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, 2001 ------------------------------------------------ OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to --------------------- ----------------------- Commission file number 0-8144 ------ F.N.B. CORPORATION - ------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Pennsylvania 25-1255406 - ------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. 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) One F.N.B. Boulevard, Hermitage, PA 16148 - ------------------------------------------------------------------------------- (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, 2001 ----- ----------------------------- Common Stock, $2 Par Value 23,799,088 Shares - -------------------------- -----------------
F.N.B. CORPORATION FORM 10-Q March 31, 2001 INDEX PART I - FINANCIAL INFORMATION PAGE Item 1. Financial Statements Consolidated Balance Sheet 2 Consolidated Income Statement 3 Consolidated Statement of Cash Flows 4 Notes to Consolidated Financial Statements 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 3. Quantitative and Qualitative Disclosure of Market Risk 18 PART II - OTHER INFORMATION Item 1. Legal Proceedings 19 Item 2. Changes in Securities 19 Item 3. Defaults Upon Senior Securities 19 Item 4. Submission of Matters to a Vote of Security Holders 19 Item 5. Other Information 19 Item 6. Exhibits and Reports on Form 8-K 19 Signatures 20 1
F.N.B. CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET Dollars in thousands, except par values Unaudited MARCH 31, DECEMBER 31, 2001 2000 ------------- ------------ ASSETS Cash and due from banks $ 141,332 $ 143,236 Interest bearing deposits with banks 3,449 1,843 Federal funds sold 175,409 35,961 Mortgage loans held for sale 7,106 1,042 Securities available for sale 435,262 436,441 Securities held to maturity (fair value of $46,748 and $60,549) 46,080 60,522 Loans, net of unearned income of $57,140 and $62,744 2,947,434 2,962,073 Allowance for loan losses (38,544) (38,737) ---------- ---------- NET LOANS 2,908,890 2,923,336 ---------- ---------- Premises and equipment 107,709 107,987 Other assets 180,639 179,226 ---------- ---------- TOTAL ASSETS $4,005,876 $3,889,594 ========== ========== LIABILITIES Deposits: Non-interest bearing $ 463,481 $ 461,386 Interest bearing 2,742,168 2,641,551 ---------- ---------- TOTAL DEPOSITS 3,205,649 3,102,937 Other liabilities 72,979 65,152 Short-term borrowings 286,379 282,865 Long-term debt 113,052 116,698 ---------- ---------- TOTAL LIABILITIES 3,678,059 3,567,652 ---------- ---------- STOCKHOLDERS' EQUITY Preferred stock - $10 par value Authorized - 20,000,000 shares Issued - 165,284 and 167,732 shares Aggregate liquidation value - $4,132 and $4,193 1,653 1,678 Common stock - $2 par value Authorized - 100,000,000 shares Issued - 22,728,497 and 22,716,035 shares 45,457 45,432 Additional paid-in capital 201,785 201,596 Retained earnings 77,373 76,054 Accumulated other comprehensive income 5,446 2,170 Treasury stock - 177,946 and 233,741 shares at cost (3,897) (4,988) ---------- ---------- TOTAL STOCKHOLDERS' EQUITY 327,817 321,942 ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $4,005,876 $3,889,594 ========== ========== See accompanying Notes to Consolidated Financial Statements 2
F.N.B. CORPORATION AND SUBSIDIARIES CONSOLIDATED INCOME STATEMENT Dollars in thousands, except per share data Unaudited THREE MONTHS ENDED MARCH 31, ---------------------- 2001 2000 ------- ------- INTEREST INCOME Loans, including fees $64,724 $61,749 Securities: Taxable 6,719 6,357 Nontaxable 399 487 Dividends 440 391 Other 1,519 182 ------- ------- TOTAL INTEREST INCOME 73,801 69,166 ------- ------- INTEREST EXPENSE Deposits 29,144 24,827 Short-term borrowings 3,766 3,693 Long-term debt 1,976 1,776 ------- ------- TOTAL INTEREST EXPENSE 34,886 30,296 ------- ------- NET INTEREST INCOME 38,915 38,870 Provision for loan losses 2,101 2,973 ------- ------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 36,814 35,897 ------- ------- NON-INTEREST INCOME Insurance commissions and fees 8,575 5,624 Service charges 5,743 5,559 Trust 1,197 1,070 Gain on sale of securities 32 40 Gain on sale of loans 905 221 Other 1,767 1,891 ------- ------- TOTAL NON-INTEREST INCOME 18,219 14,405 ------- ------- 55,033 50,302 NON-INTEREST EXPENSES Salaries and employee benefits 23,032 20,265 Net occupancy 2,696 2,401 Equipment 3,345 3,119 Merger related 283 Other 17,354 9,368 ------- ------- TOTAL NON-INTEREST EXPENSES 46,710 35,153 ------- ------- INCOME BEFORE INCOME TAXES 8,323 15,149 Income taxes 2,451 4,758 ------- ------- NET INCOME $ 5,872 $10,391 ======= ======= NET INCOME PER COMMON SHARE: * Basic $.25 $.44 ==== ==== Diluted $.24 $.43 ==== ==== CASH DIVIDENDS PER COMMON SHARE * $.17 $.16 ==== ==== * Restated to reflect a 5 percent stock dividend declared on April 23, 2001. See accompanying Notes to Consolidated Financial Statements 3
