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, 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) Florida 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 - ------------------------------------------------------------------------------- (Registrant's telephone number, including area code) - ------------------------------------------------------------------------------- (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 October 31, 2001 ----- ------------------------------- Common Stock, $0.01 Par Value 25,716,478 Shares - ----------------------------- ----------------- F.N.B. CORPORATION FORM 10-Q September 30, 2001 INDEX PART I - FINANCIAL INFORMATION PAGE Item 1. Financial Statements Consolidated Balance Sheets 2 Consolidated Income Statements 3 Consolidated Statements of Cash Flows 4 Notes to Consolidated Financial Statements 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Item 3. Quantitative and Qualitative Disclosure of Market Risk 21 PART II - OTHER INFORMATION Item 1. Legal Proceedings 21 Item 2. Changes in Securities 21 Item 3. Defaults Upon Senior Securities 21 Item 4. Submission of Matters to a Vote of Security Holders 21 Item 5. Other Information 21 Item 6. Exhibits and Reports on Form 8-K 21 Signatures 22 1 F.N.B. CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS Dollars in thousands, except par values SEPTEMBER 30, DECEMBER 31, 2001 2000 ------------- ------------ (Unaudited) ASSETS Cash and due from banks $ 131,897 $ 147,530 Interest bearing deposits with banks 8,652 1,860 Federal funds sold 7,329 39,332 Mortgage loans held for sale 4,815 1,042 Securities available for sale 437,090 441,480 Securities held to maturity (fair value of $47,262 and $73,508) 46,142 73,522 Loans, net of unearned income of $48,139 and $62,270 3,139,924 3,096,833 Allowance for loan losses (40,037) (40,373) ---------- ---------- NET LOANS 3,099,887 3,056,460 ---------- ---------- Premises and equipment 115,704 113,936 Other assets 211,461 180,759 ---------- ---------- TOTAL ASSETS $4,062,977 $4,055,921 ========== ========== LIABILITIES Deposits: Non-interest bearing $ 498,923 $ 478,167 Interest bearing 2,718,836 2,769,783 ---------- ---------- TOTAL DEPOSITS 3,217,759 3,247,950 Other liabilities 69,269 65,768 Short-term borrowings 307,986 282,865 Long-term debt 104,745 119,698 ---------- ---------- TOTAL LIABILITIES 3,699,759 3,716,281 ---------- ---------- STOCKHOLDERS' EQUITY Preferred stock - $.01 and $10 par value Authorized - 20,000,000 shares Issued - 148,587 and 167,732 shares Aggregate liquidation value - $3,715 and $4,193 2 1,678 Common stock - $.01 and $2 par value Authorized - 100,000,000 shares Issued - 25,770,459 and 24,489,817 shares 258 48,980 Additional paid-in capital 295,750 216,647 Retained earnings 59,482 75,127 Accumulated other comprehensive income 9,528 2,196 Treasury stock - 68,442 and 233,741 shares at cost (1,802) (4,988) ---------- ---------- TOTAL STOCKHOLDERS' EQUITY 363,218 339,640 ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $4,062,977 $4,055,921 ========== ========== See accompanying Notes to Consolidated Financial Statements 2 F.N.B. CORPORATION AND SUBSIDIARIES CONSOLIDATED INCOME STATEMENTS Dollars in thousands, except per share data Unaudited THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------ ------------------ 2001 2000 2001 2000 -------- -------- -------- -------- INTEREST INCOME Loans, including fees $65,137 $69,496 $199,801 $199,567 Securities: Taxable 6,287 6,710 19,800 19,893 Nontaxable 451 466 1,267 1,434 Dividends 343 513 1,184 1,367 Interest income on other investments 693 491 3,973 916 ------- ------- -------- -------- TOTAL INTEREST INCOME 72,911 77,676 226,025 223,177 ------- ------- -------- -------- INTEREST EXPENSE Deposits 25,353 30,376 84,534 83,377 Short-term borrowings 2,662 4,632 9,532 12,436 Long-term debt 1,778 2,344 5,634 6,034 ------- ------- -------- -------- TOTAL INTEREST EXPENSE 29,793 37,352 99,700 101,847 ------- ------- -------- -------- NET INTEREST INCOME 43,118 40,324 126,325 121,330 Provision for loan losses 3,297 2,659 8,190 8,778 ------- ------- -------- -------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 39,821 37,665 118,135 112,552 ------- ------- -------- -------- NON-INTEREST INCOME Insurance commissions and fees 8,812 6,639 