10-Q 1 jun2003_10q.txt JUNE 2003 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 OR For the quarterly period ended June 30, 2003 [ ] 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 31,2003 ------- --------------------------- Common Stock, $0.01 Par Value 46,197,706 Shares F.N.B. CORPORATION AND SUBSIDIARIES FORM 10-Q June 30, 2003 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 13 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 14 Item 3. Quantitative and Qualitative Disclosure of Market Risk 24 Item 4. Controls and Procedures 24 PART II - OTHER INFORMATION Item 1. Legal Proceedings 24 Item 2. Changes in Securities 25 Item 3. Defaults Upon Senior Securities 25 Item 4. Submission of Matters to a Vote of Security Holders 25 Item 5. Other Information 25 Item 6. Exhibits and Reports on Form 8-K 25 Signatures 27 Exhibits 28 -1- F.N.B. CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS Dollars in thousands, except par values and share data Unaudited June 30, December 31, 2003 2002 ---------- ----------- ASSETS Cash and due from banks $ 250,532 $ 246,802 Interest bearing deposits with banks 5,602 3,778 Federal funds sold 4,200 8,981 Mortgage loans held for sale 27,369 24,177 Securities available for sale 1,717,881 1,026,191 Securities held to maturity (fair value of $46,269 and $50,517) 44,359 48,992 Loans, net of unearned income of $31,264 and $75,746 5,544,317 5,220,504 Allowance for loan losses (72,076) (68,406) --------- --------- NET LOANS 5,472,241 5,152,098 --------- --------- Premises and equipment 205,397 163,709 Goodwill 190,304 88,425 Other assets 348,511 327,079 --------- --------- TOTAL ASSETS $8,266,396 $7,090,232 ========== ========== LIABILITIES Deposits: Non-interest bearing $1,043,443 $ 924,090 Interest bearing 5,071,602 4,502,067 --------- --------- TOTAL DEPOSITS 6,115,045 5,426,157 Other liabilities 90,892 99,052 Short-term borrowings 713,401 515,780 Long-term debt 591,183 450,647 Mandatorily redeemable capital securities of subsidiary trusts 125,000 - --------- --------- TOTAL LIABILITIES 7,635,521 6,491,636 --------- --------- STOCKHOLDERS' EQUITY Preferred stock - $0.01 par value Authorized - 20,000,000 shares Issued - -0- and 118,025 shares Aggregate liquidation value - $0.00 and $2,951 - 1 Common stock - $0.01 par value Authorized - 500,000,000 shares Issued - 46,354,886 and 44,162,460 shares 464 442 Additional paid-in capital 584,271 516,186 Retained earnings 27,040 73,363 Accumulated other comprehensive income 26,370 17,335 Treasury stock - 242,892 and 300,425 shares at cost (7,270) (8,731) -------- --------- TOTAL STOCKHOLDERS' EQUITY 630,875 598,596 -------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $8,266,396 $7,090,232 ========== ========== Note: The Balance Sheet at December 31, 2002 has been derived from the audited financial statements at that date. See accompanying Notes to Consolidated Financial Statements -2- F.N.B. CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME Dollars in thousands, except per share data Unaudited THREE MONTHS ENDED SIX MONTHS ENDED June 30, June 30, 2003 2002 2003 2002 -------- -------- -------- -------- INTEREST INCOME Loans, including fees $ 90,019 $ 93,103 $180,783 $185,722 Securities: Taxable 16,290 10,195 27,502 20,196 Nontaxable 1,793 1,979 3,658 4,025 Dividends 784 459 1,419 1,108 Other 105 525 139 1,253 ------- ------- ------- ------- TOTAL INTEREST INCOME 108,991 106,261 213,501 212,304 ------- ------- ------- ------- INTEREST EXPENSE Deposits 25,073 29,188 48,751 60,291 Short-term borrowings 2,639 3,188 4,712 5,717 Long-term debt 5,997 4,689 11,533 9,595 Capital securities of subsidiary trust 1,434 - 1,520 - ------ ------ ------- ------- TOTAL INTEREST EXPENSE 35,143 37,065 66,516 75,603 ------ ------ ------- ------- NET INTEREST INCOME 73,848 69,196 146,985 136,701 Provision for loan losses 5,731 4,502 11,590 8,693 ------ ------ ------- ------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 68,117 64,694 135,395 128,008 ------ ------ ------- ------- NON-INTEREST INCOME Service charges 13,499 11,663 25,923 22,285 Insurance premiums, commissions and fees 8,984 8,448 17,447 17,920 Securities commissions and fees 2,180 2,303 4,084 3,686 Trust 2,675 2,342 5,067 4,739 Gain on sale of securities 874 465 1,567 640 Gain on sale of mortgage loans 3,590 1,321 6,298 2,368 Other 3,558 3,521 7,010 6,369 ------ ------ ------ ------ TOTAL NON-INTEREST INCOME 35,360 30,063 67,396 58,007 ------- ------ ------- ------- 103,477 94,757 202,791 186,015 ------- ------ ------- ------- NON-INTEREST EXPENSES Salaries and employee benefits 38,141 33,011 74,908 66,153 Net occupancy 5,397 4,403 10,448 8,797 Equipment 6,231 5,007 11,687 10,018 Merger - - 1,014 41,855 Other 18,074 17,560 35,324 35,388 ------- ------- ------- ------- TOTAL NON-INTEREST EXPENSES 67,843 59,981 133,381 162,211 ------- ------- ------- ------- INCOME BEFORE INCOME TAXES 35,634 34,776 69,410 23,804 Income taxes 10,978 10,827 21,426 8,738 ------- ------- ------- ------ NET INCOME $ 24,656 $ 23,949 47,984 15,066 ======== ======== ====== ====== NET INCOME PER COMMON SHARE: * Basic $.54 $ .52 1.04 $ .33 ==== ===== ==== ===== Diluted $.53 $ .51 1.02 $ .32 ==== ===== ==== ===== CASH DIVIDENDS PER COMMON SHARE * $.24 $ .21 $ .45 $ .39 ==== ===== ===== ===== * Prior period per share amounts have been restated to reflect the 5 percent stock dividend declared on April 28, 2003. See accompanying Notes to Consolidated Financial Statements -3- F.N.B. CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Dollars in thousands Unaudited SIX MONTHS ENDED JUNE 30, 2003 2002 --------- --------- OPERATING ACTIVITIES Net income $ 47,984 $ 15,066 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 13,032 8,663 Provision for loan losses 11,590 8,693 Deferred taxes 3,398 (14,615) Net gain on sale of securities (1,567) (640) Net gain on sale of mortgage loans (6,298) (2,355) Proceeds from sale of mortgage loans 294,750 95,496 Mortgage loans originated for sale (291,644) (94,678) Net change in: Interest receivable (1,357) 156 Interest payable (103) (2,996) Other, net (24,414) 2,324 -------- -------- Net cash flows from operating activities 45,371 15,114 -------- -------- INVESTING ACTIVITIES Net change in: Interest bearing deposits with banks (1,824) 1,236 Federal funds sold 6,027 98,421 Loans (161,654) (177,454) Securities available for sale: Purchases (918,618) (177,649) Sales 343,892 154,803 Maturities 354,217 166,808 Securities held to maturity: Purchases - (6,141) Maturities 4,633 5,528 Increase in premises and equipment (10,716) (15,713) Increase in intangibles - (47,720) Net cash paid for mergers and acquisitions (141,713) (50,761) -------- --------- Net cash flows from investing activities (525,756) (48,642) -------- --------- FINANCING ACTIVITIES Net change in: Non-interest bearing deposits, savings and NOW 334,969 148,248 Time deposits (127,582) (119,234) Short-term borrowings 190,433 6,288 Increase in long-term debt 101,239 3,242 Decrease in long-term debt (115,203) (12,991) Increase in capital securities of subsidiary trust 125,000 - Net acquisition of treasury stock (3,997) (2,105) Cash dividends paid (20,744) (18,157) ------- -------- Net cash flows from financing activities 484,115 5,291 ------- -------- NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS 3,730 (28,237) Cash and due from banks at beginning of period 246,802 246,781 -------- -------- CASH AND DUE FROM BANKS AT END OF PERIOD $ 250,532 $ 218,544 ========= ========= See accompanying Notes to Consolidated Financial Statements -4- F.N.B. CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) June 30, 2003 BUSINESS F.N.B. Corporation (the Corporation) is a diversified financial services company headquartered in Naples, Florida. The Corporation owns and operates regional community banks, an insurance agency, a consumer finance company and First National Trust Company. It has full service banking offices located in Florida, Pennsylvania and Ohio and consumer finance operations in Pennsylvania, Ohio and Tennessee. BASIS OF PRESENTATION The consolidated financial statements include the accounts of the Corporation and its subsidiaries. All significant inter-company balances and transactions have been eliminated. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could materially differ from those expressed or implied. RECLASSIFICATIONS Certain prior year amounts have been reclassified to conform with current year presentation. The reclassification had no impact on total assets, liabilities, stockholders' equity, net income or cash flows. COMMON STOCK DIVIDEND On April 28, 2003, the Corporation declared a 5 percent common stock dividend payable on May 31, 2003 to shareholders of record as of May 15, 2003. As a result of the stock dividend, the Corporation issued 2,189,180 shares of its common stock. The stock dividend increased additional paid in capital and decreased retained earnings by $65.3 million. Prior period per share amounts have been adjusted for common stock dividends, including the 5 percent stock dividend declared on April 28, 2003. MERGERS AND ACQUISITIONS On March 31, 2003, the Corporation completed its business combination with Charter Banking Corp. (Charter), a bank holding company headquartered in Tampa, Florida, with assets of $795.6 million. In exchange for all of the outstanding common stock of Charter, the Corporation paid $150.2 million. The transaction, which was accounted for as a purchase, resulted in the recognition of approximately $101.9 million in Goodwill and $1.1 million in Core Deposit Intangibles. The transaction was funded primarily through the issuance of $125.0 million of capital securities of a subsidiary trust and $25.2 million from the Corporation's existing lines of credit with several major domestic banks. Charter's banking subsidiary, Southern Exchange Bank, is expected to be merged into the Corporation's existing subsidiary, First National Bank of Florida, during the fourth quarter of 2003. The Corporation incurred and paid merger related costs of $1.0 million in connection with its acquisition of Charter. These costs were related to employment expenses. The Corporation regularly evaluates the potential acquisition of, 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. -5- CAPITAL SECURITIES OF SUBSIDIARY TRUST During the first quarter of 2003, $125.0 million of corporation- obligated mandatorily redeemable capital securities (capital securities) of a subsidiary trust holding solely junior subordinated debt securities of the Corporation (debentures) were issued by F.N.B. Statutory Trust I (Statutory Trust). The Corporation owns 100% of the common equity of the Statutory Trust. The Statutory Trust was formed for the sole purpose of issuing the capital securities and investing the proceeds from the sale of such capital securities in the debentures. The debentures held by the Statutory Trust are its sole assets. Distributions on the capital securities issued by the Statutory Trust are payable quarterly at a rate per annum equal to the interest rate being earned on the debentures held by the Statutory Trust and are recorded as interest expense by the Corporation. The capital securities are subject to mandatory redemption, in whole or in part, upon repayment of the debentures. The capital securities bear interest at a floating rate per annum equal to the 3-month LIBOR plus 325 basis points. The rate in effect at June 30, 2003 was 4.35%. The Corporation has entered into agreements which, taken collectively, fully and unconditionally guarantee the capital securities subject to the terms of each of the guarantees. The debentures held by the Statutory Trust qualify as Tier 1 capital under Federal Reserve Board guidelines and are first redeemable, in whole or in part, by the Corporation on or after March 31, 2008. PREFERRED STOCK REDEMPTION The Corporation completed the planned redemption of its Preferred Series A and Preferred Series B stock during the second quarter of 2003. In connection with the redemption, the Corporation issued shares of its common stock out of treasury stock for the remaining outstanding preferred stock. The Corporation issued 15,882 and 264,568 shares of its common stock for the remaining 19,174 and 98,851 shares of Preferred Series A and Preferred Series B, respectively. NEW ACCOUNTING STANDARDS FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" was issued in November 2002. Interpretation 45 requires certain guarantees to be recorded at fair value and applies to contracts or indemnification agreements that contingently require the guarantor to make payments to the guaranteed party based on changes in an underlying that is related to an asset, liability, or an equity security of the guaranteed party. In connection with the adoption of Interpretation 45, the Corporation began recording a liability and an offsetting asset for the fair value of any standby letters of credit it issues. The impact of the adoption of this new accounting standard was not material to the financial condition or results of operations of the Corporation. Statement of Financial Accounting Standards (FAS) No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure" was issued in December 2002. It provides alternative methods of accounting for stock-based employee compensation. In addition, it amends disclosure requirements in both annual and interim financial statements about the method of accounting for stock-based compensation and the effect of the method used on reported results. The Corporation continues to account for its stock-based compensation plans under Opinion 25. Therefore, FAS 148 is not expected to have a material impact on the Corporation's financial results. -6- FASB Interpretation No. 46, "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51" was issued in January 2003. Interpretation 46 addresses consolidation by business enterprises of variable interest entities which have certain characteristics. Interpretation 46 applies immediately to variable interest entities created after January 31, 2003. It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that is acquired before February 1, 2003. The Corporation has limited partnership investments in affordable housing projects, for which it provides funding as a limited partner and receives tax credit for any losses incurred by the projects based on its partnership share. At June 30, 2003, the Corporation had recorded investments in other assets on its balance sheet of approximately $1.8 million associated with these investments. The Corporation currently adjusts the carrying value of these investments for any losses incurred by the limited partnership through earnings. While these entities may be considered variable interest entities, the Corporation's interest in these entities were acquired prior to February 1, 2003. The Corporation is completing its analysis to determine whether these entities should be consolidated. EARNINGS PER SHARE Basic earnings per share is calculated by dividing net income, adjusted for declared dividends on preferred stock, by the weighted average number of shares of common stock outstanding. Diluted earnings per common share is calculated by dividing net income by the weighted average number of shares of common stock outstanding, assuming conversion of outstanding convertible preferred stock from the beginning of the year and the exercise of stock options and warrants. Such adjustments to net income and the weighted average number of shares of common stock are made only when such adjustments dilute earnings per share. The following tables set forth the computation of basic and diluted earnings per share (dollars in thousands, except per share data): Three Months Ended Six Months Ended June 30, June 30, 2003 2002 2003 2002 ---------- --------- --------- ---------- Basic Net income $ 24,656 $ 23,949 $ 47,984 $ 15,066 Less: Preferred stock dividends declared (8) (64) (62) (131) --------- -------- -------- ------- Earnings applicable to basic earnings per share $ 24,648 $ 23,885 $ 47,922 $ 14,935 ========== ========= ========= ========= Average common shares outstanding 46,067,008 46,146,923 46,052,374 46,060,053 ========== ========== ========== ========== Earnings per share $.54 $ .52 $ 1.04 $ .32 ==== ===== ====== ===== -7- Three Months Ended Six Months Ended June 30, June 30, 2003 2002 2003 2002 --------- --------- ---------- --------- Diluted Earnings applicable to diluted earnings per share $ 24,656 $ 23,949 $ 47,984 $ 15,066 ======== ========= ======== ======== Average common shares outstanding 46,067,008 46,146,923 46,052,374 46,060,053 Series A convertible preferred stock 15,735 17,250 15,735 17,250 Series B convertible preferred stock 2,206 337,441 127,625 348,877 Net effect of dilutive stock options and stock warrants based on the treasury stock method 802,811 788,238 692,554 738,095 ---------- ---------- ---------- ---------- 46,887,760 47,289,852 46,888,288 47,164,275 ========== ========== ========== ========== Earnings per share $.53 $.51 $ 1.02 $ .32 ==== ==== ====== ===== STOCK-BASED COMPENSATION In accordance with FAS 148, the following table shows pro-forma net income and earnings per share assuming stock options had been expensed based on the fair value of the options granted along with significant assumptions used in the Black-Scholes option pricing model (dollars in thousands, except per share data). Three Months Ended Six Months Ended June 30, June 30, 2003 2002 2003 2002 -------- -------- -------- ---------- Net income (as reported) $ 24,656 $ 23,949 $ 47,984 $ 15,066 Compensation expense, net of tax (505) (511) (1,010) (1,013) ------- ------- ------- ------- Pro forma net income 24,151 23,438 46,974 14,053 Earnings per share: Basic .54 .52 1.04 .33 Basic pro forma .52 .51 1.02 .30 Diluted .53 .51 1.02 .32 Diluted pro forma .52 .50 1.00 .30 Assumptions Risk-free interest rate 2.93% 3.92% 2.93% 3.92% Dividend yield 2.95% 3.20% 2.95% 3.20% Expected stock price volatility .21% .17% .21% .17% Expected life (years) 5.00 5.00 5.00 5.00 Fair value of options granted $4.30 $4.56 $4.30 $4.56 -8- CASH FLOW INFORMATION Following is a summary of supplemental cash flow information (in thousands): Six Months Ended June 30, 2003 2002 -------- -------- Cash paid for: Interest $ 66,619 $ 78,599 Income taxes 8,981 5,147 Noncash Investing and Financing Activities: Acquisition of real estate in settlement of loans 944 2,283 Loans granted in the sale of other real estate 10 589 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, 2003 2002 2003 2002 --------- -------- -------- --------- Net income $ 24,656 $ 23,949 $ 47,984 $ 15,066 Other comprehensive income: Unrealized gains on securities: Unrealized holding gains arising during the period 12,134 7,957 10,819 4,386 Less: reclassification adjustment for gains included in net income (707) (181) (1,784) (664) ------- ------- ------- ------- Other comprehensive income 11,427 7,776 9,035 3,722 ------- ------- ------- ------- Comprehensive income $ 36,083 $ 31,725 $ 57,019 $18,788 ======== ======== ======== ======= BUSINESS SEGMENTS The Corporation operates in four reportable segments: community banks, trust company, 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 trust company provides a broad range of personal and corporate fiduciary services including the administration of decedent and trust estates. The Corporation's insurance agencies are full-service insurance agencies offering all lines of commercial and personal insurance through major carriers. The Corporation's consumer finance subsidiary is primarily involved in making personal installment loans to individuals with approximately 15 percent of its volume being derived from the purchase of installment sales finance contracts from retail merchants. This activity is funded through the sale of the Corporation's subordinated notes at the finance company's branch offices as well as select financial service centers in Florida. The following tables provide financial information for these segments of the Corporation (in thousands). Other items shown in the tables below represent the parent company, other non-bank subsidiaries and eliminations, which are necessary for purposes of reconciling to the consolidated amounts. -9-
At or for the three months Community Banks Trust Insurance Finance All ended June 30, 2003 Pennsylvania Florida Company Agencies Company Other Consolidated ------------ ------- ------- --------- ------- ------ ------------ Interest income $ 58,348 $ 43,961 $ 2 $ 80 $ 7,065 $ (465) $ 108,991 Interest expense 20,826 11,867 5 14 1,263 1,168 35,143 Provision for loan losses 2,519 1,828 - - 1,384 - 5,731 Non-interest income 11,576 8,772 4,962 7,561 442 2,047 35,360 Non-interest expense 27,840 23,376 4,440 6,034 3,167 2,986 67,843 Intangible amortization 492 252 3 81 - 20 848 Income tax expense (benefit) 5,445 5,199 192 640 604 (1,102) 10,978 Net income (loss) 13,294 10,463 327 953 1,089 (1,470) 24,656 Total assets 4,428,660 3,634,830 6,022 35,393 148,408 13,083 8,266,396 Total loans 3,126,894 2,324,439 - - 138,759 (45,775) 5,544,317 Goodwill 21,832 153,691 - 12,972 1,809 - 190,304 Total deposits 3,385,192 2,741,165 - - - (11,312) 6,115,045 At or for the three months Community Banks Trust Insurance Finance All ended June 30, 2002 Pennsylvania Florida Company Agencies Company Other Consolidated ------------ ------- ------- --------- ------- ----- ------------ Interest income $ 62,182 $ 37,740 $ 2 $ 28 $ 6,939 $ (630) $ 106,261 Interest expense 22,425 12,036 - 27 1,662 915 37,065 Provision for loan losses 1,902 1,346 - - 1,254 - 4,502 Non-interest income 10,644 5,753 4,719 7,203 422 1,322 30,063 Non-interest expense 27,733 18,559 4,370 5,591 3,136 592 59,981 Intangible amortization 597 224 2 57 31 21 932 Income tax expense (benefit) 6,160 3,897 137 641 476 (484) 10,827 Net income (loss) 14,608 7,653 214 972 833 (331) 23,949 Total assets 4,024,493 2,561,733 5,055 32,058 143,113 (17,220) 6,749,232 Total loans 3,114,091 1,890,245 - - 134,864 (45,784) 5,093,416 Goodwill 15,970 51,812 - 14,182 1,747 - 83,711 Total deposits 3,302,673 2,041,174 - - - (13,523) 5,330,324
-10-
At or for the six months Community Banks Trust Insurance Finance All ended June 30, 2003 Pennsylvania Florida Company Agencies Company Other Consolidated ------------ -------- ------- -------- ------- ------- ------------ Interest income $ 118,187 $ 81,989 $ 2 $ 135 $ 14,136 $ (948) $ 213,501 Interest expense 41,437 21,816 9 30 2,709 515 66,516 Provision for loan losses 5,256 3,560 - - 2,774 - 11,590 Non-interest income 24,915 13,869 9,362 14,851 910 3,489 67,396 Non-interest expense 56,475 42,896 8,615 12,000 6,285 7,110 133,381 Intangible amortization 984 477 3 162 - 43 1,669 Merger expense - - - - - 1,014 1,014 Income tax expense (benefit) 11,967 9,026 280 1,194 1,188 (2,229) 21,426 Net income (loss) 27,967 18,560 460 1,761 2,093 (2,857) 47,984 Total assets 4,428,660 3,634,830 6,022 35,393 148,408 13,083 8,266,396 Total loans 3,126,894 2,324,439 - - 138,759 (45,775) 5,544,317 Goodwill 21,832 153,691 - 12,972 1,809 - 190,304 Total deposits 3,385,192 2,741,165 - - - (11,312) 6,115,045 At or for the six months Community Banks Trust Insurance Finance All ended June 30, 2002 Pennsylvania Florida Company Agencies Company Other Consolidated ------------ ------- ------- --------- --------- -------- ------------ Interest income $ 125,277 $ 74,104 $ 2 $ 56 $ 13,809 $ (944) $ 212,304 Interest expense 46,740 24,039 - 55 3,377 1,392 75,603 Provision for loan losses 3,404 2,611 - - 2,678 - 8,693 Non-interest income 19,812 11,194 8,559 15,359 901 2,182 58,007 Non-interest expense 72,802 40,285 8,421 11,265 6,389 23,049 162,211 Intangible amortization 1,206 382 3 73 62 43 1,769 Merger expense 18,226 4,024 680 - 126 18,799 41,855 Income tax expense (benefit) 7,154 6,012 81 1,610 833 (6,952) 8,738 Net income (loss) 14,989 12,351 59 2,485 1,433 (16,251) 15,066 Total assets 4,024,493 2,561,733 5,055 32,058 143,113 (17,220) 6,749,232 Total loans 3,114,091 1,890,245 - - 134,864 (45,784) 5,093,416 Goodwill 15,970 51,812 - 14,182 1,747 - 83,711 Total deposits 3,302,673 2,041,174 - - - (13,523) 5,330,324
