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, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________________ to ___________________
Commission file number 0-8144
F.N.B. CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Florida 25-1255406
- ------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2150 Goodlette Road North, Naples, FL 34102
---------------------------------------------------
(Address of principal executive offices) (Zip Code)
(239) 262-7600
----------------------------------------------------
(Registrant's telephone number, including area code)
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at April 30, 2003
----- -----------------------------
Common Stock, $0.01 Par Value 43,945,293 Shares
- ----------------------------- -----------------
F.N.B. CORPORATION
FORM 10-Q
March 31, 2003
INDEX
PAGE
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets 2
Consolidated Statements of Income 3
Consolidated Statements of Cash Flows 4
Notes to Consolidated Financial Statements 5
Independent Accountants' Review Report 11
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosure of Market Risk 21
Item 4. Controls and Procedures 21
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 2. Changes in Securities 22
Item 3. Defaults Upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 24
F.N.B. CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Dollars in thousands, except par values
Unaudited
MARCH 31, DECEMBER 31,
2003 2002
----------- ------------
ASSETS
Cash and due from banks $ 239,298 $ 246,802
Interest bearing deposits with banks 2,987 3,778
Federal funds sold 1,246 8,981
Mortgage loans held for sale 18,761 24,177
Securities available for sale 1,673,424 1,026,191
Securities held to maturity (fair
value of $49,478 and $50,517) 48,088 48,992
Loans, net of unearned income of $33,174 and $75,746 5,419,087 5,220,504
Allowance for loan losses (71,200) (68,406)
----------- -----------
NET LOANS 5,347,887 5,152,098
----------- -----------
Premises and equipment 199,302 163,709
Goodwill 190,312 88,425
Other assets 356,705 327,079
----------- -----------
TOTAL ASSETS $ 8,078,010 $ 7,090,232
=========== ===========
LIABILITIES
Deposits:
Non-interest bearing $ 1,027,742 $ 924,090
Interest bearing 5,039,351 4,502,067
----------- -----------
TOTAL DEPOSITS 6,067,093 5,426,157
Other liabilities 95,962 99,052
Short-term borrowings 565,945 515,780
Long-term debt 615,369 450,647
Mandatorily redeemable capital securities
of subsidiary trusts 125,000
----------- -----------
TOTAL LIABILITIES 7,469,369 6,491,636
----------- -----------
STOCKHOLDERS' EQUITY
Preferred stock - $0.01 par value
Authorized - 20,000,000 shares
Issued - 86,445 and 118,025 shares
Aggregate liquidation value - $2,161 and $2,951 1 1
Common stock - $0.01 par value
Authorized - 500,000,000 shares
Issued - 44,165,691 and 44,162,460 shares 442 442
Additional paid-in capital 517,069 516,186
Retained earnings 84,508 73,363
Accumulated other comprehensive income 14,943 17,335
Treasury stock - 294,660 and 300,425 shares at cost (8,322) (8,731)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 608,641 598,596
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 8,078,010 $ 7,090,232
=========== ===========
Note: The Balance Sheet at December 31, 2002 has been derived from the audited
financial statements at that date.
See accompanying Notes to Consolidated Financial Statements
2
F.N.B. CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Dollars in thousands, except per share data
Unaudited
THREE MONTHS ENDED
March 31,
------------------------
2003 2002
--------- ---------
INTEREST INCOME
Loans, including fees $ 90,764 $ 92,619
Securities:
Taxable 11,212 9,978
Nontaxable 1,865 2,046
Dividends 635 598
Other 34 802
--------- ---------
TOTAL INTEREST INCOME 104,510 106,043
--------- ---------
INTEREST EXPENSE
Deposits 23,678 31,103
Short-term borrowings 2,073 2,529
Long-term debt 5,536 4,906
Capital securities of subsidiary trust 86
--------- ---------
TOTAL INTEREST EXPENSE 31,373 38,538
--------- ---------
NET INTEREST INCOME 73,137 67,505
Provision for loan losses 5,859 4,191
--------- ---------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 67,278 63,314
--------- ---------
NON-INTEREST INCOME
Service charges 12,424 10,622
Insurance premiums, commissions and fees 8,463 9,472
Securities commissions and fees 1,904 1,383
Trust 2,392 2,397
Gain on sale of securities 693 175
Gain on sale of mortgage loans 2,708 1,006
Other 3,452 2,889
--------- ---------
TOTAL NON-INTEREST INCOME 32,036 27,944
--------- ---------
99,314 91,258
--------- ---------
NON-INTEREST EXPENSES
Salaries and employee benefits 36,767 33,142
Net occupancy 5,051 4,394
Equipment 5,456 5,011
Merger 1,014 41,855
Other 17,250 17,828
--------- ---------
TOTAL NON-INTEREST EXPENSES 65,538 102,230
--------- ---------
INCOME (LOSS) BEFORE INCOME TAXES (BENEFIT) 33,776 (10,972)
Income taxes (benefit) 10,448 (2,089)
--------- ---------
NET INCOME (LOSS) $ 23,328 $ (8,883)
========= =========
NET INCOME (LOSS) PER COMMON SHARE: *
Basic $ .51 $ (.19)
========= =========
Diluted $ .50 $ (.19)
========= =========
CASH DIVIDENDS PER COMMON SHARE * $ .21 $ .18
========= =========
* Restated to reflect a 5 percent stock dividend declared on April 28, 2003.
