bearing liabilities subject to repricing over a period of
time. The cumulative one-year gap ratio was 1.00 at March 31, 2001, as compared
to .90 at March 31, 2000. A ratio of less than one indicates an excess of
repricing liabilities over repricing assets. Based on the cumulative one-year
gap and assuming no change in asset/liability composition, a change in interest
rates is expected to result in a negligible change in net interest income over
the next twelve months.
Net interest income simulations measure the exposure to short-term
earnings from changes in market rates of interest in a more rigorous and
explicit fashion. The Corporation's current financial position is combined with
assumptions regarding future business to calculate net interest income under
varying hypothetical interest rate scenarios. The economic value of equity (EVE)
measures the Corporation's long-term earnings exposure from changes in market
rates of interest. EVE is defined as the present value of assets minus the
present value of liabilities at a point in time. A decrease in EVE due to a
specified rate change indicates a decline in the long-term earnings capacity of
the balance sheet assuming that the rate change remains in effect over the life
of the balance sheet. The following table presents an analysis of the potential
sensitivity of the Corporation's annual net interest income and EVE to sudden
and sustained 200 basis point changes in market rates:
MARCH 31,
-----------------
2001 2000
------- -------
Net interest income change (12 months):
- 200 basis points (2.8)% 3.2 %
+ 200 basis points (0.9)% (4.7)%
Economic value of equity:
- 200 basis points (8.7)% 2.4 %
+ 200 basis points (1.4)% (6.6)%
14
Following is the gap analysis as of March 31, 2001 (in thousands):
Within 4-12 1-5 Over
3 Months Months Years 5 years Total
---------- --------- ---------- ----------- ----------
Interest Earning Assets
Interest bearing deposits
with banks $ 3,449 $ 3,449
Federal funds sold 175,409 175,409
Securities 46,264 $ 77,914 $ 284,711 $ 72,453 481,342
Loans, net of unearned 801,960 612,788 1,336,320 203,472 2,954,540
---------- --------- ---------- ----------- ----------
1,027,082 690,702 1,621,031 275,925 3,614,740
Other assets 391,136 391,136
---------- --------- ---------- ----------- ----------
$1,027,082 $ 690,702 $1,621,031 $ 667,061 $4,005,876
========== ========= ========== =========== ==========
Interest Bearing Liabilities
Deposits:
Interest checking $ 123,213 $ 441,949 $ 565,162
Savings 309,546 499,009 808,555
Time deposits 353,634 $ 650,911 $ 363,906 1,368,451
Borrowings 234,290 40,353 50,442 74,346 399,431
---------- --------- ---------- ----------- ----------
1,020,683 691,264 414,348 1,015,304 3,141,599
Other liabilities 536,460 536,460
Stockholders' equity 327,817 327,817
---------- --------- ---------- ----------- ----------
$1,020,683 $ 691,264 $ 414,348 $ 1,879,581 $4,005,876
========== ========= ========== =========== ==========
Period Gap $ 6,399 $ (562) $1,206,683 $(1,212,520)
========== ========= ========== ===========
Cumulative Gap $ 6,399 $ 5,837 $1,212,520
========== ========= ==========
Cumulative Gap as a Percent
of Total Assets .16% .15% 30.27%
========== ========= ==========
Rate Sensitive Assets/Rate
Sensitive Liabilities
(Cumulative) 1.01 1.00 1.57 1.15
========== ========= ========== ==========
The preceding measures reflect actions the ALCO enacted to reduce the
sensitivity of its net interest income. However, the measures do not necessarily
reflect the actions the ALCO may undertake in response to certain changes in
interest rates. Thus, the measurements assumed no change in asset/liability
composition. The disclosed measures are well within the limits set forth in the
Corporation's Asset/Liability Policy.
The computation of the prospective effects of hypothetical interest
rate changes requires numerous assumptions regarding characteristics of new
business and the behavior of existing positions. These business assumptions are
based upon the Corporation's experience, business plans and published industry
experience. Key assumptions employed in the model include asset prepayment
speeds, the relative price sensitivity of certain assets and liabilities and the
expected life of non-maturity deposits. Because these assumptions are inherently
uncertain, actual results will differ from simulated results.
