UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2002 ------------------------------------------------ OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ----------------------- --------------------- Commission file number 0-8144 ------ F.N.B. CORPORATION - ------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Florida 25-1255406 - ----------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 2150 Goodlette Road North, Naples, FL 34102 - ------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (800) 262-7600 - ------------------------------------------------------------------------------- (Registrant's telephone number, including area code) - ------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes No --- ---- APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at April 30, 2002 ----- ----------------------------- Common Stock, $0.01 Par Value 41,772,836 Shares - ----------------------------- -----------------
F.N.B. CORPORATION FORM 10-Q March 31, 2002 INDEX PART I - FINANCIAL INFORMATION PAGE Item 1. Financial Statements Consolidated Balance Sheets 2 Consolidated Statements of Operations 3 Consolidated Statements of Cash Flows 4 Notes to Consolidated Financial Statements 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 3. Quantitative and Qualitative Disclosure of Market Risk 19 PART II - OTHER INFORMATION Item 1. Legal Proceedings 20 Item 2. Changes in Securities 20 Item 3. Defaults Upon Senior Securities 20 Item 4. Submission of Matters to a Vote of Security Holders 20 Item 5. Other Information 20 Item 6. Exhibits and Reports on Form 8-K 21 Signatures 22 1
F.N.B. CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS Dollars in thousands, except par values Unaudited MARCH 31, DECEMBER 31, 2002 2001 ------------ ------------ ASSETS Cash and due from banks $ 184,331 $ 246,781 Interest bearing deposits with banks 8,792 3,712 Federal funds sold 192,107 88,260 Mortgage loans held for sale 2,873 1,323 Securities available for sale 874,058 902,970 Securities held to maturity (fair value of $52,384 and $51,770) 52,514 51,368 Loans, net of unearned income of $46,630 and $50,063 4,915,438 4,814,435 Allowance for loan losses (66,281) (65,059) ---------- ---------- NET LOANS 4,849,157 4,749,376 ---------- ---------- Premises and equipment 154,154 149,518 Other assets 413,515 295,240 ---------- ---------- TOTAL ASSETS $6,731,501 $6,488,548 ========== ========== LIABILITIES Deposits: Non-interest bearing $ 901,175 $ 798,960 Interest bearing 4,416,589 4,300,116 ---------- ---------- TOTAL DEPOSITS 5,317,764 5,099,076 Other liabilities 100,592 99,193 Short-term borrowings 421,925 375,754 Long-term debt 342,581 342,424 ---------- ---------- TOTAL LIABILITIES 6,182,862 5,916,447 ---------- ---------- STOCKHOLDERS' EQUITY Preferred stock - $0.01 par value Authorized - 20,000,000 shares Issued - 142,203 and 147,033 shares Aggregate liquidation value - $3,555 and $3,676 1 1 Common stock - $0.01 par value Authorized - 500,000,000 shares Issued - 41,807,630 and 41,781,837 shares 418 418 Additional paid-in capital 444,685 444,549 Retained earnings 100,440 118,950 Accumulated other comprehensive income 5,791 9,845 Treasury stock - 94,488 and 63,178 shares at cost (2,696) (1,662) ---------- ---------- TOTAL STOCKHOLDERS' EQUITY 548,639 572,101 ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $6,731,501 $6,488,548 ========== ========== See accompanying Notes to Consolidated Financial Statements 2
F.N.B. CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Dollars in thousands, except per share data Unaudited THREE MONTHS ENDED MARCH 31, ----------------------- 2002 2001 -------- -------- INTEREST INCOME Loans, including fees $ 92,619 $ 98,688 Securities: Taxable 9,978 11,139 Nontaxable 2,046 1,674 Dividends 598 999 Other 802 1,914 -------- -------- TOTAL INTEREST INCOME 106,043 114,414 -------- -------- INTEREST EXPENSE Deposits 31,103 46,886 Short-term borrowings 2,529 4,761 Long-term debt 4,906 3,991 -------- -------- TOTAL INTEREST EXPENSE 38,538 55,638 -------- -------- NET INTEREST INCOME 67,505 58,776 Provision for loan losses 4,191 4,441 -------- -------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 63,314 54,335 -------- -------- NON-INTEREST INCOME Insurance commissions and fees 10,923 8,575 Service charges 10,622 8,283 Trust 2,397 2,284 Gain on sale of securities 175 1,109 Gain on sale of loans 1,006 1,258 Other 2,821 1,978 -------- -------- TOTAL NON-INTEREST INCOME 27,944 23,487 -------- -------- 91,258 77,822 -------- -------- NON-INTEREST EXPENSES Salaries and employee benefits 33,142 29,066 Net occupancy 4,394 4,127 Equipment 5,011 4,728 Merger and consolidation related 41,855 3,531 Other 17,828 20,549 -------- -------- TOTAL NON-INTEREST EXPENSES 102,230 62,001 -------- -------- (LOSS) INCOME BEFORE INCOME TAXES (BENEFIT) (10,972) 15,821 Income taxes (benefit) (2,089) 4,590 -------- -------- NET (LOSS) INCOME $ (8,883) $ 11,231 ======== ======== NET (LOSS) INCOME PER COMMON SHARE: * Basic $(.20) $.27 ===== ==== Diluted $(.20) $.27 ===== ==== CASH DIVIDENDS PER COMMON SHARE * $.19 $.16 ==== ==== * Restated to reflect a 5 percent stock dividend declared on May 6, 2002. See accompanying Notes to Consolidated Financial Statements 3
