Exhibit 13
Relationships Built on
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[F.N.B. CORPORATION LOGO]
2002 ANNUAL REPORT
CORPORATE PROFILE
F.N.B. Corporation is a $7.1 billion diversified financial services company
headquartered in Naples, Florida. The company owns and operates community banks,
insurance agencies, a consumer finance company, an investment services firm and
First National Trust Company. It has offices located in Florida, Pennsylvania,
Ohio and Tennessee. The company's common stock is traded on The Nasdaq Stock
Market under the symbol "FBAN."
F.N.B. has been honored as a Dividend Achiever by Mergent Inc., a leading
provider of global business and financial information on publicly traded
companies. This annual recognition is based on the company's consistently
outstanding record of increased dividend performance. F.N.B. has increased
dividend payments for 30 consecutive years.
ANNUAL MEETING
The Annual Meeting of Shareholders was held on Monday, April 28, 2003, at 4 p.m.
at the Naples Beach Hotel, 851 Gulf Shore Blvd. N., Naples, FL 34102.
CONTENTS
1 FINANCIAL HIGHLIGHTS
2 LETTER TO SHAREHOLDERS
5 OUR CORE VALUES
6 RELATIONSHIPS BUILT ON TRUST
20 YEAR 2002 NEWS IN REVIEW
22 CORPORATE OFFICERS & DIRECTORS
23 AFFILIATE SENIOR MANAGEMENT
24 CORPORATE GOVERNANCE STATEMENT
25 INDEPENDENT AUDITORS' REPORT
26 AUDITED CONSOLIDATED FINANCIAL STATEMENTS
49 SELECTED FINANCIAL DATA
50 QUARTERLY EARNINGS SUMMARY
51 MANAGEMENT'S DISCUSSION
F.N.B. CORPORATION AND SUBSIDIARIES [F.N.B. CORPORATION LOGO]
FINANCIAL HIGHLIGHTS
(Dollars in thousands except per share data)
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2002 2001 Percent Change
For The Year
Net income $63,335 $52,985 19.5%
Return on average assets 0.93% 0.84%
Return on average shareholders' equity 10.97% 9.81%
Per Common Share(*)
Net income
Basic $1.37 $1.19 15.1%
Diluted $1.35 $1.17 14.5%
Cash dividends paid $0.81 $0.68 19.1%
Book value at year end $12.96 $12.36 4.9%
Market price at year end $26.21 $23.93 9.5%
Performance Ratios
Efficiency ratio, excluding merger
expenses 59.84% 64.51%
Net interest margin 4.70% 4.44%
At Year End
Assets $7,090,232 $6,488,383 9.3%
Net loans $5,220,504 $4,814,435 8.4%
Deposits $5,426,157 $5,099,076 6.4%
Shareholders' equity $598,596 $572,407 4.6%
Common shares outstanding 43,862,035 41,718,659 5.1%
* Per common share amounts have been adjusted for the 5% stock dividend declared
April 28, 2003 and May 6, 2002.
CONSISTENT DIVIDEND GROWTH
Cash dividends declared, adjusted for stock dividends
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1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
$0.10 $0.11 $0.12 $0.13 $0.15 $0.16 $0.17 $0.18 $0.25 $0.45 $0.48 $0.56 $0.58 $0.62 $0.68 $0.81
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[F.N.B. CORPORATION LOGO]
LETTER TO OUR SHAREHOLDERS
I am pleased to report that in 2002 F.N.B. Corporation once again delivered
solid financial results. This was achieved despite the many challenges posed by
an uncertain operating environment. We also made progress in implementing
certain organizational changes which are designed to further enhance our
performance prospects for the future.
Record Earnings Performance
For the year ended December 31, 2002, net income was a record $63.3 million, or
$1.35 per diluted share. This was up from $53.0 million, or $1.17 per diluted
share in 2001.
A key component of this consistent growth in earnings was net interest income,
which increased 12% to $286.8 million. The net interest margin actually improved
throughout the year to end at 4.70%. In the coming year, we will continue to
focus on maintaining a strong net interest margin through superior balance sheet
management practices.
Non-interest income increased 21% to $120.9 million, accounting for roughly one
third of total revenues. This was achieved despite turbulent market conditions
and is on target with our long-term goal of achieving 35% to 40% of total
revenue from fee-based sources.
At the same time, we made considerable progress in improving efficiency
throughout the organization. The efficiency ratio, a key performance measure,
improved to 59.8% in 2002. This will be a strategic priority for continuous
improvement going forward.
The return on average assets and return on average shareholders' equity,
excluding merger expenses, improved to 1.39% and 16.3%, respectively, for the
year. These outstanding performance numbers are the result of exceptional
execution at all levels, which is one of our core values. Our employees did a
superb job of executing our strategic plan this past year.
It should also be noted that despite the general economic downturn, F.N.B.
Corporation maintained superior asset quality. Non-performing assets as a
percent of total assets were a mere 0.46%, placing us well ahead of peers. We
are proud of our strong credit culture and we work very hard to make sure that
we are not incurring undue risk. This philosophy has served us well at a time
when many of our peers are struggling with asset quality issues.
F.N.B. Corporation ended the year with approximately $7.1 billion in total
assets. This is a 9.3% increase from the $6.5 billion in assets as of December
31, 2001. During the same period, total deposits increased 6.4% from $5.1
billion to $5.4 billion.
In recognition of the company's outstanding financial performance, consistently
strong cash flow from operations, and the quality of our balance sheet, the
Board of Directors voted to increase the company's dividend from the previous
$0.68 per share to $0.81 per share on an annualized basis. This cash dividend is
in addition to our annual 5% stock dividend.
The company's financial results for the full year are discussed in further
detail in the Management's Discussion and Analysis of Financial Condition
section of this report.
The F.N.B. Family
I would like to talk briefly about our family - the F.N.B. family. One of the
core commitments at this company is to our employees. We are committed to
fostering a strong, positive corporate culture that helps us attract and retain
the very best financial services professionals in the country.
"Relationships of trust depend
on our willingness to look not
only to our own interests, but
also the interests of others."
Peter Farquharson
British author
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Our employees and their spouses, children and significant others are all part of
the F.N.B. family. Gary L. Tice, company President and Chief Executive Officer,
presents the latest addition to the F.N.B. family--his grandson, Peyton Slade
Maytorena.
Through our talent management program, 360 degree leadership development
process, and F.N.B. University, we are building a leadership team that is second
to none.
We conduct a comprehensive corporate culture assessment every 12-18 months and I
am proud that our culture is in the top 1% of all companies. We intend to keep
it that way.
Because the key to a strong corporate culture is exceptional leadership at all
levels, we hold all our leaders accountable for their leadership effectiveness.
Yes, our employees are a family. But we must not forget about the spouses,
children and significant others who generously give of their time in fostering
and supporting our people while they are away from their homes.
During 2002, I became a grandfather for the first time. This experience has
reinforced my belief in the importance of family. I am convinced that our
commitment to work-life balance for our F.N.B. family is a key to our success in
attracting and retaining great people. Our employee commitment will continue to
be a top priority throughout this organization.
Expanding the F.N.B. Franchise
During the past year, F.N.B. Corporation completed the largest merger in its
history. The acquisition of Promistar Financial Corporation nearly tripled the
size of our banking operations in western Pennsylvania and greatly expanded
opportunities for increasing fee income through the sale of investment and
insurance products.
In addition, we consolidated the Ohio offices of Metropolitan National Bank into
First National Bank of Pennsylvania, achieving significant gains in efficiency.
The superior return on equity from our Pennsylvania/Ohio franchise continues to
fuel our growth in select Florida markets.
In Florida, we completed the acquisition of Bank of Central Florida. This
transaction gave F.N.B. a
"The glue that holds all
relationships together, including
the relationship between the leader
and the led, is trust, and trust is
based on integrity."
Brian Tracy
Contemporary author
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[F.N.B. CORPORATION LOGO]
foothold in the greater Orlando area, which consistently ranks as one of the
fastest-growing metropolitan areas in the United States.
In February of this year, we announced the acquisition of Charter Banking Corp.,
the holding company for Southern Exchange Bank headquartered in Tampa, Florida.
This represents our largest acquisition to date in Florida and will add more
than $700 million in assets and 18 banking offices throughout the Tampa Bay
area.
A Strong Corporate Brand
Another key priority for F.N.B. Corporation over the past year was the
introduction of our new corporate logo, which has been enthusiastically
received. This metaphoric symbol of a handshake and the American flag represents
our commitment to building relationships with our customers, employees,
shareholders and the individual communities we serve. It also accurately
demonstrates what we, as a company, stand for - Trust, Commitment, Friendship,
Service and Loyalty. Today, each of our affiliates operates under our red, white
and blue logo.
In 2003, we will continue to build the F.N.B. brand to increase positive
recognition and awareness of exactly who we are; how we are different; and why
everyone, especially our target market segments, would be better off doing
business with us. We believe that the stronger our brand, the less we will have
to compete on price.
This past year also has brought dramatic reform in the corporate and regulatory
world, forcing many companies to look more closely at their internal controls.
While F.N.B. Corporation has a proud tradition as a sound organization with some
of the very best compliance ratings in the industry, we have challenged
ourselves to do even more for our constituents.
We also will continue to expand investor awareness of our company, telling the
F.N.B. story wherever we can to increase the knowledge of our company among
institutional as well as individual investors. We maintain an open-door policy,
inviting investors to join us at the many presentations we make around the
country and in our quarterly conference calls. Our efforts in this area are
showing notable signs of success.
The theme of this year's annual report reflects our new corporate slogan -
"Relationships Built on Trust." This accurately reflects our focus on meeting
the individual needs of our customers. But it is far more than just a slogan. It
is the key to our future success at F.N.B. Corporation and why we come to work
every day. As an organization, we will continue to excel at building loyal,
profitable relationships.
I would like to take this opportunity to express my sincere gratitude to each
and every member of the F.N.B. family. Our employees share a passion for living
our core values and fulfilling our strategic mission each and every day. Special
appreciation goes out to our directors on both the corporate and affiliate level
for the support and direction they have provided so generously over the past
year. I also would like to acknowledge the members of our corporate Leadership
Council who have served this organization untiringly.
And finally, thank you, our shareholders, for your continued investment in our
company. Your support is deeply appreciated and we welcome your comments and
suggestions.
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Gary L. Tice
President & Chief Executive Officer
March 3, 2003
"A sufficiently great and
generous trust could never
be abused"
Henry David Thoreau,
American philosopher,
author, naturalist
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RELATIONSHIPS BUILT ON TRUST
In business, as in life, success is based on relationships. And the essential
glue that holds all relationships together is trust.
2002 will be remembered as a year when a stunning number of high-profile
business leaders violated the trust of their shareholders, customers, and/or
employees. As a result, public trust in Corporate America approached an all-time
low.
Throughout F.N.B. Corporation, however, "Relationships Built on Trust" is more
than just a slogan. It is, always has been, and always will be the way we do
business. We foster a corporate culture which encourages and rewards the
continuous development of "Relationships Built on Trust" with our investors and
shareholders, our existing and prospective customers, employees, regulators,
suppliers, strategic alliance partners, and the communities we serve.
From recruitment through orientation to annual reviews, the importance of strict
adherence to our code of ethics and core values is reinforced continuously. This
includes an annual written reaffirmation of acceptance and compliance by each
employee in our organization.
OUR CORE VALUES
HONESTY AND INTEGRITY
We always honor our commitments, keep our promises, and do the right thing.
QUALITY GROWTH IN EARNINGS
We are responsible stewards of our shareholders' investments.
PROACTIVE AND POSITIVE ATTITUDE
We are proactive, positive and passionate about honoring our commitments to our
customers, employees, shareholders and the individual communities we serve.
UNEQUALED SERVICE QUALITY
We will be measurably superior in exceeding customer and client expectations.
CONTINUOUS PROFESSIONAL DEVELOPMENT
A well-educated and highly-skilled workforce is our greatest sustainable
competitive advantage.
SUPERIOR EMPLOYMENT CONDITIONS AND PRACTICES
We foster a corporate culture that promotes equal opportunity and fair
treatment, thereby attracting and retaining exceptional people.
TEAMWORK
We are one team sharing a common mission.
EXECUTION
We will excel not only in the development of innovative strategies to create
value for our constituencies, but in their timely and effective execution as
well. We are a results-oriented company.
"Few things can help an
individual more than to
place responsibility on
him, and to let him know
that you trust him."
Booker T. Washington,
American educator
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[F.N.B. CORPORATION LOGO]
GROWING WITH OUR CUSTOMERS
Craig Smith understands the importance of maintaining a solid banking
relationship. The owner of Naples Progressive Gymnastics Center had conducted
business with a number of different financial institutions over the years prior
to selecting First National Bank of Florida. There, he met Susan Dawson, Vice
President and Commercial Lender, who earned his trust through personalized
service and the appropriate financial solutions.
The relationship has been mutually beneficial.
Incorporated in 1984, Naples Progressive Gymnastics Center has grown steadily
from 10,000 square feet to over 20,000 square feet. The facility serves hundreds
of children and is one of the largest and best equipped gymnastics schools in
the state of Florida.
With assistance from First National Bank, Smith plans to further expand the
family business. These plans include enclosing the center's pool for year-round
swimming lessons and building an extension onto the existing gymnasium to be
used for cheerleading, trampoline and tumbling. The gymnastics center also will
offer onsite housing for camps and clinics.
Smith notes that gymnastics as a recreational and educational activity has
existed for more than 2,000 years, but its development as a competitive sport
began a little more than 100 years ago. In addition to developing body strength,
agility, speed and posture, the sport fosters self-esteem, courage,
determination, perseverance, self-respect, expressiveness and, most important,
confidence in oneself. These are some of the traits we look for in our bankers.
At F.N.B. Corporation and its financial services subsidiaries, each and every
employee shares a commitment to building loyal and mutually beneficial
relationships with our customers.
Directly related to this commitment is a passion for consistently delivering a
superior level of service that produces not just customer satisfaction, but
loyalty. We continuously evaluate and monitor service quality throughout the
entire corporation and go to great lengths to recognize and reward all our
service quality champions.
This is a cornerstone of our relationship philosophy.
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"Whether you own a small family business or a large commercial enterprise, it's
important to have a banker who cares and understands your individual needs and
who will build a solid relationship with you."
Susan Dawson, Vice President
and Commercial Lender,
First National Bank of Florida
"Without trust, words become
the hollow sound of a wooden
gong. With trust, words become
life itself."
John Harold
Author, poet
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The staff at Naples Progressive Gymnastics Center focuses on refining skills and
developing new ones in a safe and fun environment. Many of its competitive
athletes have earned state, regional and national titles throughout the United
States and internationally. Here, gym owner Craig Smith works with 12-year-old
Emily Reichert to enhance such things as strength, posture, flexibility,
muscular endurance, and agility. The center, which began with only a handful of
members, today now serves hundreds of children through on-site camps and
clinics.
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[F.N.B. CORPORATION LOGO]
PROVIDING LOCAL FINANCIAL SERVICES
When Joe Bunk needs assistance from his banker, he doesn't have to wait on a
decision that is made thousands of miles away by people he doesn't know and who
don't know him. Instead he can simply walk a couple of blocks down the street
from his office at Johnstown City Hall to the local branch office of First
National Bank of Pennsylvania.
This type of personalized community banking service is attractive to Bunk, who
is responsible for directing finances for the City of Johnstown, Pennsylvania.
Among the diversified financial services provided to the city are general
account, payroll, bureau of sewage and parking revenue. The bank also has
participated in a number of commercial loan programs with the city.
"Many large financial institutions have become too impersonal," Bunk said.
"Banking is a people business. We value our relationship with First National
Bank. They know us and we trust them."
At F.N.B. Corporation, we firmly believe that to ensure superior customer
service, we must make our bankers available and empower them to make the
necessary decisions in their local markets.
Each of our banking affiliates operates under a community banking structure with
retail regions led by a local President and Chief Executive Officer. These
market Presidents know the people and businesses in their regions; they are
experienced, hands-on sales leaders; and they enjoy having the authority and
responsibility to deal one-on-one with their local customers.
This organizational structure allows our banking affiliates to recognize and
respond to customer needs in a more timely fashion. Getting the decision as
close as possible to the customer contributes to "Relationships Built on Trust"
and represents a meaningful and significant competitive advantage.
This community banking philosophy and focus on the customer drive our banking
affiliates, where personal service is delivered by a dedicated team of
knowledgeable, professional people who live and work in the local community. Our
customers, both large and small, feel comfortable dealing with the bank's
experienced professionals - people they have come to know and trust.
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"Our stongest competitive advantage is the ability to provide personalized
customer service in each of the markets we serve. Our customers can trust us to
make the important decisions on a local level"
William McKinney, Johnstown Area
President and Chief Executive Officer,
First National Bank of Pennsylvania
"You may be deceived if you
trust too much, but you will
live in torment if you don't
trust enough."
Frank Crane
American writer
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The City of Johnstown trusts F.N.B. Corporation affiliate First National Bank of
Pennsylvania for a complete range of financial services, including general
account, payroll, bureau of sewage and parking revenue. The city has also
maintained a commercial loan relationship with the bank for many years. Here,
Sherry Passeau, Assistant Branch Manager for First National Bank, and Joe Bunk,
City Finance Director, meet at the historic Johnstown Flood Museum.
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[F.N.B. CORPORATION LOGO]
BUILDING EMPLOYEE RELATIONSHIPS
Every dollar of shareholder value comes from building loyal and profitable
customer and client relationships, and the key to building loyal and profitable
relationships is people.
Research has shown that the single most powerful influence on the morale,
performance and retention of talented, high- performing employees is the
leadership effectiveness of their direct supervisors.
Through our Talent Management Program, 360 Degree Leadership Development
Process, and F.N.B. University, we will continue to develop leaders who
understand that perhaps their greatest leadership responsibility is the personal
and professional development of their direct reports. In fact, "continuous
professional development" is one of our core values.
This relationship building applies to employees like Christine Tvaroch. Since
joining F.N.B. Corporation in 1995, Tvaroch has advanced in her professional
career to now serve as General Auditor. It is an important position. Tvaroch is
responsible for independently evaluating the adequacy and effectiveness of the
company's internal control environment and reporting results to the Audit
Committee of the Board of Directors.
As with many other employees, we also provide Tvaroch with the flexibility of
scheduling so she can attend school functions and other appointments with her
sons.
We attract and retain good people by winning their loyalty every day. As a
member of the F.N.B. family, our employees feel appreciated and at home. Our
employees have a sense of belonging. They play an integral role in the company's
goals and business strategies.
We are dedicated to maintaining our strong employee relationships.
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"We provide our employees with the skills and training necessary to be
successful at all levels of the company. We also emphasize the highest
integrity and ethics. This is our corporate culture."
Thomas Fahey,
Executive Vice President
and Chief Financial Officer,
F.N.B. Corporation
"Trust each other again and
again. When the trust level
gets high enough, people
transcend apparent limits,
discovering new and awesome
abilities for which they
were previously unaware."
David Armistead
American author
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At F.N.B. Corporation, attracting, developing and retaining high-performance
employees is a key priority. One way the company does this is through a solid
commitment to family. When she's not busy working as the General Auditor for
F.N.B., Christine Tvaroch has her hands full at home with her two young sons,
Alex and Christopher. By enabling employees to balance their professional and
personal lives, the company is able to boast a workforce that is second to none.
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[F.N.B. CORPORATION LOGO]
MEETING THE NEEDS OF OUR CLIENTS
Everyone's financial situation is unique. At our wealth management division,
First National Trust Company, our team of professionals works to develop
customized long-term financial relationships built on the foundations of trust
and exceptional service.
Our relationship managers like Senior Vice President Paul Belfore assist our
customers in managing their wealth on their schedule, streamlining transactions,
coordinating the efforts of financial experts, and connecting customers with the
solutions they need.
