-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CBbKmWx37ch3baT6lH41vf8cLrkhud7jzYDs9B7apRXsTQsh2njO/ns8szWYCilh Rakc+7sT1jdMfMNVd7a8wA== 0000950128-04-000287.txt : 20040315 0000950128-04-000287.hdr.sgml : 20040315 20040315161445 ACCESSION NUMBER: 0000950128-04-000287 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20031231 FILED AS OF DATE: 20040315 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FNB CORP/FL/ CENTRAL INDEX KEY: 0000037808 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 251255406 STATE OF INCORPORATION: FL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-31940 FILM NUMBER: 04669734 BUSINESS ADDRESS: STREET 1: F.N.B. CORPORATION STREET 2: ONE F.N.B. BOULEVARD CITY: HERMITAGE STATE: PA ZIP: 16148 BUSINESS PHONE: 724-981-6000 MAIL ADDRESS: STREET 1: F.N.B. CORPORATION STREET 2: ONE F.N.B. BOULEVARD CITY: HERMITAGE STATE: PA ZIP: 16148 FORMER COMPANY: FORMER CONFORMED NAME: FNB CORP/PA DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: CITIZENS BUDGET CO DATE OF NAME CHANGE: 19750909 10-K 1 j0499301e10vk.txt F.N.B. CORPORATION 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Fee Required) For the fiscal year ended December 31, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (No Fee Required) For the transition period from _______________________ to ______________________ Commission file number 001-31940 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) One F.N.B Boulevard Hermitage, PA 16148 - ---------------------------------------- -------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 724-981-6000 Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Exchange on which Registered - --------------------------------------- ------------------------------------ Common Stock, par value $0.01 per share New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: NONE 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 [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12-b-2 of the Securities Act of 1934). Yes [X] No [ ] The registrant estimates that as of March 3, 2004, the aggregate market value of the voting stock held by non-affiliates of the registrant, computed by reference to the last sale price as reported by the New York Stock Exchange for such date, was approximately $985,922,463. APPLICABLE ONLY TO CORPORATE REGISTRANTS: As of February 28, 2004, the registrant had outstanding 46,135,608 shares of common stock having a par value of $0.01 per share. Continued FORM 10-K 2003 INDEX
PAGE PART I Item 1. Business. I-2 Item 2. Properties. I-12 Item 3. Legal Proceedings. I-12 Item 4. Submission of Matters to a Vote of Security Holders. I-13 Item 4A. Executive Officers of the Registrant I-13 PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. II-1 Item 6. Selected Financial Data. II-1 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. II-1 Item 7A. Quantitative and Qualitative Disclosures About Market Risk. II-1 Item 8. Financial Statements and Supplementary Data. II-1 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. II-1 Item 9A. Controls and Procedures. II-1 PART III Item 10. Directors and Executive Officers of the Registrant. III-1 Item 11. Executive Compensation. III-1 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. III-1 Item 13. Certain Relationships and Related Transactions. III-1 Item 14. Principal Accountant Fees and Services. III-1 PART IV Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K. IV-1 Signatures IV-3 Index to Exhibits IV-5
I-1 DOCUMENTS INCORPORATED BY REFERENCE
Part of Form 10-K into DOCUMENT which Document is Incorporated -------- ------------------------------ Annual Report to Stockholders for fiscal year ended December 31, 2003 I & II Definitive proxy statement for the 2004 Annual Meeting of Stockholders to be held on May 12, 2004 III
PART I ITEM 1. BUSINESS F.N.B. Corporation (the Corporation) was formed in 1974 as a bank holding company. During 2000, the Corporation elected to become and remains a financial holding company under the Gramm-Leach-Bliley Act of 1999. The Corporation has three reportable business segments: community banking, insurance agencies and consumer finance. For additional information regarding these segments, refer to the Business Segments footnote in the Notes to Consolidated Financial Statements, which is incorporated by reference to the Corporation's 2003 Annual Report to Stockholders. As of December 31, 2003, the Corporation owned and operated two regional community banks, a consumer finance company, an insurance agency, First National Trust Company and First National Wealth Management Company. Additionally, as of December 31, 2003, it had full service banking offices in Pennsylvania, Florida, and Ohio and consumer finance operations in those states and Tennessee. The Corporation's insurance agency has operations in Florida and Pennsylvania. On December 17, 2003, the Board of Directors of the Corporation declared a pro rata distribution payable to its holders of record of outstanding common stock at the close of business on December 26, 2003, the record date for the distribution, of one share of First National Bankshares of Florida, Inc. (FNBF) common stock for every share of the Corporation's common stock (the Distribution). Prior to the Distribution, which took effect at 12:01 a.m., Eastern Standard Time, on January 1, 2004 (the Distribution Date), the Corporation transferred all of its Florida operations to FNBF. As a result of the Distribution, all of the outstanding shares of FNBF common stock were distributed to the Corporation's shareholders. Immediately following the Distribution, the Corporation and its subsidiaries did not own any shares of FNBF common stock, which became an independent public company. FNBF's common stock is listed on the New York Stock Exchange (NYSE) under the symbol "FLB." On December 17, 2003, the Corporation listed its common stock with the NYSE under the symbol "FNB." 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. The Corporation, through its subsidiaries, provides a full range of financial services, principally to consumers and small- to medium-size businesses in its market areas. The Corporation's business strategy has been to focus primarily on providing quality, community-based financial services adapted to the needs of each of the markets it serves. The Corporation has emphasized its community orientation by preserving local advisory boards of directors and by allowing local management certain autonomy in decision-making, enabling them to respond to customer requests more quickly and concentrate on transactions within their market areas. However, while the Corporation has sought to preserve some decision-making at a local level, it has established centralized legal, loan review, accounting, investment, audit, loan operations and data processing functions. The centralization of these processes has enabled the Corporation to maintain consistent quality of these functions and to achieve certain economies of scale. I-2 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 was funded primarily through the issuance of $125.0 million in capital securities of a subsidiary trust and $25.2 million from the Corporation's existing line of credit with several major domestic banks. The transaction, which was accounted for as a purchase, resulted in the recognition of approximately $103.0 million in goodwill and $1.1 million in core deposit intangibles. Charter's banking subsidiary, Southern Exchange Bank, was merged into the Corporation's existing subsidiary, First National Bank of Florida, on October 14, 2003. The Corporation incurred and paid merger related costs of $1.0 million in connection with its acquisition of Charter. These costs were primarily related to employment expenses. On July 1, 2003 Roger Bouchard Insurance, Inc. completed its acquisition of Lupfer-Frakes, Inc. (Lupfer), an independent insurance agency located in Central Florida. Roger Bouchard Insurance, Inc. paid $10.2 million 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 $8.5 million in goodwill and $1.3 million in customer and renewal lists. The value assigned to the customer and renewal lists will be amortized over a ten year period. 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 three-month LIBOR plus 325 basis points. The rate in effect at December 31, 2003 was 4.39%. 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 Corporation has determined that it is not the primary beneficiary of the Statutory Trust and will not consolidate it. During the fourth quarter of 2003, $40.0 million of Corporation-obligated mandatorily redeemable capital securities of a subsidiary trust holding solely junior subordinated debt securities of the Corporation (debentures) were issued by First National Bankshares Statutory Trust I (Issuer Trust). The Issuer 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 Issuer Trust are its sole assets. Distributions on the capital securities issued by the Issuer Trust are payable quarterly at a rate per annum equal to the interest rate being earned on the debentures held by the Issuer 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 three-month LIBOR plus 290 basis points. The rate in effect at December 31, 2003 was 4.06%. 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 Corporation has determined that it is not the primary beneficiary of the Issuer Trust and will not consolidate it. I-3 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. As a result of the redemption, the Corporation no longer has any outstanding shares of Preferred Series A or Preferred Series B stock. The Corporation's lending philosophy is to minimize credit losses by following strict credit approval standards (which include independent analysis of realizable collateral value), diversifying its loan portfolio by industry and borrower and conducting ongoing review and management of the loan portfolio. The Corporation is an active residential mortgage lender, and its commercial loans are generally to established businesses within its market areas. The Corporation has no highly leveraged transaction loans. No material portion of the deposits of the Corporation's bank subsidiaries has been obtained from a single or small group of customers, and the loss of any customer's deposits or a small group of customers' deposits would not have a material adverse effect on the business of the Corporation. The majority of the deposits held by the Corporation's bank subsidiaries have been generated within the respective subsidiary's market area. Following is information as of December 31, 2003 for the Corporation's community bank and consumer finance subsidiaries, including the year established and location of principal office for each (dollars in thousands). All subsidiaries are wholly-owned by the Corporation.
NUMBER TOTAL TOTAL OF ASSETS DEPOSITS OFFICES ---------- ---------- ------- COMMUNITY BANK SUBSIDIARIES: First National Bank of Pennsylvania (Est. 1864) Hermitage, Pennsylvania............................... $4,386,835 $3,441,231 125 First National Bank of Florida (Est. 1998) Naples, Florida....................................... 3,716,613 2,720,238 58 ---------- ---------- --- $8,103,448 $6,161,469 183 ========== ========== === CONSUMER FINANCE SUBSIDIARY: Regency Finance Company (Est. 1927) Hermitage, Pennsylvania............................... $ 147,444 47 ========== === INSURANCE AGENCY SUBSIDIARY: Roger Bouchard Insurance, Inc. (Est. 1948) Clearwater, Florida................................... $ 36,845 13 ========== === TRUST SUBSIDIARIES: First National Trust Company (Est. 2003) Hermitage, Pennsylvania............................... $ 2,368 First National Wealth Management Company (Est. 2003) Naples, Florida....................................... 3,479 ---------- $ 5,847 ==========
I-4 The Corporation has five other subsidiaries, Penn-Ohio Life Insurance Company, Est. 1981 (Penn-Ohio), First National Corporation, Est. 1997 (FNC), F.N.B. Building Corporation, Est. 1987 (F.N.B. Building), First National Management Corporation, Est. 2002 (FNMC) and First National Bankshares of Florida, Inc., Est 2003 (FNBF). Penn-Ohio underwrites, as a reinsurer, credit life and accident and health insurance sold by the Corporation's subsidiaries. FNC and FNMC hold equity securities and other assets for the holding company. F.N.B. Building owns real estate that is leased to certain affiliates. FNBF was created to facilitate the spin-off of the Corporation's Florida operations. FNBF was structured as a mid-tier holding company and it owns the following subsidiaries: First National Bank of Florida, Roger Bouchard Insurance, Inc. and First National Wealth Management Company. OPERATIONS OF THE BANK SUBSIDIARIES The Corporation's bank subsidiaries offer services traditionally offered by full-service commercial banks, including commercial and individual demand and time deposit accounts and commercial, mortgage and individual installment loans. In addition to traditional banking products, the Corporation's bank subsidiaries offer various alternative investment products, including mutual funds and annuities. In addition, First National Trust Company (FNTC)and First National Wealth Management Company (FNWMC)provide a broad range of personal and corporate fiduciary services, including the administration of decedent and trust estates. As of December 31, 2003, the market value of trust assets under management totaled approximately $1.3 billion and $910.2 million at FNTC and FNWMC, respectively. On December 31, 2003, FNTC was a subsidiary of First National Bank of Pennsylvania while FNWMC was a subsidiary of FNBF. OPERATIONS OF THE INSURANCE AGENCY The Corporation's insurance agency is a full-service agency offering all lines of commercial and personal insurance through major carriers. OPERATIONS OF THE CONSUMER FINANCE SUBSIDIARY The Corporation's consumer finance subsidiary, Regency Finance Company (Regency), is involved principally in making personal installment loans to individuals and purchasing installment sales finance contracts from retail merchants. Such activity is primarily funded through the sale of the Corporation's subordinated notes at Regency's branch offices. OPERATIONS OF THE INVESTMENT ADVISOR SUBSIDIARY First National Trust Company's subsidiary, F.N.B. Investment Advisors, Inc., is registered with the Securities and Exchange Commission (SEC) as an investment advisor and, therefore, is subject to the requirements of the Investment Advisors Act of 1940 and the SEC's regulations thereunder. The principal purpose of the regulations applicable to investment advisors is the protection of clients and the securities markets, rather than the protection of creditors and stockholders of investment advisors. The regulations applicable to investment advisors cover all aspects of the investment advisory business, including limitations on the ability of investment advisors to charge performance-based or non-refundable fees to clients, record-keeping, operating marketing and reporting requirements, disclosure requirements, limitations on principal transactions between an advisor or its affiliates and advisory clients, as well as general anti-fraud prohibitions. The Corporation's investment advisory subsidiary also may be subject to certain state securities laws and regulations. I-5 In addition, since the Corporation's investment advisor subsidiary is an investment advisor to registered investment companies and other managed accounts, the investment advisory company is subject to the requirements of the Investment Company Act of 1940 and the SEC's regulations thereunder. Additional legislation, changes in rules promulgated by the SEC, other federal and state regulatory authorities and self-regulatory organizations, or changes in the interpretation or enforcement of existing laws and rules may directly affect the method of operation and profitability of investment advisors. The profitability of investment advisors could also be affected by rules and regulations that impact the business and financial communities in general, including changes to the laws governing taxation, antitrust regulation and electronic commerce. Under various provisions of the federal securities laws, including in particular those applicable to broker-dealers, investment advisors and registered investment companies and their service providers, a determination by a court or regulatory agency that certain violations have occurred at a company or its affiliates can result in a limitation of permitted activities and disqualification to continue to conduct certain activities. MARKET AREA AND COMPETITION The Corporation's Pennsylvania subsidiaries operate in Pennsylvania, northern and central Tennessee and northeastern Ohio in an area which has a diversified mix of light manufacturing, service and distribution industries. This area is served by Interstates 90, 76, 79 and 80, and is located at the approximate midpoint between New York City and Chicago. The area is also close to the Great Lakes shipping port of Erie and the Greater Pittsburgh International Airport. The Corporation's Florida subsidiaries, which have subsequently been spun-off, operated in an area represented by high growth and high median family income levels. The industries served in this market include a diversified mix of tourism, construction, services, light manufacturing, distribution and agriculture. The market extends north to Tampa and south through Naples to Marco Island, and is served by Interstate 75 and U.S. Highway 41. The Corporation's acquisition of Charter extends the Florida market across Interstate 4 through Orlando. The Corporation's subsidiaries compete for deposits, loans and service business with a large number of other financial institutions, such as commercial banks, savings banks, savings and loan associations, credit life insurance companies, mortgage banking companies, consumer finance companies, credit unions and commercial finance and leasing companies, many of which have greater resources than the Corporation. In providing wealth and asset management services, the Corporation's subsidiaries compete with many other financial services firms, brokerage firms, mutual fund complexes, investment management firms, trust and fiduciary service providers and insurance agencies. In the consumer finance subsidiary's market areas of Pennsylvania, Ohio and Tennessee, the active competitors include banks, credit unions and national, regional and local consumer finance companies, some of which have substantially greater resources than that of the consumer finance subsidiary. The ready availability of consumer credit through charge accounts and credit cards constitutes additional competition. In this market area, competition is based on the rates of interest charged for loans, the rates of interest paid to obtain funds and the availability of customer services. I-6 The ability to access and use technology is an increasingly important competitive factor in the financial services industry. Technology is not only important with respect to delivery of financial services, but also in processing information. Each of the Corporation's subsidiaries must continually make technological investments to remain competitive in the financial services industry. EMPLOYEES As of February 13, 2004, the Corporation and its subsidiaries had 1,325 full-time and 357 part-time employees. Management of the Corporation considers its relationship with its employees to be satisfactory. MERGERS AND ACQUISITIONS See the Mergers and Acquisitions footnote in the Notes to Consolidated Financial Statements, which is incorporated by reference to the Corporation's 2003 Annual Report to Stockholders. GOVERNMENT SUPERVISION AND REGULATION The following discussion describes elements of an extensive regulatory framework applicable to bank holding companies, financial holding companies and banks and specific information about the Corporation and its subsidiaries. Federal regulation of banks, bank holding companies and financial holding companies is intended primarily for the protection of depositors and the Bank Insurance Fund rather than for the protection of stockholders and creditors. There are numerous laws and regulations governing the operations of financial services institutions and their holding companies. Accordingly, the following discussion is general in nature and does not purport to be complete or to describe all of the laws and regulations that apply to the Corporation and its subsidiaries. General As a registered bank holding company and financial holding company, the Corporation is subject to the supervision of, and regular inspection by, the Board of Governors of the Federal Reserve System (Federal Reserve Board). The Corporation's subsidiary banks and trust companies are organized as national banking associations, which are subject to regulation, supervision and examination by the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve Board and other federal and state regulatory agencies. In addition to banking laws, regulations and regulatory agencies, the Corporation and its subsidiaries and affiliates are subject to various other laws and regulations and supervision and examination by other regulatory agencies, all of which directly or indirectly affect the operations and management of the Corporation and its ability to make distributions to stockholders. A financial holding company and the companies under its control are permitted to engage in activities considered "financial in nature or incidental thereto" as defined by the Gramm-Leach-Bliley Act and Federal Reserve Board interpretations, including, without limitation, insurance and securities activities, and therefore may engage in a broader range of activities than permitted for bank holding companies and their subsidiaries. A financial holding company may engage directly or indirectly in activities considered financial in nature, either de novo or by acquisition, provided the financial holding company gives the Federal Reserve Board after-the-fact notice of the new activities. The Gramm-Leach-Bliley Act also permits national banks, such as the Banks, to engage in activities considered financial in nature through a financial subsidiary, subject to certain conditions and limitations and with the approval of the OCC. I-7 The Federal Reserve Board is the "umbrella" regulator of a financial holding company. In addition, financial holding company's operating entities, such as its subsidiary broker-dealers, investment managers, investment companies, insurance companies and banks, are also subject to the jurisdiction of various federal and state "functional" regulators. Interstate Banking Bank holding companies, including those that are also financial holding companies, are required to obtain the prior approval of the Federal Reserve Board before acquiring more than five percent of any class of voting stock of any non-affiliated bank. Pursuant to the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (Interstate Banking and Branching Act), a bank holding company may acquire banks located in states other than its home state without regard to the permissibility of such acquisitions under state law, but subject to any state requirement that the bank has been organized and operating for a minimum period of time, not to exceed five years, and the requirement that the bank holding company, after the proposed acquisition, control no more than 10 percent of the total amount of deposits of insured depository institutions in the United States and no more than 30 percent or such lesser or greater amount set by state law of such deposits in that state. Subject to certain restrictions, the Interstate Banking and Branching Act also authorizes banks to merge across state lines to create interstate banks. The Interstate Banking and Branching Act also permits a bank to open new branches in a state in which it does not already have banking operations if such state enacts a law permitting de novo branching. During 2003, the Corporation had two retail subsidiary national banks: First National Bank of Pennsylvania and First National Bank of Florida. First National Bank of Pennsylvania owns and operates eleven interstate branch offices within Ohio. Changes in Regulations Proposals to change the laws and regulations governing the banking industry are frequently introduced in Congress, in the state legislatures and before the various bank regulatory agencies. The likelihood and timing of any proposals or legislation and the impact they might have on the Corporation and its subsidiaries cannot be determined at this time. Capital and Operational Requirements The Federal Reserve Board, the OCC and the FDIC have issued substantially similar risk-based and leverage capital guidelines applicable to United States banking organizations. In addition, these regulatory agencies may from time to time require that a banking organization maintain capital above the minimum levels, whether because of its financial condition or actual or anticipated growth. The Federal Reserve Board's risk-based guidelines define a three-tier capital framework. Tier 1 capital includes common shareholders' equity and qualifying preferred stock, less goodwill and other adjustments. Tier 2 capital consists of preferred stock not qualifying as Tier 1 capital, mandatory convertible debt, limited amounts of subordinated debt, other qualifying term debt and the allowance for credit losses up to 1.25 percent of risk-weighted assets. Tier 3 capital includes subordinated debt that is unsecured, fully paid, has an original maturity of at least two years, is not redeemable before maturity without prior approval by the Federal Reserve Board and includes a lock-in clause precluding payment of either interest or principal if the payment would cause the issuing bank's risk-based capital ratio to fall or remain below the required minimum. I-8 The sum of Tier 1 and 2 capital less investments in unconsolidated subsidiaries represents the Corporation's qualifying total capital. Risk-based capital ratios are calculated by dividing Tier 1 and total capital by risk-weighted assets. Assets and off-balance sheet exposures are assigned to one of four categories of risk-weights, based primarily on relative credit risk. The minimum Tier 1 capital ratio is four percent and the minimum total capital ratio is eight percent. At December 31, 2003, the Corporation's Tier 1 and total risk-based capital ratios under these guidelines were 9.2% and 10.9%, respectively. At December 31, 2003, the Corporation had $165.0 million of capital securities that qualified as Tier 1 capital and $27.0 million of subordinated debt that qualified as Tier 2 capital. Effective upon the spin-off of the Florida operations, approximately $77.0 million and $10.0 million of these capital securities will continue to qualify for Tier 1 and Tier 2 capital, respectively. The leverage ratio is determined by dividing Tier 1 capital by adjusted average total assets. Although the stated minimum ratio is 100 to 200 basis points above three percent, banking organizations are required to maintain a ratio of at least five percent to be classified as well capitalized. The Corporation's leverage ratio at December 31, 2003 was 6.7%. The Corporation meets its leverage ratio requirements. The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA), among other things, identifies five capital categories for insured depository institutions (well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized) and requires the respective federal regulatory agencies to implement systems for "prompt corrective action" for insured depository institutions that do not meet minimum capital requirements within such categories. FDICIA imposes progressively more restrictive constraints on operations, management and capital distributions, depending on the category in which an institution is classified. Failure to meet the capital guidelines could also subject a banking institution to capital raising requirements. An "undercapitalized" bank must develop a capital restoration plan and its parent holding company must guarantee that bank's compliance with the plan. The liability of the parent holding company under any such guarantee is limited to the lesser of five percent of the bank's assets at the time it became "undercapitalized" or the amount needed to comply with the plan. Furthermore, in the event of the bankruptcy of the parent holding company, such guarantee would take priority over the parent's general unsecured creditors. In addition, FDICIA requires the various regulatory agencies to prescribe certain non-capital standards for safety and soundness relating generally to operations and management, asset quality and executive compensation and permits regulatory action against a financial institution that does not meet such standards. The various regulatory agencies have adopted substantially similar regulations that define the five capital categories identified by FDICIA, using the total risk-based capital, Tier 1 risk-based capital and leverage capital ratios as the relevant capital measures. Such regulations establish various degrees of corrective action to be taken when an institution is considered undercapitalized. Under the regulations, a "well-capitalized" institution must have a Tier 1 risk-based capital ratio of at least six percent, a total risk-based capital ratio of at least ten percent and a leverage ratio of at least five percent and not be subject to a capital directive order. Under these guidelines, both of the Banks were considered well capitalized as of December 31, 2003. I-9 Federal regulators must also take into consideration (a) concentrations of credit risk; (b) interest rate risk (when the interest rate sensitivity of an institution's assets does not match the sensitivity of its liabilities or its off-balance-sheet position) and (c) risks from non-traditional activities, as well as an institution's ability to manage those risks, when determining the adequacy of an institution's capital. This evaluation will be made as a part of the institution's regular safety and soundness examination. In addition, the Corporation, and any bank with significant trading activity, must incorporate a measure for market risk in their regulatory capital calculations. Distributions The Corporation's funds for cash distributions to its stockholders are derived from a variety of sources, including cash and temporary investments. The primary source of such funds, and funds used to pay principal and interest on its indebtedness, is dividends received from the Banks. In addition to dividends from the Banks, other sources of parent company liquidity for the Corporation include cash and short-term investments, as well as dividends and loan repayments from other subsidiaries. Both of the Banks are subject to various regulatory policies and requirements relating to the payment of dividends, including requirements to maintain capital above regulatory minimums. The appropriate federal regulatory authority is authorized to determine under certain circumstances relating to the financial condition of a bank or bank holding company that the payment of dividends would be an unsafe or unsound practice and to prohibit payment thereof. In addition, the ability of the Corporation and the ability of Banks to pay dividends may be affected by the various minimum capital requirements and the capital and non-capital standards established under FDICIA, as described above. The right of the Corporation, its stockholders and its creditors to participate in any distribution of the assets or earnings of its subsidiaries is further subject to the prior claims of creditors of the respective subsidiaries. Source of Strength According to Federal Reserve Board policy, bank holding companies are expected to act as a source of financial strength to each subsidiary bank and to commit resources to support each such subsidiary. This support may be required at times when a bank holding company may not be able to provide such support. Similarly, under the cross-guarantee provisions of the Federal Deposit Insurance Act, in the event of a loss suffered or anticipated by the FDIC either as a result of default of a banking subsidiary or related to FDIC assistance provided to a subsidiary in danger of default, the other Banks that are members of the FDIC may be assessed for the FDIC's loss, subject to certain exceptions. In addition, if the Corporation's subsidiary banks were no longer "well capitalized" and "well managed" within the meaning of the Bank Holding Company Act and Federal Reserve Board rules (which take into consideration capital ratios, examination ratings and other factors), the expedited processing of certain types of Federal Reserve Board applications would not be available to the Corporation. Moreover, examination ratings of "3" or lower, lower capital ratios than peer group institutions, regulatory concerns regarding management, controls, assets, operations or other factors, can all potentially result in practical limitations on the ability of a bank or bank holding company to engage in new activities, grow, acquire new businesses, repurchase its stock or pay dividends, or continue to conduct existing activities. I-10 Securities and Exchange Commission The Corporation is also subject to regulation by the Securities and Exchange Commission (SEC) by virtue of the Corporation's status as a public company and due to the nature of certain of its businesses. CONSUMER FINANCE SUBSIDIARY The Corporation's consumer finance subsidiary is subject to regulation under Pennsylvania, Tennessee, and Ohio state laws which require, among other things, that it maintain licenses for consumer finance operations in effect for each of its offices. Representatives of the Pennsylvania Department of Banking, the Tennessee Department of Financial Institutions and the Ohio Division of Consumer Finance periodically visit the offices of the consumer finance subsidiary and conduct extensive examinations in order to determine compliance with such laws and regulations. Such examinations include a review of loans and the collateral thereof, as well as a check of the procedures employed for making and collecting loans. Additionally, the consumer finance subsidiary is subject to certain federal laws which require that certain information relating to credit terms be disclosed to customers and, in certain instances, afford customers the right to rescind transactions. INSURANCE AGENCY The Corporation's insurance agency is subject to licensing requirements and extensive regulation under the laws of the United States and its various states. These laws and regulations are primarily for the benefit of clients. In all jurisdictions, the applicable laws and regulations are subject to amendment or interpretation by regulatory authorities. Generally, such authorities are vested with relatively broad discretion to grant, renew and revoke licenses and approvals, and to implement regulations. Licenses may be denied or revoked for various reasons, including the violation of such regulations, conviction of crimes and the like. Possible sanctions which may be imposed for violation of regulations include the suspension of individual employees, limitations on engaging in a particular business for a specified period of time, revocation of licenses, censures and fines. LIFE INSURANCE SUBSIDIARY Penn-Ohio is subject to examination on a triennial basis by the Arizona Department of Insurance. Representatives of the Arizona Department of Insurance will periodically determine whether Penn-Ohio has maintained required reserves, established adequate deposits under a reinsurance agreement and complied with reporting requirements under applicable Arizona statutes. GOVERNMENTAL POLICIES The operations of the Corporation and its subsidiaries are affected not only by general economic conditions, but also by the policies of various regulatory authorities. In particular, the Federal Reserve Board regulates money and credit and interest rates in order to influence general economic conditions. These policies have a significant influence on overall growth and distribution of loans, investments and deposits and affect interest rates charged on loans or paid for time and savings deposits. Federal Reserve Board monetary policies have had a significant effect on the operating results of all financial institutions in the past and may continue to do so in the future. I-11 AVAILABLE INFORMATION The Corporation maintains a website at www.fnbcorporation.com. The Corporation makes available, free of charge, its annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K on its website as soon as practicable after such reports are filed with the SEC. The Corporation's common stock is traded on the NYSE under the symbol "FNB". The Corporation's Code of Business Conduct and Ethics, the Charters of its Audit, Compensation, Corporate Governance and Nominating Committees and the Corporation's Corporate Governance Guidelines are available on the Corporation's website and in printed form upon request. ITEM 2. PROPERTIES The Corporation owns a six-story building in Hermitage, Pennsylvania which serves as its northern executive and administrative offices and shares this facility with First National Bank of Pennsylvania. The Corporation also operates an eight-story building in Naples, Florida, which serves as its southern executive and administrative offices and shared this facility with First National Bank of Florida until December 31, 2003. The banking, consumer finance and insurance company offices are located in 31 counties in Pennsylvania, 9 counties in southwestern Florida, 16 counties in northern and central Tennessee and 7 counties in eastern Ohio. At December 31, 2003, the Corporation's subsidiaries owned 131 of the Corporation's 243 offices and leased the remaining 112 offices under operating leases expiring at various dates through the year 2087. For additional information regarding the lease commitments, see the Premises and Equipment footnote in the Notes to Consolidated Financial Statements, which is incorporated by reference to the Corporation's 2003 Annual Report to Stockholders. ITEM 3. LEGAL PROCEEDINGS The Corporation established a litigation reserve in 2001 by recording a pr-tax charge of approximately $4.0 million to cover estimated legal expenses associated with five cases filed against on of its subsidiary banks. The plaintiffs alleged that a third-party independent administrator misappropriated funds from their individual retirement accounts held with the banking subsidiary. As of December 31, 2003, the Corporation has settled all of these asserted claims, at an aggregate cost to the Corporation of $3.5 million. The Corporation believes the remaining reserve will be sufficient for all remaining 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 that is subject to litigation. Should the outcome of the pending or threatened lawsuits be adverse, the value of the property will be impaired and other costs may be incurred. Management, after consultation with outside legal counsel, does not at the present time anticipate that the ultimate liability arising out of such pending and threatened lawsuits will have a material adverse effect on the Corporation's financial position. At the present time, management is not in a position to determine whether any pending or threatened litigation will have a material adverse effect on the Corporation's results of operations in any future reporting period. I-12 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS NONE ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT Information relating to Mr. Tice, Mr. Gurgovits, Mr. Hale, Mr. Bettinger and Mr. Fahey is provided in the Corporation's definitive proxy statement filed with the SEC in connection with its annual meeting of stockholders to be held May 12, 2004. The name, age, position with the Corporation and principal occupation for the last five years of each of the remaining Corporate executive officers is set forth below:
Position with the Corporation and Prior Name Age Occupations in Previous Five Years - ------------------ ----- -------------------------------------------------- Brian F. Lilly 46 Chief Financial Officer of the Corporation since December 2003; Chief Administrative Officer of FNBPA from October 2003 to present; Chief Financial Officer of Billingzone, LLC from 2000 to 2003; Chief Financial Officer of various businesses of PNC Financial Services Group, Inc. from 1990 to 2000. Tito L. Lima 39 Controller of the Corporation since January 2004; Chief Financial Officer of FNBPA since 2002; Chief Financial Officer for the Consumer Lending Business of PNC Bank from 1996 to 2002. David B. Mogle 54 Corporate Secretary since 1994 and Treasurer since 1986; Senior Vice President, Secretary and Treasurer of FNBPA since 1994, 1994 and 1999, respectively. James G. Orie 46 Chief Legal Officer of the Corporation since January 2004; Vice President and Corporate Counsel of the Corporation from 1996 to 2003. Gale Wurster 62 Chief Credit Officer of the Corporation since January 2004; Senior Vice President of FNBPA from 1992 to present. C.C. Coghill 60 Executive Vice President and Chief Credit Officer (resigned effective of the Corporation since 2002; Executive Vice January 1, 2004) President and Chief Credit Officer of FNBFL in 2002; Executive Vice President and Senior Credit Officer of First National Bank of Naples from 1997 to 2002. Charlie Grau 59 Vice President and Chief Technology Officer since (resigned effective 2002; Executive Vice President and Chief Operating January 1, 2004) Officer of Customer Service Center of F.N.B., L.L.C. since 1998. Robert T. Reichert 41 Vice President and Corporate Controller of the (resigned effective Corporation since 1996; Executive Vice President January 1, 2004) and Chief Financial Officer of FNBFL from 2001 to 2002. Garrett S. Richter 53 Executive Vice President of the Corporation; and (resigned effective President and Chief Executive Officer of FNBFL. January 1, 2004) William J. Rundorff 55 Chief Legal Officer of the Corporation since 2001; (retired effective Executive Vice President of the Corporation since January 1, 2004) 1995. John D. Waters 57 Senior Vice President and Director of Investor (retired effective Relations since July 2002; Chief Financial Officer January 1, 2004) from 1994 to 2002.