25,868 18,231 Service charges 6,853 5,688 18,987 16,633 Trust 1,187 1,162 3,628 3,309 Gain on sale of securities 361 64 783 142 Gain on sale of loans 1,404 966 4,671 2,042 Other 2,226 2,049 5,571 5,525 ------- ------- -------- -------- TOTAL NON-INTEREST INCOME 20,843 16,568 59,508 45,882 ------- ------- -------- -------- 60,664 54,233 177,643 158,434 ------- ------- -------- -------- NON-INTEREST EXPENSES Salaries and employee benefits 22,254 21,079 68,265 62,861 Net occupancy 2,970 2,606 8,549 7,545 Equipment 3,299 3,297 9,975 9,717 Insurance claims 2,019 1,511 6,074 3,760 Merger related 174 3,731 Other 9,893 9,249 35,547 26,772 ------- ------- -------- -------- TOTAL NON-INTEREST EXPENSES 40,609 37,742 132,141 110,655 ------- ------- -------- -------- INCOME BEFORE INCOME TAXES 20,055 16,491 45,502 47,779 Income taxes 6,555 5,181 14,794 15,088 ------- ------- -------- -------- NET INCOME $13,500 $11,310 $ 30,708 $ 32,691 ======= ======= ======== ======== NET INCOME PER COMMON SHARE: * Basic $.52 $.44 $1.19 $1.28 ==== ==== ===== ===== Diluted $.51 $.43 $1.16 $1.25 ==== ==== ===== ===== CASH DIVIDENDS PER COMMON SHARE * $.20 $.17 $.55 $.50 ==== ==== ==== ==== * 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 STATEMENTS OF CASH FLOWS Dollars in thousands Unaudited NINE MONTHS ENDED SEPTEMBER 30, ------------------------- 2001 2000 --------- --------- OPERATING ACTIVITIES Net income $ 30,708 $ 32,691 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 10,318 9,795 Provision for loan losses 8,190 8,778 Deferred taxes (4,939) (1,646) Net gain on sale of securities (783) (137) Net gain on sale of loans (4,671) (2,042) Proceeds from sale of loans 22,290 17,801 Loans originated for sale (21,392) (33,268) Net change in: Interest receivable 1,723 (2,920) Interest payable (2,509) 4,845 Other, net (24,841) (10,295) --------- --------- Net cash flows from operating activities 14,094 23,602 --------- --------- INVESTING ACTIVITIES Net change in: Interest bearing deposits with banks (6,792) 1,781 Federal funds sold 32,003 (10,690) Loans (51,291) (206,679) Securities available for sale: Purchases (133,746) (68,932) Sales 16,088 12,977 Maturities 134,125 56,374 Securities held to maturity: Purchases (10,927) (1,664) Maturities 38,305 13,770 Increase in premises and equipment (10,329) (11,886) Net cash paid for mergers and acquisitions (2,678) --------- --------- Net cash flows from investing activities 4,758 (214,949) --------- --------- FINANCING ACTIVITIES Net change in: Non-interest bearing deposits, savings and NOW (1,166) 13,959 Time deposits (29,025) 146,863 Short-term borrowings 25,121 (24,544) Increase in long-term debt 6,479 51,467 Decrease in long-term debt (21,432) (36,437) Net (acquisition) issuance of treasury stock (420) 152 Cash dividends paid (14,042) (11,954) --------- --------- Net cash flows from financing activities (34,485) 139,506 --------- --------- NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS (15,633) (51,841) Cash and due from banks at beginning of period 147,530 178,403 --------- --------- CASH AND DUE FROM BANKS AT END OF PERIOD $ 131,897 $ 126,562 ========= ========= See accompanying Notes to Consolidated Financial Statements 4 F.N.B. CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) September 30, 2001 BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements give retroactive effect to the mergers of Citizens Community Bancorp, Inc. (Citizens) and OneSource Group, Inc. (OneSource), with and into F.N.B. Corporation (the Corporation). These transactions were consummated on April 30, and January 26, 2001, respectively, and have been accounted for as poolings-of-interests. The accompanying unaudited financial statements are presented as if the mergers 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 November 7, 2001, the Corporation announced the signing of a definitive merger agreement with Central Bank Shares, Inc. (Central), a bank holding company headquartered in Orlando, Florida, with assets of more than $240.0 million. The transaction will be accounted for as a purchase and is scheduled to be completed in the first quarter of 2002. Central's banking affiliate, Bank of Central Florida, will be merged into an existing affiliate, First National Bank of Florida. On August 31, 2001, the Corporation