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 June 30, 1999
------------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________________ to _______________________
Commission file number 0-8144
------
F.N.B. CORPORATION
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 25-1255406
- --------------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
One F.N.B. Boulevard, Hermitage, PA 16148
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(724) 981-6000
- -------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Not applicable
- -------------------------------------------------------------------------------
(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 July 31, 1999
----- ----------------------------
Common Stock, $2 Par Value 20,073,368 Shares
- -------------------------- -----------------
F.N.B. CORPORATION
FORM 10-Q
June 30, 1999
INDEX
PART I - FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Balance Sheet 2
Consolidated Income Statement 3
Consolidated Statement of Cash Flows 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosure of Market Risk 18
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
F.N.B. CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
Dollars in thousands, except par values
Unaudited
JUNE 30, DECEMBER 31,
1999 1998
---------- ----------
ASSETS
Cash and due from banks $ 123,676 $ 134,847
Interest bearing deposits with banks 4,524 4,192
Federal funds sold 6,601 44,706
Mortgage loans held for sale 9,290 15,947
Securities available for sale 449,666 455,082
Securities held to maturity (fair
value of $93,418 and $119,522) 94,171 118,575
Loans, net of unearned income of
$38,072 and $31,014 2,566,786 2,422,884
Allowance for loan losses (34,429) (32,308)
---------- ----------
NET LOANS 2,532,357 2,390,576
---------- ----------
Premises and equipment 97,336 93,584
Other assets 148,125 146,031
---------- ----------
$3,465,746 $3,403,540
========== ==========
LIABILITIES
Deposits:
Non-interest bearing $ 407,117 $ 401,272
Interest bearing 2,403,776 2,449,770
---------- ----------
TOTAL DEPOSITS 2,810,893 2,851,042
Other liabilities 49,129 50,252
Short-term borrowings 272,528 150,981
Long-term debt 50,292 69,492
---------- ----------
TOTAL LIABILITIES 3,182,842 3,121,767
---------- ----------
STOCKHOLDERS' EQUITY
Preferred stock - $10 par value
Authorized - 20,000,000 shares
Issued - 222,424 and 237,985 shares
Aggregate liquidation value - $5,561 and $5,950 2,224 2,380
Common stock - $2 par value
Authorized - 100,000,000 shares
Issued - 20,318,322 and 19,264,231 shares 40,637 38,529
Additional paid-in capital 182,671 161,232
Retained earnings 61,379 76,408
Accumulated other comprehensive income (707) 6,308
Treasury stock - 129,616 and 109,285
shares at cost (3,300) (3,084)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 282,904 281,773
---------- ----------
$3,465,746 $3,403,540
========== ==========
See accompanying Notes to Consolidated Financial Statements
F.N.B. CORPORATION AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENT
Dollars in thousands, except per share data
Unaudited
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
1999 1998 1999 1998
------- ------- -------- --------
INTEREST INCOME
Loans, including fees $54,073 $50,794 $106,581 $100,350
Securities:
Taxable 7,029 8,025 14,103 16,125
Nontaxable 597 611 1,209 1,216
Dividends 327 377 726 839
Other 382 1,468 1,043 2,707
------- ------- -------- --------
TOTAL INTEREST INCOME 62,408 61,275 123,662 121,237
------- ------- -------- --------
INTEREST EXPENSE
Deposits 22,337 24,144 45,161 47,798
Short-term borrowings 2,311 1,645 4,035 3,105
Long-term debt 879 1,194 1,925 2,346
------- ------- -------- --------
TOTAL INTEREST EXPENSE 25,527 26,983 51,121 53,249
------- ------- -------- --------
NET INTEREST INCOME 36,881 34,292 72,541 67,988
Provision for loan losses 2,540 1,615 4,591 3,376
------- ------- -------- --------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 34,341 32,677 67,950 64,612
------- ------- -------- --------
NON-INTEREST INCOME
Insurance commissions and fees 855 1,004 1,775 2,010
Service charges 5,133 3,911 9,485 7,804
Trust 911 698 1,761 1,389
Gain on sale of securities 106 415 906 962
Gain on sale of loans 602 758 1,435 1,427
Other 2,125 1,138 3,728 2,123
------- ------- -------- --------
TOTAL NON-INTEREST INCOME 9,732 7,924 19,090 15,715
------- ------- -------- --------
44,073 40,601 87,040 80,327
------- ------- -------- --------
NON-INTEREST EXPENSES
Salaries and employee benefits 16,670 15,073 33,484 30,128
Net occupancy 2,222 2,109 4,460 4,275
Equipment 2,620 2,241 5,192 4,292
Merger related 1,790 1,333 1,960
Other 8,886 7,367 17,028 15,537
------- ------- -------- --------
TOTAL NON-INTEREST EXPENSES 30,398 28,580 61,497 56,192
------- ------- -------- --------
INCOME BEFORE INCOME TAXES 13,675 12,021 25,543 24,135
Income taxes 4,222 4,287 7,900 8,113
------- ------- -------- --------
NET INCOME $ 9,453 $ 7,734 $ 17,643 $ 16,022
======= ======= ======== ========
NET INCOME PER COMMON SHARE:*
Basic $.46 $.38 $.87 $.79
==== ==== ==== ====
Diluted $.45 $.36 $.83 $.75
==== ==== ==== ====
CASH DIVIDENDS PER COMMON SHARE* $.18 $.17 $.35 $.33
==== ==== ==== ====
* Restated to reflect a 5 percent stock dividend declared on April 26, 1999 and
paid on June 1, 1999.