We begin by taking the time to thoroughly understand the important and
individual details of our customers' financial picture. We discuss their
financial plans and objectives for the future and help them identify specific
investment, tax and estate planning opportunities.
With this critical information in mind, we draw on our financial experts who
consider the latest practices, research and strategies to create a personal
wealth management plan that addresses our customers' financial objectives - both
now and in the years to come.
First National Trust Company has provided extraordinary service and superior
investment results on behalf of its clients since 1934. Today, we have
approximately $2 billion in total assets under management for more than 5,000
individuals, corporations and institutions.
To ensure that our customers' needs are met, we structure their financial plans
around four distinct strategies that can be used alone or in conjunction with
others. These include wealth enhancement and growth; wealth protection and
preservation; lifetime wealth distribution; and estate and wealth distribution.
But before we draw upon any of our proven financial strategies, we set out to
earn the most important thing - our customers' trust.
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"With an unwavering commitment to your financial objectives, F.N.B. will develop
a personal relationship with you to manage your wealth efficiently and
effectively."
Michael Morris, President and
Chief Executive Officer,
First National Trust Company
"Put not your trust in
money, but put
your money in trust"
Oliver Wendell Holmes Sr.,
American poet, novelist
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For many investors, managing their finances has become more complex and
time-consuming than ever. What they need is a partner they can trust for their
complete investment needs. Paul Belfore, Senior Vice President for First
National Trust Company in Hermitage, Pennsylvania, leads a statewide team of
wealth management professionals who assist investors in
achieving their goals. Belfore and his financial experts provide timely and
valuable advice and guidance, and an objective point of view to help investors
make the most of their hard earned assets.
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EXPANDING INSURANCE SERVICES PROVIDER
Our goal with any customer relationship is to be their trusted financial partner
in helping our clients effectively manage their investment assets as well as
their overall cost of risk. This particularly applies to our expanding base of
insurance customers.
All Children's Hospital in St. Petersburg, Florida, is the only freestanding
children's hospital on Florida's rapidly growing West Coast and one of only 50
such children's hospitals in the nation. Founded in 1927 as an American Legion
hospital for the treatment of youngsters with polio, All Children's has grown to
219 beds and expanded services to include care for all manner of childhood
illness and injury. As such, the hospital has unique needs when it comes to
insurance.
Through our wholly owned subsidiary, Roger Bouchard Insurance Inc., we provide
All Children's with a complete line of insurance and risk management services
including property and casualty coverage as well as workers compensation
insurance. We also consult regularly with hospital officials and provide them
guidance on managing their self-funded health and dental programs.
"Our business is very specialized. As such, we need an insurance provider who
understands the intricacies of our operation and who we can trust totally to
provide guidance and expertise on the appropriate coverage," said Ann Miller,
Media Relations Manager for All Children's Hospital.
All Children's has maintained a customer relationship with our organization
since 1988. During that time, the hospital has enjoyed significant growth in the
community and has expanded its employment base from 900 employees to more than
2,000 employees today. It also has added a new four-story Children's Research
Institute in cooperation with the University of South Florida.
As a regional referral center for children with some of the most challenging
medical problems, All Children's draws patients from throughout the United
States as well as 36 foreign countries. More than 125 dedicated pediatric
specialists and subspecialists on staff keep the hospital at the forefront of
children's health care.
In February 2003, All Children's was recognized as one of the top 20 children's
hospitals in the United States. The honor by Child magazine is based on the
results of an extensive survey conducted of children's facilities all across the
nation.
By working to understand their needs and effectively assist in managing their
day-to-day insurance and risk management programs, we enable All Children's to
focus on what's important - patient care.
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"Our client relationships are built on a foundation of trust. We take the time
necessary to get to know each and every one of our clients so that we can help
them manage their overall cost of risk."
Cheri O'Neal, Vice President,
Employee Benefits, Roger Bouchard Insurance Inc.
"Woe to the man whose heart has
not learned while young to hope,
to love - and to put its trust
in life."
Joseph Conrad,
British novelist
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All Children's Hospital in St. Petersburg, Florida, is recognized as one of the
top 20 children's hospitals in the United States. Its mission is to provide
quality health care services, education and research programs in an atmosphere
of respect. This philosophy is exemplified by Registered Nurse Kim Jay in caring
for 7-month-old Toni Allen. The hospital has maintained a customer relationship
with F.N.B. affiliate Roger Bouchard Insurance Inc. for more than 15 years and
trusts our team of experienced insurance professionals to manage all aspects of
its insurance and risk management programs.
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FOCUSED ON SUPERIOR CUSTOMER SERVICE
Our core value of "unequaled service quality" applies to internal as well as
external customers. This commitment is honored each and every day by the
outstanding professionals in the Customer Service Center of F.N.B.
The Customer Service Center was established in 1996 to provide back office
support to the corporation's banks and affiliate companies. Today, the company
employs more than 400 people with full-service operations in Naples and
Clearwater, Florida, and Hermitage and Johnstown, Pennsylvania.
Among the areas in which the Customer Service Center provides support are item
processing and imaging systems, loan servicing; computer operations; network
services and communications; deposit operations; statement rendering; call
center operations; and reconcilements.
The primary goals of the Customer Service Center are to provide a high level of
customer service and to attain efficiencies through system and product
standardization. At the same time, the company is focused on providing a strong
corporate culture that attracts, develops, recognizes and rewards positive and
proactive employees, thereby contributing to shareholder value.
Among this team of professionals is Zuleidys Maribona-Motes, Telecommunications
Voice Technician in Naples, Florida. Motes joined the Customer Service Center in
2000 as a Communication Support Specialist and has risen through the ranks to
her current position.
By understanding and satisfying the day-to-day needs of our internal customers,
the professionals at the Customer Service Center enable all of our banking and
affiliate subsidiary employees to focus on their mission of successfully
acquiring and retaining profitable customer relationships.
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"We are dedicated to providing a superior level of customer service throughout
our company. Our people know that to be the best, we must work harder and
smarter than everybody else."
Dwight Morgan, Operations Officer,
Customer Service Center of F.N.B.
"Set your expectations high;
find men and women whose integrity
and values you respect; get their
agreement on a course of action;
and give them your ultimate trust."
John Fellows Akers,
American business
executive
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Working behind the scenes to ensure a high level of customer service is a
primary objective of the Customer Service Center of F.N.B. The professionals at
the Customer Service Center employ the latest technology to provide value-added
services and introduce new electronic products. Zuleidys Maribona-Motes is
Telecommunications Voice Technician for the wholly-owned subsidiary. Her
responsibilities include creating support, repairs and maintaining all voice
resources for the phones, fax lines and modem lines companywide. She also
communicates with vendors and coordinates projects and solutions.
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COMMITMENT TO COMMUNITY SERVICE
The mission of the Neighborhood Health Clinic Inc. is "to provide quality
healthcare to working, uninsured adults in Collier County, Florida, using all
volunteer professional staff. These services will be provided in an atmosphere
that protects the dignity and respect of all."
The non-profit agency receives no government assistance - it is 100% community
driven with the major portion of financial and volunteer support coming from
local individuals.
When the Neighborhood Health Clinic opened its doors in 1999, First National
Bank of Florida was an early supporter. The bank provided financial assistance
and Marco Island Area President and Chief Executive Officer Darrell Ward joined
the board to provide strategic guidance. The bank has remained actively involved
as the clinic's financial services provider.
The Neighborhood Health Clinic provides a full range of primary care, diagnostic
testing, medications, specialty care, and, if necessary, surgery. This concept
of philanthropy and volunteerism has been honored at the local, state and
national levels. Recently, clinic co-founders Bill and Nancy Lascheid traveled
to Washington, D.C., to receive the national Jefferson Award for Public Service.
The award is presented annually by the American Institute for Public Service to
recognize "leadership and selfless generosity."
The clinic volunteer base currently numbers over 400, including 200 local
physicians and nurses. Since its opening, the clinic has served over 7,000
low-income patients and provided $1.8 million in medical services.
"Quality of health for the less fortunate is our primary goal. None of this
would have been possible had it not been for the strong support of community
leaders such as First National Bank," Nancy Lascheid said.
The Neighborhood Health Clinic is just one of many deserving community
organizations supported by F.N.B. Corporation and its financial services
subsidiaries throughout our expanding franchise in Florida, Pennsylvania, Ohio
and Tennessee. We encourage all officers and employees to take an active role in
contributing in a positive way to the economic and social well-being to the
communities in which we live and work.
Many of our most loyal and profitable customer relationships have come about as
a result of our commitment to serving our local communities.
[PICTURE OMITTED]
"Whenever a local organization approaches us, the first question we ask is 'what
can we do to help?' We are committed to making our communities better places to
live through volunteer service."
Darrell Ward, Marco Island Area
President and Chief Executive Officer,
First National Bank of Florida
"The glory of friendship is not
the outstretched hand, nor the kindly
smile...it's spiritual inspiration that
comes to one when he discovers that
someone else believes in him and is
willing to trust him with his friendship."
Ralph Waldo Emerson,
American writer,
philosopher, poet
18
[PICTURE OMITTED]
Seeing a growing need for affordable health care services, Nancy and Bill
Lascheid led the mission to establish the Neighborhood Health Clinic Inc. in
Naples, Florida, in 1999. Their philosophy is "neighbors reaching out to
neighbors." This is the same community commitment that is shared by F.N.B.
Corporation and its financial services affiliates. Our employees take an active
role in a countless number of civic and community organizations in each of the
local communities we serve.
19
[F.N.B. CORPORATION LOGO]
YEAR 2002 NEWS IN REVIEW
JANUARY 18 F.N.B. Corporation and Promistar Financial Corporation Formally
Complete Their Merger
FEBRUARY 1 F.N.B. Corporation Completes Acquisition of Bank of Central Florida,
Expanding Service to the Greater Orlando Area
MARCH 5 F.N.B. Corporation Hosts First Annual Analyst Conference
APRIL 1 F.N.B. Corporation to Build New Information Technology Center to Serve
its Expanding Operations
APRIL 11 F.N.B. Corporation affiliate First National Bank of Florida Recognized
as a Family Friendly Business
APRIL 12 F.N.B. Corporation Introduces New Corporate Slogan as a Key Component
of its Corporate Branding Strategy
MAY 6 F.N.B. Corporation Increases Quarterly Cash Dividend and Declares 5% Stock
Dividend at Annual Meeting
JUNE 6 F.N.B. Corporation Announces Several Key Staff Additions to its Corporate
and Bank Compliance Departments
JULY 11 F.N.B. Corporation Added to the Russell 1000 Index
JULY 23 F.N.B. Corporation and Sun Bancorp Inc. Announce Agreement Related to
Electronic Data Processing Services
AUGUST 5 F.N.B. Corporation Completes Rollout of First National Bank of Florida
Name for its Offices Throughout Florida
AUGUST 27 F.N.B. Corporation Recognized by Mergent Inc. for Outstanding Dividend
Performance
SEPTEMBER 9 F.N.B. Corporation Announces the Acquisition of Harry Blackwood
Inc., Expanding Insurance Offerings in the Western Pennsylvania Market
OCTOBER 1 F.N.B. Corporation Named One of America's Finest Companies by The
Staton Institute Inc.
NOVEMBER 12 Metropolitan National Bank Adopts First National Bank Name, Creating
A Banking Network of 130 Offices
DECEMBER 11 First National Bank of Pennsylvania Names Market Presidents Under
Expanded Community Banking Structure
20
[PICTURE OMITTED]
21
[F.N.B. CORPORATION LOGO]
CORPORATE OFFICERS & Directors
CORPORATE OFFICERS
Gary L. Tice
President
& Chief Executive Officer
Stephen J. Gurgovits
Vice Chairman
Kevin C. Hale
Executive Vice President
& Chief Operating Officer
Thomas E. Fahey
Executive Vice President
& Chief Financial Officer
Cass Bettinger
Executive Vice President
& Chief Administrative Officer
C.C. Coghill
Executive Vice President
& Chief Credit Officer
Garrett S. Richter
Executive Vice President
William J. Rundorff
Executive Vice President
& Chief Legal Officer
John D. Waters
Senior Vice President,
Director of Investor Relations
David B. Mogle
Secretary & Treasurer
BOARD OF DIRECTORS
G. Scott Baton, II
Retired Business Executive
Alan C. Bomstein
President & Chief Executive Officer
Creative Contractors, Inc.
William B. Campbell
Retired Business Executive
Charles T. Cricks
Principal
Starboard Ventures
Henry M. Ekker
Attorney at Law, Partner
Ekker, Kuster, McConnell,
& Epstein LLP
Stephen J. Gurgovits
Vice Chairman
F.N.B. Corporation
President & Chief Executive Officer
First National Bank of Pennsylvania
James S. Lindsay
Managing Partner
Dor-J's LLP
Licensed Real Estate Broker
The Lindsay Company
Edward J. Mace
Certified Public Accountant
Chief Operating Officer
Ribek Corporation
Peter Mortensen
Chairman
F.N.B. Corporation
Chairman
First National Bank of Pennsylvania
Harry F. Radcliffe
Investment Manager
Director of
Hawthorne Financial Corporation
William J. Strimbu
President
Nick Strimbu, Inc.
Gary L. Tice
President & Chief Executive Officer
F.N.B. Corporation
Chairman
First National Bank of Florida
Earl K. Wahl, Jr.
Principal Owner
J.E.D. Corporation
Archie O. Wallace
Attorney at Law, Partner
Rowley, Wallace, Keck, Karson
& St. John
R. Benjamin Wiley
Chief Executive Officer
Greater Erie Community Action
Committee
Director of
Erie Telecommunications Inc.
22
AFFILIATE SENIOR MANAGEMENT
First National Bank of
Pennsylvania
Peter Mortensen
Chairman
Stephen J. Gurgovits
President
& Chief Executive Officer
Tito Lima
Chief Financial Officer
Steven C. Ackmann
Senior Executive Vice President
Gary J. Roberts
Senior Executive Vice President
First National Bank of Florida
Gary L. Tice
Chairman
Garrett S. Richter
President
& Chief Executive Officer
James L. Goehler
Senior Executive Vice President
& Chief Operating Officer
Terry Reed Walston
Senior Vice President & Controller
Regency Finance Company
Stephen J. Gurgovits
Chairman
Robert T. Rawl
President
& Chief Executive Officer
Douglas J. Solock
Chief Financial Officer
Roger Bouchard Insurance Inc.
Ray Bouchard
President
Richard Bouchard
Chief Executive Officer
Tim Bouchard
Chief Operating Officer
First National Trust Company
Michael H. Morris
President
& Chief Executive Officer
Ellen C. Vanderburg
Chief Financial Officer
Customer Service Center of
F.N.B. LLC
Charlie Grau
Chief Executive Officer
Nancy L. Noa
Senior Vice President
& Chief Financial Officer
John Klumpp
Senior Vice President
& Technology Manager
Louise Lowrey
Senior Vice President
F.N.B. Affiliate Services
Myron Harvey
Senior Vice President
Human Resources
Jack Motter
Senior Vice President
Residential Mortgage
Martha H. Bibby
Vice President-Corporate
Compliance
Clay W. Cone
Vice President-Corporate
Communications
Carmen M. Danner
Vice President-Corporate
Payroll & Benefits Manager
George D. Hagi
Vice President-Risk Management
Philip L. Nemni
Corporate Budget
& Information Director
James G. Orie
Vice President
& Corporate Counsel
Robert T. Reichert
Vice President & Controller
Bernie G. Sponseller
Vice President-
Shareholder Services
Christine E. Tvaroch
General Auditor
Banking Market Executives
First National Bank of Florida
Brian P. Keenan
Orlando, Florida
Robert C. George
Clearwater, Florida
Joseph D. Hudgins
Sarasota, Florida
David W. Gomer
Cape Coral, Florida
Robert J. Avery
Cape Coral, Florida
Mark L. Morris
Fort Myers, Florida
David M. Webb Jr.
Naples, Florida
Darrell E. Ward
Marco Island, Florida
First National Bank of
Pennsylvania
William P. McKinney
Johnstown, Pennsylvania
Robert A. Rimbey
Pittsburgh, Pennsylvania
Dan R. Holquist
Erie, Pennsylvania
Paul D. Puleo
Greensburg, Pennsylvania
Peter J. Asimakopoulos
Hermitage, Pennsylvania /
Youngstown, Ohio
23
[F.N.B. CORPORATION LOGO]
CORPORATE GOVERNANCE AND
MANAGEMENT'S RESPONSIBILITY
Corporate governance has received increasingly greater attention in recent
years, and rightly so. It is not something we take lightly at F.N.B.
Corporation. The daily conduct of each and every employee is based on our core
values, such as honesty and integrity, which, in turn, are the foundation of our
corporate culture.
The consolidated financial statements of F.N.B. Corporation and its subsidiaries
have been prepared in accordance with accounting principles generally accepted
in the United States. Management is responsible for the content and integrity of
the financial statements and all other financial information contained in this
annual report.
We, along with all other members of management, are responsible for establishing
and maintaining a comprehensive system of internal controls intended to provide
reasonable assurance that transactions are executed in accordance with
management's authorization, assets are safeguarded, and financial records are
reliable. We also have established disclosure controls and procedures to ensure
that any information required to be disclosed by F.N.B. Corporation is disclosed
in a timely and forthright manner.
These internal and disclosure controls are augmented by written policies and
procedures and are continuously monitored and assessed by management and by the
internal audit function, which reports directly to the Audit Committee of the
Board of Directors. The Audit Committee is composed entirely of independent
directors who meet regularly with management, the internal auditors, and the
independent auditors, Ernst & Young LLP, to ensure each is carrying out its
responsibilities. Both internal audit and Ernst & Young LLP have full access to
the Audit Committee, with no members of management present, to discuss its
audits and its findings as to the integrity of the Corporation's effectiveness
of internal control and financial reporting.
Key accounting, financial reporting, and internal accounting controls are
reviewed with the Audit Committee. Our independent auditors express an opinion
as to the fairness of the financial statements. Their opinion is based on an
audit conducted in accordance with auditing standards generally accepted in the
United States.
We have assessed our internal control environment as of December 31, 2002, in
relation to criteria for effective internal controls over consolidated financial
reporting. Based on our assessment, we believe that our system of internal
controls over consolidated financial reporting was effective.
F.N.B. Corporation has an active, capable and diligent Board of Directors and
encourages strong and effective corporate governance. Directors of the full
corporate Board and members of specific committees are chosen and evaluated
based on their individual areas of expertise, financial knowledge and high
standards of ethical conduct. Directors are expected to maintain loan and
deposit relationships with the company's banking affiliates. It is a requirement
of the Corporation that these relationships be managed through extensive
internal controls and appropriately disclosed.
F.N.B. Corporation has a proud tradition of doing what
is right. Our company is built on strong ethical standards
and principles. In fact, we consider our policies to be
ahead of industry best practices.
We are dedicated to providing fair and accurate financial statements that
reflect the growth and success of our company and maintain investor confidence.
We are confident in the corporate culture we have cultivated and we accept
responsibility for the integrity and objectivity of the financial statements and
related information in this annual report.
/s/ Gary L. Tice /s/ Thomas E. Fahey
Gary L. Tice Thomas E. Fahey
President & Executive Vice President &
Chief Executive Officer Chief Financial Officer
24
INDEPENDENT AUDITORS' REPORT
STOCKHOLDERS AND BOARD OF DIRECTORS
F.N.B. CORPORATION
We have audited the accompanying consolidated balance sheets of F.N.B.
Corporation and subsidiaries (F.N.B. Corporation) as of December 31, 2002 and
2001, and the related consolidated statements of income, stockholders' equity
and cash flows for each of the three years in the period ended December 31,
2002. These consolidated financial statements are the responsibility of
management of F.N.B. Corporation. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits. We did not audit
the consolidated financial statements of Promistar Financial Corporation for the
year ended December 31, 2000, which statements reflect net interest income
constituting approximately 32% for 2000 of the related consolidated financial
statement total. Those statements were audited by other auditors whose report
has been furnished to us, and our opinion, insofar as it relates to data
included for Promistar Financial Corporation, is based solely on the report of
the other auditors.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of F.N.B. Corporation at
December 31, 2002 and 2001, and the consolidated results of their operations and
their cash flows for each of the three years in the period ended December 31,
2002 in conformity with accounting principles generally accepted in the United
States.
