SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
Date of Report: July 24, 2002
F.N.B. CORPORATION
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(Exact name of registrant as specified in its charter)
Florida 0-8144 25-1255406
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(State of Incorporation) (Commission (IRS Employer
File Number) Identification No.)
2150 Goodlette Road North, Naples, Florida 34102
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(Address of principal executive offices) (Zip code)
(239) 262-7600
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(Registrant's telephone number, including area code)
INFORMATION TO BE INCLUDED IN THE REPORT
ITEM 5. OTHER EVENTS
On January 18, 2002, F.N.B. Corporation (the Corporation)
completed its business combination with of Promistar Financial
Corporation. Accordingly, the Corporation's Consolidated
Financial Statements and Related Management's Discussion
and Analysis of Financial Condition and Results of
Operations have been provided giving retroactive effect to
this merger using the pooling of interests method of
accounting. The Corporation is hereby filing with the
Securities and Exchange Commission a copy of the Audited
Consolidated Financial Statements for the years ended
December 31, 2001, 2000 and 1999 and Management's
Discussion and Analysis.
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ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(C). Exhibits (all filed herewith)
Exhibit 23.1 Consent of Ernst & Young LLP, Independent
Auditors
Exhibit 23.2 Consent of PricewaterhouseCoopers LLP
Exhibit 99.1 Consolidated Financial Statements
for the years ended December 31, 2001,
2000 and 1999 with Report of Independent
Auditors and Management's Discussion and
Analysis
Exhibit 99.2 Report of Independent Auditors
PricewaterhouseCoopers LLP for the 2000
and 1999 Audits of Promistar Financial
Corporation
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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 hereunto duly authorized.
F.N.B. CORPORATION
(Registrant)
By: /s/John D. Waters
--------------------------
Name: John D. Waters
Title: Senior Vice President,
Investor Relations
Dated: July 24, 2002
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EXHIBIT INDEX
23.1 Consent of Ernst & Young LLP, Independent Auditors
23.2 Consent of PricewaterhouseCoopers LLP
99.1 Consolidated Financial Statements for the years ended December 31,
2001, 2000 and 1999 with Report of Independent Auditors and
Management's Discussion and Analysis
99.2 Report of Independent Auditors PricewaterhouseCoopers LLP for the 2000
and 1999 Audits of Promistar Financial Corporation
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EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference of our report dated May 6, 2002,
with respect to the consolidated financial statements of F.N.B. Corporation and
subsidiaries included in this Current Report on Form 8-K dated July 24, 2002
in the following Registration Statements and Prospectuses:
1. Registration Statement on Form S-8 relating to F.N.B. Corporation 1990
Stock Option Plan (File #33-78114).
2. Registration Statement on Form S-8 relating to F.N.B. Corporation
Restricted Stock Bonus Plan (File #33-78134).
3. Registration Statement on Form S-8 relating to F.N.B. Corporation 1996
Stock Option Plan (File #333-03489).
4. Registration Statement on Form S-8 relating to F.N.B. Corporation
Restricted Stock and Incentive Bonus Plan (File #333-03493).
5. Registration Statement on Form S-8 relating to F.N.B. Corporation
Directors Compensation Plan (File #333-03495).
6. Registration Statement on Form S-8 relating to F.N.B. Corporation
401(k) Plan (File #333-38372).
7. Post-Effective Amendment No.1 on Form S-8 to Registration Statement on
Form S-4 (File #333-01997).
8. Post-Effective Amendment No.1 on Form S-8 to Registration Statement on
Form S-4 (File #333-22909).
9. Registration Statement on Form S-3 relating to the F.N.B. Corporation
Subordinated Notes and Daily Cash Accounts (File #333-74737).
10. Registration Statement on Form S-8 relating to stock options assumed
in the acquisition of Mercantile Bank of Southwest Florida (File
#333-42333).
11. Post-Effective Amendment No. 1 on Form S-8 to Registration Statement
on Form S-4 (File #333-58727).
12. Registration Statement on Form S-3 relating to stock warrants assumed
in the acquisitions of Southwest Banks, Inc. and West Coast Bancorp,
Inc. (File #333-31124).
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13. Post-Effective Amendment No. 1 to Form S-3 relating to the F.N.B.
Corporation Dividend Reinvestment and Direct Stock Purchase Plan
(File #333-38374).
14. Amendment No. 1 to Form S-3 relating to the registration of F.N.B.
Corporation Subordinated Term Notes and Daily Notes (File #333-38370).
15. Registration Statement on Form S-8 relating to the F.N.B. Corporation
Salary Savings Plan (File #333-40648).
16. Registration Statement on Form S-8 relating to the F.N.B. Corporation
1998 Directors Stock Option Plan (File #333-38376).
17. Registration Statement on Form S-8 relating to the F.N.B. Corporation
2001 Incentive Plan (File #333-63042).
18. Registration Statement on Form S-3 relating to the registration of
F.N.B. Corporation and FNB Capital Trust I common stock, preferred
stock, debt securities, warrants, and trust preferred securities
(File #333-74866).
19. Registration Statement on Form S-8 relating to the F.N.B. Corporation
1996 Incentive Plan (File #333-83760).
20. Registration Statement on Form S-8 relating to stock option agreements
granted under the Promistar Financial Corporation 1998 Equity
Investment Plan and assumed by F.N.B. Corporation (File #333-83756).
/s/ERNST & YOUNG LLP
Birmingham, Alabama
July 24, 2002
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EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the
Registration Statement on Forms S-3 (Nos. 333-74737, 333-31124,
333-38374, 333-38370 and 333-74866) and Forms S-8 (Nos. 33-78114,
33-78134, 333-03489, 333-03493, 333-03495, 333-38372,
333-01997, 333-22909, 333-42333, 333-58727, 333-40648,
333-38376, 333-63042, 333-83756 and 333-83760) of F.N.B.
Corporation of our report dated January 23, 2001 except for
Note 22, which is dated February 26, 2001 relating to the
financial statements of Promistar Financial Corporation, which
appears in the Current Report on Form 8-K of F.N.B. Corporation
dated July 24, 2002.
/s/PRICEWATERHOUSECOOPERS LLP
Harrisburg, PA
July 24, 2002
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EXHIBIT 99.1
Consolidated Financial Statements
and Management's Discussion and Analysis
F.N.B. Corporation and Subsidiaries
Years ended December 31, 2001, 2000 and 1999
with Report of Independent Auditors
F.N.B. Corporation and Subsidiaries
Consolidated Financial Statements
and Management's Discussion and Analysis
Years ended December 31, 2001, 2000 and 1999
Contents
Report of Independent Auditors....................................... 1
Consolidated Financial Statements
Consolidated Balance Sheets..................................... 2
Consolidated Income Statements.................................. 3
Consolidated Statements of Stockholders' Equity................. 4
Consolidated Statements of Cash Flows........................... 5
Notes to Consolidated Financial Statements...................... 6
Selected Financial Data............................................. 33
Quarterly Earnings Summary.......................................... 34
Management's Discussion and Analysis of Financial Conditions and
Results of Operations........................................... 35
Report of Independent Auditors
Board of Directors
F.N.B. Corporation
We have audited the consolidated balance sheets of F.N.B. Corporation and
Subsidiaries (formed as a result of the consolidation of F.N.B. Corporation
and Promistar Financial Corporation) as of December 31, 2001 and 2000, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the three years in the period ended December 31, 2001. The
consolidated financial statements give retroactive effect to the merger of
F.N.B. Corporation and Promistar Financial Corporation on January 18, 2002,
which has been accounted for using the pooling of interests method as described
in the notes to the consolidated financial statements. These financial
statements are the responsibility of management of F.N.B. Corporation. Our
responsibility is to express an opinion on these financial statements based
on our audits. We did not audit the financial statements of Promistar Financial
Corporation for the years ended December 31, 2000 and 1999, which statements
reflect total assets constituting 34% in 2000 and net interest income
constituting 32% in 2000 and 34% in 1999 of the related consolidated financial
statement totals. Other auditors whose reports have been furnished to us
audited those Promistar Financial Corporation statements, and our opinion,
insofar as it relates to data included for Promistar Financial Corporation for
2000 and 1999, is based solely on the reports of the other auditors.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of F.N.B. Corporation at
December 31, 2001 and 2000, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
2001 after giving retroactive effect to the merger of Promistar Financial
Corporation, as described in the notes to the consolidated financial statements
in conformity with accounting principles generally accepted in the United
States.
/s/ERNST & YOUNG LLP
Birmingham, Alabama
May 6, 2002
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F.N.B. Corporation and Subsidiaries
Consolidated Balance Sheets
Dollars in thousands, except par values
December 31 2001 2000
---------- ----------
Assets
Cash and due from banks $ 246,781 $ 207,940
Interest bearing deposits with banks 3,712 1,975
Federal funds sold 88,260 66,832
Mortgage loans held for sale 1,323 1,042
Securities available for sale 902,970 840,118
Securities held to maturity (fair value of
$51,770 and $75,507) 51,368 75,522
Loans, net of unearned income
of $50,063 and $70,554 4,814,435 4,614,780
Allowance for loan losses (65,059) (57,124)
---------- ----------
Net Loans 4,749,376 4,557,656
Premises and equipment 149,518 140,180
Other assets 295,075 235,527
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$6,488,383 $6,126,792
========== ==========
Liabilities
Deposits:
Non-interest bearing $ 798,960 $ 721,952
Interest bearing 4,300,116 4,191,802
---------- ----------
Total Deposits 5,099,076 4,913,754
Other liabilities 98,722 85,624
Short-term borrowings 375,754 356,263
Long-term debt 342,424 267,729
---------- ----------
Total Liabilities 5,915,976 5,623,370
Stockholders' Equity
Preferred stock - $0.01 and $10 par value
Authorized - 20,000,000 shares
Issued - 147,033 and 167,732 shares
Aggregate liquidation value - $3,676 and $4,193 1 1,678
Common Stock - $0.01 and $2 par value
Authorized - 500,000,000 and 100,000,000 shares
Issued - 41,781,837 and 39,905,863 shares 418 79,812
Additional paid-in capital 444,549 328,037
Retained earnings 119,256 131,292
Accumulated other comprehensive income 9,845 1,603
Treasury stock - 63,178 and 1,835,140 shares at cost (1,662) (39,000)
---------- ----------
Total Stockholders' Equity 572,407 503,422
---------- ----------
$6,488,383 $6,126,792
========== ==========
See accompanying Notes to Consolidated Financial Statements
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F.N.B. Corporation and Subsidiaries
Consolidated Income Statements
Dollars in thousands, except per share data
Year Ended December 31 2001 2000 1999
-------- -------- --------
Interest Income
Loans, including fees $388,933 $392,473 $343,356
Securities:
Taxable 45,610 43,521 44,721
Nontaxable 7,558 7,007 7,538
Dividends 2,791 4,051 3,043
Other 5,474 3,658 3,256
-------- -------- --------
Total Interest Income 450,366 450,710 401,914
Interest Expense
Deposits 167,108 174,025 141,807
Short-term borrowings 15,026 21,072 14,905
Long-term debt 18,166 16,284 12,058
-------- -------- --------
Total Interest Expense 200,300 211,381 168,770
-------- -------- --------
Net Interest Income 250,066 239,329 233,144
Provision for loan losses 31,195 17,982 15,776
-------- -------- --------
Net Interest Income After
Provision For Loan Losses 218,871 221,347 217,368
Non-Interest Income
Insurance premiums, commissions
and fees 35,153 24,982 17,058
Service charges 36,086 32,749 30,656
Trust 9,077 8,831 7,884
Gain on sale of securities 1,828 212 1,760
Gain on sale of loans 6,562 3,184 2,187
Other 11,289 10,027 10,269
-------- -------- --------
Total Non-Interest Income 99,995 79,985 69,814
-------- -------- --------
318,866 301,332 287,182
Non-Interest Expenses
Salaries and employee benefits 121,066 116,441 104,884
Net occupancy 16,684 14,968 14,405
Amortization of intangibles 4,785 4,090 4,093
Equipment 19,731 19,260 16,824
Merger and consolidation related 8,037 6,700 6,028
Promotional 3,809 5,242 3,710
Insurance claims paid 8,011 5,304 4,162
Other 60,724 40,207 45,858
-------- -------- --------
Total Non-Interest Expenses 242,847 212,212 199,964
-------- -------- --------
Income Before Income Taxes 76,019 89,120 87,218
Income taxes 23,034 27,212 26,073
-------- -------- --------
Net Income $ 52,985 $ 61,908 $ 61,145
======== ======== ========
Earnings Per Common Share
Basic $1.25 $1.44 $1.42
===== ===== =====
Diluted $1.23 $1.42 $1.39
===== ===== =====
See accompanying Notes to Consolidated Financial Statements
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F.N.B. Corporation and Subsidiaries
Consolidated Statements of Stockholders' Equity
Dollars in thousands, except per share data
Accumulated
Other
Compre- Additional Compre-
hensive Preferred Common Paid-In Retained hensive Treasury
Income Stock Stock Capital Earnings Income Stock
------- --------- --------- --------- --------- ---------- ----------
Balance at January 1, 1999 $2,380 $71,079 $274,036 $134,215 $8,386 $ (3,108)
Net income $61,145 61,145
Change in accumulated other
comprehensive income (24,563) (24,563)
-------
Comprehensive income $36,582
=======
Cash dividends declared:
Preferred stock (411)
Common stock $.61 per share (FNB)
and $.68 per share (Promistar) (28,408)
Purchase of common stock (17,735)
Issuance of common stock 124 405 (3,840) 17,731
Stock dividend 5,888 34,643 (40,531)
Conversion of preferred stock (305) 139 166
--------- --------- -------- --------- --------- ---------
Balance at December 31, 1999 2,075 77,230 309,250 122,170 (16,177) (3,112)
Net income $61,908 61,908
Change in accumulated other
comprehensive income 17,780 17,780
-------
Comprehensive income $79,688
=======
Cash dividends declared:
Preferred stock (341)
Common stock $.65 per share (FNB)
and $.79 per share (Promistar) (29,795)
Purchase of common stock (6) (51,683)
Issuance of common stock 306 1,255 (3,233) 15,795
Stock dividend 2,085 17,332 (19,417)
