EXHIBIT 99.3
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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, 2003 and
2002, and the related consolidated statements of income, stockholders' equity
and cash flows for each of the three years in the period ended December 31,
2003. These financial statements are the responsibility of management of F.N.B.
Corporation. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (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, 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, 2003 and 2002, and the consolidated results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2003 in conformity with U.S. generally accepted accounting
principles.
/s/ Ernst & Young LLP
Pittsburgh, Pennsylvania
February 24, 2004, except for Note 2, as to which the date is January 4, 2005
F.N.B. CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Dollars in thousands, except par values
DECEMBER 31,
-----------------------------
2003 2002
----------- -----------
ASSETS
Cash and due from banks $ 105,160 $ 129,443
Interest bearing deposits with banks 1,152 2,818
Securities available for sale 878,667 657,547
Securities held to maturity (fair value of $25,009 and $33,288) 24,030 32,367
Mortgage loans held for sale 1,435 24,177
Loans, net of unearned income of $31,572 and $38,620 3,259,197 3,235,208
Allowance for loan losses (46,139) (46,984)
----------- -----------
NET LOANS 3,213,058 3,188,224
Premises and equipment 79,618 88,098
Goodwill 28,710 25,747
Other assets 225,344 206,607
Assets of discontinued operations 3,751,136 2,735,204
----------- -----------
$ 8,308,310 $ 7,090,232
=========== ===========
LIABILITIES
Deposits:
Non-interest bearing $ 592,795 $ 563,173
Interest bearing 2,846,715 2,740,932
----------- -----------
TOTAL DEPOSITS 3,439,510 3,304,105
Other liabilities 58,096 64,982
Short-term borrowings 232,966 255,370
Long-term debt 584,808 400,056
Liabilities of discontinued operations 3,386,021 2,467,123
----------- -----------
TOTAL LIABILITIES 7,701,401 6,491,636
STOCKHOLDER'S EQUITY
Preferred stock - $0.01 par value
Authorized - 20,000,000 shares -- 1
Issued - 0 and 118,025 shares
Common stock - $0.01 par value
Authorized - 500,000,000 shares
Issued - 46,354,673 and 44,162,460 shares 464 442
Additional paid-in capital 586,009 516,186
Retained earnings 11,532 73,363
Accumulated other comprehensive income 10,251 17,335
Treasury stock - 40,764 and 300,425 shares at cost (1,347) (8,731)
----------- -----------
TOTAL STOCKHOLDER'S EQUITY 606,909 598,596
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 8,308,310 $ 7,090,232
=========== ===========
See accompanying Notes to Consolidated Financial Statements
2
F.N.B. CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Dollars in thousands, except per share data
DECEMBER 31,
--------------------------------------
2003 2002 2001
-------- -------- --------
INTEREST INCOME
Loans, including fees $218,839 $241,538 $257,743
Securities:
Taxable 32,842 25,191 32,761
Nontaxable 3,855 7,113 6,773
Dividends 1,461 1,461 2,126
Other 22 550 2,235
-------- -------- --------
TOTAL INTEREST INCOME 257,019 275,853 301,638
INTEREST EXPENSE
Deposits 57,710 72,978 111,096
Short-term borrowings 7,437 8,884 9,959
Long-term debt 21,843 16,510 13,929
-------- -------- --------
TOTAL INTEREST EXPENSE 86,990 98,372 134,984
-------- -------- --------
NET INTEREST INCOME 170,029 177,481 166,654
Provision for loan losses 17,155 13,624 26,727
-------- -------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 152,874 163,857 139,927
NON-INTEREST INCOME
Service charges 34,140 33,041 24,772
Insurance commissions and fees 9,139 8,714 8,105
Securities commissions and fees 4,002 4,010 1,805
Trust 7,297 7,252 7,514
Gain on sale of securities 1,949 1,943 1,823
Gain on sale of mortgage loans 2,860 1,335 1,503
Other 8,768 9,850 6,493
-------- -------- --------
TOTAL NON-INTEREST INCOME 68,155 66,145 52,015
NON-INTEREST EXPENSE
Salaries and employee benefits 87,434 74,728 72,663
Net occupancy 12,744 10,479 10,966
Equipment 15,839 14,519 13,742
Amortization of intangibles 2,172 2,120 3,471
Merger and consolidation related -- 41,952 5,323
Debt extinguishment penalty 20,737 -- --
Promotional 2,198 1,995 2,629
Insurance claims paid 2,377 2,998 2,806
Other 41,524 36,212 37,659
-------- -------- --------
TOTAL NON-INTEREST EXPENSE 185,025 185,003 149,259
-------- -------- --------
INCOME BEFORE INCOME TAXES 36,004 44,999 42,683
Income taxes 8,966 13,728 10,914
-------- -------- --------
INCOME FROM CONTINUING OPERATIONS 27,038 31,271 31,769
Earnings from discontinued operations, net of taxes
of $16,631, $16,385 and $12,120 31,751 32,064 21,216
-------- -------- --------
NET INCOME $ 58,789 $ 63,335 $ 52,985
======== ======== ========
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F.N.B. CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (CONTINUED)
Dollars in thousands, except per share data
DECEMBER 31,
-----------------------------
2003 2002 2001
----- ----- -----
NET INCOME PER COMMON SHARE
Basic:
Continuing operations $ .58 $ .68 $ .71
Discontinued operations .69 .69 .48
----- ----- -----
$1.27 $1.37 $1.19
----- ----- -----
Diluted:
Continuing operations $ .57 $ .67 $ .70
Discontinued operations .68 .68 .47
----- ----- -----
$1.25 $1.35 $1.17
----- ----- -----
See accompanying Notes to Consolidated Financial Statements
-4-
F.N.B. CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
Dollars in thousands
ACCUMULATED
OTHER
COMPRE- ADDITIONAL COMPRE-
HENSIVE PREFERRED COMMON PAID-IN RETAINED HENSIVE TREASURY
INCOME STOCK STOCK CAPITAL EARNINGS INCOME STOCK TOTAL
------ ----- ----- ---------- -------- ------ ----- -----
BALANCE AT JANUARY 1, 2001 $ 1,678 $79,812 $ 328,037 $131,292 $ 1,603 $(39,000) $503,422
Income:
Continuing operations $ 31,769 31,769 31,769
Discontinued operations 21,216 21,216 21,216
Change in other comprehensive
Income 8,242 8,242 8,242
--------
Comprehensive income $ 61,227
========
Cash dividends declared:
Preferred stock (293) (293)
Common stock $0.68 per share (32,007) (32,007)
Purchase of common stock (12,052) (12,052)
Issuance of common stock 1,198 5,781 (4,259) 49,390 52,110
Stock dividend 2,437 26,025 (28,462) 0
Change in par value of stock (1,635) (83,050) 84,685 0
Conversion of preferred stock (42) 21 21 0
------ ------- --------- -------- ------- -------- --------
BALANCE AT DECEMBER 31, 2001 1 418 444,549 119,256 9,845 (1,662) 572,407
Income:
Continuing operations $ 31,271 31,271 31,271
Discontinued operations 32,064 32,064 32,064
Change in other comprehensive
income 7,490 7,490 7,490
--------
Comprehensive income $ 70,825
========
Cash dividends declared:
Preferred stock (242) (242)
Common stock $0.81 per share (37,274) (37,274)
Purchase of common stock (30,276) (30,276)
Issuance of common stock 2 5,351 (5,066) 23,207 23,494
Stock dividend 21 66,625 (66,646) 0
Conversion/retirement of preferred
stock 1 (339) (338)
------ ------- --------- -------- ------- -------- --------
BALANCE AT DECEMBER 31, 2002 1 442 516,186 73,363 17,335 (8,731) 598,596
-5-
Income:
Continuing operations $ 27,038 27,038 27,038
Discontinued operations 31,751 31,751 31,751
Change in other comprehensive
income (7,084) (7,084) (7,084)
--------
Comprehensive income $ 51,705
========
Cash dividends declared:
Preferred stock (62) (62)
Common stock $0.93 per share (42,810) (42,810)
Purchase of common stock (33,888) (33,888)
Issuance of common stock 7,060 (7,059) 33,367 33,368
Stock dividend 22 65,281 (65,303) 0
Conversion/retirement of preferred
stock (1) (2,518) (5,386) 7,905 0
------ ------- --------- -------- ------- -------- --------
BALANCE AT DECEMBER 31, 2003 $ 0 $ 464 $ 586,009 $ 11,532 $10,251 $ (1,347) $606,909
====== ======= ========= ======== ======= ======== ========
See accompanying Notes to Consolidated Financial Statements
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F.N.B. CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Dollars in thousands
YEAR ENDED DECEMBER 31
2003 2002 2001
--------- --------- ---------
OPERATING ACTIVITIES
Income from continuing operations $ 27,038 $ 31,271 $ 31,769
Income from discontinued operations 31,751 32,064 21,216
Adjustments to reconcile net income to net cash flows from
operating activities:
Depreciation, amortization and accretion 15,148 12,520 12,269
Provision for loan losses 17,155 13,624 26,727
Deferred taxes 3,980 (3,490) 5,545
Gain on sale of securities (1,949) (1,943) (1,823)
Gain on sale of loans (2,860) (1,335) (1,503)
Proceeds from sale of loans 156,057 58,019 22,290
Loans originated for sale (130,455) (74,405) (16,009)
Net change in:
Interest receivable 1,768 2,492 2,410
Interest payable 1,948 (5,763) (1,524)
Change in assets of discontinued operations (97,034) (88,615) (8,592)
Other, net 111,788 41,597 (2,453)
--------- --------- ---------
Net cash flows from operating activities 134,335 16,036 90,322
--------- --------- ---------
INVESTING ACTIVITIES
Net change in:
Interest bearing deposits with banks 1,666 537 (2,037)
Federal funds sold -- 66,000 6,375
Loans (43,726) (145,149) 52,488
Bank owned life insurance 2,302 (47,752) (3,476)
Securities available for sale:
Purchases (593,283) (333,790) (307,114)
Sales 31,137 188,477 127,983
Maturities 330,073 190,735 183,049
Securities held to maturity:
Purchases -- (3,781) (17,729)
Maturities 8,361 3,178 10,712
Increase in premises and equipment 618 (17,252) (14,692)
Net cash paid for mergers and acquisitions (150,126) (40,618) (9,385)
--------- --------- ---------
Net cash flows from investing activities (412,978) (139,415) 26,174
--------- --------- ---------
FINANCING ACTIVITIES
Net change in:
Non-interest bearing deposits, savings, and NOW accounts 367,528 44,229 25,094
Time deposits (232,123) (79,037) (162,351)
Short-term borrowings (22,404) 45,458 32,332
Increase in long-term debt 430,544 141,346 78,010
Decrease in long-term debt (245,792) (18,092) (18,115)
Purchase of treasury stock (33,888) (30,276) (12,052)
Issuance of treasury stock 33,367 23,207 12,648
Cash dividends paid (42,872) (37,516) (32,300)
--------- --------- ---------
Net cash flows from financing activities 254,360 89,319 (76,734)
--------- --------- ---------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (24,283) (34,060) 39,762
Cash and cash equivalents at beginning of year 129,443 163,503 123,741
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 105,160 $ 129,443 $ 163,503
========= ========= =========
See accompanying Notes to Consolidated Financial Statements
-7-
F.N.B. CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation:
The accompanying consolidated financial statements include the accounts of
the Corporation and its subsidiaries. The Corporation's consolidated financial
statements have historically included subsidiaries in which the Corporation has
a controlling financial interest. This requirement has been applied to
subsidiaries in which the Corporation has a majority voting interest.