/s/ Ernst & Young LLP
Birmingham, Alabama
May 22, 2003
25
F.N.B. CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Dollars in thousands, except par values
December 31 2002 2001
----------- -----------
ASSETS
Cash and due from banks $ 246,802 $ 246,781
Interest bearing deposits with banks 3,778 3,712
Federal funds sold 8,981 88,260
Mortgage loans held for sale 24,177 1,323
Securities available for sale 1,026,191 902,970
Securities held to maturity (fair value of $50,517 and $51,770) 48,992 51,368
Loans, net of unearned income of $75,746 and $50,063 5,220,504 4,814,435
Allowance for loan losses (68,406) (65,059)
----------- -----------
NET LOANS 5,152,098 4,749,376
----------- -----------
Premises and equipment 163,709 149,518
Goodwill 88,425 40,479
Other assets 327,079 254,596
----------- -----------
TOTAL ASSETS $ 7,090,232 $ 6,488,383
=========== ===========
LIABILITIES
Deposits:
Non-interest bearing $ 924,090 $ 798,960
Interest bearing 4,502,067 4,300,116
----------- -----------
TOTAL DEPOSITS 5,426,157 5,099,076
----------- -----------
Other liabilities 99,052 98,722
Short-term borrowings 515,780 375,754
Long-term debt 450,647 342,424
----------- -----------
TOTAL LIABILITIES 6,491,636 5,915,976
=========== ===========
STOCKHOLDERS' EQUITY
Preferred stock - $0.01 par value
Authorized - 20,000,000 shares
Issued - 118,025 and 147,033 shares
Aggregate liquidation value - $2,951 and $3,676 1 1
Common stock - $0.01 par value
Authorized - 500,000,000 shares
Issued - 44,162,460 and 41,781,837 shares 442 418
Additional paid-in capital 516,186 444,549
Retained earnings 73,363 119,256
Accumulated other comprehensive income 17,335 9,845
Treasury stock - 300,425 and 63,178 shares at cost (8,731) (1,662)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 598,596 572,407
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,090,232 $ 6,488,383
=========== ===========
See accompanying Notes to Consolidated Financial Statements
26
F.N.B. CORPORATION AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
Dollars in thousands, except per share data
Year Ended December 31 2002 2001 2000
-------- -------- --------
INTEREST INCOME
Loans, including fees $374,565 $388,933 $392,473
Securities:
Taxable 40,474 45,610 43,521
Nontaxable 7,944 7,558 7,007
Dividends 2,220 2,791 4,051
Other 1,581 5,474 3,658
-------- -------- --------
TOTAL INTEREST INCOME 426,784 450,366 450,710
======== ======== ========
INTEREST EXPENSE
Deposits 114,104 167,108 174,025
Short-term borrowings 10,878 15,026 21,072
Long-term debt 20,689 18,166 16,284
-------- -------- --------
TOTAL INTEREST EXPENSE 145,671 200,300 211,381
-------- -------- --------
NET INTEREST INCOME 281,113 250,066 239,329
Provision for loan losses 19,094 31,195 17,982
-------- -------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 262,019 218,871 221,347
======== ======== ========
NON-INTEREST INCOME
Insurance premiums, commissions and fees 34,158 31,510 23,951
Service charges 46,941 36,086 32,749
Trust 9,334 9,077 8,831
Securities commissions and fees 6,617 3,643 1,031
Gain on sale of securities 1,915 1,828 212
Gain on sale of mortgage loans 6,468 6,562 3,184
Other 15,440 11,289 10,027
-------- -------- --------
TOTAL NON-INTEREST INCOME 120,873 99,995 79,985
-------- -------- --------
382,892 318,866 301,332
======== ======== ========
NON-INTEREST EXPENSE
Salaries and employee benefits 135,215 121,066 116,441
Net occupancy 17,979 16,684 14,968
Amortization of intangibles 3,118 4,785 4,090
Equipment 21,533 19,731 19,260
Merger 42,365 8,037 6,700
Promotional 3,697 3,809 5,242
Insurance claims paid 7,995 8,011 5,304
Other 57,542 60,724 40,207
-------- -------- --------
TOTAL NON-INTEREST EXPENSE 289,444 242,847 212,212
-------- -------- --------
INCOME BEFORE INCOME TAXES 93,448 76,019 89,120
Income taxes 30,113 23,034 27,212
-------- -------- --------
NET INCOME $ 63,335 $ 52,985 $ 61,908
======== ======== ========
EARNINGS PER COMMON SHARE*
Basic $ 1.37 $ 1.19 $ 1.38
======== ======== ========
Diluted $ 1.35 $ 1.17 $ 1.36
======== ======== ========
See accompanying Notes to Consolidated Financial Statements
27
F.N.B. CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Dollars in thousands, except per share data
Accumulated
Other
Compre- Additional Compre-
hensive Preferred Common Paid-In Retained hensive Treasury
Income Stock Stock Capital Earnings Income Stock
------ ----- ----- ------- -------- ------ -----
Balance at January 1, 2000 $2,075 $77,230 $309,250 $122,170 $(16,177) $(3,112)
Net income $61,908 61,908
Change in other comprehensive income 17,780 17,780
-------
Comprehensive income $79,688
=======
Cash dividends declared:
Preferred stock (341)
Common stock $0.62 per share (29,795)
Purchase of common stock (51,683)
Issuance of common stock 306 1,249 (3,233) 15,795
Stock dividend 2,085 17,332 (19,417)
Conversion of preferred stock (397) 191 206
----- ------ ------- --------- -------- --------
Balance at December 31, 2000 1,678 79,812 328,037 131,292 1,603 (39,000)
Net income $52,985 52,985
Change in other comprehensive income 8,242 8,242
-------
Comprehensive income $61,227
=======
Cash dividends declared:
Preferred stock (293)
Common stock $0.68 per share (32,007)
Purchase of common stock (12,052)
Issuance of common stock 1,198 5,781 (4,259) 49,390
Stock dividend 2,437 26,025 (28,462)
Change in par value of stock (1,635) (83,050) 84,685
Conversion of preferred stock (42) 21 21
----- ------ ------- --------- -------- --------
Balance at December 31, 2001 1 418 444,549 119,256 9,845 (1,662)
Net income $63,335 63,335
Change in other comprehensive income 7,490 7,490
-------
Comprehensive income $70,825
=======
Cash dividends declared:
Preferred stock (242)
Common stock $0.81 per share (37,274)
Purchase of common stock (30,276)
Issuance of common stock 2 5,351 (5,066) 23,207
Stock dividend 21 66,625 (66,646)
Conversion/retirement of preferred stock 1 (339)
----- ----- -------- ------- -------- -------
Balance at December 31, 2002 $ 1 $ 442 $516,186 $73,363 $ 17,335 $(8,731)
===== ===== ======== ======= ======== =======
See accompanying Notes to Consolidated Financial Statements
28
F.N.B. CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Dollars in thousands
Year Ended December 31 2002 2001 2000
--------- --------- ---------
OPERATING ACTIVITIES
Net income $ 63,335 $ 52,985 $ 61,908
Adjustments to reconcile net income to net
cash flows from operating activities:
Depreciation and amortization 20,232 19,471 18,531
Provision for loan losses 19,094 31,195 17,982
Deferred taxes (10,863) 2,350 (541)
Gain on sale of securities (1,915) (1,828) (212)
Gain on sale of loans (6,468) (6,562) (3,184)
Proceeds from sale of loans 58,019 22,290 23,961
Loans originated for sale (74,405) (16,009) (14,009)
Net change in:
Interest receivable 1,328 4,510 (4,637)
Interest payable (4,128) (3,313) 5,459
Other, net (16,125) (19,520) (5,342)
--------- --------- ---------
Net cash flows from operating activities 48,104 85,569 99,916
--------- --------- ---------
INVESTING ACTIVITIES
Net change in:
Interest bearing deposits with banks (66) (1,129) 3,639
Federal funds sold 111,039 34,897 (1,573)
Loans (315,892) (56,498) (232,154)
Securities available for sale:
Purchases (566,269) (421,691) (175,798)
Sales 230,424 141,025 38,569
Maturities 321,898 286,306 99,175
Securities held to maturity:
Purchases (6,304) (20,259) (1,664)
Maturities 8,757 44,410 18,504
Increase in premises and equipment (29,687) (21,131) (15,250)
Increase in intangibles (54,618) (16,971) (14,619)
Net cash (paid) received for mergers and acquisitions (50,761) 4,908 (341)
--------- --------- ---------
Net cash flows from investing activities (351,479) (26,133) (281,512)
--------- --------- ---------
FINANCING ACTIVITIES
Net change in:
Non-interest bearing deposits, savings and NOW 312,109 78,926 77,595
Time deposits (187,262) (142,525) 228,403
Short-term borrowings 114,911 18,013 (92,291)
Increase in long-term debt 141,346 78,010 50,422
Decrease in long-term debt (33,123) (21,315) (51,086)
Net acquisition of treasury stock (7,069) 596 (37,585)
Cash dividends paid (37,516) (32,300) (30,136)
--------- --------- ---------
Net cash flows from financing activities 303,396 (20,595) 145,322
========= ========= =========
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 21 38,841 (36,274)
Cash and cash equivalents at beginning of year 246,781 207,940 244,214
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 246,802 $ 246,781 $ 207,940
========= ========= =========
See accompanying Notes to Consolidated Financial Statements
29
F.N.B. CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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. Certain reclassifications have been made to
the prior years' financial statements to conform to the current year's
presentation, including restatements for a transaction accounted for as a
pooling-of-interests during 2002. (See the "Mergers and Acquisitions" section of
this report).
USE OF ESTIMATES:
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 differ from those
estimates.
CASH EQUIVALENTS:
The Corporation considers cash and due from banks as cash and cash
equivalents.
SECURITIES:
Debt securities are classified as held to maturity when management has the
positive intent and ability to hold securities to maturity. Securities held to
maturity are carried at amortized cost.
Debt securities not classified as held to maturity and marketable equity
securities are classified as available for sale. Securities available for sale
are carried at fair value with net unrealized securities gains (losses), net of
income taxes, reported separately as a component of other comprehensive income.
Amortization of premiums and accretion of discounts are recorded as
interest income from securities. Realized gains and losses are recorded as net
securities gains (losses). The adjusted cost of specific securities sold is used
to compute gains or losses on sales.
Presently, the Corporation has no intention of establishing a trading
securities classification.
Securities are periodically reviewed for impairment based upon a number of
factors, including but not limited to, length of time and extent to which the
market value has been less than cost, financial condition of the underlying
issuer, ability of the issuer to meet contractual obligations, the likelihood
of the security's ability to recover any decline in its market value, and the
intent and ability to retain the security for a period of time sufficient to
allow for recovery in market value.
EQUITY METHOD INVESTMENT:
The Corporation accounts for its 15.3% ownership of the common stock of Sun
Bancorp, Inc. (Sun) under the equity method. The carrying value of the
Corporation's investment in Sun is adjusted for the Corporation's share of Sun's
earnings and reduced by dividends received from Sun. Sun, a bank holding company
headquartered in Selinsgrove, Pennsylvania, is a publicly traded company under
the stock symbol SUBI on the Nasdaq Stock Market. The carrying value of the
investment included in other assets was $22.9 million at December 31, 2002.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE:
Securities sold under agreements to repurchase are accounted for as
collateralized financing transactions and are recorded at the amounts at which
the securities were sold. Securities, generally U.S. government and Federal
agency securities, pledged as collateral under these financing arrangements
cannot be sold or repledged by the secured party.
MORTGAGE LOANS HELD FOR SALE:
Certain residential mortgage loans are originated for sale in the secondary
mortgage loan market and typically sold with servicing rights released. These
loans are classified as loans held for sale and are carried at the lower of
aggregate cost or estimated market value. Market value is determined on the
basis of rates obtained in the respective secondary market for the type of loan
held for sale. Loans are generally sold at a premium or discount from the
carrying amount of the loan. Such premium or discount is recognized at the date
of sale. Gain or loss on the sale of loans is recorded in non-interest income at
the time consideration is received and all other criteria for sales treatment
have been met.
LOANS AND THE ALLOWANCE FOR LOAN LOSSES:
Loans are reported at their outstanding principal adjusted for any
charge-offs and any deferred fees or costs on originated loans.
Interest income on loans is accrued on the principal amount outstanding. It
is the Corporation's policy to discontinue interest accruals when principal or
interest is due and has remained unpaid for 90 days or more unless the loan is
both well secured and in the process of collection. When a loan is placed on
non-accrual status, all unpaid interest is reversed. 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. Loan origination fees and related costs are deferred and recognized
over the life of the loans as an adjustment of yield.
30
F.N.B. CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The allowance for loan losses is maintained at a level that, in
management's judgement, is adequate to absorb probable losses associated with
specifically identified loans, as well as estimated probable credit losses
inherent in the remainder of the loan portfolio at the balance sheet date. The
allowance for loan losses is based on management's evaluation of potential
losses in the loan portfolio, which includes an assessment of past experience,
current economic conditions, known and inherent risks in the loan portfolio, the
estimated value of underlying collateral and residuals and changes in the
composition of the loan portfolio. Additions are made to the allowance through
periodic provisions charged to income and recovery of principal on loans
previously charged off. Losses of principal and/or residuals are charged to the
allowance when the loss actually occurs or when a determination is made that a
loss is probable.
The allowance for loan losses consists of an allocated and unallocated
component. The components of the allowance for loan losses represent an
estimation completed pursuant to Financial Accounting Standards Statement (FAS)
5, Accounting for Contingencies, or FAS 114, Accounting by Creditors for
Impairment of a Loan. The allocated component reflects expected losses resulting
from analysis developed through specific credit allocations for individual loans
and historical loss experience for each loan category. The specific credit
allocations are based on a regular analysis of all commercial loans over a
fixed-dollar amount where the internal credit rating is at or below a
predetermined classification. The historical loan loss element is determined
statistically based on regularly updated loan loss experience.
The unallocated portion of the allowance is determined based on
management's assessment of historical losses on the remaining portfolio segments
in conjunction with the current status of economic conditions, loan loss trends,
delinquency and non-accrual trends, credit administration, portfolio growth,
concentrations of credit risk and other factors, including regulatory guidance.
This determination inherently involves a higher degree of uncertainty and
considers current risk factors that may not have yet occurred in the
Corporation's historical loss factors used to determine the allocated component
of the allowance, and it recognizes that knowledge of the portfolio may be
incomplete. The allocation of the allowance should not be interpreted as an
indication that loan losses in future years will occur in the same proportions
or that the allocation indicates future loan loss trends.
Impaired loans are identified and measured based on the present value of
expected future cash flows discounted at the loan's effective interest rate, at
the loan's observable market price or at the fair value of the collateral if the
loan is collateral dependent. If the recorded investment in the loan exceeds the
measure of fair value, a valuation allowance is established as a component of
the allowance for loan losses. Impaired loans consist of non-homogeneous loans,
which based on the evaluation of current information and events, management has
determined that it is probable the Corporation will not be able to collect all
amounts due according to the contractual terms of the loan agreement. The
Corporation evaluates all commercial and commercial real estate loans which have
been classified for regulatory reporting purposes, including non-accrual and
restructured loans, in determining impaired loans.
PREMISES AND EQUIPMENT:
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed generally on the straight-line method over the asset's
estimated useful life. Useful lives are dependent upon the nature and condition
of the asset and range from 3 to 40 years.
OTHER REAL ESTATE OWNED:
Assets acquired in settlement of indebtedness are included in other assets
at the lower of fair value minus estimated costs to sell or at the carrying
amount of the indebtedness. Subsequent write-downs and net direct operating
expenses attributable to such assets are included in other expenses.
GOODWILL AND OTHER INTANGIBLE ASSETS:
Goodwill represents the excess of the cost of an acquisition over the fair
value of the net assets acquired. Other intangible assets represent purchased
assets that also lack physical substance but can be distinguished from goodwill
because of contractual or other legal rights. On January 1, 2002, the
Corporation adopted FAS 142, Goodwill and Other Intangible Assets. Under the
provisions of FAS 142, goodwill is no longer amortized into the income statement
over an estimated life, but rather is tested at least annually for impairment.
Intangible assets which have finite lives continue to be amortized over their
estimated useful lives and also continue to be subject to impairment testing.
DERIVATIVE FINANCIAL INSTRUMENTS:
The Corporation enters into various forward sales agreements to protect
against changes in interest rates and prices on its mortgage loan commitments.
These transactions do not qualify for hedge accounting under FAS 133, Accounting
for Derivative Instruments and Hedging Activities. Therefore, both the forward
agreements and the mortgage loan commitments are marked to market through
earnings.
31
F.N.B. CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 2002, the Corporation had $31.0 million in forward sales
agreements.
INCOME TAXES:
Income taxes are computed utilizing the liability method. Under this method
deferred taxes are determined based on differences between financial reporting
and tax bases of assets and liabilities and are measured using the enacted tax
rates and laws that will be in effect when the differences are expected to
reverse.
PER SHARE AMOUNTS:
Earnings and cash dividends per share have been adjusted for common stock
dividends, including the five percent stock dividend declared on April 28, 2003
and May 6, 2002.
Basic earnings per common 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 and the exercise of stock options. Such adjustments to net income and the
weighted average number of shares of common stock outstanding are made only when
such adjustments dilute earnings per common share.
NEW ACCOUNTING STANDARDS:
FAS 147, Acquisition of Certain Financial Institutions, was issued in
October 2002 and provides guidance on the accounting for the acquisition of a
financial institution and supersedes the specialized accounting guidance
provided in FAS 72, Accounting for Certain Acquisitions of Banking or Thrift
Institutions. FAS 147 became effective upon issuance and requires companies to
cease amortization of unidentified intangible assets associated with certain
branch acquisitions and reclassify these assets to goodwill. In addition, FAS
147 amends FAS 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, to include in its scope long-term customer relationship intangible
assets of financial institutions. In connection with the adoption of FAS 147,
the Corporation reclassified intangible assets with a balance of $6.4 million to
goodwill.
FAS 144 was issued in October 2001 and addresses how and when to measure
impairment on long-lived assets that an entity plans to dispose of either
through sale, abandonment, exchange, or distribution to owners. The statement
supersedes FAS 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of. The provision of FAS 144 became effective
for the Corporation on January 1, 2002, and did not have a material impact on
results of operations or financial condition.
On January 1, 2002, the Corporation adopted FAS 142, which addresses the
accounting and reporting for acquired goodwill and other intangible assets.
Further detail on the accounting for goodwill and intangible assets under FAS
142 and the impact of the adoption on the financial statements is included in
the "Goodwill" and "Other Intangible Assets" Sections of this report.
MERGERS AND ACQUISITIONS
On October 8, 2002, the Corporation completed its business combination with
Harry Blackwood Inc. (Blackwood), an independent insurance agency in Chippewa
Township, Pennsylvania. In exchange for all of the outstanding common stock of
Blackwood, the Corporation paid $1.4 million in cash. Goodwill recognized in
connection with this acquisition was $990,000. The transaction was accounted for
as a purchase. Blackwood operates as a division of Roger Bouchard Insurance,
Inc. (Bouchard), a wholly-owned subsidiary of the Corporation.
On January 31, 2002, the Corporation completed its business combination
with Central Bank Shares, Inc. (Central), a bank holding company headquartered
in Orlando, Florida, with assets of more than $251.4 million. The acquisition
complements the Corporation's Florida growth strategy, providing the Corporation
access to the greater Orlando market. In exchange for all of the outstanding
common stock of Central, the Corporation paid $80 million in cash. The
transaction, which was accounted for as a purchase, resulted in the recognition
of approximately $47.0 million of goodwill and $8.1 million in core deposit
intangibles. Central's banking affiliate, Bank of Central Florida, was merged
into an existing subsidiary of the Corporation, First National Bank of Florida
(FNBFL).