There are no family relationships among any of the above executive officers, and there is no arrangement of understanding between any of the above executive officers and any other person pursuant to which he was selected as an officer. The executive officers are elected by and serve at the pleasure of the Corporation's Board of Directors. I-13 PART II Information relating to Items 5, 6, 7, 7A and 8 is provided in the Corporation's 2003 Annual Report to Stockholders under the captions and on the pages indicated below. The Annual Report is filed as an exhibit to this report and is incorporated herein by reference.
PAGES IN 2003 ANNUAL REPORT CAPTION IN 2003 ANNUAL REPORT TO STOCKHOLDERS TO STOCKHOLDERS ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER REPURCHASES OF EQUITY SECURITIES 58 ITEM 6. SELECTED FINANCIAL DATA 39 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 43-57 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 48-50 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 6-38, 40
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9A. 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 the 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 December 31, 2003. There have been no significant changes in the Corporation's internal controls over financial reporting during the fourth quarter of 2003 that have materially affected, or are reasonably likely to material affect, the Corporation's internal controls over financial reporting. II-1 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT With the exception of information regarding certain executive officers of the Corporation, which is set forth in Item 4A. of this report, the information relating to this item is provided in the Corporation's definitive proxy statement filed with the SEC in connection with its annual meeting of stockholders to be held May 12, 2004. Such information is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION Information relating to this item is provided in the Corporation's definitive proxy statement filed with the SEC in connection with its annual meeting of stockholders to be held May 12, 2004. Such information is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS With the exception of the equity compensation plan information provided below, the information relating to this item is provided in the Corporation's definitive proxy statement filed with the SEC in connection with its annual meeting of stockholders to be held May 12, 2004. Such information is incorporated herein by reference.
Number of securities Weighted average Number of securities to be issued upon exercise price remaining for future exercise of of outstanding issuance under equity Plan category outstanding options options compensation plans - --------------------- -------------------- --------------- --------------------- Equity compensation 3,136,740 (1) $21.17 6,036,998 (2) plans approved by security holders Equity compensation plans not approved by security holders N/A N/A N/A
(1) Excludes 39,002 shares of restricted common stock awards subject to forfeiture. The shares of restricted stock vest in five equal annual installments beginning on the date of grant. (2) Represents shares of common stock eligible for issuance pursuant to stock option or restricted stock awards granted under various plans. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information relating to this item is provided in the Corporation's definitive proxy statement filed with the SEC in connection with its annual meeting of stockholders to be held May 12, 2004. Such information is incorporated herein by reference. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Information relating to this item is provided in the Corporation's definitive proxy statement filed with the SEC in connection with its annual meeting of stockholders to be held May 12, 2004. Such information is incorporated herein by reference. III-1 PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. FINANCIAL STATEMENTS The following consolidated financial statements of F.N.B. Corporation and subsidiaries and report of independent auditors, included in the Corporation's 2003 Annual Report to Stockholders, are incorporated herein by reference:
PAGES IN 2003 ANNUAL REPORT TO STOCKHOLDERS Consolidated Balance Sheets 6 Consolidated Income Statements 7 Consolidated Statements of Stockholders' Equity 8 Consolidated Statements of Cash Flows 9 Notes to Consolidated Financial Statements 10 - 38 Report of Independent Auditors 5 Quarterly Earnings Summary 40
(a) 2. FINANCIAL STATEMENT SCHEDULES All Schedules are omitted because they are not applicable. (a) 3. EXHIBITS The exhibits filed or incorporated by reference as a part of this report are listed in the Index to Exhibits which appears at page IV-5 and is incorporated by reference. (b) REPORTS ON FORM 8-K The Corporation filed the following Current Reports on Form 8-K during the fourth quarter of 2003: October 8, 2003 - Items 5 and 7. The Corporation commenced the solicitation of written consents from certain of the holders of its subordinated notes to the execution of a Second Supplemental Indenture. October 15, 2003 - Item 12. The Corporation reported its issuance of a press release announcing its financial results for the quarter ended and nine months ended September 30, 2003. October 31, 2003 - Item 5. The Corporation received the requisite consents from holders of its subordinated notes approving the execution of the Second Supplemental Indenture to its subordinated notes effective as of October 30, 2003. The Second Supplemental Indenture amends the originally filed Indenture to permit the Corporation to effect its planned spin-off of its Florida operations without causing a default under the Indenture. October 31, 2003 - Items 5 and 7. The Corporation announced the filing of the Form 10 Registration Statement with the Securities and Exchange Commission by the subsidiary to be spun-off, First National Bankshares of Florida, Inc. IV-1 December 10, 2003 - Item 5. The Corporation announced that it and its subsidiary to be spun-off, First National Bankshares of Florida, Inc., have been cleared by the New York Stock Exchange to list their common stock under the new ticker symbols "FNB" and "FLB," respectively. December 18, 2003 - Item 5. The Corporation announced that its Board of Directors declared a record date of December 26, 2003 and an effective date of January 1, 2004 for the pending spin-off of First National Bank of Florida, Inc., subject to receipt of certain regulatory approvals. December 24, 2003 - Item 5. The Corporation announced that all necessary regulatory approvals for the spin-off of its Florida operations, First National Bankshares of Florida, Inc., have been received. In addition, the Corporation confirmed December 26, 2003 as the record date of the spin-off which will occur on January 1, 2004. The Corporation has filed the following Current Reports on Form 8-K after December 31, 2003: January 9, 2004 - Items 2 and 7. The Corporation announced that it has completed the spin-off of its Florida operations through the distribution to shareholders of all of the outstanding shares of stock of First National Bankshares of Florida, Inc. (FNBF). As a result of the spin-off, FNBF is currently an independent, separately traded, public company. January 22, 2004 - Items 7 and 12. The Corporation reported its issuance of a press release announcing its financial results for the quarter ended and nine months ended September 30, 2003. IV-2 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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 By /s/ Stephen J. Gurgovits --------------------------- Stephen J. Gurgovits, President and Chief Executive Officer By /s/ Brian F. Lilly -------------------------- Brian F. Lilly, Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ Peter Mortensen Chairman and Director March 10, 2004 - --------------------------- Peter Mortensen /s/ Stephen J. Gurgovits President, Chief Executive March 10, 2004 - --------------------------- Officer and Director Stephen J. Gurgovits (Principal Executive Officer) /s/ Brian F. Lilly Chief Financial Officer March 10, 2004 - --------------------------- (Principal Financial Officer) Brian F. Lilly /s/ Tito L. Lima Corporate Controller March 10, 2004 - --------------------------- (Principal Accounting Officer) Tito L. Lima /s/ William B. Campbell Director March 10, 2004 - --------------------------- William B. Campbell /s/ Henry M. Ekker Director March 10, 2004 - --------------------------- Henry M. Ekker /s/ Robert B. Goldstein Director March 10, 2004 - --------------------------- Robert B. Goldstein /s/ Harry F. Radcliffe Director March 10, 2004 - --------------------------- Harry F. Radcliffe
IV-3 /s/ John Rose Director March 10, 2004 - --------------------------- John Rose /s/ William J. Strimbu Director March 10, 2004 - --------------------------- William J. Strimbu /s/ Earl K. Wahl, Jr. Director March 10, 2004 - --------------------------- Earl K. Wahl, Jr. /s/ Archie O. Wallace Director March 10, 2004 - --------------------------- Archie O. Wallace /s/ R. Benjamin Wiley Director March 10, 2004 - --------------------------- R. Benjamin Wiley
IV-4 INDEX TO EXHIBITS The following exhibits are filed or incorporated by reference as part of this report: 3.1. Articles of Incorporation of the Corporation as currently in effect. (incorporated by reference to Exhibit 4.1. of the Corporation's Form 8-K filed on June 1, 2001). 3.2. By-laws of the Corporation as currently in effect. (incorporated by reference to Exhibit 4.2. of the Corporation's Form 8-K filed on June 1, 2001). 4 The rights of holders of equity securities are defined in portions of the Articles of Incorporation and By-laws. The Articles of Incorporation are incorporated by reference to Exhibit 4.1. of the registrant's Form 8-K filed on June 1, 2001. The By-laws are incorporated by reference to Exhibit 4.2. of the registrant's Form 8-K filed on June 1, 2001. A designation statement defining the rights of F.N.B. Corporation Series A - Cumulative Convertible Preferred Stock is incorporated by reference to Form S-14, Registration Statement of F.N.B. Corporation, File No. 2-96404. A designation statement defining the rights of F.N.B. Corporation Series B - Cumulative Convertible Preferred Stock is incorporated by reference to Exhibit 4 of the registrant's Form 10-Q for the quarter ended June 30, 1992. The Corporation agrees to furnish to the Commission upon request copies of all instruments not filed herewith defining the rights of holders of long-term debt of the Corporation and its subsidiaries. 10.1. Form of agreement regarding deferred payment of directors' fees by First National Bank of Pennsylvania. (incorporated by reference to Exhibit 10.1. of the Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1993). 10.2. Form of agreement regarding deferred payment of directors' fees by F.N.B. Corporation. (incorporated by reference to Exhibit 10.2. of the Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1993). 10.3. Form of Deferred Compensation Agreement by and between First National Bank of Pennsylvania and four of its executive officers. (incorporated by reference to Exhibit 10.3. of the Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1993). 10.4. Employment Agreement between F.N.B. Corporation and Stephen J. Gurgovits. (incorporated by reference to Exhibit 10.5. of the Corporation's Annual Report on Form 10-K for the year ended December 31, 1998). 10.5. Employment Agreement between F.N.B. Corporation and William J. Rundorff. (incorporated by reference to exhibit 10.9 of the Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1991). Amendment No. 2 to Employment Agreement. (incorporated by reference to Exhibit 10.8. of the Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1995). 10.6. Basic Retirement Plan (formerly the Supplemental Executive Retirement Plan) of F.N.B. Corporation effective January 1, 1992. (incorporated by reference to Exhibit 10.9. of the Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1993). IV-5 10.7. F.N.B. Corporation 1990 Stock Option Plan as amended effective February 2, 1996. (incorporated by reference to Exhibit 10.10. of the Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1995). 10.8. F.N.B. Corporation Restricted Stock Bonus Plan dated January 1, 1994. (incorporated by reference to Exhibit 10.11. of the Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1993). 10.9. Employment Agreement between F.N.B. Corporation and John D. Waters. (incorporated by reference to Exhibit 10.13 of the Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1995). 10.10. F.N.B. Corporation Restricted Stock and Incentive Bonus Plan. (incorporated by reference to Exhibit 10.14. of the Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1995). 10.11. F.N.B. Corporation 1996 Stock Option Plan. (incorporated by reference to Exhibit 10.15. of the Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1995). 10.12. F.N.B. Corporation Director's Compensation Plan. (incorporated by reference to Exhibit 10.16. of the Corporation's Form 10-Q for the quarter ended March 31, 1996). 10.13. F.N.B. Corporation 1998 Director's Stock Option Plan. (incorporated by reference to Exhibit 10.14. of the Corporation's Annual Report on Form 10-K for the year ended December 31, 1998). 10.14. Employment Agreement between F.N.B. Corporation and Gary L. Tice. (incorporated by reference to Exhibit 10.1. of the Corporation's Form 10-Q for the quarter ended June 30, 1999). 10.15. Employment Agreement between F.N.B. Corporation and Kevin C. Hale. (incorporated by reference to Exhibit 10.16. of the Corporation's Form 10-Q for the quarter ended June 30, 2000). 10.16. F.N.B. Corporation 2001 Incentive Plan. (incorporated by reference to Exhibit 10.1. of the Corporation's Form S-8 filed on June 14, 2001). 10.17. Termination of Continuation of Employment Agreement between F.N.B. Corporation and Peter Mortensen. (incorporated by reference to Exhibit 10.17. of the Corporation's Form 10-K for the year ended December 31, 2001). 10.18. Employment Agreement between F.N.B. Corporation and Cass Bettinger. (incorporated by reference to Exhibit 10.2. of the Corporation's Form 10-Q for the quarter ended March 31, 2002). 10.19. Employment Agreement between F.N.B. Corporation and Thomas E. Fahey. (incorporated by reference to Exhibit 10.1. of the Corporation's Form 10-Q for the quarter ended June 30, 2002). 10.20. Employment Agreement between F.N.B. Corporation and Garrett S. Richter. (incorporated by reference to Exhibit 10.20. of the Corporation's Form 10-K for the year ended December 31, 2002). IV-6 13 Annual Report to Stockholders. (filed herewith). 14 Code of Ethics. (incorporated by reference to Exhibit 99.3. of the Corporation's Form 10-K for the year ended December 31, 2002). 21 Subsidiaries of the Registrant. (filed herewith). 23.1. Consent of Ernst & Young LLP, Independent Auditors. (filed herewith). 31.1. Rule 13a-14(a)/15(d) - 14(a) Certification of Chief Executive Officer. (filed herewith). 31.2. Rule 13a-14(a)/15(d) - 14(a) Certification of Chief Financial Officer. (filed herewith). 32.1. Section 1350 Certification of Chief Executive Officer. (filed herewith). 32.2. Section 1350 Certification of Chief Financial Officer. (filed herewith). IV-7 Exhibit 13 CREATING SHAREHOLDER VALUE THROUGH STRATEGIC POSITIONING [PICTURE] [F.N.B. CORPORATION LOGO] F.N.B. CORPORATION 2003 ANNUAL REPORT CORPORATE PROFILE F.N.B. Corporation is a diversified financial services company headquartered in Hermitage, Pennsylvania. The company owns and operates First National Bank of Pennsylvania, First National Trust Company, First National Investment Services Company, F.N.B. Investment Advisors, Inc., First National Insurance Agency, Inc. and Regency Finance Company. On January 1, 2004, F.N.B. Corporation completed the spin-off of its Florida operations into a separate, publicly traded company. Today, F.N.B. Corporation conducts business in Pennsylvania, Ohio and Tennessee. The company's common stock is traded on the New York Stock Exchange under the ticker Symbol "FNB." F.N.B. Corporation has been recognized as a Dividend Achiever by Mergent Inc., a leading provider of global business and financial information on publicly traded companies. This annual recognition is based on the company's consistently outstanding record of increased dividend performance. F.N.B. Corporation has increased dividend payments for more than 30 years. ANNUAL MEETING The Annual Meeting of Shareholders will be held on Wednesday, May 12, 2004, at 4 p.m. at the Howard Miller Student Center of Thiel College in Greenville, Pennsylvania. CONTENTS 1 FINANCIAL HIGHLIGHTS 2 LETTER TO SHAREHOLDERS 5 INDEPENDENT AUDITORS' REPORT 6 AUDITED CONSOLIDATED FINANCIAL STATEMENTS 39 SELECTED FINANCIAL DATA 40 QUARTERLY EARNINGS SUMMARY 43 MANAGEMENT'S DISCUSSION F.N.B. CORPORATION AND SUBSIDIARIES FINANCIAL HIGHLIGHTS (Dollars in thousands except per share data)
2003 2002 PERCENT CHANGE ---------------- ------------- -------------- FOR THE YEAR* Net income $ 58,789 $ 63,335 -7.2% Return on average assets 0.74% 0.93% Return on average shareholders' equity 9.66% 10.97% PER COMMON SHARE* Net income Basic $ 1.27 $ 1.37 -7.3% Diluted $ 1.25 $ 1.35 -7.4% Cash dividends paid $ 0.93 $ 0.81 14.8% Book value at year end $ 13.10 $ 12.93 1.3% Market price at year end $ 35.45 $ 26.21 35.3% PERFORMANCE RATIOS Efficiency ratio 72.74% 70.23% Net interest margin 4.20% 4.70% AT YEAR END Assets 8,308,310 $ 7,090,232 17.2% Net loans 5,634,336 $ 5,152,098 9.4% Deposits 6,159,499 $ 5,426,157 13.5% Shareholders' equity $ 606,909 $ 598,596 1.4% Common shares outstanding 46,313,909 43,862,035 5.6%
* Net income includes merger and restructuring charges of $34.5 million for the year ended December 31, 2003, and merger charges of $30.5 million for the year ended December 31, 2002, all on an after-tax basis. CONSISTENT DIVIDEND GROWTH Cash dividends declared, adjusted for stock dividends [BAR CHART] F.N.B. CORPORATION 1 LETTER TO OUR SHAREHOLDERS [PICTURE] 2003 will almost certainly be viewed as one of the most monumental years in the 140-year history of our organization. In July, the Board of Directors made a decision that we think will improve our already solid performance even more and have a positive impact for shareholders in the years to come. At that time, the Board voted to divide the Corporation into two distinct entities by spinning off the Florida operations into a separate, publicly traded company. This transaction was completed on January 1, 2004, through a tax-free distribution to shareholders of stock in the newly created company, First National Bankshares of Florida, Inc. Our goal with the spin-off was to unlock shareholder value. We felt that the shareholders would benefit by owning shares in two companies that could focus on the geographic markets and strategies most appropriate for each. This way, Florida could concentrate on the growth potential in that market, and we could concentrate on developing strong earnings and a high dividend, while experiencing steady but more modest growth. This action has the added benefit of enabling the investment community to better recognize the true value of each company. As you may know, the spin-off was a one-for-one distribution. If you retain your shares in both the Pennsylvania and Florida companies, you will realize a 25% increase in the combined dividend over the previous cash dividend. At F.N.B. Corporation, our focus is on high dividend achievement with a dividend payout ratio expected in the range of 65% to 75%. This would equate to a dividend yield of 4% to 5%. Now that the spin-off has been successfully completed, we have moved the F.N.B. corporate headquarters back "home" to Hermitage, Pennsylvania, where we have deep roots in the community. Today, the Corporation has approximately $4.6 billion in total assets and 125 full-service banking centers located throughout western Pennsylvania and northeastern Ohio. In addition to traditional community banking, we provide financial services to individuals and businesses in the areas of wealth management, insurance and consumer finance. SOLID EARNINGS PERFORMANCE For the year ended December 31, 2003, net income for the combined F.N.B. Corporation totaled $58.8 million, or $1.25 per diluted share. Included in these results were merger and restructuring expenses of $34.5 million, or $0.74 per diluted share. These results reflect the performance of the combined F.N.B. Corporation prior to the spin-off. It should be noted, however, that our northern operation contributed greatly to the Company's success. On a Pro Forma basis, the northern operation's net income for the year was $55.8 million, or $1.19 per diluted share, with a return on equity of 20% and a return on assets of 1.24%. Net interest income was $174.6 million on a tax equivalent basis, with a net interest margin for the year of 4.21%. Non-interest income was $70.2 million, representing 29% of total revenue. The efficiency ratio improved as well, ending the year at 58.7%. Our plan calls for an efficiency ratio below 55% for the year 2004. F.N.B. CORPORATION 2 Credit quality also remained solid. As of December 31, 2003, the allowance for loan losses was 1.41% of total loans. Non-performing assets were just 0.69% of total assets. Annualized net loan charge-offs for 2003 represented just 0.55% of average loans. SENIOR MANAGEMENT TEAM Bringing F.N.B. Corporation back "home" required a series of management changes because several members of the former F.N.B. senior management team remained with the Florida company. I was honored to be elected President and Chief Executive Officer. I will maintain my current day-to-day bank responsibilities as President and Chief Executive Officer of First National Bank of Pennsylvania in addition to my new corporate duties. I truly respect this company, to which I have dedicated over 40 years of my professional life. I look forward to working closely with our Chairman, Peter Mortensen, as we return to our focus on community banking and related services in western Pennsylvania and northeastern Ohio. Three individuals with extensive experience in financial services will help lead F.N.B. Corporation as key members of the new senior management team. Brian Lilly joined First National Bank of Pennsylvania last Fall as Chief Administrative Officer, and was named Chief Financial Officer for F.N.B. effective January 1, 2004. We are fortunate to have attracted someone of Brian's caliber to our organization. A Certified Public Accountant, he has over 20 years of experience in financial services including responsibility as Chief Financial Officer for operations as large as $30 billion. Gary Roberts brings an unparalleled depth of experience in community banking to his new responsibilities as Chief Operating Officer for First National Bank of Pennsylvania. Gary has been in banking for 36 years, and has served as a Chief Executive Officer for F.N.B.-affiliated banks and other institutions in several different geographic areas. [PHOTO OF STEPHEN J. GURGOVITS] STEPHEN J. GURGOVITS PRESIDENT AND CHIEF EXECUTIVE OFFICER Completing the new senior management team is Debbie Coull-Cicchini, who recently joined us as Executive Vice President of First National Bank of Pennsylvania in charge of retail banking, wealth management and marketing. These are all areas that are important to our future success, and Debbie's 20 years of experience with large retail banks in both the United States and Canada makes her well suited to the challenge. In addition, two financial services veterans have joined our Board of Directors. They are John Rose, President of McAllen Capital Partners, and Robert Goldstein, Chairman and former Chief Executive Officer of Bay View Capital Corporation. As we move forward, we are certain to benefit from their counsel based on their combined experience and knowledge of capital markets. F.N.B. CORPORATION 3 In another positive move, on December 17, 2003, we began trading our common shares on the New York Stock Exchange (NYSE). It is our belief that this will enhance shareholder value by making the Company more visible to the investment community and by having greater access to the highly liquid marketplace offered by the NYSE. On January 26, 2004, members of the Board and senior management traveled to New York City for the Original Listing Ceremony at the NYSE. I personally had the honor of ringing the opening bell. Back home, members of the F.N.B. team participated by watching the event live on cable television at various locations throughout our region, and through video replays of the event on our Intranet. It was truly a great day for F.N.B. Corporation. OPPORTUNITIES FOR GROWTH Going forward, we plan to achieve moderate growth in what is really an established, mature market. We expect our return on average shareholders' equity to be around 23% and our return on average assets to approach 1.3%. Achieving these aggressive targets will surely illustrate our continued commitment to enhancing shareholder value. So, how do we plan to accomplish this? First, we will focus on attraction, retention and expansion of our customer base in the areas of retail banking, insurance and wealth management. We will identify targeted opportunities to increase sales with our existing customers and seek to build new, mutually beneficial relationships. Second, we will target commercial lending opportunities to better serve our existing customers and grow market share in our local communities, particularly in areas where some of our major competitors have recently been acquired by larger, non-local organizations. With strong, motivated leadership and a highly visible presence in our markets, we believe that we are well positioned to accomplish this. Finally, we will benefit from the continued high performance of our consumer finance affiliate, Regency Finance Company. Regency has been our top performing affiliate with a net interest margin of 16%, a return on assets of around 3%, and a return on equity of more than 25%. These results were achieved while maintaining an allowance to total loans of 4.74%. Regency operates in 48 locations in Pennsylvania, Ohio and Tennessee and is constantly seeking opportunities to grow even more. As I noted earlier, we operate in an established, mature market. But we believe that our location will not hamper our ability to grow. We intend to expand in keeping with the natural growth in our markets, as well as by capturing increasing amounts of market share. We also expect to grow through strategic and economically feasible acquisitions in key markets. We will actively consider banks, insurance agencies and consumer finance offices within and contiguous to our current footprint. In the process of evaluating opportunities, we will not compromise our initiative to provide higher than normal returns to our shareholders. Therefore, any acquisitions will have to provide immediate positive cash flows to sustain that position. Speaking of growth, we are excited about our new banking office that will open this Fall in Cranberry Township, Pennsylvania. This is one of the fastest growing markets in the entire state and should provide a wonderful platform for the rollout of our financial services. In closing, I offer my sincere thanks to the more than 1,600 employees of F.N.B. Corporation who have provided loyal, dedicated service to this organization this past year. Going through such dramatic change is never easy. But they demonstrated real professionalism by continuing to provide uninterrupted, superior customer service. Thanks to our people, we are able to live up to our reputation as "Home of the Personal Banker." Sincerely, /s/ STEPHEN J. GURGOVITS - ----------------------------- STEPHEN J. GURGOVITS President & Chief Executive Officer March 15, 2004 F.N.B. CORPORATION 4 INDEPENDENT AUDITORS' REPORT STOCKHOLDERS AND BOARD OF DIRECTORS F.N.B. CORPORATION We have audited the accompanying consolidated balance sheets of F.N.B. Corporation and subsidiaries (F.N.B. Corporation) as of December 31, 2003 and 2002, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2003. These consolidated financial statements are the responsibility of management of F.N.B. Corporation. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of F.N.B. Corporation at December 31, 2003 and 2002, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States. ERNST & YOUNG LLP Birmingham, Alabama February 24, 2004 F.N.B. CORPORATION 5 F.N.B. CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS Dollars in thousands, except par values
December 31 2003 2002 - ------------ -------------- ---------------- ASSETS Cash and due from banks $ 204,824 $ 246,802 Interest bearing deposits with banks 6,279 3,778 Federal funds sold 867 8,981 Mortgage loans held for sale 16,588 24,177 Securities available for sale 1,641,972 1,026,191 Securities held to maturity (fair value of $37,540 and $50,517) 36,059 48,992 Loans, net of unearned income of $32,346 and $40,330 5,708,579 5,220,504 Allowance for loan losses (74,243) (68,406) -------------- ---------------- NET LOANS 5,634,336 5,152,098 -------------- ---------------- Premises and equipment 199,735 163,709 Goodwill 202,439 88,425 Other assets 365,211 327,079 -------------- ---------------- TOTAL ASSETS $ 8,308,310 $ 7,090,232 -------------- ---------------- LIABILITIES Deposits: Non-interest bearing $ 1,044,632 $ 924,090 Interest bearing 5,114,867 4,502,067 -------------- ---------------- TOTAL DEPOSITS 6,159,499 5,426,157 -------------- ---------------- Other liabilities 99,077 99,052 Short-term borrowings 587,017 515,780 Long-term debt 855,808 450,647 -------------- ---------------- TOTAL LIABILITIES 7,701,401 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 and $2,951 1 Common stock - $0.01 par value Authorized - 500,000,000 shares Issued - 46,354,673 and 44,162,460 shares 464 442 Additional paid-in capital 586,009 516,186 Retained earnings 11,532 73,363 Accumulated other comprehensive income 10,251 17,335 Treasury stock - 40,764 and 300,425 shares at cost (1,347) (8,731) -------------- ---------------- TOTAL STOCKHOLDERS' EQUITY 606,909 598,596 -------------- ---------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 8,308,310 $ 7,090,232 -------------- ----------------
See accompanying Notes to Consolidated Financial Statements F.N.B. CORPORATION 6 F.N.B. CORPORATION AND SUBSIDIARIES CONSOLIDATED INCOME STATEMENTS Dollars in thousands, except per share data
Year Ended December 31 2003 2002 2001 - --------------------- ------------- ------------- -------------- INTEREST INCOME Loans, including fees $ 356,036 $ 374,565 $ 388,933 Securities: Taxable 57,775 40,474 45,610 Nontaxable 6,748 7,944 7,558 Dividends 2,571 2,220 2,791 Other 183 1,581 5,474 ------------- ------------- -------------- TOTAL INTEREST INCOME 423,313 426,784 450,366 ------------- ------------- -------------- INTEREST EXPENSE Deposits 93,315 114,104 167,108 Short-term borrowings 9,810 10,878 15,026 Long-term debt 26,711 20,689 18,166 ------------- ------------- -------------- TOTAL INTEREST EXPENSE 129,836 145,671 200,300 ------------- ------------- -------------- NET INTEREST INCOME 293,477 281,113 250,066 Provision for loan losses 24,339 19,094 31,195 ------------- ------------- -------------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 269,138 262,019 218,871 NON-INTEREST INCOME ------------- ------------- -------------- Insurance premiums, commissions and fees 35,321 34,158 31,510 Service charges 52,255 46,941 36,086 Trust 10,065 9,334 9,077 Securities commissions and fees 7,793 6,617 3,643 Gain on sale of securities 2,392 1,915 1,828 Gain on sale of mortgage loans 8,450 6,468 6,562 Other 14,295 15,440 11,289 ------------- ------------- -------------- TOTAL NON-INTEREST INCOME 130,571 120,873 99,995 ------------- ------------- -------------- 399,709 382,892 318,866 ------------- ------------- -------------- NON-INTEREST EXPENSE Salaries and employee benefits 164,086 135,215 121,066 Net occupancy 22,882 17,979 16,684 Amortization of intangibles 3,438 3,118 4,785 Equipment 24,752 21,533 19,731 Merger and consolidation related 1,235 42,365 8,037 Debt extinguishment penalty 20,737 Promotional 3,863 3,697 3,809 Insurance claims paid 6,814 7,995 8,011 Other 67,516 57,542 60,724 ------------- ------------- -------------- TOTAL NON-INTEREST EXPENSE 315,323 289,444 242,847 ------------- ------------- -------------- INCOME BEFORE INCOME TAXES 84,386 93,448 76,019 Income taxes 25,597 30,113 23,034 ------------- ------------- -------------- NET INCOME $ 58,789 $ 63,335 $ 52,985 ------------- ------------- -------------- EARNINGS PER COMMON SHARE Basic $ 1.27 $ 1.37 $ 1.19 ------------- ------------- -------------- Diluted $ 1.25 $ 1.35 $ 1.17 ------------- ------------- --------------