See accompanying Notes to Consolidated Financial Statements
F.N.B. CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Dollars in thousands
Unaudited
Six Months Ended June 30 1999 1998
OPERATING ACTIVITIES --------- ---------
Net income $ 17,643 $ 16,022
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 5,331 4,426
Provision for loan losses 4,591 3,376
Deferred taxes 4,254 (686)
Net gain on sale of securities (906) (962)
Net gain on sale of loans (1,435) (1,427)
Proceeds from sale of loans 39,180 66,626
Loans originated for sale (31,088) (69,883)
Net change in:
Interest receivable (152) (1,314)
Interest payable (1,117) 948
Other, net (109) (1,961)
--------- ---------
Net cash flows from operating activities 36,192 15,165
--------- ---------
INVESTING ACTIVITIES
Net change in:
Interest bearing deposits with banks (332) (994)
Federal funds sold 38,105 (2,190)
Loans (149,541) (105,709)
Securities available for sale:
Purchases (122,031) (132,131)
Sales 16,818 8,307
Maturities 100,699 109,962
Securities held to maturity:
Purchases (1,021) (4,208)
Maturities 25,428 31,739
Increase in premises and equipment (8,188) (15,548)
--------- ---------
Net cash flows from investing activities (100,063) (110,772)
--------- ---------
FINANCING ACTIVITIES
Net change in:
Non-interest bearing deposits, savings and NOW 5,285 40,309
Time deposits (45,434) 56,580
Short-term borrowings 121,547 14,137
Increase in long-term debt 2,030 5,413
Decrease in long-term debt (21,230) (7,045)
Net acquisition of treasury stock (2,205) (4,332)
Cash dividends paid (7,293) (6,024)
--------- ---------
Net cash flows from financing activities 52,700 99,038
--------- ---------
NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS (11,171) 3,431
Cash and due from banks at beginning of period 134,847 112,292
--------- ---------
CASH AND DUE FROM BANKS AT END OF PERIOD $ 123,676 $ 115,723
--------- ---------
See accompanying Notes to Consolidated Financial Statements
F.N.B. CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1999
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements give
retroactive effect to the merger of Guaranty Bank & Trust (Guaranty) with and
into F.N.B. Corporation (the Corporation). The merger, which was consummated on
January 13, 1999, resulted in the Corporation issuing 1,250,994 shares of common
stock. The transaction has been accounted for as a pooling-of-interests, and
such financial statements are presented as if the merger had been consummated
for all the periods presented. The 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, 1998 and footnotes thereto included
in the Corporation's Current Report on Form 8-K filed with the Securities and
Exchange Commission on July 2, 1999.
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 June 24, 1999, the Corporation announced that its lead banking
affiliate, First National Bank of Pennsylvania (FNBPA), will acquire all of the
issued and outstanding stock of Gelvin, Jackson & Starr, Inc., a northwestern
Pennsylvania independent insurance agency for $4.3 million. In connection with
this transaction, the Corporation announced that it would repurchase
approximately 160,000 shares of its common stock in the open market, and
exchange such shares as payment for the stock of Gelvin, Jackson & Starr, Inc.
Under the terms of the agreement, the agency will retain its name and become a
wholly owned subsidiary of FNBPA. The transaction will be accounted for as a
purchase and is expected to close during the third quarter of 1999. It is
anticipated that the transaction will result in goodwill of $3.4 million.
On January 13, 1999, the Corporation completed its affiliation with
Guaranty Bank & Trust (Guaranty), headquartered in Venice, Florida with assets
of $152.8 million. Under the terms of the merger agreement, each outstanding
share of Guaranty's common stock was converted into 1.536 shares of the
Corporation's common stock. A total of 1,250,994 shares of the Corporation's
common stock were issued. On February 12, 1999, Guaranty was merged into an
existing subsidiary of the Corporation, West Coast Bank, to form West Coast
Guaranty Bank, N.A. Results for prior years are restated to reflect this
acquisition as a pooling-of-interests. The following table sets forth separate
company financial information for the year ended December 31, 1998 (in
thousands):
F.N.B.
Corporation Guaranty
----------- --------
Net interest income $132,600 $5,313
Net income 31,872 326
The Corporation regularly evaluates the potential acquisition of, and
holds discussions with, various potential acquisition candidates and as a
general rule the Corporation publicly announces such acquisitions only after a
definitive agreement has been reached.