Conversion of preferred stock (397) 191 206
--------- -------- --------- --------- --------- ---------
Balance at December 31, 2000 1,678 79,812 328,037 131,292 1,603 (39,000)
Net income $52,985 52,985
Change in accumulated other
comprehensive income 8,242 8,242
-------
Comprehensive income $61,227
=======
Cash dividends declared:
Preferred stock (293)
Common stock $.72 per share (FNB)
and $.80 per share (Promistar) (32,007)
Purchase of common stock (12,052)
Issuance of common stock 1,198 5,781 (4,259) 49,390
Stock dividend 2,437 26,025 (28,462)
Change in par value of stock (1,635) (83,050) 84,685
Conversion of preferred stock (42) 21 21
--------- -------- --------- --------- --------- ---------
Balance at December 31, 2001 $ 1 $ 418 $444,549 $119,256 $9,845 $(1,662)
========= ======== ========= ========= ========= =========
See accompanying Notes to Consolidated Financial Statements
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F.N.B. Corporation and Subsidiaries
Consolidated Statements of Cash Flows
Dollars in thousands
Year Ended December 31 2001 2000 1999
--------- --------- ---------
Operating Activities
Net income $ 52,985 $ 61,908 $ 61,145
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 19,471 18,531 18,079
Provision for loan losses 31,195 17,982 15,776
Deferred taxes 2,350 (541) (10,270)
Gain on securities available for sale (1,828) (212) (1,760)
Gain on sale of loans (6,562) (3,184) (2,187)
Proceeds from sale of loans 22,290 23,961 45,858
Loans originated for sale (16,009) (14,009) (36,457)
Net change in:
Interest receivable 4,510 (4,637) 898
Interest payable (3,313) 5,459 2,363
Other, net (36,491) (19,961) 13,767
--------- --------- ---------
Net cash flows from operating activities 68,598 85,297 107,212
--------- --------- ---------
Investing Activities
Net change in:
Interest bearing deposits with banks (1,129) 3,639 (1,365)
Federal funds sold 34,897 (1,573) 18,227
Loans (56,498) (232,154) (618,117)
Securities available for sale:
Purchases (421,691) (175,798) (249,966)
Sales 141,025 38,569 47,110
Maturities 286,306 99,175 209,192
Securities held to maturity:
Purchases (20,259) (1,664) (15,747)
Maturities 44,410 18,504 124,932
Increase in premises and equipment (21,131) (15,250) (20,756)
Net cash received (paid) for mergers,
acquisitions and divestiture 4,908 (341) (3,941)
--------- --------- ---------
Net cash flows from investing activities (9,162) (266,893) (510,431)
--------- --------- ---------
Financing Activities
Net change in:
Non-interest bearing deposits, savings and NOW 78,926 77,595 25,880
Time deposits (142,525) 228,403 88,965
Short-term borrowings 18,013 (92,291) 258,374
Increase in long-term debt 78,010 50,422 120,560
Decrease in long-term debt (21,315) (51,086) (23,433)
Net acquisition of treasury stock 596 (37,585) (3,314)
Cash dividends paid (32,300) (30,136) (28,819)
--------- --------- ---------
Net cash flows from financing activities (20,595) 145,322 438,213
--------- --------- ---------
Net Increase (Decrease) In Cash And Cash Equivalents 38,841 (36,274) 34,994
Cash and cash equivalents at beginning of year 207,940 244,214 209,220
--------- --------- ---------
Cash And Cash Equivalents At End Of Year $ 246,781 $ 207,940 $ 244,214
========= ========= =========
See accompanying Notes to Consolidated Financial Statements
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F.N.B. Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Summary of Significant Accounting Policies
Business:
F.N.B. Corporation (the Corporation) is a diversified financial services
company headquartered in Naples, Florida. The Corporation owns and operates
three regional community banks, two insurance agencies, a consumer finance
company and First National Trust Company. It has offices located in Florida,
Pennsylvania, Ohio and Tennessee.
Basis of Presentation:
The consolidated financial statements include the accounts of the Corporation
and its subsidiaries. All significant intercompany balances and transactions
have been eliminated. Certain reclassifications have been made to the prior
years' financial statements to conform to the current year's presentation. On
January 18, 2002, Promistar Financial Corporation merged with and into the
Corporation. This transaction was accounted for as a pooling-of-interests and
accordingly financial information for all periods presented has been restated
to present the combined financial position and results of operations as if the
transaction had been in effect for all periods presented.
Use of Estimates:
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Securities:
Debt securities are classified as held to maturity when management has the
positive intent and ability to hold securities to maturity. Securities held to
maturity are carried at amortized cost.
Debt securities not classified as held to maturity and marketable equity
securities are classified as available for sale. Securities available for sale
are carried at fair value with net unrealized securities gains (losses) reported
separately as a component of other comprehensive income.
Amortization of premiums and accretion of discounts are recorded as interest
income from securities. Realized gains and losses are recorded as net securities
gains (losses). The adjusted cost of specific securities sold is used to compute
gains or losses on sales.
Presently, the Corporation has no intention of establishing a trading
securities classification.
Mortgage Loans Held for Sale:
Mortgage loans held for sale are recorded at the lower of aggregate cost or
market value. Gain or loss on the sale of loans is included in non-interest
income.
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.
-6-
Interest income on loans is accrued on the principal amount outstanding. It is
the Corporation's policy to discontinue interest accruals when principal or
interest is due and has remained unpaid for 90 days or more unless the loan is
both well secured and in the process of collection. When a loan is placed on
non-accrual status, all unpaid interest is reversed. Payments on non-accrual
loans are generally applied to either principal or interest or both, depending
upon management's evaluation of collectibility. Non-accrual loans may not be
restored to accrual status until all delinquent principal and interest has been
paid, or the loan becomes both well secured and in the process of collection.
Consumer installment loans are generally charged off against the allowance for
loan losses upon reaching 90 to 180 days past due, depending on the installment
loan type. Loan origination fees and related costs are deferred and recognized
over the life of the loans as an adjustment of yield.
The allowance for loan losses is based on management's evaluation of potential
losses in the loan portfolio, which includes an assessment of past experience,
current and 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.
Premises and Equipment:
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed generally on the straight-line method over the asset's
estimated useful life. Useful lives are dependent upon the nature and condition
of the asset and range from 5 to 40 years.
Other Real Estate Owned:
Assets acquired in settlement of indebtedness are included in other assets at
the lower of fair value minus estimated costs to sell or at the carrying amount
of the indebtedness. Subsequent write-downs and net direct operating expenses
attributable to such assets are included in other expenses.
Amortization of Intangibles:
Goodwill is being amortized using the straight-line method over periods not
exceeding 20 years. Core deposit intangibles are being amortized using
accelerated methods over various lives ranging from 7-17 years. The Corporation
periodically evaluates its goodwill and core deposit intangibles for impairment.
-7-
Income Taxes:
Income taxes are computed utilizing the liability method. Under this method
deferred taxes are determined based on differences between financial reporting
and tax bases of assets and liabilities and are measured using the enacted tax
rates and laws that will be in effect when the differences are expected to
reverse.
Per Share Amounts:
Earnings and cash dividends per share have been adjusted for common stock
dividends, including the 5 percent stock dividend declared on May 6, 2002.
Basic earnings per common share is calculated by dividing net income, adjusted
for preferred stock dividends declared, by the sum of the weighted average
number of shares of common stock outstanding.
Diluted earnings per common share is calculated by dividing net income by the
weighted average number of shares of common stock outstanding, assuming
conversion of outstanding convertible preferred stock from the beginning of the
year 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 outstanding are made only when such adjustments dilute earnings per common
share.
Cash Equivalents:
The Corporation considers cash and due from banks as cash and cash
equivalents.
New Accounting Standards:
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. Because the Corporation has not entered
into any derivative transactions, the adoption of this statement did not have a
material impact on the financial statements.
FAS No. 141, "Business Combinations," requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001.
FAS No. 141 also specifies criteria that intangible assets acquired in purchase
business combinations must meet to be recognized and reported apart from
goodwill. At December 31, 2001, the Corporation's goodwill totaled $44.4
million, of which $2.5 million was deductible for income tax purposes.
FAS No. 142, "Goodwill and Other Intangible Assets," requires that goodwill
and intangible assets with indefinite 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 will apply the new rules
on accounting for goodwill and other intangible assets beginning in the first
quarter of 2002. Application of the non-amortization provisions of the Statement
is expected to result in an increase in net income of $3.5 million, or $0.08 per
share, per year. The Corporation has completed its transition impairment test
and concluded that goodwill is not impaired.
Mergers, Acquisitions and Divestitures
On January 18, 2002, the Corporation completed its affiliation with Promistar
Financial Corporation (Promistar), a bank holding company headquartered in
Johnstown, Pennsylvania,
-8-
with assets of $2.4 billion. Under the terms of the merger agreement, each
outstanding share of Promistar's common stock was converted into .926 shares
of the Corporation's common stock. A total of 16,007,346 shares of the
Corporation's common stock were issued. The transaction was accounted for as
a pooling-of-interests. Promistar's banking affiliate, Promistar Bank, was
merged into an existing subsidiary of the Corporation, First National Bank of
Pennsylvania (FNBPA). The Corporation incurred a merger related charge of
approximately $41.9 million during the first quarter of 2002 relating to this
transaction.
On August 14, 2001, the Corporation completed its affiliation with FNH
Corporation (FNH), a bank holding company headquartered in Irwin, Pennsylvania,
with assets of $303.7 million. The transaction was accounted for as a purchase.
Goodwill and a core deposit intangible of $7.0 million and $7.5 million,
respectively, were recorded in connection with the merger. FNH's banking
subsidiary, First National Bank of Herminie, was merged into Promistar Bank,
which was later merged into FNBPA.
On April 30, 2001, the Corporation completed its affiliation with Citizens
Community Bank of Florida (Citizens), a community bank headquartered in Marco
Island, Florida, with assets of $170.0 million. Under the terms of the merger
agreement, each outstanding share of Citizens common stock was converted into
..524 shares of the Corporation's common stock. A total of 1,775,224 shares of
the Corporation's common stock were issued. The transaction was accounted for as
a pooling-of-interests. Citizens' banking affiliate, Citizens Community Bank of
Florida, was merged into an existing subsidiary of the Corporation, First
National Bank of Florida (FNBFL).
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
Group, Inc. (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.
During 2000, the Corporation affiliated with Altamura, Marsh & Associates,
Clearwater and Fort Myers, Florida and Connell & Herrig, Insurance, Inc.,
Sarasota and Englewood, Florida. These affiliations were accounted for as
purchases and these acquired agencies are operating as divisions of Bouchard.
Also during 2000, Regency Finance Company (Regency), purchased eight consumer
finance offices. The transaction was also accounted for as a purchase and
resulted in the recognition of $1.2 million of goodwill.
During 1999, the Corporation affiliated with Roger Bouchard Insurance, Inc.,
Clearwater, Florida, First Philson Financial Corporation, Berlin, Pennsylvania
and Guaranty Bank & Trust Company, Venice, Florida. These affiliations added
assets and deposits of $378.7 million and $335.0 million, respectively, and
were accounted for as poolings-of-interests. The Corporation also affiliated
with Gelvin, Jackson & Starr, Inc., Meadville, Pennsylvania. This transaction
was accounted for as a purchase. Also during 1999, Regency expanded its size
and geographic scope through the purchase of 11 consumer finance offices.
This transaction was also accounted for as a purchase.
The Corporation regularly evaluates the potential acquisition of, and holds
discussions with, various acquisition candidates and as a general rule the
Corporation publicly announces such acquisitions only after a definitive merger
agreement has been reached.
-9-
Subsequent Events (unaudited)
On January 31, 2002, the Corporation completed its affiliation with Central
Bank Shares, Inc. (Central), a bank holding company headquartered in Orlando,
Florida, with assets of more than $251.4 million. The transaction, which was
accounted for as a purchase, resulted in the recognition of approximately $47.0
million of goodwill. Central's banking subsidiary, Bank of Central Florida, was
merged into FNBFL.
Reincorporation
On June 1, 2001, the Corporation reincorporated in the state of Florida. The
Corporation now operates from corporate headquarters located in Naples, Florida.
The Corporation was incorporated in 1974 in Hermitage, Pennsylvania, and at that
time substantially all of the Corporation's business was being conducted in
Pennsylvania. The Corporation expanded into Florida four years ago. As a result
of the dynamic growth experienced in that state and because of subsequent
acquisitions, a significant portion of the Corporation's assets and shareholders
now reside in Florida. In connection with the reincorporation, the Corporation
reduced the par value of both its common stock and preferred stock to $0.01 per
share.