completed its affiliation with Keller & Associates (Keller), an independent insurance agency in Greenville, Pennsylvania. This transaction was accounted for as a purchase and is not material to the Corporation. Keller operates as a division of Gelvin, Jackson & Starr, Inc., the Corporation's wholly-owned insurance agency in Meadville, Pennsylvania. On June 14, 2001, the Corporation announced the signing of a definitive merger agreement with Promistar Financial Corporation (Promistar), a bank holding company headquartered in Johnstown, Pennsylvania, with assets of more than $2.4 billion. Under the terms of the merger agreement, each outstanding share of Promistar common stock will be converted into .926 shares of the Corporation's common stock. A total of 17,570,288 shares of the Corporation's common stock are anticipated to be issued. The transaction, which will be accounted for as a pooling-of-interests, is scheduled for completion in the first quarter of 2002. Promistar's banking affiliate, Promistar Bank, will be merged into an existing affiliate, First National Bank of Pennsylvania. 5 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. REINCORPORATION F.N.B. Corporation formally completed its reincorporation in the state of Florida, effective June 1, 2001. The Corporation now legally operates from corporate headquarters located in Naples, Florida. The relocation of the Corporation's headquarters from Hermitage, Pennsylvania, to Naples, Florida, originally was announced in early March, and was approved by shareholders at the Corporation's Annual Meeting of Shareholders in April. F.N.B. Corporation was incorporated in 1974 in Hermitage, Pennsylvania, and at that time substantially all of the Corporation's business was being conducted in Pennsylvania. The Corporation expanded into Florida four years ago. As a result of the dynamic growth experienced in that state and because of subsequent acquisitions, a significant portion of the Corporation's assets and shareholders now reside in Florida. By relocating to Southwest Florida, the Corporation is now closer to markets which exhibit greater long-term growth potential. In connection with the reincorporation, the Corporation reduced the par value of both its common stock and preferred stock to $0.01 per share. 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 nine months of 2001 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 established 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. 6 NEW ACCOUNTING STANDARDS In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards (FAS) No. 141, "Business Combinations," and FAS No. 142, "Goodwill and Other Intangible Assets". FAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. FAS No. 141 also specifies criteria that intangible assets acquired in purchase business combinations meet to be recognized and reported apart from goodwill. FAS No. 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of the Statement. FAS No. 142 will also require that intangibles with definite useful lives be amortized over their respective estimated useful lives to the estimated residual values, and reviewed for impairment in accordance with FAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". The Corporation will apply the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of 2002. Application of the non- amortization provisions of the Statement is expected to result in an increase in net income of $1.4 million, or $0.05 per share, per year. During 2002, the Corporation will perform the first of the required impairment tests of goodwill and indefinite lived intangible assets as of January 1, 2002 and has not yet determined what effect these tests will have on earnings and the financial position of the Corporation. 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. 