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, 2002
------------------------------------------------
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
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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
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(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 April 30, 2002
----- -----------------------------
Common Stock, $0.01 Par Value 41,772,836 Shares
- ----------------------------- -----------------
F.N.B. CORPORATION
FORM 10-Q
March 31, 2002
INDEX
PART I - FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Balance Sheets 2
Consolidated Statements of Operations 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 9
Item 3. Quantitative and Qualitative Disclosure of Market Risk 19
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities 20
Item 3. Defaults Upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits 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
Unaudited
MARCH 31, DECEMBER 31,
2002 2001
------------ ------------
ASSETS
Cash and due from banks $ 184,331 $ 246,781
Interest bearing deposits with banks 8,792 3,712
Federal funds sold 192,107 88,260
Mortgage loans held for sale 2,873 1,323
Securities available for sale 874,058 902,970
Securities held to maturity (fair
value of $52,384 and $51,770) 52,514 51,368
Loans, net of unearned income of $46,630 and $50,063 4,915,438 4,814,435
Allowance for loan losses (66,281) (65,059)
---------- ----------
NET LOANS 4,849,157 4,749,376
---------- ----------
Premises and equipment 154,154 149,518
Other assets 413,515 295,240
---------- ----------
TOTAL ASSETS $6,731,501 $6,488,548
========== ==========
LIABILITIES
Deposits:
Non-interest bearing $ 901,175 $ 798,960
Interest bearing 4,416,589 4,300,116
---------- ----------
TOTAL DEPOSITS 5,317,764 5,099,076
Other liabilities 100,592 99,193
Short-term borrowings 421,925 375,754
Long-term debt 342,581 342,424
---------- ----------
TOTAL LIABILITIES 6,182,862 5,916,447
---------- ----------
STOCKHOLDERS' EQUITY
Preferred stock - $0.01 par value
Authorized - 20,000,000 shares
Issued - 142,203 and 147,033 shares
Aggregate liquidation value - $3,555 and $3,676 1 1
Common stock - $0.01 par value
Authorized - 500,000,000 shares
Issued - 41,807,630 and 41,781,837 shares 418 418
Additional paid-in capital 444,685 444,549
Retained earnings 100,440 118,950
Accumulated other comprehensive income 5,791 9,845
Treasury stock - 94,488 and 63,178 shares at cost (2,696) (1,662)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 548,639 572,101
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $6,731,501 $6,488,548
========== ==========
See accompanying Notes to Consolidated Financial Statements
2
F.N.B. CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Dollars in thousands, except per share data
Unaudited
THREE MONTHS ENDED
MARCH 31,
-----------------------
2002 2001
-------- --------
INTEREST INCOME
Loans, including fees $ 92,619 $ 98,688
Securities:
Taxable 9,978 11,139
Nontaxable 2,046 1,674
Dividends 598 999
Other 802 1,914
-------- --------
TOTAL INTEREST INCOME 106,043 114,414
-------- --------
INTEREST EXPENSE
Deposits 31,103 46,886
Short-term borrowings 2,529 4,761
Long-term debt 4,906 3,991
-------- --------
TOTAL INTEREST EXPENSE 38,538 55,638
-------- --------
NET INTEREST INCOME 67,505 58,776
Provision for loan losses 4,191 4,441
-------- --------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 63,314 54,335
-------- --------
NON-INTEREST INCOME
Insurance commissions and fees 10,923 8,575
Service charges 10,622 8,283
Trust 2,397 2,284
Gain on sale of securities 175 1,109
Gain on sale of loans 1,006 1,258
Other 2,821 1,978
-------- --------
TOTAL NON-INTEREST INCOME 27,944 23,487
-------- --------
91,258 77,822
-------- --------
NON-INTEREST EXPENSES
Salaries and employee benefits 33,142 29,066
Net occupancy 4,394 4,127
Equipment 5,011 4,728
Merger and consolidation related 41,855 3,531
Other 17,828 20,549
-------- --------
TOTAL NON-INTEREST EXPENSES 102,230 62,001
-------- --------
(LOSS) INCOME BEFORE INCOME TAXES (BENEFIT) (10,972) 15,821
Income taxes (benefit) (2,089) 4,590
-------- --------
NET (LOSS) INCOME $ (8,883) $ 11,231
======== ========
NET (LOSS) INCOME PER COMMON SHARE: *
Basic $(.20) $.27
===== ====
Diluted $(.20) $.27
===== ====
CASH DIVIDENDS PER COMMON SHARE * $.19 $.16
==== ====
* Restated to reflect a 5 percent stock dividend declared on May 6, 2002.