PER SHARE AMOUNTS
Per share amounts have been adjusted for common stock dividends, including
the 5 percent stock dividend declared on April 26, 1999 and paid on June 1,
1999.
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.
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 Six Months Ended
June 30, June 30,
---------------------- ----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
BASIC
Net income $ 9,453 $ 7,734 $ 17,643 $ 16,022
Less: Preferred stock
dividends declared (105) (126) (212) (259)
---------- ---------- ---------- ----------
Earnings applicable to basic
earnings per share $ 9,348 $ 7,608 $ 17,431 $ 15,763
========== ========== ========== ==========
Average common shares
outstanding 20,142,728 20,001,480 20,149,503 19,996,780
========== ========== ========== ==========
Earnings per share $.46 $.38 $.87 $.79
==== ==== ==== ====
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
DILUTED
Earnings applicable to
diluted earnings per share $ 9,453 $ 7,734 $ 17,643 $ 16,022
========== ========== ========== ==========
Average common shares
outstanding 20,142,728 20,001,480 20,149,503 19,996,780
Series A convertible
preferred stock 19,653 15,962 19,653 15,962
Series B convertible
preferred stock 508,663 596,673 517,019 607,659
Net effect of dilutive stock
options and stock warrants
based on the treasury stock
method 462,796 597,414 461,649 598,835
---------- ---------- ---------- ----------
21,133,840 21,211,529 21,147,824 21,219,236
========== ========== ========== ==========
Earnings per share $.45 $.36 $.83 $.75
==== ==== ==== ====
CASH FLOW INFORMATION
Following is a summary of supplemental cash flow information (in
thousands):
Six months ended June 30 1999 1998
------- -------
Cash paid for:
Interest $52,238 $52,301
Taxes 2,457 7,259
Noncash Investing and Financing Activities:
Acquisition of real estate in settlement of loans 3,287 723
Loans granted in the sale of other real estate 91 141
COMPREHENSIVE INCOME
The components of comprehensive income, net of related tax, are as follows (in
thousands):
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -----------------
1999 1998 1999 1998
------- ------- ------- -------
Net income $ 9,453 $ 7,734 $17,643 $16,022
Other comprehensive income:
Unrealized gains on securities:
Unrealized holding (losses)
gains arising during the
period (5,015) 494 (6,373) 1,364
Less: reclassification
adjustment for gains
included in net income (117) (235) (642) (581)
------- ------- ------- -------
Other comprehensive income (5,132) 259 (7,015) 783
------- ------- ------- -------
Comprehensive income $ 4,321 $ 7,993 $10,628 $16,805
======= ======= ======= =======
BUSINESS SEGMENTS
The Corporation operates in one reportable segment: community banking.
The Corporation's community banking 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 banking subsidiaries offer various alternative products,
including mutual funds, insurance and annuities. The following tables provide
financial information for this segment 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.
At or for the three months Community All
ended June 30, 1999 Banking Other Consolidated
---------- --------- ------------
Interest income $ 59,453 $ 2,955 $ 62,408
Interest expense 24,862 665 25,527
Provision for loan losses 1,895 645 2,540
Non-interest income 7,996 1,736 9,732
Non-interest expense 26,654 3,280 29,934
Intangible amortization 459 5 464
Income tax expense 4,221 1 4,222
Net income 9,358 95 9,453
Core operating earnings 9,358 95 9,453
Total assets 3,380,214 85,532 3,465,746
At or for the three months Community All
ended June 30, 1998 Banking Other Consolidated
---------- --------- ------------
Interest income $ 56,938 $ 4,337 $ 61,275
Interest expense 25,982 1,001 26,983
Provision for loan losses 973 642 1,615
Non-interest income 6,677 1,247 7,924
Non-interest expense 24,671 3,607 28,278
Intangible amortization 291 11 302
Income tax expense 4,161 126 4,287
Net income 7,537 197 7,734
Core operating earnings * 8,700 447 9,147
Total assets 3,122,772 91,341 3,214,113
At or for the six months Community All
ended June 30, 1999 Banking Other Consolidated
---------- --------- ------------
Interest income $ 116,434 $ 7,228 $ 123,662
Interest expense 49,615 1,506 51,121
Provision for loan losses 3,301 1,290 4,591
Non-interest income 16,005 3,085 19,090
Non-interest expense 54,213 6,340 60,553
Intangible amortization 923 21 944
Income tax expense 7,594 306 7,900
Net income 16,793 850 17,643
Core operating earnings * 17,612 850 18,462
Total assets 3,380,214 85,532 3,465,746
At or for the six months Community All
ended June 30, 1998 Banking Other Consolidated
---------- --------- ------------
Interest income $ 112,736 $ 8,501 $ 121,237
Interest expense 51,385 1,864 53,249
Provision for loan losses 2,092 1,284 3,376
Non-interest income 12,751 2,964 15,715
Non-interest expense 47,823 7,763 55,586
Intangible amortization 584 22 606
Income tax expense 7,882 231 8,113
Net income 15,721 301 16,022
Core operating earnings * 16,884 721 17,605
Total assets 3,122,772 91,341 3,214,113
* Core operating earnings exclude merger related costs of $1.4 million for the
quarter ended June 30, 1998, $819,000 for the six months ended June 30, 1999
and $1.6 million for the six months ended June 30, 1998, each on an after-tax
basis.
