-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Hu4VdoeKqZte+09h7l9WSBvs6Y6CpMmku6KVOoLHcNCPrpxREi9DRSt50EaOcsnI M22/yDQyYL5O1Dv3vgXeJw== 0000905870-96-000015.txt : 19960515 0000905870-96-000015.hdr.sgml : 19960515 ACCESSION NUMBER: 0000905870-96-000015 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19960514 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: FNB CORP/NC CENTRAL INDEX KEY: 0000764811 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 561456589 STATE OF INCORPORATION: NC FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-13823 FILM NUMBER: 96564508 BUSINESS ADDRESS: STREET 1: 101 SUNSET AVE STREET 2: P O BOX 1328 CITY: ASHEBORO STATE: NC ZIP: 27203 BUSINESS PHONE: 9106268300 MAIL ADDRESS: STREET 1: P.O. BOX 1328 CITY: ASHEBORO STATE: NC ZIP: 27203 10QSB 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-QSB X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1996 OR TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number 0-13823 FNB CORP. (Exact name of registrant as specified in its charter) North Carolina 56-1456589 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 101 Sunset Avenue, Asheboro, North Carolina 27203 (Address of principal executive offices) (Zip Code) (910) 626-8300 (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 The registrant had 1,800,296 shares of $2.50 par value common stock outstanding at April 19, 1996. Transitional Small Business Disclosure Format (Check One): Yes No X PART I. FINANCIAL INFORMATION Item 1. Financial Statements FNB Corp. and Subsidiary CONSOLIDATED BALANCE SHEETS March 31, December 31, ASSETS 1996 1995 1995 Cash and due from banks $ 9,996,374 $ 10,104,157 $ 8,764,539 Federal funds sold - 2,615,000 2,600,000 Investment securities: Available for sale, at estimated fair value(amortized cost of $24,962,914, $19,126,126 and $28,183,155) 24,989,467 18,952,290 28,375,645 Held to maturity (estimated fair value of $60,578,995, $52,859,384 and $57,008,236) 60,583,912 53,367,045 56,160,814 Loans 184,190,175 168,265,885 179,922,737 Less: Allowance for loan losses (1,936,154) (1,748,616) (1,902,640) Net loans 182,254,021 166,517,269 178,020,097 Premises and equipment 6,069,085 5,062,624 6,029,541 Other assets 4,273,951 3,470,772 3,727,476 TOTAL ASSETS $288,166,810 $260,089,157 $283,678,112 LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Noninterest-bearing demand deposits $ 35,647,986 $ 36,476,499 $ 38,590,985 Interest-bearing deposits: NOW, savings and money market deposits 80,705,479 77,536,821 78,728,366 Time deposits of $100,000 or more 37,449,538 23,308,267 36,427,161 Other time deposits 97,304,229 92,839,636 96,397,964 Total deposits 251,107,232 230,161,223 250,144,476 Retail repurchase agreements 4,214,955 3,729,667 4,641,527 Federal funds purchased 2,810,000 - - Other liabilities 3,421,429 2,263,449 2,897,038 TOTAL LIABILITIES 261,553,616 236,154,339 257,683,041 Shareholders' equity: Preferred stock - $10.00 par value; authorized 200,000 shares, none issued - - - Common stock - $2.50 par value; authorized 5,000,000 shares, issued shares - 1,800,296, 1,200,000 and 1,797,995 4,500,740 3,000,000 4,494,988 Surplus 65,858 900,000 18,705 Retained earnings 22,029,071 20,151,529 21,354,335 Net unrealized securities gains (losses) 17,525 (116,711) 127,043 TOTAL SHAREHOLDERS' EQUITY 26,613,194 23,934,818 25,995,071 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $288,166,810 $260,089,157 $283,678,112
See accompanying notes to consolidated financial statements. 1 FNB Corp. and Subsidiary CONSOLIDATED STATEMENTS OF INCOME Three Months Ended March 31, 1996 1995 INTEREST INCOME: Interest and fees on loans $ 4,043,802 $ 3,697,073 Interest and dividends on investment securities: Taxable income 1,209,345 999,144 Non-taxable income 178,169 159,433 Federal funds sold 5,183 13,640 Total interest income 5,436,499 4,869,290 INTEREST EXPENSE: Deposits 2,316,408 2,026,107 Retail repurchase agreements 45,716 40,080 Federal funds purchased 18,118 12,563 Total interest expense 2,380,242 2,078,750 NET INTEREST INCOME 3,056,257 2,790,540 Provision for loan losses 100,000 95,000 NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,956,257 2,695,540 OTHER OPERATING INCOME: Service charges on deposit accounts 348,527 303,601 Annuity and brokerage commissions 44,220 63,916 Credit card income 68,243 52,403 Other service charges, commissions and fees 84,892 79,818 Losses on sales of investment securities - (414,596) Other income 39,942 31,516 Total other operating income 585,824 116,658 OTHER OPERATING EXPENSE: Personnel expense 1,181,195 1,088,626 Net occupancy expense 119,256 118,427 Furniture and equipment expense 164,750 119,242 Data processing services 214,604 208,124 Restructuring charges - 460,457 Other expense 506,237 691,947 Total other operating expense 2,186,042 2,686,823 INCOME BEFORE INCOME TAXES 1,356,039 125,375 Income taxes (benefit) 411,259 (7,771) NET INCOME $ 944,780 $ 133,146 PER SHARE DATA: Net income $ .53 $ .07 Cash dividends declared .15 .12 Average number of shares outstanding 1,798,976 1,800,000