F.N.B. CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Dollars in thousands Unaudited THREE MONTHS ENDED MARCH 31, ------------------------- 2002 2001 --------- --------- OPERATING ACTIVITIES Net (loss) income $ (8,883) $ 11,231 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 5,450 4,735 Provision for loan losses 4,191 4,441 Deferred taxes (7,491) (1,728) Net gain on sale of securities (175) (1,109) Net gain on sale of loans (1,006) (1,258) Proceeds from sale of loans 8,747 Loans originated for sale (544) (12,319) Net change in: Interest receivable (1,140) 2,613 Interest payable (685) 1,827 Other, net 9,205 5,449 --------- --------- Net cash flows from operating activities (1,078) 22,629 --------- --------- INVESTING ACTIVITIES Net change in: Interest bearing deposits with banks (5,080) (2,410) Federal funds sold (103,847) (158,255) Loans (104,204) 13,786 Securities available for sale: Purchases (180,412) (198,909) Sales 125,695 110,043 Maturities 77,078 95,981 Securities held to maturity: Purchases (3,693) Maturities 2,546 27,439 Increase in premises and equipment (8,848) (2,904) Increase in intangibles (49,098) (2,411) Net cash paid for mergers and acquisitions (66,000) (2,495) --------- --------- Net cash flows from investing activities (315,863) (120,135) --------- --------- FINANCING ACTIVITIES Net change in: Non-interest bearing deposits, savings and NOW 178,375 28,520 Time deposits 40,313 79,495 Short-term borrowings 46,171 3,671 Increase in long-term debt 1,903 2,908 Decrease in long-term debt (1,746) (6,320) Net issuance/acquisition of treasury stock (2,126) 888 Cash dividends paid (8,399) (7,301) --------- --------- Net cash flows from financing activities 254,491 101,861 --------- --------- NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS (62,450) 4,355 Cash and due from banks at beginning of period 246,781 207,940 --------- --------- CASH AND DUE FROM BANKS AT END OF PERIOD $ 184,331 $ 212,295 ========= ========= See accompanying Notes to Consolidated Financial Statements 4
F.N.B. CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) March 31, 2002 BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements give retroactive effect to the merger of Promistar Financial Corporation with and into F.N.B. Corporation (the Corporation). The transaction was consummated on January 18, 2002, and has been accounted for as a pooling-of-interests. The accompanying unaudited financial statements are presented as if the merger had been consummated for all the periods presented. The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. For further information, refer to the consolidated financial statements for the year ended December 31, 2001 and footnotes thereto included in the Corporation's Annual Report on Form 10-K. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that affect the amounts reported in the financial statements. The Corporation cautions that any forward looking statements contained in this report, in a report incorporated by reference to this report or made by management of the Corporation, involve risks and uncertainties and are subject to change based upon various factors. Actual results could differ materially from those expressed or implied. MERGERS AND ACQUISITIONS On January 31, 2002, the Corporation completed its affiliation with Central Bank Shares, Inc. (Central), a bank holding company headquartered in Orlando, Florida, with assets of more than $251.4 million. The transaction, which was a cash transaction accounted for as a purchase, resulted in the recognition of approximately $47.0 million of goodwill and $8.1 million of core deposit intangibles. The core deposit intangibles are being amortized over a ten year period. Central's banking affiliate, Bank of Central Florida, was merged into an existing subsidiary of the Corporation, First National Bank of Florida. Central's results of operations since February 1, 2002 have been included in the Corporation's statement of operations. On January 18, 2002, the Corporation completed its affiliation 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 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 regularly evaluates the potential acquisition of, and holds discussions with, various acquisition candidates and as a general rule the Corporation publicly announces such acquisitions only after a definitive agreement has been reached. 5
MERGER AND CONSOLIDATION RELATED EXPENSES As previously discussed, the Corporation completed its affiliation with Promistar on January 18, 2002 and merged its wholly owned subsidiary Promistar Bank into the Corporation's existing subsidiary, FNBPA on February 20, 2002. In connection with this transaction, the Corporation incurred pre-tax merger and consolidation expense of $41.4 million. Involuntary separation costs associated with terminated employees totaled $6.8 million of the total merger and consolidation expense. The total amount of separation costs paid during the first quarter was $6.5 million. The remaining separation costs are anticipated to be paid during the second quarter of 2002. Early retirement and other employment related expenses totaled $7.8 million, data processing conversion charges totaled $12.2 million, professional services totaled $8.0 million, write-downs of impaired assets totaled $4.2 million and other miscellaneous merger and consolidation expenses totaled $2.4 million. The Corporation paid merger and consolidation expenses and recognized asset impairments totaling $39.1 million during the first quarter of 2002. The Corporation also incurred merger related costs of $413,000 related to its affiliation with Central. These costs related primarily to data processing conversion charges. LOANS AND THE ALLOWANCE FOR LOAN LOSSES Loans are reported at their outstanding principal adjusted for any charge-offs and any deferred fees or costs on originated loans. Interest income on loans is accrued on the principal amount outstanding. It is the Corporation's policy to discontinue interest accruals when principal or interest is due and has remained unpaid for 90 days or more unless the loan is both well secured and in the process of collection. When a loan is placed on non-accrual status, all unpaid interest is reversed. While on non-accrual, contractual interest payments are applied against principal until the loan is restored to accrual status. Non-accrual loans may not be restored to accrual status until all delinquent principal and interest has been paid, or the loan becomes both well secured and in the process of collection. Consumer installment loans are generally charged off against the allowance for loan losses upon reaching 90 to 180 days past due, depending on the installment loan type. Loan origination fees and related costs are deferred and recognized over the life of the loans as an adjustment of yield. The allowance for loan losses is based on management's evaluation of potential losses in the loan portfolio, which includes an assessment of past