10-Q 1 jun2002_10q.txt JUNE 30 2002 10Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2002 ------------------------------------------------ OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ----------------------- --------------------- Commission file number 0-8144 ------ F.N.B. CORPORATION ------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Florida 25-1255406 ------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 2150 Goodlette Road North, Naples, FL 34102 ------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (239) 262-7600 ------------------------------------------------------------------------------- (Registrant's telephone number, including area code) ------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes No --- ---- APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at July 31, 2002 ----- ---------------------------- Common Stock, $0.01 Par Value 43,787,351 Shares ----------------------------- ----------------- F.N.B. CORPORATION FORM 10-Q June 30, 2002 INDEX PART I - FINANCIAL INFORMATION PAGE Item 1. Financial Statements Consolidated Balance Sheets 2 Consolidated Statements of Income 3 Consolidated Statements of Cash Flows 4 Notes to Consolidated Financial Statements 5 Independent Accountants' Review Report 11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Item 3. Quantitative and Qualitative Disclosure of Market Risk 21 PART II - OTHER INFORMATION Item 1. Legal Proceedings 22 Item 2. Changes in Securities 22 Item 3. Defaults Upon Senior Securities 22 Item 4. Submission of Matters to a Vote of Security Holders 22 Item 5. Other Information 23 Item 6. Exhibits and Reports on Form 8-K 23 Signatures 24 1 F.N.B. CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS Dollars in thousands, except par values Unaudited JUNE 30, DECEMBER 31, 2002 2001 ----------- ------------ ASSETS Cash and due from banks $ 218,544 $ 246,781 Interest bearing deposits with banks 2,476 3,712 Federal funds sold 21,599 88,260 Mortgage loans held for sale 2,860 1,323 Securities available for sale 858,764 902,970 Securities held to maturity (fair value of $53,213 and $51,770) 51,981 51,368 Loans, net of unearned income of $43,637 and $50,063 5,093,416 4,814,435 Allowance for loan losses (67,799) (65,059) ---------- ---------- NET LOANS 5,025,617 4,749,376 ---------- ---------- Premises and equipment 158,494 149,518 Goodwill 83,711 44,371 Other assets 325,186 250,704 ---------- ---------- TOTAL ASSETS $6,749,232 $6,488,383 ========== ========== LIABILITIES Deposits: Non-interest bearing $ 906,065 $ 798,960 Interest bearing 4,424,259 4,300,116 ---------- ---------- TOTAL DEPOSITS 5,330,324 5,099,076 Other liabilities 108,142 98,722 Short-term borrowings 407,157 375,754 Long-term debt 332,675 342,424 ---------- ---------- TOTAL LIABILITIES 6,178,298 5,915,976 ---------- ---------- STOCKHOLDERS' EQUITY Preferred stock - $0.01 par value Authorized - 20,000,000 shares Issued - 131,498 and 147,033 shares Aggregate liquidation value - $3,287 and $3,676 1 1 Common stock - $0.01 par value Authorized - 500,000,000 shares Issued - 44,151,236 and 41,781,837 shares 442 418 Additional paid-in capital 517,057 444,549 Retained earnings 46,418 119,256 Accumulated other comprehensive income 13,567 9,845 Treasury stock - 214,494 and 63,178 shares at cost (6,551) (1,662) ---------- ---------- TOTAL STOCKHOLDERS' EQUITY 570,934 572,407 ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $6,749,232 $6,488,383 ========== ========== See accompanying Notes to Consolidated Financial Statements 2 F.N.B. CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME Dollars in thousands, except per share data Unaudited THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------ ------------------ 2002 2001 2002 2001 -------- -------- -------- -------- INTEREST INCOME Loans, including fees $ 93,103 $ 97,425 $185,722 $196,113 Securities: Taxable 10,195 11,452 20,196 22,591 Nontaxable 1,979 1,783 4,025 3,457 Dividends 459 547 1,108 1,546 Other 525 1,805 1,253 3,719 -------- -------- -------- -------- TOTAL INTEREST INCOME 106,261 113,012 212,304 227,426 -------- -------- -------- -------- INTEREST EXPENSE Deposits 29,188 43,762 60,291 90,648 Short-term borrowings 3,188 3,968 5,717 8,729 Long-term debt 4,689 4,341 9,595 8,332 -------- -------- -------- -------- TOTAL INTEREST EXPENSE 37,065 52,071 75,603 107,709 -------- -------- -------- -------- NET INTEREST INCOME 69,196 60,941 136,701 119,717 Provision for loan losses 4,502 3,452 8,693 7,893 -------- -------- -------- -------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 64,694 57,489 128,008 111,824 -------- -------- -------- -------- NON-INTEREST INCOME Insurance premiums, commissions and fees 11,145 8,481 22,068 17,056 Service charges 11,663 9,081 22,285 17,364 Trust 2,342 2,453 4,739 4,737 Gain on sale of securities 465 559 640 1,668 Gain on sale of loans 1,349 2,009 2,355 3,267 Other 3,099 2,107 5,920 4,085 -------- -------- -------- -------- TOTAL NON-INTEREST INCOME 30,063 24,690 58,007 48,177 -------- -------- -------- -------- 94,757 82,179 186,015 160,001 -------- -------- -------- -------- NON-INTEREST EXPENSES Salaries and employee benefits 33,011 28,779 66,153 57,845 Net occupancy 4,403 3,980 8,797 8,107 Equipment 5,007 4,755 10,018 9,483 Merger and consolidation related 3,274 41,855 6,805 Other 17,560 16,571 35,388 37,120 -------- -------- -------- -------- TOTAL NON-INTEREST EXPENSES 59,981 57,359 162,211 119,360 -------- -------- -------- -------- INCOME BEFORE INCOME TAXES 34,776 24,820 23,804 40,641 Income taxes 10,827 7,921 8,738 12,511 -------- -------- -------- -------- NET INCOME $ 23,949 $ 16,899 $ 15,066 $ 28,130 ======== ======== ======== ======== NET INCOME PER COMMON SHARE: * Basic $.54 $.41 $.34 $.68 ==== ==== ==== ==== Diluted $.53 $.40 $.33 $.66 ==== ==== ==== ==== CASH DIVIDENDS PER COMMON SHARE * $.22 $.17 $.41 $.33 ==== ==== ==== ==== * Restated to reflect a 5 percent stock dividend declared on May 6, 2002. See accompanying Notes to Consolidated Financial Statements 3 F.N.B. CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Dollars in thousands Unaudited SIX MONTHS ENDED JUNE 30, --------------------- 2002 2001 --------- --------- OPERATING ACTIVITIES Net income $ 15,066 $ 28,130 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 8,663 9,358 Provision for loan losses 8,693 7,893 Deferred taxes (14,615) (3,631) Net gain on sale of securities (640) (1,668) Net gain on sale of loans (2,355) (3,267) Proceeds from sale of loans 15,477 25,524 Loans originated for sale (14,659) (14,329) Net change in: Interest receivable 156 2,180 Interest payable (2,996) (1,616) Other, net 2,324 4,880 --------- --------- Net