Investments in companies in which the Corporation controls operating and
financing decisions (principally defined as owning a voting or economic interest
greater than 50%) are consolidated. In accordance with Financial Accounting
Standards Board Interpretation No. (FIN) 46, Consolidation of Variable Interest
Entities, an Interpretation of ARB No. 51, the Corporation considers a voting
rights entity to be a subsidiary and consolidates it if the Corporation has a
controlling financial interest in the entity. Variable interest entities are
consolidated if the Corporation is exposed to the majority of the variable
interest entity's expected losses and/or residual returns (i.e., the Corporation
is considered to be the primary beneficiary). All significant intercompany
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 does not have 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 15.2% 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 Lewisburg, 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 $23.3 million at December 31, 2003.
-8-
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 balance 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. Commercial loan charge-offs, either in whole or in part, are
generally made as soon as facts and circumstances raise a serious doubt as to
the collectibility of all or a portion of the principal. Loan origination fees
and related costs are deferred and recognized over the life of the loans as an
adjustment of yield.
The allowance for loan losses is maintained at a level that, in
management's judgment, 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, involves
a consideration of 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
-9-
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.
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.
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.
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.
Employee Stock Option Plan:
Current accounting guidance permits two alternative methods of accounting
for stock-based compensation, the intrinsic value method of Accounting
Principles Board (APB) Opinion 25, Accounting for Stock Issued to Employees, and
the fair value method of FAS 123, Accounting for Stock-Based Compensation. FAS
148, Accounting for Stock-Based Compensation Transition and Disclosure, was
issued in December 2002. It continues to provide alternative methods of
accounting for stock-based employee compensation. In addition, it amends
disclosure requirements in both annual and interim financial statements about
the method of accounting for stock-based compensation and the effect of the
method used on reported results. The Corporation continues to account for its
stock-based compensation plans under APB Opinion 25, Accounting for Stock Issued
to Employees.
-10-
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 2003 2002 2001
---------- ---------- ----------
Income from continuing operations $ 27,038 $ 31,271 $ 31,769
Less: Stock-based employee compensation cost determined if the fair
value method had been applied to all awards, net of tax (1,236) (1,338) (1,173)
---------- ---------- ----------
25,802 29,933 30,596
---------- ---------- ----------
Income from discontinued operations 31,751 32,064 21,216
Less: Stock-based employee compensation cost determined if the fair
value method had been applied to all awards, net of tax, for discontinued
operations (827) (696) (594)
---------- ---------- ----------
30,924 31,368 20,622
---------- ---------- ----------
Pro forma net income $ 56,726 $ 61,301 $ 51,218
========== ========== ==========
BASIC EARNINGS PER COMMON SHARE:
Income from continuing operations $ .58 $ .68 $ .71
Less: Stock-based employee compensation cost determined if the fair
value method had been applied to all awards, net of tax (.03) (.03) (.03)
---------- ---------- ----------
.55 .65 .68
---------- ---------- ----------
Income from discontinued operations .69 .69 .48
Less: Stock-based employee compensation cost determined if the fair
value method had been applied to all awards, net of tax, for discontinued
operations (.01) (.01) (.01)
---------- ---------- ----------
.68 .68 .47
---------- ---------- ----------
Pro forma net income $ 1.23 $ 1.33 $ 1.15
========== ========== ==========
DILUTED EARNINGS PER COMMON SHARE:
Income from continuing operations $ .57 $ .67 $ .70
Less: Stock-based employee compensation cost determined if the fair
value method had been applied to all awards, net of tax (.03) (.03) (.03)
---------- ---------- ----------
.54 .64 .67
---------- ---------- ----------
Income from discontinued operations .68 .68 .47
Less: Stock-based employee compensation cost determined if the fair
value method had been applied to all awards, net of tax, for discontinued
operations (.01) (.02) (.01)
---------- ---------- ----------
.67 .66 .46
---------- ---------- ----------
Pro forma net income $ 1.21 $ 1.30 $ 1.13
========== ========== ==========
Assumptions:
Risk-free interest rate 4.05% 3.92% 5.25%
Dividend yield 2.63% 3.09% 2.84%
Expected stock price volatility .21% .17% .26%
Expected life (years) 5.00 5.00 5.00
Fair value of options granted $ 5.04 $ 4.56 $ 5.35
-11-
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 transferable. In addition, option variation 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.
New Accounting Standards:
FIN 45, Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others, was issued in November
2002. FIN 45 requires certain guarantees to be recorded at fair value and
applies to contracts or indemnification agreements that contingently require the
guarantor to make payments to the guaranteed party based on changes in an
underlying obligation that is related to an asset, liability or an equity
security of the guaranteed party. The impact of the adoption of FIN 45 was not
material to the Corporation's financial condition or results of operations.
FIN 46, Consolidation of Variable Interest Entities, an Interpretation of
ARB No. 51, was issued in January 2003 and amended in December 2003. FIN 46
addresses consolidation by business enterprises of variable interest entities
which have certain characteristics. FIN 46 applies immediately to variable
interest entities created after January 31, 2003. It applies in the first fiscal
year or interim period beginning after December 15, 2003, to variable interest
entities in which an enterprise holds a variable interest that is acquired
before February 1, 2003. The Corporation has limited partnership investments in
affordable housing projects, for which it provides funding as a limited partner
and receives tax credit for any losses incurred by the projects based on its
partnership share. The Corporation's interests in these entities were acquired
prior to February 1, 2003. At December 31, 2003, the Corporation had recorded
investments in other assets on its balance sheet of approximately $1.4 million
associated with these investments. The Corporation currently adjusts the
carrying value of these investments for any losses incurred by the limited
partnership through earnings. The Corporation determined that it is not the
primary beneficiary of these partnerships and will not consolidate them.
Additionally, the Corporation has investments in trusts which issue trust
preferred securities. The Corporation has determined that it is not the primary
beneficiary of the trusts and will not consolidate them.
FAS 146, Accounting for Costs Associated with Exit or Disposal Activities,
was issued in June 2002 and requires that a liability for a cost associated with
an exit or disposal activity be recognized when the liability is incurred. FAS
146 also establishes that fair value is the objective for initial measurement of
the liability. The provisions of FAS 146 became effective for the Corporation on
January 1, 2003. The costs incurred in connection with the spin-off transaction,
which was discussed in the "Discontinued Operations" section of this report,
were accounted for in accordance with the provisions of FAS 146.
FAS 149, Amendment of Statement 133 on Derivative Instruments and Hedging
Activities, was issued in April 2003 and requires that contracts with comparable
characteristics be accounted for similarly. In particular, FAS 149 clarifies
under what circumstance a contract with an initial net investment meets the
characteristic of a derivative, clarifies when a derivative contains a financing
component, amends the definition of an underlying to conform it to language used
in FIN 45 and amends certain other existing pronouncements. Those changes will
result in more consistent reporting of contracts as either derivatives or hybrid
instruments. The provisions of FAS 149 became effective for the Corporation on
June 30, 2003 and did not have a material impact on the Corporation's financial
condition or results of operations.
