-----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, JpRMfw7tdqK+oFMoQX2EaVv1fAEcNOoBVBF3KCLtbmt5ymWYqePPIbpZ7rVWfjDz bWJouQYK6ZgRNlQqt/RRWg== 0000950168-98-001017.txt : 19980401 0000950168-98-001017.hdr.sgml : 19980401 ACCESSION NUMBER: 0000950168-98-001017 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 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-K SEC ACT: SEC FILE NUMBER: 000-13823 FILM NUMBER: 98583930 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-K 1 ANNUAL REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-K |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 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) Registrant's telephone number, including area code: (336) 626-8300 Securities registered pursuant to Section 12(b) of the Act: None Securities pursuant to Section 12(g) of the Act: Common Stock, par value $2.50 per share (Title of Class) 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 _____ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to the Form 10-K. |_| As of March 19, 1998, the aggregate market value of voting stock held by nonaffiliates of the registrant, assuming, without admission, that all directors and officers of the registrant may be deemed affiliates, was $88,635,993. The registrant had 3,650,686 shares of $2.50 par value common stock outstanding at March 19, 1998. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Annual Report to Shareholders for the year ended December 31, 1997 are incorporated by reference into Part II. Portions of the definitive proxy statement for the Annual Meeting of Shareholders to be held on May 12, 1998 are incorporated by reference into Part III. PART I Item 1. Business FNB Corp. (the "Parent Company") is a bank holding company incorporated under the laws of the State of North Carolina in 1984. On July 2, 1985, through an exchange of stock, the Parent Company acquired its wholly-owned bank subsidiary, First National Bank and Trust Company (the "Bank"), a national banking association founded in 1907. The Parent Company and the Bank are collectively referred to as the "Corporation". The Bank, a full-service commercial bank, currently conducts all of its operations in Randolph, Montgomery and Chatham counties in North Carolina. Four offices, including the main office, are located in Asheboro. Additional community offices are located in Archdale (two offices), Biscoe, Ramseur, Randleman, Seagrove and Siler City. Some of the major services offered include checking accounts, NOW accounts (including package account versions that offer a variety of products and services), money market accounts, savings accounts, certificates of deposit, holiday club accounts, individual retirement accounts, credit cards and loans, both secured and unsecured, for business, agricultural and personal use. The Bank also has automated teller machines and is a member of two national teller machine networks, Cirrus and Plus, and one regional network, Honor. The Bank has a Trust and Investment Services Division that offers traditional trust and estate settlement services, investment management programs, brokerage services and tax-deferred annuities. In 1995, the Trust and Investment Services Division began offering investment products and services through "FNB Investor Services", a service provided by Liberty Securities. On June 3, 1997, the Corporation entered into a definitive agreement to acquire Home Savings Bank of Siler City, Inc., SSB ("Home Savings") of Siler City, North Carolina. Under terms of the agreement, Home Savings shareholders were to receive $15.50 per share, either in FNB Corp. common stock or in cash or a combination thereof, subject to the limitation that FNB Corp. common stock issued in the merger would be not more than 60% and not less than 50% of the total consideration. On January 28, 1998, as permitted by the agreement, the Board of Directors of Home Savings exercised its right to terminate the proposed combination due to the increase in the market value of FNB Corp. common stock above a specified level. 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. The Corporation incurred certain costs in connection with the proposed acquisitions. Those costs, which had been initially deferred, are included in merger expenses in the consolidated statements of income and amounted to $305,000 and $186,350 for the years ended December 31, 1997 and 1995, respectively. 1 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. Credit card receivables amounted to $2,579,799, $2,257,204 and $1,524,718 at December 31, 1997, 1996 and 1995, 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. Subsequent to the 1994 data processing changes and without resuming any of the outsourced operations, the Bank has significantly increased its investment in computer equipment 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 and one-half of 1997 capital expenditures, which totaled $1,019,109 and $477,852, respectively, also related to personal computer networks. In 1995, 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 were either realigned or eliminated. Total restructuring charges, all of which were incurred and paid in 1995, 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. 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 at December 31, 1997, 1996 and 1995 amounted to $9,674,229, $20,355,367 and $33,525,143, respectively. While there will be no purchases of new contracts, current plans call for the collection of outstanding loans based on their contractual terms. The funds previously invested in this loan program are being redeployed, as loan payments occur, to other loan programs or to the investment securities portfolio. Year 2000 Issue The Corporation is aware of the issue associated with the programming code in existing computer systems as the year 2000 approaches. The "year 2000" problem is pervasive and complex as virtually every computer operation will be affected in some way by the rollover of the two-digit year 2 value to 00. The issue is whether computer systems and other equipment incorporating computer components will properly recognize date sensitive information when the year changes to 2000. Systems that do not properly recognize such information could generate erroneous data or cause a system to fail. The Corporation relies on vendors for all computer programming and equipment. An internal assessment of the year 2000 situation was completed in January 1997. The assessment included computer software, computer hardware and other equipment incorporating computer components that are date sensitive. The Corporation has monitored the status of its vendors and continues to evaluate vendors for adherence to their year 2000 plans. To date, confirmations have been received from the Corporation's primary processing vendors that plans have been implemented to address the processing of transactions in the year 2000. The Corporation is utilizing both internal and external resources to identify, correct or reprogram, and test systems for year 2000 compliance. The vendors anticipate that all reprogramming efforts will be completed by December 31, 1998, allowing adequate time for testing. Management estimates the cost of year 2000 compliance will be approximately $200,000, which primarily includes capital expenditures relating to computer equipment expected to be replaced in 1998 and 1999. In 1997, the cost related to year 2000 compliance was immaterial. Competition The commercial banking industry within the Bank's marketing area is extremely competitive. The Bank faces direct competition in Randolph, Montgomery and Chatham counties from approximately nineteen different financial institutions, including commercial banks, savings institutions and credit unions. Although none of these entities is dominant, the Bank considers itself one of the major financial institutions in the area in terms of total assets and deposits. Further competition is provided by banks located in adjoining counties, as well as other types of financial institutions such as insurance companies, finance companies, pension funds and brokerage houses and other money funds. Supervision and Regulation The Parent Company is a bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended (the "BHC Act"), and is registered as such with the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"). A bank holding company is required to file with the Federal Reserve Board annual reports and other information regarding its business operations and those of its subsidiaries. It is also subject to examination by the Federal Reserve Board and is required to obtain Federal Reserve Board approval prior to acquiring, directly or indirectly, ownership or control of any voting shares of any bank if, after such acquisition, it would own or control, directly or indirectly, more than five percent of the voting stock of such bank, unless it already owns a majority of the voting stock of such bank. Furthermore, a bank holding company, with limited exceptions, is prohibited from acquiring direct or indirect ownership or control of more than five percent of the voting stock of any company which is not a bank or a bank holding company and must engage only in the business of banking or managing or controlling banks or furnishing services to or performing services for its subsidiary banks. One of the exceptions to this prohibition is the ownership of shares in a company the activities of which the Federal Reserve Board has determined to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. 3 The Federal Reserve Board has determined that certain activities are closely related to banking, and that bank holding companies may apply to the Federal Reserve Board for permission to form, retain or acquire an interest in a company engaging or proposing to engage in these activities. The permitted nonbanking activities include, without limitation: (1) making, acquiring or servicing loans or other extensions of credit such as consumer finance, credit card, mortgage, commercial finance and factoring companies would make; (2) acting as an investment or financial advisor; (3) leasing real or personal property or acting as agent, broker, or advisor in leasing such property if the lease is to serve as the functional equivalent of an extension of credit to the lessee of the property and certain other conditions are met; (4) providing bookkeeping or data processing services under certain circumstances; (5) acting as an insurance agent or broker with respect to insurance that is directly related to the extension of credit with other financial services; (6) acting as an underwriter for credit life insurance and credit accident and health insurance directly related to extensions of credit by the holding company system; and (7) providing securities brokerage services and related securities credit activities. As a national banking association, the Bank is subject to regulatory supervision, of which regular bank examinations by the Comptroller of the Currency are a part. The Bank is a member of the Federal Deposit Insurance Corporation (the "FDIC") which currently insures the deposits of each member bank to a maximum of $100,000 per depositor. For this protection, each bank pays a quarterly statutory assessment and is subject to the rules and regulations of the FDIC. The Bank is also a member of the Federal Reserve System and is therefore subject to the applicable provisions of the Federal Reserve Act, which imposes restrictions on loans by subsidiary banks to a holding company and its other subsidiaries and on the use of stock or securities as collateral security for loans by subsidiary banks to any borrower. The ability of the Parent Company to pay dividends depends to a large extent upon the amount of dividends the Bank pays to the Parent Company. Approval of the Comptroller of the Currency, or his designate, will be required for any dividend to the Parent Company by the Bank if the total of all dividends, including any proposed dividend, declared by the Bank in any calendar year exceeds the total of its net profits for that year combined with its retained net profits for the preceding two years, less any required transfers to surplus or a fund for the retirement of any preferred stock. Effect of Governmental Policies The operations and earnings of the Bank and, therefore, of the Parent Company are affected by legislative changes and by the policies of various regulatory agencies. In particular, the Bank is affected by the monetary and fiscal policies of the Federal Reserve Board. The instruments of monetary policy used by the Federal Reserve Board include its open market operations in U.S. Government securities, changes in the discount rate on member bank borrowings, and changes in reserve requirements on member bank deposits. The actions of the Federal Reserve Board influence the growth of bank loans, investments and deposits and also affect interest rates charged on loans or paid on deposits. Employees As of December 31, 1997, the Parent Company had three officers, all of whom were also officers of the Bank. On that same date, the Bank had 127 full-time employees and 19 part-time employees. The Bank considers its relationship with its employees to be excellent. The Bank provides employee benefit programs, including a noncontributory defined benefit pension plan, matching retirement/savings plan, group life, health and dental insurance, paid vacations, sick leave, and health care and life insurance benefits for retired employees. 4 Item 2. Properties The main offices of the Bank and the principal executive offices of the Parent Company are located in an office building at 101 Sunset Avenue, Asheboro, North Carolina. The premises contain approximately 36,500 square feet of office space. The Bank also has other community offices in Asheboro, Archdale, Biscoe, Ramseur, Randleman, Seagrove and Siler City, North Carolina. Except as noted below, all premises are owned by the Bank in fee. The Randolph Mall office in Asheboro is under a lease expiring January 31, 2002. The Bush Hill office in Archdale is under a lease expiring January 31, 2002, with lease renewal options for up to an additional 20-year term. The land on which the Seagrove Office is situated is under a lease expiring June 30, 2016. At that time, the land is subject to a purchase option at a fixed price or lease renewal options for up to an additional 30-year term. Item 3. Legal Proceedings Not applicable. Item 4. Submission of Matters To A Vote Of Security Holders Not applicable. 5 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters Information with respect to FNB Corp. common stock, appearing under the headings "Common Stock" and "Market Makers" of the section entitled "General Information" and under the heading "Table 11 - Quarterly Financial Data" of the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the 1997 Annual Report to Shareholders, is incorporated herein by reference. Item 6. Selected Financial Data The section entitled "Five Year Financial History" in the 1997 Annual Report to Shareholders is incorporated herein by reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the 1997 Annual Report to Shareholders is incorporated herein by reference. Item 7A. Quantitative and Qualitative Disclosures about Market Risk Information with respect to market risk, appearing under the heading "Market Risk" of the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the 1997 Annual Report to Shareholders, is incorporated herein by reference. Item 8. Financial Statements and Supplementary Data The consolidated financial statements of FNB Corp. and subsidiary and the opinion of KPMG Peat Marwick LLP, independent certified public accountants, with respect thereto, are incorporated herein by reference, as identified below, from the 1997 Annual Report to Shareholders. Independent Auditors' Report Consolidated Balance Sheets, December 31, 1997 and 1996 Consolidated Statements of Income, years ended December 31, 1997, 1996 and 1995 Consolidated Statements of Shareholders' Equity, years ended December 31, 1997, 1996 and 1995 Consolidated Statements of Cash Flows, years ended December 31, 1997, 1996 and 1995 Notes to Consolidated Financial Statements 6 Information with respect to quarterly financial data, appearing under the heading "Table 11 - Quarterly Financial Data" of the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the 1997 Annual Report to Shareholders, is incorporated herein by reference, Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure Not Applicable. 