See accompanying Notes to Consolidated Financial Statements
3
F.N.B. CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Dollars in thousands
Unaudited
THREE MONTHS ENDED
MARCH 31,
-------------------------
2002 2001
--------- ---------
OPERATING ACTIVITIES
Net (loss) income $ (8,883) $ 11,231
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 5,450 4,735
Provision for loan losses 4,191 4,441
Deferred taxes (7,491) (1,728)
Net gain on sale of securities (175) (1,109)
Net gain on sale of loans (1,006) (1,258)
Proceeds from sale of loans 8,747
Loans originated for sale (544) (12,319)
Net change in:
Interest receivable (1,140) 2,613
Interest payable (685) 1,827
Other, net 9,205 5,449
--------- ---------
Net cash flows from operating activities (1,078) 22,629
--------- ---------
INVESTING ACTIVITIES
Net change in:
Interest bearing deposits with banks (5,080) (2,410)
Federal funds sold (103,847) (158,255)
Loans (104,204) 13,786
Securities available for sale:
Purchases (180,412) (198,909)
Sales 125,695 110,043
Maturities 77,078 95,981
Securities held to maturity:
Purchases (3,693)
Maturities 2,546 27,439
Increase in premises and equipment (8,848) (2,904)
Increase in intangibles (49,098) (2,411)
Net cash paid for mergers and acquisitions (66,000) (2,495)
--------- ---------
Net cash flows from investing activities (315,863) (120,135)
--------- ---------
FINANCING ACTIVITIES
Net change in:
Non-interest bearing deposits, savings and NOW 178,375 28,520
Time deposits 40,313 79,495
Short-term borrowings 46,171 3,671
Increase in long-term debt 1,903 2,908
Decrease in long-term debt (1,746) (6,320)
Net issuance/acquisition of treasury stock (2,126) 888
Cash dividends paid (8,399) (7,301)
--------- ---------
Net cash flows from financing activities 254,491 101,861
--------- ---------
NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS (62,450) 4,355
Cash and due from banks at beginning of period 246,781 207,940
--------- ---------
CASH AND DUE FROM BANKS AT END OF PERIOD $ 184,331 $ 212,295
========= =========
See accompanying Notes to Consolidated Financial Statements
4
F.N.B. CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 2002
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements give
retroactive effect to the merger of Promistar Financial Corporation with and
into F.N.B. Corporation (the Corporation). The transaction was consummated on
January 18, 2002, 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, 2001 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 January 31, 2002, the Corporation completed its affiliation with
Central Bank Shares, Inc. (Central), a bank holding company headquartered in
Orlando, Florida, with assets of more than $251.4 million. The transaction,
which was a cash transaction accounted for as a purchase, resulted in the
recognition of approximately $47.0 million of goodwill and $8.1 million of core
deposit intangibles. The core deposit intangibles are being amortized over a
ten year period. Central's banking affiliate, Bank of Central Florida, was
merged into an existing subsidiary of the Corporation, First National Bank of
Florida. Central's results of operations since February 1, 2002 have been
included in the Corporation's statement of operations.
On January 18, 2002, the Corporation completed its affiliation with
Promistar Financial Corporation (Promistar), a bank holding company
headquartered in Johnstown, Pennsylvania, with assets of $2.4 billion. Under the
terms of the merger agreement, each outstanding share of Promistar's common
stock was converted into .926 shares of the Corporation's common stock. A total
of 16,007,346 shares of the Corporation's common stock were issued. The
transaction was accounted for a pooling-of-interests. Promistar's banking
affiliate, Promistar Bank, was merged into an existing subsidiary of the
Corporation, First National Bank of Pennsylvania (FNBPA).