FAS 150, Accounting for Certain Financial Instruments with Characteristics
of both Liability and Equity, was issued in May of 2003. FAS 150 establishes how
an issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an issuer
classify certain financial instruments that would previously have been
classified as equity as liabilities (or as assets in some circumstances).
Specifically, FAS 150 requires that a mandatorily redeemable financial
instruments be classified as a liability unless the redemption is required to
occur only upon the liquidation or termination of the reporting entity. FAS 150
was effective for financial instruments entered into or modified after May 31,
2003, and otherwise became effective on July 1, 2003.
-12-
The American Institute of Certified Public Accountants issued Statement of
Position (SOP) 03-3, Accounting for Certain Loans and Debt Securities Acquired
in a Transfer, in December 2003. SOP 03-3 addresses accounting for differences
between contractual cash flows and expected cash flows to be collected from an
investor's initial investment in loans or debt securities acquired in a transfer
if the differences are attributable, at least in part, to credit quality. SOP
03-3 does not apply to loans originated by the entity. The provisions of SOP
03-3 are effective for loans acquired in fiscal years beginning after December
13, 2004. The Corporation does not expect the implementation of SOP 03-3 to have
a material impact on the Corporation's financial condition or results of
operations.
The Financial Accounting Standards Board issued Staff Position (FSP)
106-1, Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug, Improvement and Modernization Act of 2003, in December 2003.
FSP 106-1 permits a sponsor of a postretirement health care plan that provides a
prescription plan benefit to make a one-time election to defer accounting for
the effects of the Medicare Prescription Drug, Improvement and Modernization Act
of 2003. The provisions of FSP 106-1 became effective for the Corporation on
December 31, 2003 and did not have a material impact on the Corporation's
financial condition or results of operations.
2. BUSINESS, ORGANIZATIONAL CHANGES AND DISCONTINUED OPERATIONS
Business:
F.N.B. Corporation (the Corporation) is a diversified financial services
company headquartered in Hermitage, Pennsylvania. The Corporation owns and
operates First National Bank of Pennsylvania, First National Trust Company,
First National Investment Services Company, F.N.B. Investment Advisors, Inc.,
First National Insurance Agency, Inc. and Regency Finance Company. It has full
service banking offices located in Pennsylvania and Ohio and consumer finance
operations in Pennsylvania, Ohio and Tennessee.
Organizational Changes:
On June 1, 2001, the Corporation reincorporated in the State of Florida.
The Corporation was originally incorporated in 1974 in Pennsylvania, and at that
time substantially all of the Corporation's business was being conducted in
Pennsylvania. The Corporation expanded into Florida seven 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.
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.
During the first quarter of 2001, the Corporation reduced its number of
bank charters from three to two by merging its two Pennsylvania banks under
FNBPA. The Corporation incurred pre-tax consolidation expense of $2.3 million
arising from legal and accounting fees, consulting fees, data processing
conversion charges, early retirement, involuntary separation costs and related
benefit costs. Involuntary separation costs associated with 30 terminated
employees totaled $1.0 million of the consolidation expense. The total amount of
separation payments paid during 2001 was $710,000. The remaining separation
costs were paid in accordance with the contractual terms of the employment and
compensation agreements of the terminated employees in 2002.
Discontinued Operations:
On January 1, 2004, the Corporation completed the spin-off of its Florida
operations into a separate, publicly traded company known as First National
Bankshares of Florida, Inc. (Bankshares). Effective January 1, 2004, the
Corporation transferred all of its Florida operations to Bankshares. At the same
time, the Corporation distributed all of the outstanding stock of Bankshares to
the Corporation's shareholders of record as of December 26, 2003. Shareholders
eligible for the distribution received one share of Bankshares common stock for
each outstanding share of the Corporation's common stock held. Immediately
following the distribution, the Corporation and its subsidiaries did not own any
shares of Bankshares common stock and Bankshares became an independent public
company. Concurrent with the spin-off of its Florida operations, the Corporation
moved its executive offices from Naples, Florida to Hermitage, Pennsylvania on
January 1, 2004.
As a result of the spin-off, the Florida operations' earnings have been
reclassified as discontinued operations on the consolidated statements of
income, and assets and liabilities related to these discontinued operations have
been disclosed separately on the consolidated balance sheets.
-13-
Following is a summary of the carrying amount of major classes of
assets and liabilities of the Corporation's discontinued operations (in
thousands):
DECEMBER 31,
---------------------------
2003 2002
---------- ----------
ASSETS
Cash and short-term investments $ 105,658 $ 127,300
Investment securities 775,334 385,269
Mortgage loans held for sale 15,153 --
Net loans 2,421,278 1,963,874
Goodwill 173,729 62,678
Other assets 259,984 196,083
---------- ----------
TOTAL ASSETS OF DISCONTINUED OPERATIONS $3,751,136 $2,735,204
========== ==========
LIABILITIES
Deposits $2,719,989 $2,122,052
Borrowings 625,051 311,001
Other liabilities 40,981 34,070
---------- ----------
TOTAL LIABILITIES OF DISCONTINUED OPERATIONS $3,386,021 $2,467,123
========== ==========
Following is a summary of the income and expense of the Corporation's
discontinued operations (in thousands):
DECEMBER 31,
--------------------------------------
2003 2002 2001
-------- -------- --------
Interest income $166,294 $150,931 $148,728
Interest expense 42,846 47,299 65,316
Provision for loan losses 7,184 5,470 4,468
Non-interest income 62,416 54,728 47,980
Non-interest expense 130,298 104,441 93,588
-------- -------- --------
INCOME BEFORE INCOME TAXES 48,382 48,449 33,336
Income taxes 16,631 16,385 12,120
-------- -------- --------
INCOME FROM DISCONTINUED OPERATIONS $ 31,751 $ 32,064 $ 21,216
======== ======== ========
The spin-off resulted in the division of certain existing corporate
support functions between the two resulting entities. Corporate expenses
included in the Corporation's financial results represent an allocation of
F.N.B. Corporation's corporate expenses. This allocation is based on a specific
review to identify costs incurred for the benefit of the subsidiaries of the
Corporation and in management's judgment results in a reasonable allocation of
such costs. The Corporation was allocated $24.7 million, $32.6 million and $31.1
million of overhead costs related to shared administrative and support functions
for 2003, 2002 and 2001, respectively. The majority of these costs were specific
to the activities of the continuing operations. The remaining costs were
allocated based on a proportional share of assets.
The consolidated financial statements included herein may not necessarily
be indicative of the results of operations, financial position and cash flows
for the Corporation in the future or had it operated as a separate, independent
company during the periods presented. The consolidated financial statements
included herein do not reflect any changes that may occur in the financial
condition and results of operations of the Corporation or its subsidiaries as a
result of the spin-off.
The Corporation incurred approximately $39.2 million in restructuring
expense directly attributable to the distribution. These expenses consisted of a
$20.7 million prepayment penalty for refinancing Federal Home Loan Bank (FHLB)
debt, $12.0 million of early retirement expenses, involuntary separation costs
and data processing contract termination costs, $3.4 million in professional
fees and approximately $3.1 million in the write-off of fixed assets and other
expenses connected with the separation. At December 31, 2003, a liability of
approximately $7.2 million remained in connection with these expenses.
-14-
3. MERGERS AND ACQUISITIONS FOR CONTINUING OPERATIONS
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 First National
Insurance Agency, Inc., a wholly-owned subsidiary of the Corporation.
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. The total merger charge included
involuntary separation costs associated with terminated employees, early
retirement and other employment related expenses, data processing conversion
charges, professional services, write-downs of impaired assets and other
miscellaneous expenses, all of which have been paid by December 31, 2003.
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.
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.