7 PART III Item 10. Directors and Executive Officers of the Registrant Information with respect to directors, appearing under the heading "Election of Directors" in the Registrant's definitive proxy statement for the Annual Meeting of Shareholders to be held on May 12, 1998, is incorporated herein by reference. Information with respect to executive officers, appearing under the heading "Executive Officers" in the Registrant's definitive proxy statement for the Annual Meeting of Shareholders to be held on May 12, 1998, is incorporated herein by reference. Information with respect to delinquent filers pursuant to Item 405 of Regulation S-K, appearing under the heading "Security Ownership of Management" in the Registrant's definitive proxy statement for the Annual Meeting of Shareholders to be held on May 12, 1998, is incorporated herein by reference. Item 11. Executive Compensation Information with respect to executive compensation, appearing under the heading "Executive Compensation" in the Registrant's definitive proxy statement for the Annual Meeting of Shareholders to be held on May 12, 1998, is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management Information with respect to security ownership of certain beneficial owners and management, appearing under the headings "Voting Securities Outstanding and Principal Shareholders" and "Security Ownership of Management" in the Registrant's definitive proxy statement for the Annual Meeting of Shareholders to be held on May 12, 1998, is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions Information with respect to certain relationships and related transactions, appearing under the heading "Indebtedness of Officers and Directors" in the Registrant's definitive proxy statement for the Annual Meeting of Shareholders to be held on May 12, 1998, is incorporated herein by reference. 8 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) (1) The financial statements listed in Item 8 of Part II of this report are filed as part of this report. (2) The financial statement schedules normally required on Form 10-K are omitted since they are not applicable. (3) Exhibits to this report are listed in the index to exhibits on pages 12 and 13 of this report. (b) Reports on Form 8-K. No reports on Form 8-K were filed during the last quarter of the period covered by this report. 9 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. FNB Corp. (Registrant) Date: March 27, 1998 By: /s/ Michael C. Miller ------------------------------------- Michael C. Miller President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on March 27, 1998. Signature Title - --------- ----- /s/ Michael C. Miller President, Chief Executive - ------------------------------- Officer and Director Michael C. Miller /s/ Jerry A. Little Treasurer and Secretary - ------------------------------- (Principal Financial and Jerry A. Little Accounting Officer) /s/ James M. Culberson, Jr. Chairman of the Board - ------------------------------- James M. Culberson, Jr. /s/ James M. Campbell, Jr. Director - ------------------------------- James M. Campbell, Jr. /s/ Wilbert L. Hancock Director - ------------------------------- Wilbert L. Hancock /s/ Thomas A. Jordan Director - ------------------------------- Thomas A. Jordan /s/ R. Reynolds Neely, Jr. Director - ------------------------------- R. Reynolds Neely, Jr. 10 Signature Title - --------- ----- /s/ Richard K. Pugh Director - ------------------------------- Richard K. Pugh Director - ------------------------------- J. M. Ramsay III /s/ Charles W. Stout, M.D. Director - ------------------------------- Charles W. Stout, M.D. /s/ Earlene V. Ward Director - ------------------------------- Earlene V. Ward 11 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, as amended effective May 13, 1997, incorporated herein by reference to Exhibit 10.30 to the Registrant's Form 10-Q Quarterly Report for the quarter ended June 30, 1997. 12 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 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. 13 Portions of the Registrant's 1997 Annual Report to Shareholders, which are incorporated into this report at the items so designated. 21 Subsidiaries of the Registrant. 23 Consent of Independent Auditors. 27 Financial Data Schedule. 13 EX-13 2 ANNUAL REPORT - -------------------------------------------------------------------------------- Five Year Financial History (Dollars in thousands except per share data)
1997 1996 1995 1994 1993 ------------ ------------ ------------ ------------ ------------ Summary of Operations Interest income ............................................... $ 24,507 $ 22,248 $ 20,606 $ 17,688 $ 17,507 Interest expense .............................................. 10,576 9,612 9,002 6,979 6,945 -------- -------- -------- -------- -------- Net interest income ........................................... 13,931 12,636 11,604 10,709 10,562 Provision for loan losses ..................................... 600 490 515 220 370 -------- -------- -------- -------- -------- Net interest income after provision for loan losses ........... 13,331 12,146 11,089 10,489 10,192 Losses on sales of securities ................................. - - (415) - - Other operating income ........................................ 2,875 2,444 2,241 2,075 1,810 Merger expenses ............................................... 305 - 186 - - Restructuring charges ......................................... - - 460 - - Other operating expense ....................................... 9,983 9,077 8,468 8,578 8,306 -------- -------- -------- -------- -------- Income before income taxes .................................... 5,918 5,513 3,801 3,986 3,696 Income taxes .................................................. 1,818 1,676 1,101 1,159 1,006 -------- -------- -------- -------- -------- Net income .................................................... $ 4,100 $ 3,837 $ 2,700 $ 2,827 $ 2,690 ======== ======== ======== ======== ======== Per Share Data (1) Net income: Basic ........................................................ $ 1.13 $ 1.06 .75 $ .79 $ .75 Diluted ...................................................... 1.11 1.05 .75 .79 .75 Cash dividends declared ....................................... .38 .33 .26 .23 .23 Book value .................................................... 8.76 7.96 7.23 6.49 6.17 Balance Sheet Information Total assets .................................................. $325,655 $307,134 $283,678 $261,616 $249,698 Investment securities ......................................... 86,881 90,316 84,536 76,983 78,488 Loans ......................................................... 217,451 195,273 179,923 168,328 157,302 Deposits ...................................................... 280,548 271,380 250,144 229,925 224,260 Shareholders' equity .......................................... 31,901 28,767 25,995 23,379 22,223 Ratios (Averages) Return on assets .............................................. 1.30% 1.32% 1.00% 1.11% 1.09% Return on shareholders' equity ................................ 13.45 13.97 10.93 12.33 12.62 Shareholders' equity to assets ................................ 9.68 9.41 9.17 8.98 8.65 Dividend payout ratio ......................................... 33.21 31.02 34.62 29.71 30.34 Loans to deposits ............................................. 74.72 72.87 73.10 70.67 66.76 Net yield on earning assets, taxable equivalent basis ......... 4.99 4.90 4.84 4.73 4.86
(1) All per share data has been retroactively adjusted to reflect the two-for-one common stock split declared on February 19, 1998 and payable in the form of a 100% stock dividend to shareholders on March 18, 1998 and the three-for-two common stock split effected in the form of a 50% stock dividend paid in the second quarter of 1995. 9 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 consolidated financial statements and supplemental financial information appearing elsewhere in this report. Overview The Corporation earned $4,099,769 in 1997, a 6.8% increase in net income from 1996. Basic earnings per share, adjusted for the two-for-one common stock split declared in February 1998, increased from $1.06 in 1996 to $1.13 in 1997 and diluted earnings per share increased from $1.05 to $1.11. The 1997 results were impacted by merger expenses as discussed below. Total assets were $325,655,304 at December 31, 1997, up 6.0% from year-end 1996. Loans amounted to $217,450,749 at December 31, 1997, up 11.4% from the prior year. Total deposits grew 3.4% to $280,547,574 in 1997. On June 3, 1997, the Corporation entered into a definitive agreement to acquire Home Savings Bank of Siler City, Inc., SSB ("Home Savings") of Siler City, North Carolina. Under terms of the agreement, Home Savings shareholders were to receive $15.50 per share, either in FNB Corp. common stock or in cash or a combination thereof, subject to the limitation that FNB Corp. common stock issued in the merger would be not more than 60% and not less than 50% of the total consideration. On January 28, 1998, as permitted by the agreement, the Board of Directors of Home Savings exercised its right to terminate the proposed combination due to the increase in the market value of FNB Corp. common stock above a specified level. 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. The Corporation incurred certain costs in connection with the proposed acquisitions. Those costs, which had been initially deferred, are included in merger expenses in the consolidated statements of income and amounted to $305,000 and $186,350 for the years ended December 31, 1997 and 1995, respectively. Earnings Review The Corporation's net income increased $262,465 in 1997, up 6.8% over 1996. Earnings were positively impacted in 1997 by increases of $1,294,910 or 10.2% in net interest income and $431,514 in total other operating income. These gains were significantly offset, however, by merger expenses of $305,000 as discussed in the "Overview", by an increase of $906,625 in total other operating expense exclusive of the merger expenses and by a $110,000 increase in the provision for loan losses. In 1996, earnings increased $1,136,847 or 42.1% from 1995. Earnings were positively impacted in 1996 by an increase of $1,032,830 or 8.9% in net interest income. The comparison to 1995 results was affected by the fact that there were certain nonrecurring charges in 1995, including 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". The 1995 results were further negatively affected by merger expenses of $186,350 as discussed in the "Overview" and by a $295,000 increase in the provision for loan losses. Return on average assets, affected by merger expenses in 1997, declined slightly from 1.32% in 1996 to 1.30% in 1997. Return on average assets increased in 1996 from 10 - -------------------------------------------------------------------------------- 1.00% in 1995, reflecting the effect in 1995 of the negative factors noted above. Similarly, return on average shareholders' equity declined to 13.45% in 1997 after increasing to 13.97% in 1996 from 10.93% in 1995. 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 $13,931,222 in 1997 compared to $12,636,312 in 1996. The increase of $1,294,910 or 10.2% resulted from an improvement in the net yield on earning assets, or net interest margin, from 4.90% in 1996 to 4.99% in 1997 coupled with an 8.1% increase in the level of average earning assets. In 1996, there was a $1,032,830 or 8.9% increase in net interest income reflecting both an improvement in the net interest margin from 4.84% in 1995 and an 8.3% increase in average earning assets. Following a period of generally lower interest rates prior to 1994, which had ultimately resulted in a reduction 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. These interest rate increases, which have continued through the first quarter of 1997, although offset to some extent by Federal Reserve action to reduce rates in the second half of 1995 and 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 above the 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 increases in net interest income in 1997 and 1996 were $1,358,000 and $1,183,000, respectively, reflecting changes in the relative mix of taxable and non-taxable earning assets in each year. Table 1 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. 11 - -------------------------------------------------------------------------------- Table 1 Average Balances and Net Interest Income Analysis (Taxable Equivalent Basis, Dollars in Thousands)
1997 1996 -------------------------------- -------------------------------- Average Average Interest Rates Interest Rates Average Income/ Earned/ Average Income/ Earned/ Balance Expense Paid Balance Expense Paid ----------- ---------- --------- ----------- ---------- --------- EARNING ASSETS Loans (1) (2) ................................ $205,127 $18,813 9.17% $186,937 $16,777 8.96% Investment securities (1): Taxable income .............................. 70,817 4,975 7.03 71,297 4,985 6.99 Non-taxable income .......................... 17,741 1,435 8.09 14,282 1,205 8.44 Federal funds sold ........................... 2,813 155 5.51 1,688 89 5.27 -------- ------- ---- -------- ------- ---- Total earning assets ....................... 296,498 25,378 8.56 274,204 23,056 8.40 -------- ------- ---- -------- ------- ---- Cash and due from banks ...................... 9,985 9,423 Other assets, net ............................ 8,267 8,161 -------- -------- TOTAL ASSETS ............................... $314,750 $291,788 ======== ======== INTEREST-BEARING LIABILITIES Interest-bearing deposits: NOW accounts ................................ $ 38,017 677 1.78 $ 35,021 666 1.90 Savings deposits ............................ 29,199 678 2.32 30,147 756 2.50 Money market accounts ....................... 19,459 707 3.63 16,067 444 2.76 Certificates and other time deposits ................................... 150,566 8,206 5.45 138,993 7,525 5.40 Retail repurchase agreements ................. 6,229 281 4.51 4,118 178 4.32 Federal funds purchased ...................... 473 27 5.71 764 43 5.63 -------- ------- ---- -------- ------- ---- Total interest-bearing liabilities ......... 243,943 10,576 4.34 225,110 9,612 4.26 -------- ------- ---- -------- ------- ---- Noninterest-bearing demand deposits .................................... 37,289 36,296 Other liabilities ............................ 3,038 2,921 Shareholders' equity ......................... 30,480 27,461 -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ...................... $314,750 $291,788 ======== ======== NET INTEREST INCOME AND SPREAD ...................................... $14,802 4.22% $13,444 4.14% ======= ==== ======= ==== NET YIELD ON EARNING ASSETS .................. 4.99% 4.90% ==== ==== 1995 --------------------------------- Average Interest Rates Average Income/ Earned/ Balance Expense Paid ----------- ---------- ---------- EARNING ASSETS Loans (1) (2) ................................ $174,139 $15,698 9.01% Investment securities (1): Taxable income .............................. 65,397 4,418 6.76 Non-taxable income .......................... 10,610 970 9.14 Federal funds sold ........................... 3,042 177 5.82 -------- ------- ---- Total earning assets ....................... 253,188 21,263 8.40 -------- ------- ---- Cash and due from banks ...................... 9,226 Other assets, net ............................ 6,884 -------- TOTAL ASSETS ............................... $269,298 ======== INTEREST-BEARING LIABILITIES Interest-bearing deposits: NOW accounts ................................ $ 32,442 695 2.14 Savings deposits ............................ 29,945 845 2.82 Money market accounts ....................... 16,659 508 3.05 Certificates and other time deposits ................................... 122,743 6,773 5.52 Retail repurchase agreements ................. 3,358 167 4.97 Federal funds purchased ...................... 239 14 5.77 -------- ------- ---- Total interest-bearing liabilities ......... 205,386 9,002 4.38 -------- ------- ---- Noninterest-bearing demand deposits .................................... 36,444 Other liabilities ............................ 2,765 Shareholders' equity ......................... 24,703 -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ...................... $269,298 ======== NET INTEREST INCOME AND SPREAD ...................................... $12,261 4.02% ======= ==== NET YIELD ON EARNING ASSETS .................. 4.84% ====
(1) 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. (2) 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. 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. In 1996, the prime rate was reduced to 8.25% and then increased again to the 8.50% level in 1997. The average prime rate for 1995, 1996 and 1997 amounted to 8.82%, 8.28% and 8.44%, respectively. In 1997, the net interest spread increased by 8 basis points from 4.14% in 1996 to 4.22% in 1997, reflecting an increase in the average total yield on earning assets that was only partially offset by an increase in the average rate paid on interest-bearing liabilities, or cost of funds. The yield on earning assets increased by 16 basis points from 8.40% in 1996 to 8.56% in 1997, while the cost of funds increased by 8 basis points in moving from 4.26% to 12 - -------------------------------------------------------------------------------- 4.34%. In 1996, the 12 basis points increase in net interest spread resulted from a decrease in the cost of funds. The 1997 and 1996 changes in net interest income on a taxable equivalent basis, as measured by volume and rate variances, are analyzed in Table 2. Volume refers to the average dollar level of earning assets and interest-bearing liabilities. Table 2 Volume and Rate Variance Analysis (Taxable Equivalent Basis, In thousands)