Charter Consolidation
During the 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 FNBFL and its two
Pennsylvania banks were combined under FNBPA. 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 FNBFL
were consolidated into the Corporation's national trust company, First National
Trust Company. The Corporation incurred pre-tax consolidation charges of $3.2
million arising from legal and accounting fees, consulting fees, data processing
conversion charges, early retirement and involuntary separation and related
benefit costs. Involuntary separation costs associated with 42 terminated
employees totaled $1.4 million of the total consolidation expense. The total
amount of separation payments paid during 2001 was $1.0 million. The remaining
separation costs have been paid in 2002 in accordance with the contractual
terms of the employment and compensation agreements of the terminated
employees.
Securities
The amortized cost and fair value of securities are as follows (in thousands):
Securities available for sale:
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 2001 Cost Gains Losses Value
--------- ---------- ---------- ---------
U.S. Treasury and other U.S. Government
agencies and corporations $ 408,340 $ 8,745 $ (153) $ 416,932
Mortgage-backed securities of
U.S. Government agencies 288,999 3,535 (209) 292,325
States of the U.S. and political
subdivisions 146,165 665 (897) 145,933
Other debt securities 3,521 17 (1) 3,537
--------- --------- --------- ---------
Total Debt Securities 847,025 12,962 (1,260) 858,727
Equity securities 40,850 3,689 (296) 44,243
--------- --------- --------- ---------
$ 887,875 $ 16,651 $ (1,556) $ 902,970
========= ========= ========= =========
-10-
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 2000 Cost Gains Losses Value
--------- ---------- ---------- ---------
U.S. Treasury and other U.S. Government
agencies and corporations $ 398,312 $ 2,039 $ (2,510) $ 397,841
Mortgage-backed securities of
U.S. Government agencies 249,610 2,457 (1,396) 250,671
States of the U.S. and political
subdivisions 113,901 616 (575) 113,942
Other debt securities 1,675 11 (16) 1,670
--------- --------- --------- ---------
Total Debt Securities 763,498 5,123 (4,497) 764,124
Equity securities 74,107 2,759 (872) 75,994
--------- --------- --------- ---------
$ 837,605 $ 7,882 $ (5,369) $ 840,118
========= ========= ========= =========
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 1999 Cost Gains Losses Value
--------- ---------- ---------- ---------
U.S. Treasury and other U.S. Government
agencies and corporations $ 408,296 $ 84 $ (16,588) $ 391,792
Mortgage-backed securities of
U.S. Government agencies 190,969 285 (4,747) 186,507
States of the U.S. and political
subdivisions 114,797 64 (6,290) 108,571
Other debt securities 1,802 47 (24) 1,825
--------- --------- --------- ---------
Total Debt Securities 715,864 480 (27,649) 688,695
Equity securities 83,149 3,158 (891) 85,416
--------- --------- --------- ---------
$ 799,013 $ 3,638 $ (28,540) $ 774,111
========= ========= ========= =========
Securities held to maturity:
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 2001 Cost Gains Losses Value
--------- ---------- ---------- ---------
U.S. Treasury and other U.S. Government
agencies and corporations $ 3,214 $ 47 $ $ 3,261
Mortgage-backed securities of
U.S. Government agencies 3,068 38 3,106
States of the U.S. and political
subdivisions 43,493 541 (223) 43,811
Other debt securities 1,593 1 (2) 1,592
--------- --------- --------- ---------
$ 51,368 $ 627 $ (225) $ 51,770
========= ========= ========= =========
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 2000 Cost Gains Losses Value
--------- ---------- ---------- ---------
U.S. Treasury and other U.S. Government
agencies and corporations $ 32,887 $ 12 $ (171) $ 32,728
Mortgage-backed securities of
U.S. Government agencies 7,091 23 (18) 7,096
States of the U.S. and political
subdivisions 35,442 221 (79) 35,584
Other debt securities 102 (3) 99
--------- --------- --------- ---------
$ 75,522 $ 256 $ (271) $ 75,507
========= ========= ========= =========
-11-
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 1999 Cost Gains Losses Value
--------- ---------- ---------- ---------
U.S. Treasury and other U.S. Government
agencies and corporations $ 32,886 $ $ (1,177) $ 31,709
Mortgage-backed securities of
U.S. Government agencies 15,147 10 (157) 15,000
States of the U.S. and political
subdivisions 44,037 76 (656) 43,457
Other debt securities 288 (4) 284
--------- --------- --------- ---------
$ 92,358 $ 86 $ (1,994) $ 90,450
========= ========= ========= =========
At December 31, 2001 and 2000, securities with a carrying value of $313.4
million and $308.4 million, respectively, were pledged to secure public
deposits, trust deposits and for other purposes as required by law. Securities
with a carrying value of $343.3 million and $359.4 million at December 31, 2001
and 2000, respectively, were pledged as collateral for other borrowings.
As of December 31, 2001, the Corporation had not entered into any derivative
transactions.
As of December 31, 2001, the amortized cost and fair value of securities, by
contractual maturities, were as follows (in thousands):
Held to Maturity Available for Sale
-------------------- --------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- --------- --------- ---------
Due in one year or less $ 6,611 $ 6,677 $ 52,527 $ 53,672
Due from one to five years 22,063 22,501 190,403 195,435
Due from five to ten years 19,367 19,227 230,061 232,694
Due after ten years 259 259 85,035 84,601
--------- --------- --------- ---------
48,300 48,664 558,026 566,402
Mortgage-backed securities of
U.S. Government Agencies 3,068 3,106 288,999 292,325
Equity securities 40,850 44,243
--------- --------- --------- ---------
$ 51,368 $ 51,770 $ 887,875 $ 902,970
========= ========= ========= =========
Maturities may differ from contractual terms because borrowers may have the
right to call or prepay obligations with or without penalties. Periodic payments
are received on mortgage-backed securities based on the payment patterns of the
underlying collateral.
Proceeds from sales of securities available for sale during 2001, 2000 and
1999 were $141.0 million, $38.6 million and $47.1 million, respectively. Gross
gains and gross losses were realized on those sales as follows (in thousands):
2001 2000 1999
------ ------ ------
Gross gains $1,836 $ 304 $1,854
Gross losses (8) (92) (94)
------ ------ ------
$1,828 $ 212 $1,760
====== ====== ======
-12-
Loans
Following is a summary of loans (in thousands):
December 31 2001 2000
---------- ----------
Real estate:
Residential $1,777,403 $1,706,462
Commercial 1,282,944 1,110,833
Construction 227,868 220,754
Installment loans to individuals 774,932 832,904
Commercial, financial and agricultural 672,639 610,194
Lease financing 128,712 204,187
Unearned income (50,063) (70,554)
---------- ----------
$4,814,435 $4,614,780
========== ==========
The loan portfolio consists principally of loans to individuals and small-
and medium-sized businesses within the Corporation's primary market area of
southwest Florida, western and central Pennsylvania, northern and central
Tennessee, and eastern Ohio.
As of December 31, 2001, no concentrations of loans exceeding 10% of total
loans existed which were not disclosed as a separate category of loans.
Certain directors and executive officers of the Corporation and its
significant subsidiaries, as well as associates of such persons, were loan
customers during 2001. Such loans were made in the ordinary course of business
under normal credit terms and do not represent more than a normal risk of
collection. Following is a summary of the aggregate amount of loans to any such
persons who had loans in excess of $60,000 during the year (in thousands):
Total loans at December 31, 2000 $ 84,388
New loans 41,595
Repayments (47,225)
Other (3,276)
--------
Total loans at December 31, 2001 $ 75,482
========
Other represents the net change in loan balances resulting from changes in
related parties during the year.
Non-Performing Assets
Following is a summary of non-performing assets (in thousands):
December 31 2001 2000
------- -------
Non-accrual loans $21,350 $21,478
Restructured loans 5,578 3,020
------- -------
Total Non-Performing Loans 26,928 24,498
Other real estate owned 4,375 7,204
------- -------
Total Non-Performing Assets $31,303 $31,702
======= =======
-13-
For the years ended December 31, 2001, 2000 and 1999, income recognized on
non-accrual and restructured loans was $1.1 million, $964,000 and $908,000,
respectively. Income that would have been recognized during 2001, 2000 and 1999
on such loans if they were in accordance with their original terms was $2.3
million, $2.9 million and $2.4 million, respectively. Loans past due 90 days or
more were $5.9 million, $5.4 million and $5.4 million at December 31, 2001, 2000
and 1999, respectively.
Following is a summary of information pertaining to loans considered to be
impaired (in thousands):
At of For the Year Ended December 31 2001 2000 1999
------- ------- ------
Impaired loans with an allocated allowance $2,799 $2,717 $7,491
Impaired loans without an allocated allowance 1,023 1,577 1,762
------ ------ ------
Total impaired loans $3,822 $4,294 $9,253
====== ====== ======
Allocated allowance on impaired loans $1,153 $ 725 $1,957
====== ====== ======
Portion of impaired loans on non-accrual $1,678 $3,637 $6,694
====== ====== ======
Average impaired loans $2,735 $7,858 $7,605
====== ====== ======
Income recognized on impaired loans $ 187 $ 297 $ 331
====== ====== ======
Allowance for Loan Losses
Following is an analysis of changes in the allowance for loan losses (in
thousands):
Year Ended December 31 2001 2000 1999
-------- -------- --------
Balance at beginning of year $ 57,124 $ 52,851 $ 46,463
Addition from acquisitions 3,400 767 2,813
Charge-offs (29,490) (17,377) (14,786)
Recoveries 2,830 2,901 2,585
-------- -------- --------
Net Charge-Offs (26,660) (14,476) (12,201)
Provision for loan losses 31,195 17,982 15,776
-------- -------- --------
Balance at end of year $ 65,059 $ 57,124 $ 52,851
======== ======== ========
Premises and Equipment
Following is a summary of premises and equipment (in thousands):
December 31 2001 2000
--------- ---------
Land $ 27,226 $ 26,815
Premises 137,548 125,180
Equipment 112,960 102,644
--------- ---------
277,734 254,639
Accumulated depreciation (128,216) (114,459)
--------- ---------
$ 149,518 $ 140,180
========= =========
Depreciation expense was $14.8 million for 2001, $15.1 million for 2000 and
$14.3 million for 1999.
-14-
The Corporation has operating leases extending to 2087 for certain land,
office locations and equipment. Leases that expire are generally expected to be
renewed or replaced by other leases. Rental expense was $7.2 million for 2001,
$7.0 million for 2000 and $4.7 million for 1999. Total minimum rental
commitments under such leases were $34.9 million at December 31, 2001. Following
is a summary of future minimum lease payments for years following December 31,
2001 (in thousands):
2002 $ 3,640
2003 2,932
2004 1,977
2005 1,630
2006 1,074
Later years 23,619
Deposits
Following is a summary of deposits (in thousands):
December 31 2001 2000
---------- ----------
Non-interest bearing $ 798,960 $ 721,952
Savings and NOW 1,980,939 1,853,942
Certificates of deposit and
other time deposits 2,319,177 2,337,860
---------- ----------
$5,099,076 $4,913,754
========== ==========
Following is a summary of the scheduled maturities of certificates of deposits
and other time deposits for each of the five years following December 31, 2001
(in thousands):
2002 $1,668,469
2003 408,830
2004 158,433
2005 57,830
2006 25,365
Later years 250
Time deposits of $100,000 or more were $563.8 million and $605.2 million at
December 31, 2001 and 2000, respectively. Following is a summary of these time
deposits by remaining maturity at December 31, 2001 (in thousands):
Certificates Other Time
of Deposit Deposits Total
------------ ---------- ---------
Three months or less $129,638 $ 9,838 $139,476
Three to six months 95,318 9,593 104,911
Six to twelve months 152,633 12,460 165,093
Over twelve months 135,678 18,664 154,342
-------- ------- --------
$513,267 $50,555 $563,822
======== ======= ========
-15-
Short-Term Borrowings
Following is a summary of short-term borrowings (in thousands):
December 31 2001 2000
-------- --------
Securities sold under repurchase agreements $232,952 $184,060
Federal funds purchased 6,865 865
Federal Home Loan Bank advances 42,400
Other short-term borrowings 34,101 58,630
Subordinated notes 101,836 70,308
-------- --------
$375,754 $356,263
======== ========
Credit facilities amounting to $118.0 million at December 31, 2001 were
maintained with various banks with rates which are at or below prime rate. The
facilities and their terms are periodically reviewed by the banks and are
generally subject to withdrawal at their discretion. Credit facilities amounting
to $30.0 million were used at December 31, 2001.
Long-Term Debt
Following is a summary of long-term debt (in thousands):
December 31 2001 2000
-------- --------
Federal Home Loan Bank advances $303,743 $220,829
Other long-term debt 1,431 1,380
Subordinated notes 37,250 45,520
-------- --------
$342,424 $267,729
======== ========
The Corporation has available credit with the Federal Home Loan Bank of $1.3
billion, of which $303.7 million was used as of December 31, 2001. These
advances are secured by residential real estate loans and Federal Home Loan Bank
Stock and are scheduled to mature in various amounts periodically through the
year 2010. Interest rates paid on these advances range from 4.75% to 7.19% in
2001 and 5.46% and 7.19% in 2000.