See accompanying Notes to Consolidated Financial Statements F.N.B. CORPORATION 7 F.N.B. CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Dollars in thousands, except per share data
Accumulated Other Compre- Additional Compre- hensive Preferred Common Paid-In Retained hensive Treasury Income Stock Stock Capital Earnings Income Stock --------- --------- -------- ----------- ----------- -------- -------- Balance at January 1, 2001 $ 1,678 $ 79,812 $ 328,037 $ 131,292 $ 1,603 $(39,000) Net income $ 52,985 52,985 Change in other comprehensive 8,242 8,242 income --------- Comprehensive income $ 61,227 Cash dividends declared: ========= Preferred stock (293) Common stock $0.68 per share (32,007) Purchase of common stock (12,052) Issuance of common stock 1,198 5,781 (4,259) 49,390 Stock dividend 2,437 26,025 (28,462) Change in par value of stock (1,635) (83,050) 84,685 Conversion of preferred stock (42) 21 21 --------- -------- ----------- ----------- -------- -------- Balance at December 31, 2001 1 418 444,549 119,256 9,845 (1,662) Net income $ 63,335 63,335 Change in other comprehensive income 7,490 7,490 Comprehensive income $ 70,825 Cash dividends declared: ========= Preferred stock (242) Common stock $0.81 per share (37,274) Purchase of common stock (30,276) Issuance of common stock 2 5,351 (5,066) 23,207 Stock dividend 21 66,625 (66,646) Conversion/retirement of preferred stock 1 (339) --------- -------- ----------- ----------- -------- -------- Balance at December 31, 2002 1 442 516,186 73,363 17,335 (8,731) Net income $ 58,789 58,789 Change in other comprehensive (7,084) (7,084) income --------- Comprehensive income $ 51,705 Cash dividends declared: ========= Preferred stock (62) Common stock $0.93 per share (42,810) Purchase of common stock (33,888) Issuance of common stock 7,060 (7,059) 33,367 Stock dividend 22 65,281 (65,303) Conversion/retirement of preferred stock (1) (2,518) (5,386) 7,905 --------- -------- ----------- ----------- -------- -------- Balance at December 31, 2003 $ 0 $ 464 $ 586,009 $ 11,532 $ 10,251 $ (1,347) --------- -------- ----------- ----------- -------- --------
See accompanying Notes to Consolidated Financial Statements F.N.B. CORPORATION 8 F.N.B. CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Dollars in thousands
Year Ended December 31 2003 2002 2001 - --------------------- --------------------- ----------------- ------------ OPERATING ACTIVITIES Net income $ 58,789 $ 63,335 $ 52,985 Adjustments to reconcile net income to net cash flows from operating activities: Depreciation and amortization 31,974 20,232 19,471 Provision for loan losses 24,339 19,094 31,195 Deferred taxes (2,559) (10,863) 2,350 Gain on sale of securities (2,392) (1,915) (1,828) Gain on sale of loans (8,450) (6,468) (6,562) Proceeds from sale of loans 463,897 58,019 22,290 Loans originated for sale (447,858) (74,405) (16,009) Net change in: Interest receivable (251) 1,328 4,510 Interest payable 427 (4,128) (3,313) Other, net (18,065) 36,393 4,380 --------------------- ----------------- ------------ Net cash flows from operating activities 99,851 100,622 109,469 --------------------- ----------------- ------------ INVESTING ACTIVITIES Net change in: Interest bearing deposits with banks (2,501) (66) (1,129) Federal funds sold 9,360 111,039 34,897 Loans (339,991) (315,892) (56,498) Bank Owned Life Insurance (5,965) (52,518) (23,900) Securities available for sale: Purchases (1,176,149) (566,269) (421,691) Sales 362,115 230,424 141,025 Maturities 640,860 321,898 286,306 Securities held to maturity: Purchases (6,304) (20,259) Maturities 12,952 8,757 44,410 Increase in premises and equipment (15,543) (29,687) (21,131) Cash paid in purchase business combinations, net of cash acquired (150,126) (105,379) (12,063) --------------------- ----------------- ------------ Net cash flows from investing activities (664,988) (403,997) (50,033) --------------------- ----------------- ------------ FINANCING ACTIVITIES Net change in: Non-interest bearing deposits, savings and NOW 517,254 312,109 78,926 Time deposits (265,413) (187,262) (142,525) Short-term borrowings 64,049 114,911 18,013 Increase in long-term debt 544,890 141,346 78,010 Decrease in long-term debt (294,229) (33,123) (21,315) Purchase of treasury stock (33,888) (30,276) (12,052) Issuance of treasury stock 33,368 23,207 12,648 Cash dividends paid (42,872) (37,516) (32,300) --------------------- ----------------- ------------ Net cash flows from financing activities 523,159 303,396 (20,595) --------------------- ----------------- ------------ NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (41,978) 21 38,841 Cash and cash equivalents at beginning of year 246,802 246,781 207,940 --------------------- ----------------- ------------ CASH AND CASH EQUIVALENTS AT END OF YEAR $ 204,824 $ 246,802 $ 246,781 --------------------- ----------------- ------------
See accompanying Notes to Consolidated Financial Statements F.N.B. CORPORATION 9 F.N.B. CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BUSINESS: F.N.B. Corporation (the Corporation) is a diversified financial services company headquartered in Hermitage, Pennsylvania. The Corporation owns and operates regional community banks, an insurance agency, a consumer finance company, First National Trust Company and First National Wealth Management Company. As of December 31, 2003, 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. The Corporation's consolidated financial statements have historically included subsidiaries in which the Corporation has a controlling financial interest. This requirement usually has been applied to subsidiaries in which the Corporation has a majority voting interest. Investments in companies in which the Corporation controls operating and financing decisions (principally defined as owning a voting or economic interest greater than 50%) are consolidated. In accordance with Financial Accounting Standards Board Interpretation No. (FIN) 46, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51, the Corporation considers a voting rights entity to be a subsidiary and consolidates it if the Corporation has a controlling financial interest in the entity. Variable interest entities are consolidated if the Corporation is exposed to the majority of the variable interest entity's expected losses and/or residual returns (i.e., the Corporation is considered to be the primary beneficiary). All significant intercompany balances and transactions have been eliminated. Certain reclassifications have been made to the prior years' financial statements to conform to the current year's presentation, including restatements for a transaction accounted for as a pooling-of-interests during 2002. (See the "Mergers and Acquisitions" section of this report). USE OF ESTIMATES: The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. CASH EQUIVALENTS: The Corporation considers cash and due from banks as cash and cash equivalents. SECURITIES: Debt securities are classified as held to maturity when management has the positive intent and ability to hold securities to maturity. Securities held to maturity are carried at amortized cost. Debt securities not classified as held to maturity and marketable equity securities are classified as available for sale. Securities available for sale are carried at fair value with net unrealized securities gains (losses), net of income taxes, reported separately as a component of other comprehensive income. Amortization of premiums and accretion of discounts are recorded as interest income from securities. Realized gains and losses are recorded as net securities gains (losses). The adjusted cost of specific securities sold is used to compute gains or losses on sales. Presently, the Corporation has no intention of establishing a trading securities classification. Securities are periodically reviewed for impairment based upon a number of factors, including but not limited to, length of time and extent to which the market value has been less than cost, financial condition of the underlying issuer, ability of the issuer to meet contractual obligations, the likelihood of the security's ability to recover any decline in its market value, and the intent and ability to retain the security for a period of time sufficient to allow for recovery in market value. EQUITY METHOD INVESTMENT: The Corporation accounts for its 15.2% ownership of the common stock of Sun Bancorp, Inc. (Sun) under the equity method. The carrying value of the Corporation's investment in Sun is adjusted for the Corporation's share of Sun's earnings and reduced by dividends received from Sun. Sun, a bank holding company headquartered in Lewisburg, Pennsylvania, is a publicly traded company under the stock symbol "SUBI" on the Nasdaq Stock Market. The carrying value of the investment included in other assets was $23.3 million at December 31, 2003. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE: Securities sold under agreements to repurchase are accounted for as collateralized financing transactions and are recorded at the amounts at which the securities were sold. Securities, generally U.S. government and Federal agency securities, pledged as collateral under these financing arrangements cannot be sold or repledged by the secured party. F.N.B. CORPORATION 10 F.N.B. CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MORTGAGE LOANS HELD FOR SALE: Certain residential mortgage loans are originated for sale in the secondary mortgage loan market and typically sold with servicing rights released. These loans are classified as loans held for sale and are carried at the lower of aggregate cost or estimated market value. Market value is determined on the basis of rates obtained in the respective secondary market for the type of loan held for sale. Loans are generally sold at a premium or discount from the carrying amount of the loan. Such premium or discount is recognized at the date of sale. Gain or loss on the sale of loans is recorded in non-interest income at the time consideration is received and all other criteria for sales treatment have been met. LOANS AND THE ALLOWANCE FOR LOAN LOSSES: Loans are reported at their outstanding principal balance adjusted for any charge-offs and any deferred fees or costs on originated loans. Interest income on loans is accrued on the principal amount outstanding. It is the Corporation's policy to discontinue interest accruals when principal or interest is due and has remained unpaid for 90 days or more unless the loan is both well secured and in the process of collection. When a loan is placed on non-accrual status, all unpaid interest is reversed. Payments on non-accrual loans are generally applied to either principal or interest or both, depending on management's evaluation of collectibility. Non-accrual loans may not be restored to accrual status until all delinquent principal and interest has been paid, or the loan becomes both well secured and in the process of collection. Consumer installment loans are generally charged off against the allowance for loan losses upon reaching 90 to 180 days past due, depending on the installment loan type. Commercial loan charge-offs, either in whole or in part, are generally made as soon as facts and circumstances raise a serious doubt as to the collectibility of all or a portion of the principal. Loan origination fees and related costs are deferred and recognized over the life of the loans as an adjustment of yield. The allowance for loan losses is maintained at a level that, in management's judgement, is adequate to absorb probable losses associated with specifically identified loans, as well as estimated probable credit losses inherent in the remainder of the loan portfolio at the balance sheet date. The allowance for loan losses is based on management's evaluation of potential losses in the loan portfolio, which includes an assessment of past experience, current economic conditions, known and inherent risks in the loan portfolio, the estimated value of underlying collateral and residuals and changes in the composition of the loan portfolio. Additions are made to the allowance through periodic provisions charged to income and recovery of principal on loans previously charged off. Losses of principal and/or residuals are charged to the allowance when the loss actually occurs or when a determination is made that a loss is probable. The allowance for loan losses consists of an allocated and unallocated component. The components of the allowance for loan losses represent an estimation completed pursuant to Financial Accounting Standards Statement (FAS) 5, Accounting for Contingencies, or FAS 114, Accounting by Creditors for Impairment of a Loan. The allocated component reflects expected losses resulting from analysis developed through specific credit allocations for individual loans and historical loss experience for each loan category. The specific credit allocations are based on a regular analysis of all commercial loans over a fixed-dollar amount where the internal credit rating is at or below a predetermined classification. The historical loan loss element is determined statistically based on regularly updated loan loss experience. The unallocated portion of the allowance is determined based on management's assessment of historical losses on the remaining portfolio segments in conjunction with the current status of economic conditions, loan loss trends, delinquency and non-accrual trends, credit administration, portfolio growth, concentrations of credit risk and other factors, including regulatory guidance. This determination inherently involves a higher degree of uncertainty and considers current risk factors that may not have yet occurred in the Corporation's historical loss factors used to determine the allocated component of the allowance, and it recognizes that knowledge of the portfolio may be incomplete. The allocation of the allowance should not be interpreted as an indication that loan losses in future years will occur in the same proportions or that the allocation indicates future loan loss trends. Impaired loans are identified and measured based on the present value of expected future cash flows discounted at the loan's effective interest rate, at the loan's observable market price or at the fair value of the collateral if the loan is collateral dependent. If the recorded investment in the loan exceeds the measure of fair value, a valuation allowance is established as a component of the allowance for loan losses. Impaired loans consist of non-homogeneous loans, which based on the evaluation of current information and events, management has determined that it is probable the Corporation will not be able to collect all amounts due according to the contractual terms of the loan agreement. The Corporation evaluates all commercial and commercial F.N.B. CORPORATION 11 F.N.B. CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS real estate loans which have been classified for regulatory reporting purposes, including non-accrual and restructured loans, in determining impaired loans. PREMISES AND EQUIPMENT: Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed generally on the straight-line method over the asset's estimated useful life. Useful lives are dependent upon the nature and condition of the asset and range from 3 to 40 years. OTHER REAL ESTATE OWNED: Assets acquired in settlement of indebtedness are included in other assets at the lower of fair value minus estimated costs to sell or at the carrying amount of the indebtedness. Subsequent write-downs and net direct operating expenses attributable to such assets are included in other expenses. GOODWILL AND OTHER INTANGIBLE ASSETS: Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. Other intangible assets represent purchased assets that also lack physical substance but can be distinguished from goodwill because of contractual or other legal rights. On January 1, 2002, the Corporation adopted FAS 142, Goodwill and Other Intangible Assets. Under the provisions of FAS 142, goodwill is no longer amortized into the income statement over an estimated life, but rather is tested at least annually for impairment. Intangible assets which have finite lives continue to be amortized over their estimated useful lives and also continue to be subject to impairment testing. Core deposit intangibles are being amortized primarily over 10 years. Customer and renewal lists and other intangible assets are being amortized over their remaining useful lives which range from one to ten years. DERIVATIVE FINANCIAL INSTRUMENTS: The Corporation enters into various forward sales agreements to protect against changes in interest rates and prices on its mortgage loan commitments. These transactions do not qualify for hedge accounting under FAS 133, Accounting for Derivative Instruments and Hedging Activities. Therefore, both the forward agreements and the mortgage loan commitments are marked to market through earnings. At December 31, 2003, the Corporation had $5.2 million in forward sales agreements. INCOME TAXES: Income taxes are computed utilizing the liability method. Under this method deferred taxes are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. PER SHARE AMOUNTS: Earnings and cash dividends per share have been adjusted for common stock dividends, including the five percent stock dividend declared on April 28, 2003. Basic earnings per common share is calculated by dividing net income, adjusted for preferred stock dividends declared, by the sum of the weighted average number of shares of common stock outstanding. Diluted earnings per common share is calculated by dividing net income by the weighted average number of shares of common stock outstanding, assuming conversion of outstanding convertible preferred stock from the beginning of the year and the exercise of stock options. Such adjustments to net income and the weighted average number of shares of common stock outstanding are made only when such adjustments dilute earnings per common share. NEW ACCOUNTING STANDARDS: FIN 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, was issued in November 2002. FIN 45 requires certain guarantees to be recorded at fair value and applies to contracts or indemnification agreements that contingently require the guarantor to make payments to the guaranteed party based on changes in an underlying obligation that is related to an asset, liability or an equity security of the guaranteed party. The impact of the adoption of FIN 45 was not material to the Corporation's financial condition or results of operations. FAS 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 Accounting Principles Board (APB ) Opinion 25, Accounting for Stock Issued to Employees. Therefore, FAS 148 is not expected to have a material impact on the Corporation's financial condition or results of operations. F.N.B. CORPORATION 12 F.N.B. CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FIN 46, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51, was issued in January 2003 and amended in December 2003. FIN 46 addresses consolidation by business enterprises of variable interest entities which have certain characteristics. FIN 46 applies immediately to variable interest entities created after January 31, 2003. It applies in the first fiscal year or interim period beginning after December 15, 2003, to variable interest entities in which an enterprise holds a variable interest that was acquired before February 1, 2003. The Corporation has limited partnership investments in affordable housing projects, for which it provides funding as a limited partner and receives tax credit for any losses incurred by the projects based on its partnership share. The Corporation's interest in these entities were acquired prior to February 1, 2003. At December 31, 2003, the Corporation had recorded investments in other assets on its balance sheet of approximately $1.4 million associated with these investments. The Corporation currently adjusts the carrying value of these investments for any losses incurred by the limited partnership through earnings. The Corporation determined that it is not the primary beneficiary of these partnerships and will not consolidate them. Additionally, the Corporation has investments in trusts which issue trust preferred securities. The Corporation determined that it is not the primary beneficiary of the trusts and will not consolidate them. FAS 150, Accounting for Certain Financial Instruments with Characteristics of both Liability and Equity, was issued in May 2003. FAS 150 establishes how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify certain financial instruments that would previously have been classified as equity as liabilities (or as assets in some circumstances). Specifically, FAS 150 requires that a mandatorily redeemable financial instrument be classified as a liability unless the redemption is required to occur only upon the liquidation or termination of the reporting entity. FAS 150 was effective for financial instruments entered into or modified after May 31, 2003, and otherwise became effective on July 1, 2003. FAS 146, Accounting for Costs Associated with Exit or Disposal Activities, was issued in June 2002 and requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. FAS 146 also establishes that fair value is the objective for initial measurement of the liability. The provisions of FAS 146 became effective for the Corporation on January 1, 2003. The costs incurred in connection with the spin-off transaction, which is discussed in the "Subsequent Events" section of this report, were accounted for in accordance with the provisions of FAS 146. FAS 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities, was issued in April 2003 and requires that contracts with comparable characteristics be accounted for similarly. In particular, FAS 149 clarifies under what circumstance a contract with an initial net investment meets the characteristic of a derivative, clarifies when a derivative contains a financing component, amends the definition of an underlying to conform it to language used in FIN 45 and amends certain other existing pronouncements. Those changes will result in more consistent reporting of contracts as either derivatives or hybrid instruments. The provisions of FAS 149 became effective for the Corporation on June 30, 2003 and did not have a material impact on the Corporation's financial condition or results of operations. The American Institute of Certified Public Accountants issued Statement of Position (SOP) 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer, in December 2003. SOP 03-3 addresses accounting for differences between contractual cash flows and cash flows expected to be collected from an investors initial investment in loans or debt securities acquired in a transfer if those differences are attributable, at least in part, to credit quality. SOP 03-3 does not apply to loans originated by the entity. The provisions of SOP 03-3 are effective for loans acquired in fiscal years beginning after December 13, 2004. The Corporation does not expect the implementation of SOP 03-3 to have a material impact on the Corporation's financial condition or results of operations. The Financial Accounting Standards Board issued Staff Position (FSP) 106-1, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003, in December 2003. FSP 106-1 permits a sponsor of a postretirement health care plan that provides a prescription plan benefit to make a one-time election to defer accounting for the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003. The provisions of FSP 106-1 became effective for the Corporation on December 31, 2003 and did not have a material impact on the Corporation's financial condition or results of operations. MERGERS AND ACQUISITIONS On, July 1, 2003, Roger Bouchard Insurance, Inc. (Bouchard) completed its business combination with F.N.B. CORPORATION 13 F.N.B. CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Lupfer-Frakes, Inc. (Lupfer), an independent insurance agency located in central Florida. Bouchard paid $10.2 million 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 $8.5 million in goodwill and $1.3 million in customer and renewal lists. The value assigned to the customer and renewal lists will be amortized over a ten year period. 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 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. The transaction, which was accounted for as a purchase, resulted in the recognition of approximately $103.0 million in goodwill and $1.1 million in core deposit intangibles. Charter's banking subsidiary, Southern Exchange Bank, was merged into the Corporation's existing subsidiary, First National Bank of Florida (FNBFL) on October 14, 2003. The Corporation incurred and paid merger related costs of $1.0 million in connection with its acquisition of Charter. These costs were primarily related to employment expenses. On October 8, 2002, the Corporation completed its business combination with Harry Blackwood Inc. (Blackwood), an independent insurance agency in Chippewa Township, Pennsylvania. In exchange for all of the outstanding common stock of Blackwood, the Corporation paid $1.4 million in cash. Goodwill recognized in connection with this acquisition was $990,000. The transaction was accounted for as a purchase. Blackwood operates as a division of First National Insurance Agency, Inc., a wholly-owned subsidiary of the Corporation. On January 31, 2002, the Corporation completed its business combination with Central Bank Shares, Inc. (Central), a bank holding company headquartered in Orlando, Florida, with assets of more than $251.4 million. In exchange for all of the outstanding common stock of Central, the Corporation paid $80.0 million in cash. The transaction, which was accounted for as a purchase, resulted in the recognition of approximately $47.0 million of goodwill and $8.1 million in core deposit intangibles. Central's banking affiliate, Bank of Central Florida, was merged into FNBFL. On January 18, 2002, the Corporation completed its business combination with Promistar Financial Corporation (Promistar), a bank holding company headquartered in Johnstown, Pennsylvania, with assets of $2.4 billion. Under the terms of the merger agreement, each outstanding share of Promistar's common stock was converted into .926 shares of the Corporation's common stock. A total of 16,007,346 shares of the Corporation's common stock were issued. The transaction was accounted for as a pooling-of-interests. Promistar's banking affiliate, Promistar Bank, was merged into an existing subsidiary of the Corporation, First National Bank of Pennsylvania (FNBPA). The Corporation incurred a merger related charge of approximately $41.4 million during the first quarter of 2002 relating to this transaction. The total merger charge included involuntary separation costs associated with terminated employees, early retirement and other employment related expenses, data processing conversion charges, professional services, write-downs of impaired assets and other miscellaneous expenses, all of which have been paid by December 31, 2003. On August 14, 2001, Promistar completed its business combination with FNH Corporation (FNH), a bank holding company headquartered in Irwin, Pennsylvania, with assets of $303.7 million. The transaction was accounted for as a purchase. Goodwill and a core deposit intangible of $7.0 million and $7.5 million, respectively, were recorded in connection with the merger. FNH's banking subsidiary, First National Bank of Herminie, was merged into Promistar Bank, which was later merged into FNBPA. On April 30, 2001, the Corporation completed its business combination with Citizens Community Bancorp, Inc. (Citizens), a bank holding company headquartered in Marco Island, Florida, with assets of $170.0 million. Under the terms of the merger agreement, each outstanding share of Citizens common stock was converted into .524 shares of the Corporation's common stock. A total of 1,775,224 shares of the Corporation's common stock were issued. The transaction was accounted for as a pooling-of-interests. Citizens' banking affiliate, Citizens Community Bank of Florida, was merged into FNBFL. During 2001, the Corporation completed its business combinations with Ostrowsky & Associates, Inc. (Ostrowsky) and James T. Blalock (Blalock), independent insurance agencies in Cape Coral and Venice, Florida, respectively. The transactions were accounted for as purchases. The Corporation also completed its affiliation with OneSource Group, Inc. (OneSource), an independent insurance agency with offices in Clearwater and Jacksonville, F.N.B. CORPORATION 14 F.N.B. CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Florida. The transaction was accounted for as a pooling-of-interests. These affiliates are operating as divisions of Bouchard. The Corporation regularly evaluates the potential acquisition of, and holds discussions with, various acquisition candidates and as a general rule the Corporation publicly announces such acquisitions only after a definitive merger agreement has been reached. SUBSEQUENT EVENTS (UNAUDITED) On December 17, 2003, the Board of Directors of the Corporation declared a pro rata distribution payable to the holders of record of outstanding Corporation common stock at the close of business on December 26, 2003, the record date of distribution, of one share of First National Bankshares of Florida, Inc. (FNBF) for every share of the Corporation's common stock outstanding on the record date. Prior to the distribution, which took effect at 12:01 a.m., Eastern Standard Time, on January 1, 2004 (the distribution date), the Corporation transferred all of its Florida operations to FNBF. As a result of the distribution, all of the outstanding shares of FNBF common stock were distributed to the Corporation's shareholders. Immediately following the distribution, the Corporation and its subsidiaries did not own any shares of FNBF common stock and FNBF became an independent public company. FNBF's common stock is listed on the New York Stock Exchange (NYSE) under the symbol "FLB". On December 17, 2003, the Corporation listed its common stock on the NYSE under the symbol "FNB". The Corporation incurred approximately $49.7 million in restructuring expense directly attributable to the distribution. These expenses consisted of a $20.7 million prepayment penalty for refinancing Federal Home Loan Bank (FHLB) debt, $17.3 million of early retirement expenses, involuntary separation costs and data processing contract termination costs, $7.6 million in professional fees and approximately $4.1 million in fixed asset and other expenses connected with the separation. At December 31, 2003, a liability of approximately $9.4 million remained in connection with these expenses. Concurrent with the spin-off of its Florida operations, the Corporation moved its executive offices from Naples, Florida to Hermitage, Pennsylvania on January 1, 2004. From this date forward the Corporation owns and operates FNBPA, First National Trust Company, First National Investment Services Company, F.N.B. Investment Advisors, Inc., First National Insurance Agency, Inc. and Regency Finance Company. The Corporation conducts business in Pennsylvania, Ohio and Tennessee. REINCORPORATION On June 1, 2001, the Corporation reincorporated in the State of Florida. The Corporation was originally incorporated in 1974 in Pennsylvania, and at that time substantially all of the Corporation's business was being conducted in Pennsylvania. The Corporation expanded into Florida seven years ago. In connection with the reincorporation, the Corporation reduced the par value of both its common stock and preferred stock to $0.01 per share. CHARTER CONSOLIDATION During the fourth quarter of 2002, the Corporation completed the consolidation of its community banking affiliate in Ohio, Metropolitan National Bank, into FNBPA. The Corporation incurred $510,000 in consolidation costs associated with the transaction. During the first quarter of 2001, the Corporation reduced its number of bank charters from eight to three. The Corporation's five Florida banks were merged under FNBFL and its two Pennsylvania banks were combined under FNBPA. In connection with these charter consolidations, the trust operations of FNBFL were consolidated into the Corporation's national trust company, First National Trust Company. The Corporation incurred pre-tax consolidation expense of $3.2 million arising from legal and accounting fees, consulting fees, data processing conversion charges, early retirement, involuntary separation and related benefit costs. Involuntary separation costs associated with 42 terminated employees totaled $1.4 million of the total consolidation expense. The total amount of separation payments paid during 2001 was $1.0 million. The remaining separation costs were paid in accordance with the contractual terms of the employment and compensation agreements of the terminated employees in 2002. F.N.B. CORPORATION 15 F.N.B. CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SECURITIES The amortized cost and fair value of securities are as follows (in thousands): Securities available for sale:
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR December 31, 2003 COST GAINS LOSSES VALUE - ------------------------------------------------ ------------------- --------------- --------------- ------------------ U.S. Treasury and other U.S. Government agencies and corporations $ 258,844 $ 3,040 $ (388) $ 261,496 Mortgage-backed securities of U.S. Government agencies 1,145,229 10,209 (5,369) 1,150,069 States of the U.S. and political subdivisions 107,154 2,855 (51) 109,958 Other debt securities 49,439 3,347 52,786 ------------------- --------------- --------------- ------------------ Total debt securities 1,560,666 19,451 (5,808) 1,574,309 Equity securities 62,394 5,272 (3) 67,663 ------------------- --------------- --------------- ------------------ $ 1,623,060 $ 24,723 $ (5,811) $ 1,641,972 =================== =============== =============== ==================
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR December 31, 2002 COST GAINS LOSSES VALUE - ------------------------------------------------ ------------------- --------------- --------------- ------------------ U.S. Treasury and other U.S. Government agencies and corporations $ 162,565 $ 5,646 $ (1) $ 168,210 Mortgage-backed securities of U.S. Government agencies 605,492 14,993 (137) 620,348 States of the U.S. and political subdivisions 133,608 3,142 (40) 136,710 Other debt securities 46,270 842 (253) 46,859 ------------------- --------------- --------------- ------------------ Total debt securities 947,935 24,623 (431) 972,127 Equity securities 49,684 4,438 (58) 54,064 ------------------- --------------- --------------- ------------------ $ 997,619 $ 29,061 $ (489) $ 1,026,191 =================== =============== =============== ==================
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR December 31, 2001 COST GAINS LOSSES VALUE - ------------------------------------------------ ------------------- --------------- --------------- ------------------ U.S. Treasury and other U.S. Government agencies and corporations $ 408,340 $ 8,745 $ (153) $ 416,932 Mortgage-backed securities of U.S. Government agencies 288,999 3,535 (209) 292,325 States of the U.S. and political subdivisions 146,165 665 (897) 145,933 Other debt securities 3,521 17 (1) 3,537 ------------------- --------------- --------------- ------------------ Total debt securities 847,025 12,962 (1,260) 858,727 Equity securities 40,850 3,689 (296) 44,243 ------------------- --------------- --------------- ------------------ $ 887,875 $ 16,651 $ (1,556) $ 902,970 =================== =============== =============== ==================
F.N.B. CORPORATION 16 F.N.B. CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Securities held to maturity:
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR December 31, 2003 COST GAINS LOSSES VALUE - ------------------------------------------------ --------------- --------------- --------------- ---------------- U.S. Treasury and other U.S. Government agencies and corporations $ 3,761 $ 23 $ (8) $ 3,776 Mortgage-backed securities of U.S. Government agencies 691 16 707 States of the U.S. and political subdivisions 28,443 1,284 (5) 29,722 Other debt securities 3,164 172 (1) 3,335 --------------- --------------- --------------- ---------------- $ 36,059 $ 1,495 $ (14) $ 37,540 =============== =============== =============== ================
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR December 31, 2002 COST GAINS LOSSES VALUE - ------------------------------------------------ --------------- --------------- --------------- ---------------- U.S. Treasury and other U.S. Government agencies and corporations $ 5,724 $ 18 $ 5,742 Mortgage-backed securities of U.S. Government agencies 1,123 32 1,155 States of the U.S. and political subdivisions 39,492 1,486 $ (11) 40,967 Other debt securities 2,653 2,653 --------------- --------------- --------------- ---------------- $ 48,992 $ 1,536 $ (11) $ 50,517 =============== =============== =============== ================
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR December 31, 2001 COST GAINS LOSSES VALUE - ------------------------------------------------ --------------- --------------- --------------- ---------------- U.S. Treasury and other U.S. Government agencies and corporations $ 3,214 $ 47 $ 3,261 Mortgage-backed securities of U.S. Government agencies 3,068 38 3,106 States of the U.S. and political subdivisions 43,493 541 $ (223) 43,811 Other debt securities 1,593 1 (2) 1,592 --------------- --------------- --------------- ---------------- $ 51,368 $ 627 $ (225) $ 51,770 =============== =============== =============== ================
F.N.B .CORPORATION 17 F.N.B. CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Corporation does not believe the unrealized losses on securities, individually or in the aggregate, as of December 31, 2003 represent an other-than-temporary impairment. The unrealized losses are primarily the result of changes in interest rates and will not prohibit the Corporation from receiving its contractual principal and interest payments. The Corporation has the ability and intent to hold these securities for a period necessary to recover the amortized cost. Following are summaries of the unrealized loss positions as of December 31, 2003 (in thousands): Securities available for sale:
LESS THAN 12 MONTHS GREATER THAN 12 MONTHS TOTAL ----------------------------- ---------------------- -------------------------- FAIR UNREALIZED FAIR UNREALIZED FAIR UNREALIZED VALUE LOSSES VALUE LOSSES VALUE LOSSES ------------- -------------- ------- ---------- --------- --------------- U.S. Treasury and other U.S. Government agencies and corporations $ 67,830 $ (388) $ 67,830 $ (388) Mortgage-backed securities of U.S. Government agencies 402,375 (5,369) 402,375 (5,369) States of the U.S. and political subdivisions 8,185 (51) 8,185 (51) Equity securities 12 (3) 12 (3) ------------- -------------- ------- ---------- --------- --------------- $ 478,402 $ (5,811) $ 0 $ 0 $ 478,402 $ (5,811) ============= ============== ======= ========== ========= ===============
Securities held to maturity:
LESS THAN 12 MONTHS GREATER THAN 12 MONTHS TOTAL ----------------------------- ---------------------- -------------------------- FAIR UNREALIZED FAIR UNREALIZED FAIR UNREALIZED VALUE LOSSES VALUE LOSSES VALUE LOSSES ------------- -------------- ------- ---------- --------- --------------- U.S. Treasury and other U.S. Government agencies and corporations $ 1,436 $ (8) $ 1,436 $ (8) States of the U.S. and political subdivisions 384 (1) $ 256 $ (4) 640 (5) Other debt securities 200 (1) 200 (1) ------------- -------------- ------- ---------- --------- --------------- $ 2,020 $ (10) $ 256 $ (4) $ 2,276 $ (14) ============= ============== ======= ========== ========= ===============
F.N.B. CORPORATION 18 F.N.B. CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS At December 31, 2003 and 2002, securities with a carrying value of $597.3 million and $325.0 million, respectively, were pledged to secure public deposits, trust deposits and for other purposes as required by law. Securities with a carrying value of $463.7 million and $404.9 million at December 31, 2003 and 2002, respectively, were pledged as collateral for other borrowings. As of December 31, 2003, the amortized cost and fair value of securities, by contractual maturities, were as follows (in thousands):
HELD TO MATURITY AVAILABLE FOR SALE ------------------------- -------------------------------- AMORTIZED FAIR AMORTIZED FAIR December 31, 2003 COST VALUE COST VALUE - ---------------------------------- --------- -------------- ------------ ------------------ Due in one year or less $ 2,917 $ 2,961 $ 31,459 $ 32,037 Due from one to five years 28,626 29,908 233,952 236,517 Due from five to ten years 3,566 3,687 84,344 86,106 Due after ten years 259 277 65,682 69,580 --------- -------------- ------------ ------------------ 35,368 36,833 415,437 424,240 Mortgage-backed securities of U.S. Government agencies 691 707 1,145,229 1,150,069 Equity securities 62,394 67,663 --------- -------------- ------------ ------------------ $ 36,059 $ 37,540 $ 1,623,060 $ 1,641,972 ========= ============== ============ ==================
Maturities may differ from contractual terms because issuers may have the right to call or prepay obligations with or without penalties. Periodic payments are received on mortgage-backed securities based on the payment patterns of the underlying collateral. Proceeds from sales of securities available for sale during 2003, 2002 and 2001 were $362.1 million, $230.4 million and $141.0 million, respectively. Gross gains and gross losses were realized on those sales as follows (in thousands):
Year Ended December 31 2003 2002 2001 - ---------------------- -------- ---------- -------- Gross gains $ 2,415 $ 2,440 $ 1,836 Gross losses (23) (525) (8) -------- ---------- -------- $ 2,392 $ 1,915 $ 1,828 ======== ========== ========
LOANS Following is a summary of loans (in thousands):
December 31 2003 2002 - -------------------------------------- -------------- -------------- Real estate: Residential $ 2,159,116 $ 1,940,073 Commercial 1,790,458 1,465,903 Construction 352,061 287,560 Installment loans to individuals 754,290 882,908 Commercial, financial and agricultural 661,691 620,489 Lease financing 23,309 63,901 Unearned income (32,346) (40,330) -------------- -------------- $ 5,708,579 $ 5,220,504 ============== ==============
F.N.B. CORPORATION 19 F.N.B. CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The loan portfolio consists principally of loans to individuals and small- and medium-sized businesses within the Corporation's primary market area of southwest Florida, western and central Pennsylvania and northeastern Ohio. Additionally, the portfolio contains consumer finance loans to individuals in Pennsylvania, Ohio and Tennessee. As of December 31, 2003, no concentrations of loans exceeding 10% of total loans existed which were not disclosed as a separate category of loans. Certain directors and executive officers of the Corporation and its significant subsidiaries, as well as associates of such persons, are loan customers. Such loans were made in the ordinary course of business under normal credit terms and do not represent more than a normal risk of collection. Following is a summary of the aggregate amount of loans to any such persons who had loans in excess of $60,000 during 2003 (in thousands): Total loans at beginning of year ............. $ 58,890 New loans .................................... 54,950 Repayments ................................... (44,650) Other ........................................ (1,380) ---------------- Total loans at end of year ................... $ 67,810 ================
Other represents the net change in loan balances resulting from changes in related parties during the year. NON-PERFORMING ASSETS Following is a summary of non-performing assets (in thousands):
December 31 2003 2002 - ------------------------------ ----------- ---------- Non-accrual loans $ 27,970 $ 22,294 Restructured loans 5,719 5,915 ----------- ---------- TOTAL NON-PERFORMING LOANS 33,689 28,209 Other real estate owned 3,109 4,729 ----------- ---------- TOTAL NON-PERFORMING ASSETS $ 36,798 $ 32,938 =========== ==========
For the years ended December 31, 2003, 2002 and 2001, income recognized on non-accrual and restructured loans was $1.9 million, $1.4 million and $1.1 million, respectively. Income that would have been recognized during 2003, 2002 and 2001 on such loans if they were in accordance with their original terms was $3.4 million, $3.1 million and $2.3 million, respectively. Loans past due 90 days or more not on non-accrual status were $5.3 million, $7.2 million and $6.0 million at December 31, 2003, 2002 and 2001, respectively. Following is a summary of information pertaining to loans considered to be impaired (in thousands):
At or For the Year Ended December 31 2003 2002 2001 - --------------------------------------------- ---------- --------- --------- Impaired loans with an allocated allowance $ 14,865 $ 11,506 $ 8,599 Impaired loans without an allocated allowance 2,532 1,131 1,023 TOTAL IMPAIRED LOANS $ 17,397 $ 12,637 $ 9,622 ========== ========= ========= Allocated allowance on impaired loans 6,345 3,602 2,954 Average impaired loans 15,665 7,745 9,669 Income recognized on impaired loans 812 647 312
F.N.B. CORPORATION 20 F.N.B. CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ALLOWANCE FOR LOAN LOSSES Following is an analysis of changes in the allowance for loan losses (in thousands):
Year Ended December 31 2003 2002 2001 - ----------------------------- ---------- ----------- ------------ Balance at beginning of year $ 68,406 $ 65,059 $ 57,124 Addition from acquisitions 2,506 1,389 3,400 Charge-offs (24,823) (21,963) (29,490) Recoveries 3,815 4,827 2,830 ---------- ----------- ------------ NET CHARGE-OFFS (21,008) (17,136) (26,660) Provision for loan losses 24,339 19,094 31,195 ---------- ----------- ------------ Balance at end of year $ 74,243 $ 68,406 $ 65,059 ========== =========== ============
PREMISES AND EQUIPMENT Following is a summary of premises and equipment (in thousands):
December 31 2003 2002 - ------------------------ ---------- ----------- Land $ 47,432 $ 29,730 Premises 168,062 144,757 Equipment 136,135 126,819 ---------- ----------- 351,629 301,306 Accumulated depreciation (151,894) (137,597) ---------- ----------- $ 199,735 $ 163,709 ========== ===========
Depreciation expense was $19.8 million for 2003, $16.9 million for 2002 and $14.8 million for 2001. The Corporation has operating leases extending to 2087 for certain land, office locations and equipment. Leases that expire are generally expected to be renewed or replaced by other leases. Rental expense was $7.5 million for 2003, $7.9 million for 2002 and $7.2 million for 2001. Total minimum rental commitments under such leases were $34.2 million at December 31, 2003. Following is a summary of future minimum lease payments for years following December 31, 2003 (in thousands): 2004 ............................. $ 3,522 2005 ............................. 2,899 2006 ............................. 2,366 2007 ............................. 2,123 2008 ............................. 1,293 Later years 22,014
GOODWILL Upon adoption of FAS 142 on January 1, 2002, the Corporation ceased amortizing its goodwill, which decreased non-interest expense and increased net income in 2003 and 2002 as compared to 2001. Rather than amortizing goodwill, the Corporation is required to test goodwill at least annually for impairment. The Corporation completed its impairment testing and concluded that goodwill is not impaired. F.N.B. CORPORATION 21 F.N.B. CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table shows the pro forma effects of applying the non-amortization provisions of FAS 142 (in thousands, except per share data):
Year Ended December 31 2003 2002 2001 - ---------------------------------- ---------- ---------- ---------- Net income $ 58,789 $ 63,335 $ 52,985 Goodwill amortization, net of tax 2,353 ---------- ---------- ---------- Pro forma net income $ 58,789 $ 63,335 $ 55,338 ========== ========== ========== BASIC EARNINGS PER COMMON SHARE: Net income $ 1.27 $ 1.37 $ 1.19 Goodwill amortization, net of tax .05 ---------- ---------- ---------- Pro forma net income $ 1.27 $ 1.37 $ 1.24 ========== ========== ========== DILUTED EARNINGS PER COMMON SHARE: Net income $ 1.25 $ 1.35 $ 1.17 Goodwill amortization, net of tax .05 ---------- ---------- ---------- Pro forma net income $ 1.25 $ 1.35 $ 1.22 ========== ========== ==========
The following table shows a summary of goodwill by line of business (in thousands):
COMMUNITY INSURANCE FINANCE BANKS AGENCIES COMPANY TOTAL ---------- ---------- ---------- ------------ Goodwill at beginning of year $ 73,644 $ 12,972 $ 1,809 $ 88,425 Goodwill acquired 105,536 8,478 114,014 ---------- ---------- ---------- ------------ Goodwill at end of year $ 179,180 $ 21,450 $ 1,809 $ 202,439 ========== ========== ========== ============
OTHER INTANGIBLE ASSETS The following table shows a summary of core deposit intangibles, customer and renewal lists, and other intangible assets (in thousands):
CORE DEPOSIT CUSTOMER AND OTHER INTANGIBLE TOTAL FINITE- INTANGIBLES RENEWAL LISTS ASSETS LIVED INTANGIBLES ------------ ------------- ---------------- ----------------- Gross carrying amount $ 30,091 $ 4,047 $ 588 $ 34,726 Accumulated amortization (12,615) (847) (216) (13,678) ------------ ------------- ---------------- ----------------- Net December 31, 2003 $ 17,476 $ 3,200 $ 372 $ 21,048 ============ ============= ================ ================= Gross carrying amount $ 28,987 $ 2,571 $ 539 $ 32,097 Accumulated amortization (9,686) (449) (104) (10,239) ------------ ------------- ---------------- ----------------- Net December 31, 2002 $ 19,301 $ 2,122 $ 435 $ 21,858 ============ ============= ================ =================
Amortization expense on finite-lived intangible assets totaled $3.4 million, $3.1 million and $1.2 million for 2003, 2002 and 2001, respectively. Amortization expense on finite-lived intangible assets is expected to total $3.5 million, $3.3 million, $3.1 million, $3.1 million and $2.8 million in 2004, 2005, 2006, 2007 and 2008, respectively. F.N.B. CORPORATION 22 F.N.B. CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DEPOSITS Following is a summary of deposits (in thousands):
December 31 2003 2002 - ---------------------------------------------- --------------- --------------- Non-interest bearing $ 1,044,632 $ 924,090 Savings and NOW 2,863,950 2,312,119 Certificates of deposit and other time deposits 2,250,917 2,189,948 -------------- --------------- $ 6,159,499 $ 5,426,157 ============== ===============
Time deposits of $100,000 or more were $658.1 million and $529.7 million at December 31, 2003 and 2002, respectively. Following is a summary of these time deposits by remaining maturity at December 31, 2003 (in thousands):
CERTIFICATES OTHER TIME OF DEPOSIT DEPOSITS TOTAL -------------- ---------------- -------------- Three months or less $ 80,996 $ 2,553 $ 83,549 Three to six months 75,406 1,202 76,608 Six to twelve months 136,924 5,717 142,641 Over twelve months 327,586 27,747 355,333 -------------- ---------------- -------------- $ 620,912 $ 37,219 $ 658,131 ============== ================ ==============
Following is a summary of the scheduled maturities of certificates of deposit and other time deposits for each of the five years following December 31, 2003 (in thousands): 2004 $ 1,095,998 2005 771,112 2006 178,212 2007 139,962 2008 58,876 Later years 6,757
SHORT-TERM BORROWINGS Following is a summary of short-term borrowings (in thousands):
December 31 2003 2002 - ---------------------------------- ------------ -------------- Securities sold under ............ repurchase agreements ......... $ 329,495 $ 274,266 Federal funds purchased .......... 86,865 84,865 Federal Home Loan Bank advances .. 26,000 25,354 Other short-term borrowings ...... 651 540 Subordinated notes ............... 144,006 130,755 ------------ -------------- $ 587,017 $ 515,780 ============ ==============
Credit facilities amounting to $98.0 million at December 31, 2003 were maintained with various banks with rates which are at or below prime rate. The facilities and their terms are periodically reviewed by the banks and are generally subject to withdrawal at their discretion. No credit facilities were used at December 31, 2003. LONG-TERM DEBT Following is a summary of long-term debt (in thousands):
December 31 2003 2002 - ------------------------------------ ------------ ----------- Federal Home Loan Bank advances $ 637,085 $ 420,001 Other long-term debt .............. 1,102 973 Debentures due to Statutory Trust .. 170,104 Subordinated term loan ............. 17,000 Subordinated notes ................. 30,517 29,673 ------------ ----------- $ 855,808 $ 450,647 ============ ===========
The Corporation's banking subsidiaries have available credit with the FHLB of $2.0 billion, of which $663.1 million was used as of December 31, 2003. These advances are secured by residential real estate loans and FHLB stock and are scheduled to mature in various amounts periodically through the year 2012. Interest rates paid on these advances range from 1.18% to 6.40% in 2003 and 2.43% to 7.19% in 2002. The debentures due to Statutory Trust were issued by F.N.B. Statutory Trust I (Statutory Trust) and First National Bankshares Statutory Trust I (Issuer Trust), both unconsolidated subsidiary trusts. 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 recorded as interest expense by the Corporation. The capital securities are sub- F.N.B. CORPORATION 23 F.N.B. CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ject to mandatory redemption, in whole or in part, upon repayment of the debentures. The capital securities bear interest at a floating rate per annum equal to the three-month LIBOR plus 325 basis points. The Corporation has entered into agreements which, taken collectively, fully and unconditionally guarantee the capital securities subject to the terms of each of the guarantees. The Issuer Trust used the proceeds from the issuance of its preferred securities to third-party investors and common stock to acquire the debentures. The debentures held by the Issuer Trust are its sole assets and the interest payments from the debentures finance the distributions paid on the preferred securities. The debenture and preferred securities bear interest at a floating rate equal to the three-month LIBOR plus 290 basis points. The weighted average interest rate of all debentures due to Statutory Trust held by the Corporation at December 31, 2003 was 4.31%. The debentures qualify as tier 1 capital under the Federal Reserve Board guidelines. The subordinated term loan was entered into with a correspondent bank. The subordinated term loan has a seven-year maturity and bears interest at a rate based on LIBOR plus 170 basis points. The subordinated term loan qualifies as tier 2 capital under the Federal Reserve Board guidelines. Subordinated notes are unsecured and subordinated to other indebtedness of the Corporation. The long-term subordinated notes are scheduled to mature in various amounts periodically through the year 2013. At December 31, 2003, all of the long-term subordinated debt is redeemable by the holders prior to maturity at a discount equal to three months of interest. The Corporation may require the holder to give 30 days prior written notice. No sinking fund is required and none has been established to retire the debt. The weighted average interest rate on long-term subordinated debt was 5.13% at December 31, 2003 and 5.81% at December 31, 2002. Scheduled annual maturities for all of the long-term debt for each of the five years following December 31, 2003 are as follows (in thousands): 2004 ............................... $ 42,248 2005 ............................... 207,480 2006 ............................... 48,371 2007 ............................... 51,895 2008 ............................... 132,788 Later years ........................ 373,026
COMMITMENTS, CREDIT RISK AND CONTINGENCIES The Corporation has commitments to extend credit and standby letters of credit which involve certain elements of credit risk in excess of the amount stated in the consolidated balance sheet. The Corporation's exposure to credit loss in the event of non-performance by the customer is represented by the contractual amount of those instruments. Consistent credit policies are used by the Corporation for both on- and off-balance sheet items. Following is a summary of off-balance sheet credit risk information (in thousands):
December 31 2003 2002 - ------------------------------------------ ----------- ------------ Commitments to extend credit ............. $ 1,309,841 $ 948,814 Standby letters of credit ................ 83,343 67,580
At December 31, 2003, funding of approximately 65% of the commitments to extend credit is dependent on the financial condition of the customer. The Corporation has the ability to withdraw such commitments at its discretion. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Based on management's credit evaluation of the customer, collateral may be deemed necessary. Collateral requirements vary and may include accounts receivable, inventory, property, plant and equipment and income-producing commercial properties. Standby letters of credit are conditional commitments issued by the Corporation which may require payment at a future date. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. The Corporation established a litigation reserve in 2001 by recording a pre-tax charge of approximately $4.0 million to cover estimated legal expenses associated with five cases filed against one of its subsidiary banks. The plaintiffs alleged that a third-party independent administrator misappropriated funds from their individual retirement accounts held by the subsidiary bank. As of December 31, 2003, the Corporation has settled all of these asserted claims at an aggregate cost to the Corporation of $3.5 million. The Corporation believes the remaining reserve will be sufficient for all costs associated with the litigation, including legal costs, unasserted claims, settlements and adverse judgements. F.N.B. CORPORATION 24 F.N.B. CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Corporation and persons to whom the Corporation may have indemnification obligations, in the normal course of business, are subject to various pending and threatened lawsuits in which claims for monetary damages are asserted. Other real estate owned includes a property that is subject to litigation. Should the outcome of the pending or threatened lawsuits be adverse, the value of the property will be impaired and other costs may be incurred. Management, after consultation with outside legal counsel, does not at the present time anticipate that the ultimate liability, arising out of such pending and threatened lawsuits will have a material adverse effect on the Corporation's financial position. At the present time, management is not in a position to determine whether any pending or threatened litigation will have a material adverse effect on the Corporation's results of operations in any future reporting period. STOCKHOLDERS' EQUITY During 2003, the Corporation completed the planned redemption of its Preferred Stock Series A and Preferred Stock Series B. In connection with the redemption, the Corporation issued shares of its common stock out of treasury stock in exchange for the remaining outstanding preferred stock. The Corporation issued 15,882 and 264,568 shares of its common stock for the remaining 19,174 and 98,851 shares of Preferred Stock Series A and Preferred Stock Series B, respectively. As a result of the redemption, the Corporation no longer has any shares of Preferred Series A or Preferred Series B stock outstanding. COMPREHENSIVE INCOME The components of comprehensive income, net of related tax, are as follows (in thousands):
Year Ended December 31 2003 2002 2001 - --------------------------------------------------------------- ---------- ----------- ----------- Net income $ 58,789 $ 63,335 $ 52,985 Other comprehensive income: Unrealized (losses) gains on securities: Arising during the period, net of tax (benefit) expense of $(2,348), $5,561 and $5,080 (4,360) 10,327 9,434 Less: reclassification adjustment for gains included in net income, previously reflected as an unrealized gain, net of tax benefit of $1,038, $857 and $642 (1,928) (1,592) (1,192) Minimum pension liability adjustment, net of tax benefit of $429,$670 and $0 (796) (1,245) ---------- ----------- ----------- Other comprehensive income (7,084) 7,490 8,242 ---------- ----------- ----------- Comprehensive income $ 51,705 $ 70,825 $ 61,227 ========== =========== ===========
The accumulated balances related to each component of other comprehensive income (loss) are as follows (in thousands):
December 31 2003 2002 2001 - -------------------------------------- ----------- ----------- --------- Unrealized gains on securities $ 12,292 $ 18,580 $ 9,845 Minimum pension liability adjustment (2,041) (1,245) ----------- ----------- --------- Accumulated other comprehensive income $ 10,251 $ 17,335 $ 9,845 =========== =========== =========
STOCK INCENTIVE PLANS The Corporation has available up to 1,079,164 shares of common stock to be issued under the restricted stock and incentive bonus plans to key employees of the Corporation. All shares of stock awarded under these plans vest in equal installments over a five-year period on each anniversary of the date of grant. During 2003, the Corporation granted 19,247 shares of stock under these plans. The weighted average fair value of the restricted shares issued was $25.92. The Corporation has available up to 4,485,328 shares of common stock to be issued under both incentive and non-qualified stock option plans to key employees and directors of the Corporation. The options vest in equal installments over periods ranging from three to ten years. The options are granted at a price equal to the fair market value at the date of the grant and are exercisable within ten years from the date of the grant. Because the exercise price of the Corporation's stock options equals the market price of the underlying stock on the date of grant, no compensation F.N.B. CORPORATION 25 F.N.B. CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS expense is recognized in accordance with APB Opinion 25, Accounting for Stock Issued to Employees. In accordance with FAS 123, Accounting for Stock-Based Compensation, the following table shows pro forma net income and earnings per share assuming stock options had been expensed based on the fair value of the options granted along with the significant assumptions used in the Black-Scholes option pricing model (dollars in thousands, except per share data).