See accompanying notes to consolidated financial statements. 2 FNB Corp. and Subsidiary CONSOLIDATED STATEMENTS OF CASH FLOWS Three Months Ended March 31, 1996 1995 OPERATING ACTIVITIES: Net income $ 944,780 $ 133,146 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of premises and equipment 160,797 102,675 Provision for loan losses 100,000 95,000 Deferred income taxes 12,605 (232,238) Deferred loan fees and costs, net (50,309) (12,410) Premium amortization and discount accretion of investment securities, net (10,585) 51,393 Amortization of intangibles 10,963 14,779 Losses on sales of investment securities - 414,596 Net decrease in loans held for sale 405,503 - Decrease (increase) in other assets (659,163) 63,267 Increase in other liabilities 558,620 528,388 NET CASH PROVIDED BY OPERATING ACTIVITIES 1,473,211 1,158,596 INVESTING ACTIVITES: Available-for-sale securities: Proceeds from sales - 5,896,328 Proceeds from maturities 4,299,481 478,592 Purchases (1,099,414) (249,405) Held-to-maturity securities: Proceeds from maturities 8,785,367 4,580,000 Purchases (13,173,807) (5,540,477) Net decrease (increase) in loans (4,643,584) 31,086 Proceeds from sales of premises and equipment 9,240 20 Purchases of premises and equipment (200,341) (140,777) Other, net 52,292 (16,271) NET CASH PROVIDED BY (USED IN)INVESTING ACTIVITIES (5,970,766) 5,039,096 FINANCING ACTIVITIES: Net increase in deposits 962,756 235,911 Increase (decrease) in retail repurchase agreements (426,572) 203,441 Increase (decrease) in federal funds purchased 2,810,000 (3,050,000) Common stock issued 52,905 - Cash dividends paid (269,699) (216,000) NET CASH PROVIDED BY (USED IN)FINANCING ACTIVITIES 3,129,390 (2,826,648) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,368,165) 3,371,044 Cash and cash equivalents at beginning of period 11,364,539 9,348,113 CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 9,964,374 $12,719,157 Supplemental disclosure of cash flow information: Cash paid during the period for: Interest $ 2,346,718 $ 1,856,513 Income taxes 76,900 87,240
See accompanying notes to consolidated financial statements. 3 FNB Corp. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. FNB Corp. is a one-bank holding company whose wholly-owned subsidiary is the First National Bank and Trust Company (the "Bank"). The Bank is an independent community bank that offers full banking and trust services to consumer and business customers primarily in the region of North Carolina that includes Randolph, Montgomery and Chatham counties. The accompanying consolidated financial statements, prepared without audit, include the accounts of FNB Corp. and the Bank (collectively the "Corporation"). All significant intercompany balances and transactions have been eliminated. The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 2. For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, and federal funds sold. Generally, federal funds are purchased and sold for one-day periods. 3. Loans as presented are increased by net deferred expense of $305,567 and $133,400 at March 31,1996 and December 31, 1995, respectively, and are reduced by net unearned income of $602,876 at March 31, 1995. 4. Significant components of other expense were as follows: Three Months Ended March 31, 1996 1995 FDIC insurance $ 8,188 $127,974 Stationery, printing and supplies 74,977 72,109 Deferred acquisition costs charged to expense - 113,833 5. In 1995, man agement adopted a comprehensive restructuring project for the purpose of reengineering Bank operations to become more competitive and cost-effective in developing business and servicing customers and to improve long-term profitability. In connection with this project, certain positions within the Bank have either been realigned or eliminated. It is expected that all significant project costs were incurred in and paid in 1995. 4 A summary of the restructuring charges, all of which were incurred or accrued during the three months ended March 31, 1995, is as follows: Retirement benefits $256,266 Other personnel costs 44,850 Total personnel costs 301,116 Professional fees related to restructuring project 159,341 Total restructuring charges $460,457 6. All per share data has been retroactively adjusted to reflect the three-for-two common stock split effected in the form of a 50% stock dividend paid in the second quarter of 1995. 7. In the opinion of management, the financial information furnished in this report includes all adjustments (consisting of normal recurring accruals) necessary to a fair statement of the results for the periods presented. 5 Item 2. Management's Discussion and Analysis or Plan of Operation The purpose of this discussion and analysis is to assist in the understanding and evaluation of the financial condition, changes in financial condition and results of operations of FNB Corp. (the "Parent Company") and its wholly-owned subsidiary, First National Bank and Trust Company (the "Bank"), collectively referred to as the "Corporation". This discussion should be read in conjunction with the financial information appearing elsewhere in this report. OVERVIEW The Corporation earned $944,780 in the first quarter of 1996, an increase of over 600% from the same period in 1995. Earnings per share, adjusted for the three-for-two common stock split in 1995, increased from $.07 to $.53 in comparing these first quarter periods. The 1995 results, especially as related to the operations of the first quarter, were impacted by restructuring charges and losses on sales of investment securities discussed in more detail in the "Earnings Review" and in "Business Development matters". Total assets were $288,166,810 at March 31, 1996, up 10.8% from March 31, 1995 and 1.6% from December 31, 1995. Loans amounted to $184,190,175 at March 31, 1996, increasing 9.5% from March 31, 1995 and 2.4% from December 31, 1995. Total deposits grew 