10-Q 1 0001.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2000 ------------------------------------------------ OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________________ to ______________________ Commission file number 0-8144 ------ F.N.B. CORPORATION -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Pennsylvania 25-1255406 --------------------------------------- ------------------------------------- (State or other jurisdiction of (I.R.S. Employee Identification No.) incorporation or organization) One F.N.B. Boulevard, Hermitage, PA 16148 -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (724) 981-6000 -------------------------------------------------------------------------------- (Registrant's telephone number, including area code Not applicable -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ---- ---- APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ____ No____ APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at October 31, 2000 ----- ------------------------------- Common Stock, $2 Par Value 22,047,458 Shares -------------------------- ----------------- F.N.B. CORPORATION FORM 10-Q September 30, 2000 INDEX PART I - FINANCIAL INFORMATION PAGE Item 1. Financial Statements Consolidated Balance Sheet 2 Consolidated Income Statement 3 Consolidated Statement of Cash Flows 4 Notes to Consolidated Financial Statements 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 3. Quantitative and Qualitative Disclosure of Market Risk 17 PART II - OTHER INFORMATION Item 1. Legal Proceedings 18 Item 2. Changes in Securities 18 Item 3. Defaults Upon Senior Securities 18 Item 4. Submission of Matters to a Vote of Security Holders 18 Item 5. Other Information 18 Item 6. Exhibits and Reports on Form 8-K 18 Signatures 19 F.N.B. CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET Dollars in thousands, except par values Unaudited SEPTEMBER 30, DECEMBER 31, 2000 1999 ------------- ------------ ASSETS Cash and due from banks $ 121,168 $ 171,183 Interest bearing deposits with banks 3,476 3,478 Federal funds sold 25,674 7,467 Mortgage loans held for sale 26,242 8,733 Securities available for sale 412,283 408,731 Securities held to maturity (fair value of $64,434 and $75,905) 65,255 77,359 Loans, net of unearned income of $67,856 and $61,976 2,961,729 2,803,774 Allowance for loan losses (39,259) (36,311) ---------- ---------- NET LOANS 2,922,470 2,767,463 ---------- ---------- Premises and equipment 107,783 105,052 Other assets 173,994 156,718 ---------- ---------- $3,858,345 $3,706,184 ========== ========== LIABILITIES Deposits: Non-interest bearing $ 430,425 $ 424,352 Interest bearing 2,617,297 2,485,082 ---------- ---------- TOTAL DEPOSITS 3,047,722 2,909,434 Other liabilities 67,287 56,604 Short-term borrowings 307,653 332,197 Long-term debt 122,001 117,634 ---------- ---------- TOTAL LIABILITIES 3,544,663 3,415,869 ---------- ---------- STOCKHOLDERS' EQUITY Preferred stock - $10 par value Authorized - 20,000,000 shares Issued - 172,802 and 207,459 shares Aggregate liquidation value - $4,320 and $5,186 1,728 2,075 Common stock - $2 par value Authorized - 100,000,000 shares Issued - 22,478,436 and 21,005,720 shares 44,957 42,011 Additional paid-in capital 206,098 182,834 Retained earnings 68,680 71,310 Accumulated other comprehensive income (2,266) (4,803) Treasury stock - 258,162 and 121,132 shares at cost (5,515) (3,112) ---------- ---------- TOTAL STOCKHOLDERS' EQUITY 313,682 290,315 ---------- ---------- $3,858,345 $3,706,184 ========== ========== See accompanying Notes to Consolidated Financial Statements F.N.B. CORPORATION AND SUBSIDIARIES CONSOLIDATED INCOME STATEMENT Dollars in thousands, except per share data Unaudited THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------ ------------------ 2000 1999 2000 1999 -------- -------- -------- -------- INTEREST INCOME Loans, including fees $ 66,855 $ 56,156 $192,827 $162,737 Securities: Taxable 6,444 6,980 19,086 21,083 Nontaxable 466 491 1,434 1,700 Dividends 493 381 1,325 1,130 Other 444 177 741 1,219 -------- -------- -------- -------- TOTAL INTEREST INCOME 74,702 64,185 215,413 187,869 -------- -------- -------- -------- INTEREST EXPENSE Deposits 29,056 21,995 80,153 67,156 Short-term borrowings 4,531 3,526 12,291 7,561 Long-term debt 2,335 1,143 6,004 3,110 -------- -------- -------- -------- TOTAL INTEREST EXPENSE 35,922 26,664 98,448 77,827 -------- -------- -------- -------- NET INTEREST INCOME 38,780 37,521 116,965 110,042 Provision for loan losses 2,439 2,105 8,313 6,696 -------- -------- -------- -------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 36,341 35,416 108,652 103,346 -------- -------- -------- -------- NON-INTEREST INCOME Insurance commissions and fees 5,058 2,679 13,407 8,057 Service charges 5,568 5,221 16,261 14,706 Trust 1,162 975 3,309 2,736 Gain on sale of securities 64 380 142 1,286 Gain on sale of loans 757 473 1,345 1,908 Gain on sale of a branch 603 603 Other 2,047 1,953 5,514 5,684 -------- -------- -------- -------- TOTAL NON-INTEREST INCOME 14,656 12,284 39,978 34,980 -------- -------- -------- -------- 50,997 47,700 148,630 138,326 -------- -------- -------- -------- NON-INTEREST EXPENSES Salaries and employee benefits 19,248 17,713 57,372 52,315 Net occupancy 2,389 2,185 6,914 6,633 Equipment 3,143 2,787 9,281 8,064 Merger related 1,333 Other 10,216 9,992 28,924 28,421 -------- -------- -------- -------- TOTAL NON-INTEREST EXPENSES 34,996 32,677 102,491 96,766 -------- -------- -------- -------- INCOME BEFORE INCOME TAXES 16,001 15,023 46,139 41,560 Income