cash flows from operating activities 15,114 53,454 --------- --------- INVESTING ACTIVITIES Net change in: Interest bearing deposits with banks 1,236 (5,164) Federal funds sold 98,421 (8,651) Loans (177,454) 5,495 Securities available for sale: Purchases (177,649) (398,938) Sales 154,803 129,143 Maturities 166,808 163,058 Securities held to maturity: Purchases (6,141) (7,861) Maturities 5,528 37,583 Increase in premises and equipment (15,713) (6,604) Increase in intangibles (47,720) (2,466) Net cash paid for mergers and acquisitions (50,761) (2,545) --------- --------- Net cash flows from investing activities (48,642) (96,950) --------- --------- FINANCING ACTIVITIES Net change in: Non-interest bearing deposits, savings and NOW 148,248 25,344 Time deposits (119,234) (24,271) Short-term borrowings 6,288 (1,385) Increase in long-term debt 3,242 74,295 Decrease in long-term debt (12,991) (16,629) Net issuance/(acquisition) of treasury stock (2,105) 618 Cash dividends paid (18,157) (15,123) --------- --------- Net cash flows from financing activities 5,291 42,849 --------- --------- NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS (28,237) (647) Cash and due from banks at beginning of period 246,781 207,940 --------- --------- CASH AND DUE FROM BANKS AT END OF PERIOD $ 218,544 $ 207,293 ========= ========= See accompanying Notes to Consolidated Financial Statements 4 F.N.B. CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) June 30, 2002 BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements give retroactive effect to the merger of Promistar Financial Corporation with and into F.N.B. Corporation (the Corporation). The transaction was consummated on January 18, 2002, and has been accounted for as a pooling-of-interests. The accompanying unaudited financial statements are presented as if the merger had been consummated for all the periods presented. 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, 2001 and footnotes thereto included in the Corporation's Current Report on Form 8-K filed with the Securities and Exchange Commission on July 24, 2002. 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 in 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. COMMON STOCK DIVIDEND On May 6, 2002, the Corporation declared a 5 percent common stock dividend payable on May 31, 2002. As a result of the stock dividend, the Corporation issued 2,095,789 shares of its common stock. The stock dividend increased additional paid in capital by $66.6 million and decreased retained earnings by $66.6 million. MERGERS AND ACQUISITIONS 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. MERGER AND CONSOLIDATION RELATED EXPENSES The Corporation completed its affiliation with Promistar Financial Corporation (Promistar) on January 18, 2002 and merged Promistar's wholly owned subsidiary Promistar Bank into the Corporation's existing subsidiary, First National Bank of Pennsylvania on February 20, 2002. In connection with this transaction, the Corporation incurred pre- tax merger and consolidation expense of $41.4 million. Of the total merger and consolidation expenses, involuntary separation costs associated with terminated employees totaled $6.8 million, early retirement and other employment related expenses totaled $7.8 million, data processing conversion charges totaled $12.2 million, professional services totaled $8.0 million, write-downs of impaired assets totaled $4.2 million and other miscellaneous merger and consolidation expenses totaled $2.4 million. All involuntary separation costs were paid during the first six months of 2002. 5 On January 31, 2002, the Corporation completed its affiliation with Central Bank Shares, Inc. (Central), a bank holding company headquartered in Orlando, Florida, with assets of more than $251.4 million. The transaction, which was accounted for as a purchase, resulted in the recognition of approximately $47.0 million of goodwill. The Corporation also incurred merger related costs of $413,000 related to its affiliation with Central. These costs related primarily to data processing conversion charges. LOANS AND THE ALLOWANCE FOR LOAN LOSSES Loans are reported at their outstanding principal adjusted for any charge-offs and any deferred fees or costs on originated loans. Interest income on loans is accrued on the principal amount outstanding. It is the Corporation's policy to discontinue interest accruals when principal or interest is due and has remained unpaid for 90 days or more unless the loan is both well secured and in the process of collection. When a loan is placed on non-accrual status, all unpaid interest is reversed. Payments on non-accrual loans are generally applied to either principal or interest or both, depending on management's evaluation of collectibility. Non-accrual loans may not be restored to accrual status until all delinquent principal and interest has been paid, or the loan becomes both well secured and in the process of collection. Consumer installment loans are generally charged off against the allowance for loan losses upon reaching 90 to 180 days past due, depending on the installment loan type. Loan origination fees and related costs are deferred and recognized over the life of the loans as an adjustment of yield. 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 and anticipated future 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. Impaired loans are identified and measured based on the present value of expected future cash flows discounted at the loan's effective interest rate, or at the loan's observable market price or at the fair value of the collateral if the loan is collateral dependent. If the recorded investment in the loan exceeds the measure of fair value, a valuation allowance is established as a component of the allowance for loan losses. Impaired loans consist of non-homogeneous loans, which based on the evaluation of current information and events, management has determined that it is probable that 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. NEW ACCOUNTING STANDARDS Financial Accounting Standards Statement (FAS) No. 142, "Goodwill and Other Intangible Assets," requires that goodwill and intangible assets with identifiable useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of the Statement. FAS No. 142 also requires that intangibles with definite useful lives be amortized over their respective estimated useful lives to the estimated residual values, and reviewed for impairment in accordance with FAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." The Corporation adopted the new rules on accounting for goodwill and other intangible assets in the first quarter of 