15
CAPITAL RESOURCES
The assessment of capital adequacy depends on a number of factors such
as asset quality, liquidity, earnings performance, changing competitive
conditions and economic forces. The Corporation seeks to maintain a strong
capital base to support its growth and expansion activities, to provide
stability to current operations and to promote public confidence. Capital
adequacy is further discussed in the "Regulatory Matters" section of this
report.
Capital management is a continuous process. Since December 31, 2000,
stockholders' equity has increased $1.7 million as a result of earnings
retention. For the three months ended March 31, 2001, the return on average
equity was 13.31% and the dividend payout ratio was 38.55%, both based on core
operating earnings. Book value per common share was $13.67 at March 31, 2001,
compared to $12.33 at March 31, 2000.
LOANS
Following is a summary of loans (dollars in thousands):
MARCH 31, DECEMBER 31,
2001 2000
------------ ------------
Real estate:
Residential $1,088,045 $1,096,311
Commercial 828,203 812,023
Construction 191,953 180,387
Installment loans to individuals 313,865 339,126
Commercial, financial and agricultural 397,343 392,783
Lease financing 185,165 204,187
Unearned income (57,140) (62,744)
---------- ----------
$2,947,434 $2,962,073
========== ==========
NON-PERFORMING ASSETS
Non-performing assets include non-performing loans and other real estate
owned. Non-performing loans include non-accrual loans and restructured loans.
Non-accrual loans represent loans on which interest accruals have been
discontinued. It is the Corporation's policy to discontinue interest accruals
when principal or interest is due and has remained unpaid for 90 days or more
unless the loan is both well secured and in the process of collection. When a
loan is placed on non-accrual status, all unpaid interest is reversed.
Non-accrual loans may not be restored to accrual status until all delinquent
principal and interest has been paid or the loan becomes both well secured and
in the process of collection. Consumer installment loans are generally charged
off against the allowance for loan losses upon reaching 90 to 180 days past due,
depending on the installment loan type. Restructured loans are loans in which
the borrower has been granted a concession on the interest rate or the original
repayment terms due to financial distress.
Non-performing loans are closely monitored on an ongoing basis as part
of the Corporation's loan review and work-out process. The potential risk of
loss on these loans is evaluated by comparing the loan balance to the fair value
of any underlying collateral or the present value of projected future cash
flows. Losses are recognized where appropriate.
16
Following is a summary of non-performing assets (dollars in thousands):
MARCH 31, DECEMBER 31,
2001 2000
------------ ------------
Non-performing assets:
Non-accrual loans $10,173 $ 9,946
Restructured loans 2,842 2,810
------- -------
Total non-performing loans 13,015 12,756
Other real estate owned 4,016 4,786
------- -------
Total non-performing assets $17,031 $17,542
======= =======
Asset quality ratios:
Non-performing loans as percent of total loans .44% .43%
Non-performing assets as percent of total assets .43% .45%
ALLOWANCE FOR LOAN LOSSES
Management's analysis of the allowance for loan losses includes the
evaluation of the loan portfolio based on internally generated loan review
reports and the historical loss experience of the remaining balances of the
various homogeneous loan pools which comprise the loan portfolio. Specific
factors which are evaluated include the previous loan loss experience with the
customer, the status of past due interest and principal payments on the loan,
the collateral position of the loan, the quality of financial information
supplied by the borrower and the general financial condition of the borrower.
Historical loss experience on the remaining portfolio segments is considered in
conjunction with the current status of economic conditions, loan loss trends,
delinquency and non-accrual trends, credit administration and concentrations of
credit risk.
Following is a summary of changes in the allowance for loan losses and
selected ratios (dollars in thousands):
Three Months Ended
March 31,
--------------------
2001 2000
-------- --------
Balance at beginning of period $38,737 $36,311
Charge-offs (2,828) (1,958)
Recoveries 534 423
------- -------
Net charge-offs (2,294) (1,535)
Provision for loan losses 2,101 2,973
------- -------
Balance at end of period $38,544 $37,749
======= =======
Allowance for loan losses to:
Total loans, net of unearned income 1.31% 1.30%
Non-performing loans 296.17% 279.19%
REGULATORY MATTERS
Quantitative measures established by regulators to ensure capital
adequacy require the Corporation and its banking subsidiaries to maintain
minimum amounts and ratios of total and tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined) and of tier 1 capital to
average assets (as defined).