F.N.B. CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS Dollars in thousands Unaudited THREE MONTHS ENDED MARCH 31, ---------------------- 2001 2000 --------- --------- OPERATING ACTIVITIES Net income $ 5,872 $ 10,391 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 3,270 3,181 Provision for loan losses 2,101 2,973 Deferred taxes (1,330) 2,063 Net gain on sale of securities (32) (40) Net gain on sale of loans (905) (221) Proceeds from sale of loans 7,160 11,882 Loans originated for sale (12,319) (8,507) Net change in: Interest receivable 1,681 (328) Interest payable 692 1,174 Other, net 5,423 (3,226) --------- --------- Net cash flows from operating activities 11,613 19,342 --------- --------- INVESTING ACTIVITIES Net change in: Interest bearing deposits with banks (1,606) 333 Federal funds sold (139,448) (8,880) Loans 12,451 (105,152) Securities available for sale: Purchases (41,407) (23,350) Sales 8,620 12,561 Maturities 39,047 23,884 Securities held to maturity: Purchases (250) Maturities 14,441 3,739 Increase in premises and equipment (2,427) (3,525) Net cash paid for mergers and acquisitions (2,495) --------- --------- Net cash flows from investing activities (112,824) (100,640) --------- --------- FINANCING ACTIVITIES Net change in: Non-interest bearing deposits, savings and NOW 45,478 54,643 Time deposits 57,234 80,215 Short-term borrowings 3,514 (57,385) Increase in long-term debt 2,674 5,733 Decrease in long-term debt (6,320) (31,286) Net issuance/acquisition of treasury stock 888 (2,528) Cash dividends paid (4,161) (3,844) --------- --------- Net cash flows from financing activities 99,307 45,548 --------- --------- NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS (1,904) (35,750) Cash and due from banks at beginning of period 143,236 172,367 --------- --------- CASH AND DUE FROM BANKS AT END OF PERIOD $ 141,332 $ 136,617 ========= ========= See accompanying Notes to Consolidated Financial Statements 4
F.N.B. CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) March 31, 2001 BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements give retroactive effect to the merger of OneSource Group, Inc. (OneSource), with and into F.N.B. Corporation (the Corporation). The transaction was consummated on January 26, 2001, 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, 2000 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 April 30, 2001, the Corporation completed its affiliation with Citizens Community Bank of Florida (Citizens), a community bank headquartered in Marco Island, Florida, with assets of $181.0 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 1,775,244 shares of the Corporation's common stock were issued. The transaction was accounted for as a pooling-of-interests. Citizens operates as a division of the Corporation's Florida banking affiliate, First National Bank of Florida. On January 31, 2001 and January 5, 2001, the Corporation completed its affiliations 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. Both Ostrowsky and Blalock are operating as divisions of Roger Bouchard Insurance, Inc. (Bouchard), a wholly-owned subsidiary of the Corporation. On January 26, 2001, the Corporation completed its affiliation with OneSource, an independent insurance agency with offices in Clearwater and Jacksonville, Florida. The transaction was accounted for as a pooling-of-interests. OneSource is operating as a division 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 agreement has been reached. 5
