UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
-------------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________________ to ________________________
Commission file number 0-8144
------
F.N.B. CORPORATION
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 25-1255406
- ------------------------------------ ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
One F.N.B. Boulevard, Hermitage, PA 16148
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(724) 981-6000
- -------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Not applicable
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---- ----
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes____ No____
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at October 31, 1998
- --------------------- -------------------------------
Common Stock, $2 Par Value 17,951,979 Shares
- -------------------------- -----------------
<PAGE>
F.N.B. CORPORATION
FORM 10-Q
September 30, 1998
INDEX
PART I - FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Balance Sheet 2
Consolidated Income Statement 3
Consolidated Statement of Cash Flows 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
<PAGE>
F.N.B. CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
Dollars in thousands, except par values
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
UNAUDITED
-------------
ASSETS
Cash and due from banks $ 109,835 $ 107,770
Interest bearing deposits with banks 4,949 4,081
Federal funds sold 15,322 36,355
Mortgage loans held for sale 6,038 6,536
Securities available for sale 495,896 460,419
Securities held to maturity (fair
value of $104,861 and $138,937) 103,608 138,590
Loans, net of unearned income of
$27,927 and $20,473 2,264,471 2,094,904
Allowance for loan losses (31,522) (29,906)
---------- ----------
NET LOANS 2,232,949 2,064,998
---------- ----------
Premises and equipment 86,215 73,463
Other assets 78,651 75,270
---------- ----------
$3,133,463 $2,967,482
========== ==========
LIABILITIES
Deposits:
Non-interest bearing $ 327,138 $ 311,885
Interest bearing 2,226,502 2,155,172
---------- ----------
TOTAL DEPOSITS 2,553,640 2,467,057
Other liabilities 46,858 40,742
Short-term borrowings 188,915 127,186
Long-term debt 71,747 72,246
---------- ----------
TOTAL LIABILITIES 2,861,160 2,707,231
---------- ----------
STOCKHOLDERS' EQUITY
Preferred stock - $10 par value
Authorized - 20,000,000 shares
Issued - 256,783 and 287,500 shares
Aggregate liquidation value -
$6,420 and $7,188 2,568 2,875
Common stock - $2 par value
Authorized - 100,000,000 shares
Issued - 18,029,422 and 17,240,710 shares 36,059 34,482
Additional paid-in capital 156,004 128,600
Retained earnings 70,975 92,598
Accumulated other comprehensive income 8,691 5,324
Treasury stock - 61,592 and 113,592 shares at cost (1,994) (3,628)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 272,303 260,251
---------- ----------
$3,133,463 $2,967,482
========== ==========
See accompanying Notes to Consolidated Financial Statements
<PAGE>
F.N.B. CORPORATION AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENT
Dollars in thousands, except per share data
Unaudited
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
1998 1997 1998 1997
------- ------- -------- -------
INTEREST INCOME
Loans, including fees $50,158 $44,732 $146,908 $134,240
Securities:
Taxable 7,927 6,824 23,295 20,586
Nontaxable 571 603 1,726 1,871
Dividends 284 271 1,101 814
Other 684 954 3,013 2,837
------- ------- -------- --------
TOTAL INTEREST INCOME 59,624 53,384 176,043 160,348
------- ------- -------- --------
INTEREST EXPENSE
Deposits 23,388 20,359 69,009 60,870
Short-term borrowings 1,884 1,541 4,989 4,539
Long-term debt 1,131 1,057 3,477 2,665
------- ------- -------- --------
TOTAL INTEREST EXPENSE 26,403 22,957 77,475 68,074
------- ------- -------- --------
NET INTEREST INCOME 33,221 30,427 98,568 92,274
Provision for loan losses 1,959 2,464 5,278 8,408
------- ------- -------- --------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 31,262 27,963 93,290 83,866
------- ------- -------- --------
NON-INTEREST INCOME
Insurance commissions and fees 1,041 832 3,051 2,938
Service charges 3,942 3,448 11,619 10,024
Trust 499 471 1,441 1,556
Gain on sale of securities 173 423 1,135 862
Gain on sale of loans 1,046 276 2,473 1,223
Other 1,211 1,293 3,080 2,473
------- ------- -------- --------
TOTAL NON-INTEREST INCOME 7,912 6,743 22,799 19,076
------- ------- -------- --------
39,174 34,706 116,089 102,942
------- ------- -------- --------
NON-INTEREST EXPENSES
Salaries and employee benefits 14,172 11,990 43,093 38,693
Net occupancy 1,976 1,859 6,000 5,722
Equipment 2,182 1,847 6,192 5,548
Merger related 2,121 4,072 1,102
Other 7,204 6,153 21,819 22,502
------- ------- -------- --------
TOTAL NON-INTEREST EXPENSES 27,655 21,849 81,176 73,567
------- ------- -------- --------
INCOME BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM 11,519 12,857 34,913 29,375
Income taxes 3,817 4,025 11,703 9,357
------- ------- -------- --------
INCOME BEFORE EXTRAORDINARY ITEM 7,702 8,832 23,210 20,018
Gain on sale of subsidiary, net of tax 5,227
------- ------- -------- --------
NET INCOME $ 7,702 $ 8,832 $ 23,210 $ 25,245
======= ======= ======== ========
INCOME PER COMMON SHARE BEFORE
EXTRAORDINARY ITEM:
Basic $ .42 $ .50 $ 1.22 $ 1.09
======= ======= ======== ========
NET INCOME PER COMMON SHARE:
Basic $ .42 $ .50 $ 1.28 $ 1.44
======= ======= ======== ========
Diluted $ .40 $ .48 $ 1.22 $ 1.37
======= ======= ======== ========
CASH DIVIDENDS PER COMMON SHARE $ .18 $ .15 $ .53 $ .45
======= ======= ======== ========
See accompanying Notes to Consolidated Financial Statements
<PAGE>
F.N.B. CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Dollars in thousands
Unaudited
Nine Months Ended September 30 1998 1997
OPERATING ACTIVITIES --------- ---------
Net income $ 23,210 $ 25,245
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 6,394 5,949
Provision for loan losses 5,278 8,408
Deferred taxes (1,836) 934
Net gain on sale of securities (1,135) (862)
Net gain on sale of loans (2,473) (1,223)
Proceeds from sale of loans 85,613 26,220
Loans originated for sale (82,642) (16,819)
Extraordinary gain on sale of subsidiary, net of tax (5,227)
Net change in:
Interest receivable (882) (2,054)
Interest payable 1,595 1,298
Other, net 3,170 (2,770)
--------- ---------