Subordinated notes are unsecured and subordinated to other indebtedness of the
Corporation. The subordinated notes are scheduled to mature in various amounts
periodically through the year 2011. At December 31, 2001, $27.3 million of
long-term subordinated debt is redeemable by the holders prior to maturity at a
discount equal to three months of interest. The Corporation may require the
holder to give 30 days prior written notice. No sinking fund is required and
none has been established to retire the debt. The weighted average interest rate
on long-term subordinated debt was 7.24% at December 31, 2001 and 7.46% at
December 31, 2000.
Scheduled annual maturities for all of the long-term debt for each of the five
years following December 31, 2001 are as follows (in thousands):
2002 $ 18,629
2003 32,143
2004 1,840
2005 31,593
2006 3,406
Later years 254,813
-16-
Commitments, Credit Risk and Contingencies
The Corporation has commitments to extend credit and standby letters of credit
which involve certain elements of credit risk in excess of the amount stated in
the consolidated balance sheet. The Corporation's exposure to credit loss in the
event of non-performance by the customer is represented by the contractual
amount of those instruments. Consistent credit policies are used by the
Corporation for both on- and off-balance sheet items.
Following is a summary of off-balance sheet credit risk information (in
thousands):
December 31 2001 2000
-------- --------
Commitments to extend credit $877,210 $783,503
Standby letters of credit 57,520 46,870
At December 31, 2001, funding of approximately 85% of the commitments to
extend credit is dependent on the financial condition of the customer. The
Corporation has the ability to withdraw such commitments at its discretion.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. Based on management's credit evaluation of
the customer, collateral may be deemed necessary. Collateral requirements vary
and may include accounts receivable, inventory, property, plant and equipment
and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the
Corporation which may require payment at a future date. The credit risk involved
in issuing letters of credit is essentially the same as that involved in
extending loans to customers.
The Corporation established a litigation reserve by recording a pre-tax charge
of approximately $4.0 million to cover estimated legal expenses associated with
five cases filed against one of its subsidiary banks. The plaintiffs allege that
a third-party independent administrator misappropriated funds from their
individual retirement accounts held by the subsidiary bank. 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 unasserted claims, settlements and adverse judgements.
Stockholders' Equity
Series A - Cumulative Convertible Preferred Stock (Series A Preferred) was
issued in 1985. Holders of Series A Preferred are entitled to 6.9 votes for each
share held. The holders do not have cumulative voting rights in the election of
directors. Dividends are cumulative from the date of issue and are payable at
$.42 per share each quarter. Series A Preferred is convertible at the option of
the holder into shares of the Corporation's common stock based on a value of
$25.00 at time of conversion. The Corporation has the right to require the
conversion of the balance of all outstanding shares at the conversion rate. At
December 31, 2001, 19,050 shares of common stock were reserved by the
Corporation for the conversion of the remaining 19,174 outstanding shares.
-17-
Series B - Cumulative Convertible Preferred Stock (Series B Preferred) was
issued in 1992. Holders of Series B Preferred have no voting rights. Dividends
are cumulative from the date of issue and are payable at $.46875 per share each
quarter. Series B Preferred has a stated value of $25.00 per share and is
convertible at the option of the holder at any time into shares of the
Corporation's common stock at a value of $9.12 per share. The Corporation has
the right to require the redemption of the balance of all outstanding shares at
the conversion rate. During 2001, 20,679 shares of Series B Preferred were
converted to 56,140 shares of common stock. At December 31, 2001, 352,639 shares
of common stock were reserved by the Corporation for the conversion of the
remaining 127,859 outstanding shares.
Comprehensive Income
The components of comprehensive income, net of related tax, are as follows (in
thousands):
Year Ended December 31 2001 2000 1999
------- ------- -------
Net income $52,985 $61,908 $61,145
Other comprehensive income:
Unrealized gains (losses) on securities:
Arising during the period, net of tax expense
(benefit) of $5,080, $9,686 and $(12,638) 9,434 17,957 (23,469)
Less: reclassification adjustment for
gains included in net income previously
reflected as an unrealized gain or loss, net
of tax benefit of $642, $112 and $589 (1,192) (207) (1,094)
Minimum pension liability adjustment 30
------- ------- -------
Other comprehensive income 8,242 17,780 (24,563)
------- ------- -------
Comprehensive income $61,227 $79,688 $36,582
======= ======= =======
Stock Incentive Plans
The Corporation has available up to 1,166,472 shares of common stock to be
issued under the restricted stock and incentive bonus and restricted stock bonus
plans to key employees of the Corporation. All shares of stock awarded under
these plans vest in equal installments over a five year period on each
anniversary of the date of grant. During 2001, the Corporation granted 6,115
shares of stock under these plans. The weighted average fair value of the
restricted shares issued was $20.67.
The Corporation has available up to 3,008,792 shares of common stock to be
issued under both incentive and non-qualified stock option plans to key
employees of the Corporation. The options vest in equal installments over
periods ranging from three to ten years. The options are granted at a price
equal to the fair market value at the date of the grant and are exercisable
within ten years from the date of the grant. Because the exercise price of the
Corporation's stock options equals the market price of the underlying stock on
the date of grant, no compensation expense is recognized.
-18-
In accordance with FAS No. 123, the following table shows pro forma net income
and earnings per share along with significant assumptions used in the
Black-Scholes option pricing model (dollars in thousands, except per share
data):
Year Ended December 31 2001 2000 1999
------- ------- -------
Pro forma net income $50,564 $59,884 $59,695
======= ======= =======
Pro forma earnings per share:
Basic $1.19 $1.40 $1.39
===== ===== =====
Diluted $1.17 $1.38 $1.36
===== ===== =====
Assumptions:
Risk-free interest rate 5.25% 6.79% 4.72%
Dividend yield 2.84% 3.37% 3.20%
Expected stock price volitility .26% .26% .23%
Expected life (years) 5.00 5.00 5.00
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period of five years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferrable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Corporation's employee stock options have characteristics
significantly different from those of traded options, and changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
Activity in the Option Plan during the past three years was as follows:
Weighted
Average
Price per
2001 Share 2000 1999
--------- --------- --------- ---------
Outstanding, beginning of year 3,014,089 $17.93 2,372,552 2,025,727
Granted during the year 696,466 20.31 855,151 632,849
Exercised during the year (266,224) 10.99 (110,322) (235,474)
Forfeited during the year (206,347) 18.16 (103,292) (50,550)
--------- --------- ---------
Ending balance 3,237,984 19.79 3,014,089 2,372,552
========= ========= =========
-19-
The following table summarizes information about the stock options outstanding
at December 31, 2001:
Options Outstanding Options Exercisable
---------------------------------------------------- -----------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Options Contractual Exercise Options Exercise
Prices Outstanding Life Price Exercisable Price
--------------- ----------- ----------- --------- ----------- ---------
$ 4.98 - $ 7.47 93,177 4.63 6.12 93,177 6.12
7.48 - 11.22 348,205 2.44 9.33 320,399 9.33
11.23 - 16.85 205,112 4.38 14.80 188,029 14.84
16.86 - 25.29 1,898,387 8.00 20.28 723,367 19.91
26.30 - 27.28 693,103 6.33 27.04 591,733 27.00
--------- ---------
3,237,984 1,916,705
========= =========
The Corporation has granted warrants to purchase common stock (at an exercise
price of $8.57 per share). Such warrants are exercisable and will expire on
December 17, 2003. The Corporation has reserved 12,429 shares of common stock
for issuance in connection with these warrants.
Retirement and Other Postretirement Benefit Plans
Retirement Plans
Following are reconciliations of the change in benefit obligation, change in
plan assets and funded status (in thousands):
December 31 2001 2000
------- -------
Benefit obligation at beginning of year $62,156 $51,332
Service cost 3,107 2,443
Interest cost 5,101 4,304
Plan amendments 2,946 254
Actuarial loss 6,310 2,993
Termination charge due to curtailment 94
Conforming adjustment 412
Adjustment for acquisition 2,365 651
One time charge for voluntary early retirement 2,270
Benefits paid (2,797) (2,091)
------- -------
Benefit obligation at end of year $79,694 $62,156
======= =======
December 31 2001 2000
------- -------
Fair value of plan assets at beginning of year $60,214 $60,660
Actual return on plan assets (521) (96)
Company contribution 2,414 1,741
Adjustment for acquisition 1,154
Benefits paid (2,797) (2,091)
------- -------
Fair value of plan assets at end of year $60,464 $60,214
======= =======
-20-
December 31 2001 2000
-------- -------
Funded status of plan $(19,229) $(1,941)
Unrecognized actuarial loss (gain) 7,355 (6,589)
Unrecognized prior service cost 2,208 1,415
Unrecognized net transition obligation (1,130) (1,218)
-------- -------
Accrued pension cost $(10,796) $(8,333)
======== =======
Included in the above reconciliation is the benefit obligation and fair value
of plan assets for the Basic Retirement Plan which were $15.5 million and $0,
respectively, as of December 31, 2001, and $9.8 million and $0, respectively, as
of December 31, 2000.
The amounts recognized in the Corporation's consolidated financial statements
include the following (in thousands):
December 31 2001 2000
-------- -------
Prepaid pension cost $ 2,448 $ 1,177
Accrued pension cost (13,244) (9,510)
Additional minimum liability (3,504) (1,592)
Accumulated other comprehensive income 30
Intangible asset 3,504 1,562
-------- -------
Net amount recognized on balance sheet $(10,796) $(8,333)
======== =======
The pension expense for the defined benefit plans included the following
components (in thousands):
Year Ended December 31 2001 2000 1999
------- ------- -------
Service costs $ 3,107 $ 2,443 $ 2,837
Interest cost 5,102 4,304 3,944
Expected return on plan assets (4,917) (4,860) (4,777)
Termination charge due to curtailment 94
Conforming adjustment 412
Adjustment for acquisition (174)
One time charge for voluntary early retirement 2,270
Net amortization 381 (284) 398
------- ------- -------
Net pension expense $ 4,005 $ 3,873 $ 2,402
======= ======= =======
Assumptions as of December 31 2001 2000 1999
------- ------- ------
Weighted average discount rate 7.3% 7.5% 7.8%
Rates of increase in compensation levels 4.0% 4.0% 4.0%
Expected long-term rate of return on assets 8.0% 8.0% 8.0%
At December 31, 2001, plan assets include 81,712 shares of the Corporation's
common stock, having a market value of $2.2 million. Dividends received on these
shares totaled $61,000 for 2001. During 2000, the Corporation completed an
early retirement program at Promistar, which resulted in a special termination
charge of $2.3 million.
Certain subsidiaries of the Corporation participate in a qualified 401(k)
defined contribution plan for the full-time employees of the subsidiary. A
percentage of employees' contributions to the plan are matched by the
Corporation. The Corporation's contribution expense amounted to $1.8 million in
2001, $1.3 million in 2000 and $1.1 million in 1999.
-21-
Certain subsidiaries of the Corporation participate in a Salary Savings ESOP
Plan, under which eligible employees may contribute a percentage of their
salary. The Corporation matches 50 percent of an eligible employee's
contribution on the first 6 percent that the employee defers, and may make a
discretionary contribution payable either in cash or the Corporation's common
stock based upon the Corporation's profitability. Employees are generally
eligible to participate upon completing one year of service and having attained
age 21. Employer contributions become 20 percent vested when an employee has
completed two years of service, and vest at a rate of 20 percent per year
thereafter. The Corporation recognized expense of $1.4 million in 2001, $910,000
in 2000 and $1.0 million in 1999 related to the Salary Savings ESOP Plan.
Postretirement Plans
Following are reconciliations of the change in benefit obligation, change in
plan assets and funded status (in thousands):
December 31 2001 2000
------ ------
Benefit obligation at beginning of year $3,331 $3,032
Service cost 96 85
Interest cost 240 216
Plan participants' contributions 137 62
Plan amendments 13
Actuarial gain (40) (253)
Benefits paid (478) (287)
Adjustment for acquisition 230
One time charge for voluntary early retirement 471
Curtailment and settlement 18 (8)
------ ------
Benefit obligation at end of year $3,534 $3,331
====== ======
December 31 2001 2000
------ ------
Fair value of plan assets at beginning of year $ 0 $ 0
Company contribution 341 225
Plan participants' contributions 137 62
Benefits paid (478) (287)
----- -----
Fair value of plan assets at end of year $ 0 $ 0
===== =====
December 31 2001 2000
------- -------
Funded status of plan $(3,534) $(3,331)
Unrecognized actuarial gain (276) (264)
Unrecognized prior service cost 67 72
Unrecognized net transition obligation 368 418
------- -------
Accrued pension cost $(3,375) $(3,105)
======= =======
-22-
Net periodic postretirement benefit cost included the following components (in
thousands):
Year Ended December 31 2001 2000 1999
------ ------ ------
Service cost $ 96 $ 85 $101
Interest cost 240 216 189
Curtailment and settlement 18 (8)
One time charge for voluntary retirement 230 471
Net amortization 27 33 38
---- ---- ----
Net periodic postretirement benefit cost $611 $797 $328
==== ==== ====
Discount rates of 7.3%, 7.5% and 7.8% for 2001, 2000 and 1999, respectively,
were used to determine the accumulated postretirement benefit obligation.
