-----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, HOsugdKWuXPDU6fKd59Z2fmKjbqskwGFnPRWMRpYFFqqZONbpqdHmNRDopyVcIUW pfVER/LMx2tKhFnEt+fTtg== 0000950168-97-001269.txt : 19970515 0000950168-97-001269.hdr.sgml : 19970515 ACCESSION NUMBER: 0000950168-97-001269 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970514 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FNB CORP/NC CENTRAL INDEX KEY: 0000764811 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 561456589 STATE OF INCORPORATION: NC FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-13823 FILM NUMBER: 97604661 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 10-Q 1 FORM 10-Q FOR FNB CORP. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1997 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 0-13823 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 1,811,104 shares of $2.50 par value common stock outstanding at April 19, 1997. PART I. FINANCIAL INFORMATION Item 1. Financial Statements FNB Corp. and Subsidiary CONSOLIDATED BALANCE SHEETS
March 31, -------------------------------------------- December 31, ASSETS 1997 1996 1996 ------------------ ------------------- ------------------ Cash and due from banks $ 11,279,668 $ 9,996,374 $ 13,052,150 Federal funds sold 2,750,000 - - Investment securities: Available for sale, at estimated fair value (amortized cost of $27,622,493, $24,962,914 and $28,875,531) 27,622,493 24,989,467 28,928,543 Held to maturity (estimated fair value of $57,975,089, $60,578,995 and $61,274,858) 58,641,746 60,583,912 61,387,196 Loans 201,186,836 184,190,175 195,272,683 Less: Allowance for loan losses (2,043,565) (1,936,154) (1,985,581) ------------------ ------------------- ------------------ Net loans 199,143,271 182,254,021 193,287,102 ------------------ ------------------- ------------------ Premises and equipment 6,244,892 6,069,085 6,290,471 Other assets 4,457,073 4,273,951 4,189,015 ------------------ ------------------- ------------------ TOTAL ASSETS $ 310,139,143 $ 288,166,810 $ 307,134,477 ================== =================== ================== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Noninterest-bearing demand deposits $ 40,122,540 $ 35,647,986 $ 38,805,364 Interest-bearing deposits: NOW, savings and money market deposits 85,675,779 80,705,479 82,576,792 Time deposits of $100,000 or more 45,303,090 37,449,538 48,944,981 Other time deposits 101,875,481 97,304,229 101,052,928 ------------------ ------------------- ------------------ Total deposits 272,976,890 251,107,232 271,380,065 Retail repurchase agreements 4,564,338 4,214,955 3,724,929 Federal funds purchased - 2,810,000 575,000 Other liabilities 3,177,499 3,421,429 2,687,241 ------------------ ------------------- ------------------ TOTAL LIABILITIES 280,718,727 261,553,616 278,367,235 ------------------ ------------------- ------------------ 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 - 1,811,104, 1,800,296 and 1,806,994 4,527,760 4,500,740 4,517,485 Surplus 323,452 65,858 213,510 Retained earnings 24,708,010 22,029,071 24,001,259 Net unrealized securities gains (losses) (138,806) 17,525 34,988 ------------------ ------------------- ------------------ TOTAL SHAREHOLDERS' EQUITY 29,420,416 26,613,194 28,767,242 ------------------ ------------------- ------------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 310,139,143 $ 288,166,810 $ 307,134,477 ================== =================== ==================
See accompanying notes to consolidated financial statements. 1 FNB Corp. and Subsidiary CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended March 31, --------------------------------------------- 1997 1996 ------------------- ------------------ INTEREST INCOME: Interest and fees on loans $ 4,428,072 $ 4,043,802 Interest and dividends on investment securities: Taxable income 1,208,455 1,209,345 Non-taxable income 227,991 178,169 Federal funds sold 28,151 5,183 ------------------- ------------------ Total interest income 5,892,669 5,436,499 ------------------- ------------------ INTEREST EXPENSE: Deposits 2,509,933 2,316,408 Retail repurchase agreements 44,305 45,716 Federal funds purchased 4,608 18,118 ------------------- ------------------ Total interest expense 2,558,846 2,380,242 ------------------- ------------------ NET INTEREST INCOME 3,333,823 3,056,257 Provision for loan losses 125,000 100,000 ------------------- ------------------ NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 3,208,823 