1997 Versus 1996 1996 Versus 1995 -------------------------------- ---------------------------------- Variance Variance due to (1) due to (1) ------------------- ---------------------- Volume Rate Net Change Volume Rate Net Change ---------- -------- ------------ ---------- ----------- ----------- Interest Income Loans (2) ...................................... $1,640 $ 396 $2,036 $1,165 $ (86) $1,079 Investment securities (2): Taxable income ............................... (37) 27 (10) 412 155 567 Non-taxable income ........................... 282 (52) 230 314 (79) 235 Federal funds sold ............................. 62 4 66 (72) (16) (88) ------ ----- ------ ------ ------ ------ Total interest income ....................... 1,947 375 2,322 1,819 (26) 1,793 ------ ----- ------ ------ ------ ------ Interest Expense Interest-bearing deposits: NOW accounts ................................. 55 (44) 11 53 (82) (29) Savings deposits ............................. (24) (54) (78) 6 (95) (89) Money market accounts ........................ 107 156 263 (17) (47) (64) Certificates and other time deposits ......... 613 68 681 899 (147) 752 Retail repurchase agreements ................... 95 8 103 35 (24) 11 Federal funds purchased ........................ (17) 1 (16) 30 (1) 29 ------ ----- ------ ------ -------- ------ Total interest expense ...................... 829 135 964 1,006 (396) 610 ------ ----- ------ ------ ------- ------ Net Interest Income ............................. $1,118 $ 240 $1,358 $ 813 $ 370 $1,183 ====== ===== ====== ====== ======= ======
(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 related to certain investment securities and loans exempt from both federal and state income tax or from state income tax alone is 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. 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 year'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. In 1997, earnings were negatively impacted by an increase in the provision of $110,000, while in 1996 there was a positive impact from a $25,000 provision decrease. Other Operating Income Total other operating income, or noninterest income, increased $431,514 or 17.7% in 1997 and $617,351 or 33.8% in 1996, reflecting in part the general increase in the volume of business. The comparison to 1995 results was affected by the recognition of losses on sales of investment securities in the 1995 first quarter of $414,596 (see 13 - -------------------------------------------------------------------------------- "Business Development Matters"). The 1997 and 1996 gains in annuity and brokerage commissions reflected significant increases in the volume of brokerage services. The level of other service charges, commissions and fees was higher in both 1997 and 1996 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. Other income was higher in 1997 due largely to increases in gains on loan sales and in fees for trust services. The increase in service charges on deposit accounts in 1997 was primarily due to the selected increases in service charges that became effective in the 1997 second quarter and to the income generated by a new NOW account version that provides a package of products and services for a stated monthly fee. The 1996 increase in service charges on deposit accounts resulted primarily from the implementation of daily charges on overdraft balances in the second quarter of 1995. Other Operating Expense Total other operating expense, or noninterest expense, was $1,211,625 or 13.3% higher in 1997 due in part to merger expenses of $305,000 (see "Overview"). The remaining net increase of $906,625 was 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. In 1996, noninterest expense decreased $36,552 or 0.4% due primarily to the effect on 1995 results of restructuring charges of $460,457 (see "Business Development Matters") and merger expenses of 186,350 (see "Overview"). Additionally, the 1995 results, and those in 1996 also, were generally impacted by the continuing effects of inflation. Noninterest expense was favorably affected in 1995 by a $221,485 reduction in FDIC insurance expense, reflecting the effect of a rate reduction as discussed below. In 1996, noninterest expense was favorably affected by a further reduction in FDIC insurance expense, amounting to $180,273 despite a special one-time assessment of $74,845 related to new legislation enacted on September 30, 1996. This cost improvement factor was more than offset in 1996, however, by increases in personnel expense and data processing services and by a higher level of equipment costs related to the expanded use of personal computer networks. Depreciation expense was particularly impacted in 1996 by equipment purchases in 1995 and 1996 related to personal computer networks (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, 1994. The FDIC has two separate insurance funds, which are the Bank Insurance Fund (BIF) and the Savings Association Insurance Fund (SAIF). As provided by FDICIA, 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 a minimum annual charge of $2,000 for the majority of financial institutions with BIF-insured deposits only. 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 total 1996 expense, including the one-time assessment of $74,845, amounting to $101,621. 14 - -------------------------------------------------------------------------------- The Deposit Insurance Funds Act of 1996 (DIFA) was enacted on September 30, 1996 and has three main components. The first component included a one-time assessment on SAIF deposits to capitalize the SAIF fund to the mandated 1.25 percent ratio. The second component is a requirement that the repayment that of the Financing Corporation (FICO) bonds be shared by both banks and thrifts. The third component 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 approximate rate of $.065 per $100 for SAIF deposits and at a rate equal to one-fifth of that 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 in 1997 amounted to $40,764. Income Taxes The effective income tax rate of 30.7% in 1997 did not significantly change from the 30.4% rate in 1996. The effective income tax rate increased from 29.0% in 1995 to 30.4% in 1996 due principally 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 five 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, (d) the $37,000,000 line of credit established at the Federal Home Loan Bank and (e) 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. Consistent 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 core of local deposits and the Bank's 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 One of the primary objectives of asset/liability Management and management is to maximize net inter est margin while Interest Rate minimizing the earnings risk associated with changes in Sensitivity interest Management and Interest rates. One method used to manage interest rate sensitivity is to measure, over variRate Sensitivity ous 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 15 - -------------------------------------------------------------------------------- rate changes in these two categories. Included in interest-bearing liabilities subject to rate changes within 90 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 and as further discussed in Note 15 to Consolidated Financial Statements, the Bank, at December 31, 1997, had entered into two 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 notional amount of each agreement is $10,000,000. The agreements require the correspondent bank to pay to the Bank the difference between the floor rate of interest of 7.50% in one agreement and 8.00% in the other agreement as compared to 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. Table 3 presents information about the periods in which the interest-sensitive assets and liabilities at December 31, 1997 will either mature or be subject to repricing in accordance with market rates, and the resulting interest-sensitivity gaps. This table shows the sensitivity of the balance sheet at one point in time and is not necessarily indicative of what the sensitivity will be on other dates. As a simplifying assumption concerning repricing behavior, 50% of the NOW, savings and money market deposits are assumed to reprice immediately and 50% are assumed to reprice beyond one year. Table 3 Interest Rate Sensitivity Analysis (Dollars in thousands)
December 31, 1997 -------------------------------------------------------------------- Rate Maturity In Days ---------------------------------------- Beyond 1-90 91-180 181-365 One Year Total ------------- ------------- ------------ ------------- ------------- Earning Assets Loans ................................................. $ 91,233 $ 7,712 $ 14,629 $ 103,877 $ 217,451 Investment securities ................................. 1,981 3,834 5,202 75,864 86,881 --------- --------- --------- --------- --------- Total earning assets ................................ 93,214 11,546 19,831 179,741 304,332 --------- --------- --------- --------- --------- Interest-Bearing Liabilities NOW accounts .......................................... 19,303 - - 19,304 38,607 Savings deposits ...................................... 13,852 - - 13,852 27,704 Money market accounts ................................. 11,234 - - 11,235 22,469 Time deposits of $100,000 or more...................... 25,456 8,942 9,455 9,062 52,915 Other time deposits ................................... 26,426 19,256 14,927 39,933 100,542 Retail repurchase agreements .......................... 7,437 - - - 7,437 Federal funds purchased ............................... 2,400 - - - 2,400 --------- --------- --------- --------- --------- Total interest-bearing liabilities .................. 106,108 28,198 24,382 93,386 252,074 --------- --------- --------- --------- --------- Interest Sensitivity Gap ............................... $ (12,894) $ (16,652) $ (4,551) $ 86,355 $ 52,258 ========= ========= ========= ========= ========= Cumulative gap ......................................... $ (12,894) $ (29,546) $ (34,097) $ 52,258 $ 52,258 Ratio of interest-sensitive assets to interest-sensitive liabilities ........................................... 88% 41% 81% 192% 121%
16 - -------------------------------------------------------------------------------- Market Risk Market risk reflects the risk of economic loss resulting from adverse changes in mar ket price and interest rates. This risk of loss can be reflected in diminished current market values and/or reduced potential net interest income in future periods. The Bank's market risk arises primarily from interest rate risk inherent in its lending and deposit-taking activities. The structure of the Bank's loan and deposit portfolios is such that a significant decline in interest rates may adversely impact net market values and net interest income. The Bank does not maintain a trading account nor is the Bank subject to currency exchange risk or commodity price risk. Interest rate risk is monitored as part of the Bank's asset/liability management function, which is discussed in "Asset/Liability Management and Interest Rate Sensitivity" above. Table 4 presents information about the contractual maturities, average interest rates and estimated fair values of financial instruments considered market risk sensitive at December 31, 1997. Table 4 Market Risk Analysis of Financial Instruments (Dollars in thousands)
Contractual Maturities at December 31, 1997 -------------------------------------------------------------------------- Beyond Five 1998 1999 2000 2001 2002 Years Total ---------- --------- --------- ---------- ---------- ---------- ---------- Financial Assets Debt securities (2) .................. $ 11,018 $ 5,030 $ 6,308 $10,065 $11,414 $ 41,839 $ 85,674 Loans (3): Fixed rate .......................... 28,582 14,101 10,357 8,298 11,679 32,981 105,998 Variable rate ....................... 39,500 13,100 8,535 7,121 9,447 33,750 111,453 -------- ------- ------- ------- ------- -------- -------- Total ............................. $ 79,100 $32,231 $25,200 $25,484 $32,540 $108,570 $303,125 ======== ======= ======= ======= ======= ======== ======== Financial Liabilities Now accounts ......................... $ 38,607 $ - $ - $ - $ - $ - $ 38,607 Savings deposits ..................... 27,704 - - - - - 27,704 Money market accounts ................ 22,469 - - - - - 22,469 Time deposits: Fixed rate .......................... 94,856 29,670 11,376 428 323 - 136,653 Variable rate ....................... 7,035 8,750 972 47 - - 16,804 Retail repurchase agreements ......... 7,437 - - - - - 7,437 Federal funds purchased .............. 2,400 - - - - - 2,400 -------- ------- ------- ------- ------- -------- -------- Total ............................. $200,508 $38,420 $12,348 $ 475 $ 323 $ - $252,074 ======== ======= ======= ======= ======= ======== ======== Average Estimated Interest Fair Rate (1) Value ---------- ---------- Financial Assets Debt securities (2) .................. 7.18% $ 86,265 Loans (3): Fixed rate .......................... 9.19 106,478 Variable rate ....................... 8.92 112,934 -------- Total ............................. 8.52 $305,677 ======== Financial Liabilities Now accounts ......................... 1.72 $ 38,607 Savings deposits ..................... 2.25 27,704 Money market accounts ................ 3.81 22,469 Time deposits: Fixed rate .......................... 5.46 137,548 Variable rate ....................... 5.38 16,849 Retail repurchase agreements ......... 4.51 7,437 Federal funds purchased .............. 6.59 2,400 -------- Total ............................. 4.36 $253,014 ========
(1) The average interest rate related to debt securities is stated on a fully taxable equivalent basis, assuming a 34% federal income tax rate and applicable state income tax rate, reduced by the nondeductible portion of interest expense. (2) Debt securities are reported on the basis of amortized cost. (3) Nonaccrual loans are included in the balance of loans. The allowance for loan losses is excluded. 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-weighted 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 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 17 - -------------------------------------------------------------------------------- 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 December 31, 1997, FNB Corp. and the Bank had total capital ratios of 15.75% and 15.39%, respectively, and Tier I capital ratios of 14.69% and 14.33%. 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 December 31, 1997, FNB Corp. and the Bank had leverage capital ratios of 9.83% and 9.58%, 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 December 31, 1997 and, accordingly, is well-capitalized under the regulatory framework for prompt corrective action. Balance Sheet Review Asset and deposit growth in 1997 was below that in 1996. Total assets increased $18,521,000 or 6.0% in 1997 compared to $23,456,000 or 8.3% in 1996. Deposits grew $9,168,000 or 3.4% and $21,236,000 or 8.5%, respectively, in the same periods. A portion of the asset growth in 1997 was funded by retail repurchase agreements which increased $3,712,000 during that period. The average asset growth rates were 7.9% in 1997 and 8.4% in 1996. The corresponding average deposit growth rates were 7.0% and 7.7%. Investment Investments are carried on the consolidated balance sheet Securities at estimated fair value for available-for-sale securities and at amortized cost for held-to-maturity securities. Table 5 presents information, on the basis of selected maturities, about the composition of the investment securities portfolio for each of the last three years. As discussed in Note 1 to Consolidated Financial Statements and permitted on a one-time basis by the Financial Accounting Standards Board in an implementation guide to Statement of Financial Accounting Standards No. 115, certain investment securities that had been included in the held-to-maturity category were transferred in December 1995 to the available-for sale category. 18 - -------------------------------------------------------------------------------- Table 5 Investment Securities Portfolio Analysis (Dollars in thousands)
December 31 ----------------------------------------------------------------- 1997 1996 1995 ---------------------------------------- ---------- --------- Estimated Taxable Amortized Fair Equivalent Carrying Carrying Cost Value Yield (1) Value Value ----------- ----------- ------------ ---------- --------- Available for Sale U.S. Treasury: Within one year .............................. $ 1,349 $ 1,345 5.91% $ 2,589 $ 5,038 One to five years ............................ 1,255 1,280 7.14 2,114 4,526 ------- ------- ------- ------- Total ....................................... 2,604 2,625 6.50 4,703 9,564 ------- ------- ------- ------- U.S. Government agencies and corporations: Within one year .............................. 1,750 1,750 6.18 500 2,060 One to five years ............................ 8,333 8,354 7.01 9,939 6,129 Five to ten years ............................ 18,810 18,880 7.39 8,844 452 ------- ------- ------- ------- Total ....................................... 28,893 28,984 7.21 19,283 8,641 ------- ------- ------- ------- Mortgage-backed securities ..................... 2,422 2,422 6.94 4,787 10,020 ------- ------- ------- ------- Total debt securities .......................... 33,919 34,031 7.14 28,773 28,225 Equity securities .............................. 1,078 1,095 156 150 ------- ------- ------- ------- Total available-for-sale securities ......... $34,997 $35,126 $28,929 $28,375 ======= ======= ======= ======= Held to Maturity U.S. Government agencies and corporations: Within one year .............................. $ 5,383 $ 5,371 5.83 $ 1,348 $ 2,854 One to five years ............................ 18,597 18,574 6.79 24,480 23,800 Five to ten years ............................ 8,824 8,816 7.24 18,108 17,022 Over ten years ............................... - - - - 300 ------- ------- ------- ------- Total ....................................... 32,804 32,761 6.75 43,936 43,976 ------- ------- ------- ------- State, county and municipal: Within one year .............................. 753 755 8.44 325 1,203 One to five years ............................ 3,992 4,091 8.53 3,104 2,590 Five to ten years ............................ 6,456 6,617 7.56 5,930 4,959 Over ten years ............................... 7,750 8,010 8.12 8,092 3,433 ------- ------- ------- ------- Total ....................................... 18,951 19,473 8.02 17,451 12,185 ------- ------- ------- ------- Total held-to-maturity securities ........... $51,755 $52,234 7.21 $61,387 $56,161 ======= ======= ======= =======