experience, current and future economic conditions, known and inherent risks in the loan portfolio, the estimated value of underlying collateral and residuals and changes in the composition of the loan portfolio. Additions are made to the allowance through periodic provisions charged to income and recovery of principal on loans previously charged off. Losses of principal and/or residuals are charged to the allowance when the loss actually occurs or when a determination is made that a loss is probable. Impaired loans are identified and measured based on the present value of expected future cash flows discounted at the loan's effective interest rate, or at the loan's observable market price or at the fair value of the collateral if the loan is collateral dependent. If the recorded investment in the loan exceeds the measure of fair value, a valuation allowance is established as a component of the allowance for loan losses. Impaired loans consist of non-homogeneous loans, which based on the evaluation of current information and events, management has determined that it is probable that the Corporation will not be able to collect all amounts due according to the contractual terms of the loan agreement. The Corporation evaluates all commercial and commercial real estate loans which have been classified for regulatory reporting purposes, including non-accrual and restructured loans, in determining impaired loans. 6
NEW ACCOUNTING STANDARDS Financial Accounting Standards Statement (FAS) No. 142, "Goodwill and Other Intangible Assets," requires that goodwill and intangible assets with identifiable useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of the Statement. FAS No. 142 also requires that intangibles with definite useful lives be amortized over their respective estimated useful lives to the estimated residual values, and reviewed for impairment in accordance with FAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." The Corporation adopted the new rules on accounting for goodwill and other intangible assets in the first quarter of 2002. Application of the non-amortization provisions of the Statement resulted in an increase in net income of $350,000, or $0.01 per share, during the first quarter of 2002. The Corporation has completed its transition impairment test and concluded that goodwill is not impaired. PER SHARE AMOUNTS Per share amounts have been adjusted for common stock dividends, including the 5 percent stock dividend declared on May 6, 2002. Basic earnings per share is calculated by dividing net income, adjusted for preferred stock dividends declared, by the weighted average number of shares of common stock outstanding. Diluted earnings per common share is calculated by dividing net income by the weighted average number of shares of common stock outstanding, assuming conversion of outstanding convertible preferred stock from the beginning of the year or date of issuance and the exercise of stock options and warrants. Such adjustments to net income and the weighted average number of shares of common stock are made only when such adjustments dilute earnings per share. EARNINGS (LOSS) PER SHARE The following tables set forth the computation of basic and diluted earnings (loss) per share (in thousands, except per share data): Three Months Ended March 31, ----------------------- 2002 2001 ---------- ---------- Basic Net (loss) income $ (8,883) $ 11,231 Less: Preferred stock dividends declared (66) (77) ---------- ---------- (Loss) earnings applicable to basic earnings per share $ (8,817) $ 11,154 ========== ========== Average common shares outstanding 43,771,337 41,304,177 ========== ========== (Loss) earnings per share $(.20) $.27 ===== ==== 7
Three Months Ended March 31, ---------------------- 2002 2001 ---------- ---------- Diluted (Loss) earnings applicable to diluted earnings per share $ (8,883) $ 11,231 ========== ========== Average common shares outstanding 43,771,337 41,304,177 Series A convertible preferred stock 17,171 23,082 Series B convertible preferred stock 343,278 402,079 Net effect of dilutive stock options and stock warrants based on the treasury stock method 676,344 477,023 ---------- ---------- 44,808,130 42,206,361 ========== ========== (Loss) earnings per share $(.20) $.27 ===== ==== CASH FLOW INFORMATION Following is a summary of supplemental cash flow information (in thousands): Three Months Ended March 31 ---------------------- 2002 2001 ---------- ---------- Cash paid for: Interest $39,223 $53,232 Noncash Investing and Financing Activities: Acquisition of real estate in settlement of loans 242 379 Loans granted in the sale of other real estate 10 485 COMPREHENSIVE INCOME The components of comprehensive income, net of related tax, are as follows (in thousands): Three Months Ended March 31, ---------------------- 2002 2001 ---------- ---------- Net (loss) income $ (8,883) $11,231 Other comprehensive (loss) income: Unrealized gains on securities: Unrealized holding gains (losses) arising during the period (3,939) 5,407 Less: reclassification adjustment for gains included in net income (115) (703) -------- ------- Other comprehensive (loss) income (4,054) 4,704 -------- ------- Comprehensive (loss) income $(12,937) $15,935 ======== ======= 8
BUSINESS SEGMENTS The Corporation operates in three reportable segments: community banks, insurance agencies and consumer finance. The Corporation's community bank subsidiaries offer services traditionally offered by full-service commercial banks, including commercial and individual demand and time deposit accounts and commercial, mortgage and individual installment loans. In addition to traditional banking products, the Corporation's community bank subsidiaries offer trust services as well as various alternative products, including securities brokerage and investment advisory services, mutual funds, insurance and annuities. The Corporation's insurance agencies are full-service insurance agencies offering all lines of commercial and personal insurance through major carriers. The Corporation's consumer finance subsidiary is involved in making personal installment loans to individuals and purchasing installment sales finance contracts from retail merchants. This activity is funded through the sale of the Corporation's subordinated notes at the finance company's branch offices. The following tables provide financial information for these segments of the Corporation (in thousands). Other items shown in the tables below represent the parent company, other non-bank subsidiaries and eliminations, which are necessary for purposes of reconciling to the consolidated amounts. 9