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,
--------------------------
2003 2002
--------- ---------
OPERATING ACTIVITIES
Net (loss) income $ 23,328 $ (8,883)
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 4,739 5,450
Provision for loan losses 5,859 4,191
Deferred taxes 1,760 (7,491)
Net gain on sale of securities (693) (175)
Net gain on sale of mortgage loans (2,708) (1,006)
Proceeds from sale of mortgage loans 142,391 18,823
Mortgage loans originated for sale (134,267) (19,367)
Net change in:
Interest receivable (2,095) (1,140)
Interest payable (238) (685)
Other, net (13,936) 9,205
--------- ---------
Net cash flows from operating activities 24,140 (1,078)
--------- ---------
INVESTING ACTIVITIES
Net change in:
Interest bearing deposits with banks 791 (5,080)
Federal funds sold 8,981 (103,847)
Loans (33,292) (104,204)
Securities available for sale:
Purchases (358,709) (180,412)
Sales 43,762 125,695
Maturities 125,069 77,078
Securities held to maturity:
Purchases (3,693)
Maturities 904 2,546
Increase in premises and equipment (4,156) (8,848)
Increase in intangibles (29) (49,098)
Net cash paid for mergers and acquisitions (141,708) (66,000)
--------- ---------
Net cash flows from investing activities (358,387) (315,863)
--------- ---------
FINANCING ACTIVITIES
Net change in:
Non-interest bearing deposits, savings and NOW 141,334 178,375
Time deposits 18,101 40,313
Short-term borrowings 29,927 46,171
Increase in long-term debt 33,190 1,903
Decrease in long-term debt (9,918) (1,746)
Increase in capital securities of subsidiary trust 125,000
Net issuance of treasury stock (1,203) (2,126)
Cash dividends paid (9,688) (8,399)
--------- ---------
Net cash flows from financing activities 326,743 254,491
--------- ---------
NET DECREASE IN CASH AND DUE FROM BANKS (7,504) (62,450)
Cash and due from banks at beginning of period 246,802 246,781
--------- ---------
CASH AND DUE FROM BANKS AT END OF PERIOD $ 239,298 $ 184,331
========= =========
See accompanying Notes to Consolidated Financial Statements
4
F.N.B. CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 2003
BUSINESS
F.N.B. Corporation (the Corporation) is a diversified financial
services company headquartered in Naples, Florida. The Corporation owns and
operates regional community banks, an insurance agency, a consumer finance
company and First National Trust Company. It has full service banking offices
located in Florida, Pennsylvania and Ohio and consumer finance operations in
Pennsylvania, Ohio and Tennessee.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the
Corporation and its subsidiaries. All significant inter-company balances and
transactions have been eliminated.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could materially differ from
those expressed or implied.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with
current year presentation. The reclassification had no impact on total assets,
liabilities, stockholders' equity, net income or cash flows.
COMMON STOCK DIVIDEND
On April 28, 2003, the Corporation declared a 5 percent common stock
dividend payable on May 31, 2003 to shareholders of record as of May 15, 2003.
Per share amounts have been adjusted for the 5 percent stock dividend declared
on April 28, 2003.
MERGERS AND ACQUISITIONS
On March 31, 2003, the Corporation completed its business combination
with Charter Banking Corp. (Charter), a bank holding company headquartered in
Tampa, Florida, with assets of $795.6 million. In exchange for all of the
outstanding common stock of Charter, the Corporation paid $150.2 million. The
transaction, which was accounted for as a purchase, resulted in the recognition
of approximately $101.9 million in Goodwill and $1.1 million in Core Deposit
Intangibles. The transaction was funded primarily through the issuance of $125.0
million of capital securities of a subsidiary trust and $25.2 million from the
Corporation's existing lines of credit with several major domestic banks.
Charter's banking subsidiary, Southern Exchange Bank, is expected to be merged
into the Corporation's existing subsidiary, First National Bank of Florida,
during the fourth quarter of 2003. The Corporation incurred and paid merger
related costs of $1.0 million in connection with its acquisition of Charter.
These costs were related to employment expenses.
The Corporation regularly evaluates the potential acquisition of, 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
CAPITAL SECURITIES OF SUBSIDIARY TRUST
During the first quarter of 2003, $125.0 million of
corporation-obligated mandatorily redeemable capital securities (capital
securities) of a subsidiary trust holding solely junior subordinated debt
securities of the Corporation (debentures) were issued by F.N.B. Statutory Trust
I (Statutory Trust). The Corporation owns 100% of the common equity of the
Statutory Trust. The Statutory Trust was formed for the sole purpose of issuing
the capital securities and investing the proceeds from the sale of such capital
securities in the debentures. The debentures held by the Statutory Trust are its
sole assets. Distributions on the capital securities issued by the Statutory
Trust are payable quarterly at a rate per annum equal to the interest rate being
earned on the debentures held by the Statutory Trust and are recorded as
interest expense by the Corporation. The capital securities are subject to
mandatory redemption, in whole or in part, upon repayment of the debentures. The
capital securities bear interest at a floating rate per annum equal to the
3-month LIBOR plus 325 basis points. The rate in effect at March 31, 2003 was
4.56%. The Corporation has entered into agreements which, taken collectively,
fully and unconditionally guarantee the capital securities subject to the terms
of each of the guarantees.
The debentures held by the Statutory Trust qualify as Tier 1 capital
under Federal Reserve Board guidelines and are first redeemable, in whole or in
part, by the Corporation on or after March 31, 2008.
NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards (FAS) No. 148, "Accounting
for Stock-Based Compensation - Transition and Disclosure" was issued in December
2002. It provides alternative methods of accounting for stock-based employee
compensation. In addition, it amends disclosure requirements in both annual and
interim financial statements about the method of accounting for stock-based
compensation and the effect of the method used on reported results. The
Corporation continues to account for its stock-based compensation plans under
Opinion 25. Therefore, FAS 148 is not expected to have a material impact on the
Corporation's financial results.
FASB Interpretation No. 46, "Consolidation of Variable Interest
Entities, an Interpretation of ARB No. 51" was issued in January 2003.
Interpretation 46 addresses consolidation by business enterprises of variable
interest entities which have certain characteristics. Interpretation 46 applies
immediately to variable interest entities created after January 31, 2003. It
applies in the first fiscal year or interim period beginning after June 15,
2003, to variable interest entities in which an enterprise holds a variable
interest that is acquired before February 1, 2003. The Corporation has limited
partnership investments in affordable housing projects, for which it provides
funding as a limited partner and receives tax credit for any losses incurred by
the projects based on its partnership share. At March 31, 2003, the Corporation
had recorded investments in other assets on its balance sheet of approximately
$1.4 million associated with these investments. The Corporation currently
adjusts the carrying value of these investments for any losses incurred by the
limited partnership through earnings. While these entities may be considered
variable interest entities, they were acquired prior to February 1, 2003 and do
not have the characteristics required for consolidation.
EARNINGS PER SHARE
Basic earnings per share is calculated by dividing net income, adjusted
for declared dividends on preferred stock, by the weighted average number of
shares of common stock outstanding.
6
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 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.
The following tables set forth the computation of basic and diluted
earnings per share (dollars in thousands, except per share data):
Three Months Ended
March 31,
-------------------------------
2003 2002
------------ ------------
BASIC
Net income $ 23,328 $ (8,883)
Less: Preferred stock
dividends declared (54) (66)
------------ ------------
Earnings applicable to
basic earnings per share $ 23,274 $ (8,817)
============ ============
Average common shares outstanding 46,043,113 45,959,904
============ ============
Earnings per share $ .51 $ (.19)
============ ============
Three Months Ended
March 31,
------------------------------
2003 2002
------------------------------
DILUTED
Earnings applicable to
diluted earnings per share $ 23,328 $ (8,883)
============ ============
Average common shares outstanding 46,043,113 45,959,904
Series A convertible
preferred stock 18,825 18,030
Series B convertible
preferred stock 254,438 360,442
Net effect of dilutive stock
options and stock warrants
based on the treasury stock
method 579,063 710,161
------------ ------------
46,895,439 47,048,537
============ ============
Earnings per share $ .50 $ (.19)
============ ============
STOCK-BASED COMPENSATION
In accordance with FAS 148, the following table shows pro-forma net
income and earnings per share assuming stock options had been expensed based on
the fair value of the options granted along with significant assumptions used in
the Black-Scholes option pricing model (dollars in thousands, except per share
data).
7
Three Months Ended
March 31,
---------------------------
2003 2002
---------- ---------
Net income (as reported) $ 23,328 $ (8,883)
Compensation expense, net of tax (505) (502)
---------- ---------
Pro forma net income 22,823 (9,385)
Earnings per share:
Basic .51 (0.19)
Basic pro forma .50 (0.20)
Diluted .50 (0.19)
Diluted pro forma .49 (0.20)
Assumptions
Risk-free interest rate 2.93% 3.92%
Dividend yield 2.95% 3.20%
Expected stock price volatility 0.21% .17%
Expected life (years) 5.00 5.00
Fair value of options granted $ 4.30 $ 4.56
CASH FLOW INFORMATION
Following is a summary of supplemental cash flow information (in thousands):
Three Months Ended
March 31,
--------------------
2003 2002
------- -------
Cash paid for:
Interest $31,611 $39,223
Income taxes 3,609 3,287
Noncash Investing and Financing Activities:
Acquisition of real estate in settlement of loans 531 242
Loans granted in the sale of other real estate 10 10
COMPREHENSIVE INCOME
The components of comprehensive income, net of related tax, are as follows
(in thousands):
Three Months Ended
March 31,
-----------------------
2003 2002
-----------------------
Net income (loss) $ 23,328 $ (8,883)
Other comprehensive income:
Unrealized gains on securities:
Unrealized holding gains
(losses) arising
during the period (1,857) (3,939)
Less: reclassification
adjustment for gains
included in net income (535) (115)
-------- --------
Other comprehensive income (2,392) (4,054)
-------- --------
Comprehensive income $ 20,936 $(12,937)
======== ========
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 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 primarily involved in making
personal installment loans to individuals with approximately 15 percent of its
volume being derived from the purchase of 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 as well
as select financial service centers in Florida. 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, 2003 Banks Agencies Company Other Consolidated
---------- --------- -------- --------- ------------
Interest income $ 95,828 $ 54 $ 7,071 $ 1,557 $ 104,510
Interest expense 30,560 16 1,443 (646) 31,373
Provision for loan losses 4,469 1,390 5,859
Non-interest income 20,475 7,290 468 3,803 32,036
Non-interest expense 48,156 5,966 3,118 8,298 65,538
Merger expenses 1,014 1,014
Intangible amortization 717 81 23 821
Income tax expense (benefit) 10,349 553 583 (1,037) 10,448
Net income (loss) 22,770 809 1,004 (1,255) 23,328
Total assets 7,749,576 34,895 145,552 147,987 8,078,010
Goodwill 175,531 12,972 1,809 190,312
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 66,795 5,674 3,253 26,508 102,230
Merger expenses 22,250 126 19,479 41,855
Intangible amortization 767 16 31 23 837
Income tax expense (credit) 3,109 969 357 (6,524) (2,089)
Net income (loss) 5,079 1,513 600 (16,075) (8,883)
Total assets 6,555,419 30,748 141,456 3,878 6,731,501
Goodwill 69,240 12,132 1,778 83,150
10
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
The Board of Directors
F.N.B. Corporation
We have reviewed the accompanying consolidated balance sheets of F.N.B.