Year Ended December 31 2003 2002 2001 - --------------------------------------------- ------------ ----------- ---------------- Net income $ 58,789 $ 63,335 $ 52,985 Less: total stock-based employee compensation expense determined under the fair value method for all awards, net of tax (2,063) (2,034) (1,767) ============ =========== ================ Pro forma net income $ 56,726 $ 61,301 $ 51,218 ============ =========== ================ Earnings per share: Basic $ 1.27 $ 1.37 $ 1.19 ============ =========== ================ Basic pro forma $ 1.23 $ 1.33 $ 1.15 ============ =========== ================ Diluted $ 1.25 $ 1.35 $ 1.17 ============ =========== ================ Diluted pro forma $ 1.21 $ 1.30 $ 1.13 ============ =========== ================ Assumptions: Risk-free interest rate 4.05% 3.92% 5.25% Dividend yield 2.63% 3.09% 2.84% Expected stock price volatility .21% .17% .26% Expected life (years) 5.00 5.00 5.00 Fair value of options granted $ 5.04 $ 4.56 $ 5.35 ============ =========== ================
For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period of five years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferrable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Corporation's employee stock options have characteristics significantly different from those of traded options, and changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of the Corporation's employee stock options. Activity in the Option Plan during the past three years was as follows:
WEIGHTED AVERAGE PRICE 2003 PER SHARE 2002 2001 --------- ------------- --------- --------- Options outstanding at beginning of year 3,259,450 $ 20.03 3,237,984 3,014,089 Granted during the year 635,843 24.51 653,455 696,466 Exercised during the year (597,881) 17.59 (587,891) (266,224) Forfeited during the year (160,672) 24.18 (44,098) (206,347) --------- --------- --------- Options outstanding at end of year 3,136,740 21.17 3,259,450 3,237,984 ========= ========= ========= =========
F.N.B. CORPORATION 26 F.N.B. CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table summarizes information about the stock options outstanding at December 31, 2003:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ---------------------------------------------------- ------------------------------- RANGE OF WEIGHTED AVERAGE WEIGHTED WEIGHTED EXERCISE OPTIONS REMAINING AVERAGE OPTIONS AVERAGE PRICES OUTSTANDING CONTRACTUAL YEARS EXERCISE PRICE EXERCISABLE EXERCISE PRICE - ---------------------- -------------- ------------------- -------------- ----------- -------------- $ 4.74 - $ 7.11 37,611 8.22 $ 4.98 37,611 $ 4.98 7.12 - 10.68 85,859 1.06 9.79 85,271 9.78 10.69 - 16.04 128,617 2.51 13.99 121,675 13.97 16.05 - 24.08 1,553,449 6.01 19.26 1,192,223 19.26 24.09 - 29.10 1,331,204 7.37 25.27 580,728 25.40 -------------- ----------- 3,136,740 2,017,508 ============== ===========
RETIREMENT PLANS Following are the Corporation's accumulated benefit obligation and reconciliations of the change in benefit obligation, change in plan assets and funded status (in thousands):
December 31 2003 2002 - ------------------------------ ------------ ------------- Accumulated benefit obligation $ 98,668 $ 79,319 ============ =============
December 31 2003 2002 - ------------------------------------------------- ------------ ------------- Projected benefit obligation at beginning of year $ 91,217 $ 79,694 Service cost 4,412 3,235 Interest cost 6,550 5,938 Plan amendments 664 440 Actuarial loss 12,503 5,343 Termination gain due to curtailment (1,218) (1,706) Special termination benefits 3,789 1,302 Adjustment for acquisition 1,389 Benefits paid (3,954) (4,418) ------------ ------------- Projected benefit obligation at end of year $ 113,963 $ 91,217 ============ =============
December 31 2003 2002 - ---------------------------------------------- ------------ ------------- Fair value of plan assets at beginning of year $ 57,891 $ 60,464 Actual return on plan assets 9,959 (5,291) Company contribution 21,025 7,136 Benefits paid (3,954) (4,418) ------------ ------------- Fair value of plan assets at end of year $ 84,921 $ 57,891 ============ =============
December 31 2003 2002 - -------------------------------------- ------------ ------------- Funded status of plan $ (29,042) $ (33,326) Unrecognized actuarial loss 26,276 20,463 Unrecognized prior service cost 2,404 2,575 Unrecognized net transition obligation (949) (1,042) ------------ ------------- Accrued pension cost $ (1,311) $ (11,330) ============ =============
The change in plan assets reflects benefits paid from the qualified pension plan of $3.2 million and $2.6 million for 2003 and 2002, respectively, and employer contributions to the qualified pension plan of $20.2 million and F.N.B. CORPORATION 27 F.N.B. CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS $5.3 million for 2003 and 2002, respectively. For the non-qualified pension plan, the change in plan assets reflects benefits paid and contributions to the plan in the same amount. This amount represents the actual benefit payments paid from general plan assets of $781,000 and $1.8 million for 2003 and 2002, respectively. The Corporation expects that no contributions will be made to the qualified pension plan in 2004, as that plan's fully funded status is expected to preclude any deductible contribution. Discount rates of 6.00% and 6.75% for 2003 and 2002, respectively, and a compensation rate of 4.00% for both 2003 and 2002, were used to determine the end of year benefit obligations. As of December 31, 2003 and 2002, the projected benefit obligation, accumulated benefit obligation and fair value of plan assets for pension plans with a projected benefit obligation in excess of plan assets and pension plans with an accumulated benefit obligation in excess of plan assets, were as follows (in thousands):
PROJECTED BENEFIT OBLIGATION ACCUMULATED BENEFIT OBLIGATION EXCEEDS THE FAIR VALUE OF EXCEEDS THE FAIR VALUE OF PLAN'S ASSETS PLAN'S ASSETS ---------------------------- ------------------------------ December 31 2003 2002 2003 2002 - ----------- -------- -------- -------- -------- Projected benefit obligation $ 31,455 $ 91,217 $ 31,455 $ 24,352 Accumulated benefit obligation 29,116 79,319 29,116 22,074 Fair value of plan assets 57,891 -------- -------- -------- --------
The amounts recognized in the Corporation's consolidated financial statements include the following (in thousands):
December 31 2003 2002 - ----------- -------- -------- Prepaid pension cost $ 21,451 $ 5,246 Accrued pension cost (22,763) (16,576) Additional minimum liability (6,448) (5,497) Accumulated other comprehensive income 3,091 1,915 Intangible asset 3,358 3,582 -------- -------- Net amount recognized on balance sheet $ (1,311) $(11,330) -------- --------
The pension expense for the defined benefit plans includes the following components (in thousands):
Year Ended December 31 2003 2002 2001 - ---------------------- -------- -------- -------- Service costs $ 4,412 $ 3,235 $ 3,107 Interest cost 6,550 5,938 5,102 Expected return on plan assets (5,492) (4,771) (4,917) Special termination benefit 3,790 1,302 94 Curtailment loss (gain) 365 (324) Conforming adjustment 412 Adjustment for acquisition (174) Net amortization 1,382 476 381 -------- -------- -------- Net pension expense $ 11,007 $ 5,856 $ 4,005 -------- -------- --------
Assumptions for the Year Ended December 31 2003 2002 2001 - ------------------------------------------ -------- -------- -------- Weighted average discount rate 6.75% 7.25% 7.50% Rates of increase in compensation levels 4.00% 4.00% 4.00% Expected long-term rate of return on plan assets 8.00% 8.00% 8.26% -------- -------- --------
The expected long-term rate of return on plan assets has been established by considering historical and anticipated expected returns on the asset classes invested in by the pension trust and the allocation strategy currently in place among those classes. F.N.B. CORPORATION 28 F.N.B. CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Following are asset allocations for the Corporation's retirement plan as of December 31, 2003 and 2002, and the target allocation for 2004, by asset category:
TARGET ALLOCATION PERCENTAGE OF PLAN ASSETS ---------- ------------------------- December 31 2004 2003 2002 - ----------- ---------- ------ ------ ASSET CATEGORY Equity securities 45-65% 52% 49% Debt securities 33-53 39 43 Cash equivalents 0-5 9 8 ---------- ---- ----
Equity securities include 189,178 shares of the Corporation's common stock totaling $6.7 million (7.9% of total plan assets) and 165,884 shares totaling $4.6 million (7.9% of plan assets) as of December 31, 2003 and 2002, respectively. Dividends received on these shares totaled $170,000 and $73,000 for 2003 and 2002, respectively. The Corporation's investment strategy is to diversify plan assets between a wide mix of securities within the equity and debt markets in an effort to allow the account the opportunity to meet the expected long-term rate of return requirements while minimizing short-term volatility. In this regard, the plan has targeted allocations within the equity securities category for domestic large cap, domestic mid cap, domestic small cap, and international securities. Within the debt securities category, the plan has targeted allocation levels for U.S. Treasury, U.S. Agency, intermediate term corporate bonds and inflation protected securities. Certain subsidiaries of the Corporation participate in a qualified 401(k) defined contribution plan under which eligible employees may contribute a percentage of their salary. The Corporation matches 50 percent of an eligible employee's contribution on the first 6 percent that the employee defers. Employees are generally eligible to participate upon completing 90 days of service and having attained age 21. Employer contributions become 20 percent vested when an employee has completed one year of service, and vest at a rate of 20 percent per year thereafter. The Corporation's contribution expense was $1.4 million in 2003, $1.1 million in 2002 and $1.0 million in 2001. Certain subsidiaries of the Corporation participate in a Salary Savings 401(k) Plan, under which eligible employees may contribute a percentage of their salary. The Corporation matches 50 percent of an eligible employee's contribution on the first 6 percent that the employee defers, and may make a discretionary contribution payable either in cash or the Corporation's common stock based upon the Corporation's profitability. Employees are generally eligible to participate upon completing 90 days of service and having attained age 21. Employer contributions become 20 percent vested when an employee has completed one year of service, and vest at a rate of 20 percent per year thereafter. The Corporation's contribution expense was $3.5 million in 2003, $2.9 million in 2002 and $2.2 million in 2001. OTHER POSTRETIREMENT BENEFIT PLANS Following are reconciliations of the change in benefit obligation, change in plan assets and funded status (in thousands):
December 31 2003 2002 - ----------- -------- -------- Benefit obligation at beginning of year $ 6,665 $ 3,534 Service cost 290 149 Interest cost 365 332 Plan participants' contributions 108 138 Plan amendments 565 Actuarial (gain) loss (555) 2,605 Benefits paid (554) (592) Adjustment for acquisition 19 Curtailment and settlement (85) Special termination benefits 149 -------- -------- Benefit obligation at end of year $ 6,468 $ 6,665 -------- --------
F.N.B. CORPORATION 29 F.N.B. CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31 2003 2002 - ----------- -------- -------- Fair value of plan assets at beginning of year $ 0 $ 0 Company contribution 446 454 Plan participants' contributions 108 138 Benefits paid (554) (592) -------- -------- Fair value of plan assets at end of year $ 0 $ 0 -------- --------
December 31 2003 2002 - ----------- -------- -------- Funded status of plan $ (6,468) $ (6,665) Unrecognized actuarial loss 1,734 2,274 Unrecognized prior service cost 432 510 Unrecognized net transition obligation 299 334 -------- -------- Accrued pension cost $ (4,003) $ (3,547) -------- --------
Assumptions at December 31 2003 2002 - -------------------------- -------- -------- Discount rate 6.00% 6.75% Assumed healthcare cost trend: Initial trend 10.00% 9.00% Ultimate trend 5.00% 5.00% Year ultimate trend reached 2009 2007 -------- --------
The change in plan assets reflects benefits paid and contributions made to the plan in the same amount. This amount represents the actual benefit payments paid from general plan assets of $554,000 and $592,000 for 2003 and 2002, respectively. Net periodic postretirement benefit cost includes the following components (in thousands):
Year Ended December 31 2003 2002 2001 - ---------------------- -------- -------- -------- Service cost $ 290 $ 149 $ 96 Interest cost 365 332 240 Curtailment and settlement 57 (14) One time charge for voluntary retirement 149 230 Special termination benefit 19 32 Net amortization 98 69 27 -------- -------- -------- Net periodic postretirement benefit cost $ 902 $ 626 $ 611 -------- -------- --------
Assumptions for the Year Ended December 31 2003 2002 2001 - ------------------------------------------ -------- -------- -------- Discount rate 6.75% 7.25% 7.50% Assumed healthcare cost trend: Initial trend 9.00% 8.00% 6.75% Ultimate trend 5.00% 5.00% 5.00% Year ultimate trend reached 2007 2005 2003 -------- -------- --------
Costs of benefits for individuals over the age of 65 are assumed to reach 80% of the comprehensive plan cost in 2009, increasing 5.00% per year thereafter. A one percentage point change in the assumed health care cost trend rate would have had the following effects on 2003 service and interest cost and the accumulated postretirement benefit obligation at December 31, 2003 (in thousands):
1% INCREASE 1% DECREASE ----------- ----------- Effect on service and interest components of net periodic cost $ 67 $ (58) Effect on accumulated postretirement benefit obligation 520 (456) ----------- -----------
F.N.B. CORPORATION 30 F.N.B. CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS INCOME TAXES Income tax expense consists of the following (in thousands):
Year Ended December 31 2003 2002 2001 - ---------------------- -------- -------- -------- Current income taxes: Federal taxes $ 22,029 $ 38,927 $ 19,883 State taxes 2,362 2,049 801 -------- -------- -------- 24,391 40,976 20,684 Deferred income taxes: Federal taxes 2,060 (10,319) 1,920 State taxes (854) (544) 430 -------- -------- -------- $ 25,597 $ 30,113 $ 23,034 -------- -------- --------
The tax effects of temporary differences that give rise to deferred tax assets and liabilities are presented below (in thousands):
December 31 2003 2002 - ----------- -------- -------- Deferred tax assets: Allowance for loan losses $ 27,172 $ 23,942 Deferred compensation 3,468 3,462 Deferred benefits 3,303 5,541 Minimum pension liability 1,050 670 Loan fees (814) 793 Other 1,379 1,485 -------- -------- TOTAL GROSS DEFERRED TAX ASSETS 35,558 35,893 -------- -------- Deferred tax liabilities: Depreciation (1,332) 912 Deferred gain on sale of subsidiary (3,555) (3,555) Unrealized gains on securities available for sale (6,619) (10,004) Leasing (2,599) (6,129) Other (4,422) (2,645) -------- -------- TOTAL GROSS DEFERRED TAX LIABILITIES (18,527) (21,421) -------- -------- NET DEFERRED TAX ASSETS $ 17,031 $ 14,472 -------- --------
Following is a reconciliation between tax expense using federal statutory tax and actual effective tax:
Year Ended December 31 2003 2002 2001 - ---------------------- -------- -------- -------- Federal statutory tax rate 35.0% 35.0% 35.0% Effect of nontaxable interest and dividend income (6.8) (6.5) (6.8) State taxes 1.2 0.5 1.1 Goodwill 0.1 0.5 1.2 Merger related costs 1.9 2.2 0.7 Other items (1.1) 0.5 (0.9) -------- -------- -------- Effective tax rate 30.3% 32.2% 30.3% -------- -------- --------
Income tax expense related to gains on the sale of securities was $837,000, $670,000 and $640,000 for the years ended December 31, 2003, 2002 and 2001, respectively. F.N.B. CORPORATION 31 F.N.B. CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share (dollars in thousands, except per share data):
Year Ended December 31 2003 2002 2001 - ---------------------- ------------ ------------ ------------ BASIC Net income $ 58,789 $ 63,335 $ 52,985 Less: Preferred stock dividends declared (62) (242) (293) ------------ ------------ ------------ Net income applicable to basic earnings per share $ 58,727 $ 63,093 $ 52,692 ------------ ------------ ------------ Average common shares outstanding 46,080,966 46,012,908 44,289,772 ------------ ------------ ------------ Earnings per share $ 1.27 $ 1.37 $ 1.19 ------------ ------------ ------------ DILUTED Net income applicable to diluted earnings per share $ 58,789 $ 63,335 $ 52,985 ------------ ------------ ------------ Average common shares outstanding 46,080,966 46,012,908 44,289,772 Convertible preferred stock 63,927 341,886 418,682 Net effect of dilutive stock options based on the treasury stock method 827,970 718,991 677,041 ------------ ------------ ------------ Diluted average common shares outstanding 46,972,863 47,073,785 45,385,495 ------------ ------------ ------------ Earnings per share $ 1.25 $ 1.35 $ 1.17 ------------ ------------ ------------
REGULATORY MATTERS Quantitative measures established by regulators to ensure capital adequacy require the Corporation and its banking subsidiaries to maintain minimum amounts and ratios of total and tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) and of tier 1 capital to average assets (as defined). Management believes, as of December 31, 2003, that the Corporation and each of its banking subsidiaries meet all capital adequacy requirements to which they are subject. As of December 31, 2003, the Corporation and each of its banking subsidiaries have been categorized by the various regulators as "well capitalized" under the regulatory framework for prompt corrective action. The Corporation and its banking subsidiaries are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Corporation's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation and its banking subsidiaries must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Corporation's and banking subsidiaries' capital amounts and classifications are also subject to qualitative judgements by the regulators about components, risk weightings and other factors. F.N.B. CORPORATION 32 F.N.B. CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Following are the capital ratios as of December 31, 2003 for the Corporation and its banking subsidiaries, First National Bank of Pennsylvania and First National Bank of Florida (dollars in thousands):
WELL CAPITALIZED MINIMUM CAPITAL ACTUAL REQUIREMENTS REQUIREMENTS ----------------- ----------------- ----------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO -------- ----- -------- ----- -------- ----- TOTAL CAPITAL (TO RISK-WEIGHTED ASSETS): F.N.B. Corporation $640,697 10.9% $587,226 10.0% $469,781 8.0% First National Bank of Pennsylvania 338,569 10.8 312,069 10.0 249,655 8.0 First National Bank of Florida 269,042 10.4 259,913 10.0 207,930 8.0 TIER 1 CAPITAL (TO RISK-WEIGHTED ASSETS): F.N.B. Corporation $537,916 9.2% $352,336 6.0% $234,891 4.0% First National Bank of Pennsylvania 299,552 9.6 187,241 6.0 124,828 4.0 First National Bank of Florida 223,938 8.6 155,948 6.0 103,965 4.0 TIER 1 CAPITAL (TO AVERAGE ASSETS): F.N.B. Corporation $537,916 6.7% $401,246 5.0% $320,997 4.0% First National Bank of Pennsylvania 299,552 6.9 216,272 5.0 173,018 4.0 First National Bank of Florida 223,938 6.4 175,278 5.0 140,222 4.0 -------- ----- -------- ----- -------- -----
As of December 31, 2003, the Corporation's total capital to risk-weighted assets, tier 1 capital to risk weighted assets and tier 1 capital to average assets were 10.9%, 9.2% and 6.7%, respectively. These ratios are above the well capitalized and minimum capital requirements noted in the above table. The Corporation's banking subsidiaries were required to maintain aggregate cash reserves with the Federal Reserve Bank amounting to $37.4 million at December 31, 2003. The Corporation also maintains deposits for various services such as check clearing. Certain limitations exist under applicable law and regulations by regulatory agencies regarding dividend payments to a parent by its subsidiaries. As of December 31, 2003, the subsidiaries had $41.6 million of retained earnings available for distribution as dividends without prior regulatory approval. Under current Federal Reserve Board regulations, the Corporation's banking subsidiaries are limited in the amount they may lend to non-bank affiliates, including the Corporation. Such loans must be secured by specified collateral. In addition, any such loans to a single non-bank affiliate may not exceed 10% of any banking subsidiary's capital and surplus, and the aggregate of loans to all such affiliates may not exceed 20%. The maximum amount that may be borrowed by the Corporation under these provisions approximated $89.8 million at December 31, 2003. BUSINESS SEGMENTS The Corporation operates in three reportable segments: community banks, insurance agency and consumer finance. The Corporation's community bank subsidiaries offer services traditionally offered by full-service commercial banks, including commercial and individual demand and time deposit accounts and commercial, mortgage and individual installment loans. In addition to traditional banking products, the Corporation's bank subsidiaries offer various alternative products, including securities brokerage and investment advisory services, mutual funds, insurance and annuities. The Corporation's insurance agency is a full-service insurance agency offering all lines of commercial and personal insurance through major carriers. The Corporation's consumer finance subsidiary primarily is involved in making personal installment loans to individuals with approximately 15% of its volume being derived from the purchase of installment sales finance contracts from retail merchants. This activity is funded through the sale of the Corporation's subordinated notes at the finance company's branch offices. The following tables provide financial information for these segments of the Corporation (in thousands). Other items shown in the following table represent the parent company, other non-bank subsidiaries and eliminations, which are necessary for purposes of reconciling to the consolidated amounts. F.N.B. CORPORATION 33 F.N.B. CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COMMUNITY INSURANCE FINANCE ALL At or for the Year Ended December 31, 2003 BANKS AGENCY COMPANY OTHER CONSOLIDATED - ------------------------------------------ ---------- ---------- ---------- ---------- ------------ Interest income $ 394,477 $ 225 $ 28,586 $ 25 $ 423,313 Interest expense 121,455 92 5,174 3,115 129,836 Provision for loan losses 18,537 5,802 24,339 Non-interest income 74,563 30,295 1,872 23,841 130,571 Non-interest expense 227,003 25,707 12,508 46,667 311,885 Intangible amortization 2,949 398 91 3,438 Income tax expense (benefit) 29,427 1,750 2,599 (8,179) 25,597 Net income (loss) 69,669 2,573 4,375 (17,828) 58,789 Total assets 8,103,448 36,845 147,444 20,573 8,308,310 Goodwill 179,180 21,450 1,809 202,439 ---------- ---------- ---------- ---------- ------------
COMMUNITY INSURANCE FINANCE ALL At or for the Year Ended December 31, 2002 BANKS AGENCY COMPANY OTHER CONSOLIDATED - ------------------------------------------ ---------- ---------- ---------- ---------- ------------ Interest income $ 400,731 $ 192 $ 28,096 $ (2,235) $ 426,784 Interest expense 136,843 96 6,618 2,114 145,671 Provision for loan losses 13,793 5,301 19,094 Non-interest income 66,181 29,098 1,781 23,813 120,873 Non-interest expense 204,906 22,701 12,519 46,200 286,326 Intangible amortization 2,794 232 92 3,118 Income tax expense (benefit) 33,326 2,415 1,962 (7,590) 30,113 Net income (loss) 75,250 3,846 3,477 (19,238) 63,335 Total assets 6,904,302 32,921 148,400 4,609 7,090,232 Goodwill 73,644 12,972 1,809 88,425 ---------- ---------- ---------- ---------- ------------
COMMUNITY INSURANCE FINANCE ALL At or for the Year Ended December 31, 2001 BANKS AGENCY COMPANY OTHER CONSOLIDATED - ------------------------------------------ ---------- ---------- ---------- ---------- ------------ Interest income $ 423,871 $ 196 $ 28,555 $ (2,256) $ 450,366 Interest expense 191,295 232 8,711 62 200,300 Provision for loan losses 25,954 5,241 31,195 Non-interest income 61,701 26,720 1,875 9,699 99,995 Non-interest expense 190,073 20,724 12,407 14,858 238,062 Intangible amortization 3,115 775 126 769 4,785 Income tax expense (benefit) 23,034 2,192 1,443 (3,635) 23,034 Net income (loss) 52,101 2,993 2,502 (4,611) 52,985 Total assets 6,277,928 29,761 153,706 26,988 6,488,383 Goodwill 26,688 11,982 1,809 40,479 ---------- ---------- ---------- ---------- ------------
F.N.B. CORPORATION 34 F.N.B. CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CASH FLOW INFORMATION Following is a summary of cash flow information (in thousands):
Year Ended December 31 2003 2002 2001 - ---------------------- -------- -------- -------- Cash paid during year for: Interest $129,409 $149,799 $203,613 Income taxes 18,728 34,982 23,908 Non-cash investing and financing activities: Acquisition of real estate in settlement of loans $ 3,628 $ 3,811 $ 3,198 Loans granted in the sale of other real estate 60 821 3,178 -------- -------- --------
PARENT COMPANY FINANCIAL STATEMENTS Below is condensed financial information of F.N.B. Corporation (parent company only). In this information, the parent company's investments in subsidiaries are stated at cost plus equity in undistributed earnings of subsidiaries since acquisition. This information should be read in conjunction with the consolidated financial statements. BALANCE SHEET (in thousands)
December 31 2003 2002 - ----------- -------- -------- ASSETS Cash and cash equivalents $ 15,906 $ 8,869 Premises and equipment 1,392 5,539 Other assets 16,461 29,100 Investment in bank holding company 364,956 Investment in and advance to bank subsidiaries 369,433 546,890 Investment in and advance to non-bank subsidiaries 162,444 205,091 -------- -------- TOTAL ASSETS $930,592 $795,489 -------- -------- LIABILITIES Other liabilities $ 22,642 $ 34,842 Debentures due to Statutory Trust 125,000 Subordinated notes: Short-term 145,524 132,378 Long-term 30,517 29,673 -------- -------- TOTAL LIABILITIES 323,683 196,893 -------- -------- STOCKHOLDERS' EQUITY 606,909 598,596 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $930,592 $795,489 -------- --------