The assumed health care cost trend rate has a significant effect on the
amounts reported. An 8.0% annual rate of increase in the per capita costs of
covered health care benefits is assumed for 2002, gradually decreasing to 5.0%
by the year 2005. A one percentage point change in the assumed health care cost
trend rate would have had the following effects on 2001 service and interest
cost and the accumulated postretirement benefit obligation at December 31, 2001
(in thousands):
1% 1%
Increase Decrease
-------- --------
Effect on service and interest components
of net periodic cost $ 28 $ (24)
Effect on accumulated postretirement
benefit obligation 221 (194)
-23-
Income Taxes
Income tax expense consists of the following (in thousands):
Year Ended December 31 2001 2000 1999
------- ------- -------
Current income taxes:
Federal taxes $19,883 $27,245 $35,371
State taxes 801 508 972
------- ------- -------
20,684 27,753 36,343
Deferred income taxes:
Federal taxes 1,920 130 (10,270)
State taxes 430 (671)
------- ------- -------
$23,034 $27,212 $26,073
======= ======= =======
The tax effects of temporary differences that give rise to deferred tax assets
and liabilities are presented below (in thousands):
December 31 2001 2000
-------- --------
Deferred tax assets:
Allowance for loan losses $ 22,771 $ 19,421
Deferred compensation 4,063 3,048
Deferred benefits 4,553 3,928
Loan fees 438 332
Other 3,317 2,524
-------- --------
Total Gross Deferred Tax Assets 35,142 29,253
-------- --------
Deferred tax liabilities:
Depreciation (2,182) (1,905)
Deferred gain on sale of subsidiary (3,555) (3,555)
Unrealized gains on securities available for sale (5,301) (1,013)
Leasing (14,971) (20,506)
Other (1,491) (1,855)
-------- --------
Total Gross Deferred Tax Liabilities (26,009) (26,979)
-------- --------
Net Deferred Tax Assets $ 7,642 $ 419
======== ========
Following is a reconciliation between tax expense using federal statutory tax
and actual effective tax:
Year Ended December 31 2001 2000 1999
------ ------ ------
Federal statutory tax 35.0% 35.0% 35.0%
Effect of nontaxable interest and
dividend income (6.8) (5.4) (5.8)
State taxes 1.1 0.5 0.7
Goodwill 1.2 1.0 1.0
Merger related costs 0.7 0.1 0.5
Other items (0.9) (0.7) (1.5)
------ ------ ------
Actual effective taxes 30.3% 30.5% 29.9%
====== ====== ======
Income tax expense related to gains on the sale of securities was $640,000,
$74,000 and $616,000 for the years ended December 31, 2001, 2000 and 1999,
respectively.
-24-
Earnings per Share
The following tables set forth the computation of basic and diluted earnings
per share (in thousands, except per share data):
Year Ended December 31 2001 2000 1999
---------- ---------- ----------
Basic
Net income $52,985 $61,908 $61,145
Less: Preferred stock dividends declared (293) (341) (411)
------- ------- -------
Net income applicable to basic earnings
per share $52,692 $61,567 $60,734
======= ======= =======
Average common shares outstanding 42,180,735 42,617,465 42,745,288
========== ========== ==========
Earnings per share $1.25 $1.44 $1.42
===== ===== =====
Diluted
Net income applicable to diluted earnings
per share $52,985 $61,908 $61,145
======= ======= =======
Average common shares outstanding 42,180,735 42,617,465 42,745,288
Convertible preferred stock 398,745 471,499 603,665
Net effect of dilutive stock options
based on the treasury stock method
using the average market price 644,801 425,597 566,993
---------- ---------- ----------
43,224,281 43,514,561 43,915,946
========== ========== ==========
Earnings per share $1.23 $1.42 $1.39
===== ===== =====
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). Management believes, as of December 31, 2001, that the Corporation and
each of its banking subsidiaries meet all capital adequacy requirements to which
they are subject.
As of December 31, 2001, the Corporation and each of its banking subsidiaries
have been categorized by the various regulators as "well capitalized" under the
regulatory framework for prompt corrective action.
The Corporation and its banking subsidiaries are subject to various regulatory
capital requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory, and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Corporation's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Corporation and its banking subsidiaries must meet specific capital
guidelines that involve quantitative measures of assets, liabilities and certain
off-balance sheet items as calculated under regulatory accounting practices. The
Corporation's and banking subsidiaries' capital amounts and classifications are
also subject to qualitative judgments by the regulators about components, risk
weightings and other factors.
-25-
Following are the capital ratios as of December 31, 2001 for the Corporation
and its significant subsidiaries, First National Bank of Florida and First
National Bank of Pennsylvania (dollars in thousands):
Well Capitalized Minimum Capital
Actual Requirements Requirements
----------------- ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
-------- ------- -------- ------- -------- -------
Total Capital (to risk-weighted assets):
F.N.B. Corporation $568,162 11.8% $482,049 10.0% $385,639 8.0%
First National Bank of Florida 173,173 10.1 171,176 10.0 136,940 8.0
First National Bank of Pennsylvania 315,778 11.6 271,874 10.0 217,499 8.0
Tier 1 Capital (to risk-weighted assets):
F.N.B. Corporation $506,294 10.5% $289,230 6.0% $192,820 4.0%
First National Bank of Florida 154,459 9.0 102,705 6.0 68,470 4.0
First National Bank of Pennsylvania 281,751 10.4 163,125 6.0 108,750 4.0
Tier 1 Capital (to average assets):
F.N.B. Corporation $506,294 7.9% $319,922 5.0% $255,937 4.0%
First National Bank of Florida 154,459 7.2 106,744 5.0 85,395 4.0
First National Bank of Pennsylvania 281,751 7.5 188,428 5.0 150,742 4.0
The Corporation's banking subsidiaries were required to maintain aggregate
cash reserves with the Federal Reserve Bank amounting to $56.1 million at
December 31, 2001. The Corporation also maintains deposits for various services
such as check clearing.
Certain limitations exist under applicable law and regulations by regulatory
agencies regarding dividend payments to a parent by its subsidiaries. As of
December 31, 2001, the subsidiaries had $65.9 million of retained earnings
available for distribution as dividends without prior regulatory approval.
Under current Federal Reserve regulations, the Corporation's banking
subsidiaries are limited in the amount they may lend to non-bank affiliates,
including the Corporation. Such loans must be secured by specified collateral.
In addition, any such loans to a single non-bank affiliate may not exceed 10% of
any banking subsidiary's capital and surplus and the aggregate of loans to all
such affiliates may not exceed 20%. The maximum amount that may be borrowed by
the parent company under these provisions approximated $66.1 million at December
31, 2001.
-26-
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 bank subsidiaries offer trust
services as well as various alternative investment products, including mutual
funds 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 table
below represent the parent company, other non-bank subsidiaries and
eliminations, which are necessary for purposes of reconciling to the
consolidated amounts.
-27-
Community Insurance Finance All
Banks Agencies Company Other Consolidated
---------- --------- ------- ------- ------------
At or for the Year Ended December 31, 2001
Interest income $ 423,871 $ 196 $28,555 $(2,256) $ 450,366
Interest expense 191,295 232 8,711 62 200,300
Provision for loan losses 25,954 5,241 31,195
Non-interest income 61,701 26,720 1,875 9,699 99,995
Non-interest expense 190,073 20,724 12,407 14,858 238,062
Intangible amortization 3,115 775 126 769 4,785
Income tax expense (credit) 23,034 2,192 1,443 (3,635) 23,034
Net income 52,101 2,993 2,502 (4,611) 52,985
Core operating earnings* 56,605 2,993 2,502 (1,195) 60,905
Total assets 6,277,928 29,761 153,706 26,988 6,488,383
Goodwill 28,307 14,255 1,809 44,371
At or for the Year Ended December 31, 2000
Interest income $ 428,791 $ 164 $ 26,021 $(4,266) $ 450,710
Interest expense 206,308 207 8,083 (3,217) 211,381
Provision for loan losses 13,767 4,245 (30) 17,982
Non-interest income 50,449 20,190 1,818 7,528 79,985
Non-interest expense 171,674 16,242 11,200 9,006 208,122
Intangible amortization 3,540 463 87 4,090
Income tax expense (credit) 25,910 1,214 1,585 (1,497) 27,212
Net income 58,041 2,228 2,639 (1,000) 61,908
Core operating income 57,780 2,228 2,639 3,379 66,026
Total assets 5,954,375 24,824 153,152 (5,559) 6,126,792
Goodwill 23,717 12,373 1,935 38,025
At or for the Year Ended December 31, 1999
Interest income $ 386,539 $ 129 $ 17,966 (2,720) $ 401,914
Interest expense 165,807 179 4,586 (1,802) 168,770
Provision for loan losses 13,024 2,752 15,776
Non-interest income 45,202 14,040 1,240 9,332 69,814
Non-interest expense 163,437 11,762 8,208 12,464 195,871
Intangible amortization 3,986 64 43 4,093
Income tax expense (credit) 26,227 (359) 1,289 (1,084) 26,073
Net income 59,260 2,523 2,328 (2,966) 61,145
Core operating earnings* 59,322 2,523 2,328 1,088 65,261
Total assets 5,768,704 9,378 124,577 (10,396) 5,892,263
Goodwill 25,899 4,227 98 30,224
* Core operating earnings exclude consolidation charges of $2.1 million and
merger related and other non-recurring costs of $5.8 million in 2001, gain on
the sale of branches of $261,000 and merger related and other non-recurring
costs of $4.4 million in 2000 and gain on the sale of branches of $366,000
and merger related and other non-recurring costs of $4.5 million in 1999,
all on an after-tax basis. Such presentation is provided in order to
eliminate all items deemed by management to be of a non-recurring nature.
-28-
Cash Flow Information
Following is a summary of cash flow information (in thousands):
Year Ended December 31 2001 2000 1999
-------- -------- --------
Cash paid during year for:
Interest $203,613 $198,466 $166,221
Income taxes 23,908 33,150 17,642
Non-cash Investing and Financing Activities:
Acquisition of real estate in
settlement of loans 3,198 4,210 3,929
Loans granted in the sale of other real estate 3,178 465 176
Parent Company Financial Statements
Below is condensed financial information of F.N.B. Corporation (parent company
only). In this information, the parent's investments in subsidiaries are stated
at cost plus equity in undistributed earnings of subsidiaries since acquisition.
This information should be read in conjunction with the consolidated financial
statements.
Balance Sheet (in thousands):
December 31 2001 2000
-------- --------
Assets
Cash $ 2,080 $ 370
Short-term investments 7,534 10,409
Securities available for sale 190
Loans receivable 4,800
Premises and equipment 3,043 1,078
Other assets 26,868 8,827
Investment in bank subsidiaries 507,098 471,641
Investment in non-bank subsidiaries 217,021 194,661
-------- --------
Total $763,644 $691,976
======== ========
Liabilities
Other liabilities $ 22,041 $ 16,433
Short-term borrowings 133,357 127,632
Long-term debt 35,839 44,489
-------- --------
Total Liabilities 191,237 188,554
-------- --------
Stockholders' Equity 572,407 503,422
-------- --------
Total $763,644 $691,976
======== ========
-29-
Income Statement (in thousands)
Year Ended December 31 2001 2000 1999
------- ------- -------
Income
Dividend income from subsidiaries:
Bank $64,839 $36,698 $44,545
Non-bank 3,691 4,570 2,165
------- ------- -------
68,530 41,268 46,710
Interest income 574 511 667
Affiliate service fee income 23,217 25,429 23,636
Other income 903 672 864
------- ------- -------
Total Income 93,224 67,880 71,877
------- ------- -------
Expenses
Interest expense 10,333 9,186 5,846
Salaries and personnel expense 19,327 20,474 20,591
Other expenses 17,276 10,512 12,339
------- ------- -------
Total Expenses 46,936 40,172 38,776
------- ------- -------
Income Before Taxes and Equity in
Undistributed Income of Subsidiaries 46,288 27,708 33,101
Income tax benefit 7,801 4,688 3,987
------- ------- -------
54,089 32,396 37,088
------- ------- -------
Equity in undistributed income of subsidiaries:
Bank (11,168) 21,123 16,020
Non-bank 10,064 8,389 8,037
------- ------- -------
(1,104) 29,512 24,057
------- ------- -------
Net Income $52,985 $61,908 $61,145
======= ======= =======
-30-
Statement of Cash Flows (in thousands)
Year Ended December 31 2001 2000 1999
-------- -------- --------
Operating Activities
Net income $ 52,985 $ 61,908 $ 61,145
Adjustments to reconcile net income to net
cash provided by operating activities:
Undistributed earnings of subsidiaries 1,104 (29,512) (24,057)
Other, net (10,847) 5,707 6,148
-------- -------- --------
Net cash flows from operating activities 43,242 38,103 43,236
Investing Activities
Net change in short-term investments 2,875 (5,283) 18,523
Securities available for sale:
Purchases (190)
Sales 190
Sale (purchase) of premises and equipment (1,965) 882 (883)
Net decrease (increase) in loans receivable 4,800 951 (3,715)
Advances from subsidiaries 1,621
Investment in subsidiaries (12,165) (29,714) (39,328)
-------- -------- --------
Net cash flows from investing activities (6,265) (33,164) (23,972)
Financing Activities
Net increase in short-term borrowings 5,725 57,139 20,884
Decrease in long-term debt (15,390) (15,686) (17,736)
Increase in long-term debt 6,740 19,236 10,489
Net acquisition of treasury stock (42) (37,585) (3,288)
Cash dividends paid (32,300) (29,652) (28,410)
-------- -------- --------
Net cash flows from financing activities (35,267) (6,548) (18,061)
-------- -------- --------
Net (Decrease) Increase In Cash 1,710 (1,609) 1,203
Cash at beginning of year 370 1,979 776
-------- -------- --------
Cash At End Of Year $ 2,080 $ 370 $ 1,979
======== ======== ========
Cash Paid
Interest $ 9,069 $ 8,022 $ 5,933
-31-
Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of
each financial instrument:
Cash and Due from Banks:
For these short-term instruments, the carrying amount is a reasonable estimate
of fair value.