taxes 5,067 4,678 14,677 12,578 -------- -------- -------- -------- NET INCOME $ 10,934 $ 10,345 $ 31,462 $ 28,982 ======== ======== ======== ======== NET INCOME PER COMMON SHARE:* Basic $.49 $.47 $1.42 $1.31 ==== ==== ===== ===== Diluted $.48 $.45 $1.38 $1.27 ==== ==== ===== ===== CASH DIVIDENDS PER COMMON SHARE* $.18 $.17 $ .53 $ .50 ==== ==== ===== ===== * Restated to reflect a 5 percent stock dividend declared on April 17, 2000. See accompanying Notes to Consolidated Financial Statements F.N.B. CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS Dollars in thousands Unaudited NINE MONTHS ENDED SEPTEMBER 30, ----------------- 2000 1999 --------- --------- OPERATING ACTIVITIES Net income $ 31,462 $ 28,982 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 9,414 7,919 Provision for loan losses 8,313 6,696 Deferred taxes (1,684) 7,565 Net gain on sale of securities (142) (1,286) Net gain on sale of loans (1,345) (1,908) Proceeds from sale of loans 17,801 45,858 Loans originated for sale (33,965) (35,667) Net change in: Interest receivable (2,671) (358) Interest payable 4,802 (151) Other, net (9,025) (7,894) --------- --------- Net cash flows from operating activities 22,960 49,756 --------- --------- INVESTING ACTIVITIES Net change in: Interest bearing deposits with banks 2 (1,097) Federal funds sold (18,207) 41,459 Loans (164,166) (262,851) Securities available for sale: Purchases (68,727) (148,722) Sales 12,977 17,258 Maturities 56,374 140,644 Securities held to maturity: Purchases (1,664) (1,012) Maturities 13,770 33,992 Increase in premises and equipment (10,813) (15,256) --------- --------- Net cash flows from investing activities (180,454) (195,585) --------- --------- FINANCING ACTIVITIES Net change in: Non-interest bearing deposits, savings and NOW 9,963 (20,191) Time deposits 128,325 (18,793) Short-term borrowings (24,544) 190,141 Increase in long-term debt 40,467 2,453 Decrease in long-term debt (36,100) (22,234) Net acquisition of treasury stock 1,322 (3,996) Cash dividends paid (11,954) (11,830) --------- --------- Net cash flows from financing activities 107,479 115,550 --------- --------- NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS (50,015) (30,279) Cash and due from banks at beginning of period 171,183 134,847 --------- --------- CASH AND DUE FROM BANKS AT END OF PERIOD $ 121,168 $ 104,568 ========= ========= See accompanying Notes to Consolidated Financial Statements F.N.B. CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 2000 BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. For further information, refer to the consolidated financial statements for the year ended December 31, 1999 and footnotes thereto included in the Corporation's Annual Report on Form 10-K. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that affect the amounts reported in the financial statements. The Corporation cautions that any forward looking statements contained in this report, in a report incorporated by reference to this report or made by management of the Corporation, involve risks and uncertainties and are subject to change based upon various factors. Actual results could differ materially from those expressed or implied. MERGERS AND ACQUISITIONS On August 15, 2000 the Corporation completed its affiliation with Altamura, Marsh and Associates, based in Clearwater and Fort Myers, Florida. The transaction was accounted for as a purchase. Altamura, Marsh and Associates is operating as a division of Roger Bouchard Insurance, Inc., a wholly-owned subsidiary of the Corporation. On July 31, 2000, the Corporation's wholly-owned consumer finance subsidiary, Regency Finance Company, completed its acquisition of eight offices in Tennessee having gross loans of $42.0 million. The transaction, which was accounted for as a purchase, resulted in the recognition of $1.2 million of goodwill. The Corporation regularly evaluates the potential acquisition of, and holds discussions with, various acquisition candidates and as a general rule the Corporation publicly announces such acquisitions only after a definitive agreement has been reached. NEW ACCOUNTING STANDARD Financial Accounting Standards Statement (FAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," requires all derivatives to be recorded on the balance sheet at fair value and establishes standard accounting methodologies for hedging activities. The statement is effective for the Corporation's fiscal year ending December 31, 2001. Because the Corporation has not entered into any derivative transactions, the adoption of this statement is not anticipated to have a material impact on the financial statements. PER SHARE AMOUNTS Per share amounts have been adjusted for common stock dividends, including the 5 percent stock dividend declared on April 17, 2000. Basic earnings per share is calculated by dividing net income, adjusted for preferred stock dividends declared, by the sum of the weighted average number of shares of common stock outstanding. Diluted earnings per common share is calculated by dividing net income by the weighted average number of shares of common stock outstanding, assuming conversion of outstanding convertible preferred stock from the beginning of the year or date of issuance and the exercise of stock options and warrants. Such adjustments to net income and the weighted average number of shares of common stock are made only when such adjustments dilute earnings per share. EARNINGS PER SHARE The following tables set forth the computation of basic and diluted earnings per share (in thousands, except per