On January 18, 2002, the Corporation completed its business combination with
Promistar Financial Corporation (Promistar), a bank holding company
headquartered in Johnstown, Pennsylvania, with assets of $2.4 billion. Under the
terms of the merger agreement, each outstanding share of Promistar's common
stock was converted into .926 shares of the Corporation's common stock. A total
of 16,007,346 shares of the Corporation's common stock were issued. The
transaction was accounted for as a pooling-of-interests. Promistar's banking
affiliate, Promistar Bank, was merged into an existing subsidiary of the
Corporation, First National Bank of Pennsylvania (FNBPA). The Corporation
incurred a merger related charge of approximately $41.4 million during the first
quarter of 2002 relating to this transaction. Of the total merger and
consolidation expenses, involuntary separation costs associated with terminated
employees totaled $6.8 million, early retirement and other employment related
expenses totaled $7.4 million, data processing conversion charges totaled $6.1
million, professional services totaled $8.2 million, write-downs of impaired
assets totaled $10.6 million and other miscellaneous merger and consolidation
expenses totaled $2.3 million. The Corporation paid merger and consolidation
expenses of $28.7 million and incurred non-cash write downs of $10.6 million
during 2002. All involuntary separation costs were paid during the first six
months of 2002. As of December 31, 2002, approximately $2.1 million remained to
be paid related primarily to data processing conversion charges.
32
F.N.B. CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On August 14, 2001, Promistar completed its business combination with FNH
Corporation (FNH), a bank holding company headquartered in Irwin, Pennsylvania,
with assets of $303.7 million. The transaction was accounted for as a purchase.
Goodwill and a core deposit intangible of $7.0 million and $7.5 million,
respectively, were recorded in connection with the merger. FNH's banking
subsidiary, First National Bank of Herminie, was merged into Promistar Bank,
which was later merged into FNBPA.
On April 30, 2001, the Corporation completed its business combination with
Citizens Community Bancorp, Inc. (Citizens), a bank holding company
headquartered in Marco Island, Florida, with assets of $170.0 million. Under the
terms of the merger agreement, each outstanding share of Citizens common stock
was converted into .524 shares of the Corporation's common stock. A total of
1,775,224 shares of the Corporation's common stock were issued. The transaction
was accounted for as a pooling-of-interests. Citizens' banking affiliate,
Citizens Community Bank of Florida, was merged into FNBFL.
During 2001, the Corporation completed its business combination with
Ostrowsky & Associates, Inc. (Ostrowsky) and James T. Blalock (Blalock),
independent insurance agencies in Cape Coral and Venice, Florida, respectively.
The transactions were accounted for as purchases. The Corporation also completed
its affiliation with OneSource Group, Inc. (OneSource), an independent insurance
agency with offices in Clearwater and Jacksonville, Florida. The transaction was
accounted for as a pooling-of-interests. These affiliates are operating as
divisions of Bouchard.
During 2000, the Corporation completed business combinations with Altamura,
Marsh & Associates, Clearwater and Fort Myers, Florida and Connell & Herrig
Insurance, Inc., Sarasota and Englewood, Florida. These transactions were
accounted for as purchases and these acquired agencies are operating as
divisions of Bouchard. Also during 2000, Regency Finance Company purchased eight
consumer finance offices in Tennessee. The transaction was also accounted for as
a purchase and resulted in the recognition of $1.2 million of goodwill.
The Corporation regularly evaluates the potential acquisition of, and holds
discussions with, various acquisition candidates and as a general rule the
Corporation publicly announces such acquisitions only after a definitive merger
agreement has been reached.
SUBSEQUENT EVENTS (UNAUDITED)
On March 31, 2003, the Corporation completed its business combination with
Charter Banking Corp. (Charter), a bank holding company headquarted in Tampa,
Florida with assets of more than $795.6 million. The $150.2 million cash
transaction was funded primarily through the issuance of $125.0 million of trust
preferred securities and $25.2 million from the Corporation's existing lines of
credit with several major domestic banks. The transaction resulted in the
recognition of approximately $101.9 million of goodwill and $1.1 million in core
deposit intangible. Charter's banking affiliate, Southern Exchange Bank, will be
merged into FNBFL during the fourth quarter of 2003.
On March 4, 2003, the Corporation announced plans to redeem its outstanding
Preferred Series A and Preferred Series B stock. The preferred stock is expected
to be converted into the Corporation's common stock. The Corporation intends to
repurchase approximately 288,000 shares of common stock to reissue in connection
with the conversion of the preferred shares.
REINCORPORATION
On June 1, 2001, the Corporation reincorporated in the state of Florida and
operates from corporate headquarters located in Naples, Florida. The Corporation
was incorporated in 1974 in Hermitage, Pennsylvania, and at that time
substantially all of the Corporation's business was being conducted in
Pennsylvania. The Corporation expanded into Florida six years ago. In connection
with the reincorporation, the Corporation reduced the par value of both its
common stock and preferred stock to $0.01 per share.
CHARTER CONSOLIDATION
During the fourth quarter of 2002, the Corporation completed the
consolidation of its community banking affiliate in Ohio, Metropolitan National
Bank, into FNBPA. The Corporation incurred $510,000 in consolidation costs
associated with the transaction.
33
F.N.B. CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the first quarter of 2001, the Corporation reduced its number of
bank charters from eight to three. The Corporation's five Florida banks were
merged under FNBFL and its two Pennsylvania banks were combined under FNBPA. In
connection with these charter consolidations, the trust operations of FNBFL were
consolidated into the Corporation's national trust company, First National Trust
Company. The Corporation incurred pre-tax consolidation expense of $3.2 million
arising from legal and accounting fees, consulting fees, data processing
conversion charges, early retirement, involuntary separation and related benefit
costs. Involuntary separation costs associated with 42 terminated employees
totaled $1.4 million of the total consolidation expense. The total amount of
separation payments paid during 2001 was $1.0 million. The remaining separation
costs were paid in accordance with the contractual terms of the employment and
compensation agreements of the terminated employees in 2002.
SECURITIES
The amortized cost and fair value of securities are as follows (in
thousands):
Securities available for sale:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
December 31, 2002 COST GAINS LOSSES VALUE
- ----------------- ----------- ----------- ----------- -----------
U.S. Treasury and other U.S. Government
agencies and corporations $ 162,565 $ 5,646 $ (1) $ 168,210
Mortgage-backed securities of
U.S. Government agencies 605,492 14,993 (137) 620,348
States of the U.S. and political subdivisions 133,608 3,142 (40) 136,710
Other debt securities 46,270 842 (253) 46,859
----------- ----------- ----------- -----------
Total debt securities 947,935 24,623 (431) 972,127
Equity securities 49,684 4,438 (58) 54,064
----------- ----------- ----------- -----------
$ 997,619 $ 29,061 $ (489) $ 1,026,191
=========== =========== =========== ===========
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
December 31, 2001 COST GAINS LOSSES VALUE
- ----------------- --------- --------- --------- ---------
U.S. Treasury and other U.S. Government
agencies and corporations $ 408,340 $ 8,745 $ (153) $ 416,932
Mortgage-backed securities of
U.S. Government agencies 288,999 3,535 (209) 292,325
States of the U.S. and political subdivisions 146,165 665 (897) 145,933
Other debt securities 3,521 17 (1) 3,537
--------- --------- --------- ---------
Total debt securities 847,025 12,962 (1,260) 858,727
Equity securities 40,850 3,689 (296) 44,243
--------- --------- --------- ---------
$ 887,875 $ 16,651 $ (1,556) $ 902,970
========= ========= ========= =========
34
F.N.B. CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
December 31, 2000 COST GAINS LOSSES VALUE
- ----------------- --------- --------- --------- ---------
U.S. Treasury and other U.S. Government
agencies and corporations $ 398,312 $ 2,039 $ (2,510) $ 397,841
Mortgage-backed securities of
U.S. Government agencies 249,610 2,457 (1,396) 250,671
States of the U.S. and political subdivisions 113,901 616 (575) 113,942
Other debt securities 1,675 11 (16) 1,670
Total debt securities 763,498 5,123 (4,497) 764,124
Equity securities 74,107 2,759 (872) 75,994
--------- --------- --------- ---------
$ 837,605 $ 7,882 $ (5,369) $ 840,118
========= ========= ========= =========
Securities held to maturity:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
December 31, 2002 COST GAINS LOSSES VALUE
- ----------------- ------- ------- -------- -------
U.S. Treasury and other U.S. Government
agencies and corporations $ 5,724 $ 18 $ 5,742
Mortgage-backed securities of
U.S. Government agencies 1,123 32 1,155
States of the U.S. and political subdivisions 39,492 1,486 $ (11) 40,967
Other debt securities 2,653 2,653
------- ------- -------- -------
$48,992 $ 1,536 $ (11) $50,517
======= ======= ======== =======
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
December 31, 2001 COST GAINS LOSSES VALUE
- ----------------- --------- ----------- ---------- -------
U.S. Treasury and other U.S. Government
agencies and corporations $ 3,214 $ 47 $ 3,261
Mortgage-backed securities of
U.S. Government agencies 3,068 38 3,106
States of the U.S. and political subdivisions 43,493 541 $ (223) 43,811
Other debt securities 1,593 1 (2) 1,592
------- ----- -------- -------
$51,368 $ 627 $ (225) $51,770
======= ===== ======== =======
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
December 31, 2000 COST GAINS LOSSES VALUE
------- ----- -------- -------
U.S. Treasury and other U.S. Government
agencies and corporations $32,887 $ 12 $ (171) $32,728
Mortgage-backed securities of
U.S. Government agencies 7,091 23 (18) 7,096
States of the U.S. and political subdivisions 35,442 221 (79) 35,584
Other debt securities 102 (3) 99
------- ----- -------- -------
$75,522 $ 256 $ (271) $75,507
======= ===== ======== =======
35
F.N.B. CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 2002 and 2001, securities with a carrying value of $325.0
million and $313.4 million, respectively, were pledged to secure public
deposits, trust deposits and for other purposes as required by law. Securities
with a carrying value of $404.9 million and $343.3 million at December 31, 2002
and 2001, respectively, were pledged as collateral for other borrowings.
As of December 31, 2002, the amortized cost and fair value of securities,
by contractual maturities, were as follows (in thousands):
HELD TO MATURITY AVAILABLE FOR SALE
---------------- ------------------
AMORTIZED FAIR AMORTIZED FAIR
December 31, 2002 COST VALUE COST VALUE
- ----------------- --------- -------- ---------- ----------
Due in one year or less $ 3,457 $ 3,525 $ 58,050 $ 59,245
Due from one to five years 30,418 31,441 111,095 116,033
Due from five to ten years 13,735 14,137 71,210 72,513
Due after ten years 259 259 102,088 103,988
------- -------- ---------- ----------
47,869 49,362 342,443 351,779
Mortgage-backed securities of
U.S. Government agencies 1,123 1,155 605,492 620,348
Equity securities 49,684 54,064
------- -------- ---------- ----------
$48,992 $ 50,517 $ 997,619 $1,026,191
======= ======== ========== ==========
Maturities may differ from contractual terms because issuers may have the
right to call or prepay obligations with or without penalties. Periodic payments
are received on mortgage-backed securities based on the payment patterns of the
underlying collateral.
Proceeds from sales of securities available for sale during 2002, 2001 and
2000 were $230.4 million, $141.0 million and $38.6 million, respectively. Gross
gains and gross losses were realized on those sales as follows (in thousands):
Year Ended December 31 2002 2001 2000
- ---------------------- ---- ---- ----
Gross gains $ 2,440 $ 1,836 $ 304
Gross losses (525) (8) (92)
------- ------- -----
$ 1,915 $ 1,828 $ 212
======= ======= =====
LOANS
Following is a summary of loans (in thousands):
December 31 2002 2001
- ----------- ----------- -----------
Real estate:
Residential $ 1,947,529 $ 1,777,403
Commercial 1,465,903 1,282,944
Construction 287,560 227,868
Installment loans to individuals 910,868 774,932
Commercial, financial and agricultural 620,489 672,639
Lease financing 63,901 128,712
Unearned income (75,746) (50,063)
----------- -----------
$ 5,220,504 $ 4,814,435
=========== ===========
36
F.N.B. CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The loan portfolio consists principally of loans to individuals and small-
and medium-sized businesses within the Corporation's primary market area of
southwest Florida, western and central Pennsylvania, and northeastern Ohio.
Additionally, the portfolio contains consumer finance loans to individuals in
Pennsylvania, Ohio and Tennessee.
As of December 31, 2002, no concentrations of loans exceeding 10% of total
loans existed which were not disclosed as a separate category of loans.
Certain directors and executive officers of the Corporation and its
significant subsidiaries, as well as associates of such persons, are loan
customers. Such loans were made in the ordinary course of business under normal
credit terms and do not represent more than a normal risk of collection.
Following is a summary of the aggregate amount of loans to any such persons who
had loans in excess of $60,000 during 2002 (in thousands):
Total loans at beginning of year $ 75,482
New loans 28,649
Repayments (32,378)
Other 4,286
--------
Total loans at end of year $ 76,039
========
Other represents the net change in loan balances resulting from changes in
related parties during the year.
NON-PERFORMING ASSETS
Following is a summary of non-performing assets (in thousands):
December 31 2002 2001
- ----------- ------- -------
Non-accrual loans $22,294 $21,350
Restructured loans 5,915 5,578
------- -------
TOTAL NON-PERFORMING LOANS 28,209 26,928
Other real estate owned 4,729 4,375
------- -------
TOTAL NON-PERFORMING ASSETS $32,938 $31,303
======= =======
For the years ended December 31, 2002, 2001 and 2000, income recognized on
non-accrual and restructured loans was $1.4 million, $1.1 million and $964,000,
respectively. Income that would have been recognized during 2002, 2001 and 2000
on such loans if they were in accordance with their original terms was $3.1
million, $2.3 million and $2.9 million, respectively. Loans past due 90 days or
more not on non-accrual status were $7.2 million, $5.9 million and $5.4 million
at December 31, 2002, 2001 and 2000, respectively. Following is a summary of
information pertaining to loans considered to be impaired (in thousands):
At or For the Year Ended December 31 2002 2001 2000
- ------------------------------------ ------- ------ ------
Impaired loans with an allocated allowance $11,506 $8,599 $3,299
Impaired loans without an allocated allowance 1,131 1,023 1,577
------- ------ ------
TOTAL IMPAIRED LOANS $12,637 $9,622 $4,876
======= ====== ======
Allocated allowance on impaired loans 3,602 2,954 997
======= ====== ======
Average impaired loans 7,745 9,669 5,859
======= ====== ======
Income recognized on impaired loans 647 312 297
======= ====== ======
37
F.N.B. CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ALLOWANCE FOR LOAN LOSSES
Following is an analysis of changes in the allowance for loan losses (in
thousands):
Year Ended December 31 2002 2001 2000
- ---------------------- -------- -------- --------
Balance at beginning of year $ 65,059 $ 57,124 $ 52,851
Addition from acquisitions 1,389 3,400 767
Charge-offs (21,963) (29,490) (17,377)
Recoveries 4,827 2,830 2,901
-------- -------- --------
NET CHARGE-OFFS (17,136) (26,660) (14,476)
Provision for loan losses 19,094 31,195 17,982
-------- -------- --------
Balance at end of year $ 68,406 $ 65,059 $ 57,124
======== ======== ========
PREMISES AND EQUIPMENT
Following is a summary of premises and equipment (in thousands):
December 31 2002 2001
- ----------- --------- ---------
Land $ 29,730 $ 27,226
Premises 144,757 137,548
Equipment 126,819 112,960
--------- ---------
301,306 277,734
Accumulated depreciation (137,597) (128,216)
--------- ---------
$ 163,709 $ 149,518
========= =========
Depreciation expense was $16.9 million for 2002, $14.8 million for 2001 and
$15.1 million for 2000.
The Corporation has operating leases extending to 2087 for certain land,
office locations and equipment. Leases that expire are generally expected to be
renewed or replaced by other leases. Rental expense was $7.9 million for 2002,
$7.2 million for 2001 and $7.0 million for 2000. Total minimum rental
commitments under such leases were $34.0 million at December 31, 2002. Following
is a summary of future minimum lease payments for years following December 31,
2002 (in thousands):
2003 ........... $ 3,367
2004 ........... 2,623
2005 ........... 2,116
2006 ........... 1,468
2007 ........... 1,128
Later year ..... 23,332
GOODWILL
Upon adoption of FAS 142 on January 1, 2002, the Corporation ceased
amortizing its goodwill, which decreased non-interest expense and increased net
income in 2002 as compared to 2001 and 2000. Rather than amortizing goodwill,
the Corporation is required to test goodwill at least annually for impairment.
The Corporation completed its impairment testing and concluded that goodwill is
not impaired.
38
F.N.B. CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table shows the pro forma effects of applying the
non-amortization provisions of FAS 142 (in thousands, except per share data):
Year Ended December 31 2002 2001 2000
- ---------------------- ---------- ---------- ----------
Net income $ 63,335 $ 52,985 $ 61,908
Goodwill amortization, net of tax 2,353 1,815
---------- ---------- ----------
Pro forma net income $ 63,335 $ 55,338 $ 63,723
========== ========== ==========
BASIC EARNINGS PER COMMON SHARE:
Net income $ 1.37 $ 1.19 $ 1.38
Goodwill amortization, net of tax .05 .04
---------- ---------- ----------
Pro forma net income $ 1.37 $ 1.24 $ 1.42
========== ========== ==========
DILUTED EARNINGS PER COMMON SHARE:
Net income $ 1.35 $ 1.17 $ 1.36
Goodwill amortization, net of tax .05 .04
---------- ---------- ----------
Pro forma net income $ 1.35 $ 1.22 $ 1.40
========== ========== ==========
The following table shows a summary of goodwill by line of business (in
thousands):
COMMUNITY INSURANCE FINANCE
BANKS AGENCIES COMPANY TOTAL
--------- --------- -------- -------
Goodwill at beginning
of year $26,688 $11,982 $ 1,809 $40,479
Goodwill acquired 46,956 990 47,946
------- ------- ------- -------
Goodwill at end of
year $73,644 $12,972 $ 1,809 $88,425
======= ======= ======= =======
OTHER INTANGIBLE ASSETS
The following table shows a summary of core deposit intangibles, customer
and renewal lists, and other intangible assets (in thousands):
CORE DEPOSIT CUSTOMER AND OTHER INTANGIBLE TOTAL FINITE-
INTANGIBLES RENEWAL LISTS ASSETS LIVED INTANGIBLES
----------- ------------- ------ -----------------
Gross carrying amount $ 28,987 $ 2,571 $ 539 $ 32,097
Accumulated amortization (9,686) (449) (104) (10,239)
-------- ------- ----- --------
Net December 31, 2002 $ 19,301 $ 2,122 $ 435 $ 21,858
======== ======= ===== ========
Gross carrying amount $ 20,900 $ 2,776 $ 276 $ 23,952
Accumulated amortization (7,288) (575) (82) (7,945)
-------- ------- ----- --------
Net December 31, 2001 $ 13,612 $ 2,201 $ 194 $ 16,007
======== ======= ===== ========
Amortization expense on finite-lived intangible assets totaled $3.1
million, $1.2 million and $1.3 million for 2002, 2001 and 2000, respectively.
Amortization expense on finite-lived intangible assets is expected to total $3.3
million, $3.2 million, $3.0 million, $2.9 million and $2.8 million in 2003,
2004, 2005, 2006 and 2007, respectively. Core deposit intangibles are being
amortized primarily over 10 years. Customer and renewal lists and other
intangible assets are being amortized over their remaining useful lives which
range from one to ten years.