17
As of December 31, 2000, the Corporation and each of its banking
subsidiaries have been categorized as "well capitalized" under the regulatory
framework for prompt corrective action. Management believes, as of March 31,
2001, that the Corporation and each of its banking subsidiaries are all "well
capitalized". Following are capital ratios as of March 31, 2001 for the
Corporation (dollars in thousands):
Well Capitalized Minimum Capital
Actual Requirements Requirements
----------------- ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
--------- ------- --------- ------- --------- -------
Total Capital $334,027 11.3% $295,782 10.0% $236,625 8.0%
(to risk-weighted assets)
Tier 1 Capital 293,727 9.9% 177,469 6.0% 118,313 4.0%
(to risk-weighted assets)
Tier 1 Capital 293,727 7.6% 194,190 5.0% 155,352 4.0%
(to average assets)
The Corporation and its banking subsidiaries are subject to various
regulatory capital requirements administered by federal and state banking
agencies. Failure to meet minimum capital requirements can initiate certain
mandatory, and discretionary actions by regulators that, if undertaken, could
have a direct material effect on the Corporation's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Corporation and its banking subsidiaries must meet specific capital
guidelines that involve quantitative measures of assets, liabilities and certain
off-balance sheet items as calculated under regulatory accounting practices. The
Corporation's and banking subsidiaries' capital amounts and classifications are
also subject to qualitative judgments by the regulators about components, risk
weightings and other factors.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK.
The information called for by this item is provided under the caption
"Liquidity and Interest Rate Sensitivity" under Item 2 - Management's Discussion
and Analysis of Financial Condition and Results of Operations.
18
PART II
Item 1. Legal Proceedings
During the first quarter of 2001, the Corporation established a legal
reserve of approximately $4.0 million associated with individual
retirement accounts at one of its banking subsidiaries. Various cases
have been filed in the 20th Judicial Circuit and for Lee County,
Florida, naming the subsidiary of the Corporation as a co-defendant.
The plaintiffs allege that a third-party independent administrator
misappropriated funds from their individual retirement accounts held
with the banking subsidiary (see Notes to Consolidated Financial
Statements).
The Corporation and persons to whom the Corporation may have
indemnification obligations, in the normal course of business, are
subject to various pending and threatened lawsuits in which claims for
monetary damages are asserted. Management, after consultation with
outside legal counsel, does not at the present time anticipate the
ultimate aggregate liability, arising out of such pending and
threatened lawsuits will have a material adverse effect on the
Corporation's financial position. At the present time, management is
not in a position to determine whether any pending or threatened
litigation will have a material adverse effect on the Corporation's
results of operation in any future reporting period.
Item 2. Changes in Securities
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
The Secretary of the Corporation must receive written notice of any
proposal submitted by a shareholder of the Corporation for
consideration at the Annual Meeting of Shareholders on or prior to the
date which is 120 days prior to the date on which the Corporation first
mailed its proxy materials for the prior year's Annual Meeting of
Shareholders. Accordingly, any shareholder proposal must be submitted
to the Corporation by November 19, 2001 to be considered at the 2002
Annual Meeting of Shareholders.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(b) Reports on Form 8-K
A report on Form 8-K, dated January 9, 2001, was filed by the
Corporation. The Form 8-K announced the Corporation's charter
consolidation plan, which occurred during the first quarter of
2001.
A report on Form 8-K, dated February 6, 2001, was filed by the
Corporation. The Form 8-K announced the Corporation's proposed
relocation of its corporate headquarters from Hermitage,
Pennsylvania to Naples, Florida and proposed reincorporation
from Pennsylvania to Florida.
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
F.N.B. Corporation
------------------------------------------
(Registrant)
Dated: May 9, 2001 /s/Gary L. Tice
------------------------ ------------------------------------------
Gary L. Tice
President and Chief Executive Officer
(Principal Executive Officer)
Dated: May 8, 2001 /s/John D. Waters
------------------------ ------------------------------------------
John D. Waters
Vice President and Chief Financial Officer
(Principal Financial Officer)
20