4. SECURITIES
The amortized cost and fair value of securities are as follows (in
thousands):
Securities available for sale:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ----------
DECEMBER 31, 2003
U.S. Treasury and other U.S. government
agencies and corporations $ 123,294 $ 957 $ (88) $ 124,163
Mortgage-backed securities of U.S. government
Agencies 629,445 6,562 (1,330) 634,677
States of the U.S. and political subdivisions 41,970 485 (47) 42,408
Other debt securities 29,803 2,496 -- 32,299
--------- --------- --------- ---------
Total debt securities 824,512 10,500 (1,465) 833,547
Equity securities 39,864 5,259 (3) 45,120
--------- --------- --------- ---------
$ 864,376 $ 15,759 $ (1,468) $ 878,667
========= ========= ========= =========
-15-
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ----------
DECEMBER 31, 2002
U.S. Treasury and other U.S. government
agencies and corporations $ 63,497 $ 2,343 $ (1) $ 65,839
Mortgage-backed securities of U.S. government
Agencies 383,132 9,625 (69) 392,688
States of the U.S. and political subdivisions 129,010 3,032 (38) 132,004
Other debt securities 26,302 631 (127) 26,806
--------- --------- --------- ---------
Total debt securities 601,941 15,631 (235) 617,337
Equity securities 35,819 4,438 (47) 40,210
--------- --------- --------- ---------
$ 637,760 $ 20,069 $ (282) $ 657,547
========= ========= ========= =========
DECEMBER 31, 2001
U.S. Treasury and other U.S. government
agencies and corporations $ 310,071 $ 6,461 $ (48) $ 316,484
Mortgage-backed securities of U.S. government
Agencies 187,603 1,989 (116) 189,476
States of the U.S. and political subdivisions 143,699 633 (853) 143,479
Other debt securities 3,521 17 (1) 3,537
--------- --------- --------- ---------
Total debt securities 644,894 9,100 (1,018) 652,976
Equity securities 32,082 3,689 (236) 35,535
--------- --------- --------- ---------
$ 676,976 $ 12,789 $ (1,254) $ 688,511
========= ========= ========= =========
Securities held to maturity:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ----------
DECEMBER 31, 2003
U.S. Treasury and other U.S. government
agencies and corporations $ 3,761 $ 23 $ (8) $ 3,776
States of the U.S. and political subdivisions 17,105 793 -- 17,898
Other debt securities 3,164 172 (1) 3,335
---------- ---------- ---------- ----------
$ 24,030 $ 988 $ (9) $ 25,009
========== ========== ========== ==========
DECEMBER 31, 2002
U.S. Treasury and other U.S. government
agencies and corporations $ 4,724 -- -- $ 4,724
States of the U.S. and political subdivisions 24,990 $ 921 -- 25,911
Other debt securities 2,653 -- -- 2,653
---------- ---------- ---------- ----------
$ 32,367 $ 921 -- $ 33,288
========== ========== ========== ==========
DECEMBER 31, 2001
U.S. Treasury and other U.S. government
agencies and corporations $ 2,024 -- -- $ 2,024
Mortgage-backed securities of U.S. government
Agencies 721 -- -- 721
States of the U.S. and political subdivisions 27,349 $ 228 $ (190) 27,387
Other debt securities 1,593 1 (2) 1,592
---------- ---------- ---------- ----------
$ 31,687 $ 229 $ (192) $ 31,724
========== ========== ========== ==========
-16-
The Corporation does not believe the unrealized losses on securities,
individually or in the aggregate, as of December 31, 2003, represent an
other-than-temporary impairment. The unrealized losses are primarily the result
of changes in interest rates and will not prohibit the Corporation from
receiving its contractual principal and interest payments. The Corporation has
the ability and intent to hold these securities for a period necessary to
recover the amortized cost.
Following are summaries of the unrealized loss positions as of December
31, 2003 (in thousands):
Securities available for sale:
LESS THAN 12 MONTHS GREATER THAN 12 MONTHS TOTAL
---------------------- ---------------------- ----------------------
FAIR UNREALIZED FAIR UNREALIZED FAIR UNREALIZED
VALUE LOSSES VALUE LOSSES VALUE LOSSES
-------- ---------- -------- ---------- -------- ----------
U.S. Treasury and other U.S.
government agencies and
corporations $ 33,078 $ (88) -- -- $ 33,078 $ (88)
Mortgage-backed securities of U.S.
government agencies 148,743 (1,330) -- -- 148,743 (1,330)
State of the U.S. and political
subdivisions 7,768 (47) -- -- 7,768 (47)
Equity securities 12 (3) -- -- 12 (3)
-------- -------- -------- -------- -------- --------
Total $189,601 $ (1,468) -- -- $189,601 $ (1,468)
======== ======== ======== ======== ======== ========
Securities held to maturity:
LESS THAN 12 MONTHS GREATER THAN 12 MONTHS TOTAL
---------------------- ---------------------- ----------------------
FAIR UNREALIZED FAIR UNREALIZED FAIR UNREALIZED
VALUE LOSSES VALUE LOSSES VALUE LOSSES
-------- ---------- -------- ---------- -------- ----------
U.S. Treasury and other U.S.
government agencies and
corporations $ 1,436 $ (8) -- -- $ 1,436 $ (8)
Other debt securities 200 (1) -- -- 200 (1)
-------- -------- -------- -------- -------- --------
Total $ 1,636 $ (9) -- -- $ 1,636 $ (9)
======== ======== ======== ======== ======== ========
At December 31, 2003, 2002 and 2001, securities with a carrying value of
$435.4 million, $283.7 million and $212.6 million, respectively, were pledged to
secure public deposits, trust deposits and for other purposes as required by
law. Securities with a carrying value of $193.1 million, $139.0 million and
$233.1 million at December 31, 2003, 2002 and 2001, respectively, were pledged
as collateral for short-term borrowings.
As of December 31, 2003, 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
COST VALUE COST VALUE
--------- -------- --------- --------
Due in one year or less $ 1,567 $ 1,594 $ 21,075 $ 21,485
Due from one to five years 21,173 22,101 100,035 100,589
Due from five to ten years 1,031 1,037 44,292 44,589
Due after ten years 259 277 29,665 32,207
-------- -------- -------- --------
24,030 25,009 195,067 198,870
Mortgage-backed securities of U.S.
government agencies -- -- 629,445 634,677
Equity securities -- -- 39,864 45,120
-------- -------- -------- --------
$ 24,030 $ 25,009 $864,376 $878,667
======== ======== ======== ========
-17-
Maturities may differ from contractual terms because borrowers 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 for the years ended
December 31, 2003, 2002 and 2001 were $31.1 million, $188.5 million, and $128.0
million, respectively. Gross gains and gross losses were realized on those sales
as follows (in thousands):
2003 2002 2001
------- ------- -------
Gross gains $ 1,962 $ 2,417 $ 1,824
Gross losses (13) (474) (1)
------- ------- -------
$ 1,949 $ 1,943 $ 1,823
======= ======= =======
5. LOANS
Following is a summary of loans (in thousands):
December 31 2003 2002
----------- -----------
Real Estate:
Residential $ 1,348,326 $ 1,284,141
Commercial 773,167 721,246
Construction 40,795 24,941
Installment loans to individuals 676,630 787,865
Commercial, financial and agricultural 434,574 416,045
Lease financing 17,277 39,590
Unearned income (31,572) (38,620)
----------- -----------
$ 3,259,197 $ 3,235,208
=========== ===========
The loan portfolio consists principally of loans to individuals and small-
and medium-sized businesses within the Corporation's primary market area of
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, 2003, 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 the year (in thousands):
Total loans at beginning of year $ 41,278
New loans 44,268
Repayments (40,506)
Other (1,452)
--------
Total loans at end of year $ 43,588
========
Other represents the net change in loan balances resulting from changes in
related parties during the year.
-18-
6. NON-PERFORMING ASSETS
Following is a summary of non-performing assets (in thousands):
December 31 2003 2002
------- -------
Non-accrual loans $22,449 $18,329
Restructured loans 5,719 5,915
------- -------
TOTAL NON-PERFORMING LOANS 28,168 24,244
Other real estate owned 3,109 3,301
------- -------
TOTAL NON-PERFORMING ASSETS $31,277 $27,545
======= =======
For the years ended December 31, 2003, 2002 and 2001, income recognized on
non-accrual and restructured loans was $1.6 million, $1.3 million and $912,000,
respectively. Income that would have been recognized for the years ended
December 31, 2003, 2002 and 2001 on such loans if they were in accordance with
their original terms was $3.0 million, $2.6 million and $2.0 million,
respectively. Loans past due 90 days or more not on non-accrual status were $5.1
million, $6.9 million and $5.1 million, at December 31, 2003, 2002 and 2001,
respectively.
Following is a summary of information pertaining to loans considered to be
impaired (in thousands):
At or for the Year Ended December 31 2003 2002 2001
------- ------- -------
Impaired loans with an allocated allowance $12,569 $ 8,336 $ 7,402
Impaired loans without an allocated allowance 560 0 948
------- ------- -------
Total impaired loans $13,129 $ 8,336 $ 8,350
======= ======= =======
Allocated allowance on impaired loans $ 4,054 $ 2,936 $ 2,599
======= ======= =======
Average impaired loans $11,380 $ 4,959 $ 7,837
======= ======= =======
Income recognized on impaired loans $ 596 $ 605 $ 272
======= ======= =======
7. ALLOWANCE FOR LOAN LOSSES
Following is an analysis of changes in the allowance for loan losses (in
thousands):
Year Ended December 31 2003 2002 2001
-------- -------- --------
Balance at beginning of year $ 46,984 $ 46,345 $ 39,803
Addition from acquisitions -- -- 3,400
Charge-offs (20,244) (16,557) (25,804)
Recoveries 2,244 3,572 2,219
-------- -------- --------
NET CHARGE-OFFS (18,000) (12,985) (23,585)
Provision for loan losses 17,155 13,624 26,727
-------- -------- --------
Balance at end of year $ 46,139 $ 46,984 $ 46,345
======== ======== ========
8. PREMISES AND EQUIPMENT
Following is a summary of premises and equipment (in thousands):
December 31 2003 2002
--------- ---------
Land $ 10,478 $ 10,124
Premises 86,387 87,477
Equipment 83,534 86,762
--------- ---------
180,399 184,363
Accumulated Depreciation (100,781) (96,265)
--------- ---------
$ 79,618 $ 88,098
========= =========
-19-
Depreciation expense was $12.3 million for 2003, $10.9 million for 2002
and $8.4 million for 2001.
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 $6.1 million for 2003,
$6.2 million for 2002 and $5.8 million for 2001. Total minimum rental
commitments under such leases were $23.0 million at December 31, 2003. Following
is a summary of future minimum lease payments for years following December 31,
2003 (in thousands):
2004 $ 2,466
2005 1,983
2006 1,811
2007 1,658
2008 1,013
Later years 14,109
9. 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 2003 and 2002 as compared to 2001. 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.