Corporation and subsidiaries (Company) as of March 31, 2003 and 2002, and the
related consolidated statements of income and cash flows for the three-month
periods then ended. These financial statements are the responsibility of the
Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data, and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with auditing standards generally accepted in the United States,
which will be performed for the full year with the objective of expressing an
opinion regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying consolidated financial statements referred to above
for them to be in conformity with accounting principles generally accepted in
the United States.
We have previously audited, in accordance with auditing standards generally
accepted in the United States, the consolidated balance sheet of F.N.B.
Corporation and subsidiaries as of December 31, 2002, and the related
consolidated statements of income, shareholders' equity, and cash flows for the
year then ended (not presented herein) and in our report dated February 8, 2003,
we expressed an unqualified opinion on those consolidated financial statements.
In our opinion, the information set forth in the accompanying consolidated
balance sheet as of December 31, 2002, is fairly stated, in all material
respects, in relation to the consolidated balance sheet from which it has been
derived.
/s/ERNST & YOUNG LLP
Birmingham, Alabama
April 17, 2003
11
PART I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
FINANCIAL INFORMATION SUMMARY
Net income was $23.3 million for the first three months of 2003
compared to a net loss of $8.9 million for the first three months of 2002.
Diluted earnings per share were $.50 for the first three months of 2003 compared
to a net loss of $.19 for the period ending March 31, 2002. Earnings for the
three months ended March 31, 2003 and 2002, were reduced by pre-tax merger
expenses of $1.0 million and $41.9 million, or $.01 and $.65 per diluted share
on an after tax basis, respectively. These per share amounts have been adjusted
for the 5 percent stock dividend declared on April 28, 2003, that is payable on
May 30, 2003 to shareholders of record on May 15, 2003.
HIGHLIGHTS FOR THE FIRST THREE MONTHS OF 2003 INCLUDE:
- NET INCOME OF $23.3 MILLION OR $.50 PER DILUTED SHARE.
- A RETURN ON AVERAGE ASSETS OF 1.33% AND A RETURN ON AVERAGE
EQUITY OF 15.6%.
- AN INCREASE OF 5.5% OR $1.3 MILLION IN FEE INCOME, WHICH
CONSISTS OF SERVICE CHARGES, INSURANCE PREMIUMS, COMMISSIONS
AND TRUST REVENUES.
- A 7.3% INCREASE IN AVERAGE NET INTEREST EARNING ASSETS AND AN
INCREASE IN THE NET INTEREST MARGIN TO 4.70% COMPARED TO 4.68%
FOR THE THREE MONTHS ENDED MARCH 31, 2003.
- CONTINUED STRONG ASSET QUALITY AS NON-PERFORMING ASSETS AS A
PERCENTAGE OF TOTAL ASSETS WAS .45%.
- COMPLETION OF THE ACQUISITION OF CHARTER BANKING CORP.
CRITICAL ACCOUNTING POLICIES
The Corporation's significant accounting policies are described in the
"Notes to Consolidated Financial Statements" under "Summary of Significant
Accounting Policies" in the Corporation's 2002 Annual Report on Form 10-K filed
with the Securities and Exchange Commission. The Corporation considers its
policies on the accounting for the allowance for loan losses, loans held for
sale and goodwill to be critical accounting policies. These policies require the
use of estimates, judgements and strategic or economic assumptions that may
prove inaccurate or subject to variations and may significantly affect the
Corporation's reported results and financial position for the period or in
future periods. Changes in underlying factors, assumptions, or estimates in any
of these areas could have a material impact on the Corporation's future
financial condition and results of operations.