Net cash flows from operating activities 36,292 39,099
--------- ---------
INVESTING ACTIVITIES
Net change in:
Interest bearing deposits with banks (868) (2,514)
Federal funds sold 21,033 (43,361)
Loans (175,242) (146,610)
Securities available for sale:
Purchases (193,834) (165,555)
Sales 9,664 29,011
Maturities 155,190 116,943
Securities held to maturity:
Purchases (9,044) (6,325)
Maturities 44,088 41,494
Increase in premises and equipment (18,500) (15,454)
Net cash paid for mergers, acquisitions and divestiture (5,976)
--------- ---------
Net cash flows from investing activities (167,513) (198,347)
--------- ---------
FINANCING ACTIVITIES
Net change in:
Non-interest bearing deposits, savings and NOW 41,945 23,214
Time deposits 44,638 93,353
Short-term borrowings 61,729 21,644
Increase in long-term debt 15,691 29,238
Decrease in long-term debt (16,190) (26,201)
Net acquisition of treasury stock (5,148) (1,679)
Cash dividends paid (9,379) (7,039)
--------- ---------
Net cash flows from financing activities 133,286 132,530
--------- ---------
NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS 2,065 (26,718)
Cash and due from banks at beginning of period 107,770 121,355
--------- ---------
CASH AND DUE FROM BANKS AT END OF PERIOD $ 109,835 $ 94,637
========= =========
See accompanying Notes to Consolidated Financial Statements
<PAGE>
F.N.B. CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1998
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements give
retroactive effect to the mergers of West Coast Bank (West Coast), Seminole Bank
(Seminole) and Citizens Holding Corporation (Citizens) with and into F.N.B.
Corporation (the Corporation). The mergers, which were consummated on January
20, 1998, May 29, 1998 and August 31, 1998, resulted in the Corporation issuing
585,263, 855,454 and 1,012,326 shares of common stock, respectively. The
transactions have been accounted for as poolings-of-interests, and such
financial statements are presented as if the mergers had been consummated for
all the periods presented. The financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. For further information, refer to the consolidated financial
statements for the year ended December 31, 1997 and footnotes thereto included
in the Corporation's Current Report on Form 8-K filed with the Securities and
Exchange Commission on October 29, 1998.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions that affect the amounts reported in the financial statements.
Actual results could differ from those estimates.
PER SHARE AMOUNTS
Per share amounts have been adjusted for common stock dividends, including
the 5% stock dividend declared on April 9, 1998 and paid on May 24, 1998.
Basic earnings per share is calculated by dividing net income, adjusted for
preferred stock dividends declared, by the sum of the weighted average number of
shares of common stock outstanding.
Diluted earnings per common share is calculated by dividing net income by
the weighted average number of shares of common stock outstanding, assuming
conversion of outstanding convertible preferred stock from the beginning of the
year or date of issuance and the exercise of stock options and warrants. Such
adjustments to net income and the weighted average number of shares of common
stock are made only when such adjustments dilute earnings per share.
<PAGE>
EARNINGS PER SHARE
The following tables set forth the computation of basic and diluted
earnings per share (in thousands, except per share data):
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
1998 1997 1998 1997
BASIC ---------- ---------- ---------- ----------
Income before extraordinary
item $ 7,702 $ 8,832 $ 23,210 $ 20,018
Less: Preferred stock
dividends declared (120) (139) (379) (454)
---------- ---------- ---------- ----------
Income before extraordinary item
applicable to basic earnings
per share 7,582 8,693 22,831 19,564
Extraordinary item, net of tax 5,227
---------- ---------- ---------- ----------
Earnings applicable to basic
earnings per share $ 7,582 $ 8,693 $ 22,831 $ 24,791
========== ========== ========== ==========
Average common shares
outstanding 17,956,487 17,235,111 17,884,164 17,201,926
========== ========== ========== ==========
Income before extraordinary item $.42 $.50 $1.28 $1.13
Extraordinary item, net of tax .31
---- ---- ----- -----
Earnings per share $.42 $.50 $1.28 $1.44
==== ==== ===== =====
DILUTED
Income before extraordinary
item $ 7,702 $ 8,832 $ 23,210 $ 20,018
Extraordinary item, net of tax 5,227
Earnings applicable to ---------- ---------- ---------- ----------
diluted earnings per share $ 7,702 $ 8,832 $ 23,210 $ 25,245
========== ========== ========== ==========
Average common shares
outstanding 17,956,487 17,235,111 17,884,164 17,201,926
Series A convertible
preferred stock 18,095 17,391 18,095 17,391
Series B convertible
preferred stock 535,274 593,700 564,081 630,638
Net effect of dilutive stock
options and stock warrants
based on the treasury
stock method 584,413 559,367 616,152 554,298
---------- ---------- ---------- ----------
19,094,269 18,405,569 19,082,492 18,404,253
========== ========== ========== ==========
Income before extraordinary item $.40 $.48 $1.22 $1.09
Extraordinary item, net of tax .28
---- ---- ----- -----
Earnings per share $.40 $.48 $1.22 $1.37
==== ==== ===== =====
CASH FLOW INFORMATION
Following is a summary of supplemental cash flow information (in thousands):
Nine months ended September 30 1998 1997
------- -------
Cash paid for:
Interest $75,880 $66,159
Taxes 7,248 7,687
Noncash Investing and Financing Activities:
Acquisition of real estate in settlement of loans 2,294 2,603
Loans granted in the sale of other real estate 241 1,188
<PAGE>
COMPREHENSIVE INCOME
As of January 1, 1998, the Corporation adopted Financial Accounting
Standards Board Statement (FAS) No. 130, "Reporting Comprehensive Income." FAS
No. 130 establishes new rules for the reporting and display of comprehensive
income and its components; however, the adoption of FAS No. 130 had no impact on
the Corporation's net income or stockholders' equity. FAS No. 130 requires
unrealized gains or losses on the Corporation's available for sale securities,
which prior to adoption were reported separately in stockholders' equity, to be
included in other comprehensive income. Prior year financial statements have
been reclassified to conform to the requirements of FAS No. 130.