share data): Three Months Ended Nine Months Ended September 30, September 30, ----------------------- ----------------------- 2000 1999 2000 1999 ---------- ---------- ---------- ---------- BASIC Net income $ 10,934 $ 10,345 $ 31,462 $ 28,982 Less: Preferred stock dividends declared (83) (102) (180) (263) ---------- ---------- ---------- ---------- Earnings applicable to basic earnings per share $ 10,851 $ 10,243 $ 31,282 $ 28,719 ========== ========== ========== ========== Average common shares outstanding 22,189,281 21,839,130 22,000,511 21,838,704 ========== ========== ========== ========== Earnings per share $.49 $.47 $1.42 $1.32 ==== ==== ===== ===== Three Months Ended Nine Months Ended September 30, September 30, ----------------------- ----------------------- 2000 1999 2000 1999 ---------- ---------- ---------- ---------- DILUTED Earnings applicable to diluted earnings per share $ 10,934 $ 10,345 $ 31,462 $ 28,982 ========== ========== ========== ========== Average common shares outstanding 22,189,281 21,839,130 22,000,511 21,838,704 Series A convertible preferred stock 22,924 20,230 22,924 20,230 Series B convertible preferred stock 392,449 521,402 415,406 535,635 Net effect of dilutive stock options and stock warrants based on the treasury stock method 345,616 489,737 358,591 467,007 ---------- ---------- ---------- ---------- 22,950,270 22,870,499 22,797,432 22,861,576 ========== ========== ========== ========== Earnings per share $.48 $.45 $1.38 $1.27 ==== ==== ===== ===== CASH FLOW INFORMATION Following is a summary of supplemental cash flow information (in thousands): Nine Months Ended September 30 ------------------- 2000 1999 ------- ------- Cash paid for: Interest $93,646 $77,978 Taxes 6,994 6,328 Noncash Investing and Financing Activities: Acquisition of real estate in settlement of loans 1,311 3,455 Loans granted in the sale of other real estate 465 91 COMPREHENSIVE INCOME The components of comprehensive income, net of related tax, are as follows (in thousands): Three Months Ended Nine Months Ended September 30, September 30, ---------------------- --------------------- 2000 1999 2000 1999 -------- -------- -------- -------- Net income $ 10,934 $ 10,345 $ 31,462 $ 28,982 Other comprehensive income: Unrealized gains on securities: Unrealized holding (losses) gains arising during the period 3,202 (564) 2,684 (7,017) Less: reclassification adjustment for gains included in net income (38) (270) (147) (832) -------- -------- -------- -------- Other comprehensive income 3,164 (834) 2,537 (7,849) -------- -------- -------- -------- Comprehensive income $ 14,098 $ 9,511 $ 33,999 $ 21,133 ======== ======== ======== ======== BUSINESS SEGMENTS The Corporation operates in two reportable segments: community banks and insurance agencies. The Corporation's community bank subsidiaries offer services traditionally offered by full-service commercial banks, including commercial and individual demand and time deposit accounts and commercial, mortgage and individual installment loans. In addition to traditional banking products, the Corporation's community bank subsidiaries offer trust services as well as various alternative products, including securities brokerage and investment advisory services, mutual funds, insurance and annuities. The Corporation's insurance agencies are full-service insurance companies offering all lines of commercial and personal insurance through major carriers. The following tables provide financial information for these segments of the Corporation (in thousands). Other items shown in the tables below represent the parent company, other non-bank subsidiaries and eliminations, which are necessary for purposes of reconciling to the consolidated amounts. At or for the three months Community Insurance All ended September 30, 2000 Banks Agencies Other Consolidated ---------- ---------- --------- ------------ Interest income $ 69,254 $ 27 $ 5,421 $ 74,702 Interest expense 34,459 53 1,410 35,922 Provision for loan losses 1,349 1,090 2,439 Non-interest income 9,445 3,797 1,414 14,656 Non-interest expense 27,308 3,256 3,875 34,439 Intangible amortization 443 83 31 557 Income tax expense (credit) 4,876 227 (36) 5,067 Net income 10,264 205 465 10,934 Core operating earnings 10,264 205 465 10,934 Total assets 3,732,712 17,810 107,823 3,858,345 At or for the three months Community Insurance All ended September 30, 1999 Banks Agencies Other Consolidated ---------- ---------- --------- ------------ Interest income $ 60,788 $ 14 $ 3,383 $ 64,185 Interest expense 25,960 21 683 26,664 Provision for loan losses 1,460 645 2,105 Non-interest income 8,531 1,942 1,811 12,284 Non-interest expense 26,885 1,476 3,821 32,182 Intangible amortization 454 29 12 495 Income tax expense (credit) 4,736 (58) 4,678 Net income 9,824 430 91 10,345 Core operating earnings 9,432 430 458 10,320 Total assets 3,457,956 6,582 79,501 3,544,039 At or for the nine months Community Insurance All ended September 30, 2000 Banks Agencies Other Consolidated ---------- ---------- --------- ------------ Interest income $ 200,280 $ 60 $ 15,073 $ 215,413 Interest expense 95,122 99 3,227 98,448 Provision for loan losses 5,303 3,010 8,313 Non-interest income 26,955 9,961 3,062 39,978 Non-interest expense 83,514 7,594 9,902 101,010 Intangible amortization 1,328 100 53 1,481 Income tax expense 13,362 917 398 14,677 Net income 28,606 1,311 1,545 31,462 Core operating earnings 28,606 1,311 1,545 31,462 Total assets 3,732,712 17,810 107,823 3,858,345 At or for the nine months Community Insurance All ended September 30, 1999 Banks