12
FIRST THREE MONTHS OF 2003 AS COMPARED TO FIRST THREE MONTHS OF 2002:
The following table provides information regarding the average balances
and yields and rates on interest earning assets and interest bearing liabilities
(dollars in thousands):
2003 2002
------------------------------ -------------------------------
Average Yield/ Average Yield/
Three Months Ended March Balance Interest Rate Balance Interest Rate
---------- -------- ------ ----------- -------- ------
ASSETS
Interest earning assets:
Interest bearing deposits
with banks $ 4,913 $ 8 .65% $ 8,963 $ 41 1.83%
Federal funds sold 9,054 26 1.15 147,955 688 1.86
Securities:
Taxable 920,628 10,986 4.84 735,576 10,495 5.79
Non-taxable (1) 219,934 3,684 6.70 198,708 3,243 6.53
Loans (1) (2) 5,269,672 91,092 7.01 4,889,134 93,040 7.72
---------- -------- ----------- --------
Total interest
earning assets 6,424,201 105,796 6.68 5,980,336 107,507 7.29
---------- -------- ----------- --------
Cash and due from banks 191,142 196,719
Allowance for loan losses (69,408) (66,804)
Premises and equipment 164,053 151,856
Other assets 415,942 360,608
---------- -----------
$7,125,930 $ 6,622,715
========== ===========
LIABILITIES
Interest bearing liabilities:
Deposits:
Interest bearing demand $1,087,747 $ 1,723 .64 $ 960,770 $ 2,152 .91
Savings 1,238,287 3,754 1.23 1,074,038 3,892 1.47
Other time 2,205,730 18,201 3.35 2,333,300 25,059 4.36
Short-term borrowings 493,898 2,073 1.70 403,050 2,529 2.54
Long-term debt 460,424 5,536 4.81 342,220 4,906 5.74
Capital securities of
subsidiary trust 7,512 86 4.64
---------- -------- ----------- --------
Total interest
bearing liabilities 5,493,598 31,373 2.32 5,113,378 38,538 3.06
---------- -------- ----------- --------
Non-interest bearing,
demand deposits 924,765 839,563
Other liabilities 100,209 90,787
---------- -----------
6,518,572 6,043,728
---------- -----------
STOCKHOLDERS' EQUITY 607,358 578,987
---------- -----------
$7,125,930 $ 6,622,715
========== ===========
Net interest earning assets $ 930,603 $ 866,958
========== ===========
Net interest income $ 74,423 $ 68,969
======== ========
Net interest spread 4.36% 4.23%
==== ====
Net interest margin (3) 4.70% 4.68%
==== ====
(1) The amounts are reflected on a fully taxable equivalent basis using the
federal statutory tax rate of 35% adjusted for certain federal tax
preferences.
(2) Average balance includes non-accrual loans. Loans consist of average
total loans less average unearned income. The amount of loan fees
included in interest income on loans is immaterial.
(3) Net interest margin is calculated by dividing the difference between
total interest earned and total interest paid by average interest
earning assets.
13
Net interest income, the Corporation's primary source of earnings, is
the amount by which interest and fees generated by interest earning assets,
primarily loans and securities, exceed interest expense on deposits and borrowed
funds. During the three months ended March 31, 2003, net interest income, on a
fully taxable equivalent basis, totaled $74.4 million, as compared to $69.0
million for the three months ended March 31, 2002. Net interest income consisted
of interest income of $105.8 million and interest expense of $31.4 million for
the first three months of 2003 compared to $107.5 million and $38.5 million for
each, respectively, for the first three months of 2002. The yield on interest
earning assets decreased by 61 basis points and the rate paid on interest
bearing liabilities decreased by 74 basis points. Net interest margin increased
from 4.68% at March 31, 2002 to 4.70% at March 31, 2003. Although the current
year margin has increased over the same period last year, the Corporation will
experience margin compression during the second quarter of 2003. This
compression will occur as a result of the Corporation's acquisition of Charter
Banking Corp.(Charter), whose historical margin has been significantly lower
than the Corporation's, and the downward repricing of interest earning assets at
a faster rate than interest bearing liabilities. The impact of future rate
changes on the Corporation's net interest income is discussed further 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, 2003 as compared to the three months ended March 31, 2002 (in thousands):
Volume Rate Net
------- ------- -------
INTEREST INCOME
Interest bearing deposits with banks $ (36) $ (70) $ (106)
Federal funds sold (471) (191) (662)
Securities:
Taxable 1,521 (957) 564
Non-taxable 355 86 441
Loans 10,726 (12,674) (1,948)
------- -------- -------
12,095 (13,806) (1,711)
------- -------- -------
INTEREST EXPENSE
Deposits:
Interest bearing demand 345 (774) (429)
Savings 2,041 (2,179) (138)
Other time (1,310) (5,548) (6,858)
Short-term borrowings 976 (1,432) (456)
Long-term debt 1,187 (557) 630
Capital securities 86 86
------- -------- -------
3,325 (10,490) (7,165)
------- -------- -------
NET CHANGE $ 8,770 $ (3,316) $ 5,454
======= ======== =======
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 2.1% from $93.0 million for the three months ended March 31, 2002 to
$91.1 million for the three months ended March 31, 2003. This decrease was
solely related to yield as the Corporation's average loans increased by $380.5
million. The yield on loans decreased by 71 basis points from 7.72% to 7.01%.
Interest expense on deposits decreased $7.4 million or 23.9% for the
three months ended March 31, 2003, compared to the same period of 2002, despite
an increase in average interest bearing deposits of 3.7% over this same period.
The average balances in interest bearing demand deposits and savings deposits
increased by $127.0 million and $164.2 million, respectively, while the average
balance in time deposits decreased by $127.6 million. The Corporation continued
to successfully generate non-interest bearing
14
deposits as such deposits increased by $85.2 million or 10.1% from March 31,
2002 to March 31, 2003. The average balance in short-term borrowing increased by
$90.8 million as average repurchase agreements increased $30.3 million and
average short-term subordinated notes increased $24.0 million during the first
quarter of 2003. Interest expense on long-term debt increased $630,000 from
March 31, 2002 as average long-term debt increased $118.2 million.
The provision for loan losses charged to operations is determined based
upon 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 $5.9 million for the first three months of 2003, as compared to $4.2 million
for the first three months of 2002. The allowance for loan losses as a
percentage of total loans was 1.31% at March 31, 2003 and December 31, 2002, and
1.35% at March 31, 2002.