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
MERGER AND CONSOLIDATION RELATED EXPENSES
As previously discussed, the Corporation completed its affiliation with
Promistar on January 18, 2002 and merged its wholly owned subsidiary Promistar
Bank into the Corporation's existing subsidiary, FNBPA on February 20, 2002. In
connection with this transaction, the Corporation incurred pre-tax merger and
consolidation expense of $41.4 million. Involuntary separation costs associated
with terminated employees totaled $6.8 million of the total merger and
consolidation expense. The total amount of separation costs paid during the
first quarter was $6.5 million. The remaining separation costs are anticipated
to be paid during the second quarter of 2002. Early retirement and other
employment related expenses totaled $7.8 million, data processing conversion
charges totaled $12.2 million, professional services totaled $8.0 million,
write-downs of impaired assets totaled $4.2 million and other miscellaneous
merger and consolidation expenses totaled $2.4 million. The Corporation paid
merger and consolidation expenses and recognized asset impairments totaling
$39.1 million during the first quarter of 2002.
The Corporation also incurred merger related costs of $413,000 related
to its affiliation with Central. These costs related primarily to data
processing conversion charges.
LOANS AND THE ALLOWANCE FOR LOAN LOSSES
Loans are reported at their outstanding principal adjusted for any
charge-offs and any deferred fees or costs on originated loans.
Interest income on loans is accrued on the principal amount
outstanding. 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. While on
non-accrual, contractual interest payments are applied against principal until
the loan is restored to accrual status. 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. Loan origination fees and related costs are deferred and recognized over
the life of the loans as an adjustment of yield.
The allowance for loan losses is based on management's evaluation of
potential losses in the loan portfolio, which includes an assessment of past
experience, current and future economic conditions, known and inherent risks in
the loan portfolio, the estimated value of underlying collateral and residuals
and changes in the composition of the loan portfolio. Additions are made to the
allowance through periodic provisions charged to income and recovery of
principal on loans previously charged off. Losses of principal and/or residuals
are charged to the allowance when the loss actually occurs or when a
determination is made that a loss is probable.
Impaired loans are identified and measured based on the present value
of expected future cash flows discounted at the loan's effective interest rate,
or at the loan's observable market price or at the fair value of the collateral
if the loan is collateral dependent. If the recorded investment in the loan
exceeds the measure of fair value, a valuation allowance is established as a
component of the allowance for loan losses. Impaired loans consist of
non-homogeneous loans, which based on the evaluation of current information and
events, management has determined that it is probable that the Corporation will
not be able to collect all amounts due according to the contractual terms of the
loan agreement. The Corporation evaluates all commercial and commercial real
estate loans which have been classified for regulatory reporting purposes,
including non-accrual and restructured loans, in determining impaired loans.
6
NEW ACCOUNTING STANDARDS
Financial Accounting Standards Statement (FAS) No. 142, "Goodwill and
Other Intangible Assets," requires that goodwill and intangible assets with
identifiable 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 also requires 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 adopted the new rules on accounting for goodwill and other
intangible assets in the first quarter of 2002. Application of the
non-amortization provisions of the Statement resulted in an increase in net
income of $350,000, or $0.01 per share, during the first quarter of 2002. The
Corporation has completed its transition impairment test and concluded that
goodwill is not impaired.
PER SHARE AMOUNTS
Per share amounts have been adjusted for common stock dividends,
including the 5 percent stock dividend declared on May 6, 2002.
Basic earnings per share is calculated by dividing net income, adjusted
for preferred stock dividends declared, by 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.