-11- SUBSEQUENT EVENTS On July 10, 2003, the Corporation announced a plan to divide the existing Corporation into two separate public companies by spinning off the operations known principally as First National Bank of Florida to existing shareholders through a tax-free dividend. Under the plan, a new bank holding company will be established with headquarters located in Naples, Florida. It is anticipated that shareholders will receive one share of common stock in the newly formed Florida holding company for each share they own in F.N.B. Corporation. The newly formed holding company will own and operate First National Bank of Florida, Roger Bouchard Insurance, Inc. and the Florida operations of the First National Trust Company. It is anticipated the remaining segments of the Corporation will continue to operate as F.N.B. Corporation with headquarters being relocated to Hermitage, Pennsylvania. The Corporation will retain and operate First National Bank of Pennsylvania, Regency Finance Company, Gelvin, Jackson & Starr Inc. insurance agency, and the Pennsylvania operations of the First National Trust Company. The Corporation estimates it will incur a pre-tax restructuring charge of approximately $30 million to $35 million during the third and fourth quarter of 2003 as a result of the reorganization. The restructuring charge will consist primarily of early retirement and other employment related expenses, involuntary separation costs associated with terminated employees, professional services and write-down of impaired assets. In addition, the Corporation expects to incur a prepayment penalty on refinancing its Federal Home Loan Debt of approximately $20.7 million during the third quarter of 2003. The plan, pending favorable ruling from the Internal Revenue Service and all other necessary regulatory approval, is expected to be consummated in January 2004. On July 1, 2003, the Corporation completed its business combination with Lupfer-Frakes Insurance, (Lupfer) an independent insurance agency located in Central Florida. The Corporation paid cash for in exchange for all of the outstanding common stock of Lupfer. The transaction, which was accounted for as a purchase, resulted in the recognition of approximately $7.7 million in goodwill and $1.3 million in customer and renewal lists. -12- Independent Accountants' Review Report The Board of Directors F.N.B. Corporation We have reviewed the accompanying consolidated balance sheet of F.N.B. Corporation and subsidiaries (Company) as of June 30, 2003, the consolidated statements of income for the three-month and six-month periods ended June 30, 2003 and 2002, and the consolidated statements of cash flows for the six-month periods ended June 30, 2003 and 2002. These financial statements are the responsibility of the Company's management. We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States, which will be performed for the full year with the objective of expressing an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to the accompanying consolidated financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States. We have previously audited, in accordance with auditing standards generally accepted in the United States, the consolidated balance sheet of F.N.B. Corporation and subsidiaries as of December 31, 2002, and the related consolidated statements of income, shareholders' equity, and cash flows for the year then ended (not presented herein) and in our report dated May 22, 2003, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2002, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. /s/Ernst & Young LLP Birmingham, Alabama August 7, 2003 -13- PART I ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. FINANCIAL INFORMATION SUMMARY Net income was $48.0 million for the first six months of 2003 compared to net income of $15.1 million for the first six months of 2002. Diluted earnings per share were $1.02 for the first six months of 2003 compared to $.32 for the six months ended June 30, 2002. During the six months ended June 30, 2003 and 2002, the Corporation incurred after-tax merger expenses of approximately $700,000 and $30.2 million or $.02 and $.64 per diluted share, respectively. Net income for the three months ended June 30, 2003 was $24.7 million, or $.53 per diluted share, compared to $23.9 million, or $.51 per diluted share, for the three months ended June 30, 2002. Results of operations for the second quarter of 2003 include Charter Banking Corp. (Charter), which was acquired by the Corporation on March 31, 2003. Prior period per share amounts have been adjusted for the 5 percent stock dividend declared on April 28, 2003. Highlights for the three and six months ended June 30, 2003 include: Net income of $24.7 million or $.53 per diluted share for the three months ended June 30, 2003. A return on average assets of 1.20% and a return on average equity of 16.13% for the three months ended June 30, 2003. Non-interest income as a percentage of total revenues grew to 32.4% for the three months ended June 30, 2003. An increase of 10.4% or $2.6 million over the three months ended June 30, 2002, in fee income, which consists of service charges, insurance premiums, commissions and trust revenues. A 3.7% increase in average net interest earning assets over the six months ended June 30, 2002. Continued strong asset quality as non-performing assets as a percentage of total assets was .47% as of June 30, 2003. A decline in net interest margin from 4.69% at June 30, 2002 to 4.38% at June 30, 2003. CRITICAL ACCOUNTING POLICIES The Corporation's significant accounting policies are described in the "Notes to Consolidated Financial Statements" under "Summary of Significant Accounting Policies" in the Corporation's 2002 Annual Report on Form 10-K/A filed with the Securities and Exchange Commission. The Corporation considers its policies on the accounting for the allowance for loan losses, loans held for sale and goodwill to be critical accounting policies. These policies require the use of estimates, judgments 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. -14- FIRST SIX MONTHS OF 2003 AS COMPARED TO FIRST SIX MONTHS OF 2002: The following table provides information regarding the average balances and yields and rates on interest earning assets and interest bearing liabilities (dollars in thousands):
Six Months Ended June 30, 2003 2002 Average Yield/ Average Yield/ Balance Interest Rate Balance Interest Rate ------------ --------- -------- -------- -------- ------- Assets Interest earning assets: Interest bearing deposits with banks $ 4,429 $ 19 .87% $ 7,665 $ 77 2.03% Federal funds sold 20,142 120 1.19 131,966 1,177 1.80 Securities: Taxable 1,255,433 27,154 4.36 734,560 21,028 5.77 Non-taxable (1) 218,488 7,319 6.76 195,920 6,349 6.53 Loans (1) (2) 5,377,705 181,423 6.80 4,935,971 186,565 7.62 --------- -------- --------- -------- Total interest earning assets 6,876,197 216,035 6.34 6,006,082 215,196 7.23 --------- -------- --------- -------- Cash and due from banks 198,438 196,662 Allowance for loan losses (70,991) (67,421) Premises and equipment 182,935 154,338 Other assets 480,550 384,986 --------- --------- $7,667,129 $6,674,647 ========== ========== Liabilities Interest bearing liabilities: Deposits: Interest bearing demand $1,170,455 $ 4,355 .75 $1,023,549 $ 4,608 .91 Savings 1,302,734 7,614 1.18 1,062,197 7,838 1.49 Other time 2,335,023 36,782 3.18 2,317,730 47,845 4.16 Short-term borrowings 568,404 4,712 1.67 400,097 5,717 2.88 Long-term debt 537,995 11,533 4.32 339,783 9,595 5.69 Capital securities of subsidiary trust 66,582 1,520 4.60 --------- ------- --------- ------- Total interest bearing liabilities 5,981,193 66,516 2.24 5,143,356 75,603 2.97 --------- ------- --------- ------- Non-interest bearing, demand deposits 972,233 861,571 Other liabilities 103,376 99,869 --------- --------- 7,056,802 6,104,796 --------- --------- Stockholders' equity 610,327 569,851 --------- --------- $7,667,129 $6,674,647 ========== ========== Net interest earning assets $ 895,004 $ 862,726 ========= ========== Net interest income $149,519 $ 139,593 ======== ========= Net interest spread 4.10% 4.26% ==== ==== Net interest margin (3) 4.38% 4.69% == ==== ====