(1) Yields are stated on a fully taxable equivalent basis, assuming a 34% federal income tax rate and applicable state income tax rate, reduced by the nondeductible portion of interest expense. 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. Because the growth in loans exceeded that for total assets in 1997, there was a reduction in the level of investment securities of $3,435,000 or 3.8%. In 1996, when the growth in total assets exceeded that for loans, the level of investment securities was increased $5,780,000 or 6.8%. 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 funds at December 31, 1997. 19 - -------------------------------------------------------------------------------- Loans The Corporation's primary source of revenue and largest component of earning assets is the loan portfolio. Loans experienced growth of $22,178,000 or 11.4% in 1997 and $15,350,000 or 8.5% in 1996. Average loans increased $18,190,000 or 9.7% and $12,798,000 or 7.3%, respectively. The ratio of average loans to average deposits increased from 72.9% in 1996 to 74.7% in 1997. The ratio of loans to deposits at December 31, 1997 was 77.5%. Table 6 sets forth the major categories of loans for each of the last five years. The maturity distribution and interest sensitivity of selected loan categories at December 31, 1997 are presented in Table 7. Table 6 Loan Portfolio Composition (Dollars in thousands)
December 31 ----------------------------------------- 1997 1996 -------------------- -------------------- Amount % Amount % ---------- --------- ---------- --------- Commercial and agricultural ..... $ 84,221 38.7 $ 62,678 32.1 Real estate - construction ...... 4,989 2.3 4,348 2.2 Real estate - mortgage: 1-4 family residential ......... 81,182 37.3 68,887 35.3 Commercial and other ........... 20,556 9.5 24,257 12.4 Consumer ........................ 26,503 12.2 35,103 18.0 -------- ----- -------- ----- Total loans ................... $217,451 100.0 $195,273 100.0 ======== ===== ======== ===== December 31 -------------------------------------------------------------- 1995 1994 1993 -------------------- -------------------- -------------------- Amount % Amount % Amount % ---------- --------- ---------- --------- ---------- --------- Commercial and agricultural ..... $ 47,317 26.3 $ 41,777 24.8 $ 40,858 26.0 Real estate - construction ...... 759 .4 1,331 .8 2,163 1.4 Real estate - mortgage: 1-4 family residential ......... 57,664 32.0 50,575 30.0 42,302 26.9 Commercial and other ........... 27,803 15.5 28,594 17.0 27,480 17.4 Consumer ........................ 46,380 25.8 46,051 27.4 44,499 28.3 -------- ----- -------- ----- -------- ----- Total loans ................... $179,923 100.0 $168,328 100.0 $157,302 100.0 ======== ===== ======== ===== ======== =====
Table 7 Selected Loan Maturities (In thousands)
December 31, 1997 ----------------------------------------------------- One Year One to Over or Less Five Years Five Years Total ---------- ------------ ------------ ---------- Commercial and agricultural ......... $34,201 $31,775 $18,245 $84,221 Real estate - construction .......... 1,783 3,164 42 4,989 ------- ------- ------- ------- Total selected loans ............. $35,984 $34,939 $18,287 $89,210 ======= ======= ======= ======= Sensitivity to rate changes: Fixed interest rates ............... $ 6,758 $17,548 $ 9,294 $33,600 Variable interest rates ............ 29,226 17,391 8,993 55,610 ------- ------- ------- ------- Total ............................ $35,984 $34,939 $18,287 $89,210 ======= ======= ======= =======
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 net decreases in 1997 and 1996 of $10,681,138 and $13,169,776, respectively. Consequently, total consumer loans declined significantly during those periods. 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 each experienced strong gains during 1997. 20 - -------------------------------------------------------------------------------- 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 in the determination of the allowance for loan losses. 21 - -------------------------------------------------------------------------------- Table 8 presents an analysis of the changes in the allowance for loan losses and of the level of nonperforming assets for each of the last five years. Information about management's allocation of the allowance for loan losses by loan category is presented in Table 9. Table 8 Allowance For Loan Losses And Nonperforming Assets (Dollars in thousands)
1997 1996 1995 1994 1993 ----------- ----------- ----------- ----------- ----------- Allowance for Loan Losses Balance at beginning of year .............................. $ 1,986 $ 1,903 $ 1,720 $ 1,745 $ 1,766 Charge-offs: Commercial and agricultural ............................. 66 24 84 16 57 Real estate - construction .............................. - - - - - Real estate - mortgage .................................. 2 12 - 1 24 Consumer ................................................ 389 532 393 419 486 ------- ------- ------- ------- ------- Total charge-offs ...................................... 457 568 477 436 567 ------- ------- ------- ------- ------- Recoveries: Commercial and agricultural ............................. 14 12 8 6 8 Real estate - construction .............................. - - - - - Real estate - mortgage .................................. 11 3 3 5 7 Consumer ................................................ 140 146 134 180 161 ------- ------- ------- ------- ------- Total recoveries ....................................... 165 161 145 191 176 ------- ------- ------- ------- ------- Net loan charge-offs ...................................... 292 407 332 245 391 Provision for loan losses ................................. 600 490 515 220 370 ------- ------- ------- ------- ------- Balance at end of year .................................... $ 2,294 $ 1,986 $ 1,903 $ 1,720 $ 1,745 ======= ======= ======= ======= ======= Nonperforming Assets, at end of year Nonaccrual loans .......................................... $ 51 $ 65 $ 26 $ - $ - Accruing loans past due 90 days or more ................... 167 231 317 118 136 ------- ------- ------- ------- ------- Total nonperforming loans .............................. 218 296 343 118 136 Foreclosed assets ......................................... 23 38 64 78 134 Other real estate owned ................................... 27 - - - - ------- ------- ------- ------- ------- Total nonperforming assets ............................. $ 268 $ 334 $ 407 $ 196 $ 270 ======= ======= ======= ======= ======= Ratios Net loan charge-offs to average loans ..................... .14% .22% .19% .15% .26% Net loan charge-offs to allowance for loan losses ......... 12.74 20.49 17.45 14.25 22.43 Allowance for loan losses to year-end loans ............... 1.05 1.02 1.06 1.02 1.11 Total nonperforming loans to year-end loans ............... .10 .15 .19 .07 .09
Table 9 Allocation of Allowance For Loan Losses (In thousands)
December 31 --------------------------------------------------------- 1997 1996 1995 1994 1993 --------- --------- --------- --------- --------- Commercial and agricultural .............. $ 719 $ 650 $ 572 $ 490 $ 451 Real estate - construction ............... 12 10 9 14 25 Real estate - mortgage ................... 493 439 384 346 281 Consumer ................................. 830 727 695 651 569 Unallocated .............................. 240 160 243 219 419 ------ ------ ------ ------ ------ Total allowance for loan losses ......... $2,294 $1,986 $1,903 $1,720 $1,745 ======= ====== ====== ====== ======
22 - -------------------------------------------------------------------------------- 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. The 1997 growth in money market accounts of $5,165,000 was due to a new high-yield product introduced in the 1996 fourth quarter. A promotion that offered premium-rate certificates of deposit, based on selected maturities, resulted in a significant portion of the $17,173,000 increase in time deposits during 1996. 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. The balance of retail repurchase agreements, a program that has tended to transfer funds away from deposits, was $7,436,625 at December 31, 1997 and $3,724,929 at December 31, 1996. Further, the level of time deposits obtained from governmental units fluctuates, amounting to $24,431,000, $21,602,000 and $17,820,000 at December 31, 1997, 1996 and 1995, respectively. Table 10 shows the year-end and average deposit balances for the years 1997, 1996 and 1995 and the changes in 1997 and 1996. Table 10 Analysis of Deposits (Dollars in thousands)
1997 1996 1995 -------------------------------- --------------------------------- ---------- Change from Change from Prior Year Prior Year -------------------- --------------------- Balance Amount % Balance Amount % Balance ----------- ----------- -------- ----------- ----------- --------- ---------- Year-End Balances Interest-bearing deposits: NOW accounts ................................. $ 38,607 $ 2,468 6.8 $ 36,139 $ 3,732 11.5 $ 32,407 Savings deposits ............................. 27,704 (1,430) (4.9) 29,134 (958) (3.2) 30,092 Money market accounts ........................ 22,469 5,165 29.8 17,304 1,075 6.6 16,229 -------- -------- -------- ------- -------- Total ...................................... 88,780 6,203 7.5 82,577 3,849 4.9 78,728 Certificates and other time deposits ......... 153,457 3,459 2.3 149,998 17,173 12.9 132,825 -------- -------- -------- ------- -------- Total interest-bearing deposits ............ 242,237 9,662 4.2 232,575 21,022 9.9 211,553 Noninterest-bearing demand deposits ........... 38,311 (494) (1.3) 38,805 214 .6 38,591 -------- -------- -------- ------- -------- Total deposits ............................. $280,548 $ 9,168 3.4 $271,380 $21,236 8.5 $250,144 ======== ======== ======== ======= ======== Average Balances Interest-bearing deposits: NOW accounts ................................. $ 38,017 $ 2,996 8.6 $ 35,021 $ 2,579 7.9 $ 32,442 Savings deposits ............................. 29,199 (948) (3.1) 30,147 202 .7 29,945 Money market accounts ........................ 19,459 3,392 21.1 16,067 (592) (3.6) 16,659 -------- -------- -------- ------- -------- Total ...................................... 86,675 5,440 6.7 81,235 2,189 2.8 79,046 Certificates and other time deposits ......... 150,566 11,573 8.3 138,993 16,250 13.2 122,743 -------- -------- -------- ------- -------- Total interest-bearing deposits ............ 237,241 17,013 7.7 220,228 18,439 9.1 201,789 Noninterest-bearing demand deposits ........... 37,289 993 2.7 36,296 (148) ( .4) 36,444 -------- -------- -------- ------- -------- Total deposits ............................. $274,530 $ 18,006 7.0 $256,524 $18,291 7.7 $238,233 ======== ======== ======== ======= ========
23 - -------------------------------------------------------------------------------- Table 11 Quarterly Financial Data (In thousands except per share data)
First Second Third Fourth ----------- ----------- ----------- ----------- 1997 Interest income ............................................. $ 5,893 $ 5,997 $ 6,262 $ 6,355 Interest expense ............................................ 2,559 2,577 2,693 2,747 -------- -------- -------- -------- Net interest income ......................................... 3,334 3,420 3,569 3,608 Provision for loan losses ................................... 125 115 230 130 -------- -------- -------- -------- Net interest income after provision for loan losses ......... 3,209 3,305 3,339 3,478 Other operating income ...................................... 664 709 738 764 Merger expenses ............................................. - - - 305 Other operating expense ..................................... 2,400 2,485 2,497 2,601 -------- -------- -------- -------- Income before income taxes .................................. 1,473 1,529 1,580 1,336 Income taxes ................................................ 440 469 491 418 -------- -------- -------- -------- Net income .................................................. $ 1,033 $ 1,060 $ 1,089 $ 918 ======== ======== ======== ======== Per share data (2): ......................................... Net income: ............................................... Basic .................................................... $ .29 $ .29 $ .30 $ .25 Diluted .................................................. .28 .29 .29 .25 Cash dividends declared ................................... .09 .09 .09 .11 Common stock price (1): ................................... High ..................................................... 16.00 16.50 16.00 20.25 Low ...................................................... 13.50 14.25 14.38 16.00 1996 Interest income ............................................. $ 5,436 $ 5,443 $ 5,538 $ 5,831 Interest expense ............................................ 2,380 2,346 2,357 2,529 -------- -------- -------- -------- Net interest income ......................................... 3,056 3,097 3,181 3,302 Provision for loan losses ................................... 100 95 110 185 -------- -------- -------- -------- Net interest income after provision for loan losses ......... 2,956 3,002 3,071 3,117 Other operating income ...................................... 586 589 592 677 Other operating expense ..................................... 2,186 2,222 2,305 2,364 -------- -------- -------- -------- Income before income taxes .................................. 1,356 1,369 1,358 1,430 Income taxes ................................................ 411 417 419 429 -------- -------- -------- -------- Net income .................................................. $ 945 $ 952 $ 939 $ 1,001 ======== ======== ======== ======== Per share data (2): ......................................... Net income: ............................................... Basic .................................................... $ .26 $ .26 $ .26 $ .28 Diluted .................................................. .26 .26 .26 .27 Cash dividends declared ................................... .08 .08 .08 .11 Common stock price (1): ................................... High ..................................................... 13.25 13.25 13.00 15.00 Low ...................................................... 11.25 11.31 11.75 12.75