<TABLE> <CAPTION> At or for the three months Community Insurance Finance All ended March 31, 2002 Banks Agencies Company Other Consolidated ---------- ---------- ---------- --------- ------------ <S> <C> <C> <C> <C> <C> Interest income $ 99,459 $ 28 $ 6,870 $ (314) $ 106,043 Interest expense 36,318 28 1,715 477 38,538 Provision for loan losses 2,767 1,424 4,191 Non-interest income 14,609 8,156 479 4,700 27,944 Non-interest expense 43,778 5,658 3,096 7,006 59,538 Merger and consolidation related expenses 22,250 126 19,479 41,855 Intangible amortization 767 16 31 23 837 Income tax expense (benefit) 3,109 969 357 (6,524) (2,089) Net (loss) income 5,079 1,513 600 (16,075) (8,883) Core operating earnings 20,974 1,513 681 (1,319) 21,849 Total assets 6,555,419 30,748 141,456 3,878 6,731,501 </TABLE> <TABLE> <CAPTION> At or for the three months Community Insurance Finance All ended March 31, 2001 Banks Agencies Company Other Consolidated ---------- ---------- ---------- --------- ------------ <S> <C> <C> <C> <C> <C> Interest income $ 108,219 $ 55 $ 6,923 $ (783) $ 114,414 Interest expense 53,338 83 2,331 (114) 55,638 Provision for loan losses 3,332 1,109 4,441 Non-interest income 13,666 6,996 450 2,375 23,487 Non-interest expense 47,692 4,970 2,932 1,766 57,360 Merger and consolidation related expenses 1,709 1,822 3,531 Intangible amortization 690 195 33 192 1,110 Income tax expense 4,426 688 362 (886) 4,590 Net income 10,698 1,115 606 (1,188) 11,231 Core operating earnings 14,231 1,115 606 77 16,029 Total assets 6,053,769 28,368 147,277 23,286 6,252,700 </TABLE> * Core operating earnings exclude merger and consolidation related and other non-recurring costs of $30.7 million for the three months ended March 31, 2002 and merger and consolidation related and other non-recurring costs of $4.8 million for the three months ended March 31, 2001, all on an after-tax basis. 10
PART I ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. FINANCIAL INFORMATION SUMMARY Core operating earnings for the first three months of 2002 increased to $21.8 million from $16.0 million for the first three months of 2001. Basic core operating earnings per share were $.50 and $.39 for the three months ended March 31, 2002 and 2001, respectively, while diluted core operating earnings per share were $.49 and $.38 for those same periods. Core operating earnings consist of net income adjusted for non- recurring items. Non-recurring items incurred during the first quarter of 2002 included merger and consolidation related costs and other non-recurring costs of $30.7 million, net of tax, while non-recurring items incurred during the first quarter of 2001 included charter consolidation expenses of $2.1 million and merger related and other non- recurring costs of $2.7 million, net of tax. Including these costs, net loss was $8.9 million for the first quarter of 2002 compared to net income of $11.2 million for the first quarter of 2001. Diluted earnings per share were $(.20) and $.27 for those same periods, respectively. Highlights for the first three months of 2002 include: o A return on average assets of 1.34% and a return on average equity of 15.30%, both based on core operating earnings. o An increase in non-interest income of $4.5 million, including a 25.1% or $4.8 million increase in fee income, which consists of service charges, insurance commissions and trust income. o A 5.6% increase in average net interest earning assets and an increase in the net interest margin to 4.68% compared to 4.32% during the first three months of 2001. o Continued strong asset quality o Completion of affiliation with Promistar Financial Corporation on January 18, 2002. o Completion of affiliation with Central Bank Shares, Inc. on January 31, 2002. 11
FIRST THREE MONTHS OF 2002 AS COMPARED TO FIRST THREE MONTHS OF 2001: The following table provides information regarding the average balances and yields and rates on interest earning assets and interest bearing liabilities (dollars in thousands): <TABLE> <CAPTION> Three Months Ended March 31 2002 2001 ----------------------------- ---------------------------- Average Yield/ Average Yield/ Balance Interest Rate Balance Interest Rate ---------- -------- ------ ---------- -------- ------ <S> <C> <C> <C> <C> <C> <C> Assets Interest earning assets: Interest bearing deposits with banks $ 8,963 $ 114 5.09% $ 4,563 $ 94 8.24% Federal funds sold 147,955 688 1.86 134,962 1,820 5.39 Securities: Taxable 735,576 10,422 5.75 741,372 11,932 6.53 Non-taxable (1) 198,708 3,243 6.53 175,560 2,778 6.33 Loans (1) (2) 4,889,134 93,040 7.72 4,604,814 99,370 8.75 ---------- -------- ---------- -------- Total interest earning assets 5,980,336 107,507 7.29 5,661,271 115,994 8.31 ---------- -------- ---------- -------- Cash and due from banks 196,719 175,195 Allowance for loan losses (66,804) (57,865) Premises and equipment 151,856 140,073 Other assets 360,608 226,030 ---------- ---------- $6,622,715 $6,144,704 ========== ========== Liabilities Interest bearing liabilities: Deposits: Interest bearing demand $ 960,770 $ 2,152 0.91 $ 802,095 $ 4,608 2.33 Savings 1,074,038 3,892 1.47 1,038,529 6,875 2.68 Other time 2,333,300 25,059 4.36 2,391,415 35,403 6.00 Short-term borrowings 403,050 2,529 2.54 325,662 4,761 5.93 Long-term debt 342,220 4,906 5.74 297,303 3,991 5.37 ---------- -------- ---------- -------- Total interest bearing liabilities 5,113,378 38,538 3.06 4,855,004 55,638 4.65 ---------- -------- ---------- -------- Non-interest bearing demand deposits 839,563 698,375 Other liabilities 90,787 89,614 ---------- ---------- 6,043,728 5,642,993 ---------- ---------- Stockholders' equity 578,987 501,711 ---------- ---------- $6,622,715 $6,144,704 ========== ========== Net interest earning assets $ 866,958 $ 806,267 ========== ========== Net interest income $ 68,969 $ 60,356 ======== ======== Net interest spread 4.23% 3.66% ===== ===== Net interest margin (3) 4.68% 4.32% ===== ===== </TABLE> (1) The amounts are reflected on a fully taxable equivalent basis using the federal statutory tax rate of 35% adjusted for certain federal tax preferences. (2) Average balance includes non-accrual loans. Loans consist of average total loans less average unearned income. The amount of loan fees included in interest income on loans is immaterial. (3) Net interest margin is calculated by dividing the difference between total interest earned and total interest paid by average interest earning assets. 12