2,956,257 ------------------- ------------------ OTHER OPERATING INCOME: Service charges on deposit accounts 345,909 348,527 Annuity and brokerage commissions 91,227 44,220 Credit card income 86,390 68,243 Other service charges, commissions and fees 102,448 84,892 Other income 37,915 39,942 ------------------- ------------------ Total other operating income 663,889 585,824 ------------------- ------------------ OTHER OPERATING EXPENSE: Personnel expense 1,256,366 1,181,195 Net occupancy expense 148,468 119,256 Furniture and equipment expense 194,964 164,750 Data processing services 274,665 214,604 Other expense 525,243 506,237 ------------------- ------------------ Total other operating expense 2,399,706 2,186,042 ------------------- ------------------ INCOME BEFORE INCOME TAXES 1,473,006 1,356,039 Income taxes A71 440,256 411,259 ------------------- ------------------ NET INCOME $ 1,032,750 $ 944,780 =================== ================== PER SHARE DATA: Net income $ .57 $ .53 Cash dividends declared .18 .15 Weighted average number of shares outstanding 1,808,775 1,798,976
See accompanying notes to consolidated financial statements. 2 FNB Corp. and Subsidiary CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, --------------------------------------------- 1997 1996 ------------------- ------------------ OPERATING ACTIVITIES: Net income $ 1,032,750 $ 944,780 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of premises and equipment 185,274 160,797 Provision for loan losses 125,000 100,000 Deferred income taxes (benefit) (22,856) 12,605 Deferred loan fees and costs, net 114,199 (50,309) Premium amortization and discount accretion of investment securities, net (20,569) (10,585) Amortization of intangibles 8,081 10,963 Net decrease in loans held for sale - 405,503 Increase in other assets (162,300) (659,163) Increase in other liabilities 543,598 558,620 ------------------- ------------------ NET CASH PROVIDED BY OPERATING ACTIVITIES 1,803,177 1,473,211 ------------------- ------------------ INVESTING ACTIVITES: Available-for-sale securities: Proceeds from maturities 10,781,594 4,299,481 Purchases (9,721,940) (1,099,414) Held-to-maturity securities: Proceeds from maturities 2,749,844 8,785,367 Purchases - (13,173,807) Net increase in loans (6,113,931) (4,643,584) Proceeds from sales of premises and equipment 130 9,240 Purchases of premises and equipment (139,695) (200,341) Other, net 16,357 52,292 ------------------- ------------------ NET CASH USED IN INVESTING ACTIVITIES (2,427,641) (5,970,766) ------------------- ------------------ FINANCING ACTIVITIES: Net increase in deposits 1,596,825 962,756 Increase (decrease) in retail repurchase agreements 839,409 (426,572) Increase (decrease) in federal funds purchased (575,000) 2,810,000 Common stock issued 120,217 52,905 Cash dividends paid (379,469) (269,699) ------------------- ------------------ NET CASH PROVIDED BY FINANCING ACTIVITIES 1,601,982 3,129,390 ------------------- ------------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 977,518 (1,368,165) Cash and cash equivalents at beginning of period 13,052,150 11,364,539 ------------------- ------------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 14,029,668 $ 9,996,374 =================== ================== Supplemental disclosure of cash flow information: Cash paid during the period for: Interest $ 2,383,737 $ 2,346,718 Income taxes 24,500 76,900
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 periods. 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 reduced by net unearned income of $55,814 at March 31, 1997 and are increased by net deferred expense of $37,998 and $305,567 at March 31, 1997 and December 31, 1996, respectively. 4. Significant components of other expense were as follows: Three Months Ended March 31, ------------------ 1997 1996 ------ ------ Stationery, printing and supplies 92,586 74,977 5. 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. 