CHARTER CONSOLIDATION During the first quarter of 2001, the Corporation completed its charter consolidation plan which reduced the number of bank charters from eight to three. The Corporation's five Florida banks were merged under First National Bank of Florida and its two Pennsylvania banks were combined under First National Bank of Pennsylvania. The Corporation had previously consolidated its Ohio banks under a single charter, Metropolitan National Bank. In connection with these charter consolidations, the trust operations of First National Bank of Florida 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. These separation costs have been reflected within the income statement caption salaries and employee benefits. The total amount of separation payments paid during the first quarter was $1.0 million. The remaining separation costs will be paid in accordance with the contractual terms of the employment and compensation agreements of the terminated employees. RESERVE FOR LEGAL EXPENSES During the first quarter of 2001, the Corporation recorded a pre-tax charge of approximately $4.0 million to cover estimated legal expenses associated with five cases filed against one of the Corporation's subsidiary banks. The plaintiffs allege that a third-party independent administrator misappropriated funds from their individual retirement accounts held by the subsidiary bank. The Corporation decided to establish the reserve as a result of developments which occurred immediately prior to March 31, 2001. The Corporation believes this reserve will be sufficient for all costs associated with the litigation, including settlements and adverse judgements. NEW ACCOUNTING STANDARD Financial Accounting Standards Statement (FAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," requires all derivatives to be recorded on the balance sheet at fair value and establishes standard accounting methodologies for hedging activities. The statement is effective for the Corporation's fiscal year ending December 31, 2001. The adoption of this statement did not have a material impact on the accompanying financial statements. PER SHARE AMOUNTS Per share amounts have been adjusted for common stock dividends, including the 5 percent stock dividend declared on April 23, 2001. Basic earnings per share is calculated by dividing net income, adjusted for preferred stock dividends declared, by the sum of the weighted average number of shares of common stock outstanding. Diluted earnings per common share is calculated by dividing net income by the weighted average number of shares of common stock outstanding, assuming conversion of outstanding convertible preferred stock from the beginning of the year or date of issuance and the exercise of stock options and warrants. Such adjustments to net income and the weighted average number of shares of common stock are made only when such adjustments dilute earnings per share. 6
EARNINGS PER SHARE The following tables set forth the computation of basic and diluted earnings per share (in thousands, except per share data): Three Months Ended March 31, ------------------------ 2001 2000 ---------- ---------- Basic Net income $ 5,872 $ 10,391 Less: Preferred stock dividends declared (77) (93) ---------- ---------- Earnings applicable to basic earnings per share $ 5,795 $ 10,298 ========== ========== Average common shares outstanding 23,645,169 23,427,408 ========== ========== Earnings per share $.25 $.44 ==== ==== Three Months Ended March 31, ------------------------ 2001 2000 ---------- ---------- Diluted Earnings applicable to diluted earnings per share $ 5,872 $ 10,391 ========== ========== Average common shares outstanding 23,645,169 23,427,408 Series A convertible preferred stock 21,983 27,078 Series B convertible preferred stock 382,932 463,841 Net effect of dilutive stock options and stock warrants based on the treasury stock method 360,197 412,853 ---------- ---------- 24,410,281 24,331,180 ========== ========== Earnings per share $.24 $.43 ==== ==== CASH FLOW INFORMATION Following is a summary of supplemental cash flow information (in thousands): Three Months Ended March 31 ----------------------- 2001 2000 ---------- ---------- Cash paid for: Interest $34,208 $29,111 Noncash Investing and Financing Activities: Acquisition of real estate in settlement of loans 379 185 Loans granted in the sale of other real estate 485 175 7
COMPREHENSIVE INCOME The components of comprehensive income, net of related tax, are as follows (in thousands): Three Months Ended March 31, -------------------- 2001 2000 ------- ------- Net income $ 5,872 $10,391 Other comprehensive income: Unrealized gains on securities: Unrealized holding gains (losses) arising during the period 3,279 (1,287) Less: reclassification adjustment for gains included in net income (3) (25) ------- ------- Other comprehensive income 3,276 (1,312) ------- ------- Comprehensive income $ 9,148 $ 9,079 ======= ======= 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 companies 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. 8