Net interest income, the Corporation's primary source of earnings, is the amount by which interest and fees generated by interest earning assets, primarily loans and securities, exceed interest expense on deposits and borrowed funds. During the first three months of 2002, net interest income, on a fully taxable equivalent basis, totaled $69.0 million, as compared to $60.4 million for the first three months of 2001. Net interest income consisted of interest income of $107.5 million and interest expense of $38.5 million for the first three months of 2002 compared to $116.0 million and $55.6 million for each, respectively, for the first three months of 2001. The yield on interest earning assets decreased by 102 basis points and the rate paid on interest bearing liabilities decreased by 159 basis points. Net interest margin increased from 4.32% at March 31, 2001 to 4.68% at March 31, 2002. Although the net interest margin has increased over the same period last year, there is a possibility that margin compression could arise, as further discussed within the "Liquidity and Interest Rate Sensitivity" section of this report. The following table sets forth certain information regarding changes in net interest income attributable to changes in the volumes and rates of interest earning assets and interest bearing liabilities for the three months ended March 31, 2002 as compared to the three months ended March 31, 2001 (in thousands): Volume Rate Net ------- ------- ------- Interest Income Interest bearing deposits with banks $ 33 $ (13) $ 20 Federal funds sold 195 (1,327) (1,132) Securities: Taxable (93) (1,417) (1,510) Non-taxable 375 90 465 Loans 6,982 (13,312) (6,330) ------- ------- ------- 7,492 (15,979) (8,487) ------- ------- ------- Interest Expense Deposits: Interest bearing demand 1,180 (3,636) (2,456) Savings 244 (3,227) (2,983) Other time (845) (9,499) (10,344) Short-term borrowings 1,588 (3,820) (2,232) Long-term debt 628 287 915 ------- ------- ------- 2,795 (19,895) (17,100) ------- ------- ------- Net Change $ 4,697 $ 3,916 $ 8,613 ======= ======= ======= The amount of change not solely due to rate or volume changes was allocated between the change due to rate and the change due to volume based on the net size of the rate and volume changes. Interest income on loans, on a fully taxable equivalent basis, decreased 6.4% from $99.4 million for the three months ended March 31, 2001 to $93.0 million for the three months ended March 31, 2002. This decrease was solely related to yield as the Corporation experienced favorable loan volumes as average loans increased by $284.3 million. Interest expense on deposits decreased $15.8 million or 33.7% for the three months ended March 31, 2002, compared to the same period of 2001, despite an increase in average interest bearing deposits of 3.2% over this same period. The average balances in interest bearing demand deposits and savings deposits increased by $158.7 million and $35.5 million, respectively, while the average balance in time deposits decreased by $58.1 million. The Corporation continued to successfully generate non-interest bearing deposits as such deposits increased by $141.2 million or 20.2% from March 31, 2001 to March 31, 2002. The average balance in short-term borrowings increased by $77.4 million 13
as average repurchase agreements increased $83.9 million during the first quarter of 2002. Interest expense on long-term debt increased $916,000 from March 31, 2001 as average long-term debt increased $44.9 million. The provision for loan losses charged to operations is a direct result of management's analysis of the adequacy of the allowance for loan losses which takes into consideration factors, including qualitative factors, relevant to the collectibility of the existing portfolio. The provision for loan losses was $4.2 million for the first three months of 2002, as compared to $4.4 million for the first three months of 2001. The decrease reflects the Corporation's continued strong asset quality. The allowance for loan losses as a percentage of total loans was 1.35% at March 31, 2002 and 1.26% at March 31, 2001. Non-interest income increased 19.0% from $23.5 million during the first three months of 2001 to $27.9 million during the first three months of 2002. This increase was primarily attributable to the Corporation's continued transformation to a diversified financial services company. The Corporation has dedicated significant resources to expanding traditional banking services and generating insurance commissions and fees, investment service charges and trust fees. Insurance commissions and fees, service charges and trust income increased $4.8 million or 25.1% compared with the first three months of 2001. These higher levels of fee income are attributable to growth in insurance, expanded banking services and the Corporation's continued focus on providing a wide array of wealth management services, such as annuities, mutual funds and trust services. This increase was partially offset by decreases of $934,000 in gains on sale of securities and $252,000 in gains on sale of loans. Total non-interest expenses increased $40.2 million from $62.0 million during the first three months of 2001 to $102.2 million during the first three months of 2002. This increase was