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 2003 2002 2001
---------- ---------- ----------
Income from continuing operations $ 27,038 $ 31,271 $ 31,769
Goodwill amortization, net of tax -- -- 1,595
---------- ---------- ----------
27,038 31,271 33,364
---------- ---------- ----------
Income from discontinued operations 31,751 32,064 21,216
Goodwill amortization, net of tax, from discontinued operations -- -- 758
---------- ---------- ----------
31,751 32,064 21,974
---------- ---------- ----------
Pro forma net income $ 58,789 $ 63,335 $ 55,338
========== ========== ==========
BASIC EARNINGS PER COMMON SHARE:
Income from continuing operations $ .58 $ .68 $ 71
Goodwill amortization, net of tax -- -- .04
---------- ---------- ----------
.58 .68 .75
---------- ---------- ----------
Income from discontinued operations .69 .69 .48
Goodwill amortization, net of tax, from discontinued operations -- -- .01
---------- ---------- ----------
.69 .69 .49
---------- ---------- ----------
Pro forma net income $ 1.27 $ 1.37 $ 1.24
========== ========== ==========
-20-
Year Ended December 31 2003 2002 2001
-------- -------- --------
DILUTED EARNINGS PER COMMON SHARE:
Income from continuing operations $ .57 $ .67 $ .70
Goodwill amortization, net of tax -- -- .04
-------- -------- --------
.57 .67 .74
-------- -------- --------
Income from discontinued operations .68 .68 .47
Goodwill amortization, net of tax, from discontinued operations -- -- .01
-------- -------- --------
.68 .68 .48
-------- -------- --------
Pro forma net income $ 1.25 $ 1.35 $ 1.22
======== ======== ========
The following table shows a summary of goodwill by line of business as of
December 31, 2003 (in thousands):
COMMUNITY INSURANCE FINANCE
BANK AGENCY COMPANY TOTAL
--------- --------- ------- -------
Goodwill at beginning of year $21,831 $ 2,107 $ 1,809 $25,747
Goodwill addition 2,500 463 -- 2,963
------- ------- ------- -------
Goodwill at end of year $24,331 $ 2,570 $ 1,809 $28,710
======= ======= ======= =======
10. OTHER INTANGIBLE ASSETS
The following table shows a summary of core deposit intangibles, customer
and renewal lists, and other intangible assets (in thousands):
OTHER TOTAL FINITE-
CORE DEPOSIT CUSTOMER AND INTANGIBLES LIVED
INTANGIBLES RENEWAL LISTS ASSETS INTANGIBLES
------------ ------------- ----------- -------------
Gross carrying amount $ 20,305 $ 818 $ 124 $ 21,247
Accumulated amortization (10,456) (239) (21) (10,716)
-------- -------- -------- --------
NET DECEMBER 31, 2003 $ 9,849 $ 579 $ 103 $ 10,531
======== ======== ======== ========
Gross carrying amount $ 20,305 $ 818 $ 75 $ 21,198
Accumulated amortization (8,496) (124) -- (8,620)
-------- -------- -------- --------
NET DECEMBER 31, 2002 $ 11,809 $ 694 $ 75 $ 12,578
======== ======== ======== ========
Amortization expense on finite-lived intangible assets totaled $2.2
million, $2.1 million, and $1.0 million for 2003, 2002 and 2001, respectively.
Amortization expense on finite-lived intangible assets is expected to total $2.0
million, $1.9 million, $1.8 million, $1.8 million and $1.5 million in 2004,
2005, 2006, 2007 and 2008, respectively, assuming no new additions.
-21-
11. DEPOSITS
Following is a summary of deposits (in thousands):
December 31 2003 2002
---------- ----------
Non-interest bearing $ 592,795 $ 563,173
Savings and NOW 1,517,209 1,179,303
Certificates of deposit and other time deposits 1,329,506 1,561,629
---------- ----------
$3,439,510 $3,304,105
========== ==========
Time deposits of $100,000 or more were $242.3 million and $315.7 million
at December 31, 2003 and 2002, respectively. Following is a summary of these
time deposits by remaining maturity at December 31, 2003 (in thousands):
CERTIFICATES OF OTHER TIME
DEPOSIT DEPOSITS TOTAL
--------------- ---------- --------
Three months or less $ 41,581 $ 789 $ 42,370
Three to six months 18,191 461 18,652
Six to twelve months 57,483 4,183 61,666
Over twelve months 96,729 22,917 119,646
-------- -------- --------
$213,984 $ 28,350 $242,334
======== ======== ========
Following is a summary of the scheduled maturities of certificates of
deposits and other time deposits for each of the five years following December
31, 2003 (in thousands):
2004 $658,830
2005 446,871
2006 99,259
2007 84,964
2008 36,658
Later years 2,924
12. SHORT-TERM BORROWINGS
Following is a summary of short-term borrowings (in thousands):
DECEMBER 31,
----------------------
2003 2002
-------- --------
Securities sold under repurchase agreements $ 81,444 $ 43,210
Federal funds purchased 865 70,865
Federal Home Loan Bank advances 6,000 10,000
Subordinated notes 144,006 130,755
Other short-term borrowings 651 540
-------- --------
$232,966 $255,370
======== ========
Credit facilities amounting to $98.0 million at December 31, 2003 were
maintained with various banks at 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, 2003.
-22-
13. LONG-TERM DEBT
Following is a summary of long-term debt (in thousands):
December 31 2003 2002
-------- --------
Federal Home Loan Bank advances $425,141 $370,001
Debentures due to Statutory Trust 128,866 --
Subordinated notes 30,517 29,673
Other long-term debt 284 382
-------- --------
$584,808 $400,056
======== ========
The Corporation's banking affiliate has available credit with the FHLB of
$1.6 billion, of which $431.1 million was used as of December 31, 2003. These
advances are secured by residential real estate loans and FHLB stock and are
scheduled to mature in various amounts periodically through the year 2012.
Interest rates paid on these advances range from 2.10% to 5.75% in 2003 and
1.82% to 7.19% in 2002.
The debentures due to Statutory Trust were issued by F.N.B. Statutory
Trust I (Statutory Trust), an unconsolidated subsidiary of the Corporation, to
fund the acquisition of a bank that was later spun-off with the Corporation's
Florida operations. The Statutory Trust was formed for the sole purpose of
issuing the capital securities and investing the proceeds form the sale of such
capital securities in the debentures. The debentures held by Statutory Trust are
its sole assets. Distributions on the capital securities issued by Statutory
Trust are recorded as interest expense by the Corporation. The capital
securities are subject to mandatory redemption, in whole or in part, upon
repayment of the debentures. The capital securities bear interest at a floating
rate per annum equal to the three-month LIBOR plus 325 basis points. The
Corporation has entered into agreements which, taken collectively, fully and
unconditionally guarantee the capital securities subject to the terms of each of
the guarantees. The interest rate on the debentures due to Statutory Trust held
by the Corporation at December 31, 2003 was 4.39%. The debentures qualify as
tier 1 capital under the Federal Reserve Board guidelines.
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 2013. At December 31, 2003, 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 5.13% at December 31, 2003 and 5.81% at
December 31, 2002.
Scheduled annual maturities for all of the long-term debt for each of the
five years following December 31, 2003 are as follows (in thousands):
2004 $ 19,901
2005 79,419
2006 28,305
2007 51,830
2008 122,725
Later years 282,628
14. 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.
-23-
Following is a summary of off-balance sheet credit risk information (in
thousands):
December 31 2003 2002
-------- --------
Commitments to extend credit $592,762 $500,741
Standby letters of credit 48,501 40,568
At December 31, 2003, funding of approximately 48% of the commitments to
extend credit was 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 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 that is subject to
litigation. Should the outcome of the pending or threatened lawsuits 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.
15. STOCKHOLDERS' EQUITY
During 2003, the Corporation completed the planned redemption of its
Preferred Stock Series A and Preferred Stock Series B. In connection with the
redemption, the Corporation issued shares of its common stock out of treasury
stock in exchange for the remaining outstanding preferred stock. The Corporation
issued 15,882 and 264,568 shares of its common stock for the remaining 19,174
and 98,851 shares of Preferred Stock Series A and Preferred Stock Series B,
respectively. As a result of the redemption, the Corporation no longer has any
shares of Preferred Series A or Preferred Series B stock outstanding.