<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 $ 67,761 $ 55 $ 6,923 $ (938) $ 73,801 Interest expense 33,060 83 2,331 (588) 34,886 Provision for loan losses 1,001 1,100 2,101 Non-interest income 9,905 6,996 450 868 18,219 Non-interest expense 35,188 4,970 2,932 3,000 46,090 Intangible amortization 392 195 33 620 Income tax expense (credit) 2,378 688 362 (977) 2,451 Net income 5,647 1,115 615 (1,505) 5,872 Core operating earnings 9,180 1,115 615 (240) 10,670 Total assets 3,831,533 28,368 147,277 (1,302) 4,005,876 </TABLE> <TABLE> <CAPTION> At or for the three months Community Insurance Finance All ended March 31, 2000 Banks Agencies Company Other Consolidated ---------- ---------- ---------- --------- ------------ <S> <C> <C> <C> <C> <C> Interest income $ 63,913 $ 26 $ 6,014 $ (787) $ 69,166 Interest expense 29,136 30 1,642 (512) 30,296 Provision for loan losses 2,013 960 2,973 Non-interest income 8,349 4,979 351 726 14,405 Non-interest expense 28,191 3,425 2,697 373 34,686 Intangible amortization 393 63 11 467 Income tax expense 3,872 535 373 (22) 4,758 Net income 8,657 952 682 100 10,391 Core operating earnings 8,657 952 682 100 10,391 Total assets 3,690,524 15,186 121,739 (62,122) 3,765,327 </TABLE> * Core operating earnings exclude consolidation expenses of $2.1 million and merger-related and other non-recurring costs of $2.7 million, on an after-tax basis, for the three months ended March 31, 2001. 9
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 2001 increased to $10.7 million from $10.4 million for the first three months of 2000. Basic core operating earnings per share were $.45 and $.44 for the three months ended March 31, 2001 and 2000, respectively, while diluted core operating earnings per share were $.44 and $.43 for those same periods. Core operating earnings consist of net income adjusted for non- recurring items. Non-recurring items incurred during the first three months 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 income was $5.9 million for the first three months of 2001, resulting in diluted earnings per share of $.24. There were no non-recurring items during the first three months of 2000. Highlights for the first three months of 2001 include: o A return on average assets of 1.11% and a return on average equity of 13.31%, both based on core operating earnings. o An increase in non-interest income of $3.8 million, including a 26.6% or $3.3 million increase in fee income, which consists of service charges, insurance commissions and trust income. o A 5.9% increase in average earning assets. o Continued strong asset quality. o Completion of affiliations with Ostrowsky & Associates, Inc., James T. Blalock and OneSource Group, Inc. o Completion of consolidation of charters which is expected to increase after- tax earnings on an annualized basis by approximately $2.9 million, or $0.12 per share, by the year 2002. 10
FIRST THREE MONTHS OF 2001 AS COMPARED TO FIRST THREE MONTHS OF 2000: 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 2001 2000 ---------------------------- ---------------------------- 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 $ 4,205 $ 69 6.56% $ 3,307 $ 61 7.38% Federal funds sold 106,698 1,450 5.44 8,507 121 5.69 Securities: Taxable 431,089 6,719 6.32 405,442 6,357 6.31 Non-taxable (1) 62,892 1,055 6.71 70,394 1,133 6.44 Loans (1) (2) 2,946,414 65,058 8.95 2,866,645 62,024 8.70 ---------- -------- ---------- -------- Total interest earning assets 3,551,298 74,351 8.49 3,354,295 69,696 8.36 ---------- -------- ---------- -------- Cash and due from banks 118,972 125,068 Allowance for loan losses (39,118) (37,102) Premises and equipment 108,115 106,246 Other assets 176,510 155,223 ---------- ---------- $3,915,777 $3,703,730 ========== ========== Liabilities Interest bearing liabilities: Deposits: Interest bearing demand $ 522,158 $ 2,733 2.12 $ 493,177 $ 2,540 2.07 Savings 795,911 5,824 2.97 768,338 5,436 2.85 Other time 1,363,229 20,587 6.12 1,269,136 16,851 5.34 Short-term borrowings 276,794 3,766 5.52 284,368 3,693 5.22 Long-term debt 116,002 1,976 6.81 111,424 1,776 6.38 ---------- -------- ---------- -------- Total interest bearing liabilities 3,074,094 34,886 4.60 2,926,443 30,296 4.16 ---------- -------- ---------- -------- Non-interest bearing demand deposits 449,368 425,562 Other liabilities 67,199 59,939 ---------- ---------- 3,590,661 3,411,944 ---------- ---------- Stockholders' equity 325,116 291,786 ---------- ---------- $3,915,777 $3,703,730 ========== ========== Net interest earning assets $ 477,204 $ 427,852 ========== ========== Net interest income $ 39,465 $ 39,400 ======== ======== Net interest spread 3.89% 4.20% ===== ===== Net interest margin (3) 4.51% 4.72% ===== ===== </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. 11