7 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 Nine Months Ended September 30, September 30, ---------------------- ---------------------- 2001 2000 2001 2000 ---------- ---------- ---------- ---------- Basic Net income $ 13,500 $ 11,310 $ 30,708 $ 32,691 Less: Preferred stock dividends declared (72) (83) (225) (263) ---------- ---------- ---------- ---------- Earnings applicable to basic earnings per share $ 13,428 $ 11,227 $ 30,483 $ 32,428 ========== ========== ========== ========== Average common shares outstanding 25,650,526 25,594,599 25,576,502 25,396,390 ========== ========== ========== ========== Earnings per share $.52 $.44 $1.19 $1.28 ==== ==== ===== ===== Three Months Ended Nine Months Ended September 30, September 30, ---------------------- ---------------------- 2001 2000 2001 2000 ---------- ---------- ---------- ---------- Diluted Earnings applicable to diluted earnings per share $ 13,500 $ 11,310 $ 30,708 $ 32,691 ========== ========== ========== ========== Average common shares outstanding 25,650,526 25,594,599 25,576,502 25,396,390 Series A convertible preferred stock 18,589 24,070 18,589 24,070 Series B convertible preferred stock 353,648 412,071 370,179 436,176 Net effect of dilutive stock options and stock warrants based on the treasury stock method 662,009 362,897 589,360 376,521 ---------- ---------- ---------- ---------- 26,684,772 26,393,637 26,554,630 26,233,157 ========== ========== ========== ========== Earnings per share $.51 $.43 $1.16 $1.25 ==== ==== ===== ===== CASH FLOW INFORMATION Following is a summary of supplemental cash flow information (in thousands): Nine Months Ended September 30 ------------------ 2001 2000 -------- -------- Cash paid for: Interest $102,209 $97,002 Taxes 13,718 6,994 Noncash Investing and Financing Activities: Acquisition of real estate in settlement of loans 2,538 1,311 Loans granted in the sale of other real estate 2,864 465 8 COMPREHENSIVE INCOME The components of comprehensive income, net of related tax, are as follows (in thousands): Three Months Ended Nine Months Ended September 30, September 30, ------------------ ------------------ 2001 2000 2001 2000 -------- -------- -------- -------- Net income $13,500 $11,310 $30,708 $32,691 Other comprehensive income: Unrealized gains on securities: Unrealized holding gains (losses) arising during the period 3,237 3,205 7,606 2,711 Less: reclassification adjustment for gains included in net income (233) (38) (274) (147) ------- ------- ------- ------- Other comprehensive income 3,004 3,167 7,332 2,564 ------- ------- ------- ------- Comprehensive income $16,504 $14,477 $38,040 $35,255 ======= ======= ======= ======= 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. 9 At or for the three months Community Insurance Finance All ended September 30, 2001 Banks Agencies Company Other Consolidated ---------- ---------- ---------- --------- ------------ Interest income $ 66,332 $ 56 $ 6,842 $ (319) $ 72,911 Interest expense 27,917 60 1,963 (147) 29,793 Provision for loan losses 2,197 1,100 3,297 Non-interest income 12,539 6,588 417 1,299 20,843 Non-interest expense 30,168 5,260 3,012 1,557 39,997 Intangible amortization 388 193 31 612 Income tax expense (credit) 6,064 502 418 (429) 6,555 Net income 12,137 629 735 (1) 13,500 Core operating earnings 12,155 629 735 98 13,617 Total assets 3,863,984 29,146 142,691 27,156 4,062,977 At or for the three months Community Insurance Finance All ended September 30, 2000 Banks Agencies Company Other Consolidated ---------- ---------- ---------- --------- ------------ Interest income $ 72,044 $ 51 $ 6,822 $ (1,241) $ 77,676 Interest expense 35,880 62 2,301 (891) 37,352 Provision for loan losses 1,569 1,090 2,659 Non-interest income 9,559 5,379 528 1,102 16,568 Non-interest expense 28,320 4,651 2,938 1,258 37,167 Intangible amortization 445 100 30 575 Income tax expense 4,970 227 376 (392) 5,181 Net income 10,419 390 615 (114) 11,310 Core operating earnings 10,419 390 615 (114) 11,310 Total assets 3,880,863 20,586 155,711 (41,616) 4,015,544 * Core operating earnings exclude merger-related costs of $117,000, on an after-tax basis, for the three months ended September 30, 2001. 