9.1% from March 31, 1995 and 0.4% from December 31, 1995 to $251,107,232 at March 31, 1996. On December 30, 1993, the Corporation entered into definitive agreements to acquire two mutual savings banks in merger/conversion transactions, pursuant to which the savings banks would convert from mutual to stock form and the Corporation would simultaneously acquire the shares issued in the conversions. In 1995, the agreements expired without the acquisitions having been completed due to changes in federal and state regulatory policies which strictly limited the circumstances under which such transactions would be permitted. EARNINGS REVIEW The Corporation's net income increased $811,634 or 609.6% in the first quarter of 1996 compared to the same period of 1995. Earnings were negatively affected in the 1995 first quarter by restructuring charges of $460,457 and losses on sales of investment securities of $414,596, which were charges taken for the strategic purposes discussed in "Business Development Matters". Additionally, certain costs, amounting to $113,833, that had been deferred in connection with the proposed acquisitions discussed in the "Overview" were charged to expense in the 1995 first quarter. Earnings were positively impacted in the 1996 first quarter by an increase of $265,717 or 9.5% in net interest income. As discussed in "Other Operating Expense", earnings are being favorably affected, since the 1995 third quarter, by a significant reduction in the rate charged for FDIC insurance. Compared to the same period of 1995, FDIC insurance expense was $119,786 lower in the first quarter of 1996. Return on average assets, affected by the restructuring charges and losses on sales of investment securities in 1995, improved from 0.20% in the first quarter of 1995 to 1.33% in the first quarter of 1996. Similarly, return on average shareholders' equity improved from 2.24% to 14.26% in comparing the same periods. 6 Net Interest Income Net interest income is the difference between interest income, principally from loans and investments, and interest expense, principally on customer deposits. Changes in net interest income result from changes in interest rates and in the volume, or average dollar level, and mix of earning assets and interest-bearing liabilities. Net interest income was $3,056,257 in the first quarter of 1996 compared to $2,790,540 in the same period of 1995. This increase of $265,717 or 9.5% resulted primarily from a 9.2% increase in the level of average earning assets coupled with a slight improvement in the net yield on earning assets, or net interest margin, from 4.84% in the 1995 first quarter to 4.85% in the same period of 1996. Following a period of generally lower interest rates which had ultimately resulted in a decline in the net interest margin, interest rates began to increase significantly in 1994, influenced by actions taken by the Federal Reserve to combat a possible resurgence in inflation. The interest rate increases in 1994 and early 1995, later offset to some extent by Federal Reserve action to reduce rates in the second half of 1995 and in the first quarter of 1996, have resulted in an improvement in the net interest margin. Additionally, there had been a continuing negative impact on the margin from certain variable-rate time deposits with rate floors in excess of current market rates. Such variable-rate time deposits were phased out over a two-year period that commenced in January 1994. On a taxable equivalent basis, the increase in net interest income in the first quarter of 1996 was $294,000, reflecting changes in the relative mix of taxable and non-taxable earning assets. Table 1 on page 14 sets forth for the periods indicated information with respect to the Corporation's average balances of assets and liabilities, as well as the total dollar amounts of interest income (taxable equivalent basis) from earning assets and interest expense on interest-bearing liabilities, resultant rates earned or paid, net interest income, net interest spread and net yield on earning assets. Net interest spread refers to the difference between the average yield on earning assets and the average rate paid on interest-bearing liabilities. Net yield on earning assets, or net interest margin, refers to net interest income divided by average earning assets and is influenced by the level and relative mix of earning assets and interest-bearing liabilities. Changes in net interest income on a taxable equivalent basis, as measured by volume and rate variances, are also analyzed in Table 1. Volume refers to the average dollar level of earning assets and interest-bearing liabilities. Changes in the net interest margin and net interest spread tend to correlate with movements in the prime rate of interest. There are variations, however, in the degree and timing of rate changes, compared to prime, for the different types of earning assets and interest-bearing liabilities. The prime rate, which had been 6.00% at December 31, 1993, moved up significantly in 1994 to close the year at 8.50% and, after certain changes during 1995, remained at that level at December 31, 1995. The average prime for those three years amounted to 6.20%, 7.09% and 8.82%, respectively. The prime rate had declined significantly from 1991 to 1993, but began to increase in 1994 following steps taken by the Federal Reserve to combat a possible resurgence in inflation. The prime rate increased towards the end of the first quarter in 1994 and