PART I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
FINANCIAL INFORMATION SUMMARY
Core operating income for the first six months of 1999 was $18.5 million
compared to $17.6 million for the first six months of 1998. Core operating
income consists of net income adjusted for merger related costs. Basic earnings
per share were $.91 and $.87 for the six months ended June 30, 1999 and 1998,
respectively, while diluted earnings per share were $.87 and $.83 for those same
periods. Non-recurring merger related costs of $819,000 and $1.6 million, net
of tax, were incurred during the first six months of 1999 and 1998,
respectively. Including these items, net income was $17.6 million and $16.0
million for the first six months of 1999 and 1998, respectively, resulting in
diluted earnings per share of $.83 and $.75. Highlights for the first six
months of 1999 include:
* A return on average assets of 1.09% and a return on average equity of 13.09%,
both based on core operating earnings.
* Net interest income increasing by $4.6 million and was supported by an
improving net interest margin of 4.78%.
* An increase in non-interest income of $3.4 million, including a 20.95% or
$1.8 million increase in fee based income.
* A 12.56% increase in average outstanding loans.
* Continued strong asset quality.
FIRST SIX MONTHS OF 1999 AS COMPARED TO FIRST SIX MONTHS OF 1998:
The following table provides information regarding the average balances
and yields and rates on interest earning assets and interest bearing liabilities
(dollars in thousands):
Six Months Ended June 30 1999 1998
------------------------ -------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
---------- -------- ------ ---------- -------- ------
ASSETS
Interest earning assets:
Interest bearing deposits
with banks $ 4,719 $ 114 4.83% $ 7,298 $ 204 5.59%
Federal funds sold 39,004 929 4.74 91,265 2,503 5.45
Securities:
Taxable 463,393 14,103 6.14 520,311 16,125 6.25
Non-taxable (1) 83,180 2,529 6.08 85,661 2,674 6.24
Loans (1) (2) 2,514,469 107,040 8.58 2,233,963 100,759 9.10
---------- -------- ---------- --------
Total interest
earning assets 3,104,765 124,715 8.10 2,938,498 122,265 8.39
---------- -------- ---------- --------
Cash and due from banks 108,951 97,735
Allowance for loan losses (33,170) (31,813)
Premises and equipment 96,036 82,882
Other assets 145,035 76,970
---------- ----------
$3,421,617 $3,164,272
========== ==========
LIABILITIES
Interest bearing liabilities:
Deposits:
Interest bearing demand $ 467,178 $ 4,149 1.79 $ 511,580 $ 5,827 2.30
Savings 804,435 11,049 2.77 612,883 9,531 3.14
Other time 1,175,161 29,963 5.14 1,191,982 32,440 5.49
Short-term borrowings 187,582 4,035 4.34 120,468 3,105 5.20
Long-term debt 55,855 1,925 6.89 74,679 2,346 6.28
---------- -------- ---------- --------
Total interest
bearing liabilities 2,690,211 51,121 3.83 2,511,592 53,249 4.27
---------- -------- ---------- --------
Non-interest bearing
demand deposits 395,991 338,080
Other liabilities 51,085 41,613
---------- ----------
3,137,287 2,891,285
---------- ----------
STOCKHOLDERS' EQUITY 284,330 272,987
---------- ----------
$3,421,617 $3,164,272
========== ==========
Net interest
earning assets $ 414,554 $ 426,906
========== ==========
Net interest income $ 73,594 $ 69,016
======== ========
Net interest spread 4.27% 4.12%
===== =====
Net interest margin (3) 4.78% 4.74%
===== =====
(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.
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 six months of 1999, net interest income, on a fully
taxable equivalent basis, totaled $73.6 million, representing a 6.63% increase
over the first six months of 1998. Net interest income consisted of interest
income of $124.7 million and interest expense of $51.1 million for the first six
months of 1999 compared to $122.3 million and $53.2 million for each, respec-
tively, for the first six months of 1998. Net interest margin increased to
4.78% at June 30, 1999 from 4.73% at June 30, 1998. On a quarter to quarter
basis, the yield on total interest earning assets declined by 29 basis points
and the rate paid on interest bearing liabilities decreased by 44 basis points.
Strong competitive factors and moves by the Federal Reserve Board to reduce
interest rates during 1998 resulted in a 52 basis point decrease in the average
yield on loans.