Agencies Other Consolidated ---------- ---------- --------- ------------ Interest income $ 177,222 $ 37 $ 10,610 $ 187,869 Interest expense 75,575 63 2,189 77,827 Provision for loan losses 4,761 1,935 6,696 Non-interest income 24,536 5,548 4,896 34,980 Non-interest expense 81,099 4,069 10,159 95,327 Intangible amortization 1,377 29 33 1,439 Income tax expense 12,330 248 12,578 Net income 26,616 1,424 942 28,982 Core operating earnings 27,043 1,424 1,309 29,776 Total assets 3,457,956 6,582 79,501 3,544,039 * Core operating earnings exclude gain on the sale of a branch of $392,000 and non-recurring costs of $367,000 for the three months ended September 30, 1999 and merger related costs of $819,000, gain on the sale of a branch of $392,000 and other non-recurring costs of $367,000 for the nine months ended September 30, 1999, all on an after-tax basis. PART I ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. FINANCIAL INFORMATION SUMMARY Net income for the first nine months of 2000 increased to $31.5 million from $29.0 million for the first nine months of 1999. Basic earnings per share were $1.42 and $1.31 for the nine months ended September 30, 2000 and 1999, respectively, while diluted earnings per share were $1.38 and $1.27 for those same periods. Core operating earnings consist of net income adjusted for non- recurring items. Non-recurring items incurred during the first nine months of 1999 included merger related costs of $819,000, gain on the sale of a branch of $392,000 and non-recurring costs of $367,000, all net of tax. Excluding these merger costs, net income was $29.8 million for the first nine months of 1999, resulting in diluted earnings per share of $1.30. There were no non-recurring items during the first nine months of 2000. Highlights for the first nine months of 2000 include: * A return on average assets of 1.1% and a return on average equity of 14.1%. * An increase in non-interest income of $5.0 million, including a 29.3% or $7.5 million increase in fee income, which consists of service charges, insurance commissions and trust income. * A 14.9% increase in average outstanding loans. * Continued strong asset quality. FIRST NINE MONTHS OF 2000 AS COMPARED TO FIRST NINE MONTHS OF 1999: The following table provides information regarding the average balances and yields and rates on interest earning assets and interest bearing liabilities (dollars in thousands): Nine Months Ended September 30 2000 1999 ------------------------ -------------------------- Average Yield/ Average Yield/ Balance Interest Rate Balance Interest Rate ---------- -------- ------ ---------- -------- ------ ASSETS Interest earning assets: Interest bearing deposits with banks $ 3,270 $ 153 6.24% $ 4,738 $ 175 4.92% Federal funds sold 12,458 588 6.29 28,693 1,044 4.85 Securities: Taxable 404,784 19,086 6.30 459,233 21,083 6.14 Non-taxable (1) 68,791 3,495 6.77 80,585 3,696 6.12 Loans (1) (2) 2,937,102 193,713 8.81 2,555,662 163,455 8.55 ---------- -------- ---------- -------- Total interest earning assets 3,426,405 217,035 8.46 3,128,911 189,453 8.09 ---------- -------- ---------- -------- Cash and due from banks 119,501 108,159 Allowance for loan losses (38,404) (33,712) Premises and equipment 107,168 99,483 Other assets 159,727 146,621 ---------- ---------- $3,774,397 $3,449,462 LIABILITIES Interest bearing liabilities: Deposits: Interest bearing demand $ 491,952 $ 7,995 2.17 $ 466,226 $ 6,738 1.93 Savings 772,883 17,317 2.99 803,352 16,142 2.69 Other time 1,301,750 54,841 5.63 1,163,872 44,276 5.09 Short-term borrowings 287,607 12,291 5.71 221,583 7,561 4.56 Long-term debt 122,309 6,004 6.55 60,899 3,110 6.81 ---------- -------- ---------- -------- Total interest bearing liabilities 2,976,501 98,448 4.42 2,715,932 77,827 3.83 ---------- -------- ---------- -------- Non-interest bearing demand deposits 437,712 395,050 Other liabilities 62,172 53,023 ---------- ---------- 3,476,385 3,164,005 ---------- ---------- STOCKHOLDERS' EQUITY 298,012 285,457 ---------- ---------- $3,774,397 $3,449,462 ========== ========== Net interest earning assets $ 449,904 $ 412,979 ========== ========== Net interest income $118,587 $111,626 ======== ======== Net interest spread 4.04% 4.26% ===== ===== Net interest margin (3) 4.62% 4.77% ===== ===== (1) The amounts are reflected on a fully taxable equivalent basis using the federal statutory tax rate of 35% adjusted for certain federal tax preferences. (2) Average balance includes non-accrual loans. Loans consist of average total loans less average unearned income. The amount of loan fees included in interest income on loans is immaterial. (3) Net interest margin is calculated by dividing the difference between total interest earned and total interest paid by average interest earning assets. Net interest income, the Corporation's primary source of earnings, is the amount by which interest and fees generated by interest earning assets, primarily loans and securities, exceed interest expense on deposits and borrowed funds. During the first nine months of 2000, net interest income, on a fully taxable equivalent basis, totaled $118.6 million, representing a 6.2% increase over the first nine months of 1999. Net interest income consisted of interest income of $217.0 million and interest expense of $98.4 million for the first nine months of 2000 compared to $189.5 million and $77.8 million for each, respectively, for the first nine months of 1999. Net interest margin decreased from 4.77% at September 30, 1999 to 4.62% at September 30, 2000. The yield on total interest earning assets