an additional four times during the remainder of that year. In the first quarter of 1995, it increased again to 9.00% and remained at that level until the second half of the year when, in response to action taken by the Federal Reserve, it decreased twice. In the first quarter of 1996 the prime rate decreased again to 8.25%. The average prime was 8.36% in the first quarter of 1996 compared to 8.79% in the same period of 1995. In comparing first quarter periods, the net interest spread increased by 7 basis points from 4.03% in 1995 to 4.10% in 1996 due to the fact that the average total yield on earning assets increased by a 7 greater amount than the average rate paid on interest-bearing liabilities, or cost of funds. The yield on earning assets increased by 15 basis points from 8.27% in 1995 to 8.42% in 1996, while the cost of funds increased by only 8 basis points in moving from 4.24% to 4.32%. Provision for Loan Losses This provision is the charge against earnings to provide an allowance or reserve for possible future losses on loans. The amount of each period's charge is affected by several considerations including management's evaluation of various risk factors in determining the adequacy of the allowance (see "Asset Quality"), actual loan loss experience and loan portfolio growth. Earnings were negatively impacted in the first quarter of 1996 compared to the same period in 1995 by a $5,000 increase in the provision. Other Operating Income Total other operating income, or noninterest income, increased $469,166 or 402.2% in the first quarter of 1996 compared to the same period in 1995 due principally to the recognition in the 1995 first quarter of losses on sales of investment securities of $414,596 (see "Business Development Matters"). The 1996 increase also reflected in part the general increase in the volume of business. The increase in service charges on deposit accounts resulted primarily from the selected increases in service charge rates that became effective in the 1995 second quarter and included the implementation of daily charges on overdraft balances. Annuity and brokerage commissions declined because of a reduction in sales of tax-deferred annuity products. Credit card income increased due to the continuing development of the new credit card operation discussed in "Business Development Matters". Other Operating Expense Total other operating expense, or noninterest expense, decreased $500,781 or 18.7% in the first quarter of 1996 compared to the same period of 1995 due primarily to the recognition in the 1995 first quarter of restructuring charges of $460,457 (see "Business Development Matters") and of certain costs charged to "other expense", amounting to $113,833, that had been deferred in connection with proposed acquisitions (see "Overview"). Additionally, the 1996 results were generally impacted by the continuing effects of inflation. FDIC insurance expense decreased $119,786 or 93.6%, reflecting the effect of a rate reduction as discussed below. The levels of certain expenses, including personnel, are being favorably affected by the comprehensive project undertaken in 1995 for the reengineering of Bank operations (see "Business Development Matters"). There has been a decrease in the number of full-time equivalent employees. As is the situation for other operating expenses, however, personnel expense is subject to the continuing effects of inflation through normal salary adjustments and higher cost of fringe benefits. Personnel expense is also being impacted in 1996 by changes in the incentive compensation program. Furniture and equipment expense has increased due to a higher level of depreciation charges associated primarily with computer equipment purchases in 1995 (see "Business Development Matters"). Because of the Federal Deposit Insurance Corporation Improvement Act (FDICIA) enacted in 1989, FDIC insurance expense was increased substantially, with the Bank's expense amounting to $503,379 in the year ended December 31, 1995 and $127,974 in the first quarter of 1995. The FDIC has two separate insurance funds, which are the Bank Insurance Fund (BIF) and the Savings Association Insurance Fund (SAIF). When each fund reaches the 1.25 percent reserve ratio required by FDICIA, then the corresponding 8 insurance assessment rates can be lowered starting within that semiannual period. While the SAIF fund has not yet reached the mandated reserve ratio, the BIF fund was found in the third quarter of 1995 to have reached this level by the end of May 1995. Accordingly, the BIF rate was reduced effective June 1, 1995 and currently there is only a minimum annual charge of $2,000 for the majority of financial institutions with BIF-insured deposits. Since most of the Bank's deposits are insured through BIF, the Bank experienced a significant reduction in FDIC insurance expense commencing in the 1995 third quarter when the effect of the rate adjustment was initially recorded. Consequently, FDIC insurance expense for the entire 1995 year amounted to only $281,894 with the 1996 first quarter expense amounting to $8,188. Under legislation now being considered in connection with the SAIF fund, the FDIC insurance rate on SAIF deposits could be lowered to match that on BIF deposits. As part of this legislation, financial institutions would be charged a special, one-time assessment at the rate of 85 to 90 basis points on their SAIF deposits. The Bank's maximum, one-time assessment for its SAIF deposits