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 six months ending June
30, 1999 as compared to the six months ending June 30, 1998 (in thousands):
Volume Rate Net
------- ------- -------
INTEREST INCOME
Interest bearing deposits with banks $ (65) $ (25) $ (90)
Federal funds sold (1,282) (292) (1,574)
Securities:
Taxable (1,742) (280) (2,022)
Non-taxable (77) (68) (145)
Loans 11,527 (5,246) 6,281
------- ------- -------
8,361 (5,911) 2,450
------- ------- -------
INTEREST EXPENSE
Deposits:
Interest bearing demand (472) (1,206) (1,678)
Savings 2,437 (919) 1,518
Other time (449) (2,028) (2,477)
Short-term borrowings 1,323 (393) 930
Long-term debt (685) 264 (421)
------- ------- -------
2,154 (4,282) (2,128)
------- ------- -------
NET CHANGE $ 6,207 $(1,629) $ 4,578
======= ======= =======
The amount of change not solely due to rate or volume changes was
allocated between the change due to rate and the change due to volume based on
the net size of the rate and volume changes.
Interest income on loans, on a fully taxable equivalent basis, increased
6.23% from $100.8 million for the six months ended June 30, 1998 to $107.0
million for the six months ended June 30, 1999. This increase was the result of
an increase in average loans of 12.56% as the average yield declined by 52 basis
points over the same period last year.
Interest expense on deposits decreased $2.6 million or 5.52% for the six
months ended June 30, 1999, compared to the six months ended June 30, 1998,
although average deposits increased 5.63% over the same six month period. The
average balance in savings deposits increased $191.6 million, while the average
balance in interest bearing demand deposits and time deposits decreased by $44.4
and $16.8, respectively. The average balance in non-interest bearing demand
deposits increased by $57.9 million. Interest expense on short-term borrowings
increased $930,000 or 29.95% for these same periods due to a $67.1 million
increase in average short-term borrowings, which was partially offset by decline
in the rate paid of 86 basis points.
The provision for loan losses totaled $4.6 million for the first six
months of 1999, as compared to $3.4 million for the first six months of 1998.
The increase in the provision is the result of continued strong loan growth.
Non-interest income increased by 21.48% during the first six months of
1999 as compared to the first six months of 1998. Service charges and trust fees
increased $2.1 million over the first six months of 1998. In addition the
Corporation's December of 1998 investment in bank owned life insurance provided
$1.5 million of other income for the six months ended June 30, 1999.
Total non-interest expenses increased 9.44% during the first six months of
1999, compared to the first six months of 1998. The increase was primarily
attributable to an increase of $3.4 million in salaries and employee benefits.
This increase was due to normal annual salary adjustments and continued
escalation of certain benefit costs. Included in non-interest expenses during
the first six months of 1999 was $1.3 million in merger related expenses, as
compared to $2.0 million in the same period during 1998. The 1999 expenses were
primarily data processing termination and conversion costs and change in control
provisions while the 1998 expenses were primarily legal and investment banking
costs associated with the structuring and completion of the mergers.
Income tax expense for the six months ended June 30, 1999 totaled $7.9
million, providing an effective tax rate of 30.93% compared to 33.62% for the
six months ended June 30, 1998. The decrease in the effective tax rate reflects
the higher level of tax-free income in 1999 over 1998.
SECOND QUARTER OF 1999 AS COMPARED TO SECOND QUARTER OF 1998:
During the second quarter of 1999, net interest income increased $2.6
million or 7.55% over the second quarter of 1998. Total interest income
increased $1.1 million or 1.85%, primarily the result of an increase in loan
volume. Total interest expense decreased $1.5 million or 5.40% during the
second quarter of 1999, compared to the same period of 1998, mainly due to a
decrease $1.8 million in interest expense on deposits. Over the past twelve
months, the Corporation has emphasized low cost deposit growth.
The provision for loan losses totaled $2.5 million for the second quarter
of 1999, as compared to $1.6 million for the second quarter of 1998.
Non-interest income increased 22.82% during the second quarter of 1999
compared to the same period of 1998, primarily due to a $1.3 million increase in
fee based income and $769,000 of other income provided by the Corporation's
investment in bank owned life insurance. Total non-interest expenses increased
6.36% during the second quarter of 1999, compared to the second quarter of 1998.
This increase is primarily attributable to an increase of $1.6 million in
salaries and employee benefits.
Income tax expense totaled $4.2 million during the quarter providing an
effective tax rate of 30.87% compared to 35.66% in 1998. The decrease in the
effective tax rate in 1999 reflects the higher level of tax-free income in 1999
over 1998, and higher levels of non-deductible merger related expenses over
those same periods.
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 significant source of
liquidity provided by its securities portfolio, the Corporation has sufficient
sources of funds available to meet its 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 $50.0 million was unused at June 30,
1999. To further meet its liquidity needs, the Corporation and its banking
subsidiaries also have access to the Federal Home Loan Bank and the Federal
Reserve Bank, as well as other uncommitted funding sources.