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 2001, net interest income, on a fully taxable equivalent basis, totaled $39.5 million, as compared to $39.4 million for the first three months of 2000. Net interest income consisted of interest income of $74.4 million and interest expense of $34.9 million for the first three months of 2001 compared to $69.7 million and $30.3 million for each, respectively, for the first three months of 2000. Net interest margin decreased from 4.72% at March 31, 2000 to 4.51% at March 31, 2001. The yield on total interest earning assets increased by 13 basis points and the rate paid on interest bearing liabilities increased by 44 basis points. Although the Corporation has experienced margin compression, net interest income has risen as earning assets increased by 5.8%. There is a possibility that the compression could continue, as further discussed within the "Liquidity and Interest Rate Sensitivity" section of this report. The following table sets forth certain information regarding changes in net interest income attributable to changes in the volumes and rates of interest earning assets and interest bearing liabilities for the three months ending March 31, 2001 as compared to the three months ending March 31, 2000 (in thousands): Volume Rate Net ------- ------- ------- Interest Income Interest bearing deposits with banks $ 14 $ (6) $ 8 Federal funds sold 1,334 (5) 1,329 Securities: Taxable 353 9 362 Non-taxable (129) 51 (78) Loans 1,493 1,541 3,034 ------- ------- ------- 3,065 1,590 4,655 ------- ------- ------- Interest Expense Deposits: Interest bearing demand 137 56 193 Savings 179 209 388 Other time 1,258 2,478 3,736 Short-term borrowings (63) 136 73 Long-term debt 76 124 200 ------- ------- ------- 1,587 3,003 4,590 ------- ------- ------- Net Change $ 1,478 $(1,413) $ 65 ======= ======= ======= The amount of change not solely due to rate or volume changes was allocated between the change due to rate and the change due to volume based on the net size of the rate and volume changes. Interest income on loans, on a fully taxable equivalent basis, increased 4.9% from $62.0 million for the three months ended March 31, 2000 to $65.1 million for the three months ended March 31, 2001. This increase was the result of an increase in average loans of 2.8% and an increase of 25 basis points in the average yield over the same period last year. Interest expense on deposits increased $4.3 million or 17.4% for the three months ended March 31, 2001, compared to the same period of 2000, as average interest bearing deposits rose 6.0% over this period. The average balances in time deposits, savings deposits and interest bearing demand deposits increased by $94.1 million, $27.6 million and $29.0 million, respectively. The average balance in non-interest bearing demand deposits increased by $23.8 million. Despite a $7.6 million decrease in average short- term borrowings, interest expense on short-term borrowings increased $73,000 for these same periods due to a 30 basis point increase in the rate paid on the borrowings. 12
Additionally, interest expense on long-term debt increased $200,000 from March 31, 2000 due to a $4.6 million increase in average long-term debt and an increase in the rate paid of 43 basis points. The provision for loan losses charged to operations is a direct result of management's analysis of the adequacy of the allowance for loan losses which takes into consideration factors, including qualitative factors, relevant to the collectibility of the existing portfolio. The provision for loan losses was $2.1 million for the first three months of 2001, as compared to $3.0 million for the first three months of 2000. The decrease reflects the Corporation's continued strong asset quality. The allowance for loan losses as a percentage of total loans was 1.31% at March 31, 2001 and 1.30% at March 31, 2000. Non-interest income increased 26.5% from $14.4 million during the first three months of 2000 to $18.2 million during the first three months of 2001. Insurance commissions and fees, service charges and trust income increased $3.3 million or 26.6% over the first three months of 2000. These higher levels of fee income are attributable to growth in insurance, increases in deposits and the Corporation's continued expansion into annuity and mutual fund sales and trust services. Total