Non-interest income increased 14.6% to $32.0 million during the first
three months of 2003 from $27.9 million during the first three months of 2002.
The increase in non-interest income was primarily due to an increase in fees,
revenue and gains on the sale of mortgage loans originated for sale. Deposit
fees and service charges increased 17.0% as compared to the same period of 2002
due to deposit volume growth as well as fee increases. Service charges for the
first quarter of 2003 includes $1.5 million in fees from signature based
transactions on debit cards. A recent settlement between two major debit card
issuers and retailers could result in future reductions of these fees.
Securities commissions and fees increased 37.7% to $1.9 million as compared to
$1.4 million during the first quarter of 2002. The Corporation recorded $2.7
million in gains on the sale of mortgage loans, a $1.7 million increase over the
$1.0 million recorded during the same period of 2002. Income from insurance
commissions and fees declined 10.7%, reflecting the loss of commissions on the
Professional Employee Organization or employee leasing business.
Total non-interest expenses decreased $36.7 million from $102.2 million
during the first three months of 2002 to $65.5 million during the first three
months of 2003, a direct result of the Corporation recognizing pre-tax merger
expenses of $41.9 million and $1.0 million during the same periods. Excluding
these items, non-interest expenses totaled $64.5 million for the first three
months of 2003 and $60.4 million for the first three months of 2002. Salaries
and employee benefits were $36.8 million for the three months ended March 31,
2003, a 10.9% increase as compared to three months ended March 31, 2002. The
increase is due to annual employee salary increases, commissions paid to
mortgage loan originators and higher defined benefit retirement and employee
health care costs.
The Corporation's income tax expense was $10.4 million for the first
three months of 2003 compared to an income tax benefit of $2.1 million for the
same period of 2002. The effective tax rate of 33.4% for the three months ended
March 31, 2002 was lower than the 35.0% federal statutory tax rate due to
non-taxable interest and dividend income.
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
15
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) and the Federal Reserve Bank. FHLB advances are a competitively
priced and reliable source of funds. The Corporation has significant FHLB
borrowing capacity available for both general and contingency funding purposes.
As of March 31, 2003, outstanding advances were $602.6 million, or 7.5% of total
assets while FHLB availability was $1.8 billion, or 22.1% of total assets. The
Corporation anticipates funding earning assets through the utilization of FHLB
advances.
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 totaling $108.0 million, of which $38.0 million was used as
of March 31, 2003. The Corporation also issues subordinated debt on a regular
basis and has 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 Corporation continued to expand its activities in originating
mortgage loans for resale in the secondary market as the decline in mortgage
interest rates resulted in an increase in origination volumes. Originations of
mortgage loans totaled $134.3 million for the first three months of 2003. Core
deposits grew $292.8 million during the first three months of 2003 providing the
primary source of financing for the Corporation's lending and investing
activities. In addition to funds from the growth in core deposits, the
Corporation utilized long-term FHLB advances to finance the purchase of certain
investment securities.
During the first quarter of 2003, the Corporation completed the
acquisition of Charter. The $150.2 million cash transaction was primarily
financed through the issuance of $125.0 million of capital securities of a
subsidiary trust and $25.2 million from the Corporation's existing lines of
credit with several major domestic banks.
The Corporation repurchases shares of its common stock for re-issuance
under various employee benefit plans and the Corporation's dividend reinvestment
plan. During the first quarter of 2003, the Corporation purchased treasury
shares totaling $5.4 million and received $6.3 million upon issuance. In
addition, the Corporation's Board of Directors approved a plan to repurchase
approximately 288,000 shares of its common stock to be issued in connection with
the redemption of its Series A and Series B preferred stock. The Corporation
plans to use its existing lines of credit with several major domestic banks to
finance the purchase of its common stock. The redemption of the preferred stock
is expected to be completed by June 30, 2003. As of March 31, 2003, the
Corporation purchased treasury shares totaling $2.8 million for the redemption
of the preferred stock.
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 ratio of rate sensitive assets to rate sensitive liabilities repricing
over a one year period was 1.15
16
at March 31, 2003, as compared to 1.06 at March 31, 2002. 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.