Securities:
For both securities available for sale and securities held to maturity, fair
value equals quoted market price, if available. If a quoted market price is not
available, fair value is estimated using quoted market prices for similar
securities.
Loans:
The fair value of fixed rate loans is estimated by discounting the future cash
flows using the current rates at which similar loans would be made to borrowers
with similar credit ratings and for the same remaining maturities. The fair
value of adjustable rate loans approximate the carrying amount.
Deposits:
The fair value of demand deposits, savings accounts and certain money market
deposits is the amount payable on demand at the reporting date. The fair value
of fixed-maturity deposits is estimated by discounting future cash flows using
rates currently offered for deposits of similar remaining maturities.
Short-Term Borrowings:
The carrying amounts for short-term borrowings approximate fair value for
amounts that mature in 90 days or less. The fair value of subordinated notes is
estimated by discounting future cash flows using rates currently offered.
Long-Term Debt:
The fair value of long-term debt is estimated by discounting future cash flows
based on the market prices for the same or similar issues or on the current
rates offered to the Corporation for debt of the same remaining maturities.
The estimated fair values of the Corporation's financial instruments are as
follows (in thousands):
2001 2000
---------------------- ----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ---------- ---------- ----------
Financial Assets
Cash and short-term investments $ 338,753 $ 338,753 $ 276,747 $ 276,747
Securities available for sale 902,970 902,970 840,118 840,118
Securities held to maturity 51,368 51,770 75,522 75,507
Net loans, including loans held
for sale 4,750,699 4,806,261 4,558,698 4,603,941
Financial Liabilities
Deposits $5,099,076 $5,133,729 $4,913,754 $4,861,525
Short-term borrowings 375,754 375,831 356,263 356,263
Long-term debt 342,424 357,482 267,729 272,678
-32-
F.N.B. Corporation and Subsidiaries
Selected Financial Data (Dollars in thousands, except per share data)
Year Ended December 31 2001 2000 1999 1998 1997
---------- ---------- ---------- ---------- ----------
Total interest income $ 450,366 $ 450,710 $ 401,914 $ 389,119 $ 358,162
Total interest expense 200,300 211,381 168,770 170,657 152,923
Net interest income 250,066 239,329 233,144 218,462 205,239
Provision for loan losses 31,195 17,982 15,776 13,718 15,906
Total non-interest income 99,995 79,985 69,814 60,518 47,125
Total non-interest expenses 242,847 212,212 199,964 184,936 163,341
Net income before extraordinary items 52,985 61,908 61,145 54,775 49,816
Extraordinary items, net of tax 8,809
Net income 52,985 61,908 61,145 54,775 58,625
Core operating earnings * 60,905 66,026 65,261 59,823 54,381
At Year-End
Total assets $6,488,383 $6,126,792 $5,892,263 $5,407,930 $4,934,911
Net loans 4,749,376 4,557,656 4,346,621 3,747,548 3,344,803
Deposits 5,099,076 4,913,754 4,607,051 4,492,568 4,170,041
Long-term debt 342,424 267,729 268,393 171,110 87,769
Preferred stock 1 1,678 2,075 2,380 2,875
Total stockholders' equity 572,407 503,422 491,436 486,988 454,444
Per Common Share
Net income
Basic $ 1.25 $ 1.44 $ 1.42 $ 1.29 $ 1.48
Diluted 1.23 1.42 1.39 1.26 1.44
Core operating earnings *
Basic 1.44 1.54 1.52 1.41 1.37
Diluted 1.41 1.52 1.49 1.37 1.33
Cash dividends (FNB) .72 .65 .61 .59 .50
Cash dividends (Promistar) .80 .79 .68 .58 .50
Book value 12.98 11.41 11.69 11.59 11.17
Ratios
Return on average assets .84% 1.03% 1.09% 1.05% 1.26%
Return on average assets, based
on core operating earnings * .97 1.10 1.17 1.15 1.16
Return on average equity 9.81 12.28 12.50 11.63 13.78
Return on average equity, based
on core operating earnings * 11.27 13.09 13.34 12.71 12.79
Dividend payout ratio 52.81 45.36 43.81 40.13 36.02
Average equity to average assets 8.58 8.42 8.75 9.05 9.11
* Core operating earnings exclude consolidation charges of $2.1 million and
merger related and other non-recurring costs of $5.8 million in 2001, gain on
the sale of branches of $261,000 and merger related and other non-recurring
costs of $4.4 million in 2000, gain on the sale of branches of $366,000 and
merger and other non-recurring costs of $4.5 million in 1999, merger related
and other non-recurring costs of $5.0 million in 1998 and extraordinary gains
on the sale of a subsidiary and branches of $8.8 million and merger related
and other non-recurring costs of $4.6 million in 1997, all on after-tax basis.
Such presentation is provided in order to eliminate all items deemed by
management to be of a non-recurring nature.
-33-
F.N.B. Corporation and Subsidiaries
Quarterly Earnings Summary (Dollars in thousands, except per share data)
Quarter Ended 2001 Mar. 31 June 30 Sept. 30 Dec. 31
--------- --------- --------- ---------
Total interest income $114,414 $113,012 $112,549 $110,391
Total interest expense 55,638 52,071 49,160 43,431
Net interest income 58,776 60,941 63,389 66,960
Provision for loan losses 4,441 3,452 4,097 19,205
Total non-interest income 23,487 24,690 25,214 26,604
Total non-interest expenses 62,001 57,359 56,077 67,410
Net income 11,231 16,899 19,390 5,465
Core operating earnings * 16,029 19,130 20,243 5,503
Per Common Share
Earnings
Basic $.27 $.41 $.45 $.12
Diluted .27 .40 .44 .12
Core operating earnings *
Basic .39 .46 .47 .12
Diluted .38 .45 .46 .12
Cash dividends (FNB) .17 .17 .19 .19
Cash dividends (Promistar) .20 .20 .20 .20
Quarter Ended 2000 Mar. 31 June 30 Sept. 30 Dec. 31
--------- --------- --------- ---------
Total interest income $107,752 $110,475 $115,445 $117,038
Total interest expense 47,636 50,137 55,548 58,060
Net interest income 60,116 60,338 59,897 58,978
Provision for loan losses 4,261 3,958 4,344 5,419
Total non-interest income 18,608 18,802 20,558 22,017
Total non-interest expenses 50,241 50,888 51,829 59,254
Net income 16,702 16,837 16,809 11,560
Core operating earnings 16,702 16,837 16,809 15,678
Per Common Share
Earnings
Basic $.39 $.39 $.39 $.27
Diluted .38 .39 .38 .27
Core operating earnings
Basic .39 .39 .39 .37
Diluted .38 .39 .38 .37
Cash dividends (FNB) .16 .16 .16 .17
Cash dividends (Promistar) .19 .20 .20 .20
* Core operating earnings exclude consolidation charges of $2.1 million and
merger related and other non-recurring charges of $2.7 million during the
first quarter of 2001, merger related costs of $2.2 million during the second
quarter of 2001, merger related costs of $853,000 during the third quarter of
2001, merger related costs of $38,000 during the fourth quarter of 2001, and
merger related costs of $4.4 million and a gain on the sale of branches of
$261,000 during the fourth quarter of 2000, all on an after-tax basis.
-34-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This financial review summarizes the combined financial condition and results
of operations giving retroactive effect to the merger of Promistar Financial
Corporation (Promistar) with and into F.N.B. Corporation (the Corporation), and
is intended to be read in conjunction with the Consolidated Financial Statements
and accompanying Notes to those statements. The merger of the Corporation and
Promistar was consummated on January 18, 2002 and resulted in the Corporation
issuing 16,007,346 shares of common stock. The merger has been accounted for on
a pooling-of-interests basis. This financial review is presented as if the
merger had been consummated for all periods presented.
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 (FNBFL) 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 FNBFL were
consolidated into the Corporation's national trust company, First National Trust
Company. The Corporation incurred pre-tax consolidation charges of $3.2 million
arising from legal and accounting fees, consulting fees, data processing
conversion charges, early retirement and involuntary separation and related
benefit costs. Involuntary separation costs associated with 42 terminated
employees totaled $1.4 million of the total consolidation expense. The total
amount of separation payments paid during 2001 was $1.0 million. The remaining
separation costs have been paid in 2002 in accordance with the contractual
terms of the employment and compensation agreements of the terminated
employees.
Results of Operations
Year Ended December 31, 2001
Core operating earnings decreased 8.4% to $60.9 million in 2001 from $66.0
million in 2000. Basic earnings per share were $1.44 and $1.54 for 2001 and
2000, while diluted earnings per share were $1.41 and $1.52, respectively, for
those same periods. The results for 2001 include consolidation charges of $2.1
million and merger related and other non-recurring charges of $5.8 million and
the results for 2000 include merger related costs of $4.4 million and a gain on
the sale of branches of $261,000, all net of tax. Including these items, net
income was $53.0 million in 2001 and $61.9 million in 2000.
Net interest income, on a fully taxable equivalent basis, increased by 4.5% as
net average interest earning assets increased by $256.8 million. These factors
are further detailed in the discussion which follows.
Common comparative ratios for results of operations include the return on
average assets and the return on average equity. Based on core operating
earnings, the Corporation's return on average assets was .97% for 2001 compared
to 1.10% for 2000, while the Corporation's return on average equity was 11.27%
for 2001 and 13.09% for 2000. Including the non-recurring items, the Corporation
had a return on average assets of .84% and 1.03% for 2001 and 2000, and a return
on average equity of 9.81% and 12.28%, respectively, for those same periods.
-35-
Net Interest Income
The following table provides information regarding the average balances and
yields and rates on interest earning assets and interest bearing liabilities
(dollars in thousands):
Year Ended December 31, 2001 2000 1999
----------------------------- --------------------------- ---------------------------
Average Yield/ Average Yield/ Average Yield/
Assets: Balance Interest Rate Balance Interest Rate Balance Interest Rate
---------- -------- ------ ---------- -------- ------ ---------- -------- ------
Interest earning assets:
Interest bearing deposits with banks $ 6,349 $ 195 3.07% $ 4,525 $ 306 6.76% $ 8,425 $ 483 5.73%
Federal funds sold 131,818 5,279 4.00 53,439 3,352 6.27 55,558 2,773 4.99
Taxable investment securities (1) 785,782 48,116 6.12 740,271 47,298 6.39 745,818 46,309 6.21
Non-taxable investment securities 174,062 10,954 6.29 160,152 10,978 6.85 191,394 12,944 6.76
Loans (2)(3) 4,676,382 392,332 8.39 4,559,160 394,897 8.66 4,134,415 345,816 8.36
---------- -------- ---------- -------- ---------- --------
Total interest earning assets 5,774,393 456,876 7.91 5,517,547 456,831 8.28 5,135,610 408,325 7.95
---------- -------- ---------- -------- ---------- --------
Cash and due from banks 179,183 176,074 173,860
Allowance for loan losses (57,795) (55,590) (49,879)
Premises and equipment 142,157 141,475 136,158
Other assets 256,716 208,262 196,779
---------- ---------- ----------
$6,294,654 $5,987,768 $5,592,528
========== ========== ==========
Liabilities
Interest bearing liabilities:
Deposits:
Interest bearing demand $ 831,959 14,292 1.72 $ 989,461 19,023 1.92 $1,003,163 14,969 1.49
Savings 1,054,017 22,590 2.14 812,960 27,048 3.33 821,038 25,165 3.07
Other time 2,354,961 130,226 5.53 2,263,106 127,954 5.65 2,030,079 101,673 5.01
Short-term borrowings 364,420 15,026 4.12 365,301 21,072 5.77 318,381 14,905 4.68
Long-term debt 310,498 18,166 5.85 275,817 16,284 5.90 210,490 12,058 5.73
---------- -------- ---------- -------- ---------- --------
Total interest bearing liabilities 4,915,855 200,300 4.07 4,706,645 211,381 4.49 4,383,151 168,770 3.85
-------- -------- --------
Non-interest bearing demand deposits 741,298 689,385 645,252
Other liabilities 97,306 87,479 75,040
---------- ---------- ----------
5,754,459 5,483,509 5,103,443
---------- ---------- ----------
Stockholders' equity 540,195 504,259 489,085
---------- ---------- ----------
$6,294,654 $5,987,768 $5,592,528
========== ========== ==========
Excess of interest earning assets
over interest bearing liabilities $ 858,538 $ 810,902 $ 752,459
========== ========== ==========
Net interest income $256,576 $245,450 $239,555
======== ======== ========
Net interest spread 3.84% 3.79% 4.10%
===== ====== ======
Net interest margin (4) 4.44% 4.45% 4.66%
===== ====== ======
(1) The average balances and yields earned on securities are based on historical
cost.
(2) The amounts are reflected on a fully taxable equivalent basis using the
federal statutory tax rate of 35%, adjusted for certain federal tax
preferences.