non-interest expenses increased 32.9% from $35.2 million during the first three months of 2000 to $46.7 million during the first three months of 2001. This increase was primarily attributable to non-recurring items during the first quarter of 2001, including 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 (see Notes to Consolidated Financial Statements). Excluding these items, non-interest expenses totaled $39.2 million for the first quarter of 2001. In addition to the previously mentioned non-recurring items, non-interest expenses increased due to the insurance agency purchases that were consummated in January of 2001. The Corporation's income tax expense was $2.5 million for the first three months of 2001 compared to $4.8 million for the same period of 2000. The effective tax rate of 29.4% for the three months ended March 31, 2001 was lower than the 35.0% federal statutory tax rate due to the tax benefits resulting from tax-exempt instruments and excludable dividend income. LIQUIDITY AND INTEREST RATE SENSITIVITY The Corporation monitors its liquidity position on an ongoing basis to assure that it is able to meet the need for funds at all times. Given the monetary nature of its assets and liabilities and the source of liquidity provided by the available for sale securities portfolio, the Corporation has sufficient sources of funds available as needed to meet its routine, operational cash needs. Additionally, the Corporation has external sources of funds available should it desire to use them. These include approved lines of credit with several major domestic banks, of which $70.0 million was unused at March 31, 2001. To further meet its liquidity needs, the Corporation also has access to the Federal Home Loan Bank and the Federal Reserve Bank, as well as other funding sources. 13
The financial performance of the Corporation is at risk from interest rate fluctuations. This interest rate risk arises due to differences between the amount of interest-earning assets and interest-bearing liabilities subject to repricing over a period of time, the difference between the change in various interest rates and the embedded options in certain financial instruments. The Board of Directors has established an Asset/Liability Policy in order to achieve and maintain earnings performance consistent with long-term goals while maintaining acceptable levels of interest rate risk, a "well-capitalized" balance sheet and adequate levels of liquidity. This policy designates the Asset/Liability Committee (ALCO) as the body responsible for meeting this objective. The Corporation utilizes an asset/liability model to support its balance sheet strategies. The Corporation uses gap analysis, net interest income simulations and the economic value of equity to measure its interest rate risk. The gap analysis which follows measures the interest rate risk of the Corporation by comparing the difference between the amount of interest-earning assets and interest- bearing liabilities subject to repricing over a period of time. The cumulative one-year gap ratio was 1.00 at March 31, 2001, as compared to .90 at March 31, 2000. A ratio of less than one indicates an excess of repricing liabilities over repricing assets. Based on the cumulative one-year gap and assuming no change in asset/liability composition, a change in interest rates is expected to result in a negligible change in net interest income over the next twelve months. Net interest income simulations measure the exposure to short-term earnings from changes in market rates of interest in a more rigorous and explicit fashion. The Corporation's current financial position is combined with assumptions regarding future business to calculate net interest income under varying hypothetical interest rate scenarios. 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 200 basis point changes in market rates: MARCH 31, ----------------- 2001 2000 ------- ------- Net interest income change (12 months): - 200 basis points (2.8)% 3.2 % + 200 basis points (0.9)% (4.7)% Economic value of equity: - 200 basis points (8.7)% 2.4 % + 200 basis points (1.4)% (6.6)% 14