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 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 $1,032,750 in the first quarter of 1997, a 9.3% increase over the same period in 1996. Earnings per share increased from $.53 to $.57 in comparing these first quarter periods. Total assets were $310,139,143 at March 31, 1997, up 7.6% from March 31, 1996 and 1.0% from December 31, 1996. Loans amounted to $201,186,836 at March 31, 1997, increasing 9.2% from March 31, 1996 and 3.0% from December 31, 1996. Total deposits grew 8.7% from March 31, 1996 and 0.6% from December 31, 1996 to $272,976,890 at March 31, 1997. EARNINGS REVIEW The Corporation's net income increased $87,970 or 9.3% in the first quarter of 1997 compared to the same period of 1996. Earnings were positively impacted in the 1997 first quarter by an increase in net interest income of $277,566 or 9.1% and by a $78,065 increase in total other operating income. These gains were significantly offset, however, by a $25,000 increase in the provision for loan losses and a $213,664 increase in total other operating expense. Return on average assets improved from 1.33% in the first quarter of 1996 to 1.34% in the first quarter of 1997. Return on average shareholders' equity decreased slightly from 14.26% to 14.09% in comparing the same periods. 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 $2,509,933 in the first quarter of 1997 compared to $2,316,408 in the same period of 1996. This increase of $277,566 or 9.1% resulted primarily from a 8.4% increase in the level of average earning assets coupled with an improvement in the net yield on earning assets, or net interest margin, from 4.85% in the 1996 first quarter to 4.92% in the same period of 1997. On a taxable equivalent basis, the increase in net interest income in the first quarter of 1997 was $310,000, reflecting changes in the relative mix of taxable and non-taxable earning assets. 5 Table 1 on page 12 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 of interest has moved to generally higher levels in recent years, due primarily to actions taken by the Federal Reserve to combat potential increases in inflation. After averaging 6.00% in 1993, the prime rate has subsequently averaged 7.09%, 8.82% and 8.28% in 1994, 1995 and 1996, respectively. The prime rate reached a level of 9.00% in the first quarter of 1995, and then, following actions by the Federal Reserve to lower interest rates, it decreased over time to a level of 8.25% in the first quarter of 1996. In the first quarter of 1997, the Federal Reserve elected to tighten rates, and the prime increased to 8.50%. The average prime was 8.27% in the first quarter of 1997 compared to 8.36% in the same period of 1996. In comparing first quarter periods, the net interest spread increased by 7 basis points form 4.10% in 1996 to 4.17% in 1997 as the result of similar increase in the average total yield on earning assets from 8.42% to 8.49%. There was no change in the average rate paid on interest-bearing liabilities, or cost of funds, which amounted to 4.32% in each first quarter period. 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 1997 compared to the same period in 1996 by a $25,000 increase in the provision. Other Operating Income Total other operating income, or noninterest income, increased $78,065 or 13.3% in the first quarter of 1997 compared to the same period in 1996, reflecting in part the general increase in the volume of business. The gain in annuity and brokerage commissions resulted principally from increased brokerage commissions. Credit card income increased due to the continuing development of the new credit card operation discussed in "Business Development Matters". The level of other service charges, commissions and fees is higher due primarily to the implementation in the 1996 third quarter of a fee charged to noncustomers for usage of the Bank's automated teller machines. 6 Other Operating Expense Total other operating expense, or noninterest expense, increased $213,664 or 9.8% in the first quarter of 1997 compared to the same period in 1996 due largely to costs associated with changes in operations, increased personnel expense and the continuing effects of inflation. Personnel expense was impacted by increased staffing requirements, normal salary adjustments and higher costs of fringe benefits. Net occupancy expense was affected by increased maintenance charges. The expanded use of personal computer networks has contributed to higher levels of equipment costs and data processing services, the latter item also being impacted by higher costs related to the change in the credit card operation (see "Business Development Matters"). FDIC insurance expense has been significantly affected in recent years by major legislation, including the Federal Deposit Insurance Corporation Improvement Act (FDICIA) enacted in 1989. The FDIC currently has two separate insurance funds, which are the Bank Insurance Fund (BIF) and the Savings Association