-24-
16. COMPREHENSIVE INCOME
The components of comprehensive income, net of related tax, are as follows
(in thousands):
Year Ended December 31 2003 2002 2001
-------- -------- --------
Income from continuing operations $ 27,038 $ 31,271 $ 31,769
Income from discontinued operations 31,751 32,064 21,216
Other comprehensive income from continuing operations:
Unrealized gains (losses) on securities:
Arising during the period, net of tax expense (benefit) of $(604), $3,677
and $3,933 (2,264) 6,834 7,304
Less: reclassification adjustment for (gains) losses included as an unrealized
gain, net of tax expense (benefit) of $744, $791 and $650 (1,382) (1,470) (1,207)
Minimum benefit plan liability adjustment, net of tax benefit of $155,
$310 and $0 (287) (577) --
-------- -------- --------
Other comprehensive income from continuing operations (3,933) 4,787 6,097
-------- -------- --------
Other comprehensive income from discontinued operations:
Unrealized gains (losses) on securities:
Arising during the period, net of tax expense (benefit) of $(1,744),
$1,884 and $1,147 (2,096) 3,493 2,130
Less: reclassification adjustment for (gains) losses included as an unrealized
gain, net of tax expense (benefit) of $294, $66 and $(8) (546) (122) 15
Minimum benefit plan liability adjustment, net of tax benefit of $274,
$360 and $0 (509) (668) --
-------- -------- --------
Other comprehensive income from discontinued operations (3,151) 2,703 2,145
-------- -------- --------
Comprehensive income $ 51,705 $ 70,825 $ 61,227
======== ======== ========
The accumulated balances related to each component of other comprehensive
income (loss) are as follows (in thousands):
December 31 2003 2002 2001
-------- -------- --------
Continuing operations:
Unrealized gains on securities $ 9,292 $ 12,863 $ 7,499
Minimum pension liability adjustment (939) (577) --
-------- -------- --------
8,353 12,286 7,499
-------- -------- --------
Discontinued operations:
Unrealized gains on securities 3,000 5,717 2,346
Minimum pension liability adjustment (1,102) (668) --
-------- -------- --------
1,898 5,049 2,346
-------- -------- --------
Accumulated other comprehensive income $ 10,251 $ 17,335 $ 9,845
======== ======== ========
17. STOCK INCENTIVE PLANS
The Corporation has available up to 1,079,164 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 2003, the Corporation granted 9,200 shares of stock under these plans.
The weighted average fair value of the restricted shares is $25.92.
-25-
The Corporation has available up to 4,485,328 shares of common stock to be
issued under both incentive and non-qualified stock option plans to key
employees and directors 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 APB Opinion 25, Accounting for Stock Issued to Employees.
Activity in the Option Plan relating to employees of continuing operations
during the past three years was as follows:
WEIGHTED
AVERAGE
PRICE PER
2003 SHARE 2002 2001
--------- ---------- --------- ----------
Options outstanding at beginning of year 2,143,420 $ 20.26 2,150,369 1,969,542
Granted during the year 334,831 24.25 502,564 409,930
Exercised during the year (448,210) 19.82 (465,945) (99,332)
Forfeited during the year (150,712) 24.39 (43,568) (129,770)
--------- --------- ---------
Options outstanding at end of year 1,879,329 20.75 2,143,420 2,150,370
========= ========= =========
The total number of stock options outstanding at December 31, 2003 for
the employees of the discontinued operations was 1,257,411 shares.
The following table summarizes information about the stock options
outstanding relating to employees of continuing operations at December 31, 2003:
Options Outstanding Options Exercisable
- ------------------------------------------------------------------------------- -------------------------------
Weighted
Average Weighted
Range of Exercise Options Remaining Weighted Average Options Average
Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- ------------------------------------------------------------------------------- --------------------------------
$ 5.05 -$ 7.58 26,695 9.21 $ 5.05 26,695 $ 5.05
7.59 - 11.39 51,160 1.08 9.51 51,160 9.51
11.40 - 17.10 88,624 2.08 14.47 88,624 14.47
17.11 - 25.67 1,030,168 5.89 19.27 900,457 19.25
25.68 - 29.10 682,682 7.08 25.25 401,773 25.35
--------- ---------
1,879,329 1,468,709
========= =========
18. RETIREMENT PLANS
Following are the Corporation's accumulated benefit obligation and
reconciliations of the change in benefit obligation, change in plan assets and
funded status (in thousands):
December 31 2003 2002
--------- ---------
Accumulated benefit obligation $ 88,137 $ 72,934
December 31 2003 2002
--------- ---------
Projected benefit obligation at beginning of year $ 83,599 $ 74,398
Service cost 3,551 2,587
Interest cost 5,867 5,467
Plan amendments (8) 363
Actuarial loss 10,678 4,217
Termination gain due to curtailment (1,128) (1,706)
Special termination benefits 3,052 1,302
Adjustment for acquisition 1,389
Benefits paid (3,890) (4,418)
--------- ---------
Projected benefit obligation at end of year $ 101,721 $ 83,599
========= =========
-26-
December 31 2003 2002
--------- ---------
Fair value of plan assets at beginning of year $ 57,891 $ 60,464
Actual return on plan assets 9,959 (5,291)
Company contribution 21,025 7,136
Benefits paid (3,954) (4,418)
--------- ---------
Fair value of plan assets at end of year $ 84,921 $ 57,891
========= =========
December 31 2003 2002
--------- ---------
Funded status of plan $ (16,800) $ (25,708)
Unrecognized actuarial loss 22,753 18,562
Unrecognized prior service cost (365) (166)
Unrecognized net transition obligation (949) (1,042)
--------- ---------
Prepaid (accrued) pension cost $ 4,639 $ (8,354)
========= =========
The change in plan assets reflects benefits paid from the qualified
pension plan of $3.2 million and $2.6 million for 2003 and 2002, respectively,
and employer contributions to the qualified pension plan of $20.2 million and
$5.3 million for 2003 and 2002, respectively. For the non-qualified pension
plan, the change in plan assets reflects benefits paid and contributions to the
plan in the same amount. This amount represents the actual benefit payments paid
from general plan assets of $717,000 and $1.8 million for 2003 and 2002,
respectively. The Corporation expects that no contributions will be made to the
qualified pension plan in 2004, as that plan's fully funded status is expected
to preclude any deductible contribution.
Discount rates of 6.00% and 6.75% for 2003 and 2002, respectively, and a
compensation rate of 4.00% for both 2003 and 2002, were used to determine the
end of year benefit obligation.
As of December 31, 2003 and 2002, the projected benefit obligation,
accumulated benefit obligation and fair value of plan assets for pension plans
with a projected benefit obligation in excess of plan assets and pension plans
with an accumulated benefit obligation in excess of plan assets were as follows
(in thousands):
PROJECTED BENEFIT ACCUMULATED BENEFIT
OBLIGATION EXCEEDS THE FAIR OBLIGATION EXCEEDS THE
VALUE OF PLAN'S ASSETS FAIR VALUE OF PLAN'S ASSETS
--------------------------- ---------------------------
December 31 2003 2002 2003 2002
--------------------------- ---------------------------
Projected benefit obligation $19,212 $16,733 $ 19,212 $16,733
Accumulated benefit obligation 18,585 15,689 18,585 15,689
Fair value of plan assets -- -- -- --
The amounts recognized in the Corporation's consolidated financial
statements include the following (in thousands):
December 31 2003 2002
-------- --------
Prepaid pension cost $ 21,451 $ 5,246
Accrued pension cost (16,813) (13,600)
Additional minimum liability (1,868) (2,088)
Accumulated other comprehensive loss 1,280 1,247
Intangible asset 589 841
-------- --------
Net amount recognized on balance sheet $ 4,639 $ (8,354)
======== ========
-27-
The plan expense for the non-qualified benefit plan included the following
components (in thousands):
Year Ended December 31 2003 2002 2001
------- ------- -------
Service costs $ 3,551 $ 2,587 $ 2,513
Interest cost 5,867 5,467 4,749
Expected return on plan assets (5,492) (4,771) (4,917)
Special termination benefit 3,790 1,302 94
Curtailment gain (loss) 365 (324) --
Conforming adjustment -- -- 412
Adjustment for acquisition -- -- (174)
Net amortization 928 194 68
------- ------- -------
Net benefit expense $ 9,009 $ 4,455 $ 2,745
======= ======= =======
Assumptions for the Year Ended December 31 2003 2002 2001
---- ---- ----
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 assets 8.00% 8.00% 8.26%
The expected long-term rate of return on plan assets has been established
by considering historical and anticipated expected returns on the asset classes
invested in by the pension trust and the allocation strategy currently in place
among those classes.
Following are asset allocations for the Corporation's retirement plan as
of December 31, 2003 and 2002, and the target allocation for 2004, by asset
category:
TARGET
ALLOCATION PERCENTAGE OF PLAN ASSETS
December 31 2004 2003 2002
---------- ---------- ------
ASSET CATEGORY
Equity securities 45 - 65% 52% 49%
Debt securities 33 - 53% 39% 43%
Cash equivalents 0 - 5% 9% 8%
Equity securities include 189,178 shares of the Corporation's common stock
totaling $6.7 million (7.9% of total plan assets) and 165,884 shares totaling
$4.6 million (7.9% of plan assets) as of December 31, 2003 and 2002,
respectively. Dividends received on these shares totaled $170,000 and $73,000
for 2003 and 2002, respectively.
The Corporation's investment strategy is to diversify plan assets between
a wide mix of securities within the equity and debt markets in an effort to
allow the account the opportunity to meet the expected long-term rate of return
requirements while minimizing short-term volatility. In this regard, the plan
has targeted allocations within the equity securities category for domestic
large cap, domestic mid cap, domestic small cap and international securities.
Within the debt securities category, the plan has targeted allocation levels for
U.S. Treasury, U.S. Agency, intermediate term corporate bonds and inflation
protected securities.
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 was $1.4
million in 2003, $1.1 million in 2002 and $1.0 million in 2001.