(3) Average balances include non-accrual loans. Loans consist of average
total loans less average unearned income. The amount of loan fees
included in interest income on loans is immaterial.
(4) Net interest margin is calculated by dividing the difference between
total interest earned and total interest paid by total interest earning
assets.
-36-
Net interest income, the Corporation's primary source of earnings, is the
amount by which interest and fees generated by earning assets, primarily loans
and securities, exceed interest expense on deposits and borrowed funds. Net
interest income, on a fully taxable equivalent basis, totaled $256.6 million in
2001 versus $245.5 million in 2000. Net interest income consisted of interest
income of $456.9 million and interest expense of $200.3 million in 2001,
compared to $456.8 million and $211.4 million for each, respectively, in 2000.
The Corporation's net interest margin decreased slightly to 4.44% for 2001.
During 2001, the Federal Reserve Bank reduced its federal funds rate an
unprecedented 11 times. This monetary policy significantly influenced the
Corporation's asset and liability management. The yield on interest earning
assets decreased by 37 basis points and the rate paid on interest bearing
liabilities decreased by 42 basis points. Although the current year margin has
increased, there is a possibility that margin compression could arise, as
further discussed within the "Liquidity and Interest Rate Sensitivity" section
of this report.
Interest income on loans, on a fully taxable equivalent basis, decreased .6%
from $394.9 million in 2000 to $392.3 million in 2001. This decrease was despite
favorable loan volumes as average loans increased by $117.2 million.
Interest expense on deposits decreased $6.9 million or 4.0% in 2001 while
average interest bearing deposits increased by $175.4 million. The average
balance in time deposits and savings deposits increased $91.9 million and $241.1
million, respectively, while the average balance in interest bearing demand
deposits decreased $157.5 million. The Corporation continued to successfully
generate non-interest bearing deposits as such deposits increased by $51.9
million or 7.5% in 2001. Interest expense on short-term borrowings decreased by
$6.0 million and the interest rate paid decreased by 165 basis points in 2001.
Interest expense on long-term debt increased $1.9 million in 2001 due to a $34.7
million increase in average long-term debt.
The following table sets forth certain information regarding changes in net
interest income attributable to changes in the volumes of interest earning
assets and interest bearing liabilities and changes in the rates for the periods
indicated (in thousands):
Year Ended December 31, 2001 2000
-------------------------- -------------------------
Volume Rate Net Volume Rate Net
-------- ------- ------- ------- ------- -------
Interest Income
Interest bearing deposits
with banks $ 384 $ (495) $ (111) $ (281) $ 104 $ (177)
Federal funds sold 2,170 (243) 1,927 (193) 772 579
Securities 118 676 794 (2,447) 1,470 (977)
Loans 3,380 (5,945) (2,565) 39,334 9,747 49,081
-------- ------- ------- ------- ------- -------
6,052 (6,007) 45 36,413 12,093 48,506
-------- ------- ------- ------- ------- -------
Interest Expense
Deposits:
Interest bearing demand 12,427 (17,158) (4,731) 655 3,399 4,054
Savings 373 (4,831) (4,458) (248) 2,131 1,883
Other time 13,964 (11,692) 2,272 13,172 13,109 26,281
Short-term borrowings (880) (5,166) (6,046) 2,987 3,180 6,167
Long-term debt 1,767 115 1,882 4,048 178 4,226
-------- ------- ------- ------- ------- -------
27,651 (38,732) (11,081) 20,614 21,997 42,611
-------- ------- ------- ------- ------- -------
Net Change $(21,599) $32,725 $11,126 $15,799 $(9,904) $ 5,895
======== ======= ======= ======= ======= =======
-37-
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.
Provision for Loan Losses
The provision for loan losses charged to operations is a direct result of
management's analysis of the adequacy of the allowance for loan losses which
takes into consideration factors, including qualitative factors, relevant to the
collectibility of the existing portfolio. The provision for loan losses
increased 73.5% to $31.2 million in 2001. This increase resulted primarily from
the consistent application of the Corporation's charge-off policy and
methodology for determining the adequacy of the allowance for loan losses to
acquired affiliates. (See the "Non-Performing Loans and Allowance for Loan
Losses" section of this report).
Non-Interest Income
Total non-interest income increased 25.0% from $80.0 million in 2000 to $100.0
million in 2001. Exclusive of gains on the sale of securities, non-interest
income increased by 23.1%. 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 premiums, commissions
and fees, investment service charges and trust fees.
Insurance commissions and fees, service charges and trust fees increased 20.7%
from $66.6 million in 2000 to $80.3 million in 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
accompanied by increases of $1.6 million in gains on the sale of securities and
$3.4 million in gains on the sale of loans.
Non-Interest Expenses
Total non-interest expense increased from $212.2 million in 2000 to $242.8
million in 2001. The increase was primarily attributable to non-recurring items
totaling $12.0 million in 2001. During 2001, the Corporation recorded $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. Additionally, the
Corporation recognized $4.8 million in 2001 in merger related costs. These
expenses were primarily data processing termination and conversion costs and
change in control provisions. The Corporation also recognized $3.2 million in
one-time charges relating to its charter consolidation plan. During 2000, the
Corporation recognized $6.7 million in merger related and other non-recurring
costs.
Excluding these items, non-interest expense totaled $230.8 million for 2001,
an increase of 12.3% over the $205.5 million for 2000. In addition to the
non-recurring items, non-interest expenses increased due to insurance agency
purchases during the second half of 2000 and first half of 2001. Excluding the
impact of the insurance agency purchases, non-interest expense would have
increased by $20.8 million or 10.1% on a year over year basis.
-38-
Income Taxes
The Corporation's income tax expense was $23.0 million for 2001 compared to
$27.2 million for 2000. The 2001 effective tax rate of 30.3% was lower than the
35.0% federal statutory tax rate due to the tax benefits resulting from
tax-exempt instruments and excludable dividend income. Additional information
relating to income taxes is furnished in the Notes to Consolidated Financial
Statements.
Liquidity and Interest Rate Sensitivity
The Corporation's goal in liquidity management is to meet the cash flow
requirements of depositors and borrowers as well as the operating cash needs of
the Corporation, with cost- effective funding. Liquidity is centrally managed on
a daily basis by treasury personnel. In addition, the Corporate Asset/Liability
Committee (ALCO), which includes members of executive management, reviews
liquidity on a periodic basis and approves significant changes in strategies
which affect balance sheet or cash flow positions. The Board of Directors has
established an Asset/Liability Policy in order to achieve and maintain earnings
performance consistent with long-term goals while maintaining acceptable levels
of interest rate risk, a "well-capitalized" balance sheet and adequate levels of
liquidity. This policy designates the ALCO as the body responsible for meeting
this objective.
Liquidity sources from assets include payments from loans and investments as
well as the ability to securitize or sell loans and investment securities.
Liquidity sources from liabilities are generated through growth in core deposits
and, to a lesser extent, the use of wholesale sources which include federal
funds purchased, repurchase agreements and public deposits. In addition, the
banking affiliates have the ability to borrow from the 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 December 31, 2001, outstanding
advances were $303.7 million, or 4.7% of total assets, while FHLB availability
was $1.3 billion, or 19.7% 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, which were unused as of December 31, 2001. The Corporation also
issues subordinated debt on a regular basis and has access to the Federal
Reserve Bank as well as access to the capital markets.
The ALCO regularly monitors various liquidity ratios and forecasts of cash
position. Management believes the Corporation has sufficient liquidity available
to meet its normal operating and contingency funding cash needs.
The financial performance of the Corporation is at risk from interest rate
fluctuations. This interest rate risk arises due to differences between the
amount of interest earning assets and interest bearing liabilities subject to
repricing over a period of time, the difference between the change in various
interest rates and the embedded options in certain financial instruments. The
Corporation utilizes an asset/liability model to support its balance sheet
strategies. The Corporation uses gap analysis, net interest income simulations
and the economic value of equity to measure its interest rate risk.
The following gap analysis measures the interest rate risk of the Corporation
by comparing the difference between the amount of interest earning assets and
interest bearing liabilities subject to repricing over a period of time. The
cumulative one-year gap ratio was 1.14 at December 31, 2001 as compared to .90
at December 31, 2000. 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.
-39-
Following is the gap analysis as of December 31, 2001 (dollars in thousands):
Within 4-12 1-5 Over
3 Months Months Years 5 years Total
---------- ---------- ---------- ----------- ----------
Interest Earning Assets
Interest bearing
deposits with banks $ 3,435 $ 100 $ 100 $ 77 $ 3,712
Federal funds sold 88,260 88,260
Securities 134,878 264,151 422,802 132,507 954,338
Loans, net of
unearned income 1,422,613 1,082,566 1,930,105 380,474 4,815,758
---------- ---------- ---------- ----------- ----------
1,649,186 1,346,817 2,353,007 513,058 5,862,068
Other assets 626,315 626,315
---------- ---------- ---------- ----------- ----------
$1,649,186 $1,346,817 $2,353,007 $ 1,139,373 $6,488,383
========== ========== ========== =========== ==========
Interest Bearing Liabilities
Deposits:
Interest checking $ 163,981 $ 727,470 $ 891,451
Savings 465,173 624,315 1,089,488
Time deposits 459,311 $1,126,348 $ 733,518 2,319,177
Borrowings 361,433 63,127 80,506 213,112 718,178
---------- ---------- ---------- ----------- ----------
1,449,898 1,189,475 814,024 1,564,897 5,018,294
Other liabilities 897,682 897,682
Stockholders' equity 572,407 572,407
---------- ---------- ---------- ----------- ----------
$1,449,898 $1,189,475 $ 814,024 $ 3,034,986 $6,488,383
========== ========== ========== =========== ==========
Period Gap $ 199,288 $ 157,342 $1,538,983 $(1,895,613)
========== ========== ========== ===========
Cumulative Gap $ 199,288 $ 356,630 $1,895,613
========== ========== ==========
Cumulative Gap as
a Percent of
Total Assets 3.07% 5.50% 29.21%
========== ========== ==========
Rate Sensitive Assets/
Rate Sensitive
Liabilities
(Cumulative) 1.14 1.14 1.55 1.17
========== ========== ========== ==========
-40-
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 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
current balance sheet. The following table presents an analysis of the potential
sensitivity of the Corporation's annual net interest income and EVE to sudden
and sustained changes in market rates:
December 31 2001 2000
-------- --------
Net interest income change (12 months):
- 100 basis points (1.6)% .6 %
+ 200 basis points .6 % (3.0)%
Economic value of equity:
- 100 basis points (.8)% (1.0)%
+ 200 basis points (5.7)% (2.0)%
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 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.
Results of Operations
Year Ended December 31, 2000
Core operating earnings increased 1.2% to $66.0 million in 2000 from $65.3
million in 1999. Basic earnings per share were $1.54 and $1.52 for 2000 and
1999, while diluted earnings per share were $1.52 and $1.49, respectively, for
those same periods. The Corporation's return on average assets was 1.10% for
2000 and 1.17% for 1999, while the Corporation's return on average equity was
13.04% for 2000 and 13.34% for 1999. The results for 2000 exclude merger related
costs of $4.4 million and a gain on the sale of branches of $261,000, while 1999
results exclude merger related and other non-recurring costs of $4.5 million and
a gain on the sale of branches of $366,000, all net of tax. Including these
items, net income was $61.9 million in 2000 and $61.1 million in 1999. Based on
net income, the Corporation has a return on average assets of 1.03% for 2000 and
1.09% for 1999 and a return on average equity of 12.28% for 2000 and 12.50% for
1999.
Net interest income, on a fully taxable equivalent basis, totaled $245.5
million in 2000. Net interest income consisted of interest income of $456.8
million and interest expense of $211.4 million in 2000, compared to $408.3
million and $168.8 million for each, respectively, in 1999. The Corporation's
net interest margin was 4.45% for 2000. Interest income on loans, on a fully
taxable equivalent basis, increased 14.2% from $345.8 million in 1999 to $394.9
million in 2000. This increase was the result of an increase in average loans of
10.3% as well as an increase in the average yield by 30 basis points. Interest
-41-
expense on deposits increased $32.2 million or 22.7% in 2000 while average
interest bearing deposits increased 5.5%. The average balance in time deposits
increased $233.0 million, while the average balance in interest bearing demand
deposits and savings deposits decreased by $13.7 million and $8.1 million,
respectively. The average balance in non-interest bearing demand deposits
increased by $44.1 million. Interest expense on short-term borrowings increased
by $6.2 million or 41.4% in 2000 due to a $46.9 million increase in average
short-term borrowings. Interest expense on long-term debt increased $4.2 million
or 35.0% in 2000 due to a $65.3 million increase in average long-term debt.
The provision for loan losses was $18.0 million and represented an increase of
14.0% from 1999, a reflection of the Corporation's continued strong loan growth.
Total non-interest income increased 14.6% from $69.8 million in 1999 to $80.0
million in 2000. Exclusive of gains on sale of securities, non-interest income
increased by 17.2%. This increase was primarily attributable to the company's
transformation to a financial services company focusing resources dedicated to
generating insurance premiums, commissions and fees, investment service charges
and trust fees. Insurance premiums, commissions and fees, service charges and
trust fees increased 19.7% from $55.6 million in 1999 to $66.6 million in 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 funds sales and trust services. This increase was partially offset
by a decrease of $1.5 million in gains on the sale of securities.