increased by 37 basis points and the rate paid on interest bearing liabilities increased by 59 basis points. Although the Corporation has experienced some margin compression since September 30, 1999, net interest income has risen as earning assets have increased by 9.5%. There is a possibility that the compression could continue as further discussed within the "Liquidity and Interest Rate Sensitivity" section of this report. The following table sets forth certain information regarding changes in net interest income attributable to changes in the volumes and rates of interest earning assets and interest bearing liabilities for the quarter ending September 30, 2000 as compared to the quarter ending September 30, 1999 (in thousands): Volume Rate Net ------- ------- ------- INTEREST INCOME Interest bearing deposits with banks $ (164) $ 142 $ (22) Federal funds sold (959) 503 (456) Securities: Taxable (2,560) 563 (1,997) Non-taxable (733) 532 (201) Loans 25,137 5,121 30,258 ------- ------- ------- 20,721 6,861 27,582 ------- ------- ------- INTEREST EXPENSE Deposits: Interest bearing demand 386 871 1,257 Savings (606) 1,781 1,175 Other time 5,574 4,991 10,565 Short-term borrowings 2,562 2,168 4,730 Long-term debt 3,008 (114) 2,894 ------- ------- ------- 10,924 9,697 20,621 ------- ------- ------- NET CHANGE $ 9,797 $(2,836) $ 6,961 ======= ======= ======= The amount of change not solely due to rate or volume changes was allocated between the change due to rate and the change due to volume based on the net size of the rate and volume changes. Interest income on loans, on a fully taxable equivalent basis, increased 18.5% from $163.5 million for the nine months ended September 30, 1999 to $193.7 million for the nine months ended September 30, 2000. This increase was the result of an increase in average loans of 14.9% and to a lesser degree an increase of 26 basis points in the average yield over the same period last year. Interest expense on deposits increased $13.0 million or 19.4% for the nine months ended September 30, 2000, compared to the same period of 1999, as average interest bearing deposits rose 5.5% over this period. The average balances in time deposits and interest bearing demand deposits increased by $137.9 million and $25.7 million, respectively, while the average balance in savings deposits decreased by $30.5 million. The average balance in non-interest bearing demand deposits increased by $42.7 million. Interest expense on short-term borrowings increased $4.7 million for these same periods due to a $66.0 million increase in average short-term borrowings and a 115 basis point increase in the rate paid on these borrowings. Additionally, interest expense on long-term debt increased $2.9 million from September 30, 1999 due to a $61.4 million increase in average long-term debt, which was partially offset by a decline in the rate paid of 26 basis points. The provision for loan losses charged to operations is a direct result of management's analysis of the adequacy of the allowance for loan losses which takes into consideration factors, including qualitative factors, relevant to the collectibility of the existing portfolio. The provision for loan losses increased 24.1% to $8.3 million for the first nine months of 2000, as compared to $6.7 million for the first nine months of 1999. The increase reflects the Corporation's continued strong loan growth. The allowance for loan losses as a percentage of total loans was 1.33% at September 30, 2000 and 1999. Non-interest income increased 14.3% from $35.0 million during the first nine months of 1999 to $40.0 million during the first nine months of 2000. Insurance commissions and fees, service charges and trust income increased $7.5 million or 29.3% over the first nine months of 1999. These higher levels of fee income are attributable to growth in insurance, increases in deposits and the Corporation's continued expansion into annuity and mutual fund sales and trust services. This increase was offset by decreases of $1.1 million in gains on the sale of securities and $563,000 in gains on the sale of loans during the comparable nine month periods. Additionally, the Corporation recognized a $603,000 gain on the sale of a branch during the nine months ended September 30, 1999. Total non-interest expenses increased 5.9% from $96.8 million during the first nine months of 1999 to $102.5 million during the first nine months of 2000. The increase was primarily attributable to an increase of $5.1 million in salaries and employee benefits. This increase was due to both normal annual salary adjustments and business expansion, as further discussed within the "Mergers and Acquisitions" section of this report. In addition, salaries and benefits have increased as the Corporation supports the expansion into fee based services and insurance. Additionally, net occupancy and equipment has increased $1.5 million during this same period, resulting from several purchase transactions that the Corporation completed after September 30, 1999. Included in non-interest expenses during the first nine months of 1999 was $1.3 million in merger related costs. These expenses were primarily data processing termination, conversion costs and change in control provisions associated with various mergers. The Corporation's income tax expense was $14.7 million for the first nine months of 2000 compared to $12.6 million for the same period of 1999. The effective tax rate of 31.8% for the nine months ended September 30, 2000 was lower than the 35.0% federal statutory tax rate due to the tax