-28-
19. OTHER POSTRETIREMENT BENEFIT PLANS
Following are reconciliations of the change in benefit obligation, change
in plan assets and funded status (in thousands):
December 31 2003 2002
------- -------
Projected benefit obligation at beginning of year $ 6,665 $ 3,534
Service cost 290 149
Interest cost 365 332
Plan participants' contributions 108 138
Plan amendments -- 565
Actuarial (gain) loss (555) 2,605
Benefits paid (554) (592)
Adjustment for acquisition -- 19
Curtailment and settlement -- (85)
Special termination benefits 149 --
------- -------
Projected benefit obligation at end of year $ 6,468 $ 6,665
======= =======
December 31 2003 2002
------- -------
Fair value of plan assets at beginning of year $ 0 $ 0
Company contribution 446 454
Plan participants' contributions 108 138
Benefits paid (554) (592)
------- -------
Fair value of plan assets at end of year $ 0 $ 0
======= =======
December 31 2003 2002
------- -------
Funded status of plan $(6,468) $(6,665)
Unrecognized actuarial loss 1,734 2,274
Unrecognized prior service cost 432 510
Unrecognized net transition obligation 299 334
------- -------
Accrued pension cost $(4,003) $(3,547)
======= =======
December 31 2003 2002
---- ----
Discount rate 6.00% 6.75%
Assumed healthcare cost trend:
Initial trend 10.00% 9.00%
Ultimate trend 5.00% 5.00%
Year ultimate trend reached 2009 2007
The change in plan assets reflects benefits paid and contributions made to
the plan in the same amount. This amount represents the actual benefit payments
paid from general plan assets of $554,000 and $592,000 for 2003 and 2002,
respectively.
Net periodic postretirement benefit cost includes the following components
(in thousands):
Year Ended December 31 2003 2002 2001
----- ----- -----
Service costs $ 290 $ 149 $ 96
Interest cost 365 332 240
Curtailment and settlement -- 57 (14)
One time charge for voluntary retirement 149 -- 230
Special termination benefit -- 19 32
Net amortization 98 69 27
----- ----- -----
Net periodic postretirement benefit cost $ 902 $ 626 $ 611
===== ===== =====
-29-
Assumptions for the Year Ended December 31 2003 2002 2001
----- ----- -----
Discount rate 6.75% 7.25% 7.50%
Assumed healthcare cost trend:
Initial trend 9.00% 8.00% 6.75%
Ultimate trend 5.00% 5.00% 5.00%
Year ultimate cost trend reached 2007 2005 2003
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 2003 service and interest cost and
the accumulated postretirement benefit obligation at December 31, 2003 (in
thousands):
1% INCREASE 1% DECREASE
----------- -----------
Effect on service and interest components of net periodic cost $ 67 $ (58)
Effect on accumulated postretirement benefit obligation 520 (456)
20. INCOME TAXES
Income tax expense, allocated based on a separate tax return basis,
consists of the following (in thousands):
Year Ended December 31 2003 2002 2001
-------- -------- --------
Current income taxes
Federal taxes $ 1,955 $ 16,732 $ 5,944
State taxes 1,012 563 (804)
-------- -------- --------
2,967 17,295 5,140
Deferred income taxes:
Federal taxes 6,714 (4,012) 4,879
State taxes (715) 445 895
-------- -------- --------
$ 8,966 $ 13,728 $ 10,914
======== ======== ========
The tax effects of temporary differences that give rise to deferred tax
assets and liabilities are presented below (in thousands):
December 31 2003 2002
-------- --------
Deferred tax assets:
Allowance for loan losses $ 16,149 $ 16,444
Deferred compensation 2,080 1,985
Deferred benefits 1,298 5,476
Minimum benefit plan liability 416 310
Loan fees (1,065) 208
Other 268 375
-------- --------
TOTAL GROSS DEFERRED TAX ASSETS 19,146 24,798
======== ========
Deferred tax liabilities:
Depreciation 675 1,793
Deferred gain on sale of subsidiary (3,555) (3,555)
Net unrealized securities gains (5,002) (6,929)
Leasing (1,075) (3,890)
Other (3,539) (1,794)
-------- --------
TOTAL GROSS DEFERRED TAX LIABILITIES (12,496) (14,375)
-------- --------
NET DEFERRED TAX ASSETS $ 6,650 $ 10,423
======== ========
-30-
Following is a reconciliation between tax expense using federal statutory
tax and actual effective tax:
Year Ended December 31 2003 2002 2001
---- ---- ----
Federal statutory tax 35.0% 35.0% 35.0%
Effect of nontaxable interest and dividend income (10.2) (11.1) (10.7)
State taxes 0.5 0.2 0.3
Goodwill 0.1 0.9 0.2
Merger and consolidation related costs 1.7 4.6 0.6
Other items (2.2) 0.9 0.2
----- ----- -----
Actual effective taxes applicable to continuing operations 24.9% 30.5% 25.6%
===== ===== =====
Income tax expense related to gains on the sale of securities was
$682,000, $680,000 and $638,000 for 2003, 2002 and 2001, respectively.
21. EARNINGS PER SHARE
The following tables set forth the computation of basic and diluted
earnings per share (dollars in thousands, except per share data):
BASIC
Year Ended December 31 2003 2002 2001
------------ ------------ ------------
Income from continuing operations $ 27,038 $ 31,271 $ 31,769
Income from discontinued operations 31,751 32,064 21,216
Preferred stock dividends (62) (242) (293)
------------ ------------ ------------
Net income applicable to basic earnings per share $ 58,727 $ 63,093 $ 52,692
============ ============ ============
Average common shares outstanding 46,080,966 46,012,908 44,289,772
============ ============ ============
Basic earnings per share:
From continuing operations $ .58 $ .68 $ .71
From discontinued operations .69 .69 .48
------------ ------------ ------------
Total basic earnings per share $ 1.27 $ 1.37 $ 1.19
============ ============ ============
DILUTED
Year Ended December 31 2003 2002 2001
------------ ------------ ------------
Income from continuing operations $ 27,038 $ 31,271 $ 31,769
Income from discontinued operations 31,751 32,064 21,216
------------ ------------ ------------
Net income applicable to diluted earnings per share $ 58,789 $ 63,335 $ 52,985
============ ============ ============
Average common shares outstanding 46,080,966 46,012,908 44,289,772
Convertible preferred stock 63,927 341,886 418,682
Net effect of dilutive stock options based on the treasury
stock method using the average market price 827,970 718,991 677,041
------------ ------------ ------------
46,972,863 47,073,785 45,385,495
============ ============ ============
Diluted earnings per share:
From continuing operations $ .57 $ .67 $ .70
From discontinued operations .68 .68 .47
------------ ------------ ------------
Total diluted earnings per share $ 1.25 $ 1.35 $ 1.17
============ ============ ============
-31-
22. REGULATORY MATTERS
Quantitative measures established by regulators to ensure capital adequacy
requires the Corporation and its banking subsidiary 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, 2003, that the Corporation and
its banking subsidiary meets all capital adequacy requirements to which they are
subject.
As of December 31, 2003, the Corporation and its banking subsidiary has
been categorized by the various regulators as "well capitalized" under the
regulatory framework for prompt corrective action.
The Corporation and its banking subsidiary 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 subsidiary 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 its banking subsidiary's capital amounts and
classifications are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors.
Following are the capital ratios as of December 31, 2003 for the
Corporation and its banking subsidiary, 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 $640,697 10.9% $587,226 10.0% $469,781 8.0%
First National Bank of Pennsylvania 338,569 10.8% 312,069 10.0% 249,655 8.0%
Tier 1 Capital (to risk-weighted assets):
F.N.B. Corporation 537,916 9.2% 352,336 6.0% 234,891 4.0%
First National Bank of Pennsylvania 299,552 9.6% 187,241 6.0% 124,828 4.0%
Tier 1 Capital (to average assets):
F.N.B. Corporation 537,916 6.7% 401,246 5.0% 320,997 4.0%
First National Bank of Pennsylvania 299,552 6.9% 216,272 5.0% 173,018 4.0%
As of December 31,2003, the Corporation's total capital to risk-weighted
assets, tier 1 capital to risk-weighted assets and tier 1 capital to average
assets were 10.9%, 9.2% and 6.7%, respectively. These ratios are above the
well-capitalized and minimum capital requirements noted in the above table.
The Corporation's banking subsidiary was required to maintain aggregate
cash reserves with the Federal Reserve Bank amounting to $37.4 million at
December 31, 2003. 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, 2003, the Corporation's subsidiaries had $40.8 million of
retained earnings available for distribution without prior regulatory approval.
Under current Federal Reserve regulations, the Corporation's banking
subsidiary is limited in the amount it may lend to non-bank affiliates,
including the Corporation. Such loans must be secured by specified collateral.
In addition, any such loans to a non-bank affiliate may not exceed 10% of the
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
Corporation under these provisions approximated $44.8 million at December 31,
2003.
-32-
23. BUSINESS SEGMENTS
The Corporation operates in four reportable segments: a community bank,
wealth management, an insurance agency and consumer finance. The Corporation's
community bank offers services traditionally offered by full-service commercial
banks, including commercial and individual demand and time deposit accounts and
commercial, mortgage and individual installment loans. Wealth Management
provides a broad range of personal and corporate fiduciary services including
the administration of decedent and trust estates. In addition, it offers various
alternative products, including securities brokerage and investment advisory
services, mutual funds and annuities. The Corporation's insurance agency is a
full-service insurance agency 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 with
approximately 15% of its volume being derived from the purchase of installment
sales finance contracts from retail merchants. This activity is funded through
the sale of the Corporation's subordinated notes at the finance company's branch
offices. The following tables provide financial information for these segments
(in thousands). Other items shown in the tables represent the parent company,
other non-bank subsidiaries and elimination, which are necessary for purposes of
reconciling to the consolidated amounts.