EARNINGS (LOSS) PER SHARE
The following tables set forth the computation of basic and diluted
earnings (loss) per share (in thousands, except per share data):
Three Months Ended
March 31,
-----------------------
2002 2001
---------- ----------
Basic
Net (loss) income $ (8,883) $ 11,231
Less: Preferred stock dividends declared (66) (77)
---------- ----------
(Loss) earnings applicable to basic earnings per share $ (8,817) $ 11,154
========== ==========
Average common shares outstanding 43,771,337 41,304,177
========== ==========
(Loss) earnings per share $(.20) $.27
===== ====
7
Three Months Ended
March 31,
----------------------
2002 2001
---------- ----------
Diluted
(Loss) earnings applicable to diluted earnings per share $ (8,883) $ 11,231
========== ==========
Average common shares outstanding 43,771,337 41,304,177
Series A convertible preferred stock 17,171 23,082
Series B convertible preferred stock 343,278 402,079
Net effect of dilutive stock options and stock
warrants based on the treasury stock method 676,344 477,023
---------- ----------
44,808,130 42,206,361
========== ==========
(Loss) earnings per share $(.20) $.27
===== ====
CASH FLOW INFORMATION
Following is a summary of supplemental cash flow information (in
thousands):
Three Months Ended
March 31
----------------------
2002 2001
---------- ----------
Cash paid for:
Interest $39,223 $53,232
Noncash Investing and Financing Activities:
Acquisition of real estate in settlement of loans 242 379
Loans granted in the sale of other real estate 10 485
COMPREHENSIVE INCOME
The components of comprehensive income, net of related tax, are as
follows (in thousands):
Three Months Ended
March 31,
----------------------
2002 2001
---------- ----------
Net (loss) income $ (8,883) $11,231
Other comprehensive (loss) income:
Unrealized gains on securities:
Unrealized holding gains (losses) arising
during the period (3,939) 5,407
Less: reclassification adjustment for gains
included in net income (115) (703)
-------- -------
Other comprehensive (loss) income (4,054) 4,704
-------- -------
Comprehensive (loss) income $(12,937) $15,935
======== =======
8
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
agencies 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 March 31, 2002 Banks Agencies Company Other Consolidated
---------- ---------- ---------- --------- ------------
Interest income $ 99,459 $ 28 $ 6,870 $ (314) $ 106,043
Interest expense 36,318 28 1,715 477 38,538
Provision for loan losses 2,767 1,424 4,191
Non-interest income 14,609 8,156 479 4,700 27,944
Non-interest expense 43,778 5,658 3,096 7,006 59,538
Merger and consolidation
related expenses 22,250 126 19,479 41,855
Intangible amortization 767 16 31 23 837
Income tax expense (benefit) 3,109 969 357 (6,524) (2,089)
Net (loss) income 5,079 1,513 600 (16,075) (8,883)
Core operating earnings 20,974 1,513 681 (1,319) 21,849
Total assets 6,555,419 30,748 141,456 3,878 6,731,501
At or for the three months Community Insurance Finance All
ended March 31, 2001 Banks Agencies Company Other Consolidated
---------- ---------- ---------- --------- ------------
Interest income $ 108,219 $ 55 $ 6,923 $ (783) $ 114,414
Interest expense 53,338 83 2,331 (114) 55,638
Provision for loan losses 3,332 1,109 4,441
Non-interest income 13,666 6,996 450 2,375 23,487
Non-interest expense 47,692 4,970 2,932 1,766 57,360
Merger and consolidation
related expenses 1,709 1,822 3,531
Intangible amortization 690 195 33 192 1,110
Income tax expense 4,426 688 362 (886) 4,590
Net income 10,698 1,115 606 (1,188) 11,231
Core operating earnings 14,231 1,115 606 77 16,029
Total assets 6,053,769 28,368 147,277 23,286 6,252,700
* Core operating earnings exclude merger and consolidation related and other
non-recurring costs of $30.7 million for the three months ended March 31,
2002 and merger and consolidation related and other non-recurring costs of
$4.8 million for the three months ended March 31, 2001, all on an after-tax
basis.
10
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 2002 increased to
$21.8 million from $16.0 million for the first three months of 2001. Basic core
operating earnings per share were $.50 and $.39 for the three months ended March
31, 2002 and 2001, respectively, while diluted core operating earnings per share
were $.49 and $.38 for those same periods. Core operating earnings consist of
net income adjusted for non- recurring items. Non-recurring items incurred
during the first quarter of 2002 included merger and consolidation related costs
and other non-recurring costs of $30.7 million, net of tax, while non-recurring
items incurred during the first quarter 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 loss was $8.9 million for
the first quarter of 2002 compared to net income of $11.2 million for the first
quarter of 2001. Diluted earnings per share were $(.20) and $.27 for those same
periods, respectively. Highlights for the first three months of 2002 include:
o A return on average assets of 1.34% and a return on average
equity of 15.30%, both based on core operating earnings.
o An increase in non-interest income of $4.5 million, including a
25.1% or $4.8 million increase in fee income, which consists of
service charges, insurance commissions and trust income.
o A 5.6% increase in average net interest earning assets and an
increase in the net interest margin to 4.68% compared to 4.32%
during the first three months of 2001.
o Continued strong asset quality
o Completion of affiliation with Promistar Financial Corporation on
January 18, 2002.
o Completion of affiliation with Central Bank Shares, Inc. on
January 31, 2002.