39
F.N.B. CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DEPOSITS
Following is a summary of deposits (in thousands):
December 31 2002 2001
- ----------- --------- ---------
Non-interest bearing $ 924,090 $ 798,960
Savings and NOW 2,312,119 1,980,939
Certificates of deposit and other time deposits 2,189,948 2,319,177
--------- ---------
$5,426,157 $5,099,076
========== ==========
Time deposits of $100,000 or more were $529.7 million and $563.8 million at
December 31, 2002 and 2001, respectively. Following is a summary of these time
deposits by remaining maturity at December 31, 2002 (in thousands):
CERTIFICATES OTHER TIME
OF DEPOSIT DEPOSITS TOTAL
------------ ----------- --------
Three months or less $ 96,675 $ 2,865 $ 99,540
Three to six months 90,095 1,349 91,444
Six to twelve months 110,471 3,548 114,019
Over twelve months 198,245 26,429 224,674
-------- -------- --------
$495,486 $ 34,191 $529,677
======== ======== ========
Following is a summary of the scheduled maturities of certificates of
deposit and other time deposits for each of the five years following December
31, 2002 (in thousands):
2003 .........................$1,169,033
2004 ......................... 468,894
2005 ......................... 412,580
2006 ......................... 28,027
2007 ......................... 107,879
Later years .................. 3,535
SHORT-TERM BORROWINGS
Following is a summary of short-term borrowings (in thousands):
December 31 2002 2001
- ------------ -------- --------
Securities sold under
repurchase agreements .......... $274,266 $232,952
Federal funds purchased ........ 84,865 6,865
Federal Home Loan Bank advances 25,354
Other short-term borrowings .... 540 34,101
Subordinated notes ............. 130,755 101,836
-------- --------
$515,780 $375,754
======== ========
Credit facilities amounting to $66.0 million at December 31, 2002 were
maintained with various banks with rates which are at or below prime rate. The
facilities and their terms are periodically reviewed by the banks and are
generally subject to withdrawal at their discretion. No credit facilities were
used at December 31, 2002.
LONG-TERM DEBT
Following is a summary of long-term debt (in thousands):
December 31 2002 2001
- ----------- -------- --------
Federal Home Loan Bank advances ......... $420,001 $303,743
Other long-term debt .................... 973 1,431
Subordinated notes ...................... 29,673 37,250
-------- --------
$450,647 $342,424
======== ========
The Corporation's banking subsidiaries have available credit with the
Federal Home Loan Bank of $1.5 billion, of which $420.0 million was used as of
December 31, 2002. These advances are secured by residential real estate loans
and Federal Home Loan Bank Stock and are scheduled to mature in various amounts
periodically through the year 2012. Interest rates paid on these advances range
from 2.43% to 7.19% in 2002 and 5.46% to 7.19% in 2001.
40
F.N.B. CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Subordinated notes are unsecured and subordinated to other indebtedness of
the Corporation. The long-term subordinated notes are scheduled to mature in
various amounts periodically through the year 2012. At December 31, 2002, all of
the long-term subordinated debt is redeemable by the holders prior to maturity
at a discount equal to three months of interest. The Corporation may require the
holder to give 30 days prior written notice. No sinking fund is required and
none has been established to retire the debt. The weighted average interest rate
on long-term subordinated debt was 5.81% at December 31, 2002 and 7.24% at
December 31, 2001.
Scheduled annual maturities for all of the long-term debt for each of the
five years following December 31, 2002 are as follows (in thousands):
2003 .......................... $33,745
2004 .......................... 16,072
2005 .......................... 28,225
2006 .......................... 3,261
2007 .......................... 28,225
Later years ................... 341,119
COMMITMENTS, CREDIT RISK AND CONTINGENCIES
The Corporation has commitments to extend credit and standby letters of
credit which involve certain elements of credit risk in excess of the amount
stated in the consolidated balance sheet. The Corporation's exposure to credit
loss in the event of non-performance by the customer is represented by the
contractual amount of those instruments. Consistent credit policies are used by
the Corporation for both on- and off-balance sheet items.
Following is a summary of off-balance sheet credit risk information (in
thousands):
December 31 2002 2001
- ----------- -------- --------
Commitments to extend credit ............ $948,814 $877,210
Standby letters of credit ............... 67,580 57,520
At December 31, 2002, funding of approximately 65% of the commitments to
extend credit is dependent on the financial condition of the customer. The
Corporation has the ability to withdraw such commitments at its discretion.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. Based on management's credit evaluation of
the customer, collateral may be deemed necessary. Collateral requirements vary
and may include accounts receivable, inventory, property, plant and equipment
and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the
Corporation which may require payment at a future date. The credit risk involved
in issuing letters of credit is essentially the same as that involved in
extending loans to customers.
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 December 31, 2002, the Corporation has settled all of these asserted claims
at an aggregate cost to the Corporation of $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 incurred. Management, after consultation with
outside legal counsel, does not at the present time anticipate that the ultimate
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 operations in any future reporting period.
41
F.N.B. CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
STOCKHOLDERS' EQUITY
Series A - Cumulative Convertible Preferred Stock (Series A Preferred) was
issued in 1985. Holders of Series A Preferred are entitled to 6.9 votes for each
share held. The holders do not have cumulative voting rights in the election of
directors. Dividends are cumulative from the date of issue and are payable at
$.42 per share each quarter. Series A Preferred is convertible at the option of
the holder into shares of the Corporation's common stock based on a value of
$25.00 at time of conversion. The Corporation has the right to require the
conversion of the balance of all outstanding shares at the conversion rate. At
December 31, 2002, 17,130 shares of common stock were reserved by the
Corporation for the conversion of the remaining 19,174 outstanding shares.
Series B - Cumulative Convertible Preferred Stock (Series B Preferred) was
issued in 1992. Holders of Series B Preferred have no voting rights. Dividends
are cumulative from the date of issue and are payable at $.46875 per share each
quarter. Series B Preferred has a stated value of $25.00 per share and is
convertible at the option of the holder at any time into shares of the
Corporation's common stock at a value of $9.12 per share. The Corporation has
the right to require the redemption of the balance of all outstanding shares at
the conversion rate. During 2002, 29,008 shares of Series B Preferred were
converted to 50,837 shares of common stock. At December 31, 2002, 270,939 shares
of common stock were reserved by the Corporation for the conversion of the
remaining 98,851 outstanding shares.
COMPREHENSIVE INCOME
The components of comprehensive income, net of related tax, are as follows
(in thousands):
Year Ended December 31 2002 2001 2000
- ---------------------- -------- -------- --------
Net income $ 63,335 $ 52,985 $ 61,908
Other comprehensive income:
Unrealized gains on securities:
Arising during the period, net of tax expense
of $5,561, $5,080 and $9,686 10,327 9,434 17,957
Less: reclassification adjustment for gains included in
net income previously reflected as an unrealized gain,
net of tax benefit of $857, $642 and $112 (1,592) (1,192) (207)
Minimum pension liability adjustment,
net of tax (benefit) expense of $(670), $0 and $16 (1,245) 30
-------- -------- --------
Other comprehensive income 7,490 8,242 17,780
-------- -------- --------
Comprehensive income $ 70,825 $ 61,227 $ 79,688
======== ======== ========
STOCK INCENTIVE PLANS
The Corporation has available up to 1,166,472 shares of common stock to be
issued under the restricted stock and incentive bonus plans to key employees of
the Corporation. All shares of stock awarded under these plans vest in equal
installments over a five year period on each anniversary of the date of grant.
During 2002, the Corporation granted 14,694 shares of stock under these plans.
The weighted average fair value of the restricted shares issued was $26.90.
The Corporation has available up to 3,008,792 shares of common stock to be
issued under both incentive and non-qualified stock option plans to key
employees of the Corporation. The options vest in equal installments over
periods ranging from three to ten years. The options are granted at a price
equal to the fair market value at the date of the grant and are exercisable
within ten years from the date of the grant. Because the exercise price of the
Corporation's stock options equals the market price of the underlying stock on
the date of grant, no compensation expense is recognized in accordance with
Accounting Principles Board Opinion No. 25.
42
F.N.B. CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In accordance with FAS 123, Accounting for Stock-Based Compensation, 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 the significant assumptions used in the Black-Scholes option pricing model
(dollars in thousands, except per share data):
Year Ended December 31 2002 2001 2000
- ---------------------- -------- ------- -------
Net income $63,335 $52,985 $61,908
Pro forma net income 61,400 50,564 59,884
Earnings per share:
Basic $ 1.37 $ 1.19 $ 1.38
------- ------- -------
Basic pro forma $ 1.33 $ 1.14 $ 1.33
------- ------- -------
Diluted $ 1.35 $ 1.17 $ 1.36
------- ------- -------
Diluted pro forma $ 1.30 $ 1.11 $ 1.31
------- ------- -------
Assumptions:
Risk-free interest rate 3.92% 5.25% 6.79%
Dividend yield 3.20% 2.84% 3.37%
Expected stock price volatility .17% .26% .23%
Expected life (years) 5.00 5.00 5.00
Fair value of options granted $ 4.56 $ 5.35 $ 3.64
======= ======= =======
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period of five years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferrable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Corporation's employee stock options have
characteristics significantly different from those of traded options, and
changes in the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of the Corporation's
employee stock options.
Activity in the Option Plan during the past three years was as follows:
WEIGHTED
AVERAGE PRICE
2002 PER SHARE 2001 2000
---------- -------------- ---------- ----------
Options outstanding at beginning of year 3,237,984 $19.79 3,014,089 2,372,552
Granted during the year 653,455 25.74 696,466 855,151
Exercised during the year (587,891) 19.18 (266,224) (110,322)
Forfeited during the year (44,098) 23.07 (206,347) (103,292)
---------- ---------- ----------
Options outstanding at end of year 3,259,450 21.03 3,237,984 3,014,089
========== ====== ========== ==========
The following table summarizes information about the stock options
outstanding at December 31, 2002:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------ -------------------------------------
RANGE OF WEIGHTED AVERAGE WEIGHTED WEIGHTED
EXERCISE OPTIONS REMAINING AVERAGE OPTIONS AVERAGE
PRICES OUTSTANDING CONTRACTUAL YEARS EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- -------------- ----------- ----------------- -------------- ----------- --------------
$ 4.97 - $7.46 51,674 6.42 $ 5.69 51,674 $ 5.69
7.47 - 11.79 244,380 1.46 9.56 237,958 9.53
11.80 - 17.70 176,437 3.52 15.24 147,971 14.99
17.71 - 26.57 2,332,477 7.62 21.77 1,218,721 21.46
26.58 - 29.10 454,482 5.43 27.41 375,873 27.25
--------- ---------
3,259,450 2,032,197
========= =========
43
F.N.B. CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RETIREMENT AND OTHER POSTRETIREMENT BENEFIT PLANS
RETIREMENT PLANS
Following are reconciliations of the change in benefit obligation, change in
plan assets and funded status (in thousands):
December 31 2002 2001
- ----------- -------- --------
Benefit obligation at beginning of year $ 79,694 $ 62,156
Service cost 3,235 3,107
Interest cost 5,938 5,102
Plan amendments 440 2,945
Actuarial loss 5,343 6,310
Termination gain due to curtailment (1,706)
Special termination benefits 1,302 94
Conforming adjustment 412
Adjustment for acquisition 1,389 2,365
Benefits paid (4,418) (2,797)
-------- --------
Benefit obligation at end of year $ 91,217 $ 79,694
======== ========
December 31 2002 2001
- ----------- -------- --------
Fair value of plan assets at beginning of year $ 60,464 $ 60,214
Actual return on plan assets (5,291) (521)
Company contribution 7,136 2,414
Adjustment for acquisition 1,154
Benefits paid (4,418) (2,797)
-------- --------
Fair value of plan assets at end of year $ 57,891 $ 60,464
======== ========
December 31 2002 2001
- ----------- -------- --------
Funded status of plan $(33,326) $(19,229)
Unrecognized actuarial loss 20,463 7,355
Unrecognized prior service cost 2,575 2,208
Unrecognized net transition obligation (1,042) (1,130)
-------- --------
Accrued pension cost $(11,330) $(10,796)
======== ========
Included in the above reconciliation is the benefit obligation and fair
value of plan assets for the non-qualified benefit plans which were $22.1
million and $0, respectively, as of December 31, 2002, and $15.5 million and $0,
respectively, as of December 31, 2001.
The amounts recognized in the Corporation's consolidated financial statements
include the following (in thousands):
December 31 2002 2001
- ----------- -------- --------
Prepaid pension cost $ 5,246 $ 2,448
Accrued pension cost (16,576) (13,244)
Additional minimum liability (5,497) (3,504)
Accumulated other comprehensive income 1,915
Intangible asset 3,582 3,504
-------- --------
Net amount recognized on balance sheet $(11,330) $(10,796)
======== ========
44
F.N.B. CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The pension expense for the defined benefit plans included the following
components (in thousands):
Year Ended December 31 2002 2001 2000
- ---------------------- ------- ------- -------
Service costs $ 3,235 $ 3,107 $ 2,443
Interest cost 5,938 5,102 4,304
Expected return on plan assets (4,771) (4,917) (4,860)
Special termination benefit 1,302 94 2,270
Curtailment gain (324)
Conforming adjustment 412
Adjustment for acquisition (174)
Net amortization 476 381 (284)
------- ------- -------
Net pension expense $ 5,856 $ 4,005 $ 3,873
======= ======= =======
Assumptions as of December 31 2002 2001 2000
- ----------------------------- ------- ------- -------
Weighted average discount rate 6.75% 7.25% 7.50%
Rates of increase in compensation levels 4.00% 4.00% 4.00%
Expected long-term rate of return on plan assets 8.00% 8.26% 8.13%
======= ======= =======
At December 31, 2002, plan assets include 165,884 shares of the
Corporation's common stock, having a market value of $4.6 million. Dividends
received on these shares totaled $73,000 for 2002. During 2000, Promistar
completed an early retirement program which resulted in a special termination
charge of $2.3 million.
Certain subsidiaries of the Corporation participate in a qualified 401(k)
defined contribution plan under which eligible employees may contribute a
percentage of their salary. The Corporation matches 50 percent of an eligible
employee's contribution on the first 6 percent that the employee defers.
Employees are generally eligible to participate upon completing 90 days of
service and having attained age 21. Employer contributions become 20 percent
vested when an employee has completed one year of service, and vest at a rate of
20 percent per year thereafter. The Corporation's contribution expense amounted
to $1.1 million in 2002, $1.0 million in 2001 and $865,000 in 2000.
Certain subsidiaries of the Corporation participate in a Salary Savings
401(k) Plan, under which eligible employees may contribute a percentage of their
salary. The Corporation matches 50 percent of an eligible employee's
contribution on the first 6 percent that the employee defers, and may make a
discretionary contribution payable either in cash or the Corporation's common
stock based upon the Corporation's profitability. Employees are generally
eligible to participate upon completing 90 days of service and having attained
age 21. Employer contributions become 20 percent vested when an employee has
completed one year of service, and vest at a rate of 20 percent per year
thereafter. The Corporation recognized expense of $2.9 million in 2002, $2.2
million in 2001 and $1.4 million in 2000 related to the Salary Savings 401(k)
Plan.
OTHER POSTRETIREMENT BENEFIT PLANS
Following are reconciliations of the change in benefit obligation, change in
plan assets and funded status (in thousands):
December 31 2002 2001
- ----------- ------- -------
Benefit obligation at beginning of year $ 3,534 $ 3,331
Service cost 149 96
Interest cost 332 240
Plan participants' contributions 138 137
Plan amendments 565
Actuarial loss (gain) 2,605 (40)
Benefits paid (592) (478)
Adjustment for acquisition 19 230
Curtailment and settlement (85) 18
------- -------
Benefit obligation at end of year $ 6,665 $ 3,534
======= =======
45
F.N.B. CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31 2002 2001
----------- ------- -----
Fair value of plan assets at beginning of year $ 0 $ 0
Company contribution 454 341
Plan participants' contributions 138 137
Benefits paid (592) (478)
------- -------
Fair value of plan assets at end of year $ 0 $ 0
======= =======
December 31 2002 2001
----------- ------- -------
Funded status of plan $(6,665) $(3,534)
Unrecognized actuarial loss (gain) 2,274 (276)
Unrecognized prior service cost 510 67
Unrecognized net transition obligation 334 368
------- -------
Accrued pension cost $(3,547) $(3,375)
======= =======
Net periodic postretirement benefit cost included the following components
(in thousands):
Year Ended December 31 2002 2001 2000
---------------------- ----- ----- -----
Service cost $149 $ 96 $ 85
Interest cost 332 240 216
Curtailment and settlement 57 (14) (8)
One time charge for voluntary retirement 230 471
Special termination benefit 19 32
Net amortization 69 27 33
----- ----- -----
Net periodic postretirement benefit cost $626 $611 $797
===== ===== =====
Discount rates of 6.75%, 7.25% and 7.50% for 2002, 2001 and 2000,
respectively, were used to determine the accumulated postretirement benefit
obligation.
The assumed health care cost trend rate has a significant effect on the
amounts reported. A 9.00% annual rate of increase in the per capita costs of
covered health care benefits is assumed for 2003, gradually decreasing to 5.00%
by the year 2007 for the benefits to individuals who have not attained the age
of 65. Costs of benefits for individuals over the age of 65 are assumed to
reach 80% of the comprehensive plan cost in 2009, increasing 5.00% per year
thereafter. A one percentage point change in the assumed health care cost
trend rate would have had the following effects on 2002 service and interest
cost and the accumulated postretirement benefit obligation at December 31, 2002
(in thousands):
1% 1%
Increase Decrease
-------- --------
Effect on service and interest components of net periodic cost $ 44 $ (38)
Effect on accumulated postretirement benefit obligation 461 (410)
46
F.N.B. CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INCOME TAXES
Income tax expense consists of the following (in thousands):
Year Ended December 31 2002 2001 2000
- ---------------------- -------- -------- -------
Current income taxes:
Federal taxes $ 38,927 $19,883 $27,245
State taxes 2,049 801 508
40,976 20,684 27,753
Deferred income taxes:
Federal taxes (10,319) 1,920 130
State taxes (544) 430 (671)
-------- ------- -------
$ 30,113 $23,034 $27,212
======== ======= =======
The tax effects of temporary differences that give rise to deferred tax
assets and liabilities are presented below (in thousands):
December 31 2002 2001
- ----------- -------- --------
Deferred tax assets:
Allowance for loan losses $ 23,942 $ 22,771
Deferred compensation 3,462 4,063
Deferred benefits 5,541 4,553
Minimum pension liability 670
Loan fees 793 438
Other 1,485 3,317
TOTAL GROSS DEFERRED TAX ASSETS 35,893 35,142
Deferred tax liabilities:
Depreciation 912 (2,182)
Deferred gain on sale of subsidiary (3,555) (3,555)
Unrealized gains on securities available for sale (10,004) (5,301)
Leasing (6,129) (14,971)
Other (2,645) (1,491)
-------- --------
TOTAL GROSS DEFERRED TAX LIABILITIES (21,421) (27,500)
-------- --------
NET DEFERRED TAX LIABILITIES $ 14,472 $ 7,642
======== ========
Following is a reconciliation between tax expense using federal statutory
tax and actual effective tax:
Year Ended December 31 2002 2001 2000
- ---------------------- -------- -------- -------
Federal statutory tax rate 35.0% 35.0% 35.0%
Effect of nontaxable interest and dividend income (6.5) (6.8) (5.4)
State taxes 0.5 1.1 0.5
Goodwill 0.5 1.2 1.0
Merger related costs 2.2 0.7 0.1
Other items 0.5 (0.9) (0.7)
-------- ------- -------
Effective tax rate 32.2% 30.3% 30.5%
======== ======= =======
Income tax expense related to gains on the sale of securities was $670,000,
$640,000 and $74,000 for the years ended December 31, 2002, 2001 and 2000,
respectively.