(1) FNB Corp. common stock is traded on the NASDAQ National Market System under the symbol FNBN. (2) All per share data has been retroactively adjusted to reflect the two-for-one common stock split declared on February 19, 1998 and payable in the form of a 100% stock dividend to shareholders on March 18, 1998. 24 - -------------------------------------------------------------------------------- Business As discussed in the "Overview" and in Note 18 to Development Consolidated Financial Statements, the Corporation in 1997 Matters entered into a definitive agreement to acquire Home Savings Matters Bank of Siler City, Inc., SSB ("Home Savings") of Siler City, North Carolina. On January 28, 1998, as permitted by the agreement, the Board of Directors of Home Savings exercised its right to terminate the proposed combination due to the increase in the market value of FNB Corp. common stock above a specified level. As similarly discussed, the Corporation in 1993 entered into definitive agreements to acquire two mutual savings banks. In 1995, those 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. Credit card receivables amounted to $2,579,799, $2,257,204 and $1,524,718 at December 31, 1997, 1996 and 1995, 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. Subsequent to the 1994 data processing changes and without resuming any of the outsourced operations, the Bank has significantly increased its investment in computer equipment 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 and one-half of 1997 capital expenditures, which totaled $1,019,109 and $477,852, respectively, also related to personal computer networks. In 1995, as discussed in Note 17 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 were either realigned or eliminated. Total restructuring charges, all of which were incurred and paid in 1995, 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. 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 at December 31, 1997, 1996 and 1995 amounted to 25 - -------------------------------------------------------------------------------- $9,674,229, $20,355,367 and $33,525,143, respectively. While there will be no purchases of new contracts, current plans call for the collection of outstanding loans based on their contractual terms. The funds previously invested in this loan program are being redeployed, as loan payments occur, to other loan programs or to the investment securities portfolio. Year 2000 Issue The Corporation is aware of the issue associated with the programming code in existing computer systems as the year 2000 approaches. The "year 2000" problem is pervasive and complex as virtually every computer operation will be affected in some way by the rollover of the two-digit year value to 00. The issue is whether computer systems and other equipment incorporating computer components will properly recognize date sensitive information when the year changes to 2000. Systems that do not properly recognize such information could generate erroneous data or cause a system to fail. The Corporation relies on vendors for all computer programming and equipment. An internal assessment of the year 2000 situation was completed in January 1997. The assessment included computer software, computer hardware and other equipment incorporating computer components that are date sensitive. The Corporation has monitored the status of its vendors and continues to evaluate vendors for adherence to their year 2000 plans. To date, confirmations have been received from the Corporation's primary processing vendors that plans have been implemented to address the processing of transactions in the year 2000. The Corporation is utilizing both internal and external resources to identify, correct or reprogram, and test systems for year 2000 compliance. The vendors anticipate that all reprogramming efforts will be completed by December 31, 1998, allowing adequate time for testing. Management estimates the cost of year 2000 compliance will be approximately $200,000, which primarily includes capital expenditures relating to computer equipment expected to be replaced in 1998 and 1999. In 1997, the cost related to year 2000 compliance was immaterial. Accounting In June 1996, the Financial Accounting Standards Board Pronouncement (the "FASB") issued Statement of Financial Accounting Matters Standards (SFAS) No. 125, "Accounting for Transfers Pronouncement Matters and Servicing of Financial Assets and Extinguishments of Liabilities". SFAS No. 125 provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities using a financial-components approach that focuses on control of the asset or liability. It requires that an entity recognize only assets it controls and liabilities it has incurred and should derecognize assets only when control has been surrendered and derecognize liabilities only when they have been extinguished. SFAS No. 125 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996 and is to be applied prospectively. The Corporation adopted the provisions of SFAS No. 125 in 1997 without any effect on the consolidated financial statements. In February 1997, The FASB issued SFAS No. 129, "Disclosures of Information About Capital Structure". SFAS No. 129 continues the existing requirements to disclose the pertinent rights and privileges of all securities other than ordinary common stock but expands the number of companies subject to portions of its requirements. Specifically, SFAS No. 129 requires all entities to provide the capital structure disclosures previously required by APB Opinion No. 15. Companies that were exempt from the provisions of APB Opinion No. 15 will now need to make those disclosures. SFAS No. 129 will have no impact on the Corporation's consolidated financial statements. In July 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income", which establishes standards for reporting and display of comprehensive income and its components in a full set of general purpose financial statements. The objective of SFAS No. 130 is to report a measure of all changes in equity of an enterprise that 26 - -------------------------------------------------------------------------------- result from transactions and other economic events during the period other than transactions with owners (therein defined as "comprehensive income"). Comprehensive income is the total of net income and all other nonshareholder changes in equity. SFAS No. 130 is effective for fiscal years beginning after December 15, 1997, with earlier application permitted. If comparative financial statements are provided for earlier periods, those financial statements shall be reclassified to reflect application of the provisions of SFAS No. 130. Adoption of SFAS No. 130 will not change total shareholders' equity as previously reported. In July 1997, the FASB issued SFAS No. 131, "Disclosure About Segments of an Enterprise and Related Information". SFAS No. 131 requires disclosures for each segment that are similar to those required under current standards with the addition of quarterly disclosure requirements and a finer partitioning of geographic disclosures. It requires limited segment data on a quarterly basis. It also requires geographic data by country, as opposed to broader geographic regions as permitted under current standards. SFAS No. 131 is effective for fiscal years beginning after December 15, 1997, with earlier application permitted. As the Corporation has only one operating segment, adoption of SFAS No. 131 is not expected to have a significant impact on the consolidated financial statements. In February 1998, the FASB issued SFAS No. 132, "Employers Disclosures about Pensions and Other Postretirement Benefits". SFAS No. 132 standardizes the disclosure requirements of pensions and other postretirement benefits. It does not change any measurement or recognition provisions, and thus will not materially impact the Corporation. SFAS No. 132 is effective for fiscal years beginning after December 15, 1997. Effects of Inflation The operations of the Bank and therefore of the Corporation are subject to the effects of inflation through interest rate fluctuations and changes in the general price level of noninterest operating expenses. Such costs as salaries, fringe benefits and utilities have tended to increase at a rate comparable to or even greater than the general rate of inflation. Broadly speaking, all operating expenses have risen to higher levels as inflationary pressures have increased. Management has responded to this situation by evaluating and adjusting fees charged for specific services and by emphasizing operating efficiencies. The level of interest rates is also considered to be influenced by inflation, rising whenever inflationary expectations and the actual level of inflation increase and declining whenever the inflationary outlook appears to be improving. Management constantly monitors this situation, attempting to adjust both rates received on earning assets and rates paid on interest-bearing liabilities in order to maintain the desired net yield on earning assets. 27 - -------------------------------------------------------------------------------- Independent Auditors' Report The Board of Directors FNB Corp. We have audited the accompanying consolidated balance sheets of FNB Corp. and subsidiary as of December 31, 1997 and 1996, and the related consolidated statements of income, shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1997. These consolidated financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of FNB Corp. and subsidiary as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997, in conformity with generally accepted accounting principles. KPMG PEAT MARWICK LLP Greensboro, North Carolina March 13, 1998 28 FNB CORP. AND SUBSIDIARY - -------------------------------------------------------------------------------- Consolidated Balance Sheets
December 31 ----------------------------------- 1997 1996 ---------------- ---------------- ASSETS Cash and due from banks ........................................................... $ 12,914,021 $ 13,052,150 Investment securities: Available for sale, at estimated fair value (amortized cost of $34,997,094 in 1997 and $28,875,531 in 1996) ....................................................... 35,125,191 28,928,543 Held to maturity (estimated fair value of $52,234,241 in 1997 and $61,274,858 in 1996) ....................................................................... 51,755,433 61,387,196 Loans ............................................................................. 217,450,749 195,272,683 Less: Allowance for loan losses .................................................. (2,293,495) (1,985,581) ------------ ------------ Net loans ...................................................................... 215,157,254 193,287,102 ------------ ------------ Premises and equipment, net ....................................................... 6,129,335 6,290,471 Other assets ...................................................................... 4,574,070 4,189,015 ------------ ------------ Total Assets .................................................................. $325,655,304 $307,134,477 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Noninterest-bearing demand deposits .............................................. $ 38,310,654 $ 38,805,364 Interest-bearing deposits: NOW, savings and money market deposits ......................................... 88,779,811 82,576,792 Time deposits of $100,000 or more .............................................. 52,915,324 48,944,981 Other time deposits ............................................................ 100,541,785 101,052,928 ------------ ------------ Total deposits ................................................................ 280,547,574 271,380,065 Retail repurchase agreements ...................................................... 7,436,625 3,724,929 Federal funds purchased ........................................................... 2,400,000 575,000 Other liabilities ................................................................. 3,369,747 2,687,241 ------------ ------------ Total Liabilities ............................................................. 293,753,946 278,367,235 ------------ ------------ 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 1,819,825 shares in 1997 and 1,806,994 shares in 1996 .................................... 4,549,563 4,517,485 Surplus .......................................................................... 527,627 213,510 Retained earnings ................................................................ 26,739,624 24,001,259 Net unrealized securities gains .................................................. 84,544 34,988 ------------ ------------ Total Shareholders' Equity .................................................... 31,901,358 28,767,242 ------------ ------------ Total Liabilities And Shareholders' Equity .................................... $325,655,304 $307,134,477 ============ ============ Commitments (Note 15)
See accompanying notes to consolidated financial statements. 29 FNB CORP. AND SUBSIDIARY - -------------------------------------------------------------------------------- Consolidated Statements of Income
Years Ended December 31 ---------------------------------------------------- 1997 1996 1995 ---------------- ---------------- -------------- Interest Income Interest and fees on loans ................................. $ 18,787,063 $ 16,727,702 $15,638,486 Interest and dividends on investment securities: Taxable income ............................................ 4,645,185 4,661,250 4,170,724 Non-taxable income ........................................ 919,543 770,119 619,480 Federal funds sold ......................................... 154,917 88,799 177,071 ------------ ------------ ----------- Total interest income ................................... 24,506,708 22,247,870 20,605,761 ------------ ------------ ----------- Interest Expense Deposits ................................................... 10,268,235 9,390,717 8,821,404 Retail repurchase agreements ............................... 280,322 178,113 167,076 Federal funds purchased .................................... 26,929 42,728 13,799 ------------ ------------ ----------- Total interest expense .................................. 10,575,486 9,611,558 9,002,279 ------------ ------------ ----------- Net Interest Income ......................................... 13,931,222 12,636,312 11,603,482 Provision for loan losses .................................. 600,000 490,000 515,000 ------------ ------------ ----------- Net Interest Income After Provision for Loan Losses ......... 13,331,222 12,146,312 11,088,482 ------------ ------------ ----------- Other Operating Income Service charges on deposit accounts ........................ 1,532,549 1,415,038 1,356,083 Annuity and brokerage commissions .......................... 313,440 217,766 182,091 Cardholder and merchant services income .................... 332,979 315,641 263,678 Other service charges, commissions and fees ................ 389,167 314,097 284,994 Losses on sales of investment securities ................... - - (414,596) Other income ............................................... 306,896 180,975 153,916 ------------ ------------ ----------- Total other operating income ............................ 2,875,031 2,443,517 1,826,166 ------------ ------------ ----------- Other Operating Expense Personnel expense .......................................... 5,318,017 4,733,429 4,479,773 Net occupancy expense ...................................... 562,339 485,357 461,992 Furniture and equipment expense ............................ 776,853 661,504 452,094 Data processing services ................................... 1,135,733 1,006,405 881,757 Merger expenses ............................................ 305,000 - 186,350 Restructuring charges ...................................... - - 460,457 Other expense .............................................. 2,190,757 2,190,379 2,191,203 ------------ ------------ ----------- Total other operating expense ........................... 10,288,699 9,077,074 9,113,626 ------------ ------------ ----------- Income Before Income Taxes .................................. 5,917,554 5,512,755 3,801,022 Income taxes ................................................ 1,817,785 1,675,451 1,100,565 ------------ ------------ ----------- Net Income .................................................. $ 4,099,769 $ 3,837,304 $ 2,700,457 ============ ============ =========== Net income per common share: Basic ...................................................... $ 1.13 $ 1.06 $ .75 Diluted .................................................... $ 1.11 $ 1.05 $ .75 Weighted average number of shares outstanding: Basic ...................................................... 3,626,132 3,603,866 3,597,434 Diluted .................................................... 3,696,384 3,641,660 3,606,110
See accompanying notes to consolidated financial statements. 30 FNB CORP. AND SUBSIDIARY - -------------------------------------------------------------------------------- Consolidated Statements of Shareholders' Equity Years Ended December 31, 1997, 1996 and 1995
Net Common Stock Unrealized -------------------------- Retained Securities Shares Amount Surplus Earnings Gains (Losses) ------------ ------------- ------------ -------------- --------------- Balance, December 31, 1994 ............................ 1,200,000 $3,000,000 $ 900,000 $ 20,234,383 $ (755,253) Net income, 1995 ...................................... - - - 2,700,457 - Cash dividends declared, $.52 per share ............... - - - (935,017) - Three-for-two stock split effected in the form of a 50% stock dividend ................................... 599,968 1,499,920 (900,000) (599,920) - Cash paid for fractional shares ....................... - - - (768) - Common stock issued through dividend reinvestment plan .................................... 1,227 3,068 18,705 - - Common stock repurchased .............................. (3,200) (8,000) - (44,800) - Change in net unrealized gains (losses) on available-for-sale securities ........................ - - - - 882,296 --------- ---------- ---------- ------------ ---------- Balance, December 31, 1995 ............................ 1,797,995 4,494,988 18,705 21,354,335 127,043 Net income, 1996 ...................................... - - - 3,837,304 - Cash dividends declared, $.66 per share ............... - - - (1,190,380) - Common stock issued through: Dividend reinvestment plan ........................... 6,574 16,435 150,356 - - Stock option plan .................................... 2,425 6,062 44,449 - - Change in net unrealized gains (losses) on available-for-sale securities ........................ - - - - (92,055) --------- ---------- ---------- ------------ ---------- Balance, December 31, 1996 ............................ 1,806,994 4,517,485 213,510 24,001,259 34,988 Net income, 1997 ...................................... - - - 4,099,769 - Cash dividends declared, $.75 per share ............... - - - (1,361,404) - Common stock issued through: Dividend reinvestment plan ........................... 8,106 20,265 220,718 - - Stock option plan .................................... 4,725 11,813 93,399 - - Change in net unrealized gains (losses) on available-for-sale securities ........................ - - - - 49,556 --------- ---------- ---------- ------------ ---------- Balance, December 31, 1997 ............................ 1,819,825 $4,549,563 $ 527,627 $ 26,739,624 $ 84,544 ========= ========== ========== ============ ==========