benefits resulting from tax-exempt instruments and excludable dividend income. THIRD QUARTER OF 2000 AS COMPARED TO THIRD QUARTER OF 1999 During the third quarter of 2000, net interest income increased $1.3 million or 3.4% over the third quarter of 1999. Total interest income increased $10.5 million or 16.4%, primarily the result of an increase in loan volume and to a lesser extent an increase in the yield on average earning assets from 8.09% to 8.46%. Total interest expense increased $9.3 million or 34.7% during the third quarter of 2000, compared to the third quarter of 1999, due to increases in the average balances of deposits and borrowings . The provision for loan losses totaled $2.4 million for the third quarter of 2000, as compared to $2.1 million for the third quarter of 1999. Non-interest income increased 19.3% during the third quarter of 2000 compared to the same period of 1999, primarily due to a $2.9 million or 32.8% increase in fee based income and insurance. Total non-interest expenses increased 7.1% during the third quarter of 2000, compared to the third quarter of 1999, mainly due to an increase of $1.5 million in salaries and employee benefits, associated with business acquisitions and additional support needed for the Corporation's expansion into fee based services and insurance. LIQUIDITY AND INTEREST RATE SENSITIVITY The Corporation monitors its liquidity position on an ongoing basis to assure that it is able to meet the need for funds at all times. Given the monetary nature of its assets and liabilities and the source of liquidity provided by the available for sale securities portfolio, the Corporation has sufficient sources of funds available as needed to meet its routine, operational cash needs. Additionally, the Corporation has external sources of funds available should it desire to use them. These include approved lines of credit with several major domestic banks, of which $33.0 million was unused at September 30, 2000. To further meet its liquidity needs, the Corporation also has access to the Federal Home Loan Bank and the Federal Reserve Bank, as well as other funding sources. The financial performance of the Corporation is at risk from interest rate fluctuations. This interest rate risk arises due to differences between the amount of interest-earning assets and interest-bearing liabilities subject to repricing over a period of time, the difference between the change in various interest rates and the embedded options in certain financial instruments. The Board of Directors has established an Asset/Liability Policy in order to achieve and maintain earnings performance consistent with long-term goals while maintaining acceptable levels of interest rate risk, a "well-capitalized" balance sheet and adequate levels of liquidity. This policy designates the Asset/Liability Committee (ALCO) as the body responsible for meeting this objective. The Corporation utilizes an asset/liability model to support its balance sheet strategies. The Corporation uses gap analysis, net interest income simulations and the economic value of equity to measure its interest rate risk. The gap analysis which follows measures the interest rate risk of the Corporation by comparing the difference between the amount of interest-earning assets and interest-bearing liabilities subject to repricing over a period of time. The cumulative one-year gap ratio was .86 at September 30, 2000, as compared to .96 at September 30, 1999. A ratio of less than one indicates an excess of repricing liabilities over repricing assets. Based on the cumulative one-year gap and assuming no change in asset/liability composition, an increase in interest rates is expected to result in a reduction in net interest income over the next twelve months. Net interest income simulations measure the exposure to short-term earnings from changes in market rates of interest in a more rigorous and explicit fashion. The Corporation's current financial position is combined with assumptions regarding future business to calculate net interest income under varying hypothetical interest rate scenarios. An immediate 100 basis point increase in interest rates as of September 30, 2000 is estimated to reduce net interest income by 1.7% or $2.6 million over the next twelve month period. Comparatively, a 100 basis point increase in interest rates as of September 30, 1999 was estimated to have a minimal impact on net interest income during the twelve month period following September 30, 1999. Following is the gap analysis as of September 30, 2000 (in thousands): Within 4-12 1-5 Over 3 Months Months Years 5 years Total -------- --------- ---------- --------- ----------- INTEREST EARNING ASSETS Interest bearing deposits with banks $ 3,386 $ 90 $ 3,476 Federal funds sold 25,674 25,674 Securities: Available for sale 30,775 $ 70,431 273,980 $ 37,097 412,283 Held to maturity 3,042 6,730 26,055 29,428 65,255 Loans, net of unearned 731,842 583,631 1,419,554 252,944 2,987,971 -------- --------- ---------- ---------- ---------- 794,719 660,792 1,719,679 319,469 3,494,659 Other assets 363,686 363,686 -------- --------- ---------- ---------- ---------- $794,719 $ 660,792 $1,719,679 $ 683,155 $3,858,345 ======== ========= ========== ========== ========== INTEREST BEARING LIABILITIES Deposits: Interest checking $198,151 $ 274,779 $ 472,930 Savings 184,578 621,992 806,570 Time deposits 270,231 $ 656,299 $ 411,267 1,337,797 Short-term borrowings 247,512 60,141 307,653 Long-term debt 63,082 16,431 39,640 2,848 122,001 -------- --------- ---------- ---------- ---------- 