Insurance Fund (SAIF). As provided by FIDICA, the insurance assessment rate could be lowered once a fund had reached a mandated 1.25 percent reserve ratio. While the SAIF fund did not reach 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, resulting in 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. The Deposit Insurance Funds Act of 1996 (DIFA) was enacted on September 30, 1996 and has three main components. The first included both a one-time assessment on SAIF deposits to capitalize the SAIF fund to the mandated 1.25 percent reserve ratio. The second is a requirement that the repayment of the Financing Corporation (FICO) bonds be shared by both banks and thrifts. The third is the ultimate elimination of the BIF and SAIF funds by merging them into a new Deposit Insurance Fund. The one-time assessment on the Bank's SAIF deposits, which amounted to $74,845, was determined on the date of enactment and expensed at that time. Effective January 1, 1997, FDIC insurance premiums are being assessed for FICO bond purposes at an initial rate of $.0648 per $100 for SAIF deposits and a rate equal to one-fifth of that, or $.01296 per $100, for BIF deposits. Additional premiums could be assessed in order to maintain the BIF and SAIF funds at the required 1.25 percent reserve ratio. FDIC insurance expense for the first quarters of 1997 and 1996 amounted to $10,057 and $8,188, respectively, and was included in "other expense". Income Taxes The effective income tax rate decreased from 30.3% in the first quarter of 1996 to 29.9% in the same period of 1997 due principally to a decrease 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 four major sources: (a) cash on hand and on deposit at other banks, (b) the outstanding balance of federal funds sold, (c) lines for the purchase of federal funds from other banks and 7 (d) the available-for-sale securities portfolio. 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 five 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. 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 is a portion of the NOW, savings, and money market deposits. These types of deposits historically have not repriced coincidentally with or in the same proportion as general market indicators. As a specific asset/liability management tool, the Bank, at March 31, 1997, had entered into interest rate floor agreements with a correspondent bank to protect certain variable-rate loans from the downward effects of their repricing in the event of a decreasing rate environment. The total notional amount of the agreements is $20,000,000. The agreements require the correspondent bank to pay to the Bank the difference between the specified floor rate of interest in each agreement and the prime rate of interest in the event that the prime rate is less. Any payments received under the agreements, net of premium amortization, will be treated as an adjustment of interest income on loans. CAPITAL ADEQUACY Under guidelines established by the Board of Governors of the Federal Reserve System, capital adequacy is currently measured for regulatory purposes by certain risk-based capital ratios, supplemented by a leverage capital ratio. The risk-based capital ratios are determined by expressing allowable capital amounts, defined in terms of Tier I and Tier II, 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 8 sheet exposures. Tier I capital consists primarily of common shareholders' equity and qualifying perpetual preferred stock, net of goodwill and other disallowed intangible assets. Tier II capital, which is limited to the total of Tier I capital, includes allowable amounts of subordinated debt, mandatory convertible securities, preferred stock and the allowance for loan losses. Under current requirements, the minimum total capital ratio, consisting of both Tier I and Tier II capital, is 8.00% and the minimum Tier I capital ratio is 4.00%. At March 31, 1997, FNB Corp. and the Bank had total capital ratios of 14.93% and 14.65%, respectively, and Tier I capital ratios of 13.96% and 13.69%. The leverage capital ratio, which serves as a minimum capital standard, considers Tier I 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. As currently required, the minimum leverage capital ratio is 4.00%. At March 31, 1997, FNB Corp. and the Bank had leverage capital ratios of 9.57% and 9.38%, respectively. The Bank is also required to comply with prompt corrective action provisions established by the Federal