See accompanying notes to consolidated financial statements. 31 FNB CORP. AND SUBSIDIARY - -------------------------------------------------------------------------------- Consolidated Statements of Cash Flows
Years Ended December 31 ------------------------------------------------------ 1997 1996 1995 ---------------- ---------------- ---------------- Operating Activities Net income ....................................................... $ 4,099,769 $ 3,837,304 $ 2,700,457 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of premises and equipment ......... 734,022 634,116 397,979 Provision for loan losses ....................................... 600,000 490,000 515,000 Deferred income taxes (benefit) ................................. (251,925) (65,999) 36,206 Deferred loan fees and costs, net ............................... 367,368 395,050 (130,477) Premium amortization and discount accretion of investment securities, net ................................................ (24,970) 39,357 157,127 Losses on sales of investment securities ........................ - - 414,596 Amortization of intangibles ..................................... 32,336 43,876 59,115 Net decrease (increase) in loans held for sale .................. (559,350) 405,503 (405,503) Increase in other assets ........................................ (203,805) (439,441) (557,531) Increase (decrease) in other liabilities ........................ 581,277 (160,153) 732,884 ------------- ------------- ------------- Net Cash Provided by Operating Activities ...................... 5,374,722 5,179,613 3,919,853 ------------- ------------- ------------- Investing Activities Available-for-sale securities: Proceeds from sales ............................................. - - 5,896,328 Proceeds from maturities and calls .............................. 20,536,260 20,000,719 2,659,634 Purchases ....................................................... (26,645,098) (20,765,272) (249,405) Held-to-maturity securities: Proceeds from maturities and calls .............................. 11,717,140 15,368,717 21,184,527 Purchases ....................................................... (2,072,378) (20,558,380) (36,279,578) Net increase in loans ............................................ (22,291,097) (16,531,348) (11,376,742) Proceeds from sales of premises and equipment .................... 4,862 15,485 2,718 Purchases of premises and equipment .............................. (477,852) (1,019,109) (1,302,230) Other, net ....................................................... 23,622 (33,497) (26,031) ------------- ------------- ------------- Net Cash Used in Investing Activities .......................... (19,204,541) (23,522,685) (19,490,779) ------------- ------------- ------------- Financing Activities Net increase in deposits ......................................... 9,167,509 21,235,589 20,219,164 Increase (decrease) in retail repurchase agreements .............. 3,711,696 (916,598) 1,115,301 Increase (decrease) in federal funds purchased ................... 1,825,000 575,000 (3,050,000) Common stock issued .............................................. 346,195 217,302 21,773 Common stock repurchased ......................................... - - (52,800) Cash dividends and fractional shares paid ........................ (1,358,710) (1,080,610) (666,086) ------------- ------------- ------------- Net Cash Provided by Financing Activities ...................... 13,691,690 20,030,683 17,587,352 ------------- ------------- ------------- Net Increase (Decrease) in Cash and Cash Equivalents ............... (138,129) 1,687,611 2,016,426 Cash and cash equivalents at beginning of year ..................... 13,052,150 11,364,539 9,348,113 ------------- ------------- ------------- Cash and Cash Equivalents At End Of Year ........................... $ 12,914,021 $ 13,052,150 $ 11,364,539 ============= ============= ============= Supplemental disclosure of cash flow information: Cash paid during the year for: Interest ........................................................ $ 10,230,874 $ 9,746,990 $ 8,233,042 Income taxes .................................................... 1,895,676 1,911,293 1,075,350 Noncash investing and financing activity - Transfer of investment securities to available-for-sale category ....................... - - 11,353,710
See accompanying notes to consolidated financial statements. 32 FNB CORP. AND SUBSIDIARY - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations/Consolidation 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 consolidated financial statements 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. Certain items for 1995 and 1996 have been reclassified to conform with the 1997 presentation. The reclassifications have no effect on the financial position or results of operations as previously reported. Cash and Cash Equivalents 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. Investment Securities Under Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities", investment securities are to be categorized and accounted for as follows: o Held-to-maturity securities - Debt securities that the Corporation has the positive intent and ability to hold to maturity are reported at amortized cost. o Trading securities - Debt and equity securities bought and held principally for the purpose of being sold in the near future are reported at fair value, with unrealized gains and losses included in earnings. o Available-for-sale securities - Debt and equity securities not classified as either held-to-maturity securities or trading securities are reported at fair value, with unrealized gains and losses, net of related tax effect, excluded from earnings and reported as a separate component of shareholders' equity. The Corporation intends to hold its securities classified as available-for-sale securities for an indefinite period of time but may sell them prior to maturity. All other securities, which the Corporation has the positive intent and ability to hold to maturity, are classified as held-to-maturity securities. In November 1995, the Financial Accounting Standards Board (the "FASB") issued an implementation guide for SFAS No. 115. The FASB stated that the transition provisions included in the guide permit a one-time opportunity for companies to reconsider their ability and intent to hold the securities accounted for under SFAS No. 115 to maturity and allow entities to transfer securities from the held-to-maturity category without tainting their remaining held-to-maturity securities. The FASB emphasized that this would be a one-time event and that any transfers from the held-to-maturity category to the available-for-sale category under this provision must be made by December 31, 1995. The Corporation transferred $11,353,710 in investment securities from the held-to-maturity category to the available-for-sale category as allowed under the provisions of the implementation guide. On the date of the transfer, the held-to-maturity securities were recorded as available-for-sale securities at their current fair value, which resulted in the recognition of an unrealized gain of $54,908 being recorded, net of the related tax effect, as an addition to shareholders' equity. Interest income on debt securities is adjusted using the level yield method for the amortization of premiums and accretion of discounts. The adjusted cost of the specific security is used to compute gains or losses on the disposition of securities. Loans Effective January 1, 1995, the Corporation adopted Statement of Financial Accounting Standards (SFAS) No. 114, "Accounting by Creditors for Impairment of a Loan" and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures". Commencing in 1995 under the provisions of SFAS No. 114, the allowance for loan losses relating to loans that are determined to be impaired is based on discounted cash flows using the loan's initial effective interest rate or the fair value of the collateral for certain collateral dependent 33 FNB CORP. AND SUBSIDIARY - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements loans. The Corporation previously measured loan impairment in a method generally comparable to the methods prescribed in SFAS No. 114. Accordingly, no additional provisions for loan losses were required as a result of the adoption of SFAS No. 114. Unearned income on certain installment loans is recognized as income over the life of the loans by the sum-of-the-months'-digits method which is not materially different from the interest method. Interest on all other loans is calculated by using the constant yield method based on the daily outstanding balance. The recognition of interest revenue, including interest income on impaired loans, is discontinued when, in management's opinion, the collection of all or a portion of interest becomes doubtful. 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. Residential mortgage loans held for sale are valued at the lower of cost or market as determined by outstanding commitments from investors or current investor yield requirements, calculated on the aggregate loan basis. Allowance for Loan Losses The allowance for loan losses represents an amount considered adequate to absorb loan losses inherent in the portfolio. Management's evaluation of the adequacy of the allowance is based on a review of individual loans, historical loan loss experience, the value and adequacy of collateral, and economic conditions in the Bank's market area. Losses are charged and recoveries are credited to the allowance for loan losses. 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. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan losses. Such agencies may require the Bank to recognize changes to the allowance based on their judgments about information available to them at the time of their examination. Premises and Equipment Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed on a straight-line basis over the estimated useful lives of the assets as follows: buildings and improvements, 10 to 50 years and furniture and equipment, 3 to 10 years. Leasehold improvements are amortized on a straight-line basis over the shorter of the estimated life of the improvement or the term of the lease. Intangible Assets Deposit base premiums, arising from deposit and branch purchase acquisitions, amounted to $67,367 and $99,703 at December 31, 1997 and 1996, respectively, and are included in other assets. The premium amounts are amortized on an accelerated basis over ten-year periods. Income Taxes Income tax expense includes both a current provision based on the amounts computed for income tax return purposes and a deferred provision that results from application of the asset and liability method of accounting for deferred taxes. Under the asset and liability method, deferred tax assets and liabilities are established for the temporary differences between the financial reporting basis and the tax basis of the Corporation's assets and liabilities at enacted tax rates expected to be in effect when such amounts are realized or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Earnings Per Share In 1997, the Corporation adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share", which establishes standards for computing and presenting earnings per share (EPS) data. SFAS No. 128 simplifies the standards for computing EPS previously found in APB Opinion No. 15, "Earnings Per Share", and makes them comparable to international EPS standards. Under SFAS No.128, basic EPS replaces the former presentation of primary EPS. Also, a dual presentation of basic and diluted EPS is required on the face of the income statement for all entities with complex capital structures, and a reconciliation must be provided of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. In accordance with SFAS No. 128, all prior period EPS data has been restated. Employee Benefit Plans The Corporation has a defined benefit pension plan covering substantially all full-time employees. Pension costs, which are actuarially determined using the projected unit credit method, are charged to current operations. Annual funding contributions are made up to the maximum amounts allowable for Federal income tax purposes. 34 FNB CORP. AND SUBSIDIARY - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements Medical and life insurance benefits are provided by the Corporation on a postretirement basis under defined benefit plans covering substantially all full-time employees. Postretirement benefit costs, which are actuarially determined using the attribution method and recorded on an unfunded basis, are charged to current operations and credited to a liability account on the consolidated balance sheet. Stock Options Effective January 1, 1997, the Corporation adopted Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation", which requires either (i) the fair value of employee stock-based compensation plans be recorded as a component of compensation expense in the statement of income as of the date of grant of awards related to such plans or (ii) the impact of such fair value on net income and earnings per share be disclosed in a footnote to financial statements for awards granted after December 15, 1994., if the accounting for such awards continues to be in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees". The Corporation has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123. Derivative Financial Instruments The Corporation may use off-balance sheet derivative contracts for interest rate risk management purposes. The existing contracts are accounted for on the accrual basis and the net interest differential, including premiums paid, if any, is recognized as an adjustment to interest income or expense of the related asset or liability. The Corporation does not utilize derivative financial instruments for trading purposes. Restatements Share and per share information in the consolidated financial statements and related notes thereto have been restated, where appropriate, to reflect the three-for-two common stock split effected in the form of a 50% stock dividend paid to shareholders on May 26, 1995 and the two-for-one common stock split declared on February 19, 1998 and payable in the form of a 100% stock dividend to shareholders on March 18, 1998. - -------------------------------------------------------------------------------- 35 FNB CORP. AND SUBSIDIARY - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements 2. INVESTMENT SECURITIES Summaries of the amortized cost and estimated fair value of investment securities and the related gross unrealized gains and losses are presented below:
Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value ------------- ------------ ------------ ------------- Available For Sale December 31, 1997 U.S. Treasury ..................................... $ 2,603,382 $ 25,969 $ 4,497 $ 2,624,854 U.S. Government agencies and corporations ......... 28,893,256 120,150 29,465 28,983,941 Mortgage-backed securities ........................ 2,422,481 6,428 6,788 2,422,121 Equity securities ................................. 1,077,975 16,300 - 1,094,275 ----------- -------- -------- ----------- Total ........................................... $34,997,094 $168,847 $ 40,750 $35,125,191 =========== ======== ======== =========== December 31, 1996 U.S. Treasury ..................................... $ 4,685,376 $ 33,154 $ 15,432 $ 4,703,098 U.S. Government agencies and corporations ......... 19,283,516 63,259 63,882 19,282,893 Mortgage-backed securities ........................ 4,759,750 43,187 15,799 4,787,138 Equity securities ................................. 146,889 8,525 - 155,414 ----------- -------- -------- ----------- Total ........................................... $28,875,531 $148,125 $ 95,113 $28,928,543 =========== ======== ======== =========== Held To Maturity December 31, 1997 U.S. Government agencies and corporations ......... $32,804,633 $ 67,265 $110,484 $32,761,414 State, county and municipal ....................... 18,950,800 550,826 28,799 19,472,827 ----------- -------- -------- ----------- Total ........................................... $51,755,433 $618,091 $139,283 $52,234,241 =========== ======== ======== =========== December 31, 1996 U.S. Government agencies and corporations ......... $43,935,800 $114,573 $441,497 $43,608,876 State, county and municipal ....................... 17,451,396 301,006 86,420 17,665,982 ----------- -------- -------- ----------- Total ........................................... $61,387,196 $415,579 $527,917 $61,274,858 =========== ======== ======== ===========
The amortized cost and estimated fair value of investment securities at December 31, 1997, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because issuers may have the right to prepay obligations with or without prepayment penalties.