at March 31, 1996, under the proposed legislation as described, would be $140,000. Income Taxes Based on the interaction of the significantly lower level of pre-tax income and the normal level of tax-exempt income, there was an income tax benefit recorded in the first quarter of 1995. The effective income tax rate of 30.3% in the first quarter of 1996 is more comparable to the 28.7% rate in the same period of 1994 and tends to vary from the 1994 rate due to an increase in the ratio of taxable to tax-exempt income. LIQUIDITY Liquidity refers to the continuing ability of the Bank to meet deposit withdrawals, fund loan and capital expenditure commitments, maintain reserve requirements, pay operating expenses and provide funds to the Parent Company for payment of dividends, debt service and other operational requirements. Liquidity is immediately available from three major sources: (a) cash on hand and on deposit at other banks, (b) the outstanding balance of federal funds sold and (c) the available-for-sale securities portfolio. While additional liquidity is readily obtainable by purchasing federal funds from other banks, the Bank has not found it necessary to utilize this resource to any substantial extent in recent years. Further, while available-for-sale securities are intended to be a source of immediate liquidity, the entire investment securities portfolio is managed to provide both income and a ready source of liquidity. The average portfolio life of debt securities is approximately four and one-half years, resulting in a substantial level of maturities each year. All debt securities are of investment grade quality and, if the need arises, can be promptly liquidated on the open market or pledged as collateral for short-term borrowing. In line with its approach to liquidity, the Bank as a matter of policy does not solicit or accept brokered deposits for funding asset growth. Instead, loans and other assets are based on a solid core of local deposits and the Bank's strong capital position. To date, the steady increase in deposits, retail repurchase agreements and capital has been adequate to fund loan demand in the Bank's market area, while maintaining the desired level of immediate liquidity and a substantial investment securities portfolio available for both immediate and secondary liquidity purposes. 9 ASSET/LIABILITY MANAGEMENT AND INTEREST RATE SENSITIVITY One of the primary objectives of asset/liability management is to maximize net interest margin while minimizing the earnings risk associated with changes in interest rates. One method used to manage interest rate sensitivity is to measure, over various time periods, the interest rate sensitivity positions, or gaps; however, this method addresses only the magnitude of timing differences and does not address earnings or market value. Therefore, management uses an earnings simulation model to prepare, on a regular basis, earnings projections based on a range of interest rate scenarios in order to more accurately measure interest rate risk. The Bank's balance sheet is liability-sensitive, meaning that in a given period there will be more liabilities than assets subject to immediate repricing as market rates change. Because immediately rate sensitive interest-bearing liabilities exceed rate sensitive assets, the earnings position could improve in a declining rate environment and could deteriorate in a rising rate environment, depending on the correlation of rate changes in these two categories. Included in interest-bearing liabilities subject to rate changes within 30 days are NOW, savings, and money market deposits totaling $80,705,000 as of March 31, 1996. These types of deposits historically have not repriced coincidentally with or in the same proportion as general market indicators. CAPITAL ADEQUACY Under guidelines established by the Federal Reserve Board, capital adequacy is currently measured for regulatory purposes by certain risk-based capital ratios, supplemented by a leverage ratio. The risk-based capital ratios are determined by expressing allowable capital amounts, defined in terms of Tier 1 and Tier 2, as a percentage of risk-adjusted assets, which are computed by measuring the relative credit risk of both the asset categories on the balance sheet and various off-balance sheet exposures. Tier 1 capital consists primarily of common shareholders' equity and qualifying perpetual preferred stock, net of goodwill and other disallowed intangible assets. Tier 2 capital, which is limited to the total of Tier 1 capital, includes allowable amounts of subordinated debt, mandatory convertible securities, preferred stock and the allowance for loan losses. Under current requirements, the minimum Tier 1 capital ratio is 4% and the minimum total capital ratio, consisting of both Tier 1 and Tier 2 capital, is 8%. At March 31, 1996, the Corporation had a Tier 1 capital ratio of 13.97% and a total capital ratio of 14.99%. The leverage ratio, which serves as a minimum capital standard, considers Tier 1 capital only and is expressed as a percentage of average total assets for the most recent quarter, after reduction of those assets for goodwill and other disallowed intangible assets at the measurement date. The required ratio ranges from 3% to 5%, subject to federal bank regulatory evaluation of the organization's overall safety and soundness. At March 31, 1996, the Corporation had a leverage ratio of 9.34%. BALANCE SHEET REVIEW Total assets at March 31, 1996 were higher than at March 31, 1995 and December 31, 1995 by $28,078,000 or 10.8% and $4,489,000 or 1.6%, respectively; deposits were ahead by $20,946,000 or 9.1% and $963,000 or 0.4%. Average assets increased $24,471,000 or 9.4% in the first quarter of 1996 compared to the same period in 1995, while average deposits increased $19,519,000 or 8.5%. 