963,554 732,871 450,907 899,619 3,046,951 Other liabilities 497,712 497,712 Stockholders' equity 313,682 313,682 -------- --------- ---------- ---------- ---------- $963,554 $ 732,871 $ 450,907 $1,711,013 $3,858,345 ======== ========= ========== ========== ========== PERIOD GAP $(168,835) $ (72,079) $1,268,772 $(1,027,858) ========= ========= ========== =========== CUMULATIVE GAP $(168,835) $(240,914) $1,027,858 ========= ========= ========== CUMULATIVE GAP AS A PERCENT OF TOTAL ASSETS (4.38)% (6.24)% 26.64% ======= ======= ====== RATE SENSITIVE ASSETS/RATE SENSITIVE LIABILITIES (CUMULATIVE) .82 .86 1.48 1.15 === === ==== ==== The preceding measures indicate that the Corporation's earnings are susceptible to an increase in interest rates. In general, the increased susceptibility to rising interest rates can be attributed to a greater proportion of rate-sensitive liabilities on the balance sheet at September 30, 2000. However, the disclosed measures are within the limits set forth in the Corporation's Asset/Liability Policy. Furthermore, the computations do not contemplate any actions the ALCO could undertake to mitigate an increase in interest rates. The measurements assumed no change in asset/liability composition. The computation of the prospective effects of hypothetical interest rate changes are based on numerous assumptions including asset/liability prepayments and the relative price sensitivity of certain assets and liabilities. The analysis assumed that certain core non-maturity deposit rates had a low correlation to changes in market rates of interest. CAPITAL RESOURCES The assessment of capital adequacy depends on a number of factors such as asset quality, liquidity, earnings performance, changing competitive conditions and economic forces. The Corporation seeks to maintain a strong capital base to support its growth and expansion activities, to provide stability to current operations and to promote public confidence. Capital adequacy is further discussed in the "Regulatory Matters" section of this report. Capital management is a continuous process. Since December 31, 1999, stockholders' equity has increased $19.5 million as a result of earnings retention. For the nine months ended September 30, 2000, the return on average equity was 14.1% and the dividend payout ratio was 37.5%. Book value per common share was $13.92 at September 30, 2000, compared to $12.90 at September 30, 1999. LOANS Following is a summary of loans (dollars in thousands): SEPTEMBER 30, DECEMBER 31, 2000 1999 ------------- ------------ Real estate: Residential $1,102,549 $1,059,432 Commercial 796,980 747,835 Construction 182,360 119,398 Installment loans to individuals 341,380 334,810 Commercial, financial and agricultural 383,849 350,023 Lease financing 222,467 254,252 Unearned income (67,856) (61,976) ---------- ---------- $2,961,729 $2,803,774 ========== ========== NON-PERFORMING ASSETS Non-performing assets include non-performing loans and other real estate owned. Non-performing loans include non-accrual loans and restructured loans. Non-accrual loans represent loans on which interest accruals have been discontinued. It is the Corporation's policy to discontinue interest accruals when principal or interest is due and has remained unpaid for 90 days or more unless the loan is both well secured and in the process of collection. When a loan is placed on non-accrual status, all unpaid interest is reversed. Non- accrual loans may not be restored to accrual status until all delinquent principal and interest has been paid or the loan becomes both well secured and in the process of collection. Consumer installment loans are generally charged off against the allowance for loan losses upon reaching 90 to 180 days past due, depending on the installment loan type. Restructured loans are loans in which the borrower has been granted a concession on the interest rate or the original repayment terms due to financial distress. Non-performing loans are closely monitored on an ongoing basis as part of the Corporation's loan review and work-out process. The potential risk of loss on these loans is evaluated by comparing the loan balance to the fair value of any underlying collateral or the present value of projected future cash flows. Losses are recognized where appropriate. Following is a summary of non-performing assets (dollars in thousands): SEPTEMBER 30, DECEMBER 31, 2000 1999 ------------- ------------ Non-performing assets: Non-accrual loans $ 8,296 $ 9,321 Restructured loans 2,805 3,560 ------- ------- Total non-performing loans 11,101 12,881 Other real estate owned 4,553 4,801 ------- ------- Total non-performing assets $15,654 $17,682 ======= ======= Asset quality ratios: Non-performing loans as percent of total loans .37% .46% Non-performing assets as percent of total assets .41% .48% ALLOWANCE FOR LOAN LOSSES Management's analysis of the allowance for loan losses includes the evaluation of the loan portfolio based on internally generated loan review reports and the historical loss experience of the remaining balances of the various homogeneous loan pools which comprise the loan portfolio. Specific factors which are evaluated include the previous loan loss experience with the customer, the status of past due interest and principal payments on the loan, the collateral position of the loan, the quality of financial information supplied by the borrower and the general financial condition of the borrower. Historical loss experience on the remaining portfolio segments is considered in conjunction with the current status of