(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. -15- 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, 2003, net interest income, on a fully taxable equivalent basis, totaled $149.5 million, as compared to $139.6 million for the six months ended June 30, 2002. Net interest income consisted of interest income of $216.0 million and interest expense of $66.5 million for the first six months of 2003 compared to $215.2 million and $75.6 million for each, respectively, for the first six months of 2002. The yield on interest earning assets decreased by 89 basis points and the rate paid on interest bearing liabilities decreased by 72 basis points. Net interest margin declined from 4.69% at June 30, 2002 to 4.38% at June 30, 2003. The decline in the margin can be attributed to the acquisition of Charter, which reduced the Corporation's margin for the six months ended June 30, 2003 by 7 basis points, and the acceleration of prepayments and repricing of interest earning assets. Consistent with the industry, the Corporation expects to continue to experience modest margin compression throughout the remainder of 2003 as interest earning assets reprice downward at a faster pace than interest bearing liabilities. The impact of future rate changes on the Corporation's net interest income is discussed further within the "Liquidity and Interest Rate Sensitivity" section of this report. The following table sets forth certain information regarding changes in net interest income attributable to changes in the volumes and rates of interest earning assets and interest bearing liabilities for the six months ended June 30, 2003 as compared to the six months ended June 30, 2002 (in thousands): Volume Rate Net -------- ------- ------- Interest Income Interest bearing deposits with banks $ (25) $ (33) $ (58) Federal funds sold (756) (301) (1,057) Securities: Taxable 9,347 (3,221) 6,126 Non-taxable 743 227 970 Loans 25,393 (30,535) (5,142) ------ ------- ------ 34,702 (33,863) 839 ------ ------- ------ Interest Expense Deposits: Interest bearing demand 1,124 (1,377) (253) Savings 2,757 (2,981) (224) Other time 362 (11,425) (11,063) Short-term borrowings 7,710 (8,715) (1,005) Long-term debt 3,300 (1,362) 1,938 Capital securities 1,520 - 1,520 ------ ------- ------- 16,773 (25,860) (9,087) ------ ------- ------- Net Change $17,929 $ (8,003) $ 9,926 ======= ======== ======= The amount of change not solely due to rate or volume changes was allocated between the change due to rate and the change due to volume based on the net size of the rate and volume changes. Interest income on loans, on a fully taxable equivalent basis, decreased 2.8% from $186.6 million for the six months ended June 30, 2002 to $181.4 million for the six months ended June 30, 2003. This decrease was solely related to yield as the Corporation's average loans increased by $441.7 million. The yield on loans decreased by 82 basis points from 7.62% to 6.80%. Interest expense on deposits decreased $11.5 million or 19.1% for the six months ended June 30, 2003, compared to the same period of 2002, despite an increase in average interest bearing deposits of 9.2% over this same period. -16- The average balances in interest bearing demand deposits and savings deposits increased by $146.9 million and $240.5 million, respectively, while the average balance in time deposits increased by $17.3 million. The Corporation continued to successfully generate non-interest bearing deposits as the average balance of such deposits increased by $110.7 million or 12.8% from June 30, 2002 to June 30, 2003. The average balance in short-term borrowings increased by $168.3 million as average repurchase agreements, federal funds purchased and short-term subordinated notes increased $53.6 million, $54.3 million and $21.8 million, respectively. Interest expense on long-term debt increased $1.9 million from June 30, 2002 as average long-term debt increased $198.2 million. In addition, the Corporation incurred $1.5 million in expense on its capital securities of subsidiary trust which were issued March 31, 2003. The provision for loan losses charged to operations is determined based upon management's analysis of the adequacy of the allowance for loan losses which takes into consideration factors, including qualitative factors, relevant to the collectibility of the existing portfolio. The provision for loan losses was $11.6 million for the first six months of 2003, as compared to $8.7 million for the first six months of 2002. The allowance for loan losses as a percentage of total loans was 1.30% at June 30, 2003 and 1.31% at December 31, 2002. Non-interest income increased 16.2% to $67.4 million during the first six months of 2003 from $58.0 million during the first six months of 2002. The increase in non-interest income was primarily due to an increase in deposit fees and service charges and gains on the sale of mortgage loans originated for sale. Deposit fees and service charges increased 16.3% as compared to the same period of 2002 due to deposit volume growth as well as fee increases. Service charges for the six months ended June 30, 2003 include $1.5 million in fees from signature based transactions on debit cards. A recent settlement between two major debit card issuers and retailers will result in future reductions of these fees beginning in the third quarter of 2003. Securities commissions and fees increased 10.8% to $4.1 million as compared to $3.7 million during the first six months of 2002. The Corporation recorded $6.3 million in gains on the sale of mortgage loans, a $3.9 million increase over the $2.4 million recorded during the same period of 2002. Income from insurance commissions and fees declined 2.6%, reflecting the loss of commissions on the Professional Employee Organization or employee leasing business. Total non-interest expenses decreased $28.8 million from $162.2 million during the first six months of 2002 to $133.4 million during the first six months of 2003, a direct result of the Corporation recognizing pre-tax merger expenses of $41.9 million and $1.0 million during the same periods. Salaries and employee benefits were $74.9 million for the six months ended June 30, 2003, a 13.2% increase as compared to the six months ended June 30, 2002. The increase is due to annual employee salary increases, commissions paid to mortgage loan originators, higher defined benefit retirement and employee health care costs and the inclusion of Charter's results of operations from the date of acquisition. The Corporation's income tax expense was $21.4 million for the first six months of 2003 compared to an income tax expense of $8.7 million for the same period of 2002. The effective tax rate of 30.9% for the six months ended June 30, 2003 was lower than the 35.0% federal statutory tax rate due to non- taxable interest and dividend income. SECOND QUARTER OF 2003 AS COMPARED TO SECOND QUARTER OF 2002 During the second quarter of 2003, net interest income increased $4.7 million, or 6.7%, over the second quarter of 2002. Total interest income increased $2.7 million, or 2.6%. Total interest expense decreased $1.9 million, or 5.2%, primarily