47
F.N.B. CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EARNINGS PER SHARE
The following tables set forth the computation of basic and diluted
earnings per share (dollars in thousands, except per share data):
Year Ended December 31 2002 2001 2000
- ---------------------- -------- -------- -------
BASIC
Net income $63,335 $52,985 $61,908
Less: Preferred stock dividends declared (247) (293) (341)
---------- ---------- ----------
Net income applicable to basic earnings per share $63,088 $52,692 $61,567
========== ========== ==========
Average common shares outstanding 46,012,908 44,289,772 44,748,338
========== ========== ==========
Earnings per share $1.37 $1.19 $1.38
========== ========== ==========
DILUTED
Net income applicable to diluted earnings per share $63,335 $52,985 $61,908
========== ========== ==========
Average common shares outstanding 46,012,908 44,289,772 44,748,338
Convertible preferred stock 341,886 418,682 495,074
Net effect of dilutive stock options
based on the treasury stock method 718,991 677,041 446,877
---------- ---------- ----------
Diluted average common shares outstanding 47,073,785 45,385,495 45,690,289
========== ========== ==========
Earnings per share $1.35 $1.17 $1.36
========== ========== ==========
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 December 31, 2002, that the Corporation and
each of its banking subsidiaries meet all capital adequacy requirements to which
they are subject.
As of December 31, 2002, the Corporation and each of its banking
subsidiaries have been categorized by the various regulators as "well
capitalized" under the regulatory framework for prompt corrective action.
The Corporation and its banking subsidiaries are subject to various
regulatory capital requirements administered by the federal banking agencies.
Failure to meet minimum capital requirements can initiate certain mandatory, and
possibly additional 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 judgements by the
regulators about components, risk weightings and other factors.
48
F.N.B. CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Following are the capital ratios as of December 31, 2002 for the
Corporation and its banking subsidiaries, First National Bank of Florida and
First National Bank of Pennsylvania (dollars in thousands):
WELL CAPITALIZED MINIMUM CAPITAL
ACTUAL REQUIREMENTS REQUIREMENTS
------------------------ -------------------- --------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
TOTAL CAPITAL (TO RISK-WEIGHTED ASSETS):
F.N.B. Corporation $544,445 10.1% $538,883 10.0% $431,106 8.0%
First National Bank of Florida 204,839 10.0 204,738 10.0 163,790 8.0
First National Bank of Pennsylvania 327,852 10.9 299,228 10.0 239,382 8.0
TIER 1 CAPITAL (TO RISK-WEIGHTED ASSETS):
F.N.B. Corporation $475,096 8.8% $323,330 6.0% $215,553 4.0%
First National Bank of Florida 183,418 9.0 122,843 6.0 81,895 4.0
First National Bank of Pennsylvania 290,411 9.7 179,537 6.0 119,691 4.0
TIER 1 CAPITAL (TO AVERAGE ASSETS):
F.N.B. Corporation $475,096 6.9% $343,021 5.0% $274,416 4.0%
First National Bank of Florida 183,418 6.9 131,881 5.0 105,505 4.0
First National Bank of Pennsylvania 290,411 7.0 206,299 5.0 165,039 4.0
The Corporation's banking subsidiaries were required to maintain aggregate
cash reserves with the Federal Reserve Bank amounting to $23.7 million at
December 31, 2002. The Corporation also maintains deposits for various services
such as check clearing.
Certain limitations exist under applicable law and regulations by
regulatory agencies regarding dividend payments to a parent by its subsidiaries.
As of December 31, 2002, the subsidiaries had $59.3 million of retained earnings
available for distribution as dividends without prior regulatory approval.
Under current Federal Reserve regulations, the Corporation's banking
subsidiaries are limited in the amount they may lend to non-bank affiliates,
including the Corporation. Such loans must be secured by specified collateral.
In addition, any such loans to a single non-bank affiliate may not exceed 10% of
any banking subsidiary's capital and surplus, and the aggregate of loans to all
such affiliates may not exceed 20%. The maximum amount that may be borrowed by
the parent company under these provisions approximated $67.8 million at December
31, 2002.
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 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 primarily is involved in making personal installment loans to
individuals and approximately 15% of its remaining volume is 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. The following tables provide financial information for
these segments of the Corporation (in thousands). Other items shown in the
following table represent the parent company, other non-bank subsidiaries and
eliminations, which are necessary for purposes of reconciling to the
consolidated amounts.
49
F.N.B. CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COMMUNITY INSURANCE FINANCE ALL
At or for the Year Ended December 31, 2002 BANKS AGENCIES COMPANY OTHER CONSOLIDATED
--------- --------- ------- ----- ------------
Interest income $ 400,731 $ 192 $ 28,096 $ (2,235) $ 426,784
Interest expense 136,843 96 6,618 2,114 145,671
Provision for loan losses 13,793 5,301 19,094
Non-interest income 66,181 29,098 1,781 23,813 120,873
Non-interest expense 204,906 22,701 12,519 46,200 286,326
Intangible amortization 2,794 232 92 3,118
Income tax expense (credit) 33,326 2,415 1,962 (7,590) 30,113
Net income (loss) 72,456 3,612 3,477 (16,210) 63,335
Total assets 6,904,302 32,921 148,400 4,609 7,090,232
Goodwill 73,644 12,972 1,809 88,425
COMMUNITY INSURANCE FINANCE ALL
At or for the Year Ended December 31, 2001 BANKS AGENCIES COMPANY OTHER CONSOLIDATED
--------- --------- ------- ----- ------------
Interest income $ 423,871 $ 196 $ 28,555 $ (2,256) $ 450,366
Interest expense 191,295 232 8,711 62 200,300
Provision for loan losses 25,954 5,241 31,195
Non-interest income 61,701 26,720 1,875 9,699 99,995
Non-interest expense 190,073 20,724 12,407 14,858 238,062
Intangible amortization 3,115 775 126 769 4,785
Income tax expense (credit) 23,034 2,192 1,443 (3,635) 23,034
Net income (loss) 52,101 2,993 2,502 (4,611) 52,985
Total assets 6,277,928 29,761 153,706 26,988 6,488,383
Goodwill 26,688 11,982 1,809 40,479
COMMUNITY INSURANCE FINANCE ALL
At or for the Year Ended December 31, 2000 BANKS AGENCIES COMPANY OTHER CONSOLIDATED
--------- --------- ------- ----- ------------
Interest income $ 428,791 $ 164 $ 26,021 $ (4,266) $ 450,710
Interest expense 206,308 207 8,083 (3,217) 211,381
Provision for loan losses 13,767 4,245 (30) 17,982
Non-interest income 50,449 20,190 1,818 7,528 79,985
Non-interest expense 171,674 16,242 11,200 9,006 208,122
Intangible amortization 3,540 463 87 4,090
Income tax expense (credit) 25,910 1,214 1,585 (1,497) 27,212
Net income (loss) 58,041 2,228 2,639 (1,000) 61,908
Total assets 5,954,375 24,824 153,152 (5,559) 6,126,792
Goodwill 23,717 12,373 1,935 38,025
50
F.N.B. CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CASH FLOW INFORMATION
Following is a summary of cash flow information (in thousands):
Year Ended December 31 2002 2001 2000
- ---------------------- -------- -------- -------
Cash paid during year for:
Interest $149,799 $203,613 $198,466
Income taxes 34,982 23,908 33,150
Non-cash investing and financing activities:
Acquisition of real estate in settlement of loans $3,811 $3,198 $4,210
Loans granted in the sale of other real estate 821 3,178 465
PARENT COMPANY FINANCIAL STATEMENTS
Below is condensed financial information of F.N.B. Corporation (parent
company only). In this information, the parent's investments in subsidiaries are
stated at cost plus equity in undistributed earnings of subsidiaries since
acquisition. This information should be read in conjunction with the
consolidated financial statements.
BALANCE SHEET (in thousands)
December 31 2002 2001
- ----------- ------ ------
ASSETS
Cash $ 2,080
Short-term investments $ 8,869 7,534
Premises and equipment 5,539 3,043
Other assets 29,100 26,868
Investment in bank subsidiaries 546,890 507,098
Investment in and advance to non-bank subsidiaries 205,091 217,021
-------- --------
TOTAL ASSETS $795,489 $763,644
======== ========
LIABILITIES
Other liabilities $ 34,842 $ 52,041
Subordinated notes:
Short-term 132,378 103,357
Long-term 29,673 35,839
-------- --------
TOTAL LIABILITIES 196,893 191,237
-------- --------
STOCKHOLDERS' EQUITY 598,596 572,407
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $795,489 $763,644
======== ========
51
F.N.B. CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INCOME STATEMENT (in thousands)
Year Ended December 31 2002 2001 2000
------- ------- -------
INCOME
Dividend income from subsidiaries:
Bank $ 84,910 $64,839 $36,698
Non-bank 9,050 3,691 4,570
-------- ------- -------
93,960 68,530 41,268
-------- ------- -------
Interest income 5,500 574 511
Affiliate service fee income 12,723 23,217 25,429
Other income 1,188 903 672
-------- ------- -------
TOTAL INCOME 113,371 93,224 67,880
-------- ------- -------
EXPENSES
Interest expense 8,568 10,333 9,186
Salaries and personnel expense 13,620 19,327 20,474
Merger and consolidation expenses 18,798 3,695 55
Other expenses 8,207 13,581 10,457
-------- ------- -------
TOTAL EXPENSES 49,193 46,936 40,172
-------- ------- -------
INCOME BEFORE TAXES AND EQUITY IN
UNDISTRIBUTED INCOME OF SUBSIDIARIES 64,178 46,288 27,708
Income tax benefit 8,885 7,801 4,688
-------- ------- -------
73,063 54,089 32,396
-------- ------- -------
Equity in undistributed income of subsidiaries:
Bank (12,418) (11,168) 21,123
Non-bank 2,690 10,064 8,389
-------- ------- -------
(9,728) (1,104) 29,512
-------- ------- -------
NET INCOME $ 63,335 $52,985 $61,908
======== ======= =======
52
F.N.B. CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
STATEMENT OF CASH FLOWS (in thousands)
Year Ended December 31 2002 2001 2000
- ---------------------- ---------- --------- --------
OPERATING ACTIVITIES
Net income $ 63,335 $ 52,985 $ 61,908
Adjustments to reconcile net income to net
cash flows from operating activities:
Undistributed earnings of subsidiaries 9,728 1,104 (29,512)
Other, net 14,867 (10,847) 5,707
---------- --------- --------
Net cash flows from operating activities 87,930 43,242 38,103
---------- --------- --------
INVESTING ACTIVITIES
Net change in short-term investments (1,335) 2,875 (5,283)
Sale of securities available for sale 190
Sale (purchase) of premises and equipment (3,083) (1,965) 882
Net decrease in loans receivable 4,800 951
Advance to non-bank subsidiary (86,551)
Investment in subsidiaries 52,711 (12,165) (29,714)
---------- --------- --------
Net cash flows from investing activities (38,258) (6,265) (33,164)
---------- --------- --------
FINANCING ACTIVITIES
Net (decrease) increase in short-term borrowings (979) 5,725 57,139
Decrease in long-term debt (14,513) (15,390) (15,686)
Increase in long-term debt 8,346 6,740 19,236
Net acquisition of treasury stock (7,090) (42) (37,585)
Cash dividends paid (37,516) (32,300) (29,652)
---------- --------- --------
Net cash flows from financing activities (51,752) (35,267) (6,548)
---------- --------- --------
NET (DECREASE) INCREASE IN CASH (2,080) 1,710 (1,609)
---------- --------- --------
Cash at beginning of year 2,080 370 1,979
---------- --------- --------
CASH AT END OF YEAR $ 0 $ 2,080 $ 370
========== ========= ========
CASH PAID
Interest $ 8,558 $ 9,069 $ 8,022
========== ========= ========
53
F.N.B. CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each financial instrument:
CASH AND DUE FROM BANKS:
For these short-term instruments, the carrying amount is a reasonable
estimate of fair value.
SECURITIES:
For both securities available for sale and securities held to maturity,
fair value equals quoted market price, if available. If a quoted market price is
not available, fair value is estimated using quoted market prices for similar
securities.
LOANS:
The fair value of fixed rate loans is estimated by discounting the future
cash flows using the current rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining maturities. The
fair value of adjustable rate loans approximates the carrying amount.
DEPOSITS:
The fair value of demand deposits, savings accounts and certain money
market deposits is the amount payable on demand at the reporting date. The fair
value of fixed-maturity deposits is estimated by discounting future cash flows
using rates currently offered for deposits of similar remaining maturities.
SHORT-TERM BORROWINGS:
The carrying amounts for short-term borrowings approximate fair value for
amounts that mature in 90 days or less. The fair value of subordinated notes is
estimated by discounting future cash flows using rates currently offered.
LONG-TERM DEBT:
The fair value of long-term debt is estimated by discounting future cash
flows based on the market prices for the same or similar issues or on the
current rates offered to the Corporation for debt of the same remaining
maturities.
The estimated fair values of the Corporation's financial instruments are as
follows (in thousands):
DECEMBER 31 2002 2001
- ----------- -------------------- --------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ----- -------- -----
FINANCIAL ASSETS
Cash and short-term investments $ 259,561 $ 259,561 $ 338,753 $ 338,753
Securities available for sale 1,026,191 1,026,191 902,970 902,970
Securities held to maturity 48,992 50,517 51,368 51,770
Net loans, including loans held for sale 5,176,275 5,288,315 4,750,699 4,806,261
FINANCIAL LIABILITIES
Deposits $5,426,157 $5,465,390 $5,099,076 $5,133,729
Short-term borrowings 515,780 514,724 375,754 375,831
Long-term debt 450,647 484,235 342,424 357,482
54
F.N.B. CORPORATION AND SUBSIDIARIES
SELECTED FINANCIAL DATA
Dollars in thousands, except per share data
Year Ended December 31 2002 2001 2000 1999 1998
- ---------------------- --------- ----------- ----------- ------------ -----------
Total interest income $426,784 $450,366 $450,710 $401,914 $389,119
Total interest expense 145,671 200,300 211,381 168,770 170,657
Net interest income 281,113 250,066 239,329 233,144 218,462
Provision for loan losses 19,094 31,195 17,982 15,776 13,718
Total non-interest income 120,873 99,995 79,985 69,814 60,518
Merger expenses 42,365 8,037 6,700 6,028 5,831
Other non-interest expenses 247,079 234,810 205,512 193,936 179,105
Total non-interest expenses 289,444 242,847 212,212 199,964 184,936
Net income 63,335 52,985 61,908 61,145 54,775
Merger expenses, net of tax 30,543 5,463 4,379 4,482 4,603
AT YEAR-END
Total assets $7,090,232 $6,488,383 $6,126,792 $5,892,263 $5,407,930
Net loans 5,152,098 4,749,376 4,557,656 4,346,621 3,747,548
Deposits 5,426,157 5,099,07 4,913,754 4,607,051 4,492,568
Long-term debt 450,647 342,424 267,729 268,393 171,110
Preferred stock 1 1 1,678 2,075 2,380
Total stockholders' equity 598,596 572,407 503,422 491,436 486,988
PER COMMON SHARE(1)
Net income
Basic $ 1.37 $ 1.19 $ 1.38 $ 1.35 $ 1.23
Diluted 1.35 1.17 1.36 1.33 1.20
Merger expenses, net of tax
Basic (.66) (.12) (.10) (.10) (.10)
Diluted (.65) (.12) (.10) (.10) (.10)
Cash dividends declared .81 .68 .62 .58 .56
Book value 12.96 12.36 10.87 11.13 11.04
RATIOS
Return on average assets .93% .84% 1.03% 1.09% 1.05%
Return on average equity 10.97 9.81 12.28 12.50 11.63
Dividend payout ratio 59.03 52.81 45.36 43.81 40.13
Average equity to average assets 8.51 8.58 8.42 8.75 9.05
(1) Per share amounts have been restated for the stock dividend on
April 28, 2003 and May 6, 2002.
55
F.N.B. CORPORATION AND SUBSIDIARIES
QUARTERLY EARNINGS SUMMARY (UNAUDITED)
Dollars in thousands, except per share data
QUARTER ENDED 2002 MAR. 31 JUNE 30 SEPT. 30 DEC. 31
- ------------------ ------- ------- -------- -------
Net interest income $ 67,505 $69,196 $72,004 $72,408
Provision for loan losses 4,191 4,502 4,835 5,566
Gain on sales of securities 175 465 1,001 274
Total non-interest income 27,944 30,063 30,087 32,779
Total non-interest expenses 102,230 59,981 62,239 64,994
Net income (8,883) 23,949 24,131 24,138
Merger expenses, net of tax 30,212 331
PER COMMON SHARE(1)
Earnings
Basic $(.19) $.50 $.53 $.53
Diluted (.19) .50 .52 .52
Merger expenses, net of tax
Basic (.66)
Diluted (.65)
Cash dividends declared .18 .21 .21 .21
QUARTER ENDED 2001 MAR. 31 JUNE 30 SEPT. 30 DEC. 31
- ------------------ ------- ------- -------- -------
Net interest income $58,776 $60,941 $63,389 $66,960
Provision for loan losses 4,441 3,452 4,097 19,205
Gain on sales of securities 1,109 559 90 70
Total non-interest income 23,487 24,690 25,214 26,604
Total non-interest expenses 62,001 57,359 56,077 67,410
Net income 11,231 16,899 19,390 5,465
Merger expenses, net of tax 2,341 2,231 853 38
PER COMMON SHARE(1)
Earnings
Basic $.26 $.39 $.43 $.11
Diluted .26 .38 .42 .11
Merger expenses, net of tax
Basic (.05) (.05) (.02)
Diluted (.05) (.05) (.02)
Cash dividends declared .16 .16 .18 .18
(1) Per share amounts have been restated for the stock dividend on
April 28, 2003 and May 6, 2002.
56
F.N.B. CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2002
Net income was $63.3 million for 2002 compared to net income of $53.0
million reported in 2001. Basic earnings per share were $1.37 and $1.19 for 2002
and 2001, while diluted earnings per share were $1.35 and $1.17, respectively,
for those same periods.
Full-year 2002 and 2001 diluted earnings were reduced by $0.65 and $0.12
per share, respectively, due to pre-tax merger expenses of $42.4 million and
$8.0 million, respectively.
Net interest income, on a fully taxable equivalent basis, increased by
11.8% as net average interest earning assets increased by $18.4 million. These
factors are further detailed in the discussion which follows.
Common comparative ratios for results of operations include the return on
average assets and the return on average equity. The Corporation's return on
average assets was .93% for 2002 compared to .84% for 2001, while the
Corporation's return on average equity was 10.97% for 2002 and 9.81% for 2001.
NET INTEREST INCOME
Net interest income, the Corporation's primary source of earnings, is the
amount by which interest and fees generated by earning assets, primarily loans
and securities, exceed interest expense on deposits and borrowed funds. Net
interest income, on a fully taxable equivalent basis, totaled $286.8 million in
2002 versus $256.6 million in 2001. Net interest income consisted of interest
income of $432.4 million and interest expense of $145.7 million in 2002,
compared to $456.9 million and $200.3 million for each, respectively, in 2001.
The Corporation's net interest margin increased 26 basis points to 4.70% for
2002.