economic conditions, loan loss trends, delinquency and non-accrual trends, credit administration and concentrations of credit risk. Following is a summary of changes in the allowance for loan losses and selected ratios (dollars in thousands): Three Months Ended Nine Months Ended September 30, September 30, ------------------ ------------------ 2000 1999 2000 1999 -------- -------- -------- -------- Balance at beginning of period $ 38,618 $ 34,429 $ 36,311 $ 32,308 Addition arising from purchase transaction 767 767 Charge-offs (3,036) (2,868) (7,465) (6,133) Recoveries 471 325 1,333 1,120 -------- -------- -------- -------- Net charge-offs (2,565) (2,543) (6,132) (5,013) Provision for loan losses 2,439 2,105 8,313 6,696 -------- -------- -------- -------- Balance at end of period $ 39,259 $ 33,991 $ 39,259 $ 33,991 ======== ======== ======== ======== Allowance for loan losses to: Total loans, net of unearned income 1.33% 1.34% Non-performing loans 353.65% 273.03% REGULATORY MATTERS Quantitative measures established by regulators to ensure capital adequacy require the Corporation and its banking subsidiaries to maintain minimum amounts and ratios of total and tier 1 capital (as defined in the regulations) to risk- weighted assets (as defined) and of tier 1 capital to average assets (as defined). As of June 30, 2000, the Corporation and each of its banking subsidiaries have been categorized as "well capitalized" under the regulatory framework for prompt corrective action. Management believes, as of September 30, 2000, that the Corporation and each of its banking subsidiaries are all "well capitalized". Following are capital ratios as of September 30, 2000 for the Corporation (dollars in thousands): Well Capitalized Minimum Capital Actual Requirements Requirements ---------------- ---------------- ---------------- Amount Ratio Amount Ratio Amount Ratio -------- ----- -------- ----- -------- ----- Total Capital $329,403 11.2% $293,121 10.0% $234,497 8.0% (to risk-weighted assets) Tier 1 Capital 289,621 9.9% 175,873 6.0% 117,248 4.0% (to risk-weighted assets) Tier 1 Capital 289,621 7.6% 191,148 5.0% 152,919 4.0% (to average assets) The Corporation and its banking subsidiaries are subject to various regulatory capital requirements administered by federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and discretionary actions by regulators that, if undertaken, could have a direct material effect on the Corporation's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation and its banking subsidiaries must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Corporation's and banking subsidiaries' capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. YEAR 2000 DISCLOSURE The Corporation successfully managed the transition into the Year 2000, and management has a high level of confidence that the core business processes will continue to provide uninterrupted service into the twenty-first century. Should the worldwide experience continue, management does not expect any disruptions to services provided or delivered. Management will continue to monitor all business processes, including interaction with the Corporation's customers, vendors and other third parties, throughout 2000 to address any issues and ensure all processes continue to function properly. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK. The information called for by this item is provided under the caption "Liquidity and Interest Rate Sensitivity" under Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations. PART II ITEM 1. LEGAL PROCEEDINGS The Corporation and persons to whom the Corporation may have indemnification obligations, in the normal course of business, are subject to various pending and threatened lawsuits in which claims for monetary damages are asserted. Management, after consultation with legal counsel, does not at the present time anticipate the ultimate aggregate liability, if any, arising out of such lawsuits will have a material adverse effect on the Corporation's financial position. At the present time, management is not in a position to determine whether any pending or threatened litigation will have a material adverse effect on the Corporation's results of operation in any future reporting period. ITEM 2. CHANGES IN SECURITIES Not applicable ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable ITEM 5. OTHER INFORMATION The Secretary of the Corporation must receive written notice of any proposal submitted by a shareholder of the Corporation for consideration at the Annual Meeting of Shareholders on or prior to the date which is 120 days prior to the date on which the Corporation first mailed its proxy materials for the prior year's Annual Meeting of Shareholders. Accordingly, any shareholder proposal must be submitted to the Corporation by November 13, 2000 to be considered at the 2001 Annual Meeting of Shareholders. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 27. Financial Data Schedule (filed herewith) (b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended September 30, 2000. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. F.N.B. Corporation ---------------------------------- (Registrant) Dated: November 14, 2000 /s/Peter Mortensen _________________________ __________________________________________ Peter Mortensen Chairman and Chief Executive Officer (Principal Executive Officer) Dated: November 14, 2000 /s/John D. Waters _________________________ __________________________________________ John D. Waters Vice President and Chief Financial Officer (Principal Financial Officer)