due to a decrease of $4.1 million in interest expense on deposits, despite an increase in the average balance of deposits. -17- The provision for loan losses totaled $5.7 million for the second quarter of 2003, as compared to $4.5 million for the second quarter of 2002. Non-interest income increased 17.6% during the second quarter of 2003 compared to the same period of 2002, primarily due to a $2.3 million increase in the gain on sale of mortgage loans. Deposit fees and service charges increased 15.7% to $13.5 million for the three months ended June 30, 2003 from $11.7 million for the same period last year. Service charges for the second quarter of 2003 include $715,000 in fees from signature based transactions on debit cards. Non-interest expenses increased by $7.9 million or 13.1% during the second quarter of 2003, compared to the second quarter of 2002. Salaries and employee benefits increased $5.1 million during the second quarter of 2003, as compared to the second quarter of 2002, due to normal annual salary adjustments, and the purchase of Charter. The Corporation's income tax expense was $11.0 million for the second quarter of 2003 compared to an income tax expense of $10.8 million for the same period of 2002. The effective tax rate of 30.8% for the second quarter of 2003 was lower than the 35.0% federal statutory tax rate due to non-taxable interest and dividend income. LIQUIDITY AND INTEREST RATE SENSITIVITY The Corporation's goal in liquidity management is to meet the cash flow requirements of depositors and borrowers as well as the operating cash needs of the Corporation, with cost-effective funding. The Corporate Asset/ Liability Committee (ALCO), which includes members of executive management, reviews liquidity on a periodic basis and approves significant changes in strategies which affect balance sheet or cash flow positions. The Board of Directors has established an Asset/Liability Policy in order to achieve and maintain earnings performance consistent with long-term goals while maintaining acceptable levels of interest rate risk, a "well-capitalized" balance sheet and adequate levels of liquidity. This policy designates the ALCO as the body responsible for meeting this objective. Liquidity sources from assets include payments from loans and investments as well as the ability to securitize or sell loans and investment securities. Liquidity sources from liabilities are generated primarily through growth in core deposits, and to a lesser extent, the use of wholesale sources which include federal funds purchased, repurchase agreements and public deposits. In addition, the banking affiliates have the ability to borrow funds from the Federal Home Loan Bank (FHLB) and the Federal Reserve Bank. FHLB advances are a competitively priced and reliable source of funds. The Corporation has significant FHLB borrowing capacity available for both general and contingency funding purposes. As of June 30, 2003, outstanding advances were $663.7 million, or 8.03% of total assets while FHLB availability was $1.1 billion, or 14.0% of total assets. 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 $98.0 million, of which $24.0 million was used as of June 30, 2003. The Corporation also issues subordinated debt on a regular basis and has access to the capital markets. The ALCO regularly monitors various liquidity ratios and forecasts of cash position. Management believes the Corporation has sufficient liquidity available to meet its normal operating and contingency funding cash needs. The Corporation continued to expand its activities in originating mortgage loans for resale in the secondary market as the decline in mortgage interest rates resulted in an increase in origination volumes. Originations of mortgage loans totaled $291.6 million for the first six months of 2003. -18- Core deposits grew $610.1 million during the first six months of 2003 providing the primary source of financing for the Corporation's lending and investing activities. Core deposits acquired through the acquisition of Charter totaled $391.4 million. In addition to funds from the growth in core deposits, the Corporation utilized long-term FHLB advances to finance the purchase of certain investment securities. The Corporation repurchases shares of its common stock for re-issuance under various employee benefit plans and the Corporation's dividend reinvestment plan. During the second quarter of 2003, the Corporation purchased treasury shares totaling $12.2 million and received $7.7 million upon issuance. In addition, the Corporation completed its plan to repurchase shares of its common stock to be issued in connection with the redemption of its Series A and Series B preferred stock during the second quarter of 2003. The Corporation used its existing lines of credit with several major domestic banks to purchase treasury shares totaling $8.1 million which were reissued for the redemption of the preferred stock. During the third quarter of 2003, the Corporation will refinance approximately $220 million of its higher-cost, adjustable FHLB advances to fixed-rate, fixed maturity advances at lower long-term rates. The advances are scheduled to mature periodically through 2011 and have a weighted average interest rate of 5.10% at June 30, 2003. These advances will be replaced with FHLB advances maturing periodically through 2008 with a weighted average interest rate of 3.62%. The refinancing, which will result in a pre-tax prepayment penalty of approximately $20.7 million, will result in approximately $3.3 million in annual savings. The financial performance of the Corporation is at risk from interest rate fluctuations. This interest rate risk arises due to differences between the amount of interest earning assets and interest bearing liabilities subject to repricing over a period of time, the difference between the change in various interest rates and the embedded options in certain financial instruments. The Corporation utilizes an asset/liability model to support its balance sheet strategies. The Corporation uses gap analysis, net interest income simulations and the economic value of equity to measure its interest rate risk. The gap analysis below measures the interest rate risk of the Corporation by comparing the difference between the amount of interest earning assets and interest bearing liabilities subject to repricing over a period of time. The ratio of rate sensitive assets to rate sensitive liabilities repricing over a one year period was 1.21 at June 30, 2003, as compared to 1.11 at June 30, 2002. A ratio of more than one indicates a higher level of repricing assets over repricing liabilities over the next twelve months, assuming the current interest rate environment. Following is the gap analysis as of June 30, 2003 (in thousands):
Within 4-12 1-5 Over 3 Months Months Years 5 years Total -------- -------- ----------- ---------- ------- Interest Earning Assets Interest bearing deposits with banks $ 5,499 $ 103 $ 5,602 Federal funds sold 4,200 4,200 Securities 197,805 546,880 $ 778,400 $ 239,155 1,762,240 Loans, net of unearned 1,853,746 1,239,077 2,216,233 262,630 5,571,686 ---------- ---------- ---------- ---------- ---------- 2,061,250 1,786,060 2,994,633 501,785 7,343,728 Other assets 922,668 922,668 ---------- ---------- $2,061,250 $1,786,060 $2,994,633 $1,424,453 $8,266,396 ========== ========== ========== ========== ========== -19-
Interest Bearing Liabilities Deposits: Interest checking $ 362,251 $ 934,249 $1,296,500 Savings 471,134 911,537 1,382,671 Time deposits 466,126 $1,078,026 $ 844,296 3,983 2,392,431 Borrowings 651,957 139,973 265,250 372,404 1,429,584 ---------- ---------- ---------- ---------- ---------- 1,951,468 1,217,999 1,109,546 2,222,173 6,501,186 Other liabilities 1,134,335 1,134,335 Stockholders' equity 630,875 630,875 ---------- ---------- ---------- ---------- ---------- $1,951,468 $1,217,999 $1,109,546 $3,987,383 $8,266,396 ========== ========== ========== ========== ========== Period Gap $ 109,782 $ 568,061 $1,885,087 $(2,562,930) ========== ========= ========== =========== Cumulative Gap $ 109,782 $ 677,843 $2,562,930 ========== ========== ========== Cumulative Gap as a Percent of Earnings Assets 1.49% 9.23% 34.90% ==== ==== ===== Rate Sensitive Assets/Rate Sensitive Liabilities (Cumulative) 1.06 1.21 1.60 1.13 ==== ==== ==== ====