10 Investment Securities Additions to the investment securities portfolio depend to a large extent on the availability of investable funds that are not otherwise needed to satisfy loan demand. During the twelve-month period ended March 31, 1996, when the growth in total assets significantly exceeded that for loans, the level of investment securities was increased $13,254,000 or 18.3%. Of this total increase, $1,037,000 occurred during the first quarter of 1996. Investable funds not otherwise utilized are temporarily invested on an overnight basis as federal funds sold, the level of which is affected by such considerations as near-term loan demand and liquidity needs. Based on funds requirements, the Bank was a net purchaser of federal funds at March 31, 1996. Loans The Corporation's primary source of revenue and largest component of earning assets is the loan portfolio. Loans increased $15,924,000 or 9.5% during the twelve-month period ended March 31, 1996. The net loan increase during the first quarter of 1996 was $4,267,000 or 2.4%. Average loans were $14,081,000 or 8.4% higher in the first quarter of 1996 than in the same period of 1995. The ratio of average loans to average deposits, in comparing first quarter periods, was 73.2% in each period. The ratio of loans to deposits at March 31, 1996 was 73.4%. The commercial loan portfolio accounted for nearly half of the loan increase during the last twelve months, and the residential construction and mortgage loan portfolio accounted for nearly one-third. Consumer loan growth related primarily to credit cards and home equity lines of credit. Changes in the credit card operation are discussed in "Business Development Matters". The level of consumer loans may be affected in the future by management's decision in March 1996 that the Bank would discontinue the purchase of retail installment loan contracts from automobile and equipment dealers (see "Business Development Matters"). Asset Quality Management considers the Bank's asset quality to be of primary importance. A formal loan review function, independent of loan origination, is used to identify and monitor problem loans. In determining the allowance for loan losses and any resulting provision to be charged against earnings, particular emphasis is placed on the results of the loan review process. Consideration is also given to historical loan loss experience, the value and adequacy of collateral, and economic conditions in the Bank's market area. This evaluation is inherently subjective as it requires material estimates, including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant charge. Management's policy in regard to past due loans is conservative and normally requires a prompt charge-off to the allowance for loan losses following timely collection efforts and a thorough review. Further efforts are then pursued through various means available. Loans carried in a nonaccrual status are generally collateralized and the possibility of future losses is considered minimal. Deposits The level and mix of deposits is affected by various factors, including general economic conditions, the particular circumstances of local markets and the specific deposit strategies employed. In general, broad interest 11 rate declines tend to encourage customers to consider alternative investments such as mutual funds and tax-deferred annuity products, while interest rate increases tend to have the opposite effect. The Bank's level and mix of deposits has been specifically affected by the following factors. Certain variable-rate time deposits with minimum rates in excess of current market rates were phased out over a two-year period that commenced in January 1994. A retail repurchase agreements program, established in the second quarter of 1994, has tended to transfer funds away from deposits. The balance of retail repurchase agreements was $4,215,000 at March 31, 1996 and $3,730,000 at March 31, 1995. Further, the level of time deposits obtained from governmental units fluctuates, amounting to $17,478,000, $7,429,000 and $17,820,000 at March 31, 1996, March 31, 1995 and December 31, 1995, respectively. BUSINESS DEVELOPMENT MATTERS As discussed in the "Overview", the Corporation had entered into definitive agreements to acquire two mutual savings banks. In 1995, the agreements expired without the acquisitions having been completed due to changes in federal and state regulatory policies which strictly limited the circumstances under which such transactions would be permitted. During 1994, a new credit card operation was established in which the Bank carries its own credit card receivables as opposed to the former fee-based arrangement under which accounts were generated for and owned by a correspondent bank. As part of the new credit card strategy, extensive marketing efforts were undertaken in 1995, primarily to Bank customers. Additionally, the merchant aspect of credit card operations has been shifted to an in-house basis from the prior correspondent arrangement. In a significant 1994 development, the Bank elected to outsource all of its data processing, item capture and