F.N.B. CORPORATION 35 F.N.B. CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS INCOME STATEMENT (in thousands)
Year Ended December 31 2003 2002 2001 - ---------------------- --------- --------- --------- INCOME Dividend income from subsidiaries: Bank $ 90,094 $ 84,910 $ 64,839 Non-bank 20,509 9,050 3,691 --------- --------- --------- 110,603 93,960 68,530 --------- --------- --------- Interest income 3,776 5,500 574 Affiliate service fee income 11,882 12,723 23,217 Other income 1,210 1,188 903 --------- --------- --------- TOTAL INCOME 127,471 113,371 93,224 --------- --------- --------- EXPENSES Interest expense 11,632 8,568 10,333 Salaries and personnel expense 13,488 13,620 19,327 Merger and consolidation expense 18,798 3,695 Other expenses 21,380 8,207 13,581 --------- --------- --------- TOTAL EXPENSES 46,500 49,193 46,936 --------- --------- --------- INCOME BEFORE TAXES AND EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARIES 80,971 64,178 46,288 Income tax benefit 10,016 8,885 7,801 --------- --------- --------- 90,987 73,063 54,089 --------- --------- --------- Equity in undistributed income of subsidiaries: Bank (23,974) (12,418) (11,168) Non-bank (8,224) 2,690 10,064 --------- --------- --------- (32,198) (9,728) (1,104) --------- --------- --------- NET INCOME $ 58,789 $ 63,335 $ 52,985 --------- --------- ---------
F.N.B. CORPORATION 36 F.N.B. CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS STATEMENT OF CASH FLOWS (in thousands)
Year Ended December 31 2003 2002 2001 - ---------------------- --------- --------- --------- OPERATING ACTIVITIES Net income $ 58,789 $ 63,335 $ 52,985 Adjustments to reconcile net income to net cash flows from operating activities: Undistributed earnings of subsidiaries 32,198 9,728 1,104 Other, net 953 14,867 (10,847) --------- --------- --------- Net cash flows from operating activities 91,940 87,930 43,242 --------- --------- --------- INVESTING ACTIVITIES Sale of securities available for sale 190 Sale (purchase) of premises and equipment 3,440 (3,083) (1,965) Net decrease in loans receivable 4,800 Advances to subsidiaries (47,990) (86,551) Investment in subsidiaries (135,950) 52,711 (12,165) --------- --------- --------- Net cash flows from investing activities (180,500) (36,923) (9,140) --------- --------- --------- FINANCING ACTIVITIES Net increase (decrease) in short-term borrowings 13,145 (979) 5,725 Decrease in long-term debt (7,067) (14,513) (15,390) Increase in long-term debt 132,912 8,346 6,740 Net acquisition of treasury stock (521) (7,090) (42) Cash dividends paid (42,872) (37,516) (32,300) --------- --------- --------- Net cash flows from financing activities 95,597 (51,752) (35,267) --------- --------- --------- NET INCREASE (DECREASE) IN CASH 7,037 (745) (1,165) Cash at beginning of year 8,869 9,614 10,779 --------- --------- --------- CASH AT END OF YEAR $ 15,906 $ 8,869 $ 9,614 --------- --------- --------- CASH PAID Interest $ 11,600 $ 8,558 $ 9,069 --------- --------- ---------
F.N.B. CORPORATION 37 F.N.B. CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each financial instrument: CASH AND DUE FROM BANKS: For these short-term instruments, the carrying amount is a reasonable estimate of fair value. SECURITIES: For both securities available for sale and securities held to maturity, fair value equals quoted market price, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. LOANS: The fair value of fixed rate loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. The fair value of adjustable rate loans approximates the carrying amount. DEPOSITS: The fair value of demand deposits, savings accounts and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity deposits is estimated by discounting future cash flows using rates currently offered for deposits of similar remaining maturities. SHORT-TERM BORROWINGS: The carrying amounts for short-term borrowings approximate fair value for amounts that mature in 90 days or less. The fair value of subordinated notes is estimated by discounting future cash flows using rates currently offered. LONG-TERM DEBT: The fair value of long-term debt is estimated by discounting future cash flows based on the market prices for the same or similar issues or on the current rates offered to the Corporation for debt of the same remaining maturities. The estimated fair values of the Corporation's financial instruments are as follows (in thousands):
2003 2002 ------------------------- ------------------------- CARRYING FAIR CARRYING FAIR December 31 AMOUNT VALUE AMOUNT VALUE - ----------- ---------- ---------- ---------- ---------- FINANCIAL ASSETS Cash and short-term investments $ 211,970 $ 211,970 $ 259,561 $ 259,561 Securities available for sale 1,641,972 1,641,972 1,026,191 1,026,191 Securities held to maturity 36,059 37,540 48,992 50,517 Net loans, including loans held for sale 5,650,924 5,681,252 5,176,275 5,288,315 FINANCIAL LIABILITIES Deposits $6,159,499 $6,191,182 $5,426,157 $5,465,390 Short-term borrowings 587,017 587,033 515,780 514,724 Long-term debt 855,808 864,383 450,647 484,235 ---------- ---------- ---------- ----------
F.N.B. CORPORATION 38 F.N.B. CORPORATION AND SUBSIDIARIES SELECTED FINANCIAL DATA Dollars in thousands, except per share data
PRO FORMA Year Ended December 31 2003 (1) 2003 2002 2001 2000 1999 - ---------------------- ----------- ----------- ----------- ----------- ----------- ----------- Total interest income $ 258,697 $ 423,313 $ 426,784 $ 450,366 $ 450,710 $ 401,914 Total interest expense 86,570 129,836 145,671 200,300 211,381 168,770 Provision for loan losses 17,155 24,339 19,094 31,195 17,982 15,776 Total non-interest income 70,193 130,571 120,873 99,995 79,985 69,814 Merger and restructuring expense 50,903 42,365 8,037 6,700 6,028 Other non-interest expense 145,810 264,420 247,079 234,810 205,512 193,936 Total non-interest expense 145,810 315,323 289,444 242,847 212,212 199,964 Net income 55,794 58,789 63,335 52,985 61,908 61,145 Merger and restructuring expense, net of tax 34,459 30,543 5,463 4,379 4,482 ----------- ----------- ----------- ----------- ----------- ----------- AT YEAR-END Total assets $ 4,557,174 $ 8,308,310 $ 7,090,232 $ 6,488,383 $ 6,126,792 $ 5,892,263 Net loans 3,213,058 5,634,336 5,152,098 4,749,376 4,557,656 4,346,621 Deposits 3,439,510 6,159,499 5,426,157 5,099,076 4,913,754 4,607,051 Long-term debt 584,808 855,808 450,647 342,424 267,729 268,393 Preferred stock 1 1 1,678 2,075 Total stockholders' equity 241,794 606,909 598,596 572,407 503,422 491,436 ----------- ----------- ----------- ----------- ----------- ----------- PER COMMON SHARE (2) Net income Basic $ 1.21 $ 1.27 $ 1.37 $ 1.19 $ 1.38 $ 1.35 Diluted 1.19 1.25 1.35 1.17 1.35 1.33 Merger and restructuring expense, net of tax Basic (.75) (.66) (.12) (.10) (.10) Diluted (.74) (.65) (.12) (.10) (.10) Cash dividends declared .93 .93 .81 .68 .61 .59 Book value 5.22 13.10 12.93 12.37 10.87 11.13 ----------- ----------- ----------- ----------- ----------- ----------- RATIOS Return on average assets 1.24% .74% .93% .84% 1.03% 1.09% Return on average equity 20.10 9.66 10.97 9.81 12.28 12.50 Dividend payout ratio 76.81 72.90 59.03 52.81 45.36 43.81 Average equity to average assets 6.15 7.66 8.51 8.58 8.42 8.75 ----------- ----------- ----------- ----------- ----------- -----------
(1) Pro forma information assumes that the spin-off of First National Bankshares of Florida, Inc. occurred on January 1, 2003. (2) Per share amounts have been restated for the stock dividend declared on April 28, 2003. F.N.B. CORPORATION 39 F.N.B. CORPORATION AND SUBSIDIARIES QUARTERLY EARNINGS SUMMARY (UNAUDITED) Dollars in thousands, except per share data
QUARTER ENDED 2003 MAR. 31 JUNE 30 SEPT. 30 DEC. 31 - ------------------ --------- --------- --------- --------- Interest income $ 104,510 $ 108,991 $ 104,485 $ 105,327 Interest expense 31,373 35,143 32,508 30,812 Net interest income 73,137 73,848 71,977 74,515 Provision for loan losses 5,859 5,731 5,237 7,512 Gain on sales of securities 693 874 740 85 Total non-interest income 32,036 35,360 32,632 30,543 Total non-interest expense 65,538 67,843 100,491 81,451 Net income 23,328 24,656 484 10,321 Merger and restructuring expense, net of tax 659 21,207 12,593 PER COMMON SHARE (1) Earnings Basic $ .51 $ .54 $ .01 $ .21 Diluted .50 .53 .01 .21 Merger and restructuring expense, net of tax Basic (.01) (.46) (.28) Diluted (.01) (.45) (.28) Cash dividends declared .21 .24 .24 .24
QUARTER ENDED 2002 MAR. 31 JUNE 30 SEPT. 30 DEC. 31 - ------------------ --------- --------- --------- --------- Interest income $ 106,043 $ 106,261 $ 107,596 $ 106,884 Interest expense 38,538 37,065 35,592 34,476 Net interest income 67,505 69,196 72,004 72,408 Provision for loan losses 4,191 4,502 4,835 5,566 Gain on sales of securities 175 465 1,001 274 Total non-interest income 27,944 30,063 30,087 32,779 Total non-interest expense 102,230 59,981 62,239 64,994 Net income (8,883) 23,949 24,131 24,138 Merger and restructuring expense, net of tax 30,212 331 PER COMMON SHARE (1) Earnings Basic $ (.19) $ .52 $ .52 $ .52 Diluted (.19) .51 .51 .52 Merger and restructuring expense, net of tax Basic (.66) Diluted (.65) Cash dividends declared .18 .21 .21 .21
(1) Per share amounts have been restated for the stock dividend declared on April 28, 2003. F.N.B. CORPORATION 40 F.N.B. CORPORATION AND SUBSIDIARIES PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED) Dollars in thousands In order to facilitate the understanding of the performance of the Corporation excluding its Florida operations, management has developed unaudited pro forma financial statements for the year ended December 31, 2003. To arrive at the pro forma financial statements, several adjustments and assumptions were made to the income statement. The pro forma condensed consolidated financial statements of the Corporation should be read in conjunction with the historical consolidated financial statements and the notes thereto of the Corporation. The pro forma consolidated income statement assumes that the spin-off of First National Bankshares of Florida, Inc. (FNBF) occurred on January 1, 2003. The pro forma consolidated financial statements are presented for informational purposes only and do not reflect the historical results of operations or financial position of the Corporation or FNBF. The pro forma data also does not purport to project the financial position or results of operations of the Corporation or FNBF as of any future date or for any future period. Earnings per share data is shown on a pro forma basis based upon an assumed distribution of one share of FNBF common stock for every one share of the Corporation's common stock outstanding. The pro forma adjustments to the historical consolidated income statement are presented below that statement.
FIRST NATIONAL F.N.B. F.N.B. BANKSHARES OF CORPORATION CORPORATION FLORIDA, INC. PRO FORMA December 31, 2003 HISTORICAL HISTORICAL (UNAUDITED) - ----------------- ----------- -------------- ----------- ASSETS Cash and due from banks $ 204,824 $ 99,664 $ 105,160 Interest bearing deposits with banks and other short term investments 7,146 5,994 1,152 Mortgage loans held for sale 16,588 15,153 1,435 Securities available for sale 1,641,972 763,305 878,667 Securities held to maturity 36,059 12,029 24,030 Loans, net of unearned income 5,708,579 2,449,382 3,259,197 Allowance for loan losses (74,243) (28,104) (46,139) ----------- -------------- ----------- NET LOANS 5,634,336 2,421,278 3,213,058 ----------- -------------- ----------- Goodwill 202,439 173,729 28,710 Other assets 564,946 259,984 304,962 ----------- -------------- ----------- TOTAL ASSETS $ 8,308,310 $ 3,751,136 $ 4,557,174 ----------- -------------- ----------- LIABILITIES Deposits: Non-interest bearing $ 1,044,632 $ 451,837 $ 592,795 Interest bearing 5,114,867 2,268,152 2,846,715 ----------- -------------- ----------- TOTAL DEPOSITS 6,159,499 2,719,989 3,439,510 ----------- -------------- ----------- Other liabilities 99,077 40,981 58,096 FHLB borrowings 663,085 231,944 431,141 Debentures due to Statutory Trust 170,104 41,238 128,866 Other short-term borrowings 561,017 334,051 226,966 Other long-term debt 48,619 17,818 30,801 ----------- -------------- ----------- TOTAL LIABILITIES 7,701,401 3,386,021 4,315,380 ----------- -------------- ----------- STOCKHOLDERS' EQUITY 606,909 365,115 241,794 ----------- -------------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 8,308,310 $ 3,751,136 $ 4,557,174 ----------- -------------- -----------
F.N.B. CORPORATION 41 F.N.B. CORPORATION AND SUBSIDIARIES PRO FORMA CONDENSED CONSOLIDATED INCOME STATEMENT (UNAUDITED) Dollars in thousands, except per share data
FIRST NATIONAL F.N.B. F.N.B. BANKSHARES OF CORPORATION CORPORATION FLORIDA, INC. PRO FORMA December 31, 2003 HISTORICAL HISTORICAL ADJUSTMENTS (UNAUDITED) - ----------------- ------------ -------------- ----------- ----------- Total interest income $ 423,313 $ 166,294 $ 1,678 (1) $ 258,697 Total interest expense 129,836 42,846 (420)(1) 86,570 ------------ -------------- ----------- ----------- NET INTEREST INCOME 293,477 123,448 2,098 172,127 Provision for loan losses 24,339 7,184 17,155 ------------ -------------- ----------- ----------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 269,138 116,264 2,098 154,972 ------------ -------------- ----------- ----------- NON-INTEREST INCOME Insurance premiums, commissions and fees 35,321 26,182 9,139 Service charges 52,255 18,115 34,140 Trust 10,065 2,768 7,297 Securities commissions and fees 7,793 3,791 4,002 Gain on sale of securities 2,392 443 2,038(2) 3,987 Gain on sale of mortgage loans 8,450 5,590 2,860 Other 14,295 5,527 8,768 ------------ -------------- ----------- ----------- TOTAL NON-INTEREST INCOME 130,571 62,416 2,038 70,193 ------------ -------------- ----------- ----------- NON-INTEREST EXPENSE Salaries and employee benefits 164,086 76,652 (11,991)(3) 75,443 Net occupancy and equipment 47,634 19,051 (2,008)(3) 26,575 Amortization of intangibles 3,438 1,266 2,172 Merger and consolidation related 1,235 1,235 Debt extinguishment penalty 20,737 (20,737)(3) Other 78,193 32,094 (4,479)(3) 41,620 ------------ -------------- ----------- ----------- TOTAL NON-INTEREST EXPENSE 315,323 130,298 (39,215) 145,810 ------------ -------------- ----------- ----------- INCOME BEFORE INCOME TAXES 84,386 48,382 43,351 79,355 Income taxes 25,597 16,631 14,595(4) 23,561 ------------ -------------- ----------- ----------- NET INCOME $ 58,789 $ 31,751 $ 28,756 $ 55,794 ------------ -------------- ----------- ----------- EARNINGS PER COMMON SHARE Basic $ 1.27 $ 1.21 Diluted 1.25 1.19 ------------ -------------- ----------- ----------- AVERAGE SHARES OUTSTANDING Basic 46,080,966 46,080,966 Diluted 46,972,863 46,972,863 ------------ -------------- ----------- -----------
Notes to pro forma condensed consolidated income statement: (1) To record intercompany interest income and interest expense which were previously eliminated in consolidation and to record interest income and reduction in interest expense through the utilization of excess funds received in connection with the spin-off. (2) To record intercompany gain on the sale of municipal securities which was previously eliminated in consolidation. (3) To reduce expenses incurred as a result of the spin-off. (4) To record tax effect of items (1), (2) and (3) above, at an effective tax rate of 33.7%. F.N.B. CORPORATION 42 F.N.B. CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 2003 Net income was $58.8 million for 2003 compared to net income of $63.3 million in 2002. Basic earnings per share were $1.27 and $1.37 for 2003 and 2002, respectively, while diluted earnings per share were $1.25 and $1.35, respectively, for those same periods. Diluted earnings for 2003 and 2002 were reduced by $0.74 and $0.65 per share, respectively, due to pre-tax merger and restructuring expenses of $50.9 million and $42.4 million, respectively. Net interest income, on a fully taxable equivalent basis, increased by $11.4 million or 4.0% and net interest margin declined by 50 basis points. These factors are further detailed in the discussion which follows. Common comparative ratios for results of operations include the return on average assets and the return on average equity. The Corporation's return on average assets was .74% for 2003 compared to .93% for 2002, while the Corporation's return on average equity was 9.66% for 2003 and 10.97% for 2002. NET INTEREST INCOME Net interest income, the Corporation's primary source of earnings, is the amount by which interest and fees generated by earning assets, primarily loans and securities, exceed interest expense on deposits and borrowed funds. Net interest income, on a fully taxable equivalent basis, totaled $298.2 million in 2003 versus $286.8 million in 2002. Net interest income consisted of interest income of $428.0 million and interest expense of $129.8 million in 2003, compared to $432.4 million and $145.7 million for each, respectively, in 2002. The Corporation's net interest margin decreased 50 basis points to 4.20% for 2003. During 2003, in order to help revive economic growth, the Federal Reserve Board reduced its target federal funds rate to the lowest level in nearly 45 years. During the first and second quarter of 2003, concerns about continued economic weakness and possible disinflation drove mid-term and long-term treasury yields down significantly. This, in turn, sparked the refinancing of mortgages in the Corporation's loan and mortgage-backed security portfolios. Thus, the lower interest rate levels experienced during 2003 contributed to the decline in the net interest margin as the yield on earning assets declined by more than the rate on interest-bearing liabilities. The impact of future rate changes on the Corporation's net income is discussed further within the "Liquidity and Interest Rate Sensitivity" section. Total interest income, on a fully taxable equivalent basis, decreased $4.4 million or 1.0% in 2003. This decrease was a result of lower yield, partially offset by higher earning assets. The impact of lower yield was $68.0 million while the impact of higher earning assets was $63.5 million. The decrease in yield was caused primarily by loan refinancing activity and scheduled repricing of adjustable rate loans to lower market rates, coupled with accelerated prepayments of mortgage-backed securities. The growth in earning assets was driven by the acquisition of Southern Exchange Bank (SEB), which added $127.7 million in loans, coupled with an increase in loans of $302.3 million, driven mostly by organic growth in commercial and consumer loans. In addition, investment securities increased $641.9 million, of which $338.7 million was added as a result of the SEB transaction. Total interest expense decreased $15.8 million or 10.9% in 2003. This decrease was driven primarily by the lower rate paid on interest bearing liabilities, partially offset by an increase in interest bearing liabilities. The impact of a lower rate paid was $45.0 million while the impact of higher interest bearing liabilities was $29.1 million. The decrease in rate paid was driven primarily by actions taken by the Corporation to reduce rates paid on deposits and a reduction in the cost of debt, which was partially due to the early retirement of $220.3 million of higher cost Federal Home Loan Bank (FHLB) borrowings during the third quarter of 2003. In addition, the Corporation continued to successfully generate non-interest bearing deposits, which increased $122.2 million or 13.9% in 2003. The acquisition of SEB contributed approximately $29.0 million in non-interest bearing deposits to the 2003 average. The growth in interest bearing liabilities was driven partially by the acquisition of SEB, which added $328.1 million in interest bearing deposits, coupled with $180.9 million or 1.4% growth in interest bearing deposits. In addition, short-term and long-term borrowings increased $500.7 million, of which $115.9 million was added as a result of the SEB transaction. F.N.B. CORPORATION 43 F.N.B. CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION The following table provides information regarding the average balances and yields and rates on interest earning assets and interest bearing liabilities (dollars in thousands):
Year Ended December 31 2003 2002 2001 - ---------------------- ----------------------------- ----------------------------- ----------------------------- AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/ BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE ------- -------- ---- ------- -------- ---- ------- -------- ---- ASSETS Interest earning assets: Interest bearing deposits with banks $ 4,058 $ 38 0.94% $ 5,027 $ 86 1.71% $ 6,349 $ 195 3.07% Federal funds sold 12,566 145 1.15 86,993 1,495 1.72 131,818 5,279 4.00 Taxable investment securities (1) 1,423,561 60,043 4.22 758,399 42,263 5.57 785,782 48,116 6.12 Non-taxable investment securities (2) 168,901 10,519 6.23 192,161 12,395 6.45 174,062 10,954 6.29 Loans (2)(3) 5,490,062 357,269 6.51 5,060,067 376,201 7.43 4,676,382 392,332 8.39 ---------- -------- ---------- -------- ----------- -------- TOTAL INTEREST EARNING ASSETS 7,099,148 428,014 6.03 6,102,647 432,440 7.09 5,774,393 456,876 7.91 ---------- -------- ---------- -------- ----------- -------- Cash and due from banks 200,746 195,992 179,183 Allowance for loan losses (72,336) (68,513) (57,795) Premises and equipment 194,832 159,408 142,157 Other assets 524,953 398,190 256,716 ---------- ---------- ----------- $7,947,343 $6,787,724 $ 6,294,654 ========== ========== =========== LIABILITIES Interest bearing liabilities: Deposits: Interest bearing demand $1,228,422 $ 8,487 .69 $1,048,780 $ 8,887 .85 $ 831,959 14,292 1.72 Savings 1,386,132 13,971 1.01 1,108,463 16,556 1.49 1,054,017 22,590 2.14 Other time 2,327,262 70,857 3.04 2,275,603 88,661 3.90 2,354,961 130,226 5.53 Short-term borrowings 621,806 9,810 1.58 407,407 10,878 2.67 364,420 15,026 4.12 Long-term debt 671,790 26,711 3.98 385,451 20,689 5.37 310,498 18,166 5.85 ---------- -------- ---------- -------- ----------- -------- TOTAL INTEREST BEARING LIABILITIES 6,235,412 129,836 2.08 5,225,704 145,671 2.79 4,915,855 200,300 4.07 ---------- -------- ---------- -------- ----------- -------- Non-interest bearing demand deposits 1,000,210 878,020 741,298 Other liabilities 103,328 106,427 97,306 ---------- ---------- ----------- 7,338,950 6,210,151 5,754,459 ---------- ---------- ----------- STOCKHOLDERS' EQUITY 608,393 577,573 540,195 ---------- ---------- ----------- $7,947,343 $6,787,724 $ 6,294,654 ========== ========== =========== Excess of interest earning assets over interest bearing liabilities $ 863,736 $ 876,943 $ 858,538 ========== ========== =========== Net interest income $298,178 $286,769 $256,576 ======== ======== ======== Net interest spread 3.95% 4.30% 3.84% ==== ==== ==== Pro forma net interest spread 3.91% ==== Net interest margin (4) 4.20% 4.70% 4.44% ==== ==== ==== Pro forma net interest margin 4.21% ====
- ---------- (1) The average balances and yields earned on securities are based on historical cost. (2) The amounts are reflected on a fully taxable equivalent basis using the federal statutory tax rate of 35%, adjusted for certain federal tax preferences. (3) Average balances include non-accrual loans. Loans consist of average total loans less average unearned income. The amount of loan fees included in interest income on loans is immaterial. (4) Net interest margin is calculated by dividing the difference between total interest earned and total interest paid by total interest earning assets. F.N.B. CORPORATION 44 F.N.B. CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION The following table sets forth certain information regarding changes in net interest income attributable to changes in the volumes of interest earning assets and interest bearing liabilities and changes in the rates for the periods indicated (in thousands):
Year Ended December 31 2003 2002 - ---------------------- ------------------------------------ ----------------------------------- VOLUME RATE NET VOLUME RATE NET ------ ---- --- ------ ---- --- INTEREST INCOME Interest bearing deposits with banks $ (14) $ (34) $ (48) $ (35) $ (74) $ (109) Federal funds sold (973) (377) (1,350) (1,414) (2,370) (3,784) Securities 23,106 (7,202) 15,904 (479) (3,933) (4,412) Loans 41,417 (60,349) (18,932) 40,881 (57,012) (16,131) ------- -------- -------- ------- -------- -------- 63,536 (67,962) (4,426) 38,953 (63,389) (24,436) ------- -------- -------- ------- -------- -------- INTEREST EXPENSE Deposits: Interest bearing demand 4,042 (4,442) (400) 5,745 (11,150) (5,405) Savings 9,038 (11,623) (2,585) 1,236 (7,270) (6,034) Other time 2,043 (19,847) (17,804) (4,265) (37,300) (41,565) Short-term borrowings 4,767 (5,835) (1,068) 2,091 (6,239) (4,148) Long-term debt 9,242 (3,220) 6,022 3,822 (1,299) 2,523 ------- -------- -------- ------- -------- -------- 29,132 (44,967) (15,835) 8,629 (63,258) (54,629) ------- -------- -------- ------- -------- -------- NET CHANGE $34,404 $(22,995) $ 11,409 $30,324 $ (131) $ 30,193 ------- -------- -------- ------- -------- --------