Deposit Insurance Corporation Improvement Act. To be categorized as well-capitalized, the Bank must have a minimum ratio for total capital of 10.00%, for Tier I capital of 6.00% and for leverage capital of 5.00%. As noted above, the Bank met all of those ratio requirements at March 31, 1997 and, accordingly, is well-capitalized under the regulatory framework for prompt corrective action. BALANCE SHEET REVIEW Total assets at March 31, 1997 were higher than at March 31, 1996 and December 31, 1996 by $21,972,000 or 7.6% and $3,005,000 or 1.0%, respectively; deposits were ahead by $21,870,000 or 8.7% and $1,597,000 or 0.6%. Average assets increased $23,847,000 or 8.4% in the first quarter of 1997 compared to the same period in 1996, while average deposits increased $22,278,000 or 8.9%. 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, 1997, when the growth in total assets exceeded that for loans, the level of investment securities was increased by a net amount of $691,000 or 0.8%. Based on funds needs in the 1997 first quarter, however, when loan growth was at a much higher rate than that for either total assets or deposits, there was a net reduction in the level of investment securities of $4,052,000 or 4.5%. 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. Loans The Corporation's primary source of revenue and largest component of earning assets is the loan portfolio. Loans increased $16,997,000 or 9.2% during the twelve-month period ended March 31, 1997. The net loan increase during the first quarter of 1997 was $5,914,000 or 3.0%. Average loans were $14,821,000 or 8.1% higher in the first quarter of 1997 than in the same period of 1996. The ratio of average loans to average deposits, in comparing first quarter periods, decreased from 73.2% in 1996 to 72.6% in 1997. The ratio of loans to deposits at March 31, 1997 was 73.7%. 9 Loan growth and the composition of the loan portfolio are being affected by management's decision in March 1996 to discontinue the purchase of retail installment loan contracts from automobile and equipment dealers (see "Business Development Matters"). The outstanding balance of these loan contracts, which are primarily included in consumer loans, experienced a net decrease of $16,662,090 during the twelve-month period ended March 31, 1997. Consequently, total consumer loans declined significantly during that period. Other consumer loan elements, including credit cards and home equity lines of credit, have continued to grow. Changes in the credit card operation are discussed in "Business Development Matters". The commercial loan portfolio and the residential construction and mortgage loan portfolio have each experienced strong gains during the last twelve months and also during the first quarter of 1997. 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. As part of the loan review function, a third party assessment group is employed to review the underwriting documentation and risk grading analysis. 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 change. 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 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. A promotion that offered premium-rate certificates of deposit, based on a selected maturities, has resulted in a significant portion of the $12,424,000 increase in time deposits during the twelve-month period ended March 31, 1997. A retail repurchase agreements program has tended to transfer funds away from deposits. The balance of retail repurchase agreements was $4,564,000 at March 31, 1997 and $4,215,000 at March 31, 1996. Further, the level of time deposits obtained from governmental units fluctuates, amounting to $21,504,000, $17,478,000 and $21,602,000 at March 31, 1997, March 31, 1996 and December 31, 1996, respectively. BUSINESS DEVELOPMENT MATTERS 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 10 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. Credit card receivables amounted to $2,272,120, $1,580,015 and $2,257,204 at March 31, 1997, March 31, 1996 and December 31, 1996, respectively. 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 full effect on annual depreciation expense was not recognized until 1996. Approximately one-third of 1996 capital expenditures, which totaled $1,019,109, also related to personal computer networks. 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 $17,259,805, $33,921,895 and $20,355,367 at March 31, 1997, March 31, 1996 and December 31, 1996, respectively. 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. 11 TABLE 1 CONSOLIDATED AVERAGE BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS (Taxable Equivalent Basis, Dollars in Thousands)