2002. Application of the non-amortization provisions of the Statement resulted in an increase in net income of 6 $1.4 million, or $.04 per diluted share, during the first six months of 2002. Diluted earnings per share for the first six months of 2002 was $.33 compared to pro-forma diluted earnings per share for 2001 of $.70. The pro-forma earnings per share gives effect to the non-amortization of goodwill in 2001. The Corporation has completed its transition impairment test and concluded that goodwill is not impaired. PER SHARE AMOUNTS Per share amounts have been adjusted for common stock dividends, including the 5 percent stock dividend declared on May 6, 2002. Basic earnings per share is calculated by dividing net income, adjusted for declared dividends on preferred stock, by the weighted average number of shares of common stock outstanding. Diluted earnings per common share is calculated by dividing net income by the weighted average number of shares of common stock outstanding, assuming conversion of outstanding convertible preferred stock from the beginning of the year or date of issuance and the exercise of stock options and warrants. Such adjustments to net income and the weighted average number of shares of common stock are made only when such adjustments dilute earnings per share. EARNINGS PER SHARE The following tables set forth the computation of basic and diluted earnings per share (in thousands, except per share data): Three Months Ended Six Months Ended June 30, June 30, ---------------------- ---------------------- 2002 2001 2002 2001 ---------- ---------- ---------- ---------- Basic Net income $ 23,949 $ 16,899 $ 15,066 $ 28,130 Less: Preferred stock dividends declared (64) (76) (131) (153) ---------- ---------- ---------- ---------- Earnings applicable to basic earnings per share $ 23,885 $ 16,823 $ 14,935 $ 27,977 ========== ========== ========== ========== Average common shares outstanding 43,957,743 41,348,780 43,870,873 41,321,275 ========== ========== ========== ========== Earnings per share $.54 $.41 $.34 $.68 ==== ==== ==== ==== Three Months Ended Six Months Ended June 30, June 30, ---------------------- ---------------------- 2002 2001 2002 2001 ---------- ---------- ---------- ---------- Diluted Earnings applicable to diluted earnings per share $ 23,949 $ 16,899 $ 15,066 $ 28,130 ========== ========== ========== ========== Average common shares outstanding 43,957,743 41,348,780 43,870,743 41,321,275 Series A convertible preferred stock 16,429 19,583 16,429 19,583 Series B convertible preferred stock 321,372 392,993 332,264 397,511 Net effect of dilutive stock options and stock warrants based on the treasury stock method 805,128 674,221 755,659 573,654 ---------- ---------- ---------- ---------- 45,100,672 42,435,577 44,975,095 42,312,023 ========== ========== ========== ========== Earnings per share $.53 $.40 $.33 $.66 ==== ==== ==== ==== 7 CASH FLOW INFORMATION Following is a summary of supplemental cash flow information (in thousands): Six Months Ended June 30 ---------------------- 2002 2001 ---------- ---------- Cash paid for: Interest $78,599 $109,267 Income taxes 5,147 7,859 Noncash Investing and Financing Activities: Acquisition of real estate in settlement of loans 2,283 1,502 Loans granted in the sale of other real estate 589 578 COMPREHENSIVE INCOME The components of comprehensive income, net of related tax, are as follows (in thousands): Three Months Ended Six Months Ended June 30, June 30, -------------------- -------------------- 2002 2001 2002 2001 --------- -------- ---------- -------- Net income $ 23,949 $ 16,899 $ 15,066 $28,130 Other comprehensive income: Unrealized gains on securities: Unrealized holding gains (losses) arising during the period 7,957 96 4,386 5,414 Less: reclassification adjustment for gains included in net income (181) (308) (664) (882) --------- -------- -------- ------- Other comprehensive income 7,776 (212) 3,722 4,532 --------- -------- -------- ------- Comprehensive income $ 31,725 $ 16,687 $ 18,788 $32,662 ========= ======== ======== ======= BUSINESS SEGMENTS The Corporation operates in three reportable segments: community banks, insurance agencies and consumer finance. The Corporation's community bank subsidiaries offer services traditionally offered by full-service commercial banks, including commercial and individual demand and time deposit accounts and commercial, mortgage and individual installment loans. In addition to traditional banking products, the Corporation's community bank subsidiaries offer various alternative products, including securities brokerage and investment advisory services, mutual funds, insurance and annuities. The Corporation's insurance agencies are full-service insurance agencies offering all lines of commercial and personal insurance through major carriers. The Corporation's consumer finance subsidiary is primarily involved in making personal installment loans to individuals, and approximately 15 percent of its remaining volume is from the purchase of installment sales finance contracts from retail merchants. This activity is funded through the sale of the Corporation's subordinated notes at the finance company's branch offices. The following tables provide financial information for these segments of the Corporation (in thousands). Other items shown in the tables below represent the parent company, other non-bank subsidiaries and eliminations, which are necessary for purposes of reconciling to the consolidated amounts. 8
At or for the three months Community Insurance Finance All ended June 30, 2002 Banks Agencies Company Other Consolidated ---------- ---------- ---------- --------- ------------ Interest income $ 99,922 $ 28 $ 6,939 $ (628) $ 106,261 Interest expense 34,461 27 1,662 915 37,065 Provision for loan losses 3,248 1,254 4,502 Non-interest income 16,397 7,203 422 6,041 30,063 Non-interest expense 45,471 5,534 3,105 4,939 59,049 Intangible amortization 821 57 31 23 932 Income tax expense (benefit) 10,057 641 476 (347) 10,827 Net income (loss) 22,261 972 833 (117) 23,949 Core operating earnings 22,261 972 833 (117) 23,949 Total assets 6,586,226 32,058 143,113 (12,165) 6,749,232 Goodwill 67,782 14,182 1,747 83,711
At or for the three months Community Insurance Finance All ended June 30, 2001 Banks Agencies Company Other Consolidated ---------- ---------- ---------- --------- ------------ Interest income $ 106,231 $ 44 $ 6,948 $ (211) $ 113,012 Interest expense 49,786 64 2,191 30 52,071 Provision for loan losses 2,340 1,112 3,452 Non-interest income 15,256 6,409 447 2,578 24,690 Non-interest expense 43,298 5,211 3,016 1,461 52,986 Merger and consolidation related expenses 1,237 2,037 3,274 Intangible amortization 678 198 31 192 1,099 Income tax expense 7,558 444 393 (474) 7,921 Net income (loss) 16,590 536 652 (879) 16,899 Core operating earnings 17,540 536 652 402 19,130 Total assets 5,998,214 28,936 145,585 37,563 6,210,298 Goodwill 16,611 14,517 1,871 32,999