statement rendering operations. The conversion to a service bureau arrangement was completed in the 1994 fourth quarter. The major items of data processing equipment that were no longer needed by the Bank were acquired by the new processor. While the Bank does not currently plan to resume any major data processing operations, the level of computer equipment was significantly increased in 1995 through expanded use of personal computer networks. The new networks allow for a more direct input of basic loan and deposit account information to the data files maintained by the service bureau. Capital expenditures in 1995, which totaled $1,302,230, related primarily to the increase in computer equipment. Since most of this equipment was not placed into service until late in 1995, the majority of the effect on annual depreciation expense occurs in 1996. In 1995, as discussed in Note 5 to Consolidated Financial Statements, management adopted a comprehensive restructuring project for the purpose of reengineering Bank operations to become more competitive and cost-effective in developing business and servicing customers and to improve long-term profitability. In connection with this project, certain positions within the Bank have either been realigned or eliminated. Total restructuring charges in 1995 (all recorded in the first quarter), with the expectation that all significant costs were incurred and paid within that year, amounted to $460,457, of which $301,116 related to personnel costs and $159,341 to professional fees. The Bank also decided in March 1995 to recognize losses of $414,596 from the sales of certain investment securities held in the available-for-sale portfolio in order to gain favorable tax treatment for the losses and to take advantage of reinvestment opportunities at higher coupon rates. While these actions had a significant adverse impact on 1995 earnings, management believes these decisions will enhance the long-term value of the Corporation and strengthen the competitive position of its community banking operations. 12 Management decided in March 1996 that the Bank would discontinue the purchase of retail installment loan contracts from automobile and equipment dealers, due largely to the declining yields being experienced in this loan program. Contracts of this nature included in loans amounted to $33,525,143 at December 31, 1995 and $33,921,895 at March 31, 1996. While there will be no purchases of new contracts, current plans call for the collection of outstanding loans based on their contractual terms. It is expected that the funds previously invested in this loan program will be redeployed, as loan payments occur, to other loan programs or to the investment securities portfolio. 13 TABLE 1 CONSOLIDATED AVERAGE BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS (Taxable Equivalent Basis, Dollars in Thousands) 1996 1995 THREE MONTHS ENDED MARCH 31 Average Interest Rates Average Income/ Earned/ Average Balance Expense Paid Balance EARNING ASSETS Loans (2) (3) $182,709 $ 4,056 8.90 % $168,628 Investment securities (2): Taxable income 72,195 1,290 7.15 65,588 Non-taxable income 12,692 279 8.79 10,279 Federal funds sold 409 5 5.08 870 Total earning assets 268,005 5,630 8.42 245,365 Cash and due from banks 8,579 8,806 Other assets, net 8,152 6,094 TOTAL ASSETS 284,736 $260,265 INTEREST-BEARING LIABILITIES Interest-bearing deposits: NOW accounts $ 34,361 177 2.07 $ 31,357 Savings deposits 30,138 197 2.62 30,238 Money market accounts 16,138 112 2.79 19,075 Certificates and other time deposits 134,650 1,830 5.45 114,171 Retail repurchase agreements 4,278 46 4.29 3,215 Federal funds purchased 1,302 18 5.58 873 Total interest- bearing liabilities 220,867 2,380 4.32 198,929 Noninterest-bearing demand deposits 34,467 35,394 Other liabilities 2,901 2,154 Shareholders' equity 26,501 23,788 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $284,736 $260,265 NET INTEREST INCOME AND SPREAD $ 3,250 4.10 % NET YIELD ON EARNING ASSETS 4.85 %
(1) The mix variance, not separately stated, has been proportionally allocated to the volume and rate variances based on their absolute dollar amount. (2) Interest income and yields related to certain investment securities and loans exempt from both federal and state income tax or from state income tax alone are stated on a fully taxable equivalent basis, assuming a 34% federal tax rate and applicable state tax rate, reduced by the nondeductible portion of interest expense. (3) Nonaccrual loans are included in the average loan balance. Loan fees and the incremental direct costs associated with making loans are deferred and subsequently recognized over the life of the loan as an adjustment of interest income. 14a TABLE 1 CONSOLIDATED AVERAGE BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS (Taxable Equivalent Basis, Dollars in Thousands) 1995 THREE MONTHS ENDED MARCH 31 Average 1996 Versus 1995 Interest Rates Interest Variance Income/ Earned/ due to (1) Net Expense Paid Volume Rate Change EARNING ASSETS Loans (2) (3) $ 3,718 8.91 % $ 342 $ (4) $ 338 Investment securities (2): Taxable income 1,052 6.42 112 126 238 Non-taxable income 251 9.76 55 (27) 28 Federal funds sold 14 6.36 (6) (3) (9) Total earning assets 5,035 8.27 503 92 595 Cash and due from banks Other assets, net TOTAL ASSETS INTEREST-BEARING LIABILITIES Interest-bearing deposits: NOW accounts 166 2.15 17 (6) 11 Savings deposits 217 2.92 (1) (19) (20) Money market accounts 144 3.06 (20) (12) (32) Certificates and other time deposits 1,499 5.32 291 40 331 Retail repurchase agreements 40 5.06 12 (6) 6 Federal funds purchased 13 5.84 6 (1) 5 Total interest- bearing liabilities 2,079 4.24 305 (4) 301 Noninterest-bearing demand deposits Other liabilities Shareholders' equity TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY NET INTEREST INCOME AND SPREAD $ 2,956 4.03 % $ 198 $ 96 $ 294 NET YIELD ON EARNING ASSETS 4.84 %