Total non-interest expense increased from $200.0 million in 1999 to $212.2
million in 2000. The increase was primarily attributable to an increase of $11.6
million in salaries and employee benefits. This increase was mainly due to the
Corporation's continued expansion into non-interest revenue lines of business
along with normal annual salary adjustments and the continued escalation of
certain benefit costs. The Corporation recognized merger related costs of $6.7
million in 2000 and $6.0 million in 1999. These expenses were primarily data
processing termination and conversion costs and change in control provisions.
Also during 1999, the Corporation recorded a net insurance recovery of $883,000.
Income tax expense was $27.2 million for 2000 compared to $26.1 million for
1999. The effective tax rate of 30.5% was below the 35.0% statutory tax rate due
to the tax benefits resulting from tax-exempt instruments and excludable
dividend income.
Financial Condition
Lending Activity
Following is a summary of loans (dollars in thousands):
December 31 2001 2000 1999 1998 1997
---------- ---------- ---------- ---------- ----------
Real estate:
Residential $1,777,403 $1,706,462 $1,615,137 $1,446,479 $1,366,410
Commercial 1,282,944 1,110,833 1,113,281 920,644 800,953
Construction 227,868 220,754 134,184 115,852 81,485
Installment loans to individuals 774,932 832,904 779,485 726,807 692,703
Commercial, financial and agricultural 672,639 610,194 579,724 512,880 466,366
Lease financing 128,712 204,187 254,252 132,266 59,852
Unearned income (50,063) (70,554) (76,591) (60,917) (79,002)
---------- ---------- ---------- ---------- ----------
$4,814,435 $4,614,780 $4,399,472 $3,794,011 $3,388,767
========== ========== ========== ========== ==========
-42-
The Corporation strives to minimize credit losses by utilizing credit approval
standards, diversifying its loan portfolio by industry and borrower and
conducting ongoing review and management of the loan portfolio.
During 2001, 2000 and 1999 the Corporation sold $19.5 million, $23.5 million
and $49.8 million, respectively, in fixed rate residential mortgages to the
Federal National Mortgage Association (FNMA). These sales allowed the
Corporation to avoid the potential interest rate risk of those fixed rate loans
in a rising rate environment. Additionally, it created liquidity for the
Corporation to continue to offer credit availability to the markets it serves.
The loan portfolio consists principally of loans to individuals and small- and
medium- sized businesses within the Corporation's primary market area of
southwest Florida, western and central Pennsylvania, central Tennessee and
eastern Ohio.
As of December 31, 2001, no concentrations of loans exceeding 10% of total
loans existed which were not disclosed as a separate category of loans. During
2000, the Corporation curtailed offering lease financing.
Following is a summary of the maturity distribution of certain loan categories
based on remaining scheduled repayments of principal (in thousands):
One to After
Within Five Five
One Year Years Years Total
-------- -------- -------- --------
December 31, 2001
Commercial, financial and agricultural $305,643 $271,849 $ 95,147 $672,639
Real Estate - construction 151,366 55,892 20,610 227,868
-------- -------- -------- --------
Total $457,009 $327,741 $115,757 $900,507
======== ======== ======== ========
The total amount of loans due after one year includes $263.0 million with
floating or adjustable rates of interest and $180.5 million with fixed rates of
interest.
Non-Performing Loans
Non-performing loans include non-accrual loans and restructured loans.
Non-accrual loans represent loans on which interest accruals have been
discontinued. Restructured loans are loans in which the borrower has been
granted a concession on the interest rate or the original repayment terms due to
financial distress.
Following is a summary of non-performing loans (dollars in thousands):
December 31 2001 2000 1999 1998 1997
------- ------- ------- ------- -------
Non-accrual loans $21,350 $21,478 $18,257 $18,971 $16,491
Restructured loans 5,578 3,020 3,772 2,034 1,611
------- ------- ------- ------- -------
$26,928 $24,498 $22,029 $21,005 $18,102
======= ======= ======= ======= =======
Non-performing loans as a
percentage of total loans .56% .53% .50% .55% .53%
-43-
Following is a table showing the amounts of contractual interest income and
actual interest income recorded on non-accrual and restructured loans (in
thousands):
Year Ended December 31 2001 2000 1999 1998 1997
------- ------- ------- ------- -------
Gross interest income that
would have been recorded if
the loans had been current
and in accordance with
their original terms $2,294 $2,947 $2,445 $2,462 $1,963
Interest income recorded
during the year 1,083 964 908 1,166 800
Following is a summary of loans 90 days or more past due, on which interest
accruals continue (dollars in thousands):
December 31 2001 2000 1999 1998 1997
------- ------- ------- ------- -------
Loans 90 days or more past due $5,993 $5,383 $5,445 $3,637 $4,916
Loans 90 days or more past due
as a percentage of total loans .12% .12% .12% .10% .15%
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 Summary of Significant Accounting Policies in 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
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.
-44-
Following is a summary of changes in the allowance for loan losses (dollars in
thousands):
Year Ended December 31 2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
Balance at beginning of year $ 57,124 $ 52,851 $ 46,463 $ 43,964 $ 44,166
Reduction due to the sale of a
subsidiary and loans (3,828)
Addition due to acquisitions 3,400 767 2,813 1,167
Charge-offs:
Real estate - mortgage (4,649) (2,967) (2,375) (1,965) (1,788)
Installment loans to individuals (12,685) (10,343) (8,887) (8,430) (9,598)
Lease financing (3,270) (1,867) (632) (300) (106)
Commercial, financial and
agricultural (8,886) (2,200) (2,892) (2,788) (3,948)
------- -------- -------- -------- --------
(29,490) (17,377) (14,786) (13,483) (15,440)
------- -------- -------- -------- --------
Recoveries:
Real estate - mortgage 255 882 579 567 359
Installment loans to individuals 1,671 1,463 1,470 1,290 1,168
Lease financing 448 220 80 38 32
Commercial, financial and
agricultural 456 336 456 369 434
-------- -------- -------- -------- --------
2,830 2,901 2,585 2,264 1,993
-------- -------- -------- -------- --------
Net charge-offs (26,660) (14,476) (12,201) (11,219) (13,447)
Provision for loan losses 31,195 17,982 15,776 13,718 15,906
-------- -------- -------- -------- --------
Balance at end of year $ 65,059 $ 57,124 $ 52,851 $ 46,463 $ 43,964
======== ======== ======== ======== ========
Net charge-offs as a percent of
average loans, net of unearned
income .57% .32% .30% .31% .42%
Allowance for loan losses as a
percent of total loans, net
of unearned income 1.35 1.24 1.20 1.22 1.30
Allowance for loan losses as a
percent of non-performing loans 241.60 233.18 239.92 221.20 242.87
The increase in the level of charge-offs and the provision for loan losses in
2001 resulted primarily from the consistent application of the Corporation's
charge-off policy and methodology for determining the adequacy of the allowance
for loan losses to acquired affiliates.
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Following is a summary of the allocation of the allowance for loan losses
(dollars in thousands):
% of % of % of % of % of
Loans Loans Loans Loans Loans
in each in each in each in each in each
Category Category Category Category Category
to total to total to total to total to total
Year Ended December 31 2001 Loans 2000 Loans 1999 Loans 1998 Loans 1997 Loans
------- -------- ------- -------- ------- -------- ------- -------- ------- --------
Commercial, financial and
agricultural $11,018 14% $ 9,437 13% $10,497 13% $10,075 13% $ 9,339 14%
Real estate - construction 316 5 437 5 475 3 271 2 284 2
Real estate - mortgage 18,559 63 16,953 61 14,195 62 11,195 64 10,386 64
Installment loans to
individuals 16,353 16 13,225 18 12,136 18 10,402 19 8,009 18
Lease financing 5,319 2 1,093 3 847 4 812 2 359 2
Unallocated portion 13,494 15,979 14,701 13,708 15,587
------ --- ------- --- ------- --- ------- --- ------- ---
$65,059 100% $57,124 100% $52,851 100% $46,463 100% $43,964 100%
======= ======= ======= ======= =======
The Corporation has allocated the allowance according to the amount deemed
to be reasonably necessary to provide for the estimated losses being incurred
within each of the categories of loans shown in the table above. Management's
allocation considers amounts necessary for concentrations and changes in
portfolio mix and volume. The allocation of the allowance should not be
interpreted as an indication that loan losses in future years will occur in the
same proportions or that the allocation indicates future loan loss trends.
Furthermore, the portion allocated to each loan category is not the sole amount
available for future losses within such categories since the total allowance is
a general allowance applicable to the entire portfolio. During 2001, the
Corporation allocated an additional $4.2 million of the allowance to leases and
lease residuals. The Corporation determined the need to provide a more refined
allocation based upon recent loss experience in the lease portfolio.
Investment Activity
Investment activities serve to enhance overall yield on earning assets while
supporting interest rate sensitivity and liquidity positions. Securities
purchased with the intent and ability to retain until maturity are categorized
as securities held to maturity and carried at amortized cost. All other
securities are categorized as securities available for sale and are recorded at
fair market value. The relatively short average maturity of all securities
provides a source of liquidity to the Corporation and reduces the overall market
risk of the portfolio.
During 2001, securities available for sale increased by $62.9 million and
securities held to maturity decreased by $24.2 million from December 31, 2000.
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The following table indicates the respective maturities and weighted-average
yields of securities as of December 31, 2001 (dollars in thousands):
Weighted
Average
Amount Yield
-------- --------
Obligations of U.S. Treasury and
Other U.S. Government agencies:
Maturing within one year $ 48,569 6.40%
Maturing after one year within five years 172,117 5.79
Maturing after five years within ten years 197,572 5.52
Maturing after ten years 1,888 5.62
State & political subdivisions:
Maturing within one year 11,714 6.06
Maturing after one year within five years 43,840 5.02
Maturing after five years within ten years 52,409 4.92
Maturing after ten years 81,463 4.78
Other securities:
Maturing after one year within five years 1,541 6.42
Maturing after five years within ten years 2,080 6.53
Maturing after ten years 1,509 9.18
Mortgage-backed securities 295,393 6.02
Equity securities 44,243 6.07
--------
TOTAL $954,338 5.70
========
The weighted average yields for tax exempt securities are computed on a tax
equivalent basis.
Deposits and Short-Term Borrowings
As a commercial bank holding company, the Corporation's primary source of
funds is its deposits. Those deposits are provided by businesses and individuals
located within the markets served by the Corporation's subsidiaries.
Total deposits increased 3.8% to $5.1 billion in 2001. This increase was due
to a $127.0 million or 6.9% increase in savings and interest checking accounts
and a $77.0 million or 10.7% increase in non-interest bearing deposit accounts,
partially offset by a decrease of $18.7 million or 0.8% in time deposits.
Short-term borrowings, made up of repurchase agreements, federal funds
purchased, Federal Home Loan Bank advances, subordinated notes and other
short-term borrowings, increased by $19.5 million in 2001 to $375.8 million. The
composition of short-term borrowings shifted during 2001 as increases in
securities sold under repurchase agreements and subordinated notes of $48.9
million and $31.5 million, respectively, were offset by decreases in Federal
Home Loan Bank advances and other short-term borrowings, of $42.4 million and
$24.5 million, respectively.
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Repurchase agreements are the largest component of short-term borrowings. At
December 31, 2001, repurchase agreements represented 62.0% of total short-term
borrowings. Following is a summary of selected information on repurchase
agreements (dollars in thousands):
December 31 2001 2000 1999
-------- -------- --------
Balance at end of year $232,952 $184,060 $172,415
Maximum month-end balance 233,953 203,736 172,415
Average balance during the year 215,765 192,787 156,496
Weighted average interest rates:
At end of year 1.58% 5.20% 3.95%
During the year 3.09% 5.06% 3.95%
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. During December of 2001, the
Corporation filed a $200.0 million registration with the Securities and
Exchange Commission utilizing a shelf registration process. The Corporation
may, from time to time, issue any combination of common stock, preferred stock,
debt securities or trust preferred securities in one or more offerings up to a
total dollar amount of $200.0 million. Capital management is a continuous
process. Both the Corporation and its banking affiliates are subject to various
regulatory capital requirements administered by the federal banking agencies.
(See the "Regulatory Matters" section in the Notes to Consolidated Financial
Statements). Stockholders' equity has increased through earnings retention by
$20.7 million, $31.8 million and $32.3 million in 2001, 2000 and 1999,
respectively. During 2001, the Corporation issued 2.1 million shares
representing $39.5 million of capital in connection with its purchase of FNH
Corporation. The Corporation also issues shares, which are initially acquired
through the acquisition of treasury shares, in connection with its various
benefit plans.
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EXHIBIT 99.2
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Promistar Financial Corporation:
In our opinion, the consolidated balance sheet as of December 31, 2000 and the
related consolidated statements of income, cash flows, changes in shareholders'
equity, and comprehensive income for each of the two years in the period ended
December 31, 2000 (appearing on pages 22 through 42 of the Promistar Financial
Corporation 2000 Annual Report to Shareholders) present fairly, in all material
respects, the financial position, results of operations and cash flows of
Promistar Financial Corporation and its subsidiaries at December 31, 2000 and
for each of the two years in the period ended December 31, 2000, in conformity
with accounting principles generally accepted in the United States of America.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
/s/PRICEWATERHOUSECOOPERS LLP
Harrisburg, Pennsylvania
January 23, 2001 except for Note 22, which is dated February 26, 2001
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