The amount of change not solely due to rate or volume changes was allocated between the change due to rate and the change due to volume based on the net size of the rate and volume changes. CRITICAL ACCOUNTING POLICIES The Corporation's consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. Application of these principles requires management to make estimates, assumptions and judgements that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions and judgements are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions and judgements. Certain policies inherently have a greater reliance on the use of estimates, assumptions and judgements and as such have a greater possibility of producing results that could be materially different than originally reported. The most significant accounting policies followed by the Corporation are presented in the Notes to Consolidated Financial Statements. These policies, along with the disclosures presented in the Notes to Consolidated Financial Statements, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions and estimates underlying those amounts, management has identified the following accounting areas that require the most subjective or complex judgements, and as such could be most subject to revision as new information becomes available. The allowance for loan losses represents management's estimate of probable credit losses inherent in the loan portfolio. Determining the amount of the allowance for loan losses is considered a critical accounting estimate because it requires significant judgement and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, and consideration of current economic trends and conditions, all of which may be susceptible to significant change. The loan portfolio represents the largest asset type on the consolidated balance sheet. Leases are carried at the aggregate of the lease payments and the estimated residual value of the leased property, less unearned income. Loans are classified as held for sale based on management's intent to sell them. At the date a loan is determined to be sold, the loan is recorded at the lower of cost or market. Any subsequent adjustment as a result of the lower of cost or market analysis is recognized as a valua- F.N.B. CORPORATION 45 F.N.B. CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION tion adjustment with changes included in non-interest income. These market value assumptions include but are not limited to the timing of a sale, the market conditions for the particular credit and overall investor demand for these assets. Changes in market condition, interest rate environment and actual liquidation experience may result in additional valuation adjustments that could adversely impact earnings in future periods. Goodwill arising from business acquisitions represents the value attributable to unidentifiable intangible elements in the business acquired. The majority of the Corporation's goodwill relates to value inherent in its banking and insurance businesses. The value of this goodwill is dependent upon the Corporation's ability to provide quality, cost effective services in the face of competition. As such, goodwill value is supported ultimately by revenue which is driven by the volume of business transacted and the market value of the assets under administration. A decline in earnings as a result of a lack of growth or the Corporation's inability to deliver cost effective services over sustained periods can lead to impairment of goodwill which could result in additional expense and adversely impact earnings in future periods. PROVISION FOR LOAN LOSSES The provision for loan losses increased 27.5% to $24.3 million in 2003. This increase is consistent with the Corporation's continued strong loan growth. (See the "Non-Performing Loans" and "Allowance for Loan Losses" sections of this report). NON-INTEREST INCOME Total non-interest income increased 8.0% from $120.9 million in 2002 to $130.6 million in 2003. Excluding gains on sale of securities, non-interest income increased by 7.8%. Service charges increased $5.3 million or 11.3%, while wealth management services increased $1.9 million or 12.0% to $17.9 million during 2003. In addition, insurance premiums, commissions and fees increased $1.2 million or 3.4% to $35.3 million in 2003. These higher levels of fee income are attributable to the SEB acquisition, the Corporation's success in generating core deposit fees and a continued focus on providing a wide array of wealth management services, such as annuities, mutual funds and trust services. NON-INTEREST EXPENSE Total non-interest expense increased from $289.4 million in 2002 to $315.3 million in 2003. During 2003, the Corporation recorded restructuring charges related to the spin-off of its Florida operations totaling $49.7 million. These were primarily a prepayment penalty in connection with the early retirement of higher cost FHLB borrowings, involuntary separation costs associated with terminated employees, other employment related expenses, professional fees and data processing charges. In addition, the Corporation recorded merger costs associated with the SEB acquisition of $1.2 million. These expenses were primarily involuntary separation costs associated with terminated employees, other employment related expenses, professional fees and data processing conversion charges. Salary and employee benefits increased 21.4% to $164.1 million in 2003. This increase includes restructuring charges of $17.3 million. This increase was also driven by the acquisition of SEB and higher costs associated with employee medical insurance. Other non-interest expense includes $32.4 million associated with restructuring charges related to the spin-off of the Corporation's Florida operations and a prepayment penalty incurred in connection with the early retirement of higher cost FHLB borrowings. INCOME TAXES The Corporation's income tax expense was $25.6 million for 2003 compared to $30.1 million for 2002. The 2003 effective tax rate of 30.3% was lower than the 35.0% federal statutory tax rate due to the tax benefits resulting from tax-exempt instruments and excludable dividend income. Additional information relating to income taxes is furnished in the Notes to Consolidated Financial Statements. F.N.B. CORPORATION 46 F.N.B. CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION The following table provides unaudited pro forma information for the quarterly periods of 2003 (dollars in thousands, except per share data):
PRO FORMA QUARTER ENDED 2003 (UNAUDITED) MAR. 31 JUNE 30 SEPT. 30 DEC. 31 - ---------------------------------------- ------- ------- -------- ------- Interest income (FTE) $ 67,676 $ 66,199 $ 63,883 $ 63,411 Interest expense 21,291 22,970 21,766 20,543 Net interest income (FTE) 46,385 43,229 42,117 42,868 Provision for loan losses 4,127 3,903 4,285 4,840 Gain on sales of securities 2,420 772 733 62 Total non-interest income 18,970 17,837 17,591 15,795 Total non-interest expense 37,289 36,311 37,101 35,109 Net income 16,270 14,410 12,538 12,576 - --------------------- -------- -------- -------- -------- PER COMMON SHARE Earnings Basic $ .36 $ .31 $ .27 $ .27 Diluted .34 .31 .27 .27 - --------------------- -------- -------- -------- --------
DISCUSSION OF 2003 UNAUDITED QUARTERLY PRO FORMA FINANCIAL INFORMATION In the fourth quarter, the Corporation had net income of $12.6 million, or $0.27 per diluted share, compared to $12.5 million, or $0.27 per diluted share for the third quarter. Return on average equity for the fourth quarter was 21.73%. For the year, net income was $55.8 million, or $1.19 per diluted share, resulting in a return on average equity of 20.10%. Net interest income on a tax equivalent basis was $42.9 million in the fourth quarter, compared to $42.1 million in the third quarter. This represents an increase of 1.8%, driven by a widening net interest margin of 4.05% in the fourth quarter, up from 3.99% in the third quarter. The improved net interest margin can be attributed to a lower cost of deposits, as well as the third quarter restructuring of FHLB borrowings which reduced the cost of funds. For the year, net interest income on a tax equivalent basis was $174.6 million with a net interest margin of 4.21%. Non-interest income was $15.8 million in the fourth quarter, compared to $17.6 million in the third quarter. The decrease is attributable to lower gains on sales of mortgages and securities, combined with a seasonal decrease in retail investment sales and insurance commissions. Non-interest income for the year was $70.2 million, and represents 28.9% of total revenue. Total non-interest expense was $35.1 million in the fourth quarter, compared to $37.1 million in the third quarter. This represents a decline of 5.4% on a linked quarter basis. In addition to realizing the previously announced cost savings, the decrease reflects the reversal of certain performance compensation accruals at year end. The efficiency ratio improved to 58.92% in the fourth quarter from 61.23% in the third quarter. For the year, total non-interest expenses were $145.8 million with an efficiency ratio of 58.68%. Credit quality remained solid during the fourth quarter. As of December 31, 2003, the allowance for loan losses was 1.41% of total loans, compared to 1.42% in the third quarter. Non-performing assets were 0.69% of total assets in the fourth quarter, compared to 0.70% in the third quarter. Annualized net charge-offs in the fourth quarter represented 0.59% of average loans, compared to 0.55% in the third quarter. The provision for loan losses was $4.8 million for the fourth quarter and equaled net charge-offs. Shareholders' equity was $241.8 million at December 31, 2003, with a leverage capital ratio of 6.0% and a tangible capital ratio of 4.5%. Outstanding common shares totaled 46.3 million at year end. As of December 31, 2003, book value per common share was $5.22, while tangible book value per common share was $4.37. F.N.B. CORPORATION 47 F.N.B. CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION LIQUIDITY AND INTEREST RATE SENSITIVITY The Corporation's goal in liquidity management is to meet the cash flow requirements of depositors and borrowers, as well as the operating cash needs of the Corporation, with cost-effective funding. Liquidity is centrally managed on a daily basis by treasury personnel. In addition, the Corporate Asset/Liability Committee (ALCO), which includes members of executive management, reviews liquidity on a periodic basis and approves significant changes in strategies which affect balance sheet or cash flow positions. The Board of Directors has established an Asset/Liability Policy in order to achieve and maintain earnings performance consistent with long-term goals while maintaining acceptable levels of interest rate risk, a "well-capitalized" balance sheet and adequate levels of liquidity. This policy designates the ALCO as the body responsible for meeting this objective. Liquidity sources from assets include payments from loans and investments as well as the ability to securitize or sell loans and investment securities. Liquidity sources from liabilities are generated through growth in core deposits and, to a lesser extent, the use of wholesale sources which include federal funds purchased, repurchase agreements and public deposits. In addition, the banking affiliates have the ability to borrow from the FHLB. The FHLB advances are a competitively priced and reliable source of funds. The Corporation has made limited use of FHLB advances and has a large reserve available for contingency funding purposes. As of December 31, 2003, outstanding advances were $663.1 million, or 8.0% of total assets while FHLB availability was $2.0 billion, or 24.5% of total assets. Core deposits grew $672.4 million during 2003 providing the primary source of financing for the Corporation's lending activities, including origination of mortgage loans held for sale in the secondary market. The Corporation continued to expand its activities in originating mortgage loans for resale in the secondary market rather than keeping these loans in the portfolio. Mortgage loan origination volumes increased due to the decline in mortgage rates during 2003. Originations of mortgage loans totaled $447.9 million for 2003 as compared to $74.4 million for 2002. The proceeds from the sale of mortgage loans were used to fund the growth in mortgage loan origination. The Corporation has repurchased shares of its common stock for re-issuance under various employee benefit plans and the Corporation's dividend reinvestment plan since 1991. In addition, the Corporation has repurchased shares for specific re-issuance in connection with certain business combinations accounted for as purchase transactions. During 2003, the Corporation purchased treasury shares totaling $33.9 million and received $33.4 million upon re-issuance. In 2002 and 2001, the Corporation purchased treasury shares totaling $30.3 million and $12.1 million, respectively, and received $23.2 million and $12.6 million, respectively, as a result of re-issuance. During 2003, the Corporation completed its business combination with SEB. The $150.2 million cash transaction was funded through the issuance of $125.0 million of trust preferred securities and $25.2 million from the Corporation's existing lines of credit with several major domestic banks. The principal source of cash for the parent company is dividends from its subsidiaries. The parent also has approved lines of credit with several major domestic banks, which were unused as of December 31, 2003. The Corporation also issues subordinated debt on a regular basis and has access to the Federal Reserve Bank as well as access to the capital markets. The ALCO regularly monitors various liquidity ratios and forecasts of cash position. Management believes the Corporation has sufficient liquidity available to meet its normal operating and contingency funding cash needs. The financial performance of the Corporation is at risk from interest rate fluctuations. This interest rate risk arises due to differences between the amount of interest earning assets and interest bearing liabilities subject to repricing over a period of time, the difference between the change in various interest rates and the embedded options in certain financial instruments. The Corporation utilizes an asset/liability model to support its balance sheet strategies. The Corporation uses gap analysis, net interest income simulations and the economic value of equity to measure its interest rate risk. The following gap analysis measures the interest rate risk of the Corporation by comparing the difference between the amount of interest earning assets and interest bearing liabilities subject to repricing over a period of time. The ratio of rate sensitive assets to rate sensitive liabilities maturing over a one year period was 1.10 at December 31, 2003, as compared to 1.21 at December 31, 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. F.N.B. CORPORATION 48 F.N.B CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION Following is the gap analysis as of December 31, 2003 (dollars in thousands):
WITHIN 4-12 1-5 OVER 3 MONTHS MONTHS YEARS 5 YEARS TOTAL ------------- ----------- ----------- ------------- ------------ INTEREST EARNING ASSETS Interest bearing deposits with banks $ 6,179 $ 100 $ 6,279 Federal funds sold 867 867 Securities 82,016 254,396 $ 923,070 $ 418,549 1,678,031 Loans, net of unearned income 1,924,271 1,126,369 2,286,878 387,649 5,725,167 ------------- ----------- ----------- ------------- ------------ 2,013,333 1,380,865 3,209,948 806,198 7,410,344 Other assets 897,966 897,966 ------------- ----------- ----------- ------------- ------------ $ 2,013,333 $ 1,380,865 $ 3,209,948 $ 1,704,164 $ 8,308,310 ============= =========== =========== ============= ============ INTEREST BEARING LIABILITIES Deposits: Interest checking $ 498,119 $ 774,957 $ 1,273,076 Savings 509,629 1,081,245 1,590,874 Time deposits 476,497 $ 864,615 $ 902,834 6,971 2,250,917 Borrowings 651,166 87,591 430,559 273,509 1,442,825 ------------- ----------- ----------- ------------- ------------ 2,135,411 952,206 1,333,393 2,136,682 6,557,692 Other liabilities 1,143,709 1,143,709 Stockholders' equity 606,909 606,909 ------------- ----------- ----------- ------------- ------------ $ 2,135,411 $ 952,206 $ 1,333,393 $ 3,887,300 $ 8,308,310 ============= =========== =========== ============= ============ PERIOD GAP $ (122,078) $ 428,659 $ 1,876,555 $ (2,183,136) ============= =========== =========== ============= CUMULATIVE GAP $ (122,078) $ 306,581 $ 2,183,136 ============= =========== =========== CUMULATIVE GAP AS A PERCENT OF TOTAL ASSETS (1.47)% 3.69% 26.28% ============= =========== =========== RATE SENSITIVE ASSETS/ RATE SENSITIVE LIABILITIES (CUMULATIVE) .94 1.10 1.49 1.13% ============= =========== =========== =============
Net interest income simulations measure the exposure to short-term earnings from changes in market rates of interest. The Corporation's current financial position is combined with assumptions regarding future business to calculate net interest income under varying hypothetical rate scenarios. The economic value of equity (EVE) measures the Corporation's long-term earnings exposure from changes in market rates of interest. EVE is defined as the present value of assets minus the 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 current balance sheet assuming that the rate change remains in effect over the life of the current balance sheet. The following table presents an analysis of the potential sensitivity of the Corporation's annual net interest income and EVE to sudden and sustained changes in market rates:
PRO FORMA December 31 2003 2003 2002 ---- ---- ---- Net interest income change (12 months): - 100 basis points . . . . (3.4)% (5.0)% (2.4)% + 200 basis points . . . . (2.3)% 0.6 % 3.3 % Economic value of equity: - 100 basis points . . . . (12.7)% (15.4)% (7.9)% + 200 basis points . . . . (6.4)% (5.6)% 7.5 %
The above measures reveal the challenges created by the continued decrease in interest rates during 2003. Should rates decline by an additional large amount, the net interest margin would compress due to a limited ability to lower certain deposit rates. Such a rate change might also spur additional loan refinancing and mortgage-backed security prepayments at those lower rates. At this point in the rate F.N.B. CORPORATION 49 F.N.B CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION cycle, the ALCO does not feel substantially lower rates are probable. As discussed under the "Net Interest Income" section, the lower interest rates during 2003 resulted in the refinancing of certain loans and the prepayment of certain securities. The replacement of those instruments has effectively lengthened the duration of assets somewhat. In addition, there has been a significant movement of deposit balances from time deposits to non-maturity deposits. This movement reflects depositors' preference for liquidity during periods of low interest rates. These combined balance sheet changes have made substantially higher interest rates less beneficial to net interest income. 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. While these measures are within the limits set forth in the Corporation's Asset/Liability Policy, the ALCO is evaluating strategies to position itself better for an environment with substantially higher interest rates. 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. Changes in the interest rate environment can cause significant fluctuations in the market value of mortgage loans originated for resale in the secondary market. The Corporation began utilizing forward loan commitments on mortgage loans in 2002 to offset the risk of decreases in the market values of the loans as a result of increases in interest rates. At December 31, 2003, the Corporation had $5.2 million in forward sales agreements. CONTRACTUAL OBLIGATIONS, COMMITMENTS AND OFF-BALANCE SHEET ARRANGEMENTS The following table sets forth contractual obligations of the Corporation, which represent required and potential cash outflows as of December 31, 2003 (in thousands):
WITHIN ONE TO THREE TO AFTER ONE YEAR THREE YEARS FIVE YEARS FIVE YEARS TOTAL -------------- --------------- ------------ ------------ -------------- Operating leases $ 3,522 $ 5,265 $ 3,416 $ 22,014 $ 34,217 Long-term debt 42,248 255,851 184,683 373,026 855,808 -------------- --------------- ------------ ------------ -------------- Total contractual obligations $ 45,770 $ 261,116 $ 188,099 $ 395,040 $ 890,025 ============== =============== ============ ============ ==============
The following table sets forth the amounts and expected maturities of commitments to extend credit and other off-balance sheet items as of December 31, 2003 (in thousands):
WITHIN ONE TO THREE TO AFTER ONE YEAR THREE YEARS FIVE YEARS FIVE YEARS TOTAL -------------- --------------- ------------ ------------ -------------- Commitments to extend credit $ 1,028,940 $ 197,313 $ 11,733 $ 71,855 $ 1,309,841 Standby letters of credit 53,059 15,068 12,406 2,810 83,343 Commitments to sell mortgage loans 5,166 5,166 -------------- --------------- ------------ ------------ -------------- $ 1,087,165 $ 212,381 $ 24,139 $ 74,665 $ 1,398,350 ============== =============== ============ ============ ==============
Commitments to extend credit and standby letters of credit do not necessarily represent future cash requirements in that the borrower has the ability to draw upon these commitments at any time and these commitments often expire without being drawn upon. F.N.B. CORPORATION 50 F.N.B CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 2002 Net income increased 19.5% to $63.3 million in 2002. Diluted earnings per share were $1.35 and $1.17 for 2002 and 2001, respectively. Diluted earnings for those same periods were reduced $0.65 and $0.12 per share, respectively, due to pre-tax merger expenses of $42.4 million and $8.0 million, respectively. The results for 2002 include merger costs associated with the Promistar Financial Corporation (Promistar) and Central Bank Shares (Central) mergers of $41.4 million and $413,000, respectively. These expenses were primarily involuntary separation costs associated with terminated employees, early retirement and other employee related expenses, professional fees and data processing conversion charges. The Corporation's return on average assets was .93% for 2002 compared to ..84% for 2001, while the Corporation's return on average equity was 10.97% for 2002 and 9.81% for 2001. Net interest income, on a fully taxable equivalent basis, increased by 11.8% to $286.8 million. Net interest income consisted of interest income of $432.4 million and interest expense of $145.7 million in 2002 compared to $456.9 million and $200.3 million for each, respectively, in 2001. The Corporation's net interest margin increased 26 basis points to 4.70% in 2002. Interest income on loans, on a fully taxable equivalent basis, decreased 4.1% to $376.2 million in 2002. This decrease occurred despite favorable loan volumes as average loans increased by $383.7 million. Interest expense on deposits decreased $53.0 million or 31.7% in 2002 while average interest bearing deposits increased $191.9 million. The average balance in interest bearing demand and savings deposits increased $216.8 million and $54.4 million, respectively, while time deposits decreased $79.4 million during 2002. The Corporation continued to successfully generate non-interest bearing deposits as such deposits increased by $136.7 million or 18.4% in 2002. Interest expense on short-term borrowings decreased by $4.1 million and the interest rate paid decreased by 145 basis points in 2002. Interest expense on long-term debt increased $2.5 million in 2002 due to a $75.0 million increase in average long-term debt. The increase in long-term debt was a result of the Corporation's use of low cost FHLB advances to fund the purchase of certain investment securities and mortgage loans. The interest rates on these advances ranged from 2.43% to 3.46%. The provision for loan losses decreased 38.8% to $19.1 million in 2002. This decrease was influenced by the level of net charge-offs and provisions taken by Promistar prior to its acquisition by the Corporation. Total non-interest income increased 20.9% to $120.9 million in 2002. Exclusive of gains on the sale of securities, non-interest income increased by 21.2%. Insurance premiums, commissions and fees increased 8.4% to $34.2 million in 2002. Service charges increased 30.1% during 2002. Income from wealth management services increased $3.2 million or 25.4% to $16.0 million during 2002. The Corporation's insurance commissions from worker's compensation, provided specifically to employee leasing companies, have declined and are not expected to return to historical levels as insurance carriers have discontinued providing coverage to this market segment. During 2002, the Corporation recognized insurance commissions totaling $2.8 million for this line of business. Other non-interest income increased $4.2 million. This included a gain of $1.8 million on the exchange of a portfolio investment resulting from a business combination and income on an additional investment of $57.6 million in Bank Owned Life Insurance. Total non-interest expense increased by $46.6 million to $289.4 million in 2002. During 2002, the Corporation recorded merger costs associated with the Promistar and Central mergers of $41.4 million and $413,000, respectively. These expenses were primarily involuntary separation costs associated with terminated employees, early retirement and other employment related expenses, professional fees and data processing conversion charges. In addition, the Corporation recognized $510,000 in costs relating to the consolidation of Metropolitan National Bank into First National Bank of Pennsylvania. Salary and employee benefits increased 11.7% to $135.2 million in 2002. This was due to increased pension costs and the acquisitions of Central and First National Bank of Herminie, a bank acquired by Promistar in August of 2001. Other non-interest expenses includes a pre-payment penalty of $1.6 million incurred by the Corporation in connection with the early retirement of $15.0 million of high-cost debt with the FHLB. The Corporation's income tax expense was $30.1 million for 2002 compared to $23.0 million for 2001. The 2002 effective tax rate of 32.2% was lower than the 35.0% federal statutory tax rate due to the tax benefits resulting from tax-exempt instruments and excludable dividend income. Additional information relating to income taxes is furnished in the Notes to Consolidated Financial Statements. F.N.B. CORPORATION 51 F.N.B CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION FINANCIAL CONDITION LENDING ACTIVITY The loan portfolio consists principally of loans to individuals and small- and medium-sized businesses within the Corporation's primary market area of southwest Florida, western and central Pennsylvania and northeastern Ohio. Additionally, the portfolio contains consumer finance loans to individuals in Pennsylvania, Ohio and Tennessee. Following is a summary of loans (in thousands):
PRO FORMA December 31 2003 2003 2002 2001 2000 1999 - ----------- ---- ---- ---- ---- ---- ---- Real estate: Residential $ 1,348,399 $ 2,159,116 $ 1,940,073 $ 1,777,403 $ 1,706,462 $ 1,615,137 Commercial 766,967 1,790,458 1,465,903 1,282,944 1,110,833 1,113,281 Construction 40,795 352,061 287,560 227,868 220,754 134,184 Installment loans to individuals 676,630 754,290 882,908 774,932 832,904 779,485 Commercial, financial and agricultural 440,775 661,691 620,489 672,639 610,194 579,724 Lease financing 17,277 23,309 63,901 128,712 204,187 254,252 Unearned income (31,646) (32,346) (40,330) (50,063) (70,554) (76,591) ------------ -------------- ------------ ------------ ------------ ------------- $ 3,259,197 $ 5,708,579 $ 5,220,504 $ 4,814,435 $ 4,614,780 $ 4,399,472 ============ ============== ============ ============ ============ =============