Available For Sale Held To Maturity ------------------------------ ----------------------------- Amortized Estimated Amortized Estimated Cost Fair Value Cost Fair Value ------------- -------------- ------------- ------------- Due in one year or less ........................ $ 3,098,752 $ 3,095,124 $ 6,135,736 $ 6,126,062 Due after one year through five years .......... 9,587,851 9,634,235 22,589,667 22,665,912 Due after five years through ten years ......... 18,810,035 18,879,436 15,280,238 15,432,584 Due after ten years ............................ - - 7,749,792 8,009,683 ----------- ----------- ----------- ----------- Total ...................................... 31,496,638 31,608,795 51,755,433 52,234,241 Mortgage-backed securities ..................... 2,422,481 2,422,121 - - Equity securities .............................. 1,077,975 1,094,275 - - ----------- ----------- ----------- ----------- Total investment securities ................ $34,997,094 $35,125,191 $51,755,433 $52,234,241 =========== =========== =========== ===========
Debt securities with an estimated fair value of $50,171,509 were pledged to secure public funds and trust funds on deposit and retail repurchase agreements at December 31, 1997. Proceeds from the sale of investment securities classified as available-for-sale amounted to $5,896,328 in 1995. Gross losses of $414,596 were realized on these sales. There were no securities sales in 1997 and 1996. - -------------------------------------------------------------------------------- 36 FNB CORP. AND SUBSIDIARY - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements 3. LOANS Major classifications of loans are as follows:
December 31 ------------------------------- 1997 1996 -------------- -------------- Commercial and agricultural ......... $ 84,220,526 $ 62,677,847 Real estate - construction .......... 4,988,792 4,347,673 Real estate - mortgage: 1-4 family residential ............. 81,182,189 68,886,704 Commercial and other ............... 20,556,246 24,256,938 Consumer ............................ 26,502,996 35,103,521 ------------ ------------ Total loans ....................... $217,450,749 $195,272,683 ============ ============
Loans as presented are reduced by net unearned income of $269,599 at December 31,1997 and are increased by net deferred expense of $37,998 at December 31, 1996. Nonaccrual loans amounted to $51,087 at December 31, 1997 and $65,230 at December 31, 1996. Lost and recorded interest income on nonaccrual loans was not material. Under the criteria of SFAS No. 114, as discussed in Note 1, there were no loans considered to be impaired at December 31, 1997 or 1996. Loans are primarily made in the region of North Carolina that includes Randolph, Montgomery and Chatham counties. The real estate loan portfolio can be affected by the condition of the local real estate markets. Included in consumer loans at December 31, 1997 and 1996 are $9,674,229 and $20,355,367, respectively, of retail installment loan contracts purchased primarily from automobile dealers. In March 1996, the Bank discontinued the purchase of retail installment loan contracts from automobile and equipment dealers. Loans have been made by the Bank to directors and executive officers of the Corporation and to the associates of such persons, as defined by the Securities and Exchange Commission. Such loans were made in the ordinary course of business on substantially the same terms, including rate and collateral, as those prevailing at the time in comparable transactions with other borrowers and do not involve more than normal risk of collectibility. A summary of the activity during 1997 with respect to related party loans is as follows: Balance, December 31, 1996 ......... $ 10,202,891 New loans during 1997 .............. 22,201,685 Repayments during 1997 ............. (22,367,245) ------------- Balance, December 31, 1997 ......... $ 10,037,331 =============
- -------------------------------------------------------------------------------- 4. ALLOWANCE FOR LOAN LOSSES Changes in the allowance for loan losses were as follows:
Years Ended December 31 --------------------------------------------- 1997 1996 1995 ------------- ------------- ------------- Balance at beginning of year ....................... $1,985,581 $1,902,640 $1,719,717 Provision for losses charged to operations ......... 600,000 490,000 515,000 Loans charged off .................................. (456,976) (568,499) (476,977) Recoveries on loans previously charged off ......... 164,890 161,440 144,900 ---------- ---------- ---------- Balance at end of year ............................. $2,293,495 $1,985,581 $1,902,640 ========== ========== ==========
- -------------------------------------------------------------------------------- 37 FNB CORP. AND SUBSIDIARY - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements 5. PREMISES AND EQUIPMENT Premises and equipment are summarized as follows:
December 31 ----------------------------- 1997 1996 ------------- ------------- Land ................................................... $ 1,003,619 $ 1,003,619 Buildings and improvements ............................. 4,314,513 4,275,866 Furniture and equipment ................................ 5,221,327 4,953,489 Leasehold improvements ................................. 409,780 394,390 ----------- ----------- Total ............................................... 10,949,239 10,627,364 Less accumulated depreciation and amortization ......... 4,819,904 4,336,893 ----------- ----------- Premises and equipment, net ............................ $ 6,129,335 $ 6,290,471 =========== ===========
- -------------------------------------------------------------------------------- 6. INCOME TAXES Income taxes as reported in the consolidated income statement included the following expense (benefit) components:
1997 1996 1995 ------------- ------------- ------------- Current: Federal ...................... $1,941,569 $1,674,945 $1,045,564 State ........................ 128,141 66,505 18,795 ---------- ---------- ---------- Total ...................... 2,069,710 1,741,450 1,064,359 ---------- ---------- ---------- Deferred - Federal ............ (251,925) (65,999) 36,206 ---------- ---------- ---------- Total income taxes ......... $1,817,785 $1,675,451 $1,100,565 ========== ========== ==========
A reconciliation of income tax expense computed at the statutory Federal income tax rate to actual income tax expense is presented below:
1997 1996 1995 ------------- ------------- ------------- Amount of tax computed using Federal statutory tax rate of 34% ......... $2,011,968 $1,874,337 $1,292,348 Increases (decreases) resulting from: Effect of tax-exempt loan and investment securities income ............ (282,470) (251,508) (213,390) Other ................................................................. 88,287 52,622 21,607 ---------- ---------- ---------- Total ............................................................... $1,817,785 $1,675,451 $1,100,565 ========== ========== ==========
38 FNB CORP. AND SUBSIDIARY - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements The components of deferred tax assets and liabilities and the tax effect of each are as follows:
December 31 -------------------------- 1997 1996 ------------ ----------- Deferred tax assets: Allowance for loan losses ........................... $ 606,261 $501,571 Accrued expenses, not currently deductible .......... 470,563 324,210 Other ............................................... 76,401 76,663 ---------- -------- Total .............................................. 1,153,225 902,444 ---------- -------- Deferred tax liabilities: Depreciable basis of premises and equipment ......... 323,616 309,869 Taxable basis of investment securities .............. 67,665 53,499 Prepaid pension cost ................................ 266,568 224,827 Net deferred loan fees and costs .................... 139,001 219,625 Other ............................................... 62,827 27,472 ---------- -------- Total .............................................. 859,677 835,292 ---------- -------- Net deferred tax asset ............................... $ 293,548 $ 67,152 ========== ========
There is no valuation allowance for deferred tax assets as it is management's contention that realization of the deferred tax assets is more likely than not based upon the Corporation's history of taxable income and estimates of future taxable income. - -------------------------------------------------------------------------------- 7. TIME DEPOSITS The scheduled maturities of time deposits are as follows:
Years ending December 31 - ---------------------------------- 1998 ........................... $101,891,679 1999 ........................... 38,419,009 2000 ........................... 12,348,322 2001 ........................... 475,022 2002 ........................... 323,077 ------------ Total time deposits ......... $153,457,109 ============
- -------------------------------------------------------------------------------- 8. BORROWED FUNDS Funds are borrowed on an overnight basis through retail repurchase agreements with Bank customers and federal funds purchased from other financial institutions. Retail repurchase agreement borrowings are collateralized by securities of the U.S. Treasury and U.S. Government agencies and corporations. Information concerning retail repurchase agreements and federal funds purchased is as follows:
1997 1996 --------------------------------- -------------------------------- Retail Federal Retail Federal Repurchase Funds Repurchase Funds Agreements Purchased Agreements Purchased --------------- --------------- --------------- -------------- Balance at December 31 .................. $ 7,436,625 $ 2,400,000 $ 3,724,929 $ 575,000 Average balance during the year ......... 6,229,000 473,000 4,118,000 764,000 Maximum month-end balance ............... 7,675,607 2,400,000 4,848,611 4,200,000 Weighted average interest rate: At December 31 ......................... 4.51% 6.59% 4.21% 7.33% During the year ........................ 4.51 5.71 4.32 5.63
39 FNB CORP. AND SUBSIDIARY - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements At December 31, 1997, the Bank had an available line of credit of $37,000,000 with the Federal Home Loan Bank (the "FHLB"). Any advances that the Bank may obtain under the FHLB line would be secured by a blanket collateral agreement on qualifying 1-4 family residential mortgage loans. - -------------------------------------------------------------------------------- 9. EMPLOYEE BENEFIT PLANS Pension Plan The Corporation has a noncontributory defined benefit pension plan covering substantially all full-time employees who qualify as to age and length of service. Benefits are based on the employee's compensation, years of service and age at retirement. The Corporation's funding policy is to contribute annually to the plan an amount which is not less than the minimum amount required by the Employee Retirement Income Security Act of 1974 and not more than the maximum amount deductible for income tax purposes. Information concerning the funded status of the plan is as follows:
December 31 ----------------------------------- 1997 1996 ---------------- ---------------- Actuarial present value of benefit obligation: Vested benefit obligation ............................................. $ 4,658,760 $ 4,368,884 Non-vested benefit obligation ......................................... 49,043 48,293 ------------ ------------ Total accumulated benefit obligation ................................. $ 4,707,803 $ 4,417,177 ============ ============ Projected benefit obligation for service rendered ...................... $ (5,680,805) $ (5,325,298) Plan assets at fair value, primarily marketable securities ............. 5,952,459 4,828,175 ------------ ------------ Plan assets in excess of (under) projected benefit obligations ......... 271,654 (497,123) Unrecognized net transition liability .................................. 85,894 107,369 Unrecognized prior service cost ........................................ 887,673 995,011 Unrecognized net loss (gain) ........................................... (461,197) 56,000 ------------ ------------ Prepaid pension cost included on the consolidated balance sheet ...... $ 784,024 $ 661,257 ============ ============
Net periodic pension cost included the following components:
1997 1996 1995 --------------- ------------- ------------- Service cost - benefits earned during the period ......... $ 150,589 $ 108,379 $ 71,275 Interest cost on projected benefit obligation ............ 363,237 327,835 311,432 Actual return on plan assets ............................. (1,050,212) (517,299) (458,088) Net amortization and deferral ............................ 793,739 266,453 290,002 ------------ ---------- ---------- Net periodic pension cost ............................. $ 257,353 $ 185,368 $ 214,621 ============ =========== ==========
The rates used in determining the actuarial present value of the projected benefit obligation were as follows:
1997 1996 1995 --------- --------- --------- Discount rate ............................................ 7.0% 7.0% 7.0% Rate of increase in compensation levels .................. 6.0 6.0 6.0 Expected long-term rate of return on plan assets ......... 8.0 8.0 8.0
Other Postretirement Defined Benefit Plans The Corporation has postretirement medical and life insurance plans covering substantially all full-time employees who qualify as to age and length of service. The medical plan is contributory, with retiree contributions adjusted whenever medical insurance rates change. The life insurance plan is noncontributory. 40 FNB CORP. AND SUBSIDIARY - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements Information reconciling the plans, which are unfunded, with the amount included on the consolidated balance sheet is as follows:
December 31 ------------------------------- 1997 1996 -------------- -------------- Accumulated postretirement benefit obligation: Retirees ................................................................. $ (458,706) $ (322,587) Fully eligible active participants ....................................... (30,845) (26,174) Other active plan participants ........................................... (231,752) (201,338) ---------- ---------- Total accumulated postretirement benefit obligation .................... (721,303) (550,099) Unrecognized net transition liability ..................................... 303,284 323,502 Unrecognized prior service cost ........................................... 78,139 87,906 Unrecognized net loss (gain) .............................................. 126,171 (13,926) ---------- ---------- Accrued postretirement benefit cost included on the consolidated balance sheet ................................................................. $ (213,709) $ (152,617) =========== ==========
Net periodic postretirement benefit cost included the following components:
1997 1996 1995 ---------- ---------- ---------- Service cost - benefits earned during the period ....................... $18,654 $17,049 $12,523 Interest cost on accumulated postretirement benefit obligation ......... 46,412 35,931 35,998 Net amortization and deferral .......................................... 34,670 29,985 28,239 ------- ------- ------- Net periodic postretirement benefit cost ............................ $99,736 $82,965 $76,760 ======= ======== =========
For measurement purposes, the annual rate of increase assumed in 1997 for the cost of medical benefits was 13%, decreasing gradually to 6% in 2004 and assumed to remain at that level thereafter. In 1996, the annual rate of increase assumed for the cost of medical benefits was 14%, decreasing gradually to 6% in 2004 and assumed to remain at that level thereafter. Increasing the assumed medical cost trend rate by one percentage point in each year would not have a significant effect on either the accumulated postretirement benefit obligation at December 31, 1997 or the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year ended December 31, 1997. The discount rate used in determining the accumulated postretirement benefit obligation was 7.0% in 1997, 1996 and 1995. Matching Retirement/Savings Plan The Corporation has a matching retirement/savings plan which permits eligible employees to make contributions to the plan up to a specified percentage of compensation as defined by the plan. A portion of the employee contributions are matched by the Corporation based on the plan formula. The matching contributions amounted to $85,184 in 1997, $78,247 in 1996 and $77,835 in 1995. - -------------------------------------------------------------------------------- 10. LEASES Future obligations for minimum rentals under noncancellable operating lease commitments, primarily relating to premises, are as follows:
Years ending December 31 - ------------------------------------------- 1998 .................................... $ 50,686 1999 .................................... 46,703 2000 .................................... 45,376 2001 .................................... 45,376 2002 .................................... 6,623 2003 and later years .................... 47,740 -------- Total minimum lease payments ......... $242,504 ========
Net rental expense for all operating leases amounted to $57,308 in 1997, $57,891 in 1996 and $55,122 in 1995. One operating lease for real property contains a purchase option considered to approximate fair market value. - -------------------------------------------------------------------------------- 41 FNB CORP. AND SUBSIDIARY - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements 11. SUPPLEMENTARY INCOME STATEMENT INFORMATION Significant components of other expense were as follows:
1997 1996 1995 ---------- ----------- ----------- FDIC insurance ............................ $ 40,764 $101,621 $281,894 Stationery, printing and supplies ......... 335,240 301,703 280,665
- -------------------------------------------------------------------------------- 12. FNB CORP. (PARENT COMPANY) FINANCIAL DATA The Parent Company's principal asset is its investment in the Bank subsidiary, and its principal source of income is dividends from that subsidiary. The Parent Company's condensed balance sheets as of December 31, 1997 and 1996, and the related condensed statements of income and cash flows for each of the years in the three-year period ended December 31, 1997 are as follows: Condensed Balance Sheets
December 31 ----------------------------- 1997 1996 ------------- ------------- Assets: Cash ................................................. $ 706,162 $ 611,884 Investment in wholly-owned bank subsidiary ........... 31,155,338 28,129,278 Other assets ......................................... 422,021 405,549 ----------- ----------- Total assets ....................................... $32,283,521 $29,146,711 =========== =========== Liabilities and Shareholders' Equity: Accrued liabilities .................................. $ 382,163 $ 379,469 Shareholders' equity ................................. 31,901,358 28,767,242 ----------- ----------- Total liabilities and shareholders' equity ......... $32,283,521 $29,146,711 =========== ===========
Condensed Statements of Income
Years Ended December 31 --------------------------------------------- 1997 1996 1995 ------------- ------------- ------------- Income: Dividends from bank subsidiary ................................ $1,137,000 $1,383,000 $ 936,000 Other income (expense) ........................................ 755 3,899 (315) ---------- ---------- ---------- Total income ................................................ 1,137,755 1,386,899 935,685 ---------- ---------- ---------- Operating expenses ............................................. 23,109 15,707 201,916 ---------- ---------- ---------- Income before income tax benefit and equity in undistributed net income of bank subsidiary ..................................... 1,114,646 1,371,192 733,769 Income tax benefit ............................................. 8,618 2,815 68,957 ---------- ---------- ---------- Income before equity in undistributed net income of bank subsidiary ............................................ 1,123,264 1,374,007 802,726 Equity in undistributed net income of bank subsidiary .......... 2,976,505 2,463,297 1,897,731 ---------- ---------- ---------- Net income .................................................. $4,099,769 $3,837,304 $2,700,457 ========== ========== ==========
42 FNB CORP. AND SUBSIDIARY - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements Condensed Statements of Cash Flows
Years Ended December 31 --------------------------------------------------- 1997 1996 1995 --------------- --------------- --------------- Operating activities: Net income ...................................................... $ 4,099,769 $ 3,837,304 $ 2,700,457 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed net income of bank subsidiary ......... (2,976,505) (2,463,297) (1,897,731) Other, net .................................................... (8,204) (111,900) (82,601) ------------ ------------ ------------ Net cash provided by operating activities .................... 1,115,060 1,262,107 720,125 ------------ ------------ ------------ Investing activities: Increase in other assets ........................................ (8,267) (7,227) (4,444) ------------ ------------ ------------ Financing activities: Common stock issued ............................................. 346,195 217,302 21,773 Common stock repurchased ........................................ - - (52,800) Cash dividends and fractional shares paid ....................... (1,358,710) (1,080,610) (666,086) ------------ ------------ ------------ Net cash used in financing activities ........................ (1,012,515) (863,308) (697,113) ------------ ------------ ------------ Net increase in cash ............................................. 94,278 391,572 18,568 Cash at beginning of year ........................................ 611,884 220,312 201,744 ------------ ------------ ------------ Cash at end of year .............................................. $ 706,162 $ 611,884 $ 220,312 ============ ============ ============
- -------------------------------------------------------------------------------- 13. CAPITAL ADEQUACY REQUIREMENTS Certain regulatory requirements restrict the lending of funds by the Bank to FNB Corp. and the amount of dividends which can be paid to FNB Corp. In 1998, the maximum amount of dividends the Bank can pay to FNB Corp., without the approval of the Comptroller of the Currency, is $5,439,802 plus an additional amount equal to the retained net income in 1998 up to the date of any dividend declaration. The Bank is required to maintain average reserve balances with the Federal Reserve Bank based on a percentage of deposits. For the reserve maintenance period in effect at December 31, 1997, the average daily reserve requirement was $3,585,000. FNB Corp. and the Bank are required to comply with capital adequacy standards established by the Board of Governors of the Federal Reserve System. In addition, the Bank is required to comply with prompt corrective action provisions established by the Federal Deposit Insurance Corporation Improvement Act. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, there are minimum ratios of capital to risk-weighted assets. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Failure to meet minimum capital requirements can initiate certain mandatory and possibly discretionary actions by regulators that, if undertaken, could have a material effect on the consolidated financial statements. Regulatory capital amounts and ratios are set forth in the table below. 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- weighted 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 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. Total capital, for risk-based purposes, consists of both Tier I and Tier II capital. 43 FNB CORP. AND SUBSIDIARY - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements The Bank is well-capitalized under the regulatory framework for prompt corrective action. To be categorized as well-capitalized, the Bank must meet minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the table below. There are no events or conditions since the notification that management believes have changed the Bank's category.