9
At or for the six months Community Insurance Finance All ended June 30, 2002 Banks Agencies Company Other Consolidated ---------- ---------- --------- -------- ------------ Interest income $ 199,381 $ 56 $ 13,809 $ (942) $ 212,304 Interest expense 70,779 55 3,377 1,392 75,603 Provision for loan losses 6,015 2,678 8,693 Non-interest income 31,006 15,359 901 10,741 58,007 Non-interest expense 89,249 11,192 6,201 11,945 118,587 Merger and consolidation related expenses 22,250 126 19,479 41,855 Intangible amortization 1,588 73 62 46 1,769 Income tax expense (benefit) 13,166 1,610 833 (6,871) 8,738 Net income (loss) 27,340 2,485 1,433 (16,192) 15,066 Core operating earnings 43,235 2,485 1,516 (1,438) 45,798 Total assets 6,586,226 32,058 143,113 (12,165) 6,749,232 Goodwill 67,782 14,182 1,747 83,711
At or for the six months Community Insurance Finance All ended June 30, 2001 Banks Agencies Company Other Consolidated ---------- ---------- --------- --------- ------------ Interest income $ 214,450 $ 99 $ 13,871 $ (994) $ 227,426 Interest expense 103,124 147 4,522 (84) 107,709 Provision for loan losses 5,672 2,221 7,893 Non-interest income 28,922 13,405 897 4,953 48,177 Non-interest expense 90,990 10,181 5,948 3,227 110,346 Merger and consolidation related expenses 2,946 3,859 6,805 Intangible amortization 1,368 393 64 384 2,209 Income tax expense 11,984 1,132 755 (1,360) 12,511 Net income (loss) 27,288 1,651 1,258 (2,067) 28,130 Core operating earnings 31,771 1,651 1,258 479 35,159 Total assets 5,998,214 28,936 145,585 37,563 6,210,298 Goodwill 16,611 14,517 1,871 32,999
* For a description and reconciliation of core operating earnings refer to Management's Discussion and Analysis of Financial Condition and Results of Operations. 10 Independent Accountants' Review Report The Board of Directors F.N.B. Corporation We have reviewed the accompanying consolidated balance sheets of F.N.B. Corporation and subsidiaries as of June 30, 2002 and 2001, and the related consolidated statements of income for the three-month and six-month periods ended June 30, 2002 and 2001, and the consolidated statements of cash flows for the six-month periods ended June 30, 2002 and 2001. These financial statements are the responsibility of the Company's management. We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data, and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States, which will be performed for the full year with the objective of expressing an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to the accompanying consolidated financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States. We have previously audited, in accordance with audited standards generally accepted in the United States, the consolidated balance sheet of F.N.B. Corporation and subsidiaries as of December 31, 2001, and the related statements of income, shareholders' equity, and cash flows for the year then ended (not presented herein) and in our report dated May 6, 2002, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2001, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. /s/ERNST & YOUNG LLP Birmingham, Alabama August 7, 2002 11 PART I ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. FINANCIAL INFORMATION SUMMARY Core operating earnings for the first six months of 2002 increased to $45.8 million from $35.2 million for the first six months of 2001. Basic core operating earnings per share were $1.04 and $.85 for the six months ended June 30, 2002 and 2001, respectively, while diluted core operating earnings per share were $1.02 and $.83 for those same periods. Core operating earnings consist of net income adjusted for non- recurring items. Net income was $15.1 million for the first six months of 2002 compared to net income of $28.1 million for the first six months of 2001. Diluted earnings per share were $.33 and $.66 for those same periods, respectively. The following consists of a reconciliation of net income to core operating earnings (in thousands): Three Months Ended Six Months Ended June 30, June 30, ---------------------- ---------------------- 2002 2001 2002 2001 ---------- ---------- ---------- ---------- Net income $ 23,949 $ 16,899 $ 15,066 $ 28,130 Merger and consolidation related expenses, net of income taxes 2,231 30,212 4,572 Other non-recurring items, net of income taxes 520 2,457 ---------- ---------- ---------- ---------- Core operating earnings $ 23,949 $ 19,130 $ 45,798 $ 35,159 ========== ========== ========== ========== Highlights for the first six months of 2002 include: o A return on average assets of 1.38% and a return on average equity of 16.21%, both based on core operating earnings. o An increase of 25.4% or $9.9 million in fee income, which consists of service charges, insurance premiums, commissions and trust income. o A 3.9% increase in average net interest earning assets and an increase in the net interest margin to 4.69% compared to 4.36% during the second quarter of 2001. o Continued strong asset quality as non-performing assets as a percentage of total assets decreased to .53%. o Completion of affiliation with Promistar Financial Corporation on January 18, 2002. o Completion of affiliation with Central Bank Shares, Inc. on January 31, 2002. 12 FIRST SIX MONTHS OF 2002 AS COMPARED TO FIRST SIX MONTHS OF 2001: The following table provides information regarding the average balances and yields and rates on interest earning assets and interest bearing liabilities (dollars in thousands):