primarily attributable to non-recurring items. The Corporation recognized merger and consolidation related and other non-recurring charges of $42.7 million during the first quarter of 2002, compared to consolidation expenses of $3.2 million, a $4.0 million legal reserve related to a defalcation by a third party IRA administrator and merger related costs of $283,000 during the first quarter of 2001. Excluding these items, non-interest expenses totaled $59.6 million for the first quarter of 2002 and $54.5 million during the first quarter of 2001. In addition to the previously mentioned non-recurring items, non-interest expenses increased as a result of an increase of 14.0% or $4.1 million in salaries and employee benefits due to normal annual salary adjustments, business expansion and the purchase of Central Bank Shares, Inc. The majority of the salary savings associated with the consolidation of First National Bank of Pennsylvania with Promistar Bank and the Central Bank Shares, Inc. acquisition are anticipated to arise in the second quarter of 2002. The Corporation's income tax benefit was $2.1 million for the first three months of 2002 compared to expense of $4.6 million for the same period of 2001. The effective tax rate of 19.1% for the three months ended March 31, 2002 was lower than the 35.0% federal statutory tax rate due to the tax benefits resulting from tax-exempt instruments and excludable dividend income. 14
LIQUIDITY AND INTEREST RATE SENSITIVITY The Corporation's goal in liquidity management is to meet the cash flow requirements of depositors and borrowers as well as the operating cash needs of the Corporation, with cost-effective funding. The Corporate Asset/Liability Committee (ALCO), which includes members of executive management, reviews liquidity on a periodic basis and approves significant changes in strategies which affect balance sheet or cash flow positions. The Board of Directors has established an Asset/Liability Policy in order to achieve and maintain earnings performance consistent with long-term goals while maintaining acceptable levels of interest rate risk, a "well-capitalized" balance sheet and adequate levels of liquidity. This policy designates the ALCO as the body responsible for meeting this objective. Liquidity sources from assets include payments from loans and investments as well as the ability to securitize or sell loans and investment securities. Liquidity sources from liabilities are generated primarily through growth in core deposits, and to a lesser extent, the use of wholesale sources which include federal funds purchased, repurchase agreements and public deposits. In addition, the banking affiliates have the ability to borrow funds from the Federal Home Loan Bank (FHLB). FHLB advances are a competitively priced and reliable source of funds. The Corporation has made limited use of FHLB advances and has a large reserve available for contingency funding purposes. As of March 31, 2002, outstanding advances were $303.7 million, or 4.5% of total assets while FHLB availability was $1.3 billion , or 19.0% of total assets. The principal source of cash for the parent company is dividends from its subsidiaries. The parent also has approved lines of credit with several major domestic banks, of which $40.0 million was used as of March 31, 2002. The Corporation also issues subordinated debt on a regular basis and has access to the Federal Reserve Bank as well as access to the capital markets. The ALCO regularly monitors various liquidity ratios and forecasts of cash position. Management believes the Corporation has sufficient liquidity available to meet its normal operating and contingency funding cash needs. The financial performance of the Corporation is at risk from interest rate fluctuations. This interest rate risk arises due to differences between the amount of interest earning assets and interest bearing liabilities subject to repricing over a period of time, the difference between the change in various interest rates and the embedded options in certain financial instruments. The Corporation utilizes an asset/liability model to support its balance sheet strategies. The Corporation uses gap analysis, net interest income simulations and the economic value of equity to measure its interest rate risk. The gap analysis below measures the interest rate risk of the Corporation by comparing the difference between the amount of interest earning assets and interest bearing liabilities subject to repricing over a period of time. The cumulative one-year gap ratio was 1.06 at March 31, 2002, as compared to 1.00 at March 31, 2001. A ratio of more than one indicates a higher level of repricing assets over repricing liabilities over the next twelve months, assuming the current interest rate environment. 15
Following is the gap analysis as of March 31, 2002 (in thousands): <TABLE> <CAPTION> Within 4-12 1-5 Over 3 Months Months Years 5 years Total --------- ---------- ---------- ----------- ---------- <S> <C> <C> <C> <C> <C> Interest Earning Assets Interest bearing deposits with banks $ 8,615 $ 177 $ 8,792 Federal funds sold 192,107 192,107 Securities 80,360 168,056 $ 402,868 $ 275,288 926,572 Loans, net of unearned 1,284,629 1,039,117 2,111,938 482,627 4,918,311 ---------- ---------- ---------- ----------- ---------- 1,565,711 1,207,350 2,514,806 757,915 6,045,782 Other assets 685,719 685,719 ---------- ---------- ---------- ----------- ---------- $1,565,711 $1,207,350 $2,514,806 $1,443,634 $6,731,501 ========== ========== ========== =========== ========== Interest Bearing Liabilities Deposits: Interest checking $ 170,304 $ 867,955 $1,038,259 Savings 363,378 55,462 1,018,840 Time deposits 490,559 $1,235,315 $ 628,409 5,207 2,359,490 Borrowings 326,341 31,604 65,116 341,445 764,506 ---------- ---------- ---------- ---------- ---------- 1,350,582 1,266,919 693,525 1,870,069 5,181,095 Other liabilities 1,001,767 1,001,767 Stockholders' equity 548,639 548,639 ---------- ---------- ---------- ----------- ---------- $1,350,582 $1,266,919 $ 693,525 $ 3,420,475 $6,731,501 ========== ========== ========== =========== ========== Period