Minimum Ratios ------------------------------- To Be Well For Capitalized Capital Amount Ratio Capital Under Prompt ----------------------- ------------------------- Adequacy Corrective 1997 1996 1997 1996 Purposes Action Provisions ---------- ---------- ----------- ----------- ---------- ------------------ (in thousands) As of December 31 Total capital (to risk-weighted assets): FNB Corp. ................ $34,095 $30,695 15.75% 14.79% 8.00% N/A Bank ..................... 33,298 29,980 15.39 14.46 8.00 10.00% Tier I capital (to risk-weighted assets): FNB Corp. ................ 31,801 28,709 14.69 13.84 4.00 N/A Bank ..................... 31,004 27,994 14.33 13.50 4.00 6.00% Tier I capital (to average assets): FNB Corp. ................ 31,801 28,709 9.83 9.41 4.00 N/A Bank ..................... 31,004 27,994 9.58 9.18 4.00 5.00%
- -------------------------------------------------------------------------------- 14. SHAREHOLDERS' EQUITY Earnings Per Share (EPS) Basic net income per share, or basic EPS, is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if the Corporation's dilutive stock options were exercised. The numerator of the basic EPS computation is the same as the numerator of the diluted EPS computation for all periods presented. A reconcilation of the denominators of the basic and diluted EPS computations is as follows:
1997 1996 1995 ----------- ----------- ------------ Basic EPS denominator - Weighted average number of common shares outstanding ........................................................ 3,626,132 3,603,866 3,597,434 Dilutive share effect arising from assumed exercise of stock options 70,252 37,794 8,676 --------- --------- --------- Diluted EPS denominator ............................................. 3,696,384 3,641,660 3,606,110 ========= ========= =========
Stock Options All information presented below has been restated to reflect the 1998 and 1995 stock splits disclosed in Note 1. The Corporation adopted a stock compensation plan in 1993 that allows for the granting of incentive and nonqualified stock options to key employees and directors. Under terms of the plan, options are granted at prices equal to the fair market value of the common stock on the date of grant. Options become exercisable after one year in equal, cumulative installments over a five-year period. No option shall expire later than ten years from the date of grant. A maximum of 360,000 shares of common stock has been reserved for issuance under the stock compensation plan. At December 31, 1997, there were 4,900 shares available under the plan for the granting of additional options. The Corporation applies APB Opinion No. 25 in accounting for the stock compensation plan and, accordingly, no compensation cost has been recognized for stock option grants in the consolidated financial statements. As required by Statement of Financial Accounting Standards (SFAS) No. 123, disclosures are presented below for the effect on net income and net income per share that would result from the use of the fair value based method to 44 FNB CORP. AND SUBSIDIARY - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements measure compensation costs related to stock option grants in 1995 and subsequent years. The effect on pro forma net income for 1997, 1996 and 1995 for options granted prior to 1995 has not been determined. Consequently, the effects of applying SFAS No. 123 pro forma disclosures during the initial phase-in period may not be representative of the effects on reported net income in future years.
1997 1996 1995 --------------- --------------- ------------- Net Income: As reported ........... $ 4,099,769 $ 3,837,304 $2,700,457 Pro forma ............. 4,017,763 3,803,186 2,699,117 Net Income Per Share: Basic: As reported ......... 1.13 1.06 .75 Pro forma ........... 1.11 1.06 .75 Diluted: As reported ......... 1.11 1.05 .75 Pro forma ........... 1.09 1.04 .75
The weighted-average fair value per share of options granted in 1997, 1996 and 1995 amounted to $5.55, $4.44 and $3.61, respectively. Fair values were estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:
1997 1996 1995 ---------- ---------- ---------- Risk-free interest rate ......... 5.86% 6.25% 5.38% Dividend yield .................. 1.60 2.50 2.50 Volatility ...................... 26.00 30.00 30.00 Expected life ................... 6 years 6 years 6 years
A summary of stock option activity is as follows:
Years Ended December 31 ------------------------------------------------------------------------------ 1997 1996 1995 ------------------------ ------------------------ ------------------------ Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ----------- ---------- ----------- ---------- ------------ --------- Outstanding at beginning of year ........... 276,100 $ 11.21 194,750 $ 9.73 132,000 $ 8.13 Granted .................................... 93,000 17.47 95,500 14.00 80,000 12.00 Exercised .................................. (9,450) 9.41 (4,850) 8.78 - - Forfeited .................................. (18,850) 12.00 (9,300) 10.01 (17,250) 8.13 ------- ------- ------- Outstanding at end of year ................. 340,800 12.93 276,100 11.21 194,750 9.73 ======= ======= ======= Options exercisable at end of year ......... 96,500 10.19 54,500 9.15 22,950 8.13 ======= ======= =======
At December 31, 1997, information concerning stock options outstanding and exercisable is as follows:
Options Outstanding --------------------------- Weighted Average Remaining Exercise Contractual Options Price Shares Life (Years) Exercisable - ------------ ---------- -------------- ------------ $ 8.13 94,200 6.96 53,700 12.00 68,400 7.96 26,400 14.00 85,200 8.96 16,400 16.00 2,000 9.75 - 17.50 91,000 9.96 - ------ ------ 340,800 8.48 96,500 ======= ======
45 FNB CORP. AND SUBSIDIARY - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 15. COMMITMENTS In the normal course of business, various commitments are outstanding that are not reflected in the consolidated financial statements. At December 31, 1997, a summary of significant commitments is as follows: Commitments to extend credit ......... $54,394,000 Standby letters of credit ............ 561,000
In management's opinion, these commitments will be funded from normal operations with not more than the normal risk of loss. The Bank has entered into two 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 notional amount of each agreement is $10,000,000. The agreements require the correspondent bank to pay to the Bank the difference between the floor rate of interest of 7.50% in one agreement and 8.00% in the other agreement as compared to 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. The Bank's exposure to credit risk is limited to the ability of the counterparty to make potential future payments to the Bank that are required pursuant to the agreements. The Bank's exposure to market risk of loss is limited to the amount of the unamortized premium. At December 31, 1997, the unamortized premium related to the interest rate floor agreements amounted to $55,625 and had an estimated fair value of $65,000. - -------------------------------------------------------------------------------- 16. FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value for each class of financial instruments. Cash and Cash Equivalents. For cash on hand, amounts due from banks, and federal funds sold, the carrying value is considered to be a reasonable estimate of fair value. Investment Securities. The fair value of investment securities is based on quoted market price, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. Loans. The fair value of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Deposits. The fair value of noninterest-bearing demand deposits and NOW, savings and money market deposits is the amount payable on demand at the reporting date. The fair value of time deposits is estimated using the rates currently offered for deposits of similar remaining maturities. Borrowed Funds. The carrying value of retail repurchase agreements and federal funds purchased is considered to be a reasonable estimate of fair value. Commitments. The fair value of commitments to extend credit is considered to approximate carrying value, since the large majority of these commitments would result in loans that have variable rates and/or relatively short terms to maturity. For other commitments, generally of a short-term nature, the carrying value is considered to be a reasonable estimate of fair value. The various commitment items are disclosed in Note 15. 46 FNB CORP. AND SUBSIDIARY - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements The estimated fair values of financial instruments are as follows (in thousands):
December 31, 1997 December 31, 1996 ------------------------ ----------------------- Estimated Estimated Carrying Fair Carrying Fair Value Value Value Value ---------- ----------- ---------- ---------- Financial Assets Cash and cash equivalents ............ $ 12,914 $ 12,914 $ 13,052 $ 13,052 Investment securities: Available for sale ................. 35,126 35,126 28,929 28,929 Held to maturity ................... 51,755 52,234 61,387 61,275 Net loans ............................ 215,157 217,118 193,287 191,296 Financial Liabilities Deposits ............................. 280,548 281,488 271,380 272,047 Retail repurchase agreements ......... 7,437 7,437 3,725 3,725 Federal funds purchased .............. 2,400 2,400 575 575
The fair value estimates are made at a specific point in time based on relevant market and other information about the financial instruments. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Corporation's entire holdings of a particular financial instrument nor are potential taxes and other expenses that would be considered in an actual sale considered. Because no market exists for a significant portion of the Corporation's financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and such other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates. - -------------------------------------------------------------------------------- 17. RESTRUCTURING CHARGES In 1995, 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 were either realigned or eliminated. All significant project costs were incurred and paid in 1995. A summary of the restructuring charges 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 ========
- -------------------------------------------------------------------------------- 18. ACQUISITIONS On June 3, 1997, the Corporation entered into a definitive agreement to acquire Home Savings Bank of Siler City, Inc., SSB ("Home Savings") of Siler City, North Carolina. Under terms of the agreement, Home Savings shareholders were to receive $15.50 per share, either in FNB Corp. common stock or in cash or a combination thereof, subject to the limitation that FNB Corp. common stock issued in the merger would be not more than 60% and not less than 50% of the total consideration. On January 28, 1998, as permitted by the agreement, the Board of Directors of Home Savings exercised its right to terminate the proposed combination due to the increase in the market value of FNB Corp. common stock above a specified level. On December 30, 1993, the Corporation entered into definitive agreements to acquire two mutual savings banks, Home Savings Bank of Siler City, SSB of Siler City, North Carolina and Randleman Savings Bank, SSB of Randleman, 47 FNB CORP. AND SUBSIDIARY - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements North Carolina, 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. The Corporation incurred certain costs in connection with the proposed acquisitions. Those costs, which had been initially deferred, are included in merger expenses in the consolidated statements of income and amounted to $305,000 and $186,350 for the years ended December 31, 1997 and 1995, respectively. 48 - -------------------------------------------------------------------------------- General Information Corporate Headquarters Form 10-K FNB Corp. Copies of the FNB Corp. Annual Report 101 Sunset Avenue to the Securities and Exchange Post Office Box 1328 Commission on Form 10-K may be obtained Asheboro, North Carolina 27204 by any shareholder upon written request to Jerry A. Little, Treasurer. Common Stock Equal Opportunity Employer FNB Corp. common stock is traded on the NASDAQ National Market System FNB Corp. and First National Bank under the symbol FNBN. At and Trust Company are equal December 31, 1997, there were 1,078 opportunity employers. All matters shareholders of record. regarding recruiting, hiring, training, compensation, benefits, promotions, transfers and all other Market Makers personnel policies will continue to be free from all discriminatory Interstate/Johnson Lane Corporation practices. J.C. Bradford & Co., Incorporated Stock Transfer Agent and Registrar Annual Meeting First National Bank and Trust Company The annual Meeting of Shareholders Post Office Box 1328 of FNB Corp. will be held at the AVS Asheboro, North Carolina 27204 Banquet Centre, 2045 North Attention: Mrs. Susan G. Brown, Fayetteville Street, Asheboro, North Assistant Secretary Carolina, on Tuesday, May 12, 1998 (336) 626-8300 at 1:00 p.m., preceded by a buffet luncheon beginning at 12:15 p.m. Independent Auditors KPMG Peat Marwick LLP Greensboro, North Carolina 52 EX-21 3 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21 Subsidiaries of the Registrant The Registrant has one direct, wholly-owned subsidiary as follows: First National Bank and Trust Company - National banking association headquartered in the State of North Carolina. EX-23 4 CONSENT OF INDEPENDENT AUDITORS EXHIBIT 23 Consent of Independent Auditors The Board of Directors FNB Corp. We consent to incorporation by reference in the registration statement (No. 33-72686) on Form S-8 of FNB Corp. of our report dated March 13, 1998, relating to the consolidated balance sheets of FNB Corp. and subsidiary as of December 31, 1997 and 1996, and the related consolidated statements of income, shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1997, which report is incorporated by reference in the December 31, 1997 annual report on Form 10-K of FNB Corp. KPMG PEAT MARWICK LLP Greensboro, North Carolina March 31, 1998 EX-27 5 FINANCIAL DATA SCHEDULE
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRTY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR DEC-31-1997 DEC-31-1997 12,914,021 0 0 0 35,125,191 51,755,433 0 217,450,749 2,293,495 325,655,304 280,547,574 9,836,625 3,369,747 0 0 0 4,549,563 27,351,795 325,655,304 18,787,063 5,564,728 154,917 24,506,708 10,268,235 10,575,486 13,931,222 600,000 0 10,288,699 5,917,554 5,917,554 0 0 4,099,769 1.13 1.11 4.70 51,000 167,000 0 0 1,986,000 457,000 165,000 2,294,000 2,054,000 0 240,000
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