The Corporation continued to experience strong loan growth as total loans excluding unearned income increased $480.0 million or 9.1% to $5.7 billion at December 31, 2003. The loan growth was driven by the Corporation's focus on growing commercial and real estate loans which contributed to a strong growth of $649.3 million or 15.1% as depicted in the real estate and commercial, financial and agricultural categories. Included in this growth was the SEB loan portfolio which totaled $169.7 million at the acquisition date. Installment loans to individuals and lease financing decreased $128.6 million or 14.6% and $40.6 million or 63.5%, respectively, as the Corporation ceased to originate automobile leases in 2000 and continues to deemphasize its presence in the indirect lending business. The Corporation's loan portfolio is well-diversified with a significant portion of the portfolio being made up of loans secured by real estate. Residential, commercial and construction loans secured by real estate accounted for 75.4% of the loan portfolio. Historically, these relationships experienced the fewest loan losses as compared to any other category of loan. As of December 31, 2003 no concentrations of loans exceeding 10% of total loans existed which were not disclosed as a separate category of loans. Following is a summary of the maturity distribution of certain loan categories based on remaining scheduled repayments of principal (in thousands):
WITHIN ONE TO AFTER December 31, 2003 ONE YEAR FIVE YEARS FIVE YEARS TOTAL - ----------------- ----------- ---------- ------------ -------------- Commercial, financial and agricultural $ 65,801 $ 258,583 $ 337,307 $ 661,691 Real estate - construction 224,549 80,857 46,655 352,061 ----------- ---------- ------------ -------------- $ 290,350 $ 339,440 $ 383,962 $ 1,013,752 =========== ========== ============ ==============
The total amount of the above loans due after one year includes $574.3 million with floating or adjustable rates of interest and $149.1 million with fixed rates of interest. NON-PERFORMING LOANS Non-performing loans include non-accrual loans and restructured loans. Non-accrual loans represent loans on which interest accruals have been discontinued. Restructured loans are loans in which the borrower has been granted a concession on the interest rate or the original repayment terms due to financial distress. F.N.B. CORPORATION 52 F.N.B CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION Following is a summary of non-performing loans (dollars in thousands):
PRO FORMA December 31 2003 2003 2002 2001 2000 1999 - ----------- ---- ---- ---- ---- ---- ---- Non-accrual loans $ 22,449 $ 27,970 $ 22,294 $ 21,350 $ 21,478 $ 18,257 Restructured loans 5,719 5,719 5,915 5,578 3,020 3,772 ----------- --------- ----------- --------- --------- ----------- $ 28,168 $ 33,689 $ 28,209 $ 26,928 $ 24,498 $ 22,029 =========== ========= =========== ========= ========= =========== Non-performing loans as a percentage of total loans .86% .59% .54% .56% .53% .50%
Following is a summary of the amounts of contractual interest income and actual interest income recorded on non-accrual and restructured loans (in thousands):
PRO FORMA Year Ended December 31 2003 2003 2002 2001 2000 1999 - ---------------------- ---- ---- ---- ---- ---- ---- Gross interest income: In accordance with their original terms $ 2,894 $ 3,413 $ 3,059 $ 2,294 $ 2,947 $ 2,445 Interest income recorded during the year 1,590 1,855 1,405 1,083 964 908
Following is a summary of loans 90 days or more past due, on which interest accruals continue (dollars in thousands):
PRO FORMA December 31 2003 2003 2002 2001 2000 1999 - ----------- ---- ---- ---- ---- ---- ---- Loans 90 days or more past due $ 5,100 $ 5,263 $ 7,186 $ 5,993 $ 5,383 $ 5,445 As a percentage of total loans .16% .09% .14% .12% .12% .12%
ALLOWANCE FOR LOAN LOSSES The allowance for loan losses consists of an allocated and an unallocated component. Management's analysis of the allocated portion of the allowance for loan losses includes the evaluation of the loan portfolio based upon the Corporation's internal loan grading system, evaluation of portfolio industry concentrations and the historical loss experience of the remaining balances of the various homogeneous loan pools which comprise the loan portfolio. Specific factors used in the internal loan grading system include the previous loan loss experience with the customer, the status of past due interest and principal payments on the loan, the collateral position and residual value of the loan, the quality of financial information supplied by the borrower and the general financial condition of the borrower. The unallocated portion of the allowance is determined based on management's assessment of historical loss on the remaining portfolio segments in conjunction with the current status of economic conditions, loan loss trends, delinquency and non-accrual trends, credit administration, portfolio growth, concentrations of credit risk and other factors, including regulatory guidance. This determination inherently involves a higher degree of uncertainty and considers current risk factors that may not have yet occurred in the Corporation's historical loss factors used to determine the allocated component of the allowance, and it recognizes that knowledge of the portfolio may be incomplete. The Corporation strives to minimize credit losses by utilizing credit approval standards, diversifying its loan portfolio by industry and borrower and conducting ongoing review and management of the loan portfolio. The Corporation has allocated the allowance according to the amount deemed to be reasonably necessary to provide for the possibility of losses being incurred within each of the F.N.B. CORPORATION 53 F.N.B. CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION categories of loans shown in the table below. Management's allocation considers amounts necessary for concentrations and changes in portfolio mix and volume. The allocation of the allowance should not be interpreted as an indication that loan losses in future years will occur in the same proportions or that the allocation indicates future loan loss trends. Following is a summary of the allocation of the allowance for loan losses (dollars in thousands):
% OF % OF % OF % OF % OF LOANS LOANS LOANS LOANS LOANS IN EACH IN EACH IN EACH IN EACH IN EACH CATEGORY CATEGORY CATEGORY CATEGORY CATEGORY TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL Year Ended December 31 2003 LOANS 2002 LOANS 2001 LOANS 2000 LOANS 1999 LOANS - ---------------------- ------- -------- ------- -------- ------- -------- ------- -------- ------- -------- Commercial, financial and agricultural $21,320 12% $14,817 12% $11,018 14% $ 9,437 13% $10,497 13% Real estate - construction 670 6 322 6 316 5 437 5 475 3 Real estate - mortgage 19,047 69 18,113 65 18,559 64 16,953 61 14,195 62 Installment loans to individuals 27,104 13 22,226 16 16,353 15 13,225 18 12,136 18 Lease financing 2,439 3,209 1 5,319 2 1,093 3 847 4 Unallocated portion 3,663 9,719 13,494 15,979 14,701 ------- --- ------- --- ------- --- ------- --- ------- --- $74,243 100% $68,406 100% $65,059 100% $57,124 100% $52,851 100% ======= === ======= === ======= === ======= === ======= ===
Following is a summary of changes in the allowance for loan losses (dollars in thousands):
PRO FORMA Year Ended December 31 2003 2003 2002 2001 2000 1999 ---------------------- --------- -------- -------- -------- -------- -------- Balance at beginning of year $ 46,984 $ 68,406 $ 65,059 $ 57,124 $ 52,851 $ 46,463 Addition due to acquisitions 2,506 1,389 3,400 767 2,813 Charge-offs: Real estate - mortgage (570) (643) (955) (4,649) (2,967) (2,375) Installment loans to individuals (15,770) (17,359) (14,192) (12,685) (10,343) (8,887) Lease financing (1,457) (3,838) (3,934) (3,270) (1,867) (632) Commercial, financial and agricultural (2,447) (2,983) (2,882) (8,886) (2,200) (2,892) -------- -------- -------- -------- -------- -------- (20,244) (24,823) (21,963) (29,490) (17,377) (14,786) -------- -------- -------- -------- -------- -------- Recoveries: Real estate - mortgage 53 54 136 255 882 579 Installment loans to individuals 1,482 1,879 2,055 1,671 1,463 1,470 Lease financing 204 725 704 448 220 80 Commercial, financial and agricultural 505 1,157 1,932 456 336 456 -------- -------- -------- -------- -------- -------- 2,244 3,815 4,827 2,830 2,901 2,585 -------- -------- -------- -------- -------- -------- Net charge-offs (18,000) (21,008) (17,136) (26,660) (14,476) (12,201) Provision for loan losses 17,155 24,339 19,094 31,195 17,982 15,776 -------- -------- -------- -------- -------- -------- Balance at end of year $ 46,139 $ 74,243 $ 68,406 $ 65,059 $ 57,124 $ 52,851 -------- -------- -------- -------- -------- -------- Net charge-offs as a percent of average loans, net of unearned income .55% .38% .34% .57% .32% .30% Allowance for loan losses as a percent of total loans, net of unearned income 1.42 1.30 1.31 1.35 1.24 1.20 Allowance for loan losses as a percent of non-performing loans 163.80 220.38 242.50 241.60 233.18 239.92
F.N.B. CORPORATION 54 F.N.B. CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION The provision for loan losses charged to operations is a direct result of management's analysis of the adequacy of the allowance for loan losses which takes into consideration factors, including qualitative factors, relevant to the collectibility of the existing portfolio. The provision for loan losses increased from $19.1 million in 2002 to $24.3 million in 2003. Charge-offs reflect the realization of losses in the portfolio that were recognized previously through provisions for credit losses. Loans charged off in 2003 increased $2.9 million to $24.8 million. Net charge-offs as a percent of average loans increased to .38% in 2003 as compared to .34% in 2002. Loans charged off in 2002 decreased $7.5 million as compared to 2001. Loans charged off in 2001 increased $12.1 million over 2000. The 2001 provision for loan losses was significantly influenced by the level of net charge-offs taken by Promistar prior to its acquisition by the Corporation. The weak economy in central Pennsylvania, which existed in 2001, and the overall economic climate subsequent to September 11 resulted in deterioration in the credit quality of several significant commercial loans. In addition, Promistar began to experience credit quality deterioration within the indirect consumer auto loan portfolio as loan loss and delinquency trends increased. As a result, Promistar charged-off $14.2 million in loans and recorded a provision for loan losses of $18.3 million during 2001. INVESTMENT ACTIVITY Investment activities serve to enhance overall yield on earning assets while supporting interest rate sensitivity and liquidity positions. Securities purchased with the intent and ability to retain until maturity are categorized as securities held to maturity and carried at amortized cost. All other securities are categorized as securities available for sale and are recorded at fair market value. During 2003, securities available for sale increased by $615.8 million and securities held to maturity decreased by $12.9 million from December 31, 2002. The following table indicates the respective maturities and weighted average yields of securities as of December 31, 2003 (dollars in thousands):
WEIGHTED AMOUNT AVERAGE YIELD ---------- ------------- U.S. Treasury and other U.S. Government agencies and corporations: Maturing within one year $ 25,318 5.72% Maturing after one year within five years 217,462 3.47 Maturing after five years within ten years 20,653 4.18 Maturing after ten years 1,824 3.84 States of the U.S. and political subdivisions: Maturing within one year 6,861 5.98% Maturing after one year within five years 44,276 5.91 Maturing after five years within ten years 68,492 6.02 Maturing after ten years 18,772 6.88 Other debt securities: Maturing within one year 2,775 4.69% Maturing after one year within five years 3,405 5.62 Maturing after five years within ten years 527 6.98 Maturing after ten years 49,243 7.75 Mortgage-backed securities of U.S. Government agencies 1,150,760 4.60% Equity securities 67,663 3.31 ---------- $1,678,031 4.63 ----------
The weighted average yields for tax exempt securities are computed on a tax equivalent basis. F.N.B. CORPORATION 55 F.N.B. CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION DEPOSITS AND SHORT-TERM BORROWINGS As a commercial bank holding company, the Corporation's primary source of funds is its deposits. Those deposits are provided by businesses and individuals located within the markets served by the Corporation's subsidiaries. Total deposits increased 13.5% to $6.2 billion in 2003. This increase was due to a $551.8 million or 23.9% increase in savings and interest checking accounts and a $120.5 million or 13.0% increase in non-interest bearing deposit accounts. Time deposits increased by $61.0 million or 2.8%. Short-term borrowings, made up of repurchase agreements, federal funds purchased, FHLB advances, subordinated notes and other short-term borrowings, increased by $71.2 million in 2003 to $587.0 million. Repurchase agreements are the largest component of short-term borrowings. At December 31, 2003, repurchase agreements represented 56.1% of total short-term borrowings. Following is a summary of selected information on repurchase agreements (dollars in thousands):
December 31 2003 2002 2001 ----------- -------- -------- -------- Balance at end of year $329,495 $274,266 $232,952 Maximum month-end balance 347,848 293,446 233,953 Average balance during the year 315,769 252,004 215,765 Weighted average interest rates: At end of year .57% .92% 1.58% During the year .71% 1.29% 3.09%
CAPITAL RESOURCES The assessment of capital adequacy depends on a number of factors such as asset quality, liquidity, earnings performance, changing competitive conditions and economic forces. The Corporation seeks to maintain a strong capital base to support its growth and expansion activities, to provide stability to current operations and to promote public confidence. The Corporation has an effective $200.0 million shelf registration with the Securities and Exchange Commission. The Corporation may, from time to time, issue any combination of common stock, preferred stock, debt securities or trust preferred securities in one or more offerings up to a total dollar amount of $200.0 million. Capital management is a continuous process. Both the Corporation and its banking affiliates are subject to various regulatory capital requirements administered by the federal banking agencies. (See the "Regulatory Matters" section in the Notes to Consolidated Financial Statements). Stockholders' equity has increased through earnings retention by $15.9 million, $25.8 million and $20.7 million in 2003, 2002 and 2001, respectively. Book value per share was $13.10 at December 31, 2003 compared to $12.93 at December 31, 2002. The Corporation issues shares, which were initially acquired through the acquisition of treasury shares, in connection with its various benefit plans. F.N.B. CORPORATION 56 F.N.B. CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION The following table summarizes capital ratios as of December 31, 2003 for the Corporation on both a historical and pro forma basis (dollars in thousands):
WELL CAPITALIZED MINIMUM CAPITAL ACTUAL REQUIREMENTS REQUIREMENTS ------------------- ------------------- ------------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO -------- -------- -------- -------- -------- -------- TOTAL CAPITAL (TO RISK-WEIGHTED ASSETS): Historical $640,697 10.9% $587,226 10.0% $469,781 8.0% Pro forma 373,270 11.5 324,588 10.0 259,670 8.0 TIER 1 CAPITAL (TO RISK-WEIGHTED ASSETS): Historical $537,916 9.2% $352,336 6.0% $234,891 4.0% Pro forma 272,763 8.4 194,753 6.0 129,835 4.0 TIER 1 CAPITAL (TO AVERAGE ASSETS): Historical $537,916 6.7% $401,246 5.0% $320,997 4.0% Pro forma 272,763 6.0 226,494 5.0 181,195 4.0
As of December 31, 2003, the Corporation's pro forma total capital to risk-weighted assets, tier 1 capital to risk-weighted assets and tier 1 capital to average assets were 11.5%, 8.4% and 6.0%, respectively. These ratios are above the well capitalized and minimum capital requirements noted in the above table. F.N.B. CORPORATION 57 F.N.B. CORPORATION AND SUBSIDIARIES MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS INFORMATION AS TO STOCK PRICES AND DIVIDENDS Effective December 17, 2003, the Corporation's common stock trades on the New York Stock Exchange (NYSE) under the symbol "FNB." Prior to that date, the Corporation's common stock traded on the Nasdaq Stock Market (Nasdaq) under the symbol "FBAN." The accompanying table shows the range of the high and low bid prices per share of the common stock as reported by the NYSE and Nasdaq. Also included in the table are dividends per share paid on the outstanding common stock. Stock prices and dividend figures have been adjusted to reflect the 5% stock dividends declared on April 28, 2003 and May 6, 2002. As of February 13, 2004, there were 11,208 holders of record of common stock.
Quarter Ended 2003 LOW HIGH DIVIDENDS -------- -------- --------- March 31 $ 25.52 $ 27.62 $ .21 June 30 27.20 31.04 .24 September 30 29.35 35.08 .24 December 31 31.68 35.48 .24
Quarter Ended 2002 LOW HIGH DIVIDENDS -------- -------- --------- March 31 $ 23.31 $ 27.49 $ .18 June 30 24.89 29.65 .21 September 30 23.53 27.76 .21 December 31 24.64 26.35 .21
F.N.B. CORPORATION 58 CORPORATE HEADQUARTERS F.N.B. Corporation One F.N.B. Boulevard Hermitage, Pennsylvania 16148 Telephone: (724)981-6000 Web Site: www.fnbcorporation.com ANNUAL MEETING The Annual Meeting of Shareholders will be held on Wednesday, May 12, 2004, at 4 p.m. at the Howard Miller Student Center, Thiel College, in Greenville, PA. INTERNET INFORMATION Information on F.N.B. Corporation's financial results, acquisitions, and its products and services is available on the Internet at www.fnbcorporation.com FINANCIAL INFORMATION The Annual Report on Form 10-K is filed with the Securities and Exchange Commission (SEC). Copies of this document and other filings, including exhibits thereto, may be obtained electronically at the SEC's home page at www.sec.gov or at F.N.B.'s home page at www.fnbcorporation.com QUARTERLY REPORTS Quarterly earnings release dates for 2004 are January 22, April 21, July 21 and October 20. Results are released to the press and then posted on F.N.B. Corporation's Web Site. Quarterly reports also are mailed to shareholders on request. Shareholders may request reports at any time. DIVIDEND PAYMENT DATES F.N.B. Corporation pays regular quarterly cash dividends in March, June, September and December. ANNUAL REPORT To order additional copies of the 2003 Annual Report, please contact the F.N.B. Corporation Marketing Department at One F.N.B. Boulevard, Hermitage, PA 16148. Telephone: (724)983-3430 Fax: (724)983-3309 COMMON STOCK INFORMATION AT DECEMBER 31, 2003 Shares issued 46,354,673 Shares outstanding 46,313,909 Treasury shares 40,764 Number of shareholders of record 11,290 Closing market price per share $ 35.45 Book value per share $ 13.10 Stock exchange NYSE Stock symbol FNB
DIVIDEND REINVESTMENT PLAN F.N.B. Corporation offers a Dividend Reinvestment Plan that allows shareholders to reinvest their dividends in additional company common stock at the prevailing market price. A prospectus and an enrollment form may be obtained upon request by visiting our Web Site at www.fnbcorporation.com , by phoning Shareholder Services at (888)441-4362, or by writing to Shareholder Services, P.O. Box 11929, Naples, FL 34101-1929. BOARD OF DIRECTORS William B. Campbell Henry M. Ekker Robert B. Goldstein Stephen J. Gurgovits Peter Mortensen Harry F. Radcliffe John W. Rose William J. Strimbu Earl K. Wahl, Jr. Archie O. Wallace R. Benjamin Wiley CORPORATE OFFICERS Stephen J. Gurgovits, President and CEO Brian F. Lilly, Chief Financial Officer Gale E. Wurster, Vice President David B. Mogle, Secretary and Treasurer Tito L. Lima, Controller James G. Orie, Chief Legal Officer PRINCIPAL SUBSIDIARIES First National Bank of Pennsylvania First National Trust Company First National Investment Services Company F.N.B. Investment Advisors, Inc. First National Insurance Agency, Inc. Regency Finance Company [F.N.B. CORPORATION LOGO] F.N.B. Corporation F.N.B. Corporation One F.N.B. Boulevard Hermitage, PA 16148 www.fnbcorporation.com EX-21 3 j0499301exv21.txt EXHIBIT 21 . . . Exhibit 21 LIST OF SUBSIDIARIES Following lists the significant subsidiaries of the registrant and the state or jurisdiction of incorporation of each:
NAME INCORPORATED 1) First National Bank of Pennsylvania United States 2) First National Bank of Florida United States 3) Regency Finance Company Pennsylvania 4) First National Insurance Agency, Inc. Pennsylvania 5) First National Trust Company United States 6) First National Wealth Management Company United States 7) Roger Bouchard Insurance, Inc. Florida
Regency Finance Company also conducts business under the names F.N.B. Consumer Discount Company, Citizens Financial Services, Inc. and Finance and Mortgage Acceptance Corporation First National Insurance Agency, Inc. also conducts business under the name Gelvin, Jackson & Starr, Inc. EX-23.1 4 j0499301exv23w1.txt EXHIBIT 23.1 Exhibit 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference of our report dated February 24, 2004, with respect to the consolidated financial statements of F.N.B. Corporation and subsidiaries included in this Annual Report (Form 10-K) for the year ended December 31, 2003 in the following Registration Statements and in the related Prospectuses: 1. Registration Statement on Form S-8 relating to F.N.B. Corporation 1990 Stock Option Plan (File #33-78114). 2. Registration Statement on Form S-8 relating to F.N.B. Corporation Restricted Stock Bonus Plan (File #33-78134). 3. Registration Statement on Form S-8 relating to F.N.B. Corporation 1996 Stock Option Plan (File #333-03489). 4. Registration Statement on Form S-8 relating to F.N.B. Corporation Restricted Stock and Incentive Bonus Plan (File #333-03493). 5. Registration Statement on Form S-8 relating to F.N.B. Corporation Directors Compensation Plan (File #333-03495). 6. Registration Statement on Form S-8 relating to F.N.B. Corporation 401(k) Plan (File #333-38372). 7. Post-Effective Amendment No. 1 on Form S-8 to Registration Statement on Form S-4 (File #333-01997). 8. Post-Effective Amendment No. 1 on Form S-8 to Registration Statement on Form S-4 (File #333-22909). 9. Registration Statement on Form S-3 relating to F.N.B. Corporation Subordinated Notes and Daily Cash Accounts (File #333-74737). 10. Registration Statement on Form S-8 relating to stock options assumed in the acquisition of Mercantile Bank of Southwest Florida (File #333-42333). 11. Post-Effective Amendment No. 1 on Form S-8 to Registration Statement on Form S-4 (File #333-58727). 12. Registration Statement on Form S-3 relating to stock warrants assumed in the acquisitions of Southwest Banks, Inc. and West Coast Bancorp, Inc. (File #333-31124). 13. Post Effective Amendment No. 1 to Form S-3 relating to the F.N.B. Corporation Dividend Reinvestment and Direct Stock Purchase Plan (File #333-38374). 14. Amendment No. 1 to Form S-3 relating to the registration of F.N.B. Corporation Subordinated Term Notes and Daily Notes (File #333-38370). 15. Registration Statement on Form S-8 relating to the F.N.B. Corporation Salary Savings Plan (File #333-40648). 16. Registration Statement on Form S-8 relating to the F.N.B. Corporation 1998 Directors Stock Option Plan (File #333-38376). 17. Registration Statement on Form S-8 relating to the F.N.B. Corporation 2001 Incentive Plan (File #333-63042). 18. Registration Statement on Form S-3 relating to the registration of F.N.B. Corporation and FNB Capital Trust I common stock, preferred stock, debt securities, warrants, and trust preferred securities (File #333-74866). 19. Registration Statement on Form S-8 relating to the F.N.B. Corporation 1996 Incentive Plan (File #333-83760). 20. Registration Statement on Form S-8 relating to stock option agreements granted under the Promistar Financial Corporation 1998 Equity Incentive Plan and assumed by F.N.B. Corporation (File #333-83756). 21. Registration Statement on Form S-8 relating to the F.N.B. Corporation 401(k) Plan (File #333-97113). 22. Registration Statement on Form S-8 relating to the Roger Bouchard Insurance, Inc. 401(k) Plan (File #333-97115). 23. Pre-Effective Amendment No. 1 to the Registration Statement filed on Form S-3 related to the Dividend Reinvestment and Stock Purchase Plan (File #333-111833). 24. Post-Effective Amendment No. 1 to the Registration Statement filed on Form S-3 related to the issuance of Subordinated Term Notes (File #333-103902). /s/ Ernst & Young LLP --------------------- Ernst & Young LLP Birmingham, Alabama March 11, 2004 EX-31.1 5 j0499301exv31w1.txt EXHIBIT 31.1 EXHIBIT 31.1 CERTIFICATION I, Stephen J. Gurgovits, President of F.N.B. Corporation, certify that: 1. I have reviewed this annual report on Form 10-K for the year ended December 31, 2003 of F.N.B. Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report. 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: 3/10/04 /s/ Stephen J. Gurgovits ---------------------------- CEO EX-31.2 6 j0499301exv31w2.txt EXHIBIT 31.2 EXHIBIT 31.2 CERTIFICATION I, Brian F. Lilly, Chief Financial Officer of F.N.B. Corporation, certify that: 1. I have reviewed this annual report on Form 10-K for the year ended December 31, 2003 of F.N.B. Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report. 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: 3/10/04 /s/ Brian F. Lilly ---------------------------- Chief Financial Officer EX-32.1 7 j0499301exv32w1.txt EXHIBIT 32.1 EXHIBIT 32.1 Statement of Chief Executive Officer Pursuant to Section 1350 of Title 18 of the United States Code Pursuant to Section 1350 of Title 18 of the United States Code, I, Stephen J. Gurgovits, the President and Chief Executive Officer of F.N.B. Corporation (the "Company"), hereby certify that, to the best of my knowledge: 1. The Company's Form 10-K Annual Report for the period ended December 31, 2003 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: March 10, 2004 /s/ Stephen J. Gurgovits --------------------------------- President and Chief Executive Officer EX-32.2 8 j0499301exv32w2.txt EXHIBIT 32.2 EXHIBIT 32.2 Statement of Chief Financial Officer Pursuant to Section 1350 of Title 18 of the United States Code Pursuant to Section 1350 of Title 18 of the United States Code, I, Brian F. Lilly, Chief Financial Officer of F.N.B. Corporation (the "Company"), hereby certify that, to the best of my knowledge: 1. The Company's Form 10-K Annual Report for the period ended December 31, 2003 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: March 10, 2004 /s/ Brian F. Lilly, ----------------------------- Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----