The components of comprehensive income, net of related tax, are as follows
(in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1998 1997 1998 1997
------- ------- ------- -------
Net income $ 7,702 $ 8,832 $23,210 $25,245
Other comprehensive income:
Unrealized gains on securities:
Unrealized holding gains
arising during the period 2,788 1,983 4,151 2,122
Less: reclassification
adjustment for gains
included in net income (203) (113) (784) (487)
------- ------- ------- -------
Other comprehensive income 2,585 1,870 3,367 1,635
------- ------- ------- -------
Comprehensive income $10,287 $10,702 $26,577 $26,880
======= ======= ======= =======
MERGERS AND ACQUISITIONS
On August 21, 1998, the Corporation signed a definitive merger agreement
with Guaranty Bank & Trust (Guaranty), a community bank headquartered in Venice,
Florida with assets of $148.0 million. The merger agreement calls for the
exchange of the Corporation's common stock for each share of Guaranty common
stock. The exchange ratio, which is based upon the average price of the
Corporation's common stock prior to closing, ranges from 1.121 to 1.536 shares
of the Corporation's common stock for each share of Guaranty's common stock.
At September 30, 1998, Guaranty had 756,118 shares of common stock outstanding
and options covering 58,631 shares of common stock. Guaranty will be merged
into an existing subsidiary of the Corporation, West Coast Bank to form West
Coast Guaranty Bank N.A. The transaction, which is expected to close during
the first quarter of 1999 pending regulatory and shareholder approval, is
expected to be accounted for as a pooling-of-interests.
On August 31, 1998, the Corporation completed its affiliation with Citizens
Holding Corporation (Citizens), headquartered in Clearwater, Florida with assets
of $135.0 million. Under the terms of the merger agreement, each outstanding
share of Citizens' common stock was converted into 1.743 shares of the
Corporation's common stock. A total of 1,012,325 shares of the Corporation's
common stock were issued. Citizens principal asset, Citizens Bank and Trust,
was merged into an existing subsidiary of the Corporation, First National Bank
of Florida (FNB Florida), formerly Indian Rocks National Bank. Results for
prior years are restated to reflect this acquisition as a pooling-of-interests.
<PAGE>
On May 29, 1998, the Corporation completed its merger with Seminole,
headquartered in Seminole, Florida with assets totaling $91.5 million. Under
the terms of the agreement, each outstanding share of Seminole's common stock
was converted into 1.530 shares of the Corporation's common stock. A total of
855,454 shares of the Corporation's common shares were issued. Seminole was
merged into an existing subsidiary of the Corporation, FNB Florida. Results for
prior years are restated to reflect this acquisition as a pooling-of-interests.
On January 20, 1998, the Corporation completed its merger with West Coast,
headquartered in Sarasota, Florida, with assets totaling $107.4 million. Under
the terms of the agreement, each outstanding share of West Coast's common stock
was converted into 1.0 share of the Corporation's common stock. A total of
585,263 shares of the Corporation's common stock were issued. Results for prior
years are restated to reflect this acquisition as a pooling-of-interests.
The following table sets forth separate company financial information for
the year ended December 31, 1997. The F.N.B. Corporation results exclude the
effects of any mergers which occurred subsequent to December 31, 1997 (in
thousands):
F.N.B.
Corporation West Coast Seminole Citizens
----------- ---------- -------- --------
Net interest income $111,030 $4,013 $3,771 $4,800
Net income 33,123 879 1,146 1,052
The Corporation regularly evaluates the potential acquisition of, and holds
discussions with, various potential acquisition candidates and as a general rule
the Corporation publicly announces such acquisitions only after a definitive
agreement has been reached.
PART I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
LIQUIDITY AND INTEREST RATE SENSITIVITY
The Corporation monitors its liquidity position on an ongoing basis to
assure that it is able to meet the need for funds at all times. Given the
monetary nature of its assets and liabilities and the significant source of
liquidity provided by its securities portfolio, the Corporation has sufficient
sources of funds available to meet its cash needs.
Additionally, the Corporation has external sources of funds available
should it desire to use them. These include approved lines of credit with
several major domestic banks, of which $35.0 million was unused at September 30,
1998. To further meet its liquidity needs, the Corporation also has access to
the Federal Home Loan Bank and the Federal Reserve Bank, as well as other
uncommitted funding sources.