Six Months Ended June 30 2002 2001 ----------------------------- ---------------------------- Average Yield/ Average Yield/ Balance Interest Rate Balance Interest Rate ---------- -------- ------ ---------- -------- ------ Assets Interest earning assets: Interest bearing deposits with banks $ 7,665 $ 77 2.01% $ 4,742 $ 81 3.42% Federal funds sold 131,966 1,177 1.78 148,572 3,638 4.90 Securities: Taxable 734,560 21,028 5.77 769,229 23,801 6.24 Non-taxable (1) 195,920 6,349 6.48 158,772 5,637 7.10 Loans (1) (2) 4,935,971 186,565 7.62 4,606,780 197,479 8.64 ---------- -------- ---------- -------- Total interest earning assets 6,006,082 215,196 7.22 5,688,095 230,636 8.18 ---------- -------- ---------- -------- Cash and due from banks 196,662 175,392 Allowance for loan losses (67,421) (57,704) Premises and equipment 154,338 139,934 Other assets 384,986 234,671 ---------- ---------- $6,674,647 $6,180,388 ========== ========== Liabilities Interest bearing liabilities: Deposits: Interest bearing demand $1,023,549 $ 4,608 0.91 $ 815,349 $ 8,304 2.05 Savings 1,062,197 7,838 1.49 1,032,729 12,947 2.53 Other time 2,317,730 47,845 4.16 2,372,744 69,397 5.90 Short-term borrowings 400,097 5,717 2.88 326,229 8,729 5.40 Long-term debt 339,783 9,595 5.65 310,987 8,332 5.36 ---------- -------- ---------- -------- Total interest bearing liabilities 5,143,356 75,603 2.96 4,858,038 107,709 4.47 ---------- -------- ---------- -------- Non-interest bearing, demand deposits 861,571 716,287 Other liabilities 99,869 94,969 ---------- ---------- 6,104,796 5,669,294 ---------- ---------- Stockholders' equity 569,851 511,094 ---------- ---------- $6,674,647 $6,180,388 ========== ========== Net interest earning assets $ 862,726 $ 830,057 ========== ========== Net interest income $ 139,593 $122,927 ========= ======== Net interest spread 4.26% 3.71% ===== ===== Net interest margin (3) 4.69% 4.36% ===== =====
(1) The amounts are reflected on a fully taxable equivalent basis using the federal statutory tax rate of 35% adjusted for certain federal tax preferences. (2) Average balance includes non-accrual loans. Loans consist of average total loans less average unearned income. The amount of loan fees included in interest income on loans is immaterial. (3) Net interest margin is calculated by dividing the difference between total interest earned and total interest paid by average interest earning assets. 13 Net interest income, the Corporation's primary source of earnings, is the amount by which interest and fees generated by interest earning assets, primarily loans and securities, exceed interest expense on deposits and borrowed funds. During the six months ended June 30, 2002, net interest income, on a fully taxable equivalent basis, totaled $139.6 million, as compared to $122.9 million for the six months ended June 30, 2002. Net interest income consisted of interest income of $215.2 million and interest expense of $75.6 million for the first six months of 2002 compared to $230.6 million and $107.7 million for each, respectively, for the first six months of 2001. The yield on interest earning assets decreased by 96 basis points and the rate paid on interest bearing liabilities decreased by 151 basis points. Net interest margin increased from 4.36% at June 30, 2001 to 4.69% at June 30, 2002. Although the net interest margin has increased over the same period last year, there is a possibility that margin compression could arise, 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 six months ended June 30, 2002 as compared to the six months ended June 30, 2001 (in thousands): Volume Rate Net ------- ------- ------- Interest Income Interest bearing deposits with banks $ (12) $ 8 $ (4) Federal funds sold (367) (2,094) (2,461) Securities: Taxable (1,038) (1,735) (2,773) Non-taxable 1,136 (424) 712 Loans 16,737 (27,651) (10,914) ------- ------- ------- 16,456 (31,896) (15,440) ------- ------- ------- Interest Expense Deposits: Interest bearing demand 3,138 (6,834) (3,696) Savings 381 (5,490) (5,109) Other time (1,571) (19,981) (21,552) Short-term borrowings 2,839 (5,851) (3,012) Long-term debt 797 466 1,263 ------- ------- ------- 5,584 (37,690) (32,106) ------- ------- ------- Net Change $10,872 $ 5,794 $16,666 ======= ======= ======= The amount of change not solely due to rate or volume changes was allocated between the change due to rate and the change due to volume based on the net size of the rate and volume changes. Interest income on loans, on a fully taxable equivalent basis, decreased 5.5% from $197.5 million for the six months ended June 30, 2001 to $186.6 million for the six months ended June 30, 2002. This decrease was solely related to yield as the Corporation experienced favorable loan volumes as average loans increased by $329.2 million. Interest expense on deposits decreased $30.4 million or 33.5% for the six months ended June 30, 2002, compared to the same period of 2001, despite an increase in average interest bearing deposits of 4.3% over this same period. The average balances in interest bearing demand deposits and savings deposits increased by $208.2 million and $29.5 million, respectively, while the average balance in time deposits decreased by $55.0 million. The Corporation continued to successfully generate non-interest bearing deposits as such deposits increased by $145.3 million or 20.3% from June 30, 2001 to June 30, 2002. The average balance in short-term borrowings increased by $73.9 million as average repurchase agreements increased $36.2 million and average short-term subordinated 14 notes increased $31.4 million during the second quarter of 2002. Interest expense on long-term debt increased $1.3 million from June 30, 2001 as average long-term debt increased $28.8 million. 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 was $8.7 million for the first six months of 2002, as compared to $7.9 million for the first six months of 2001. The allowance for loan losses as a percentage of total loans was 1.33% at June 30, 2002 and 1.24% at June 30, 2001. Non-interest income increased 20.4% from $48.2 million during the first six months of 2001 to $58.0 million during the first six months of 2002. This increase was primarily attributable to the Corporation's continued transformation to a diversified financial services company. The Corporation has dedicated significant resources to expanding traditional banking services and generating insurance commissions and fees, investment service charges and trust fees. Insurance premiums, commissions and fees, service charges and trust income increased $9.9 million or 25.4% compared with the first six months of 2001. These higher levels of fee income are attributable to growth in insurance, expanded banking services and the Corporation's continued focus on providing a wide array of wealth management services, such as annuities, mutual funds and trust services. Other non-interest income increased by $1.5 million as the Corporation increased its investment in Bank Owned Life Insurance by $50.0 million. This increase was partially offset by decreases of $1.0 million in gains on sale of securities and $912,000 in gains on sale of loans. Total non-interest expenses increased $42.9 million from $119.4 million during the first six months of 2001 to $162.2 million during the first six months of 2002. This increase was primarily attributable to non-recurring items. The Corporation recognized pre-tax merger and consolidation related or other non-recurring charges of $42.7 million during the first six months of 2002, compared to pre-tax merger and consolidation related