Gap $ 215,129 $ (59,569) $1,821,281 $(1,976,841) ========== ========== ========== =========== Cumulative Gap $ 215,129 $ 155,560 $1,976,841 ========== ========== ========== Cumulative Gap as a Percent of Total Assets 3.20% 2.31% 29.37% ========== ========== ========= Rate Sensitive Assets/Rate Sensitive Liabilities (Cumulative) 1.16 1.06 1.60 1.17 ========== ========== ========== =========== </TABLE> Net interest income simulations measure the exposure to short-term earnings from changes in market rates of interest in a more rigorous and explicit fashion. The Corporation's current financial position is combined with assumptions regarding future business to calculate net interest income under varying hypothetical interest rate scenarios. The economic value of equity (EVE) measures the Corporation's long-term earnings exposure from changes in market rates of interest. EVE is defined as the present value of assets minus the present value of liabilities at a point in time. A decrease in EVE due to a specified rate change indicates a decline in the long-term earnings capacity of the balance sheet assuming that the rate change remains in effect over the life of the balance sheet. The following table presents an analysis of the potential sensitivity of the Corporation's annual net interest income and EVE to sudden and sustained changes in market rates: MARCH 31, -------------------- 2002 2001 -------- -------- Net interest income change (12 months): - 100 basis points (2.3)% (1.2)% + 200 basis points 1.1 % (0.9)% Economic value of equity: - 100 basis points (5.7)% (3.9)% + 200 basis points 0.9 % (1.4)% 16
The preceding measures assumed no change in asset/liability compositions. Thus, the measures do not reflect actions the ALCO may undertake in response to such changes in interest rates. The disclosed measures are within the limits set forth in the Corporation's Asset/Liability Policy. The computation of the prospective effects of hypothetical interest rate changes requires numerous assumptions regarding characteristics of new business and the behavior of existing positions. These business assumptions are based upon the Corporation's experience, business plans and published industry experience. Key assumptions employed in the model include asset prepayment speeds, the relative price sensitivity of certain assets and liabilities and the expected life of non-maturity deposits. Because these assumptions are inherently uncertain, actual results will differ from simulated results. CAPITAL RESOURCES The assessment of capital adequacy depends on a number of factors such as asset quality, liquidity, earnings performance, changing competitive conditions and economic forces. The Corporation seeks to maintain a strong capital base to support its growth and expansion activities, to provide stability to current operations and to promote public confidence. Capital adequacy is further discussed in the "Regulatory Matters" section of this report. Capital management is a continuous process. For the three months ended March 31, 2002, the return on average equity was 15.30% and the dividend payout ratio was 38.25%, both based on core operating earnings. Book value per common share was $12.45 at March 31, 2002, compared to $11.60 at March 31, 2001. LOANS Following is a summary of loans (dollars in thousands): MARCH 31, DECEMBER 31, 2002 2001 ------------ ----------- Real estate: Residential $1,799,255 $1,777,403 Commercial 1,339,241 1,282,944 Construction 249,252 227,868 Installment loans to individuals 794,647 774,932 Commercial, financial and agricultural 668,230 672,639 Lease financing 111,443 128,712 Unearned income (46,630) (50,063) ---------- ---------- $4,915,438 $4,814,435 ========== ========== NON-PERFORMING ASSETS Non-performing assets include non-performing loans and other real estate owned. Non-performing loans include non-accrual loans and restructured loans. Non-accrual loans represent loans on which interest accruals have been discontinued. It is the Corporation's policy to discontinue interest accruals when principal or interest is due and has remained unpaid for 90 days or more unless the loan is both well secured and in the process of collection. When a loan is placed on non-accrual status, all unpaid interest is reversed. Non-accrual loans may not be restored to accrual status until all delinquent principal and interest has been paid or the loan becomes both well secured and in the process of collection. Consumer installment loans are generally charged off against the allowance for loan losses upon reaching 90 to 180 days past due, depending on the installment loan type. Restructured loans are loans in which the borrower has been granted a concession on the interest rate or the original repayment terms due to financial distress. 17
Non-performing loans are closely monitored on an ongoing basis as part of the Corporation's loan review and work-out process. The potential risk of loss on these loans is evaluated by comparing the loan balance to the fair value of any underlying collateral or the present value of projected future cash flows. Losses are recognized where appropriate. Following is a summary of non-performing assets (dollars in thousands): MARCH 31, DECEMBER 31, 2002 2001 ------------ ------------ Non-performing assets: Non-accrual loans $22,357 $21,350 Restructured loans 6,248 5,578 ------- ------- Total non-performing loans 28,605 26,928 Other real estate owned 4,803 4,375 ------- ------- Total non-performing assets $33,408 $31,303 ======= ======= Asset quality ratios: Non-performing loans as percent of total loans .58% .56% Non-performing assets as percent of total assets .50% .48% ALLOWANCE FOR LOAN LOSSES Management considers the accounting policy for the allowance for loan losses to be a critical accounting policy. For a full description of this policy refer to the Notes to Consolidated Financial Statements. Management's analysis of the allocated portion of the allowance for loan losses includes the evaluation of the loan portfolio based on 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 manifested themselves 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. 18