57
F.N.B. CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION
The following table provides information regarding the average balances and
yields and rates on interest earning assets and interest bearing liabilities
(dollars in thousands):
Year Ended December 31 2002 2001 2000
- ---------------------- --------------------------- ---------------------------- ----------------------------
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
------- -------- ------ ------- -------- ------ ------- -------- ------
ASSETS
Interest earning assets:
Interest bearing deposits with banks $ 5,027 $ 86 1.71% $ 6,349 $ 195 3.07% $ 4,525 $ 306 6.76%
Federal funds sold 86,993 1,495 1.72 131,818 5,279 4.00 53,439 3,352 6.27
Taxable investment securities (1) 758,399 42,263 5.57 785,782 48,116 6.12 740,271 47,298 6.39
Non-taxable investment securities 192,161 12,395 6.45 174,062 10,954 6.29 160,152 10,978 6.85
Loans (2)(3) 5,060,067 376,201 7.43 4,676,382 392,332 8.39 4,559,160 394,897 8.66
---------- -------- ---------- -------- ---------- --------
TOTAL INTEREST EARNING ASSETS 6,102,647 432,440 7.09 5,774,393 456,876 7.91 5,517,547 456,831 8.28
---------- -------- ---------- -------- ---------- --------
Cash and due from banks 195,992 179,183 176,074
Allowance for loan losses (68,513) (57,795) (55,590)
Premises and equipment 159,408 142,157 141,475
Other assets 398,190 256,716 208,262
---------- ---------- ----------
$6,787,724 $6,294,654 $5,987,768
========== ========== ==========
LIABILITIES
Interest bearing liabilities:
Deposits:
Interest bearing demand $1,048,780 8,887 .85 $ 831,959 14,292 1.72 $ 989,461 19,023 1.92
Savings 1,108,463 16,556 1.49 1,054,017 22,590 2.14 812,960 27,048 3.33
Other time 2,275,603 88,660 3.90 2,354,961 130,226 5.53 2,263,106 127,954 5.65
Short-term borrowings 407,407 10,879 2.67 364,420 15,026 4.12 365,301 21,072 5.77
Long-term debt 385,451 20,689 5.37 310,498 18,166 5.85 275,817 16,284 5.90
--------- -------- ---------- -------- ---------- --------
TOTAL INTEREST BEARING LIABILITIES 5,225,704 145,671 2.79 4,915,855 200,300 4.07 4,706,645 211,381 4.49
--------- -------- ---------- -------- ---------- --------
Non-interest bearing demand deposits 878,020 741,298 689,385
Other liabilities 106,427 97,306 87,479
---------- ---------- ----------
6,210,151 5,754,459 5,483,509
---------- ---------- ----------
STOCKHOLDERS' EQUITY 577,573 540,195 504,259
---------- ---------- ----------
$6,787,724 $6,294,654 $5,987,768
========== ========== ==========
Excess of interest earning assets
over interest bearing liabilities $ 876,943 $ 858,538 $ 810,902
========== ========== ==========
Net interest income $286,769 $256,576 $245,450
======== ======== =========
Net interest spread 4.30% 3.84% 3.79%
==== ==== ====
Net interest margin (4) 4.70% 4.44% 4.45%
==== ==== ====
(1) The average balances and yields earned on securities are based on
historical cost.
(2) The amounts are reflected on a fully taxable equivalent basis using the
federal statutory tax rate of 35%, adjusted for certain federal tax
preferences.
(3) Average balances include 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.
(4) Net interest margin is calculated by dividing the difference between total
interest earned and total interest paid by total interest earning assets.
58
F.N.B. CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION
During 2002, interest rates declined to the lowest point in recent history
as the Federal Reserve Bank continued to reduce its federal funds rate in an
attempt to revive the nation's sluggish economy. This monetary policy
significantly influenced the Corporation's asset and liability management.
Despite the declining interest rate environment, the Corporation's net interest
margin increased 26 basis points as the yield on interest earning assets
decreased by 82 basis points and the rate paid on interest bearing liabilities
decreased by 128 basis points. Although the current year margin has increased,
without future increases in rates by the Federal Reserve Bank the Corporation
will begin to experience future margin compression. The impact of future rate
changes on the Corporation's net interest income is discussed further within the
"Liquidity and Interest Rate Sensitivity" section.
Interest income on loans, on a fully taxable equivalent basis, decreased
4.1% from $392.3 million in 2001 to $376.2 million in 2002. This decrease
occurred despite favorable loan volumes as average loans increased by $383.7
million.
Interest expense on deposits decreased $53.0 million or 31.7% in 2002 while
average interest bearing deposits increased by $191.9 million. The average
balance in interest bearing demand and savings deposits increased $216.8 million
and $54.4 million, respectively, while time deposits decreased $79.4 million
during 2002. The Corporation continued to successfully generate non-interest
bearing deposits as such deposits increased by $136.7 million or 18.4% in 2002.
Interest expense on short-term borrowings decreased $4.1 million and the
interest rate paid decreased by 145 basis points in 2002. Interest expense on
long-term debt increased $2.5 million in 2002 due to a $75.0 million increase in
average long-term debt. The increase in long-term debt is a result of the
Corporation's use of low cost Federal Home Loan Bank (FHLB) advances to fund the
purchase of certain investment securities and mortgage loans. The interest rates
on these advances ranged from 2.43% to 3.46%.
The following table sets forth certain information regarding changes in net
interest income attributable to changes in the volumes of interest earning
assets and interest bearing liabilities and changes in the rates for the periods
indicated (in thousands):
2002 2001
Year Ended December 31 VOLUME RATE NET VOLUME RATE NET
- ----------------------- ------ ---- --- ------ ---- ---
INTEREST INCOME
Interest bearing deposits with banks $ (35) $ (74) $ (109) $ 384 $ (495) $ (111)
Federal funds sold (1,414) (2,370) (3,784) 2,170 (243) 1,927
Securities (479) (3,933) (4,412) 118 676 794
Loans 40,881 (57,012) (16,131) 3,380 (5,945) (2,565)
-------- -------- -------- -------- -------- --------
38,953 (63,389) (24,436) 6,052 (6,007) 45
-------- -------- -------- -------- -------- --------
INTEREST EXPENSE
Deposits:
Interest bearing demand 5,745 (11,150) (5,405) 12,427 (17,158) (4,731)
Savings 1,236 (7,270) (6,034) 373 (4,831) (4,458)
Other time (4,265) (37,301) (41,566) 13,964 (11,692) 2,272
Short-term borrowings 2,091 (6,238) (4,147) (880) (5,166) (6,046)
Long-term debt 3,822 (1,299) 2,523 1,767 115 1,882
-------- -------- -------- -------- -------- --------
8,629 (63,258) (54,629) 27,651 (38,732) (11,081)
-------- -------- -------- -------- -------- --------
NET CHANGE $30,324 $ (131) $ 30,193 $(21,599) $ 32,725 $ 11,126
======== ======== ======== ======== ======== ========
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.
CRITICAL ACCOUNTING POLICIES
The Corporation's consolidated financial statements are prepared in
accordance with accounting principles generally accepted in the United States.
Application of these principles requires management to make estimates,
assumptions, and judgements that affect the amounts reported in the financial
statements and accompanying notes. These estimates, assumptions, and judgements
are based on information available as of the date of the financial statements;
accordingly, as this information changes the financial statements could reflect
different estimates, assumptions, and
59
F.N.B. CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION
judgements. Certain policies inherently have a greater reliance on the use of
estimates, assumptions, and judgements and as such have a greater possibility of
producing results that could be materially different than originally reported.
The most significant accounting policies followed by the Corporation are
presented in the Notes to Consolidated Financial Statements. These policies,
along with the disclosures presented in the Notes to Consolidated Financial
Statements provide information on how significant assets and liabilities are
valued in the financial statements and how those values are determined. Based on
the valuation techniques used and the sensitivity of financial statement amounts
to the methods, assumptions, and estimates underlying those amounts, management
has identified the following accounting areas that require the most subjective
or complex judgements, and as such could be most subject to revision as new
information becomes available.
The allowance for loan losses represents management's estimate of probable
credit losses inherent in the loan portfolio. Determining the amount of the
allowance for loan losses is considered a critical accounting estimate because
it requires significant judgement and the use of estimates related to the amount
and timing of expected future cash flows on impaired loans, estimated losses on
pools of homogeneous loans based on historical loss experience, and
consideration of current economic trends and conditions, all of which may be
susceptible to significant change.
The loan portfolio represents the largest asset type on the consolidated
balance sheet. Leases are carried at the aggregate of the lease payments and the
estimated residual value of the leased property, less unearned income.
Loans are classified as held for sale based on management's intent to sell
them. At the date a loan is determined to be sold, the loan is recorded at the
lower of cost or market. Any subsequent adjustment as a result of the lower of
cost or market analysis is recognized as a valuation adjustment with changes
included in non-interest income. These market value assumptions include but are
not limited to the timing of a sale, the market conditions for the particular
credit and overall investor demand for these assets. Changes in market
condition, interest rate environment, and actual liquidation experience may
result in additional valuation adjustments that could adversely impact earnings
in future periods.
Goodwill arising from business acquisitions represents the value
attributable to unidentifiable intangible elements in the business acquired. The
majority of the Corporation's goodwill relates to value inherent in its banking
and insurance businesses. The value of this goodwill is dependent upon the
Corporation's ability to provide quality, cost effective services in the face of
competition. As such, goodwill value is supported ultimately by revenue which is
driven by the volume of business transacted and the market value of the assets
under administration. A decline in earnings as a result of a lack of growth or
the Corporation's inability to deliver cost effective services over sustained
periods can lead to impairment of goodwill which could result in additional
expense and adversely impact earnings in future periods.
NON-INTEREST INCOME
Total non-interest income increased 20.9% from $100.0 million in 2001 to
$120.9 million in 2002. Exclusive of gains on sale of securities, non-interest
income increased by 21.2%. This increase was primarily attributable to the
Corporation's continued transformation to a diversified financial services
company. The Corporation has dedicated significant resources to expanding
traditional banking services and generating insurance commissions and fees,
securities commissions and fees, and trust fees.
Insurance commissions and fees increased 8.4% from $31.5 million in 2001 to
$34.2 million in 2002. Service charges on deposit accounts increased 30.1%
during 2002. Income from wealth management services increased $3.2 million or
25.4% to $16.0 million during 2002 compared to $12.7 million in 2001. These
higher levels of fee income are attributable to growth in insurance, expanded
banking services and the Corporation's continued focus on providing a wide array
of wealth management services, such as annuities, mutual funds and trust
services. The Corporation's insurance commissions from workmen's compensation,
provided specifically to employee leasing companies, have declined and are not
expected to return to historical levels as insurance carriers have discontinued
providing coverage to this market segment. During 2002, the Corporation
recognized insurance commissions totaling $2.8 million for this line of
business. Other non-interest income increased $4.2 million. This included a gain
of $1.8 million on the exchange of a portfolio investment resulting from a
business combination and income on an additional investment of $57.6 million in
Bank Owned Life Insurance.
NON-INTEREST EXPENSE
Total non-interest expense increased from $242.8 million in 2001 to $289.4
million in 2002. During 2002, the Corporation recorded merger costs associated
with the
60
F.N.B. CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION
Promistar Financial Corporation and Central Bank Shares mergers of $41.4 million
and $413,000, respectively. These expenses were primarily involuntary separation
costs associated with the terminated employees, early retirement and other
employment related expenses, professional fees and data processing conversion
charges. In addition, the Corporation recognized $510,000 in costs relating to
the consolidation of Metropolitan National Bank into First National Bank of
Pennsylvania.
Salary and employee benefits increased 11.7% to $135.2 million in 2002.
This increase is due to increased pension costs and the acquisitions of Central
Bank Shares and First National Bank of Herminie, a bank acquired by Promistar
Financial Corporation in August of 2001. Other non-interest expenses includes a
pre-payment penalty of $1.6 million incurred by the Corporation in connection
with the early retirement of $15.0 million of high-cost debt with the FHLB.
INCOME TAXES
The Corporation's income tax expense was $30.1 million for 2002 compared to
$23.0 million for 2001. The 2002 effective tax rate of 32.2% was lower than the
35.0% federal statutory tax rate due to the tax benefits resulting from
tax-exempt instruments and excludable dividend income. Additional information
relating to income taxes is furnished in the Notes to Consolidated Financial
Statements.
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. Liquidity is centrally managed on
a daily basis by treasury personnel. In addition, the Corporate Asset/Liability
Committee (ALCO), which includes members of executive management, reviews
liquidity on a periodic basis and approves significant changes in strategies
which affect balance sheet or cash flow positions. The Board of Directors has
established an Asset/Liability Policy in order to achieve and maintain earnings
performance consistent with long-term goals while maintaining acceptable levels
of interest rate risk, a "well-capitalized" balance sheet and adequate levels of
liquidity. This policy designates the ALCO as the body responsible for meeting
this objective.
Liquidity sources from assets include payments from loans and investments
as well as the ability to securitize or sell loans and investment securities.
Liquidity sources from liabilities are generated 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 from the FHLB. The FHLB advances
are a competitively priced and reliable source of funds. The Corporation has
made limited use of FHLB advances and has a large reserve available for
contingency funding purposes. As of December 31, 2002, outstanding advances were
$445.4 million, or 6.3% of total assets while FHLB availability was $1.5
billion, or 21.2% of total assets.
Core deposits grew $456.3 million during 2002 providing the primary source
of financing for the Corporation's lending activities, including origination of
mortgage loans held for sale in the secondary market. The Corporation continued
to expand its activities in originating mortgage loans for resale in the
secondary market rather than keeping these loans in portfolio. Mortgage loan
origination volumes increased due to the decline in mortgage rates during 2002.
Originations of mortgage loans totaled $74.4 million for 2002 as compared to
$16.0 million for 2001. The proceeds from the sale of mortgage loans were used
to fund the growth in mortgage loan originations. During 2002, the Corporation
utilized low cost FHLB advances to finance the purchase of certain investment
securities to replace securities which were sold or matured during the year.
The Corporation has repurchased shares of it common stock for re-issuance
under various employee benefit plans and the Corporation's dividend
reinvestment plan since 1991. In addition, the Corporation has repurchased
shares for specific re-issuance in connection with certain business
combinations accounted for as purchase transactions. During 2002, the
Corporation purchased treasury shares totaling $30.3 million and received $23.2
million upon re-issuance. In 2001 and 2000, the Corporation purchased treasury
shares totaling $12.1 million and $51.7 million and received $12.6 million and
$14.1 million, respectively, as a result of re-issuances.
On March 31, 2003, the Corporation completed its business combination with
Charter Banking Corp. (Charter). The $150.2 million cash transaction was funded
through the issuance of $125.0 million of trust preferred securities and $25.2
million from the Corporation's existing lines of credit with several major
domestic banks.
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 $66.0 million, which were unused as of December 31,
2002. The Corporation also issues subordinated debt on a regular basis and has
access to the Federal Reserve Bank as well as access to the capital markets.
The ALCO regularly monitors various liquidity ratios and forecasts of cash
position. Management believes the Corporation has sufficient liquidity available
to meet its normal operating and contingency funding cash needs.
The financial performance of the Corporation is at risk from interest rate
fluctuations. This interest rate risk arises due to differences between the
amount of interest earning assets and interest bearing liabilities subject to
repricing over a period of time, the difference between the change in various
interest rates and the embedded options in certain financial instruments. The
Corporation utilizes an asset/liability model to support its balance sheet
strategies. The Corporation uses gap analysis, net interest income simulations
and the economic value of equity to measure its interest rate risk.
The following gap analysis 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 maturing
over a one year period was 1.21 at December 31, 2002, as compared to 1.14 at
December 31, 2001. A ratio of more than one indicates a higher level of
repricing assets over repricing liabilities over the next twelve months,
assuming the current interest rate environment.
61
F.N.B. CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION
Following is the gap analysis as of December 31, 2002 (dollars in
thousands):
WITHIN 4-12 1-5 OVER
3 MONTHS MONTHS YEARS 5 YEARS TOTAL
-------- ------ ----- ------- ------
INTEREST EARNING ASSETS
Interest bearing deposits with banks $ 3,577 $ 201 $ 3,778
Federal funds sold 8,981 8,981
Securities 107,893 234,928 $ 498,293 $ 234,069 1,075,183
Loans, net of unearned income 1,672,190 1,158,071 2,128,810 285,610 5,244,681
---------- --------- ---------- ---------- ----------
1,792,641 1,393,200 2,627,103 519,679 6,332,623
Other assets 757,609 757,609
---------- --------- ---------- ---------- ----------
$1,792,641 $1,393,200 $2,627,103 $ 1,277,288 $7,090,232
========== ========== ========== =========== ==========
INTEREST BEARING LIABILITIES
Deposits:
Interest checking $ 302,384 $ 801,277 $1,103,661
Savings 369,126 839,332 1,208,458
Time deposits 491,680 $ 993,088 $ 701,587 3,593 2,189,948
Borrowings 409,207 61,754 69,097 426,369 966,427
---------- ---------- ---------- ----------- ----------
1,572,397 1,054,842 770,684 2,070,571 5,468,494
Other liabilities 1,023,142 1,023,142
Stockholders' equity 598,596 598,596
---------- ---------- ---------- ----------- ----------
$1,572,397 $1,054,842 $ 770,684 $ 3,692,309 $7,090,232
========== ========== ========== =========== ==========
PERIOD GAP $ 220,244 $ 338,358 $1,856,419 $(2,415,021)
========== ========== ========== ===========
CUMULATIVE GAP $ 220,244 $ 558,602 $2,415,021
========== ========== ==========
CUMULATIVE GAP AS A PERCENT
OF TOTAL ASSETS 3.11% 7.88% 34.06%
RATE SENSITIVE ASSETS/
RATE SENSITIVE LIABILITIES (CUMULATIVE) 1.14 1.21 1.71 1.30
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 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 pre sent value
of liabilities at a point in time. A decrease in EVE due to a specified rate
change indicates a decline in long-term earnings capacity of the balance sheet
assuming that the rate change remains in effect over the life of the current
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:
December 31 2002 2001
---- ----
Net interest income change
(12 months):
- - 100 basis points................ (3.0)% (1.6)%
+ 200 basis points................ 2.2% 0.6%
Economic value of equity:
- - 100 basis points................ (7.9)% (0.8)%
+200 basis points................. 7.5% (5.7)%
The preceding measures are indicative of the Corporation developing a more
asset-sensitive interest rate risk position during 2002 due to the general
expectation that long-term market interest rates will rise. An asset-sensitive
position means that income should increase if rates increase and decrease if
rates decline. This position is a result of the lengthening of time deposits,
the emphasis on 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 and an increase in mortgage-related assets. 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 interest rates. The disclosed measures are within
the limits set forth in the Corporation's Asset/Liability Policy.
The computation of the prospective effects of hypothetical interest rate
changes requires numerous assumptions regarding characteristics of new business
and the behavior of existing
62
F.N.B. CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION
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.
Changes in the interest rate environment can cause significant
fluctuations in the market value of mortgage loans originated for resale in the
secondary market. The Corporation began utilizing forward loan commitments on
mortgage loans in 2002 to offset the risk of decreases in the market values of
the loans as a result of increases in interest rates. At December 31, 2002, the
Corporation had $31.0 million in forward sales agreements.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2001
Net income decreased 14.4% to $53.0 million in 2001 from $61.9 million in
2000. Basic earnings per share were $1.19 and $1.38 for 2001 and 2000, while
diluted earnings per share were $1.17 and $1.36, respectively, for those same
periods. Full-year 2001 and 2000 diluted earnings were reduced by $.12 and $.10
per share, respectively, due to pre-tax merger expenses of $8.0 million and
$6.7 million, respectively.
The Corporation's return on average assets was .84% for 2001 compared to
1.03% for 2000, while the Corporation's return on average equity was 9.81% for
2001 and 12.28% for 2000.
Net interest income, on a fully taxable equivalent basis, increased by 4.5%
to $256.6 million. Net interest income consisted of interest income of $456.9
million and interest expense of $200.3 million in 2001 compared to $456.8
million and $211.4 million for each, respectively, in 2000. The Corporation's
net interest margin decreased slightly to 4.44% for 2001.
Interest income on loans, on a fully taxable equivalent basis, decreased
from $394.9 million in 2000 to $392.3 million in 2001. This decrease was
despite favorable loan volumes as average loans increased by $117.2 million.