<PAGE>
The financial performance of the Corporation is subject to risk from
interest rate fluctuations. This interest rate risk arises due to differences
between the amount of interest-earning assets and the amount of interest-bearing
liabilities subject to pricing over a specified period, the amount of change in
individual interest rates and the embedded options in all financial instruments.
The principal objective of the Corporation's asset/liability management
activities is to maximize net interest income while maintaining acceptable
levels of interest rate and liquidity risk and facilitating the funding needs of
the Corporation. The Corporation's Asset/Liability Committee (ALCO) is
responsible for achieving this objective. The Corporation uses an
asset/liability model to quantify its balance sheet strategies and their
associated risks. Net interest income simulation is the principal tool utilized
for these purposes. Gap analysis is employed as a secondary diagnostic
measurement. The Corporation attempts to mitigate interest rate risk through
asset deployment, asset and liability pricing and matched maturity funding.
A gradual 300 basis point decrease in interest rates over the next twelve
months is estimated to cause a decline in net interest income of .5% or $600,000
as compared to net interest income if interest rates were unchanged. This low
level of variation is within the Corporation's policy limits. This simulation
analysis assumed that savings and checking interest rates have a low correlation
to changes in market rates of interest and that certain asset prepayments
changed as refinancing incentives evolved. Further, in the event of a change of
such a magnitude in interest rates, the ALCO would likely take actions to
further mitigate its exposure to the change. However, due to the greater
uncertainty of other specific actions that would be taken, the analysis assumed
no change in the Corporation's asset/liability composition.
The gap analysis which follows is based on the amortization, maturity or
repricing of the Corporation's interest-earning assets and interest-bearing
liabilities. Non-maturity deposits have been allocated to represent their lower
sensitivity to changes in market interest rates than other adjustable rate
instruments. The cumulative gap represents the difference between these assets
and liabilities over a specified time period. Based on the cumulative one year
gap and assuming no change in asset/liability composition, a decrease in
interest rates would be expected to result in slightly lower net interest
income. The gap position is within the Corporation's policy limits.
<PAGE>
Following is the gap analysis as of September 30, 1998 (in thousands):
Within 4-12 1-5 Over
3 Months Months Years 5 years Total
-------- -------- ---------- ---------- ---------
INTEREST EARNING ASSETS
Interest bearing deposits
with banks $ 4,949 $ 4,949
Federal funds sold 15,322 15,322
Mortgage loans held for sale 6,038 6,038
Securities:
Available for sale 50,315 $118,836 $ 240,927 $ 85,818 495,896
Held to maturity 23,890 30,148 38,643 10,927 103,608
Loans, net of unearned 645,612 614,921 910,496 93,442 2,264,471
-------- -------- ---------- ---------- ----------
746,126 763,905 1,190,066 190,187 2,890,284
Other assets 243,179 243,179
-------- -------- ---------- ---------- ----------
$746,126 $763,905 $1,190,066 $ 433,366 $3,133,463
======== ======== ========== ========== ==========
INTEREST BEARING LIABILITIES
Deposits:
Interest checking $127,366 $ 341,551 $ 468,917
Savings 220,968 404,961 625,929
Time deposits 259,357 $608,327 $ 263,417 555 1,131,656
Short-term borrowings 188,639 149 127 188,915
Long-term debt 8,425 26,790 26,433 10,099 71,747
-------- -------- ---------- ---------- ----------
804,755 635,266 289,850 757,293 2,487,164
Other liabilities 373,996 373,996
Stockholders' equity 272,303 272,303
-------- -------- ---------- ---------- ----------
$804,755 $635,266 $ 289,850 $1,403,592 $3,133,463
======== ======== ========== ========== ==========
PERIOD GAP $(58,629) $128,639 $ 900,216 $ (970,226)
======== ======== ========== ==========
CUMULATIVE GAP $(58,629) $ 70,010 $ 970,226
======== ======== ==========
CUMULATIVE GAP AS A PERCENT
OF TOTAL ASSETS 1.87% 2.23% 30.96%
==== ==== =====
RATE SENSITIVE ASSETS/RATE
SENSITIVE LIABILITIES
(CUMULATIVE) .93 1.05 1.56 1.16
==== ==== ==== ====
CAPITAL RESOURCES
The assessment of capital adequacy depends on a number of factors such as
asset quality, liquidity, earnings performance, changing competitive conditions
and economic forces. The Corporation seeks to maintain a strong capital base to
support its growth and expansion activities, to provide stability to current
operations and to promote public confidence.
Capital management is a continuous process. Since December 31, 1997,
stockholders' equity has increased $13.8 million as a result of earnings
retention. For the nine months ended September 30, 1998, the return on average
equity on a recurring earnings basis was 13.27%. Recurring earnings exclude
merger related costs of $3.1 million, net of tax. Total cash dividends
declared represented 35.70% of recurring earnings. Book value per common
share was $14.80 at September 30, 1998, compared to $14.14 at December 31, 1997.
<PAGE>
LOANS
Following is a summary of loans (dollars in thousands):
SEPTEMBER 30, DECEMBER 31,
1998 1997
Real estate: ------------- ------------
Residential $ 912,676 $ 905,065
Commercial 619,563 524,006
Construction 86,546 67,216
Installment loans to individuals 288,478 295,336
Commercial, financial and agricultural 273,737 263,902
Lease financing 111,398 59,852
Unearned income (27,927) (20,473)
---------- ----------
$2,264,471 $2,094,904
========== ==========
NON-PERFORMING ASSETS
Non-performing assets include non-performing loans and other real estate
owned. Non-performing loans include non-accrual loans and restructured loans.