11
FIRST THREE MONTHS OF 2002 AS COMPARED TO FIRST THREE MONTHS OF 2001:
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 2002 2001
----------------------------- ----------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
---------- -------- ------ ---------- -------- ------
Assets
Interest earning assets:
Interest bearing deposits
with banks $ 8,963 $ 114 5.09% $ 4,563 $ 94 8.24%
Federal funds sold 147,955 688 1.86 134,962 1,820 5.39
Securities:
Taxable 735,576 10,422 5.75 741,372 11,932 6.53
Non-taxable (1) 198,708 3,243 6.53 175,560 2,778 6.33
Loans (1) (2) 4,889,134 93,040 7.72 4,604,814 99,370 8.75
---------- -------- ---------- --------
Total interest
earning assets 5,980,336 107,507 7.29 5,661,271 115,994 8.31
---------- -------- ---------- --------
Cash and due from banks 196,719 175,195
Allowance for loan losses (66,804) (57,865)
Premises and equipment 151,856 140,073
Other assets 360,608 226,030
---------- ----------
$6,622,715 $6,144,704
========== ==========
Liabilities
Interest bearing liabilities:
Deposits:
Interest bearing demand $ 960,770 $ 2,152 0.91 $ 802,095 $ 4,608 2.33
Savings 1,074,038 3,892 1.47 1,038,529 6,875 2.68
Other time 2,333,300 25,059 4.36 2,391,415 35,403 6.00
Short-term borrowings 403,050 2,529 2.54 325,662 4,761 5.93
Long-term debt 342,220 4,906 5.74 297,303 3,991 5.37
---------- -------- ---------- --------
Total interest
bearing liabilities 5,113,378 38,538 3.06 4,855,004 55,638 4.65
---------- -------- ---------- --------
Non-interest bearing
demand deposits 839,563 698,375
Other liabilities 90,787 89,614
---------- ----------
6,043,728 5,642,993
---------- ----------
Stockholders' equity 578,987 501,711
---------- ----------
$6,622,715 $6,144,704
========== ==========
Net interest earning assets $ 866,958 $ 806,267
========== ==========
Net interest income $ 68,969 $ 60,356
======== ========
Net interest spread 4.23% 3.66%
===== =====
Net interest margin (3) 4.68% 4.32%
===== =====
(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.
12
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 2002, net interest income, on a fully
taxable equivalent basis, totaled $69.0 million, as compared to $60.4 million
for the first three months of 2001. Net interest income consisted of interest
income of $107.5 million and interest expense of $38.5 million for the first
three months of 2002 compared to $116.0 million and $55.6 million for each,
respectively, for the first three months of 2001. The yield on interest earning
assets decreased by 102 basis points and the rate paid on interest bearing
liabilities decreased by 159 basis points. Net interest margin increased from
4.32% at March 31, 2001 to 4.68% at March 31, 2002. Although the net interest
margin has increased over the same period last year, there is a possibility that
margin compression could arise, 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 ended
March 31, 2002 as compared to the three months ended March 31, 2001 (in
thousands):
Volume Rate Net
------- ------- -------
Interest Income
Interest bearing deposits with banks $ 33 $ (13) $ 20
Federal funds sold 195 (1,327) (1,132)
Securities:
Taxable (93) (1,417) (1,510)
Non-taxable 375 90 465
Loans 6,982 (13,312) (6,330)
------- ------- -------
7,492 (15,979) (8,487)
------- ------- -------
Interest Expense
Deposits:
Interest bearing demand 1,180 (3,636) (2,456)
Savings 244 (3,227) (2,983)
Other time (845) (9,499) (10,344)
Short-term borrowings 1,588 (3,820) (2,232)
Long-term debt 628 287 915
------- ------- -------
2,795 (19,895) (17,100)
------- ------- -------
Net Change $ 4,697 $ 3,916 $ 8,613
======= ======= =======
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,
decreased 6.4% from $99.4 million for the three months ended March 31, 2001 to
$93.0 million for the three months ended March 31, 2002. This decrease was
solely related to yield as the Corporation experienced favorable loan volumes as
average loans increased by $284.3 million.