The financial performance of the Corporation is subject to risk from
interest rate fluctuations. This interest rate risk arises due to differences
between the amount of interest-earning assets and the amount of interest-bearing
liabilities subject to repricing over a specified period, the amount of change
in individual interest rates and the embedded options in all financial
instruments. The principal objective of the Corporation's asset/liability
management activities is to maximize net interest income while maintaining
acceptable levels of interest rate and liquidity risk and facilitating the
funding needs of the Corporation. The Corporation's Asset/Liability Committee
(ALCO) is responsible for achieving this objective. The Corporation uses an
asset/liability model to quantify the effects of its balance sheet strategies
and their associated risks. Net interest income simulation is the principal
tool utilized for these purposes. Gap analysis is employed as a secondary
diagnostic measurement. The Corporation attempts to mitigate interest rate risk
through asset deployment, asset and liability pricing and matched maturity
funding.
A gradual 300 basis point decrease in interest rates is estimated to cause
a decline in net interest income of 1.7% or $1.8 million for 1999 as compared to
net interest income if interest rates were unchanged during 1999.
Comparatively, a gradual 300 basis point decrease in interest rates to actual
1998 interest rates would have decreased net interest income by 0.9% or $1.1
million in 1998. These low levels of variation are within the Corporation's
policy limits. The simulation analyses assumed that savings and checking
interest rates have a low correlation to changes in market rates of interest and
that certain asset prepayments changed as refinancing incentives evolved.
Further, in the event of a change of such a magnitude in interest rates, the
ALCO would likely take actions to further mitigate its exposure to the change.
However, due to greater uncertainty of other specific actions that would be
taken, the analysis assumed no change in the Corporation's asset/liability
composition.
The gap analysis which follows is based on the amortization, maturity or
repricing of the Corporation's interest-earning assets and interest-bearing
liabilities. Non-maturity deposits have been allocated to represent their lower
sensitivity to changes in market interest rates than other adjustable rate
instruments. The cumulative gap represents the difference between these assets
and liabilities over a specified time period. Based on the cumulative one year
gap and assuming no change in asset/liability composition, a decrease in
interest rates would be expected to result in slightly lower net interest
income. The gap position is within the Corporation's policy limits.
Following is the gap analysis as of June 30, 1999 (in thousands):
Within 4-12 1-5 Over
3 Months Months Years 5 years Total
--------- --------- ---------- ---------- ----------
INTEREST EARNING ASSETS
Interest bearing deposits
with banks $ 4,524 $ 4,524
Federal funds sold 6,601 6,601
Mortgage loans held
for sale 9,290 9,290
Securities:
Available for sale 46,181 $ 142,599 $ 208,081 $ 52,805 449,666
Held to maturity 14,269 24,401 38,321 17,180 94,171
Loans, net of unearned 729,704 648,340 1,053,728 135,014 2,566,786
--------- --------- ---------- ---------- ----------
810,569 815,340 1,300,130 204,999 3,131,038
Other assets 334,708 334,708
--------- --------- ---------- ---------- ----------
$ 810,569 $ 815,340 $1,300,130 $ 539,707 $3,465,746
========= ========= ========== ========== ==========
INTEREST BEARING LIABILITIES
Deposits:
Interest checking $ 117,009 $ 343,273 $ 460,282
Savings 288,669 515,268 803,937
Time deposits 307,853 $ 547,440 $ 284,264 1,139,557
Short-term borrowings 272,528 272,528
Long-term debt 7,764 11,195 23,750 7,583 50,292
--------- --------- ---------- ---------- ----------
993,823 558,635 308,014 866,124 2,726,596
Other liabilities 456,246 456,246
Stockholders' equity 282,904 282,904
--------- --------- ---------- ---------- ----------
$ 993,823 $ 558,635 $ 308,014 $1,605,274 $3,465,746
========= ========= ========== ========== ==========
PERIOD GAP $(183,254)$ 256,705 $ 992,116 $(1,065,567)
========= ========= ========== ===========
CUMULATIVE GAP $(183,254)$ 73,451 $1,065,567
========= ========= ==========
CUMULATIVE GAP AS A PERCENT
OF TOTAL ASSETS (5.29)% 2.12% 30.75%
===== ==== =====
RATE SENSITIVE ASSETS/RATE
SENSITIVE LIABILITIES
(CUMULATIVE) .82 1.05 1.57 1.15
=== ==== ==== ====
CAPITAL RESOURCES
The assessment of capital adequacy depends on a number of factors such as
asset quality, liquidity, earnings performance, changing competitive conditions
and economic forces. The Corporation seeks to maintain a strong capital base to
support its growth and expansion activities, to provide stability to current
operations and to promote public confidence.
Capital management is a continuous process. Since December 31, 1998,
stockholders' equity has increased $10.4 million as a result of earnings
retention. For the six months ended June 30, 1999, the return on average
equity, based on core operating earnings, was 13.09%. Core operating earnings
exclude merger related costs of $819,000, net of tax. Total cash dividends
declared represented 41.34% of net income. Book value per common share was
$13.74 at June 30, 1999, compared to $13.71 at December 31, 1998.