Non-accrual loans represent loans on which interest accruals have been
discontinued. It is the Corporation's policy to discontinue interest accruals
when principal or interest is due and has remained unpaid for 90 days or more
unless the loan is both well secured and in the process of collection. When a
loan is placed on non-accrual status, all unpaid interest is reversed.
Non-accrual loans may not be restored to accrual status until all delinquent
principal and interest has been paid, or the loan becomes both well secured
and in the process of collection. Consumer installment loans are generally
charged off against the allowance for loan losses upon reaching 90 to 180 days
past due, depending on the installment loan type. Restructured loans are loans
in which the borrower has been granted a concession on the interest rate or
the original repayment terms due to financial distress.
Following is a summary of non-performing assets (dollars in thousands):
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
Non-performing assets:
Non-accrual loans $10,346 $ 8,340
Restructured loans 1,840 1,345
------- -------
Total non-performing loans 12,186 9,685
Other real estate owned 5,266 4,027
------- -------
Total non-performing assets $17,452 $13,712
Asset quality ratios:
Non-performing loans as percent of total loans .54% .46%
Non-performing assets as percent of total assets .56% .46%
Non-performing loans are closely monitored on an ongoing basis as part of
the Corporation's loan review and work-out process. The potential risk of loss
on these loans is evaluated by comparing the loan balance to the fair value of
any underlying collateral or the present value of projected future cash flows.
Losses are recognized where appropriate.
<PAGE>
ALLOWANCE FOR LOAN LOSSES
Management's analysis of the allowance for loan losses includes the
evaluation of the loan portfolio based on internally generated loan review
reports and the historical loss experience of the remaining balances of the
various homogeneous loan pools which comprise the loan portfolio. Specific
factors which are evaluated include the previous loan loss experience with the
customer, the status of past due interest and principal payments on the loan,
the collateral position of the loan, the quality of financial information
supplied by the borrower and the general financial condition of the borrower.
Historical loss experience on the remaining portfolio segments is considered in
conjunction with current status of economic conditions, loan loss trends,
delinquency and non-accrual trends, credit administration and concentrations of
credit risk.
Following is a summary of changes in the allowance for loan losses and
selected ratios (dollars in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1998 1997 1998 1997
------- ------- ------- -------
Balance at beginning of period $31,022 $30,590 $29,906 $30,231
Reduction arising from the sale
of a subsidiary and loans (2,479) (3,922)
Charge-offs (1,677) (2,622) (4,704) (7,527)
Recoveries 218 294 1,042 1,057
------- ------- ------- -------
Net charge-offs (1,459) (2,328) (3,662) (6,470)
Provision for loan losses 1,959 2,464 5,278 8,408
------- ------- ------- -------
Balance at end of period $31,522 $28,247 $31,522 $28,247
======= ======= ======= =======
Allowance for loan losses to:
Total loans, net of unearned income 1.39% 1.35%
Non-performing loans 302.11% 291.66%
The higher level of the provision for loan losses in 1997 resulted from the
consistent application of the Corporation's charge-off policy and methodology
for determining the adequacy of the allowance for loan losses to West Coast
Bancorp, Inc., which was merged into the Corporation in April of 1997.
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 September 30, 1998, that the Corporation
and each of its banking subsidiaries are all "well capitalized".
<PAGE>
As of June 30, 1998, the Corporation and each of its banking subsidiaries
have been categorized as "well capitalized" under the regulatory framework for
prompt corrective action. Following are capital ratios as of September 30, 1998
for the Corporation (dollars in thousands):
To Be Well
For Capital Capitalized Under
Adequacy Prompt Corrective
Actual Purposes Action Provisions
--------------- -------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
-------- ----- -------- ----- -------- -----
Total Capital $292,533 13.4% $174,786 8.0% $218,483 10.0%
(to risk-weighted
assets)
Tier 1 Capital 255,166 11.7% 87,393 4.0% 131,090 6.0%
(to risk-weighted
assets)
Tier 1 Capital 255,166 8.3% 123,205 4.0% 154,006 5.0%
(to average assets)
The Corporation and its banking subsidiaries are subject to various
regulatory capital requirements administered by federal and state banking
agencies. Failure to meet minimum capital requirements can initiate certain
mandatory, and discretionary actions by regulators that, if undertaken, could
have a direct material effect on the Corporation's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Corporation and its banking subsidiaries must meet specific capital
guidelines that involve quantitative measures of assets, liabilities and certain
off-balance sheet items as calculated under regulatory accounting practices.
The Corporation's and banking subsidiaries' capital amounts and classifications
are also subject to qualitative judgments by the regulators about components,
risk weightings and other factors.
FINANCIAL INFORMATION SUMMARY
Net income for the first nine months of 1998 was $23.2 million compared to
$25.2 million for the first nine months of 1997. Basic earnings per share were
$1.28 and $1.44 for the nine months ended September 30, 1998 and 1997,
respectively, while diluted earnings per share were $1.22 and $1.37 for those
same periods. Several non-recurring items are included in these results,
including $3.1 million of merger costs in 1998 and a $5.3 million gain on the
sale of a subsidiary and $4.4 million of merger related and other non-recurring
charges in 1997, all net of tax. Excluding these non-recurring items, net
income was $26.3 million and $24.3 million for the first nine months of 1998 and
1997, respectively, resulting in diluted earnings per share of $1.38 and $1.32
for the same periods. Highlights for the first nine months of 1998 include:
* A return on average assets of 1.15% and a return on average equity of
13.27%, both based on recurring earnings.