WEALTH
COMMUNITY MANAGE- INSURANCE FINANCE
BANK MENT AGENCY COMPANY OTHER CONSOLIDATED
---------- ---------- ---------- ---------- ---------- ------------
AT OR FOR THE YEAR ENDED
DECEMBER 31, 2003
Interest income $ 228,346 $ 21 $ 35 $ 28,586 $ 31 $ 257,019
Interest expense 78,675 9 5 5,174 3,127 86,990
Provision for loan losses 11,353 -- -- 5,802 -- 17,155
Non-interest income 45,938 11,787 3,075 1,872 5,483 68,155
Non-interest expense 126,790 10,041 3,426 12,508 30,088 182,853
Intangible amortization 1,967 4 116 -- 85 2,172
Income tax expense (benefit) 14,811 563 (156) 2,599 (8,851) 8,966
Income from continuing
operations 40,688 1,191 (281) 4,375 (18,935) 27,038
Income from discontinued
operations 28,981 (84) 2,854 -- -- 31,751
Net income 69,669 1,107 2,573 4,375 (18,935) 58,789
Total assets from continuing
operations 4,385,455 3,479 6,070 147,444 14,726 4,557,174
Goodwill from continuing
operations 24,331 -- 2,570 1,809 -- 28,710
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WEALTH
COMMUNITY MANAGE- INSURANCE FINANCE
BANK MENT AGENCY COMPANY OTHER CONSOLIDATED
---------- ---------- ---------- ---------- ---------- ------------
AT OR FOR THE YEAR ENDED
DECEMBER 31, 2002
Interest income $ 249,897 $ 5 $ 38 $ 28,096 $ (2,183) $ 275,853
Interest expense 89,542 -- 41 6,618 2,171 98,372
Provision for loan losses 8,323 -- -- 5,301 -- 13,624
Non-interest income 41,953 11,662 3,288 1,781 7,461 66,145
Non-interest expense 126,863 10,077 2,600 12,519 30,824 182,883
Intangible amortization 1,962 1 71 -- 86 2,120
Income tax expense (benefit) 18,982 592 187 1,962 (7,995) 13,728
Income from continuing
operations 46,178 997 427 3,477 (19,808) 31,271
Income from discontinued
operations 29,072 (427) 3,419 -- -- 32,064
Net income 75,250 570 3,846 3,477 (19,808) 63,335
Total assets from continuing
operations 4,196,746 2,436 7,265 148,400 181 4,355,028
Goodwill from continuing
operations 21,831 -- 2,107 1,809 -- 25,747
AT OR FOR THE YEAR ENDED
DECEMBER 31, 2001
Interest income $ 275,221 $ 2 $ 55 $ 28,555 $ (2,195) $ 301,638
Interest expense 126,080 -- 68 8,711 125 134,984
Provision for loan losses 21,486 -- -- 5,241 -- 26,727
Non-interest income 38,969 3,464 3,058 1,875 4,649 52,015
Non-interest expense 120,715 1,778 1,871 12,407 10,417 147,188
Intangible amortization 597 (176) 775 126 749 2,071
Income tax expense (benefit) 12,461 683 200 1,443 (3,873) 10,914
Income from continuing
operations 32,851 1,181 199 2,502 (4,964) 31,769
Income from discontinued
operations 19,250 (828) 2,794 -- -- 21,216
Net income 52,101 353 2,993 2,502 (4,964) 52,985
Total assets from continuing
operations 4,101,900 1,188 4,902 153,706 24,683 4,286,379
Goodwill from continuing
operations 21,725 -- 1,117 1,809 -- 24,651
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24. CASH FLOW INFORMATION
Following is a summary of cash flow information (in thousands):
Year Ended December 31 2003 2002 2001
--------- --------- ---------
Cash paid during year for:
Interest $ 85,042 $ 104,135 $ 136,507
Income taxes (8,149) 18,379 14,565
Non-cash Investing and Financing Activities:
Acquisition of real estate in settlement of loans 3,374 2,038 1,397
Loans granted in the sale of other real estate 60 739 1,964
25. PARENT COMPANY FINANCIAL STATEMENTS
Below is condensed financial information of F.N.B. Corporation (parent
company only). In this information, the parent company'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 2003 2002
--------- ---------
ASSETS
Cash and cash equivalents $ 15,906 $ 8,869
Premises and equipment 1,392 5,539
Other assets 16,461 29,100
Assets of discontinued operations 364,956 265,203
Investment in bank holding company 31,278 35,358
Investment in and advance to bank subsidiary 369,433 281,687
Investment in and advance to non-bank subsidiaries 131,166 169,733
--------- ---------
TOTAL ASSETS $ 930,592 $ 795,489
========= =========
LIABILITIES
Other liabilities $ 22,642 $ 34,842
Debentures to Statutory Trust 125,000 --
Subordinated notes:
Short-term 145,524 132,378
Long-term 30,517 29,673
--------- ---------
TOTAL LIABILITIES 323,683 196,893
--------- ---------
STOCKHOLDERS' EQUITY 606,909 598,596
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 930,592 $ 795,489
========= =========
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INCOME STATEMENT (in thousands)
Year Ended December 31 2003 2002 2001
--------- --------- ---------
INCOME
Dividend income from subsidiaries:
Bank $ 37,924 $ 61,394 $ 45,071
Non-bank 6,527 8,050 3,341
--------- --------- ---------
44,451 69,444 48,412
Interest income 3,776 5,500 574
Affiliate service fee income 11,882 12,723 23,217
Other income 1,210 1,188 903
--------- --------- ---------
TOTAL INCOME 61,319 88,855 73,106
--------- --------- ---------
EXPENSES
Interest expense 11,632 8,568 10,333
Salaries and personnel expense 13,488 13,620 19,327
Merger and consolidation expense -- 18,798 3,695
Other expenses 21,380 8,207 13,581
--------- --------- ---------
TOTAL EXPENSES 46,500 49,193 46,936
INCOME BEFORE TAXES AND EQUITY IN UNDISTRIBUTED
INCOME OF SUBSIDIARIES 14,819 39,662 26,170
Income Tax Benefit 10,016 8,885 7,801
--------- --------- ---------
24,835 48,547 33,971
Equity in undistributed income of subsidiaries:
Bank (3,124) (16,455) (10,838)
Non-bank 5,327 (821) 8,636
--------- --------- ---------
INCOME FROM CONTINUING OPERATIONS 27,038 31,271 31,769
Dividends from discontinued operations 66,152 24,516 20,118
Undistributed earnings from discontinued operations (34,401) 7,548 1,098
--------- --------- ---------
Income from discontinued operations 31,751 32,064 21,216
--------- --------- ---------
NET INCOME $ 58,789 $ 63,335 $ 52,985
========= ========= =========
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STATEMENT OF CASH FLOWS (in thousands)
Year Ended December 31 2003 2002 2001
--------- --------- ---------
OPERATING ACTIVITIES
Income from continuing operations $ 27,038 $ 31,271 $ 31,769
Income from discontinued operations 31,751 32,064 21,216
Adjustments to reconcile net income to net
cash flows from operating activities:
Undistributed earnings from subsidiaries (2,203) 17,276 2,202
Other, net 953 14,867 (10,847)
Other assets from discontinued operations, net 34,401 (7,548) (1,098)
--------- --------- ---------
Net cash flows from operating activities 91,940 87,930 43,242
--------- --------- ---------
INVESTING ACTIVITIES
Sale of securities available for sale -- -- 190
Sale (purchase) of premises and equipment 3,440 (3,083) (1,965)
Net decrease in loans receivable -- -- 4,800
Advances to subsidiaries (47,990) (86,551) --
Investment in subsidiaries (135,950) 52,711 (12,165)
--------- --------- ---------
Net cash flows from investing activities (180,500) (36,923) (9,140)
--------- --------- ---------
FINANCING ACTIVITIES
Net increase (decrease) in short-term borrowings 13,145 (979) 5,725
Decrease in long-term debt (7,067) (14,513) (15,390)
Increase in long-term debt 132,912 8,346 6,740
Net acquisition of treasury stock (521) (7,090) (42)
Cash dividends paid (42,872) (37,516) (32,300)
--------- --------- ---------
Net cash flows from financing activities 95,597 (51,752) (35,267)
--------- --------- ---------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS 7,037 (745) (1,165)
Cash and cash equivalents at beginning of year 8,869 9,614 10,779
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 15,906 $ 8,869 $ 9,614
--------- --------- ---------
Cash paid during the year for:
Interest $ 11,600 $ 8,558 $ 9,069
26. 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.
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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 2003 2002
-------------------------- --------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ---------- ---------- ----------
FINANCIAL ASSETS
Cash and short term investments $ 106,312 $ 106,312 $ 132,261 $ 132,261
Securities available for sale 878,667 878,667 657,547 657,547
Securities held to maturity 24,030 25,009 32,367 33,288
Net loans, including loans held for sale 3,214,493 3,203,947 3,212,401 3,282,071
FINANCIAL LIABILITIES
Deposits $3,439,510 $3,461,240 $3,304,105 $3,330,595
Short-term borrowings 232,966 232,982 255,370 254,314
Long-term debt 584,808 588,834 400,056 425,649
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