(1) The mix variance, not separately stated, has been proportionally allocated to the volume and rate variances based on their absolute dollar amount. (2) Interest income and yields related to certain investment securities and loans exempt from both federal and state income tax or from state income tax alone are stated on a fully taxable equivalent basis, assuming a 34% federal tax rate and applicable state tax rate, reduced by the nondeductible portion of interest expense. (3) Nonaccrual loans are included in the average loan balance. Loan fees and the incremental direct costs associated with making loans are deferred and subsequently recognized over the life of the loan as an adjustment of interest income. 14b PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits. Exhibits to this report are listed in the index to exhibits on pages 16 and 17 of this report. (b) Reports on Form 8-K. No reports on Form 8-K were filed during the quarter ended March 31, 1996. SIGNATURES In accordance with the requirements of the Exchange Act, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FNB Corp. (Registrant) Date: May 8, 1996 By: /s/ Jerry A. Little Jerry A. Little Treasurer and Secretary (Principal Financial and Accounting Officer) 15 FNB CORP. INDEX TO EXHIBITS Exhibit No. Description of Exhibit 3.10 Articles of Incorporation of the Registrant, incorporated herein by reference to Exhibit 3.1 to the Registrant's Form S-14 Registration Statement (No. 2-96498) filed March 16, 1985. 3.11 Articles of Amendment to Articles of Incorporation of the Registrant, adopted May 10, 1988, incorporated herein by reference to Exhibit 19.10 to the Registrant's Form 10-Q Quarterly Report for the quarter ended June 30, 1988. 3.20 Amended and Restated Bylaws of the Registrant, adopted May 9, 1995, incorporated herein by reference to Exhibit 3.20 to the Registrant's Form 10-QSB Quarterly Report for the quarter ended June 30, 1995. 4 Specimen of Registrant's Common Stock Certificate, incorporated herein by reference to Exhibit 4 to Amendment No. 1 to the Registrant's Form S-14 Registration Statement (No. 2-96498) filed April 19, 1985. 10.10 Form of Split Dollar Insurance Agreement dated as of November 1, 1987 between First National Bank and Trust Company and certain of its key employees and directors, incorporated herein by reference to Exhibit 19.20 to the Registrant's Form 10-Q Quarterly Report for the Quarter ended June 30, 1988. 10.11 Form of Amendment to Split Dollar Insurance Agreement dated as of November 1, 1994 between First National Bank and Trust Company and certain of its key employees and directors, incorporated herein by reference to Exhibit 10.11 to the Registrant's Form 10-KSB Annual Report for the fiscal year ended December 31, 1994. 10.20 Copy of Split Dollar Insurance Agreement dated as of May 28, 1989 between First National Bank and Trust Company and James M. Culberson, Jr., incorporated herein by reference to Exhibit 10.30 to the Registrant's Form 10-K Annual Report for the fiscal year ended December 31, 1989. 10.30 Copy of Stock Compensation Plan adopted May 11, 1993, incorporated herein by reference to Exhibit 10.40 to the Registrant's Form 10-QSB Quarterly Report for the quarter ended June 30, 1993. 16 Exhibit No. Description of Exhibit 10.31 Form of Incentive Stock Option Agreement between FNB Corp. and certain of its key employees, pursuant to the Registrant's Stock Compensation Plan, incorporated herein by reference to Exhibit 10.31 to the Registrant's Form 10-KSB Annual Report for the fiscal year ended December 31, 1994. 10.32 Form of Nonqualified Stock Option Agreement between FNB Corp. and certain of its directors, pursuant to the Registrant's Stock Compensation Plan, incorporated herein by reference to Exhibit 10.32 to the Registrant's Form 10-KSB Annual Report for the fiscal year ended December 31, 1994. 10.40 Copy of FNB Corp. Savings Institutions Management Stock Compensation Plan adopted May 10, 1994, incorporated herein by reference to Exhibit 10.40 to the Registrant's Form 10-QSB Quarterly Report for the quarter ended June 30, 1994. 10.50 Copy of Employment Agreement dated as of December 27, 1995 between First National Bank and Trust Company and Michael C. Miller, incorporated herein by reference to Exhibit 10.50 to the Registrant's Form 10-KSB Annual Report for the fiscal year ended December 31, 1995. 27 Financial Data Schedule. 17 /TEXT> EX-27 2
9 This schedule contains summary financial information extracted from Form 10-QSB for the quarterly period ended March 31, 1996 and is qualified in its entirety by reference to such financial statements. 3-MOS DEC-31-1996 MAR-31-1996 9,996,374 0 0 0 24,989,467 60,583,912 0 184,190,175 1,936,154 288,166,810 251,107,232 7,024,955 3,421,429 0 0 0 4,500,740 22,112,454 288,166,810 4,043,802 1,387,514 5,183 5,436,499 2,316,408 2,380,242 3,056,257 100,000 0 2,186,042 1,356,039 1,356,039 0 0 944,780 .53 .53 4.56 25,000 323,000 0 0 1,903,000 120,000 53,000 1,936,000 1,693,000 0 243,000
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