* A 37.23% decrease in the provision for loan losses as compared to the first
nine months of 1997. This decrease includes a $1.7 million provision taken
in 1997 in order to consistently apply the Corporation's charge-off policy
and methodology for determining the adequacy of the allowance for loan
losses to West Coast Bancorp, Inc.
* A $42.2 million or 11.46% increase in net interest earning assets as
compared to the first nine months of 1997, which offset the impact of a
declining net interest margin. During the comparable nine month periods,
the Corporation's net interest margin fell 24 basis points.
<PAGE>
FIRST NINE MONTHS OF 1998 AS COMPARED TO FIRST NINE MONTHS OF 1997:
The following table provides information regarding the average balances and
yields and rates on interest earning assets and interest bearing liabilities
(dollars in thousands):
Nine Months Ended September 30 1998 1997
------------------------- -------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
---------- -------- ----- ---------- -------- -----
ASSETS
Interest earning assets:
Interest bearing deposits
with banks $ 5,926 $ 236 5.31% $ 3,422 $ 126 4.91%
Federal funds sold 66,723 2,776 5.55 65,277 2,711 5.54
Securities:
Taxable 502,433 23,296 6.20 440,225 20,586 6.25
Non-taxable (1) 82,321 3,654 5.92 79,757 3,512 5.87
Loans (1) (2) 2,176,273 147,546 9.06 1,942,778 134,980 9.29
---------- -------- ---------- --------
Total interest
earning assets 2,833,676 177,508 8.37 2,531,459 161,915 8.55
Cash and due from banks 92,032 85,340
Allowance for loan losses (30,908) (31,173)
Premises and equipment 81,535 60,153
Other assets 74,400 60,494
---------- ----------
$3,050,735 $2,706,273
LIABILITIES
Interest bearing liabilities:
Deposits:
Interest bearing demand $ 487,425 $ 7,910 2.17 $ 342,677 $ 5,927 2.31
Savings 600,328 14,678 3.27 618,676 12,916 2.79
Other time 1,133,311 46,421 5.48 1,029,618 42,027 5.46
Short-term borrowings 128,196 4,989 5.20 125,286 4,539 4.84
Long-term debt 73,942 3,477 6.27 46,920 2,665 7.57
---------- -------- ---------- --------
Total interest
bearing liabilities 2,423,202 77,475 4.27 2,163,177 68,074 4.21
---------- -------- ---------- --------
Non-interest bearing
demand deposits 321,546 274,061
Other liabilities 41,199 35,922
---------- ----------
2,785,947 2,473,160
---------- ----------
STOCKHOLDERS' EQUITY 264,788 233,113
---------- ----------
$3,050,735 $2,706,273
========== ==========
Net interest earning
assets $ 410,474 $ 368,282
========== ==========
Net interest income $100,033 $ 93,941
======== ========
Net interest spread 4.10% 4.34%
==== ====
Net interest margin (3) 4.72% 4.96%
==== ====
(1) The amounts are reflected on a fully taxable equivalent basis using the
federal statutory tax rate of 35% adjusted for certain federal tax
preferences.
(2) Average balance includes non-accrual loans. Loans consist of average total
loans less average unearned income. The amount of loan fees included in
interest income on loans is immaterial.
(3) Net interest margin is calculated by dividing the difference between total
interest earned and total interest paid by total interest earning assets.
<PAGE>
Net interest income, the Corporation's primary source of earnings, is the
amount by which interest and fees generated by interest earning assets,
primarily loans and securities, exceed interest expense on deposits and borrowed
funds. During the first nine months of 1998, net interest income, on a fully
taxable equivalent basis, totaled $100.0 million, representing a 6.60% increase
over the first nine months of 1997. Net interest income consisted of interest
income of $177.5 million and interest expense of $77.5 million for the first
nine months of 1998 compared to $161.9 million and $68.1 million for each,
respectively, for the first nine months of 1997. Net interest margin fell to
4.72% at September 30, 1998 from 4.96% at September 30, 1997, as the yield on
total interest earning assets declined by 18 basis points and the rate paid on
interest bearing liabilities increased by 6 basis points. Strong competitive
factors and recent moves by the Federal Reserve Board to reduce interest rates
resulted in a 23 basis point decrease in the average yield on loans and a 6
basis point increase in rates paid on deposits.
The following table sets forth certain information regarding changes in net
interest income attributable to changes in the volumes and rates of interest
earning assets and interest bearing liabilities for the nine months ending
September 30, 1998 as compared to the nine months ending September 30, 1997 (in
thousands):
Volume Rate Net
------- ------- -------
INTEREST INCOME
Interest bearing deposits with banks $ 99 $ 11 $ 110
Federal funds sold 60 5 65
Securities:
Taxable 2,873 (163) 2,710
Non-taxable 112 30 142
Loans 15,826 (3,260) 12,566
------- ------- -------
18,970 (3,377) 15,593
------- ------- -------
INTEREST EXPENSE
Deposits:
Interest bearing demand 2,315 (332) 1,983
Savings (367) 2,129 1,762
Other time 4,240 154 4,394
Short-term borrowings 107 343 450
Long-term debt 1,157 (345) 812
------- ------- -------
7,452 1,949 9,401
------- ------- -------
NET CHANGE $11,518 $(5,326) $ 6,192
The amount of change not solely due to rate or volume changes was allocated
between the change due to rate and the change due to volume based on the net
size of the rate and volume changes.
Interest income on loans, on a fully taxable equivalent basis, increased
9.31% from $135.0 million for the nine months ended September 30, 1997 to $147.5
million for the nine months ended September 30, 1998. This increase was the
result of an increase in average loans of 12.02% as the average yield declined
by 23 basis points over the same period last year.