Following is the gap analysis as of March 31, 2001 (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 $ 3,449 $ 3,449 Federal funds sold 175,409 175,409 Securities 46,264 $ 77,914 $ 284,711 $ 72,453 481,342 Loans, net of unearned 801,960 612,788 1,336,320 203,472 2,954,540 ---------- --------- ---------- ----------- ---------- 1,027,082 690,702 1,621,031 275,925 3,614,740 Other assets 391,136 391,136 ---------- --------- ---------- ----------- ---------- $1,027,082 $ 690,702 $1,621,031 $ 667,061 $4,005,876 ========== ========= ========== =========== ========== Interest Bearing Liabilities Deposits: Interest checking $ 123,213 $ 441,949 $ 565,162 Savings 309,546 499,009 808,555 Time deposits 353,634 $ 650,911 $ 363,906 1,368,451 Borrowings 234,290 40,353 50,442 74,346 399,431 ---------- --------- ---------- ----------- ---------- 1,020,683 691,264 414,348 1,015,304 3,141,599 Other liabilities 536,460 536,460 Stockholders' equity 327,817 327,817 ---------- --------- ---------- ----------- ---------- $1,020,683 $ 691,264 $ 414,348 $ 1,879,581 $4,005,876 ========== ========= ========== =========== ========== Period Gap $ 6,399 $ (562) $1,206,683 $(1,212,520) ========== ========= ========== =========== Cumulative Gap $ 6,399 $ 5,837 $1,212,520 ========== ========= ========== Cumulative Gap as a Percent of Total Assets .16% .15% 30.27% ========== ========= ========== Rate Sensitive Assets/Rate Sensitive Liabilities (Cumulative) 1.01 1.00 1.57 1.15 ========== ========= ========== ========== </TABLE> The preceding measures reflect actions the ALCO enacted to reduce the sensitivity of its net interest income. However, the measures do not necessarily reflect the actions the ALCO may undertake in response to certain changes in interest rates. Thus, the measurements assumed no change in asset/liability composition. The disclosed measures are well 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. 15
CAPITAL RESOURCES The assessment of capital adequacy depends on a number of factors such as asset quality, liquidity, earnings performance, changing competitive conditions and economic forces. The Corporation seeks to maintain a strong capital base to support its growth and expansion activities, to provide stability to current operations and to promote public confidence. Capital adequacy is further discussed in the "Regulatory Matters" section of this report. Capital management is a continuous process. Since December 31, 2000, stockholders' equity has increased $1.7 million as a result of earnings retention. For the three months ended March 31, 2001, the return on average equity was 13.31% and the dividend payout ratio was 38.55%, both based on core operating earnings. Book value per common share was $13.67 at March 31, 2001, compared to $12.33 at March 31, 2000. LOANS Following is a summary of loans (dollars in thousands): MARCH 31, DECEMBER 31, 2001 2000 ------------ ------------ Real estate: Residential $1,088,045 $1,096,311 Commercial 828,203 812,023 Construction 191,953 180,387 Installment loans to individuals 313,865 339,126 Commercial, financial and agricultural 397,343 392,783 Lease financing 185,165 204,187 Unearned income (57,140) (62,744) ---------- ---------- $2,947,434 $2,962,073 ========== ========== NON-PERFORMING ASSETS Non-performing assets include non-performing loans and other real estate owned. Non-performing loans include non-accrual loans and restructured loans. Non-accrual loans represent loans on which interest accruals have been discontinued. It is the Corporation's policy to discontinue interest accruals when principal or interest is due and has remained unpaid for 90 days or more unless the loan is both well secured and in the process of collection. When a loan is placed on non-accrual status, all unpaid interest is reversed. Non-accrual loans may not be restored to accrual status until all delinquent principal and interest has been paid or the loan becomes both well secured and in the process of collection. Consumer installment loans are generally charged off against the allowance for loan losses upon reaching 90 to 180 days past due, depending on the installment loan type. Restructured loans are loans in which the borrower has been granted a concession on the interest rate or the original repayment terms due to financial distress. Non-performing loans are closely monitored on an ongoing basis as part of the Corporation's loan review and work-out process. The potential risk of loss on these loans is evaluated by comparing the loan balance to the fair value of any underlying collateral or the present value of projected future cash flows. Losses are recognized where appropriate. 16