10 At or for the nine months Community Insurance Finance All ended September 30, 2001 Banks Agencies Company Other Consolidated ---------- ---------- ---------- --------- ------------ Interest income $ 206,813 $ 155 $ 20,713 $ (1,656) $ 226,025 Interest expense 94,113 207 6,485 (1,105) 99,700 Provision for loan losses 4,890 3,300 8,190 Non-interest income 34,786 19,993 1,314 3,415 59,508 Non-interest expense 98,398 15,441 8,960 7,490 130,289 Intangible amortization 1,171 586 95 1,852 Income tax expense (credit) 13,926 1,634 1,173 (1,939) 14,794 Net income 29,101 2,280 2,014 (2,687) 30,708 Core operating earnings 33,602 2,280 2,014 (42) 37,854 Total assets 3,863,984 29,146 142,691 27,156 4,062,977 At or for the nine months Community Insurance Finance All ended September 30, 2000 Banks Agencies Company Other Consolidated ---------- ---------- ---------- --------- ------------ Interest income $ 207,466 $ 116 $ 18,827 $(3,232) $ 223,177 Interest expense 98,522 129 5,656 (2,460) 101,847 Provision for loan losses 5,768 3,010 8,778 Non-interest income 27,295 14,796 1,281 2,510 45,882 Non-interest expense 86,354 11,861 8,260 2,647 109,122 Intangible amortization 1,333 148 52 1,533 Income tax expense (credit) 13,669 917 1,137 (635) 15,088 Net income 29,115 1,857 1,993 (274) 32,691 Core operating earnings 29,115 1,857 1,993 (274) 32,691 Total assets 3,880,863 20,586 155,711 (41,616) 4,015,544 * Core operating earnings exclude consolidation expenses of $2.1 million and merger-related and other non-recurring costs of $5.1 million, on an after-tax basis, for the nine months ended September 30, 2001. 11 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 nine months of 2001 increased to $37.9 million from $32.7 million for the first nine months of 2000. Basic core operating earnings per share were $1.47 and $1.28 for the nine months ended September 30, 2001 and 2000, respectively, while diluted core operating earnings per share were $1.43 and $1.25 for those same periods. Core operating earnings consist of net income adjusted for non- recurring items. Non-recurring items incurred during the first nine months of 2001 included charter consolidation expenses of $2.1 million and merger related and other non-recurring costs of $5.1 million, net of tax. Including these costs, net income was $30.7 million for the first nine months of 2001, resulting in diluted earnings per share of $1.16. There were no non-recurring items during the first nine months of 2000. Highlights for the first nine months of 2001 include: o A return on average assets of 1.24% and a return on average equity of 14.51%, both based on core operating earnings. o An increase in non-interest income of $13.6 million, including a 27.0% or $10.3 million increase in fee income, which consists of service charges, insurance commissions and trust income. o An 11.8% increase in average net interest earning assets. o Continued strong asset quality. o Completion of affiliations with Ostrowsky & Associates, Inc., James T. Blalock, OneSource Group, Inc., Citizens Community Bank of Florida and Keller & Associates. 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. 12 FIRST NINE MONTHS OF 2001 AS COMPARED TO FIRST NINE 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): Nine Months Ended September 30 2001 2000 ---------------------------- ---------------------------- Average Yield/ Average Yield/ Balance Interest Rate Balance Interest Rate ---------- -------- ------ ---------- -------- ------ Assets Interest earning assets: Interest bearing deposits with banks $ 5,780 $ 175 4.04% $ 3,559 $ 222 8.32% Federal funds sold 109,032 3,798 4.64 14,909 694 6.21 Securities: Taxable 451,129 20,745 6.15 442,289 21,024 6.35 Non-taxable (1) 45,337 2,176 6.40 51,208 2,406 6.26 Loans (1) (2) 3,086,530 200,745 8.70 3,037,617 200,453 8.81 ---------- -------- ---------- -------- Total interest earning assets 3,697,808 227,639 8.23 3,549,582 224,799 8.46 ---------- -------- ---------- -------- Cash and due from banks 125,086 125,354 Allowance for loan losses (40,290) (39,415) Premises and equipment 114,138 112,793 Other assets 186,765 162,813 ---------- ---------- $4,083,507 $3,911,127 ========== ========== Liabilities Interest bearing liabilities: Deposits: Interest bearing demand $ 559,788 $ 7,881 1.88 $ 519,916 $ 9,238 2.37 Savings 832,736 15,849 2.54 802,923 17,521 2.91 Other time 1,393,312 60,804 5.83 1,341,763 56,618 5.64 Short-term borrowings 274,075 9,532 4.65 288,224 12,436 5.76 Long-term debt 110,706 5,634 6.79 125,025 6,034 6.43 ---------- -------- ---------- -------- Total interest bearing liabilities 3,170,617 99,700 4.20 3,077,851 101,847 4.42 ---------- -------- ---------- -------- Non-interest bearing demand deposits 489,816 451,382 Other liabilities 74,185 64,877 ---------- ---------- 3,734,618 3,594,110 ---------- ---------- Stockholders' equity 348,889 317,017 ---------- ---------- $4,083,507 $3,911,127 ========== ========== Net interest earning assets $ 527,191 $ 471,731 ========== ========== Net interest income $127,939 $122,952 ======== ======== Net interest spread 4.03% 4.04% ===== ===== Net interest margin (3) 4.63% 4.63% ===== ===== (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. 