Interest expense on deposits decreased $15.8 million or 33.7% for the
three months ended March 31, 2002, compared to the same period of 2001, despite
an increase in average interest bearing deposits of 3.2% over this same period.
The average balances in interest bearing demand deposits and savings deposits
increased by $158.7 million and $35.5 million, respectively, while the average
balance in time deposits decreased by $58.1 million. The Corporation continued
to successfully generate non-interest bearing deposits as such deposits
increased by $141.2 million or 20.2% from March 31, 2001 to March 31, 2002. The
average balance in short-term borrowings increased by $77.4 million
13
as average repurchase agreements increased $83.9 million during the first
quarter of 2002. Interest expense on long-term debt increased $916,000 from
March 31, 2001 as average long-term debt increased $44.9 million.
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 $4.2
million for the first three months of 2002, as compared to $4.4 million for the
first three months of 2001. The decrease reflects the Corporation's continued
strong asset quality. The allowance for loan losses as a percentage of total
loans was 1.35% at March 31, 2002 and 1.26% at March 31, 2001.
Non-interest income increased 19.0% from $23.5 million during the first
three months of 2001 to $27.9 million during the first three months of 2002.
This increase was primarily attributable to the Corporation's continued
transformation to a diversified financial services company. The Corporation has
dedicated significant resources to expanding traditional banking services and
generating insurance commissions and fees, investment service charges and trust
fees. Insurance commissions and fees, service charges and trust income increased
$4.8 million or 25.1% compared with the first three months of 2001. These higher
levels of fee income are attributable to growth in insurance, expanded banking
services and the Corporation's continued focus on providing a wide array of
wealth management services, such as annuities, mutual funds and trust services.
This increase was partially offset by decreases of $934,000 in gains on sale of
securities and $252,000 in gains on sale of loans.
Total non-interest expenses increased $40.2 million from $62.0 million
during the first three months of 2001 to $102.2 million during the first three
months of 2002. This increase was primarily attributable to non-recurring items.
The Corporation recognized merger and consolidation related and other
non-recurring charges of $42.7 million during the first quarter of 2002,
compared to 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 during the first quarter of 2001. Excluding these items,
non-interest expenses totaled $59.6 million for the first quarter of 2002 and
$54.5 million during the first quarter of 2001. In addition to the previously
mentioned non-recurring items, non-interest expenses increased as a result of an
increase of 14.0% or $4.1 million in salaries and employee benefits due to
normal annual salary adjustments, business expansion and the purchase of Central
Bank Shares, Inc. The majority of the salary savings associated with the
consolidation of First National Bank of Pennsylvania with Promistar Bank and the
Central Bank Shares, Inc. acquisition are anticipated to arise in the second
quarter of 2002.
The Corporation's income tax benefit was $2.1 million for the first
three months of 2002 compared to expense of $4.6 million for the same period of
2001. The effective tax rate of 19.1% for the three months ended March 31, 2002
was lower than the 35.0% federal statutory tax rate due to the tax benefits
resulting from tax-exempt instruments and excludable dividend income.
14
LIQUIDITY AND INTEREST RATE SENSITIVITY
The Corporation's goal in liquidity management is to meet the cash flow
requirements of depositors and borrowers as well as the operating cash needs of
the Corporation, with cost-effective funding. The Corporate Asset/Liability
Committee (ALCO), which includes members of executive management, reviews
liquidity on a periodic basis and approves significant changes in strategies
which affect balance sheet or cash flow positions. 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 ALCO as the body responsible for
meeting this objective.
Liquidity sources from assets include payments from loans and
investments as well as the ability to securitize or sell loans and investment
securities. Liquidity sources from liabilities are generated primarily through
growth in core deposits, and to a lesser extent, the use of wholesale sources
which include federal funds purchased, repurchase agreements and public
deposits. In addition, the banking affiliates have the ability to borrow funds
from the Federal Home Loan Bank (FHLB). FHLB advances are a competitively priced
and reliable source of funds. The Corporation has made limited use of FHLB
advances and has a large reserve available for contingency funding purposes. As
of March 31, 2002, outstanding advances were $303.7 million, or 4.5% of total
assets while FHLB availability was $1.3 billion , or 19.0% of total assets.