Following is a summary of non-performing assets (dollars in thousands): MARCH 31, DECEMBER 31, 2001 2000 ------------ ------------ Non-performing assets: Non-accrual loans $10,173 $ 9,946 Restructured loans 2,842 2,810 ------- ------- Total non-performing loans 13,015 12,756 Other real estate owned 4,016 4,786 ------- ------- Total non-performing assets $17,031 $17,542 ======= ======= Asset quality ratios: Non-performing loans as percent of total loans .44% .43% Non-performing assets as percent of total assets .43% .45% ALLOWANCE FOR LOAN LOSSES Management's analysis of the allowance for loan losses includes the evaluation of the loan portfolio based on internally generated loan review reports and the historical loss experience of the remaining balances of the various homogeneous loan pools which comprise the loan portfolio. Specific factors which are evaluated include the previous loan loss experience with the customer, the status of past due interest and principal payments on the loan, the collateral position of the loan, the quality of financial information supplied by the borrower and the general financial condition of the borrower. Historical loss experience on the remaining portfolio segments is considered in conjunction with the current status of economic conditions, loan loss trends, delinquency and non-accrual trends, credit administration and concentrations of credit risk. Following is a summary of changes in the allowance for loan losses and selected ratios (dollars in thousands): Three Months Ended March 31, -------------------- 2001 2000 -------- -------- Balance at beginning of period $38,737 $36,311 Charge-offs (2,828) (1,958) Recoveries 534 423 ------- ------- Net charge-offs (2,294) (1,535) Provision for loan losses 2,101 2,973 ------- ------- Balance at end of period $38,544 $37,749 ======= ======= Allowance for loan losses to: Total loans, net of unearned income 1.31% 1.30% Non-performing loans 296.17% 279.19% 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). 17
As of December 31, 2000, the Corporation and each of its banking subsidiaries have been categorized as "well capitalized" under the regulatory framework for prompt corrective action. Management believes, as of March 31, 2001, that the Corporation and each of its banking subsidiaries are all "well capitalized". Following are capital ratios as of March 31, 2001 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 $334,027 11.3% $295,782 10.0% $236,625 8.0% (to risk-weighted assets) Tier 1 Capital 293,727 9.9% 177,469 6.0% 118,313 4.0% (to risk-weighted assets) Tier 1 Capital 293,727 7.6% 194,190 5.0% 155,352 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, and discretionary actions by regulators that, if undertaken, could have a direct material effect on the Corporation's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation and its banking subsidiaries must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Corporation's and banking subsidiaries' capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. 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. 18
PART II Item 1. Legal Proceedings During the first quarter of 2001, the Corporation established a legal reserve of approximately $4.0 million associated with individual retirement accounts at one of its banking subsidiaries. Various cases have been filed in the 20th Judicial Circuit and for Lee County, Florida, naming the subsidiary of the Corporation as a co-defendant. The plaintiffs allege that a third-party independent administrator misappropriated funds from their individual retirement accounts held with the banking subsidiary (see 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. 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 19, 2001 to be considered at the 2002 Annual Meeting of Shareholders. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits (b) Reports on Form 8-K A report on Form 8-K, dated January 9, 2001, was filed by the Corporation. The Form 8-K announced the Corporation's charter consolidation plan, which occurred during the first quarter of 2001. A report on Form 8-K, dated February 6, 2001, was filed by the Corporation. The Form 8-K announced the Corporation's proposed relocation of its corporate headquarters from Hermitage, Pennsylvania to Naples, Florida and proposed reincorporation from Pennsylvania to Florida. 19
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 9, 2001 /s/Gary L. Tice ------------------------ ------------------------------------------ Gary L. Tice President and Chief Executive Officer (Principal Executive Officer) Dated: May 8, 2001 /s/John D. Waters ------------------------ ------------------------------------------ John D. Waters Vice President and Chief Financial Officer (Principal Financial Officer) 20