Interest expense on deposits decreased $6.9 million or 4.0% in 2001 while
average interest bearing deposits increased $175.4 million. The average balance
in time deposits and savings deposits increased $91.8 million and $241.1
million, respectively, while the average balance in interest bearing demand
deposits decreased $157.5 million. Non-interest bearing deposits increased by
$51.9 million or 7.5% in 2001. Interest expense on short-term borrowings
decreased by $6.0 million and the interest rate paid decreased by 165 basis
points in 2001. Interest expense on long-term debt increased $1.9 million in
2001 due to a $34.7 million increase in average long-term debt.
The provision for loan losses increased 73.5% to $31.2 million in 2001.
This increase was significantly influenced by the level of net charge-offs and
provisions taken at Promistar Financial Corporation prior to its acquisition by
the Corporation.
Total non-interest income increased 25.0% from $80.0 million in 2000 to
$100.0 million in 2001. Exclusive of gains on the sale of securities,
non-interest income increased by 23.1%. Insurance commissions and fees, service
charges and trust fees increased 20.7% from $66.6 million in 2000 to $80.3
million in 2001. These higher levels of fee income are attributable to growth in
insurance, expanded banking services and the Corporation's continued focus on
providing a wide array of wealth management services, such as annuities, mutual
funds and trust services. This increase was accompanied by increases of $1.6
million in gains on the sale of securities and $3.4 million in gains on the sale
of loans.
Total non-interest expense increased from $212.2 million in 2000 to $242.8
million in 2001. During 2001, the Corporation recorded a pre-tax charge of $4.0
million, or $.06 per diluted share on an after tax basis, to cover estimated
legal expenses associated with five cases filed against one of the Corporation's
subsidiary banks. The plaintiffs allege that a third-party independent
administrator misappropriated funds from their individual retirement accounts
held by the subsidiary bank. Additionally, the Corporation recognized $4.8
million in 2001 in merger related costs. The Corporation also recognized $3.2
million in expenses relating to its charter consolidation plan. In addition,
non-interest expenses increased due to insurance agency purchases during the
second half of 2000 and first half of 2001.
Income tax expense was $23.0 million for 2001 compared to $27.2 million for
2000. The 2001 effective tax rate of 30.3% was lower than the 35.0% federal
statutory tax rate due to the tax benefits resulting from tax-exempt instruments
and excludable dividend income.
63
F.N.B. CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION
FINANCIAL CONDITION
LENDING ACTIVITY
The loan portfolio consists principally of loans to individuals and small-
and medium-sized businesses within the Corporation's primary market area of
southwest Florida, western and central Pennsylvania and northeastern Ohio.
Additionally, the portfolio contains consumer finance loans to individuals in
Pennsylvania, Ohio and Tennessee.
Following is a summary of loans (in thousands):
December 31 2002 2001 2000 1999 1998
- ----------- ---- ---- ---- ---- ----
Real estate:
Residential $1,947,529 $1,777,403 $1,706,462 $1,615,137 $1,446,479
Commercial 1,465,903 1,282,944 1,110,833 1,113,281 920,644
Construction 287,560 227,868 220,754 134,184 115,852
Installment loans to individuals 910,868 774,932 832,904 779,485 726,807
Commercial, financial and agricultural 620,489 672,639 610,194 579,724 512,880
Lease financing 63,901 128,712 204,187 254,252 132,266
Unearned income (75,746) (50,063) (70,554) (76,591) (60,917)
---------- ---------- ---------- ---------- ----------
$5,220,504 $4,814,435 $4,614,780 $4,399,472 $3,794,011
========== ========== ========== ========== ==========
The Corporation continued to experience strong loan growth as total loans
increased 8.4% to $5.2 million at December 31, 2002. The loan growth principally
occurred in the Florida markets where total loans increased 16.4% during 2002.
The Corporation was able to achieve this loan growth despite a $64.8 million or
50.4% decrease in lease financing receivables. The balance of the lease
financing receivables has been declining since the Corporation ceased to
originate automobile leases in 2000.
The Corporation's loan portfolio is well-diversified with a significant
portion of the portfolio being made up of loans secured by real estate.
Residential, commercial and construction loans secured by real estate accounted
for 69.9% of the loan portfolio. Historically, these relationships experienced
fewest loan losses as compared to any other category of loan.
As of December 31, 2002, no concentrations of loans exceeding 10% of total
loans existed which were not disclosed as a separate category of loans.
Following is a summary of the maturity distribution of certain loan
categories based on remaining scheduled repayments of principal (in thousands):
WITHIN ONE TO AFTER
December 31, 2002 ONE YEAR FIVE YEARS FIVE YEARS TOTAL
- ----------------- -------- ---------- ---------- ------
Commercial, financial and agricultural $ 96,510 $251,805 $272,174 $620,489
Real estate - construction 173,055 75,935 38,570 287,560
-------- -------- -------- --------
Total $269,565 $327,740 $310,744 $908,049
======== ======== ======== ========
The total amount of the above loans due after one year includes $481.7
million with floating or adjustable rates of interest and $156.7 million with
fixed rates of interest.
NON-PERFORMING LOANS
Non-performing loans include non-accrual loans and restructured loans.
Non-accrual loans represent loans on which interest accruals have been
discontinued. 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.
64
F.N.B. CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION
Following is a summary of non-performing loans (dollars in thousands):
December 31 2002 2001 2000 1999 1998
- ----------- ---- ---- ---- ---- ----
Non-accrual loans $22,294 $21,350 $21,478 $18,257 $18,971
Restructured loans 5,915 5,578 3,020 3,772 2,034
------- ------ ------- ------- -------
$28,209 $26,928 $24,498 $22,029 $21,005
======= ======= ======= ======= =======
Non-performing loans as a
percentage of total loans .54% .56% .53% .50% .55%
Following is a summary of the amounts of contractual interest income and
actual interest income recorded on non-accrual and restructured loans (in
thousands):
Year Ended December 31 2002 2001 2000 1999 1998
- ---------------------- ---- ---- ---- ---- ----
Gross interest income:
In accordance with their original terms $3,059 $2,294 $2,947 $2,445 $2,462
Interest income recorded during the year 1,405 1,083 964 908 1,166
Following is a summary of loans 90 days or more past due, on which interest
accruals continue (dollars in thousands):
December 31 2002 2001 2000 1999 1998
- ----------- ---- ---- ---- ---- ----
Loans 90 days or more past due $ 7,186 $ 5,993 $ 5,383 $ 5,445 $ 3,637
As a percentage of total loans .14% .12% .12% .12% .10%
ALLOWANCE FOR LOAN LOSSES
Following is a summary of changes in the allowance for loan losses (dollars
in thousands):
Year Ended December 31 2002 2001 2000 1999 1998
- ------------------------ ---- ---- ---- ---- ----
Balance at beginning of year $ 65,059 $ 57,124 $ 52,851 $ 46,463 $ 43,964
Addition due to acquisitions 1,389 3,400 767 2,813
Charge-offs:
Real estate - mortgage (955) (4,649) (2,967) (2,375) (1,965)
Installment loans to individuals (14,192) (12,685) (10,343) (8,887) (8,430)
Lease financing (3,934) (3,270) (1,867) (632) (300)
Commercial, financial and agricultural (2,882) (8,886) (2,200) (2,892) (2,788)
-------- -------- -------- -------- --------
(21,963) (29,490) (17,377) (14,786) (13,483)
Recoveries:
Real estate - mortgage 136 255 882 579 567
Installment loans to individuals 2,055 1,671 1,463 1,470 1,290
Lease financing 704 448 220 80 38
Commercial, financial and agricultural 1,932 456 336 456 369
4,827 2,830 2,901 2,585 2,264
Net charge-offs (17,136) (26,660) (14,476) (12,201) (11,219)
Provision for loan losses 19,094 31,195 17,982 15,776 13,718
-------- -------- -------- -------- --------
Balance at end of year $ 68,406 $ 65,059 $ 57,124 $ 52,851 $ 46,463
======== ======== ======== ======== ========
Net charge-offs as a percent of
average loans, net of unearned income .34% .57% .32% .30% .31%
Allowance for loan losses as a percent of
total loans, net of unearned income 1.31 1.35 1.24 1.20 1.22
Allowance for loan losses as a
percent of non-performing loans 242.50 241.60 233.18 239.92 221.20
65
F.N.B. CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION
The allowance for loan losses consists of an allocated and an unallocated
component. Management's analysis of the allocated portion 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.
The unallocated portion of the allowance is determined based on
management's assessment of historical loss on the remaining portfolio segments
in conjunction with the current status of economic conditions, loan loss trends,
delinquency and non-accrual trends, credit administration, portfolio growth,
concentrations of credit risk and other factors, including regulatory guidance.
This determination inherently involves a higher degree of uncertainty and
considers current risk factors that may not have yet occurred in the
Corporation's historical loss factors used to determine the allocated component
of the allowance, and it recognizes that knowledge of the portfolio may be
incomplete.
The provision for loan losses charged to operations is a direct result of
management's analysis of the adequacy of the allowance for loan losses which
takes into consideration factors, including qualitative factors, relevant to the
collectibility of the existing portfolio. The provision for loan losses
decreased from $31.2 million in 2001 to $19.1 million in 2002.
Charge-offs reflect the realization of losses in the portfolio that were
recognized previously through provisions for credit losses. Loans charged off in
2002 decreased $7.5 million as compared to 2001. Loans charged off in 2001
increased $12.1 million over 2000. Net charge-offs as a percent of average loans
decreased to .34% in 2002 as compared to .57% in 2001. The 2001 provision for
loan losses was significantly influenced by the level of net charge-offs taken
at Promistar Financial Corporation prior to its acquisition by the Corporation.
The weak economy in central Pennsylvania which existed in 2001 and the overall
economic climate subsequent to September 11 resulted in significant
deterioration in the credit quality of several significant commercial loans. In
addition, Promistar began to experience credit quality deterioration within the
indirect consumer auto loan portfolio as loan loss and delinquency trends
increased. As a result, Promistar charged-off $14.2 million in loans and
recorded a provision for loan losses of $18.3 million during 2001.
Following is a summary of the allocation of the allowance for loan losses
(dollars in thousands):
% OF % OF % OF % OF % OF
LOANS LOANS LOANS LOANS LOANS
IN EACH IN EACH IN EACH IN EACH IN EACH
CATEGORY CATEGORY CATEGORY CATEGORY CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL
Year Ended December 31 2002 LOANS 2001 LOANS 2000 LOANS 1999 LOANS 1998 LOANS
- ----------------------- ---- ----- ---- ----- ----- ----- ----- ----- ---- -----
Commercial, financial and
agricultural $ 14,817 12% $ 11,018 14% $ 9,437 13% $10,497 13% $10,075 13%
Real estate - construction 322 6 316 5 437 5 475 3 271 2
Real estate - mortgage 18,113 65 18,559 64 16,953 61 14,195 62 11,195 64
Installment loans to
individuals 22,226 16 16,353 15 13,225 18 12,136 18 10,402 19
Lease financing 3,209 1 5,319 2 1,093 3 847 4 812 2
Unallocated portion 9,719 13,494 15,979 14,701 13,708
-------- ---- -------- ---- ------- ---- ------- ---- ------- ----
$ 68,406 100% $ 65,059 100% $57,124 100% $52,851 100% $46,463 100%
======== ==== ======== ==== ======= ==== ======= ==== ======= ====
The Corporation strives to minimize credit losses by utilizing credit
approval standards, diversifying its loan portfolio by industry and borrower and
conducting ongoing review and management of the loan portfolio.
The Corporation has allocated the allowance according to the amount deemed
to be reasonably necessary to provide for the possibility of losses being
incurred within each of the categories of loans shown in the table above.
Management's allocation considers amounts necessary for concentrations and
changes in portfolio mix and volume. The allocation of the allowance should not
be interpreted as an indication that loan losses in future years will occur in
the same proportions or that the allocation indicates future loan loss trends.
66
F.N.B. CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION
INVESTMENT ACTIVITY
Investment activities serve to enhance overall yield on earning assets
while supporting interest rate sensitivity and liquidity positions. Securities
purchased with the intent and ability to retain until maturity are categorized
as securities held to maturity and carried at amortized cost. All other
securities are categorized as securities available for sale and are recorded at
fair market value. The relatively short average maturity of all securities
provides a source of liquidity to the Corporation and reduces the overall market
risk of the portfolio.
During 2002, securities available for sale increased by $123.2 million and
securities held to maturity decreased by $2.4 million from December 31, 2001.
The following table indicates the respective maturities and weighted average
yields of securities as of December 31, 2002 (dollars in thousands):
WEIGHTED
AMOUNT AVERAGE YIELD
------ -------------
U.S. Treasury and other U.S. Government agencies and corporations:
Maturing within one year $ 53,233 6.01%
Maturing after one year within five years 86,611 4.97
Maturing after five years within ten years 32,181 3.32
Maturing after ten years 1,909 4.35
States of the U.S. and political subdivisions:
Maturing within one year 6,468 6.91%
Maturing after one year within five years 55,494 5.92
Maturing after five years within ten years 52,142 6.39
Maturing after ten years 62,098 7.02
Other debt securities:
Maturing within one year 3,001 4.36%
Maturing after one year within five years 4,346 5.29
Maturing after five years within ten years 1,925 6.27
Maturing after ten years 40,240 7.78
----------
Mortgage-backed securities of U.S. Government agencies 621,471 5.49%
Equity securities 54,064 4.41
----------
TOTAL $1,075,183 5.60%
==========
The weighted average yields for tax exempt securities are computed on a tax
equivalent basis.
DEPOSITS AND SHORT-TERM BORROWINGS
As a commercial bank holding company, the Corporation's primary source of
funds is its deposits. Those deposits are provided by businesses and individuals
located within the markets served by the Corporation's subsidiaries.
Total deposits increased 6.4% to $5.4 billion in 2002. This increase was
due to a $331.2 million or 16.7% increase in savings and interest checking
accounts and a $125.1 million or 15.7% increase in non-interest bearing deposit
accounts. Time deposits decreased by $129.2 million or 5.6%.
Short-term borrowings, made up of repurchase agreements, federal funds
purchased, FHLB advances, subordinated notes and other short-term borrowings,
increased by $140.0 million in 2002 to $515.8 million.
Repurchase agreements are the largest component of short-term borrowings.
At December 31, 2002, repurchase agreements represented 53.2% of total
short-term borrowings.
67
F.N.B. CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION
Following is a summary of selected information on repurchase agreements
(dollars in thousands):
December 31 2002 2001 2000
- ----------- ---- ---- ----
Balance at end of year $274,266 $232,952 $184,060
Maximum month-end balance 293,446 233,953 203,736
Average balance during the year 252,004 215,765 192,787
Weighted average interest rates:
At end of year 0.92% 1.58% 5.20%
During the year 1.29% 3.09% 5.06%
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.
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 trust
preferred securities in one or more offerings up to a total dollar amount of
$200.0 million.
Capital management is a continuous process. Both the Corporation and its
banking affiliates are subject to various regulatory capital requirements
administered by the federal banking agencies. (See the "Regulatory Matters"
section in the Notes to Consolidated Financial Statements).
Stockholders' equity has increased through earnings retention by $25.8 million,
$20.7 million and $31.8 million in 2002, 2001 and 2000, respectively. Book value
per share was $12.96 at December 31, 2002 compared to $12.36 at December 31,
2001. During 2001, Promistar Financial Corporation issued 2.1 million shares
representing $39.5 million of capital in connection with its purchase of FNH
Corporation. The Corporation also issues shares, which are initially acquired
through the acquisition of treasury shares, in connection with its various
benefit plans.
INFORMATION AS TO STOCK PRICES AND DIVIDENDS
The Corporation's common stock trades on the Nasdaq Stock Market under the
symbol "FBAN." The accompanying table shows the range of the high and low bid
prices per share of the common stock as reported by Nasdaq. Also included in the
table are dividends per share paid on the outstanding common stock.
Stock prices and dividend figures have been adjusted to reflect the 5%
stock dividends declared on April 28, 2003, May 6, 2002 and April 23, 2001. As
of April 30, 2003, there were 10,917 holders of record of common stock.
Quarter Ended 2002 LOW HIGH DIVIDENDS
--- ---- ---------
March 31 ........................ $23.31 $27.49 $.18
June 30 ......................... 24.89 29.65 .21
September 30 .................... 23.53 27.76 .21
December 31 ..................... 24.64 26.35 .21
Quarter Ended 2001 LOW HIGH DIVIDENDS
--- ---- ---------
March 31......................... $18.47 $20.73 $.16
June 30.......................... 20.04 24.40 .16
September 30 .................... 21.01 25.58 .18
December 31 ..................... 21.68 25.35 .18
68
CORPORATE HEADQUARTERS
F.N.B. Center
2150 Goodlette Road N.
Naples, FL 34102
(239)262-7600
INTERNET INFORMATION
Information on F.N.B. Corporation's
financial results, acquisitions, and its
products and services is available on the
Internet by visiting our Web site at
www.fnbcorporation.com
FORM 10-K AND 10-Q AVAILABILITY
Copies of F.N.B. Corporation's Annual
Report on Form 10-K and Quarterly
Reports on 10-Q filed with the Securities &
Exchange Commission will be furnished to
any shareholder, free of charge, upon
request. Forms also are available over the
Internet at www.fnbcorporation.com
QUARTERLY REPORTS
Quarterly earnings release dates for 2003
are January 16, April 15, July 15 and
October 16. Results are released to the press
and then posted on F.N.B. Corporation's
Web site. Quarterly reports also are mailed
to shareholders on request. Shareholders
may request reports at any time.
DIVIDEND PAYMENT DATES
F.N.B. Corporation pays regular quarterly
cash dividends to shareholders in March,
June, September and December.
ANNUAL REPORT
To order additional copies of the 2002
Annual Report, please contact the F.N.B.
Corporation Corporate Communications
Department at 2150 Goodlette Road N.,
Third Floor, Naples, FL 34102. Telephone:
(239)436-1676 Fax: (239)436-1677
COMMON STOCK INFORMATION AT DECEMBER 31,2002, adjusted for 5% stock dividend
declared April 28, 2003
Shares issued 46,370,583
Shares outstanding 46,055,137
Treasury shares 315,446
Number of shareholders of record 10,609
Closing market price per share $26,21
Book value per share $12.96
Stock exchange NASDAQ
Stock symbol FBAN
DIVIDEND REINVESTMENT PLAN
F.N.B. Corporation offers a Dividend Reinvestment Plan that
allows shareholders to reinvest their F.N.B. dividends in additional
company common stock at the prevailing market price. A
prospectus and an enrollment form may be obtained upon request
by visiting our Web site at www.fnbcorporation.com., the F.N.B.
Shareholder Services Department at (888)441-4362, or by
writing to F.N.B. Shareholder Services, P.O. Box 11929,
Naples, FL 34101-1929.
INSTITUTIONAL INVESTMENT AND ANALYST INQUIRIES
Institutional investors, analysts or individuals desiring financial
information or reports may contact: John D. Waters, Senior Vice
President, Director of Investor Relations, F.N.B. Corporation,
2150 Goodlette Road N., Naples, FL 34102.
Telephone: (239)659-6894 Fax: (239)435-7658
NEWS MEDIA INQUIRIES
Media representatives and others with inquiries may contact:
Clay W. Cone, Vice President-Corporate Communications, F.N.B.
Corporation, 2150 Goodlette Road N., Naples, FL 34102.
Telephone: (239)436-1676 Fax: (239)436-1677
PRINCIPAL SUBSIDIARIES
First National Bank of Florida
First National Bank of Pennsylvania
First National Trust Company
First National Investment Services Company
F.N.B. Investment Advisors Inc.
Roger Bouchard Insurance Inc.
Regency Finance Company
Customer Service Center of F.N.B.
Relationships Built on
TRUST
[F.N.B. logo]
F.N.B. CORPORATION
F.N.B. Center
2150 Goodlette Road N.
Naples, FL 34102
www.fnbcorporation.com