and other non-recurring charges of $10.8 million for the same period of 2001. Excluding these items, non-interest expenses totaled $119.6 million for the first six months of 2002 and $108.6 million for the first six months of 2001. This increase of 10.0% includes the additional operating costs reflected in 2002 related to the purchase acquisition of FNH Corporation in August of 2001 and Central Bank Shares, Inc. in January of 2002. The Corporation's income tax was $8.7 million for the first six months of 2002 compared to expense of $12.5 million for the same period of 2001. The effective tax rate of 36.7% for the six months ended June 30, 2002 was higher than the 35.0% federal statutory tax rate due to a higher level of non-deductible merger expenses incurred in 2002. SECOND QUARTER OF 2002 AS COMPARED TO SECOND QUARTER OF 2001 During the second quarter of 2002, net interest income increased $8.3 million, or 13.5%, over the second quarter of 2001. Total interest income decreased $6.8 million, or 6.0%, primarily the result of a decrease in interest income on loans of $4.3 million. Total interest expense decreased $15.0 million, or 28.8%, primarily due to a decrease of $14.6 million in interest expense on deposits, despite an increase in the average balance of deposits. The provision for loan losses totaled $4.5 million for the second quarter of 2002, as compared to $3.5 million for the second quarter of 2001. 15 Non-interest income increased 21.8% during the second quarter of 2002 compared to the same period of 2001, primarily due to a $5.1 million or 25.7% increase in insurance premiums, commissions and fees, service charges and trust income. 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. Continued expansion of insurance commissions is dependent on insurance carriers continuing to offer workmen's compensation coverage in our market areas. Gains on the sale of loans and securities decreased $754,000 during this same period. Non-interest expenses increased by $2.6 million or 4.6% during the second quarter of 2002, compared to the second quarter of 2001. Salaries and employee benefits increased by $4.2 million during the second quarter of 2002, as compared to the second quarter of 2001, due to normal annual salary adjustments, business expansion, and the purchase of FNH Corporation and Central Bank Shares, Inc. During the second quarter of 2001, the Corporation incurred merger and consolidation related expenses of $3.3 million. LIQUIDITY AND INTEREST RATE SENSITIVITY The Corporation's goal in liquidity management is to meet the cash flow requirements of depositors and borrowers as well as the operating cash needs of the Corporation, with cost-effective funding. The Corporate Asset/Liability Committee (ALCO), which includes members of executive management, reviews liquidity on a periodic basis and approves significant changes in strategies which affect balance sheet or cash flow positions. The Board of Directors has established an Asset/Liability Policy in order to achieve and maintain earnings performance consistent with long-term goals while maintaining acceptable levels of interest rate risk, a "well-capitalized" balance sheet and adequate levels of liquidity. This policy designates the ALCO as the body responsible for meeting this objective. Liquidity sources from assets include payments from loans and investments as well as the ability to securitize or sell loans and investment securities. Liquidity sources from liabilities are generated primarily through growth in core deposits, and to a lesser extent, the use of wholesale sources which include federal funds purchased, repurchase agreements and public deposits. In addition, the banking affiliates have the ability to borrow funds from the Federal Home Loan Bank (FHLB). FHLB advances are a competitively priced and reliable source of funds. The Corporation has significant FHLB borrowing capacity available for both general and contingency funding purposes. As of June 30, 2002, outstanding advances were $304.1 million, or 4.5% of total assets while FHLB availability was $1.3 billion, or 19.0% of total assets. The Corporation anticipates funding earning assets through the utilization of FHLB advances. The principal source of cash for the parent company is dividends from its subsidiaries. The parent also has approved lines of credit with several major domestic banks totaling $90.0 million, of which $15.0 million was used as of June 30, 2002. The Corporation also issues subordinated debt on a regular basis and has access to the Federal Reserve Bank as well as access to the capital markets. The ALCO regularly monitors various liquidity ratios and forecasts of cash position. Management believes the Corporation has sufficient liquidity available to meet its normal operating and contingency funding cash needs. The financial performance of the Corporation is at risk from interest rate fluctuations. This interest rate risk arises due to differences between the amount of interest earning assets and interest bearing liabilities subject to repricing over a period of time, the difference between the change in various interest rates and the embedded options in certain financial instruments. The Corporation utilizes an asset/liability model to support its balance sheet strategies. The Corporation uses gap 16 analysis, net interest income simulations and the economic value of equity to measure its interest rate risk. The gap analysis below measures the interest rate risk of the Corporation by comparing the difference between the amount of interest earning assets and interest bearing liabilities subject to repricing over a period of time. The cumulative one-year gap ratio was 1.11 at June 30, 2002, as compared to 1.05 at June 30, 2001. A ratio of more than one indicates a higher level of repricing assets over repricing liabilities over the next twelve months, assuming the current interest rate environment. Following is the gap analysis as of June 30, 2002 (in thousands):