13 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 nine months of 2001, net interest income, on a fully taxable equivalent basis, totaled $127.9 million, as compared to $123.0 million for the first nine months of 2000. Net interest income consisted of interest income of $227.6 million and interest expense of $99.7 million for the first nine months of 2001 compared to $224.8 million and $101.8 million for each, respectively, for the first nine months of 2000. Net interest margin was 4.63% at both September 30, 2001 and September 30, 2000. The yield on total interest earning assets decreased by 23 basis points and the rate paid on interest bearing liabilities decreased by 22 basis points. The net interest margin was 4.63% for each of the nine-month periods ended September 30, 2001 and 2000. 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 nine months ending September 30, 2001 as compared to the nine months ending September 30, 2000 (in thousands): Volume Rate Net ------- ------- ------- Interest Income Interest bearing deposits with banks $ 141 $ (188) $ (47) Federal funds sold 3,233 (129) 3,104 Securities: Taxable 485 (764) (279) Non-taxable (286) 56 (230) Loans 1,300 (1,008) 292 ------- ------- ------- 4,873 (2,033) 2,840 ------- ------- ------- Interest Expense Deposits: Interest bearing demand 800 (2,157) (1,357) Savings 690 (2,362) (1,672) Other time 2,230 1,956 4,186 Short-term borrowings (590) (2,314) (2,904) Long-term debt (783) 383 (400) ------- ------- ------- 2,347 (4,494) (2,147) ------- ------- ------- Net Change $ 2,526 $ 2,461 $ 4,987 ======= ======= ======= 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, remained relatively constant at $200.7 million for the nine months ended September 30, 2001 as compared to $200.5 million for the nine months ended September 30, 2000. Average loans increased 1.6%, however this was offset by a decrease of 11 basis points in the average yield over the same period last year. Interest expense on deposits increased $1.2 million or 1.4% for the nine months ended September 30, 2001, compared to the same period of 2000, as average interest bearing deposits rose 4.5% over this period. The average balances in time deposits, savings deposits and interest bearing demand deposits increased by $51.5 million, $29.8 million and $39.9 million, respectively. The average balance in non-interest bearing demand deposits increased by $38.4 million. Interest expense on short-term borrowings decreased $2.9 million, as the average balance of short-term borrowings decreased $14.1 million and the rate paid decreased by 111 basis points. Interest expense on long-term 14 debt decreased $400,000 from September 30, 2000 as average long-term debt decreased $14.3 million and the rate paid increased by 36 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 $8.2 million for the first nine months of 2001, as compared to $8.8 million for the first nine 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 1.28% at September 30, 2001 and 1.31% at September 30, 2000. Non-interest income increased 29.7% from $45.9 million during the first nine months of 2000 to $59.5 million during the first nine months of 2001. Insurance commissions and fees, service charges and trust income increased $10.3 million or 27.0% over the first nine months of 2000. These higher levels of fee income are attributable to insurance agency purchases that were consummated during the second half of 2000, increases in deposits and the Corporation's continued expansion into annuity and mutual fund sales and trust services. Additionally, gains on the sale of loans increased $2.6 million during this same period. Non-interest expenses increased 19.4% from $110.7 million during the first nine months of 2000 to $132.1 million during the first nine months of 2001. This increase was primarily attributable to non-recurring items during the first nine months 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 $3.7 million (see Notes to Consolidated Financial Statements). Excluding