Interest expense on deposits increased $8.1 million or 13.37% for the nine
months ended September 30, 1998, compared to the nine months ended September 30,
1997. This increase was the result of an increase in average deposits of 11.56%
over the same nine month period. The average balance in interest bearing demand
and time deposits increased by $144.4 million and $103.7 million, respectively.
The average balance in non-interest bearing demand deposits increased by $47.5
million. Interest expense on long-term debt increased $812,000 or 30.47% for
these same periods due to a $27.0 million increase in long-term debt, which
was partially offset by a decline in the rate paid of 130 basis points.
<PAGE>
The provision for loan losses totaled $5.3 million for the first nine
months of 1998, as compared to $8.4 million for the first nine months of 1997.
In connection with the Corporation's 1997 acquisition of West Coast Bancorp,
Inc. (WCBI), the Corporation recognized an additional provision for loan losses
of approximately $1.7 million, during the second quarter of 1997 after applying
the Corporation's allowance for loan loss policy and methodology for evaluating
the adequacy of the allowance to WCBI. After considering this additional
provision, the reduction in the provision of $1.4 million reflects the
Corporation's strong asset quality.
Non-interest income increased by 19.52% during the first nine months of
1998 as compared to the first nine months of 1997, primarily due to increases of
$1.7 million and $1.3 million in service charges and other fees and gain on sale
of loans, respectively. Additionally, the Corporation recognized $965,000 of
income relating to it's equity investment in Sun Bancorp, Inc., a bank holding
company headquartered in Selinsgrove, Pennsylvania.
Total non-interest expenses increased 10.34% during the first nine months
of 1998, compared to the first nine months of 1997. The increase was
attributable to the full year recognition of operating expenses associated with
Mercantile Bank of Southwest Florida and Indian Rocks National Bank. Operating
costs for these acquisitions were not recognized until after the closing of each
transaction during the fourth quarter of 1997. Included in non-interest
expenses during the first nine months of 1998 was $3.0 million for expenses
related to the affiliations with West Coast, Seminole and Citizens. Included
in non-interest expenses during the first nine months of 1997 was $1.1 million
for expenses related to the affiliation with West Coast Bancorp, Inc. These
expenses were primarily legal and investment banking costs associated with
the structuring and completion of the mergers.
Income tax expense for the nine months ended September 30, 1998 totaled
$11.7 million, providing an effective tax rate of 33.52% compared to 31.85% for
the nine months ended September 30, 1997. The increase in the effective tax
rate reflects the higher level of non-deductible merger related expense
recognized in 1998 over the same period in 1997.
THIRD QUARTER OF 1998 AS COMPARED TO THIRD QUARTER OF 1997:
During the third quarter of 1998, net interest income increased $2.8
million or 9.18% over the third quarter of 1997. Total interest income
increased $6.2 million or 11.69%, primarily the result of an increase in loan
volume. Total interest expense increased $3.4 million or 15.01% during the
third quarter of 1998, compared to the same period of 1997. Interest expense on
deposits accounted for the majority of this increase, $3.0 million, due to an
increase in average deposits.
The provision for loan losses totaled $2.0 million for the third quarter of
1998, as compared to $2.5 million for the third quarter of 1997.
Non-interest income increased 17.34% during the third quarter of 1998
compared to the same period of 1997. Total non-interest expenses increased
26.57% during the third quarter of 1998, compared to the third quarter of 1997.
The increase was attributable to operating costs associated with Mercantile
Bank of Southwest Florida and Indian Rocks National Bank, which were acquired
during the fourth quarter of 1997 and not reflected within the third quarter
results for 1997. Included in non-interest expenses during the third quarter
of 1998 was $1.5 million for expenses related to the affiliation with Citizens.
These expenses were primarily legal and investment banking costs associated
with the structuring and completion of the mergers.
<PAGE>
Income tax expense totaled $3.8 million during the quarter providing an
effective tax rate of 32.27% compared to 31.31% in 1997. The increase in the
effective tax rate in 1998 reflects the recognition of non-deductible merger
costs during the third quarter of 1998. Net income totaled $7.7 million for
the third quarter of 1998, compared to $8.8 million for the third quarter of
1997. Excluding the impact of the non-recurring items, net income totaled
$9.2 million for the third quarter of 1998.
YEAR 2000
The Year 2000 (Y2K) Issue is the result of computer programs being written
using date fields consisting of only two digits rather than four. Computer
programs that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than year 2000. This could result in system failures and
temporary interruptions in the processing of transactions. The Y2K Issue is not
only an internal issue but also affects third parties including customers,
counter parties, service providers and vendors.
Because the Y2K Issue poses an unprecedented and profound enterprise wide
challenge for every organization, the Corporation formed a Y2K Committee. The
Y2K Committee has developed a Year 2000 Enterprise Wide Project Plan (Y2K Plan).
The Y2K Plan addresses both internal and external technology.
In connection with the Y2K Plan, the Corporation has completed its
inventory and assessment of all internal technologies, including both software
and hardware. Each system was assigned a significance rating as to the degree
of criticality. Formal detailed test plans for systems with significance
ratings of a critical nature have been completed. Such systems include core
processing and ancillary systems required to sustain operations.
By the beginning of the new millennium, each of the Corporation's banking
subsidiaries will be processing on either of two core processing systems. The
Corporation's northern banking affiliates will continue to process transactions
on their existing core processing system. During the second quarter the
Corporation made the strategic decision to convert each of the Florida banking
affiliates to a new core processing system over the next fifteen month period.