LOANS
Following is a summary of loans (dollars in thousands):
JUNE 30, DECEMBER 31,
1999 1998
---------- ------------
Real estate:
Residential $ 992,035 $ 994,157
Commercial 687,688 632,304
Construction 103,319 103,672
Installment loans to individuals 299,502 292,418
Commercial, financial and agricultural 335,950 299,081
Lease financing 186,364 132,266
Unearned income (38,072) (31,014)
---------- ----------
$2,566,786 $2,422,884
========== ==========
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.
Following is a summary of non-performing assets (dollars in thousands):
JUNE 30, DECEMBER 31,
1999 1998
-------- ------------
Non-performing assets:
Non-accrual loans $10,825 $12,250
Restructured loans 1,755 1,770
------- -------
Total non-performing loans 12,580 14,020
Other real estate owned 4,147 1,370
------- -------
Total non-performing assets $16,727 $15,390
======= =======
Asset quality ratios:
Non-performing loans as percent of total loans .49% .58%
Non-performing assets as percent of total assets .48% .45%
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.
ALLOWANCE FOR LOAN LOSSES
Management's analysis of the allowance for loan losses includes the
evaluation of the loan portfolio based on internally generated loan review
reports and the historical loss experience of the remaining balances of the
various homogeneous loan pools which comprise the loan portfolio. Specific
factors which are evaluated include the previous loan loss experience with the
customer, the status of past due interest and principal payments on the loan,
the collateral position of the loan, the quality of financial information
supplied by the borrower and the general financial condition of the borrower.
Historical loss experience on the remaining portfolio segments is considered in
conjunction with the current status of economic conditions, loan loss trends,
delinquency and non-accrual trends, credit administration and concentrations of
credit risk.
Following is a summary of changes in the allowance for loan losses and
selected ratios (dollars in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
1999 1998 1999 1998
------- ------- ------- -------
Balance at beginning of period $32,709 $31,741 $32,308 $31,055
Charge-offs (1,300) (1,489) (3,265) (3,055)
Recoveries 480 336 795 827
------- ------- ------- -------
Net charge-offs (820) (1,153) (2,470) (2,228)
Provision for loan losses 2,540 1,615 4,591 3,376
------- ------- ------- -------
Balance at end of period $34,429 $32,203 $34,429 $32,203
======= ======= ======= =======
Allowance for loan losses to:
Total loans, net of unearned income 1.34% 1.41%
Non-performing loans 273.03% 281.25%
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). Management believes, as of June 30, 1999, that the Corporation and
each of its banking subsidiaries are all "well capitalized".
As of March 31, 1999, the Corporation and each of its banking subsidiaries
have been categorized as "well capitalized" under the regulatory framework for
prompt corrective action. Following are capital ratios as of June 30, 1999 for
the Corporation (dollars in thousands):
Well Capitalized Minimum Capital
Actual Requirements Requirements
---------------- ---------------- ---------------
Amount Ratio Amount Ratio Amount Ratio
-------- ------ -------- ------ -------- -----
Total Capital $312,772 12.6% $247,816 10.0% $198,253 8.0%
(to risk-weighted assets)
Tier 1 Capital 269,323 10.9% 148,689 6.0% 99,126 4.0%
(to risk-weighted assets)
Tier 1 Capital 269,323 7.9% 171,708 5.0% 137,366 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.
YEAR 2000 READINESS
The Year 2000 (Y2K) Issue is the result of computer programs being written
using year fields consisting of only two digits rather than four. Computer
programs that have time-sensitive software may recognize "00" as the year 1900
rather than year 2000. If such programs were in use and not corrected, it could
result in system failures and temporary interruptions in the processing of
transactions. The Corporation's core processing systems were written with four
digit year fields.
The Y2K Issue is not only an internal issue but also affects third parties
including customers, counter parties, service providers and vendors. Because
the Y2K Issue poses an unprecedented and profound enterprise wide challenge for
every organization, the Corporation formed a Y2K Committee. The Y2K Committee
developed a Year 2000 Enterprise Wide Project Plan (Y2K Plan), which addresses
both internal and external technology.
In accordance with the Y2K Plan, the Corporation has completed its
inventory and assessment of all internal technologies, including both software
and hardware. Each system was assigned a significance rating as to the degree
of criticality. Formal detailed tests for systems with significance ratings of
a critical nature have been completed. Such systems include core processing and
ancillary systems required to sustain operations.
During the second quarter of 1998, the Corporation made the strategic
decision to convert each of the Florida banking affiliates to a new core
processing system. The decision to convert was based in part on the number of
different systems being utilized by the Florida banking affiliates and the
expiration of the Corporation's primary Florida core processing contract.
Effective May 31, 1999, all Florida banking affiliates have been converted. The
Corporation's northern banking affiliates will continue to process transactions
on their existing core processing system.