Net interest income simulations measure the exposure to short-term earnings from changes in market rates of interest in a more rigorous and dynamic 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, 2003 2002 ------- ------ Net interest income change (12 months): - 100 bp shock vs. stable rate (4.9)% 0.3 % + 200 bp shock vs. stable rate 2.8 % 1.3 % Economic value of equity: - 100 bp shock vs. stable rate (13.1)% (3.9)% + 200 bp shock vs. stable rate 6.8 % 1.0 % The preceding measures indicate that the ALCO has developed a more asset-sensitive interest rate risk position due to the general expectation that short-term market interest rates will rise. An asset-sensitive position means that income should be higher if rates increase and lower if rates decline versus income under stable rates. This position resulted mainly from the emphasis of adjustable-rate loans and an increase in non-maturity deposits (which are generally less rate-sensitive than other funding sources). In the table above, the risk of declining rates has increased due to the limited ability to lower certain deposit rates further and an increase in mortgage- related assets. The computation of the prospective effects of hypothetical interest rate changes requires numerous assumptions regarding characteristics of new business and the behavior of existing positions. These business assumptions are based upon the Corporation's experience, business plans and published industry experience. Key assumptions employed in the model include asset prepayment speeds, the relative price sensitivity of certain assets and -20- liabilities and the expected life of non-maturity deposits. Because these assumptions are inherently uncertain, actual results will differ from simulated results. In addition, the preceding measures assumed no change in asset/ liability compositions. Thus, the measures do not reflect the effects of refinancing the FHLB advances or other actions the ALCO may undertake in response to such changes in market rates of interest. Changes in the interest rate environment can cause significant fluctuations in the market value of mortgage loans originated for resale in the secondary market. The Corporation utilizes forward loan commitments on mortgage loans to offset the risk of decreases in the market values of the loans as a result of increases in interest rates. At June 30, 2003, the Corporation had $21.1 million in forward sales commitments. LOANS Following is a summary of loans (in thousands): June 30, December 31, 2003 2002 ----------- ------------ Real estate: Residential $2,083,353 $1,947,529 Commercial 1,641,193 1,465,903 Construction 323,204 287,560 Installment loans to individuals 829,449 910,868 Commercial, financial and agricultural 660,777 620,489 Lease financing 37,605 63,901 Unearned income (31,264) (75,746) --------- --------- $5,544,317 $5,220,504 ========== ========== NON-PERFORMING ASSETS Non-performing assets include non-performing loans and other real estate owned. Non-performing loans include non-accrual loans and restructured loans. Non-accrual loans represent loans on which interest accruals have been discontinued. It is the Corporation's policy to discontinue interest accruals when principal or interest is due and has remained unpaid for 90 days or more unless the loan is both well secured and in the process of collection. When a loan is placed on non-accrual status, all unpaid interest is reversed. Payments on non-accrual loans are generally applied to either principal or interest or both, depending on management's evaluation of collectibility. Non-accrual loans may not be restored to accrual status until all delinquent principal and interest has been paid or the loan becomes both well secured and in the process of collection. Consumer installment loans are generally charged off against the allowance for loan losses upon reaching 90 to 180 days past due, depending on the installment loan type. Restructured loans are loans in which the borrower has been granted a concession on the interest rate or the original repayment terms due to financial distress. Non-performing loans are closely monitored on an ongoing basis as part of the Corporation's loan review and work-out process. The potential risk of loss on these loans is evaluated by comparing the loan balance to the fair value of any underlying collateral or the present value of projected future cash flows. Losses are recognized where appropriate. -21- Following is a summary of non-performing assets (dollars in thousands): June 30, December 31, 2003 2002 --------- ------------ Non-performing assets: Non-accrual loans $27,980 $22,294 Restructured loans 6,099 5,915 -------- ----------- Total non-performing loans 34,079 28,209 Other real estate owned 4,592 4,729 -------- ----------- Total non-performing assets $38,671 $32,938 ======= ======= Asset quality ratios: Non-performing loans as percent of total loans .61% .54% Non-performing assets as percent of total assets .47% .46% ALLOWANCE FOR LOAN LOSSES Management's analysis of the allowance for loan losses includes the evaluation of the loan portfolio based upon the Corporation's internal loan grading system, evaluation of portfolio industry concentrations and the historical loss experience of the remaining balances of the various homogeneous loan pools which comprise the loan portfolio. Specific factors used in the internal loan grading system include the previous loan loss experience with the customer, the status of past due interest and principal payments on the loan, the collateral position and residual value of the loan, the quality of financial information supplied by the borrower and the general financial condition of the borrower. Management also assesses historical loss on the remaining portfolio segments in conjunction with the current status of economic conditions, loan loss trends, delinquency and non-accrual trends, credit administration, portfolio growth, concentrations of credit risk and other factors, including regulatory guidance in determining the adequacy of the allowance. This determination inherently involves a higher degree of uncertainty and considers current risk factors that may not have yet manifested themselves in the Corporation's historical loss factors used to determine the 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, 2003 2002 2003 2002 ------- ------- ------- ------- Balance at beginning of period $71,200 $66,281 $68,406 $65,059 Addition from acquisition 2,506 1,389 Charge-offs (5,861) (5,010) (12,202) (10,267) Recoveries 1,006 2,026 1,776 2,925 ------- ------- ------- ------- Net charge-offs (4,855) (2,984) (10,426) ( 7,342) Provision for loan losses 5,731 4,502 11,590 8,693 ------- ------- ------- ------- Balance at end of period $72,076 $67,799 $72,076 $67,799 ======= ======= ======= ======= Allowance for loan losses to: Total loans, net of unearned income 1.30% 1.33% Non-performing loans 211.50% 249.72% -22- CAPITAL RESOURCES AND REGULATORY MATTERS The assessment of capital adequacy depends on a number of factors such as asset quality, liquidity, earnings performance, changing competitive conditions and economic forces. The Corporation seeks to maintain a strong capital base to support its growth and expansion activities, to provide stability to current operations and to promote public confidence. Capital management is a continuous process. The Corporation has an existing registration statement for the Corporation's subordinated