Following is the gap analysis as of March 31, 2003 (in thousands):
Within 4-12 1-5 Over
3 Months Months Years 5 years Total
---------- ---------- ---------- ----------- ----------
INTEREST EARNING ASSETS
Interest bearing deposits
with banks $ 2,887 $ 100 $ 2,987
Federal funds sold 1,246 1,246
Securities 171,123 485,691 $ 768,830 $ 295,868 1,721,512
Loans, net of unearned 1,786,550 1,154,965 2,204,001 292,332 5,437,848
---------- ---------- ---------- ----------- ----------
1,961,806 1,640,756 2,972,831 588,200 7,163,593
Other assets 914,417 914,417
---------- ---------- ---------- ----------- ----------
$1,961,806 $1,640,756 $2,972,831 $ 1,502,617 $8,078,010
========== ========== ========== =========== ==========
INTEREST BEARING LIABILITIES
Deposits:
Interest checking $ 326,566 $ 822,384 $1,148,950
Savings 433,043 919,244 1,352,287
Time deposits 533,211 $1,170,537 $ 831,218 3,148 2,538,114
Borrowings 597,321 63,243 255,984 389,766 1,306,314
---------- ---------- ---------- ----------- ----------
1,890,141 1,233,780 1,087,202 2,134,542 6,345,665
Other liabilities 1,123,704 1,123,704
Stockholders' equity 608,641 608,641
---------- ---------- ---------- ----------- ----------
$1,890,141 $1,233,780 $1,087,202 $3,866,887 $8,078,010
========== ========== ========== =========== ==========
PERIOD GAP $ 71,665 $ 406,976 $1,885,629 $(2,364,270)
========== ========== ========== ===========
CUMULATIVE GAP $ 71,665 $ 478,641 $2,364,270
========== ========== ==========
CUMULATIVE GAP AS A PERCENT
OF TOTAL ASSETS .89% 5.93% 29.27%
========== ========== ==========
RATE SENSITIVE ASSETS/RATE SENSITIVE
LIABILITIES (CUMULATIVE) 1.04 1.15 1.56 1.13
========== ========== ========== ===========
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,
--------------------
2003 2002
------ ----
Net interest income change (12 months):
- 100 bp shock vs. stable rate (3.4)% (2.3)%
+ 200 bp shock vs. stable rate 2.8 % 1.1 %
Economic value of equity:
- 100 bp shock vs. stable rate (11.2)% (5.7)%
+ 200 bp shock vs. stable rate 4.4 % 0.9 %
The preceding measures indicate that the ALCO has developed a more
asset-sensitive interest rate risk position due to the general expectation that
long-term market interest rates will rise. An asset-sensitive position means
that income should be higher if rates increase and lower if rates decline versus
income under stable rates. This position resulted mainly from the lengthening of
time deposits, the emphasis of adjustable-rate loans and an increase in
non-maturity deposits (which are generally less rate-sensitive than other
funding sources). In the table above, the impact of declining rates is increased
by the limited ability to lower certain deposit rates further and an increase in
mortgage-related assets.
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.In addition, 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 market rates of interest.
LOANS
Following is a summary of loans (in thousands):
MARCH 31, DECEMBER 31,
2003 2002
---------- ------------
Real estate:
Residential $2,000,477 $ 1,947,529
Commercial 1,588,390 1,465,903
Construction 283,658 287,560
Installment loans to individuals 864,036 910,868
Commercial, financial and agricultural 667,305 620,489
Lease financing 48,395 63,901
Unearned income (33,174) (75,746)
---------- ------------
$5,419,087 $ 5,220,504
========== ============
18
NON-PERFORMING ASSETS
Non-performing assets include non-performing loans and other real
estate owned. Non-performing loans include non-accrual loans and restructured
loans. Non-accrual loans represent loans on which interest accruals have been
discontinued. It is the Corporation's policy to discontinue interest accruals
when principal or interest is due and has remained unpaid for 90 days or more
unless the loan is both well secured and in the process of collection. When a
loan is placed on non-accrual status, all unpaid interest is reversed. Payments
on non-accrual loans are generally applied to either principal or interest or
both, depending on management's evaluation of collectibility. Non-accrual loans
may not be restored to accrual status until all delinquent principal and
interest has been paid or the loan becomes both well secured and in the process
of collection. Consumer installment loans are generally charged off against the
allowance for loan losses upon reaching 90 to 180 days past due, depending on
the installment loan type. Restructured loans are loans in which the borrower
has been granted a concession on the interest rate or the original repayment
terms due to financial distress.
Non-performing loans are closely monitored on an ongoing basis as part
of the Corporation's loan review and work-out process. The potential risk of
loss on these loans is evaluated by comparing the loan balance to the fair value
of any underlying collateral or the present value of projected future cash
flows. Losses are recognized where appropriate.
Following is a summary of non-performing assets (dollars in thousands):
MARCH 31, DECEMBER 31,
2003 2002
---------- ------------
Non-performing assets:
Non-accrual loans $ 26,301 $22,294
Restructured loans 5,975 5,915
---------- ------------
Total non-performing loans 32,276 28,209
Other real estate owned 3,995 4,729
---------- ------------
Total non-performing assets $ 36,271 $32,938
========== ============
Asset quality ratios:
Non-performing loans as percent of total loans .60% .54%
Non-performing assets as percent of total assets .45% .46%
ALLOWANCE FOR LOAN LOSSES
Management's analysis of the allowance for loan losses includes the
evaluation of the loan portfolio based 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. Management also assesses 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 in determining the adequacy of the allowance. 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
19
adequacy of the allowance, and it recognizes that knowledge of the portfolio may
be incomplete.
Following is a summary of changes in the allowance for loan losses and
selected ratios (dollars in thousands):
Three Months Ended
March
------------------
2003 2002
------- --------
Balance at beginning of period $68,406 $ 65,059
Addition from acquisition 2,506 1,389
Charge-offs (6,341) (5,257)
Recoveries 770 899
------- --------
Net charge-offs (5,571) (4,358)
Provision for loan losses 5,859 4,191
------- --------
Balance at end of period $71,200 $ 66,281
======= ========
Allowance for loan losses to:
Total loans, net of unearned income 1.31% 1.35%
Non-performing loans 220.60% 231.71%
CAPITAL RESOURCES AND REGULATORY MATTERS
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. The Corporation has an existing registration
statement for the Corporation's subordinated notes which are issued through its
finance company subsidiary, Regency Finance Company (Regency). The net proceeds
from the issuance of the subordinated notes are used to finance Regency's
lending and purchasing activities. In addition, the Corporation has an effective
$200.0 million shelf registration with the Securities and Exchange Commission.