Following is a summary of changes in the allowance for loan losses and selected ratios (dollars in thousands): Three Months Ended March 31, --------------------- 2002 2001 -------- -------- Balance at beginning of period $65,059 $57,124 Addition from acquisition 1,389 Charge-offs (5,257) (4,304) Recoveries 899 659 ------- ------- Net charge-offs (4,358) (3,645) Provision for loan losses 4,191 4,441 ------- ------- Balance at end of period $66,281 $57,920 ======= ======= Allowance for loan losses to: Total loans, net of unearned income 1.35% 1.26% Non-performing loans 236.84% 240.39% REGULATORY MATTERS Quantitative measures established by regulators to ensure capital adequacy require the Corporation and its banking subsidiaries to maintain minimum amounts and ratios of total and tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) and of tier 1 capital to average assets (as defined). As of December 31, 2001, the Corporation and each of its banking subsidiaries have been categorized as "well capitalized" under the regulatory framework for prompt corrective action. Management believes, as of March 31, 2002, that the Corporation and each of its banking subsidiaries are all "well capitalized". Following are capital ratios as of March 31, 2002 for the Corporation (dollars in thousands): <TABLE> <CAPTION> Well Capitalized Minimum Capital Actual Requirements Requirements ----------------- ----------------- ----------------- Amount Ratio Amount Ratio Amount Ratio --------- ------- --------- ------- --------- ------- <S> <C> <C> <C> <C> <C> <C> Total Capital $501,482 10.2% $491,411 10.0% $393,129 8.0% (to risk-weighted assets) Tier 1 Capital 438,370 8.9% 294,847 6.0% 196,564 4.0% (to risk-weighted assets) Tier 1 Capital 438,370 6.7% 325,349 5.0% 260,279 4.0% (to average assets) </TABLE> The Corporation and its banking subsidiaries are subject to various regulatory capital requirements administered by federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory or discretionary actions by regulators that, if undertaken, could have a direct material effect on the Corporation's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation and its banking subsidiaries must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Corporation's and banking subsidiaries' capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK. The information called for by this item is provided under the caption "Liquidity and Interest Rate Sensitivity" under Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations. 19
PART II Item 1. Legal Proceedings During the first quarter of 2001, the Corporation established a legal reserve of approximately $4.0 million associated with individual retirement accounts at one of its banking subsidiaries. Various cases have been filed in the 20th Judicial Circuit and for Lee County, Florida, naming the subsidiary of the Corporation as a co-defendent. The plaintiffs allege that a third-party independent administrator misappropriated funds from their individual retirement accounts held with the banking subsidiary. As of April 30, 2002, the Corporation has settled all of these asserted claims except one, at an aggregate cost to the Corporation of $2.6 million. The Corporation believes the remaining reserve will be sufficient for all costs associated with the litigation, including all unasserted claims, settlements and adverse judgements. The Corporation and persons to whom the Corporation may have indemnification obligations, in the normal course of business, are subject to various pending and threatened lawsuits in which claims for monetary damages are asserted. Management, after consultation with outside legal counsel, does not at the present time anticipate the ultimate aggregate liability, arising out of such pending and threatened lawsuits will have a material adverse effect on the Corporation's financial position. At the present time, management is not in a position to determine whether any pending or threatened litigation will have a material adverse effect on the Corporation's results of operation in any future reporting period. Item 2. Changes in Securities Not applicable Item 3. Defaults Upon Senior Securities Not applicable Item 4. Submission of Matters to a Vote of Security Holders Not applicable Item 5. Other Information The Secretary of the Corporation must receive written notice of any proposal submitted by a shareholder of the Corporation for consideration at the Annual Meeting of Shareholders on or prior to the date which is 120 days prior to the date on which the Corporation first mailed its proxy materials for the prior year's Annual Meeting of Shareholders. Accordingly, any shareholder proposal must be submitted to the Corporation by November 25, 2002 to be considered at the 2003 Annual Meeting of Shareholders. 20
Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 10.1 Amendment No. 1 to Employment Agreement between F.N.B. Corporation and Gary L. Tice. (filed herewith). 10.2 Employment Agreement between F.N.B. Corporation and Cass Bettinger. (filed herewith). (b) Reports on Form 8-K A report on Form 8-K, dated February 28, 2002, was filed by the Corporation. The Form 8-K announced the Corporation's merger with Promistar Financial Corporation. A report on Form 8-K, dated March 29, 2002, was filed by the Corporation. The Form 8-K included unaudited pro forma combined condensed financial statements for the period ending September 30, 2001 giving effect to the merger of the Corporation and Promistar Financial Corporation on a pooling-of-interests basis. 21
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. F.N.B. Corporation ------------------------------------------ (Registrant) Dated: May 15, 2002 /s/Gary L. Tice --------------------------- ----------------------------------------- Gary L. Tice President and Chief Executive Officer (Principal Executive Officer) Dated: May 15, 2002 /s/John D. Waters --------------------------- ------------------------------------------ John D. Waters Vice President and Chief Financial Officer (Principal Financial Officer) 22