these items, non-interest expenses totaled $121.2 million for the first nine months of 2001. In addition to the previously mentioned non-recurring items, non-interest expenses increased due to insurance agency purchases that were consummated during the second half of 2000. Excluding the impact of the insurance agency purchases, non-interest expenses would have increased by $7.0 million or 6.4% on a year over year basis. The Corporation's income tax expense was $14.8 million for the first nine months of 2001 compared to $15.1 million for the same period of 2000. The effective tax rate of 32.5% for the nine months ended September 30, 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. THIRD QUARTER OF 2001 AS COMPARED TO THIRD QUARTER OF 2000: During the third quarter of 2001, net interest income increased $2.8 million, or 6.9%, over the third quarter of 2000. Total interest income decreased $4.8 million, or 6.1%, primarily the result of a decrease in interest income on loans of $4.4 million. Total interest expense decreased $7.6 million, or 20.2%, primarily due to a decrease of $5.0 million in interest expense on deposits, despite an increase in the average balance of deposits. The provision for loan losses totaled $3.3 million for the third quarter of 2001, as compared to $2.7 million for the third quarter of 2000. Non-interest income increased 25.8% during the third quarter of 2001 compared to the same period of 2000, primarily due to a $3.4 million or 24.9% increase in insurance commissions and fees, service charges and trust income. 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. Additionally, gains on the sale of loans increased $438,000 during this same period. 15 Non-interest expenses increased by $2.9 million or 7.6% during the third quarter of 2001, compared to the third quarter of 2000. Non-interest expenses increased by $788,000 from insurance agencies acquired after September 30, 2000 and accounted for as purchase transactions. 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 $68.0 million was unused at September 30, 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. 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 1.04 at September 30, 2001, as compared to .86 at September 30, 2000. A ratio of more than one indicates a net-asset repricing position and, conversely, a ratio of less that one indicates a net-liability repricing position during the subsequent twelve months. 16 Following is the gap analysis as of September 30, 2001 (in thousands): Within 4-12 1-5 Over 3 Months Months Years 5 years Total ---------- --------- ---------- ---------- ---------- Interest Earning Assets Interest bearing deposits with banks $ 6,877 $ 1,725 $ 50 $ 8,652 Federal funds sold 7,329 7,329 Securities 66,739 95,980 $ 239,626 80,887 483,232 Loans, net of unearned 913,293 654,481 1,352,227 224,738 3,144,739 ---------- --------- ---------- ---------- ---------- 994,238 752,186 1,591,853 305,675 3,643,952 Other assets 419,025 419,025 ---------- --------- ---------- ---------- ---------- $ 994,238 $ 752,186 $1,591,853 $ 724,700 $4,062,977 ========== ========= ========== ========== ========== Interest Bearing Liabilities Deposits: Interest checking $ 85,423 $ 458,033 $ 543,456 Savings 355,872 477,875 833,747 Time deposits 355,781 $ 626,270 $ 359,582 1,341,633 Borrowings 218,313 31,577 47,432 115,409 412,731 ---------- --------- ---------- ---------- ---------- 1,015,389 657,847 407,014 1,051,317 3,131,567 Other liabilities 568,192 568,192 Stockholders' equity 363,218 363,218 ---------- --------- ---------- ---------- ---------- $1,015,389 $ 657,847 $ 407,014 $1,982,727 $4,062,977 ========== ========= ========== ========== ========== Period Gap $ (21,151) $ 94,339 $1,184,839 $(1,258,027) ========== ========= ========== =========== Cumulative Gap $ (21,151) $ 73,188 $1,258,027 ========== ========= ========== Cumulative Gap as a Percent of Total Assets (.52)% 1.80% 30.96% ========== ========= ========== Rate Sensitive Assets/Rate Sensitive Liabilities (Cumulative) .98 1.04 1.60 1.16 ========== ========= ========== ========== 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. Both net interest income simulations and EVE capture balance sheet risks (such as changing embedded options) that a single gap analysis fails to expose. 