The Corporation may, from time to time, issue any combination of common stock,
preferred stock, debt securities or capital securities of a subsidiary trust in
one or more offerings. During the first quarter of 2003, $125.0 million of
capital securities of a subsidiary trust were issued in private placements.
These capital securities qualify as tier I capital under Federal Reserve Board
guidelines.
Both the Corporation and its banking affiliates are subject to various
regulatory capital requirements administered by the federal banking agencies.
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, 2002, 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,
2003, that the Corporation and each of its banking subsidiaries are all "well
capitalized". Following are capital ratios as of March 31, 2003 for the
Corporation (dollars in thousands):
20
Well Capitalized Minimum Capital
Actual Requirements Requirements
---------------- ---------------- ----------------
Amount Ratio Amount Ratio Amount Ratio
-------- ------ -------- ----- -------- ------
Tier 1 Capital (Leverage) $510,095 7.4% $344,996 5.0% $275,997 4.0%
(to average assets)
Total Capital 587,889 10.7% 551,471 10.0% 441,177 8.0%
(to risk-weighted assets)
Tier 1 Capital 510,095 9.2% 330,883 6.0% 220,588 4.0%
(to risk-weighted assets)
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 and its banking subsidiaries' capital amounts and classifications
are also subject to qualitative judgments by the regulators regarding
components, risk weightings and other factors.
IMPORTANT NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-Q are "forward-looking" within the
meaning of the Private Securities Litigation Reform Act of 1995, which
statements generally can be identified by the use of forward-looking
terminology, such as "may," "will," "expect," "estimate," "anticipate,"
believe," "target," "plan," "project," or "continue" or the negatives thereof or
other variations thereon or similar terminology, and are made on the basis of
management's plans and current analyses of the Corporation, its business and the
industry as a whole. These forward-looking statements are subject to risks and
uncertainties, including, but not limited to, economic conditions, competition,
interest rate sensitivity and exposure to regulatory and legislative changes.
The above factors, in some cases, have affected, and in the future could affect,
the Corporation's financial performance and could cause actual results to differ
materially from those expressed or implied in such forward-looking statements.
The Corporation does not undertake to publicly update or revise it
forward-looking statements even if experience or future changes make it clear
that any projected results expressed or implied therein will not be realized.
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.
ITEM 4. CONTROLS AND PROCEDURES.
An evaluation was performed under the supervision and with the
participation of the Corporation's management, including the Chief Executive
Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of the
design and operation of the Corporation's disclosure controls and procedures.
Based on that evaluation, the Corporation's management, including the CEO and
CFO, concluded that the Corporation's disclosure controls and procedures were
effective as of March 31, 2003. There have been no significant changes in the
Corporation's internal controls over financial reporting since December 31,
2002.
21
PART II
ITEM 1. LEGAL PROCEEDINGS
The Corporation established a litigation reserve in 2001 by recording a
pre-tax charge of approximately $4.0 million to cover estimated legal
expenses associated with five cases filed against one of its subsidiary
banks. The plaintiffs alleged that a third-party independent
administrator misappropriated funds from their individual retirement
accounts held by the subsidiary bank. As of March 31, 2003, the
Corporation has settled all of these asserted claims at an aggregate
cost to the Corporation of approximately $3.5 million. The Corporation
believes the remaining reserve will be sufficient for all costs
associated with the litigation, including legal costs, 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. Other real estate owned includes a
property which is subject to litigation. Should the outcome be adverse,
the value of the property will be impaired and other costs may be
increased. Management, after consultation with outside legal counsel,
does not at the present time anticipate the ultimate aggregate
liability arising out of such pending and threatened lawsuits will have
a material adverse effect on the Corporation's financial position. At
the present time, management is not in a position to determine whether
any pending or threatened litigation will have a material adverse
effect on the Corporation's results of operation in any future
reporting period.
ITEM 2. CHANGES IN SECURITIES
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
The Secretary of the Corporation must receive written notice of any
proposal submitted by a shareholder of the Corporation for
consideration at the Annual Meeting of Shareholders on or prior to the
date which is 120 days prior to the date on which the Corporation first
mailed its proxy materials for the prior year's Annual Meeting of
Shareholders. Accordingly, any shareholder proposal must be submitted
to the Corporation by November 19, 2003 to be considered at the 2004
Annual Meeting of Shareholders.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
15 Letter Re: Unaudited Interim Financial Information
99.1 Certification pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
22
99.2 Certifications pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
The Corporation filed the following reports on Form 8-K during
the first quarter of 2003:
March 4, 2003 - The Corporation reported its issuance of a
press release announcing plans to redeem its Preferred Series
A and Preferred Series B stock and approval by Corporation's
Board of Directors to repurchase approximately 288,000 shares
of the Corporation's common stock to be issued for the
redemption.
February 3, 2003 - The Corporation reported its issuance of a
press release announcing it had signed a definitive agreement
to acquire all of the outstanding shares of Charter Banking
Corp., the holding company for Southern Exchange Bank based in
Tampa, Florida.
January 16, 2003 - The Corporation reported its issuance of a
press release announcing its financial results for the quarter
and year ended December 31, 2002
23
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, 2003 /s/Gary L. Tice
-------------------------------------
Gary L. Tice
President and Chief Executive Officer
(Principal Executive Officer)
Dated: May 15, 2003 /s/Thomas E. Fahey
-------------------------------------
Thomas E. Fahey
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
24