The principal source of cash for the parent company is dividends from
its subsidiaries. The parent also has approved lines of credit with several
major domestic banks, of which $40.0 million was used as of March 31, 2002. The
Corporation also issues subordinated debt on a regular basis and has access to
the Federal Reserve Bank as well as access to the capital markets.
The ALCO regularly monitors various liquidity ratios and forecasts of
cash position. Management believes the Corporation has sufficient liquidity
available to meet its normal operating and contingency funding cash needs.
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
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 below 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 1.06 at March 31, 2002, as compared
to 1.00 at March 31, 2001. A ratio of more than one indicates a higher level of
repricing assets over repricing liabilities over the next twelve months,
assuming the current interest rate environment.
15
Following is the gap analysis as of March 31, 2002 (in thousands):
Within 4-12 1-5 Over
3 Months Months Years 5 years Total
--------- ---------- ---------- ----------- ----------
Interest Earning Assets
Interest bearing deposits
with banks $ 8,615 $ 177 $ 8,792
Federal funds sold 192,107 192,107
Securities 80,360 168,056 $ 402,868 $ 275,288 926,572
Loans, net of unearned 1,284,629 1,039,117 2,111,938 482,627 4,918,311
---------- ---------- ---------- ----------- ----------
1,565,711 1,207,350 2,514,806 757,915 6,045,782
Other assets 685,719 685,719
---------- ---------- ---------- ----------- ----------
$1,565,711 $1,207,350 $2,514,806 $1,443,634 $6,731,501
========== ========== ========== =========== ==========
Interest Bearing Liabilities
Deposits:
Interest checking $ 170,304 $ 867,955 $1,038,259
Savings 363,378 55,462 1,018,840
Time deposits 490,559 $1,235,315 $ 628,409 5,207 2,359,490
Borrowings 326,341 31,604 65,116 341,445 764,506
---------- ---------- ---------- ---------- ----------
1,350,582 1,266,919 693,525 1,870,069 5,181,095
Other liabilities 1,001,767 1,001,767
Stockholders' equity 548,639 548,639
---------- ---------- ---------- ----------- ----------
$1,350,582 $1,266,919 $ 693,525 $ 3,420,475 $6,731,501
========== ========== ========== =========== ==========
Period Gap $ 215,129 $ (59,569) $1,821,281 $(1,976,841)
========== ========== ========== ===========
Cumulative Gap $ 215,129 $ 155,560 $1,976,841
========== ========== ==========
Cumulative Gap as a Percent
of Total Assets 3.20% 2.31% 29.37%
========== ========== =========
Rate Sensitive Assets/Rate Sensitive
Liabilities (Cumulative) 1.16 1.06 1.60 1.17
========== ========== ========== ===========
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 changes in market rates:
MARCH 31,
--------------------
2002 2001
-------- --------
Net interest income change (12 months):
- 100 basis points (2.3)% (1.2)%
+ 200 basis points 1.1 % (0.9)%
Economic value of equity:
- 100 basis points (5.7)% (3.9)%
+ 200 basis points 0.9 % (1.4)%
16
The preceding measures assumed no change in asset/liability
compositions. Thus, the measures do not reflect actions the ALCO may undertake
in response to such changes in interest rates. The disclosed measures are 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.
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. For the three months ended
March 31, 2002, the return on average equity was 15.30% and the dividend payout
ratio was 38.25%, both based on core operating earnings. Book value per common
share was $12.45 at March 31, 2002, compared to $11.60 at March 31, 2001.
LOANS
Following is a summary of loans (dollars in thousands):
MARCH 31, DECEMBER 31,
2002 2001
------------ -----------
Real estate:
Residential $1,799,255 $1,777,403
Commercial 1,339,241 1,282,944
Construction 249,252 227,868
Installment loans to individuals 794,647 774,932
Commercial, financial and agricultural 668,230 672,639
Lease financing 111,443 128,712
Unearned income (46,630) (50,063)
---------- ----------
$4,915,438 $4,814,435
========== ==========
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.