Within 4-12 1-5 Over 3 Months Months Years 5 years Total ---------- ---------- ---------- ----------- ---------- Interest Earning Assets Interest bearing deposits with banks $ 2,276 $ 200 $ 2,476 Federal funds sold 21,599 21,599 Securities 57,618 227,546 $ 428,061 $ 197,520 910,745 Loans, net of unearned 1,455,880 1,086,738 2,107,719 445,939 5,096,276 ---------- ---------- ---------- ----------- ---------- 1,537,373 1,314,484 2,535,780 643,459 6,031,096 Other assets 718,136 718,136 ---------- ---------- ---------- ----------- ---------- $1,537,373 $1,314,484 $2,535,780 $ 1,361,595 $6,749,232 ========== ========== ========== =========== ========== Interest Bearing Liabilities Deposits: Interest checking $ 237,183 $ 834,054 $1,071,237 Savings 408,598 686,448 1,095,046 Time deposits 535,785 $1,040,190 $ 677,663 4,338 2,257,976 Borrowings 304,805 43,591 43,251 348,185 739,832 ---------- ---------- ---------- ----------- ---------- 1,486,371 1,083,781 720,914 1,873,025 5,164,091 Other liabilities 1,014,207 1,014,207 Stockholders' equity 570,934 570,934 ---------- ---------- ---------- ----------- ---------- $1,486,371 $1,083,781 $ 720,914 $ 3,458,166 $6,749,232 ========== ========== ========== =========== ========== Period Gap $ 51,002 $ 230,703 $1,814,866 $(2,096,571) ========== ========== ========== =========== Cumulative Gap $ 51,002 $ 281,705 $2,096,571 ========== ========== ========== Cumulative Gap as a Percent of Total Assets 0.76% 4.17% 31.06% ========== ========== ========== Rate Sensitive Assets/Rate Sensitive Liabilities (Cumulative) 1.03 1.11 1.64 1.17 ========== ========= ========== ==========
17 Net interest income simulations measure the exposure to short-term earnings from changes in market rates of interest in a more rigorous and explicit fashion. The Corporation's current financial position is combined with assumptions regarding future business to calculate net interest income under varying hypothetical interest rate scenarios. The economic value of equity (EVE) measures the Corporation's long-term earnings exposure from changes in market rates of interest. EVE is defined as the present value of assets minus the present value of liabilities at a point in time. A decrease in EVE due to a specified rate change indicates a decline in the long-term earnings capacity of the balance sheet assuming that the rate change remains in effect over the life of the balance sheet. The following table presents an analysis of the potential sensitivity of the Corporation's annual net interest income and EVE to sudden and sustained changes in market rates: JUNE 30, -------------------- 2002 2001 -------- -------- Net interest income change (12 months): - 100 basis points 0.3 % (1.2)% + 200 basis points 1.3 % (0.3)% Economic value of equity: - 100 basis points (3.9)% (2.9)% + 200 basis points 1.0 % (2.7)% The preceding measures assumed no change in asset/liability compositions. Thus, the measures do not reflect actions the ALCO may undertake in response to such changes in interest rates. The disclosed measures are within the limits set forth in the Corporation's Asset/Liability Policy. The computation of the prospective effects of hypothetical interest rate changes requires numerous assumptions regarding characteristics of new business and the behavior of existing positions. These business assumptions are based upon the Corporation's experience, business plans and published industry experience. Key assumptions employed in the model include asset prepayment speeds, the relative price sensitivity of certain assets and liabilities and the expected life of non-maturity deposits. Because these assumptions are inherently uncertain, actual results will differ from simulated results. CAPITAL RESOURCES The assessment of capital adequacy depends on a number of factors such as asset quality, liquidity, earnings performance, changing competitive conditions and economic forces. The Corporation seeks to maintain a strong capital base to support its growth and expansion activities, to provide stability to current operations and to promote public confidence. The Corporation has an effective $200.0 million shelf registration with the Securities and Exchange Commission. The Corporation may, from time to time, issue any combination of common stock, preferred stock, debt securities or trust preferred securities in one or more offerings up to a total dollar amount of $200.0 million. Capital management is a continuous process. Both the Corporation and its banking affiliates are subject to various regulatory capital requirements administered by the federal banking agencies. (See the "Regulatory Matters" section of this report). 18 LOANS Following is a summary of loans (dollars in thousands): JUNE 30, DECEMBER 31, 2002 2001 ------------ ------------ Real estate: Residential $1,869,955 $1,777,403 Commercial 1,328,798 1,282,944 Construction 281,850 227,868 Installment loans to individuals 817,970 774,932 Commercial, financial and agricultural 743,530 672,639 Lease financing 94,950 128,712 Unearned income (43,637) (50,063) ---------- ---------- $5,093,416 $4,814,435 ========== ========== 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. Other real estate owned includes a $1.0 million property which is subject to litigation. Should the outcome be adverse, the value of the property will be impaired. Following is a summary of non-performing assets (dollars in thousands): JUNE 30, DECEMBER 31, 2002 2001 ----------- ------------ Non-performing assets: Non-accrual loans $20,982 $21,350 Restructured loans 6,168 5,578 ------- ------- Total non-performing loans 27,150 26,928 Other real estate owned 5,192 4,375 ------- ------- Total non-performing assets $32,342 $31,303 ======= ======= Asset quality ratios: Non-performing loans as percent of total loans .53% .56% Non-performing assets as percent of total assets .48% .48% 19 CRITICAL ACCOUNTING POLICIES The Corporation's significant accounting policies are described in the "Notes to Consolidated Financial Statements" under "Summary of Significant Accounting Policies" in the Corporation's 2001 Annual Report on Form 8-K filed on July 24, 2002 with the Securities and Exchange Commission. The Corporation considers its policy on the accounting for the allowance for loan losses to be a critical accounting policy. This policy requires the use of estimates and strategic or economic assumptions that may prove inaccurate or subject to variations and may significantly affect the Corporation's reported results and financial position for the period or in future periods. Changes in underlying factors, assumptions, or estimates in any of these areas could have a material impact on the Corporation's future financial condition and results of operations. ALLOWANCE FOR LOAN LOSSES Management's analysis of the allowance for loan losses includes the evaluation of the loan portfolio based upon the Corporation's internal loan grading system, evaluation of portfolio industry concentrations and the historical loss experience of the remaining balances of the various homogeneous loan pools which comprise the loan portfolio. Specific factors used in the internal loan grading system include the previous loan loss experience with the customer, the status of past due interest and principal payments on the loan, the collateral position and residual value of the