The Corporation has received written representation from both vendors that
each system is Y2K compliant as well as third party certification of the vendors
compliance methodology. The Corporation has completed test verifications of
each core system. This testing confirmed the vendor representations that both
core systems are Y2K compliant.
The Corporation has developed a Corporate Business Resumption Contingency
Plan (BRC Plan) which identifies the level of customer service management
desires in the event of a system failure. The BRC Plan is the model for all
financial affiliates use in the development of their specific BRC Plan. The BRC
Plan has also identified resources and tools to be used for implementation along
with a method of plan validation, testing, trigger dates for implementation and
training of the personnel who will be exercising the plan.
During July of 1998, the Corporation's consumer finance subsidiary,
Regency Finance Company (Regency), selected a third party vendor to support all
of its future core application requirements. These core applications included
loans, insurance and the Corporation's subordinated note program. Regency's
decision to select a new system was based upon the system's ability to support
new lending products as well as the operating efficiencies resulting from real-
time centralized processing. The vendor has provided a written warranty to
Regency that it is Y2K compliant. The system was tested for Y2K readiness
during the fourth quarter of 1998 and installation was completed on February 28,
1999.
With respect to external technology, the Y2K Plan provides for the
evaluation and assessment of all significant funds takers, including large
borrowing customers and bond issuers, and funds providers, including contingency
lines of credit and deposit accounts. All project plans for funds takers and
providers have been substantially completed with continued monitoring to occur.
An integral part of the Corporation's funds provider project plan includes a
Customer Awareness Program. This program was developed to assure customer
confidence and mitigate reputation and liquidity risk. The program was not only
developed to educate the Corporation's customers, but also its employees in
responding to customer inquiries.
The Y2K Plan includes due diligence procedures as it relates to the
fiduciary responsibilities of the Corporation's investment and trust functions,
including such activities as settlement transactions, remittance of bond
payments and transactions related to mutual funds and other securities. In
performing its fiduciary responsibilities, the Corporation assessed the Y2K
readiness of its safekeeping agents and broker/dealers.
The Corporation's current assessment of cost associated with the
completion of its Y2K Plan is not considered by management to be material to the
Corporation's future operations. Through June 30, 1999, the Corporation has
expended $126,000 on its Y2K Plan and anticipates additional costs of
approximately $50,000 to be incurred during 1999. The cost of completing the
Corporation's Y2K Plan and the dates on which all procedures will be completed
are based on management's best estimates. These estimates were derived
utilizing various assumptions about future events, including the continued
availability of resources, external technology modification plans and other
significant factors. However, there can be no guarantee that these estimates
will be achieved and actual results could differ materially from those
anticipated.
The Corporation believes that modifications to existing systems,
conversion to new systems and vendor compliance upgrades will be resolved on a
timely basis and related costs will not have a material impact on its results of
operations or financial condition.
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
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 legal counsel,
does not at the present time anticipate the ultimate aggregate liability,
if any arising out of such 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
The Annual Meeting of Shareholders of F.N.B. Corporation was held on
April 28, 1999. Proxies were solicited pursuant to Section 14(a) of
the Securities and Exchange Act of 1934 and there was no solicitation
in opposition to the Corporation's solicitations.
The Corporation's 1998 Directors Stock Option Plan was approved with
12,855,563 shares voted for, 1,750,902 shares against and 324,318
abstentions.
All of the Corporation's nominees for directors as listed in the proxy
statement were elected with the following vote:
Shares Voted Shares
"For" "Withhold"
----------- ----------
William J. Strimbu 14,742,895 196,892
Archie O. Wallace 14,721,986 208,801
James T. Weller 14,720,104 210,683
Eric J. Werner 14,609,477 321,310
R. Benjamin Wiley 14,728,378 202,409
ITEM 5. OTHER INFORMATION
On January 25, 1999, the Corporation adopted an amendment to its By-laws
providing that no proposal submitted by a shareholder of the Corporation
for consideration at the Annual Meeting of Shareholders will be
considered at any such meeting unless the Secretary of the Corporation
has received written notice of the matter proposed to be presented from
the shareholder 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
26, 1999 to be considered at the 2000 Annual Meeting of Shareholders.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.1. Amendment to Employment Agreement between F.N.B. Corporation and
Gary L. Tice. (filed herewith).
27. Financial Data Schedule (filed herewith)
(b) Reports on Form 8-K
A report on Form 8-K, dated July 3, 1999, was filed by the Corporation.
The Form 8-K included Audited Consolidated Financial Statements for the
years ended December 31, 1998, 1997 and 1996 with Report of Independent
Auditors and Management's Discussion and Analysis giving effect to the
merger of the Corporation and Guaranty Bank & Trust on a pooling-of-
interests basis.
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: August 12, 1999 /s/Peter Mortensen
__________________________ __________________________________________
Peter Mortensen
Chairman and Chief Executive Officer
(Principal Executive Officer)
Dated: August 12, 1999 /s/John D. Waters
__________________________ __________________________________________
John D. Waters
Vice President and Chief Financial Officer
(Principal Financial Officer)