The decision to convert was based in part on the number of different systems
currently being utilized by the Florida banking affiliates and the expiration of
the Corporation's primary Florida core processing contract. The Corporation has
received a third party certification and written representations from both
vendors that each system is Y2K compliant. The Corporation will be
participating in test verifications of each core system during the fourth
quarter of 1998 and the first quarter of 1999. The Corporation continues to
develop its contingency plan which is dependent upon the results of testing and
anticipates utilizing the two corporate wide core processing systems as
contingencies for each other. Phases I and II of the contingency plan,
organizational planning and business impact analysis, were completed as of
September 30, 1998.
During July of 1998, the Corporation's consumer finance subsidiary, Regency
Finance Company (Regency), selected a third party vendor to support all of its
future core application requirements. These core applications will include
loans, insurance and the Corporation's subordinated note program. Regency's
decision to select a new system was based upon the system's ability to support
new lending products as well as the operating efficiencies resulting from real-
time centralized processing. The vendor has provided a written warranty to
Regency that it is Y2K compliant. The system will be installed during the
first quarter of 1999.
<PAGE>
With respect to external technology, the Y2K Plan provides for the
evaluation and assessment of all significant funds takers, including large
borrowing customers and bond issuers, and funds providers, including contingency
lines of credit and deposit accounts. All project plans for funds takers and
providers have been substantially completed with continued monitoring to occur.
An integral part of the Corporation's funds provider project plan includes a
Customer Awareness Program. This program was developed to assure customer
confidence and avert reputation and liquidity risk. The program was not only
developed to educate the Corporation's customers, but also its employees in
responding to customer inquiries.
The Y2K Plan includes due diligence procedures as it relates to the
fiduciary responsibilities of the Corporation's investment and trust department,
including such activities as settlement transactions, remittance of bond
payments and transactions related to mutual funds and other securities.
Finally, the Y2K plan addresses the Corporation's service providers,
including significant suppliers and vendors. Currently, the Corporation is in
the process of rating each service provider, assessing their ability to be Y2K
ready and developing a contingency plan for those in question. While this
process is in its early stages, there is a reluctance by the service providers
to expressly certify to Y2K readiness. The Corporation's assessment of all
significant service providers and the identification of contingency providers is
currently in process.
The Corporation's current assessment of cost associated with the completion
of its Y2K Plan is not considered by management to be material to the
Corporation's future operations. The cost of completing the Corporation's Y2K
Plan and the dates on which all procedures will be completed are based on
management's best estimates. These estimates were derived utilizing various
assumptions about future events, including the continued availability of
resources, external technology modification plans and other significant factors.
However, there can be no guarantee that these estimates will be achieved and
actual results could differ materially from those anticipated.
<PAGE>
PART II
ITEM 1. LEGAL PROCEEDINGS
No material pending legal proceedings exist to which the Corporation or any
of its subsidiaries is a party, or of which any of their property is the
subject, except ordinary routine proceedings which are incidental to the
ordinary conduct of business. In the opinion of management, pending legal
proceedings will not have a material adverse effect on the consolidated
financial position of the Corporation and its subsidiaries.
ITEM 2. CHANGES IN SECURITIES
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
Pursuant to recent amendments to the rules relating to proxy statements
under the Securities Exchange Act of 1934 (the "Exchange Act"),
shareholders of the Corporation are hereby notified that any shareholder
proposal not included in the proxy materials disseminated by the
management of the Corporation for the Corporation's 1999 Annual Meeting
of Shareholders in accordance with Rule 14a-8 under the Exchange Act will
be considered untimely for the purposes of Rules 14a-4 and 14a-5 under the
Exchange Act if notice thereof is received after February 3, 1999.
Management proxies will be authorized to exercise discretionary voting
authority with respect to any shareholder proposal not included in such
proxy materials for the Corporation's Annual Meeting of Shareholders unless
(a) the Corporation receives notice of such proposal by the date set forth
above, and (b) the conditions set forth in Rule 14a-4(c)(2)(i)-(iii) under
the Exchange Act are met.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27. Financial Data Schedule (filed herewith)
(b) Reports on Form 8-K
A report on Form 8-K, dated July 6, 1998, was filed by the Corporation.
The Form 8-K included Audited Supplemental Consolidated Financial
Statements for the years ended December 31, 1997, 1996 and 1995 with Report
of Independent Auditors and Management's Discussion and Analysis giving
effect to the merger of the Corporation and Seminole Bank on a pooling-of-
interests basis.
A report on Form 8-K, dated October 29, 1998, was filed by the Corporation.
The Form 8-K included Audited Supplemental Consolidated Financial
Statements for the years ended December 31, 1997, 1996 and 1995 with Report
of Independent Auditors and Management's Discussion and Analysis giving
effect to the merger of the Corporation and Citizens Holding Corporation on
a pooling-of-interests basis.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
F.N.B. Corporation
-------------------------------------
(Registrant)
Dated: November 13, 1998 /s/Peter Mortensen
________________________ _____________________________________
Peter Mortensen
Chairman and Chief Executive Officer
(Principal Executive Officer)
Dated: November 13, 1998 /s/John D. Waters
________________________ _____________________________________
John D. Waters
Vice President and Chief Financial Officer
(Principal Financial Officer)
<TABLE> <S> <C>
<ARTICLE> 9
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 109,835
<INT-BEARING-DEPOSITS> 4,949
<FED-FUNDS-SOLD> 15,322
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 495,896
<INVESTMENTS-CARRYING> 103,608
<INVESTMENTS-MARKET> 105,626
<LOANS> 2,264,471
<ALLOWANCE> 31,522
<TOTAL-ASSETS> 3,133,463
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<SHORT-TERM> 188,915
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<COMMON> 36,059
0
2,568
<OTHER-SE> 233,676
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<INCOME-PRETAX> 11,519
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