17
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):
MARCH 31, DECEMBER 31,
2002 2001
------------ ------------
Non-performing assets:
Non-accrual loans $22,357 $21,350
Restructured loans 6,248 5,578
------- -------
Total non-performing loans 28,605 26,928
Other real estate owned 4,803 4,375
------- -------
Total non-performing assets $33,408 $31,303
======= =======
Asset quality ratios:
Non-performing loans as percent of total loans .58% .56%
Non-performing assets as percent of total assets .50% .48%
ALLOWANCE FOR LOAN LOSSES
Management considers the accounting policy for the allowance for loan
losses to be a critical accounting policy. For a full description of this policy
refer to the Notes to Consolidated Financial Statements. Management's analysis
of the allocated portion of the allowance for loan losses includes the
evaluation of the loan portfolio based on upon the Corporation's internal loan
grading system, evaluation of portfolio industry concentrations and the
historical loss experience of the remaining balances of the various homogeneous
loan pools which comprise the loan portfolio. Specific factors used in the
internal loan grading system include the previous loan loss experience with the
customer, the status of past due interest and principal payments on the loan,
the collateral position and residual value of the loan, the quality of financial
information supplied by the borrower and the general financial condition of the
borrower. The unallocated portion of the allowance is determined based on
management's assessment of historical loss on the remaining portfolio segments
in conjunction with the current status of economic conditions, loan loss trends,
delinquency and non-accrual trends, credit administration, portfolio growth,
concentrations of credit risk and other factors, including regulatory guidance.
This determination inherently involves a higher degree of uncertainty and
considers current risk factors that may not have yet manifested themselves in
the Corporation's historical loss factors used to determine the allocated
component of the allowance, and it recognizes that knowledge of the portfolio
may be incomplete.
18
Following is a summary of changes in the allowance for loan losses and
selected ratios (dollars in thousands):
Three Months Ended
March 31,
---------------------
2002 2001
-------- --------
Balance at beginning of period $65,059 $57,124
Addition from acquisition 1,389
Charge-offs (5,257) (4,304)
Recoveries 899 659
------- -------
Net charge-offs (4,358) (3,645)
Provision for loan losses 4,191 4,441
------- -------
Balance at end of period $66,281 $57,920
======= =======
Allowance for loan losses to:
Total loans, net of unearned income 1.35% 1.26%
Non-performing loans 236.84% 240.39%
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 December 31, 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 March 31,
2002, that the Corporation and each of its banking subsidiaries are all "well
capitalized". Following are capital ratios as of March 31, 2002 for the
Corporation (dollars in thousands):
Well Capitalized Minimum Capital
Actual Requirements Requirements
----------------- ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
--------- ------- --------- ------- --------- -------
Total Capital $501,482 10.2% $491,411 10.0% $393,129 8.0%
(to risk-weighted assets)
Tier 1 Capital 438,370 8.9% 294,847 6.0% 196,564 4.0%
(to risk-weighted assets)
Tier 1 Capital 438,370 6.7% 325,349 5.0% 260,279 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 or 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.
19
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-defendent.
The plaintiffs allege that a third-party independent administrator
misappropriated funds from their individual retirement accounts held
with the banking subsidiary. As of April 30, 2002, the Corporation has
settled all of these asserted claims except one, at an aggregate cost
to the Corporation of $2.6 million. The Corporation believes the
remaining reserve will be sufficient for all costs associated with the
litigation, including all unasserted claims, settlements and adverse
judgements.
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 25, 2002 to be considered at the 2003
Annual Meeting of Shareholders.
20
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Amendment No. 1 to Employment Agreement between F.N.B.
Corporation and Gary L. Tice. (filed herewith).
10.2 Employment Agreement between F.N.B. Corporation and Cass
Bettinger. (filed herewith).
(b) Reports on Form 8-K
A report on Form 8-K, dated February 28, 2002, was filed by the
Corporation. The Form 8-K announced the Corporation's merger with
Promistar Financial Corporation.
A report on Form 8-K, dated March 29, 2002, was filed by the
Corporation. The Form 8-K included unaudited pro forma combined
condensed financial statements for the period ending September 30,
2001 giving effect to the merger of the Corporation and Promistar
Financial Corporation on a pooling-of-interests basis.
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: May 15, 2002 /s/Gary L. Tice
--------------------------- -----------------------------------------
Gary L. Tice
President and Chief Executive Officer
(Principal Executive Officer)
Dated: May 15, 2002 /s/John D. Waters
--------------------------- ------------------------------------------
John D. Waters
Vice President and Chief Financial Officer
(Principal Financial Officer)
22