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: 17 SEPTEMBER 30, ------------------ 2001 2000 -------- -------- Net interest income change (12 months): - 200 basis points (1.2)% 1.6 % + 200 basis points (0.7)% (3.7)% Economic value of equity: - 200 basis points (6.9)% (1.7)% + 200 basis points (1.0)% (3.6)% The preceding 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. As such, the measures do not necessarily reflect the actions the ALCO may undertake in response to certain changes in interest rates. 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. 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 $16.7 million as a result of earnings retention. For the nine months ended September 30, 2001, the return on average equity was 14.51% and the dividend payout ratio was 36.72%, both based on core operating earnings. Book value per common share was $13.99 at September 30, 2001, compared to $12.80 at September 30, 2000. LOANS Following is a summary of loans (dollars in thousands): SEPTEMBER 30, DECEMBER 31, 2001 2000 ------------ ------------ Real estate: Residential $1,169,208 $1,162,568 Commercial 941,012 845,136 Construction 210,667 204,267 Installment loans to individuals 294,705 341,436 Commercial, financial and agricultural 425,261 401,983 Lease financing 147,209 204,187 Unearned income (48,139) (62,744) ---------- ---------- $3,139,923 $3,096,833 ========== ========== 18 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. Following is a summary of non-performing assets (dollars in thousands): SEPTEMBER 30, DECEMBER 31, 2001 2000 ------------ ------------ Non-performing assets: Non-accrual loans $16,354 $10,392 Restructured loans 3,451 2,810 ------- ------- Total non-performing loans 19,805 13,202 Other real estate owned 3,173 4,786 ------- ------- Total non-performing assets $22,978 $17,988 ======= ======= Asset quality ratios: Non-performing loans as percent of total loans .63% .43% Non-performing assets as percent of total assets .57% .44% 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. 19 Following is a summary of changes in the allowance for loan losses and selected ratios (dollars in thousands): Three Months Ended Nine Months Ended September 30, September 30, ------------------- ------------------- 2001 2000 2001 2000 -------- -------- -------- -------- Balance at beginning of period $39,800 $39,672 $40,373 $37,197 Addition arising from purchase transaction 767 767 Charge-offs (3,833) (3,044) (10,279) (7,550) Recoveries 773 472 1,753 1,334 ------- ------- ------- ------- Net charge-offs (3,060) (2,572) (8,526) (6,216) Provision for loan losses 3,297 2,659 8,190 8,778 ------- ------- ------- ------- Balance at end of period $40,037 $40,526 $40,037 $39,759 ======= ======= ======= ======= Allowance for loan losses to: Total loans, net of unearned income 1.28% 1.31% Non-performing loans 202.22% 358.38% 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). As of June 30, 2001, 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 September 30, 2001, that the Corporation and each of its banking subsidiaries are all "well capitalized". Following are capital ratios as of September 30, 2001 for the Corporation (dollars in thousands): Well Capitalized Minimum Capital Actual Requirements Requirements ----------------- ----------------- ----------------- Amount Ratio Amount Ratio Amount Ratio --------- ------- --------- ------- --------- ------- Total Capital $366,753 11.6% $316,341 10.0% $253,073 8.0% (to risk-weighted assets) Tier 1 Capital 325,995 10.3% 189,805 6.0% 126,537 4.0% (to risk-weighted assets) Tier 1 Capital 325,995 8.1% 200,548 5.0% 160,439 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. 20 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. 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 No reports on Form 8-K were filed during the quarter ended September 30, 2001. 21 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: November 13, 2001 /s/Gary L. Tice ------------------------- ------------------------------------------ Gary L. Tice President and Chief Executive Officer (Principal Executive Officer) Dated: November 13, 2001 /s/John D. Waters ------------------------- ------------------------------------------ John D. Waters Vice President and Chief Financial Officer (Principal Financial Officer) 22