notes which are issued through its finance company subsidiary, Regency Finance Company (Regency). The net proceeds from the issuance of the subordinated notes are used to finance Regency's lending and purchasing activities. In addition, the Corporation has an effective $200.0 million shelf registration with the Securities and Exchange Commission. The Corporation may, from time to time, issue any combination of common stock, preferred stock, debt securities or capital securities of a subsidiary trust in one or more offerings. Both the Corporation and its banking affiliates are subject to various regulatory capital requirements administered by the federal banking agencies. Quantitative measures established by regulators to ensure capital adequacy require the Corporation and its banking subsidiaries to maintain minimum amounts and ratios of total and tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) and of tier 1 capital to average assets (as defined). As of March 31, 2003, 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, 2003, that the Corporation and each of its banking subsidiaries are all "well capitalized". Following are capital ratios as of June 30, 2003 for the Corporation (dollars in thousands):
Well Capitalized Minimum Capital Actual Requirements Requirements Amount Ratio Amount Ratio Amount Ratio -------- ------ -------- ----- -------- ------ Tier 1 Capital (Leverage) $518,501 6.5% $398,936 5.0% $319,148 4.0% (to average assets) Total Capital 593,434 10.3% 579,252 10.0% 463,402 8.0% (to risk-weighted assets) Tier 1 Capital 518,501 9.0% 347,551 6.0% 231,701 4.0% (to risk-weighted assets)
Failure to meet minimum capital requirements can initiate certain mandatory or discretionary actions by regulators that, if undertaken, could have a direct material effect on the Corporation's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation and its banking subsidiaries must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Corporation and its banking subsidiaries' capital amounts and classifications are also subject to qualitative judgments by the regulators regarding components, risk weightings and other factors. IMPORTANT NOTE REGARDING FORWARD-LOOKING STATEMENTS Certain statements in this Form 10-Q are "forward-looking" within the meaning of the Private Securities Litigation Reform Act of 1995, which statements generally can be identified by the use of forward-looking terminology, such as "may," "will," "expect," "estimate," "anticipate," believe, " target," "plan," "project," or "continue" or the negatives thereof or other -23- variations thereon or similar terminology, and are made on the basis of management's plans and current analyses of the Corporation, its business and the industry as a whole. These forward-looking statements are subject to risks and uncertainties, including, but not limited to, economic conditions, competition, interest rate sensitivity and exposure to regulatory and legislative changes. The above factors, in some cases, have affected, and in the future could affect, the Corporation's financial performance and could cause actual results to differ materially from those expressed or implied in such forward-looking statements. The Corporation does not undertake to publicly update or revise it forward-looking statements even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK. The information called for by this item is provided under the caption "Liquidity and Interest Rate Sensitivity" under Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations. ITEM 4. CONTROLS AND PROCEDURES. An evaluation was performed under the supervision and with the participation of the Corporation's management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of the design and operation of the Corporation's disclosure controls and procedures. Based on that evaluation, the Corporation's management, including the CEO and CFO, concluded that the Corporation's disclosure controls and procedures were effective as of June 30, 2003. There have been no significant changes in the Corporation's internal controls over financial reporting since the date of the evaluation. PART II Item 1. Legal Proceedings The Corporation established a litigation reserve in 2001 by recording a pre-tax charge of approximately $4.0 million to cover estimated legal expenses associated with five cases filed against one of its subsidiary banks. The plaintiffs alleged that a third-party independent administrator misappropriated funds from their individual retirement accounts held by the subsidiary bank. As of June 30, 2003, the Corporation has settled all of these asserted claims at an aggregate cost to the Corporation of approximately $3.5 million. The Corporation believes the remaining reserve will be sufficient for all costs associated with the litigation, including legal costs, unasserted claims, settlements and adverse judgements. The Corporation and persons to whom the Corporation may have indemnification obligations, in the normal course of business, are subject to various pending and threatened lawsuits in which claims for monetary damages are asserted. Other real estate owned includes a property which is subject to litigation. Should the outcome be adverse, the value of the property will be impaired and other costs may be increased. Management, after consultation with outside legal counsel, does not at the present time anticipate the ultimate aggregate liability arising out of such pending and threatened lawsuits will have a material adverse effect on the Corporation's financial position. At the present time, management is not in a position to determine whether any pending or threatened litigation will have a material adverse effect on the Corporation's results of operation in any future reporting period. -24- 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 April 28, 2003. 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 34,719,286 370,509 Alan C. Bomstein 34,684,101 405,694 David A. Straz, Jr. 34,737,720 352,075 William J. Strimbu 34,737,720 352,075 Archie O. Wallace, Esq. 34,722,319 367,476 R. Benjamin Wiley 34,724,834 364,961 Item 5. Other Information The Secretary of the Corporation must receive written notice of any proposal submitted by a shareholder of the Corporation for consideration at the Annual Meeting of Shareholders on or prior to the date which is 120 days prior to the date on which the Corporation first mailed its proxy materials for the prior year's Annual Meeting of Shareholders. Accordingly, any shareholder proposal must be submitted to the Corporation by November 19, 2003 to be considered at the 2004 Annual Meeting of Shareholders. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 15 Letter Re: Unaudited Interim Financial Information 31 Certifications pursuant to Section 302 of the Sarbanes- Oxley Act of 2002. 32 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 The Corporation filed the following reports on Form 8-K during the second quarter of 2003: June 30, 2003 - The Corporation reported its issuance of a press release announcing the signing of a definitive agreement to acquire Lupfer-Frakes Insurance Agency. -25- April 15, 2003 - The Corporation reported its issuance of a press release announcing its financial results for the quarter and year ended March 31, 2003. April 1, 2003 - The Corporation reported its issuance of a press release announcing that it had completed the acquisition of Charter Banking Corp., the holding company for Southern Exchange Bank based in Tampa, Florida. -26- 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, 2003 /s/Gary L. Tice ------------------------------------ Gary L. Tice President and Chief Executive Officer (Principal Executive Officer) Dated: August 14, 2003 /s/Thomas E. Fahey ------------------------------------ Thomas E. Fahey Executive Vice President and Chief Financial Officer (Principal Financial Officer) -27-