1997 1996 -------------------------------------------- ------------------------------------ THREE MONTHS ENDED MARCH 31 Average Average Interest Rates Interest Rates Average Income/ Earned/ Average Income/ Earned/ Balance Expense Paid Balance Expense Paid ------------- ------------- ------------- ------------ ----------- ----------- EARNING ASSETS Loans (2) (3) $ 197,530 $ 4,441 9.09% $ 182,709 $ 4,056 8.90% Investment securities (2): Taxable income 73,533 1,294 7.04 72,195 1,290 7.15 Non-taxable income 17,345 356 8.20 12,692 279 8.79 Federal funds sold 2,171 28 5.26 409 5 5.08 ------------- ------------- ------------- ------------ ----------- ----------- Total earning assets 290,579 6,119 8.49 268,005 5,630 8.42 ------------- ------------- ------------- ------------ ----------- ----------- Cash and due from banks 9,752 8,579 Other assets, net 8,252 8,152 ------------- ------------ TOTAL ASSETS $308,583 284,736 ============= ============ INTEREST-BEARING LIABILITIES Interest-bearing deposits: NOW accounts $ 36,318 157 1.76 $ 34,361 177 2.07 Savings deposits 29,538 173 2.38 30,138 197 2.62 Money market accounts 17,837 146 3.31 16,138 112 2.79 Certificates and other time deposits 152,066 2,034 5.42 134,650 1,830 5.45 Retail repurchase agreements 4,256 44 4.22 4,278 46 4.29 Federal funds purchased 345 5 5.42 1,302 18 5.58 ------------- ------------- ------------- ------------ ----------- ----------- Total interest-bearing liabilities 240,360 2,559 4.32 220,867 2,380 4.32 ------------- ------------- ------------- ------------ ----------- ----------- Noninterest-bearing demand deposits 36,273 34,467 Other liabilities 2,628 2,901 Shareholders' equity 29,322 26,501 ------------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ $308,583 $ 284,736 ============== =========== NET INTEREST INCOME AND SPREAD $ 3,560 4.17% $ 3,250 4.10% ============= ============= =========== ========= NET YIELD ON EARNING ASSETS 4.92% 4.85% ============= ========= 1997 Versus 1996 ---------------------------------------- Interest Variance due to (1) ----------------------- Net Volume Rate Change --------- ----------- ----------- EARNING ASSETS Loans (2) (3) $ 305 $ 80 $ 385 Investment securities (2): Taxable income 24 (20) 4 Non-taxable income 97 (20) 77 Federal funds sold 22 1 23 --------- ----------- ----------- Total earning assets 448 41 489 --------- ----------- ----------- Cash and due from banks Other assets, net TOTAL ASSETS INTEREST-BEARING LIABILITIES Interest-bearing deposits: 9 (29) (20) NOW accounts (4) (20) (24) Savings deposits 12 22 34 Money market accounts 215 (11) 204 Certificates and other time deposits (1) (1) (2) Retail repurchase agreements (12) (1) (13) Federal funds purchased --------- ----------- ----------- 219 (40) 179 --------- ----------- ----------- Total interest-bearing liabilities Noninterest-bearing demand deposits Other liabilities Shareholders' equity TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 229 $ 81 $ 310 NET INTEREST INCOME AND SPREAD =========== =========== ============ NET YIELD ON EARNING ASSETS
(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. 12 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 14 and 15 of this report. (b) Reports on Form 8-K. No reports on Form 8-K were filed during the quarter ended March 31, 1997. ------------------------------------ SIGNATURES In accordance with the requirements of the Securities Exchange Act of 1934, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FNB Corp. (Registrant) Date: May 9, 1997 By: /s/ Jerry A. Little ------------------- Jerry A. Little Treasurer and Secretary (Principal Financial and Accounting Officer) 13 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. 14 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. 15 EX-27 2 EXHIBIT 27
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 3-MOS DEC-31-1997 MAR-31-1997 11,279,668 0 2,750,000 0 27,622,493 58,641,746 0 201,186,836 2,043,565 310,139,143 272,976,890 4,564,338 3,177,499 0 0 0 4,527,760 24,892,656 310,139,143 4,428,072 1,436,446 28,151 5,892,669 2,509,933 2,558,846 3,333,823 125,000 0 2,399,706 1,473,006 1,473,006 0 0 1,032,750 .57 .57 4.61 20,000 221,000 0 0 1,986,000 101,000 34,000 2,044,000 1,884,000 0 160,000
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