loan, the quality of financial information supplied by the borrower and the general financial condition of the borrower. Management also assesses historical loss on the remaining portfolio segments in conjunction with the current status of economic conditions, loan loss trends, delinquency and non-accrual trends, credit administration, portfolio growth, concentrations of credit risk and other factors, including regulatory guidance in determining the adequacy of the allowance. This determination inherently involves a higher degree of uncertainty and considers current risk factors that may not have yet manifested themselves in the Corporation's historical loss factors used to determine the adequacy of the allowance, and it recognizes that knowledge of the portfolio may be incomplete. Following is a summary of changes in the allowance for loan losses and selected ratios (dollars in thousands): Three Months Ended Six Months Ended June 30, June 30, ------------------- ------------------- 2002 2001 2002 2001 -------- -------- -------- -------- Balance at beginning of period $ 66,281 $ 57,920 $65,059 $57,124 Addition from acquisition 1,389 Charge-offs (5,010) (5,105) (10,267) (9,409) Recoveries 2,026 683 2,925 1,342 -------- -------- ------- ------- Net charge-offs (2,984) (4,422) (7,342) (8,067) Provision for loan losses 4,502 3,452 8,693 7,893 -------- -------- ------- ------- Balance at end of period $ 67,799 $ 56,950 $67,799 $56,950 ======== ======== ======= ======= Allowance for loan losses to: Total loans, net of unearned income 1.33% 1.24% Non-performing loans 249.72% 224.14% 20 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 March 31, 2002, the Corporation and each of its banking subsidiaries have been categorized as "well capitalized" under the regulatory framework for prompt corrective action. Management believes, as of June 30, 2002, that the Corporation and each of its banking subsidiaries are all "well capitalized". Following are capital ratios as of June 30, 2002 for the Corporation (dollars in thousands):
Well Capitalized Minimum Capital Actual Requirements Requirements ----------------- ----------------- ----------------- Amount Ratio Amount Ratio Amount Ratio --------- ------- --------- ------- --------- ------- Total Capital $519,886 10.4% $502,197 10.0% $401,757 8.0% (to risk-weighted assets) Tier 1 Capital 455,079 9.1% 301,318 6.0% 200,879 4.0% (to risk-weighted assets) Tier 1 Capital 455,079 6.9% 330,809 5.0% 246,647 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 or discretionary actions by regulators that, if undertaken, could have a direct material effect on the Corporation's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation and its banking subsidiaries must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Corporation's and banking subsidiaries' capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. 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. 21 PART II Item 1. Legal Proceedings During the first quarter of 2001, the Corporation established a legal reserve of approximately $4.0 million associated with individual retirement accounts at one of its banking subsidiaries. Various cases have been filed in the 20th Judicial Circuit and for Lee County, Florida, naming the subsidiary of the Corporation as a co-defendant. The plaintiffs alleged that a third-party independent administrator misappropriated funds from their individual retirement accounts held with the banking subsidiary. As of July 31, 2002, the Corporation has settled all of the asserted claims except one, at an aggregate cost to the Corporation of $2.6 million. The Corporation believes the remaining reserve will be sufficient for all costs associated with the litigation, including all unasserted claims, settlements and adverse judgements. The Corporation and persons to whom the Corporation may have indemnification obligations, in the normal course of business, are subject to various pending and threatened lawsuits in which claims for monetary damages are asserted. Management, after consultation with outside legal counsel, does not at the present time anticipate the ultimate aggregate liability, arising out of such pending and threatened lawsuits will have a material adverse effect on the Corporation's financial position. At the present time, management is not in a position to determine whether any pending or threatened litigation will have a material adverse effect on the Corporation's results of operation in any future reporting period. Item 2. Changes in Securities Not applicable Item 3. Defaults Upon Senior Securities Not applicable Item 4. Submission of Matters to a Vote of Security Holders The Annual Meeting of shareholders of F.N.B. Corporation was held May 6, 2002. Proxies were solicited pursuant to Section 14(a) of the Securities and Exchange Act of 1934 and there was no solicitation in opposition to the Corporation's solicitations. All of the Corporation's nominees for directors as listed in the proxy statement were elected with the following vote: Votes Votes "For" Withheld ------------ ------------- G. Scott Baton 27,855,658 318,810 Alan C. Bomstein 27,852,696 321,771 James S. Lindsay 27,871,712 302,756 Edward J. Mace 27,876,214 298,254 Peter Mortensen 27,740,535 433,933 Harry F. Radcliffe 27,843,179 331,289 Gary L. Tice 27,783,840 390,627 Earl K. Wahl, Jr. 27,857,695 316,772 22 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 25, 2002 to be considered at the 2003 Annual Meeting of Shareholders. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 10.1 Employment Agreement between F.N.B. Corporation and Thomas E. Fahey. (filed herewith). 15 Letter Re: Unaudited Interim Financial Information 99.1 Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K A report on Form 8-K, dated July 24, 2002, was filed by the Corporation. The Form 8-K included Audited Consolidated Financial Statements for the three years ended December 31, 2001, 2000, and 1999 with Report of Independent Auditors and Management's Discussion and Analysis giving effect to the merger of the Corporation and Promistar Financial Corporation on a pooling-of- interests basis. 23 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. F.N.B. Corporation ------------------------------------------ (Registrant) Dated: August 14, 2002 /s/Gary L. Tice ----------------------- ------------------------------------------- Gary L. Tice President and Chief Executive Officer (Principal Executive Officer) Dated: August 14, 2002 /s/Thomas E. Fahey ----------------------- ------------------------------------------- Thomas E. Fahey Executive Vice President and Chief Financial Officer (Principal Financial Officer) 24