-----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, D6xLiGLvVM9UTid6G5U29+NJwvqd+3qA3wgQtCFxQWjQ9LRdQt+VC9d8h/9D3aok Fn5rMuZO1PZCO4AjXR0/hA== /in/edgar/work/0000950168-00-002419/0000950168-00-002419.txt : 20001115 0000950168-00-002419.hdr.sgml : 20001115 ACCESSION NUMBER: 0000950168-00-002419 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FNB CORP/NC CENTRAL INDEX KEY: 0000764811 STANDARD INDUSTRIAL CLASSIFICATION: [6021 ] IRS NUMBER: 561456589 STATE OF INCORPORATION: NC FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-13823 FILM NUMBER: 765025 BUSINESS ADDRESS: STREET 1: 101 SUNSET AVE STREET 2: P O BOX 1328 CITY: ASHEBORO STATE: NC ZIP: 27203 BUSINESS PHONE: 3366268300 MAIL ADDRESS: STREET 1: P.O. BOX 1328 CITY: ASHEBORO STATE: NC ZIP: 27203 10-Q 1 0001.txt FNB CORPORATION UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------ FORM 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 2000 Commission File Number 0-13823 ------------ FNB CORP. (Exact name of Registrant as specified in its charter) North Carolina 56-1456589 (State of incorporation) (I.R.S. Employer Identification No.) 101 Sunset Avenue, Asheboro, North Carolina 27203 (Address of principal executive offices) (336) 626-8300 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] The registrant had 5,058,476 shares of $2.50 par value common stock outstanding at November 10, 2000. PART I. FINANCIAL INFORMATION Item 1. Financial Statements FNB Corp. and Subsidiary CONSOLIDATED BALANCE SHEETS
September 30, (unaudited) ------------------------- December 31, 2000 1999 1999 --------- --------- --------- (in thousands, except share data) ASSETS Cash and due from banks $ 12,926 $ 12,039 $ 18,808 Interest-bearing bank accounts 71 9,242 3,115 Federal funds sold 82 7,000 - Investment securities: Available for sale, at estimated fair value (amortized cost of $65,822, $67,473 and $64,063) 63,683 65,631 61,065 Held to maturity (estimated fair value of $55,962, $58,594 and $56,954) 56,923 59,534 58,721 Loans 400,066 335,950 360,840 Less: Allowance for loan losses (4,169) (3,088) (3,289) --------- --------- --------- Net loans 395,897 332,862 357,551 --------- --------- --------- Premises and equipment, net 9,644 10,532 10,330 Other assets 8,909 8,023 7,878 --------- --------- --------- Total Assets $ 548,135 $ 504,863 $ 517,468 ========= ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Noninterest-bearing demand deposits $ 45,530 $ 44,319 $ 43,334 Interest-bearing deposits: NOW, savings and money market deposits 124,370 123,100 127,819 Time deposits of $100,000 or more 98,476 80,761 86,818 Other time deposits 192,127 172,084 169,039 --------- --------- --------- Total deposits 460,503 420,264 427,010 Retail repurchase agreements 10,065 12,366 10,667 Federal Home Loan Bank advances 15,000 15,000 15,000 Federal funds purchased 3,200 - 7,735 Other liabilities 6,067 5,312 4,988 --------- --------- --------- Total Liabilities 494,835 452,942 465,400 --------- --------- --------- Shareholders' equity: Preferred stock - $10.00 par value; authorized 200,000 shares, none issued - - - Common stock - $2.50 par value; authorized 10,000,000 shares, issued shares - 5,053,529, 5,166,006 and 5,139,520 12,634 12,915 12,849 Surplus 2,786 4,248 4,131 Retained earnings 39,292 38,329 39,158 ESOP and MRP plans - (2,355) (2,092) Accumulated other comprehensive loss: Net unrealized securities losses (1,412) (1,216) (1,978) --------- --------- --------- Total Shareholders' Equity 53,300 51,921 52,068 --------- --------- --------- Total Liabilities and Shareholders' Equity $ 548,135 $ 504,863 $ 517,468 ========= ========= =========
See accompanying notes to consolidated financial statements. 1 FNB Corp. and Subsidiary CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Nine Months Ended September 30, (unaudited) September 30, (unaudited) ---------------------------- ---------------------------- 2000 1999 2000 1999 ---------- ---------- ---------- ---------- (in thousands, except per share data) Interest Income: Interest and fees on loans $ 8,885 $ 7,030 $ 25,174 $ 20,688 Interest and dividends on investment securities: Taxable income 1,579 1,603 4,710 4,776 Non-taxable income 242 243 735 746 Other interest income 28 102 259 284 ---------- ---------- ---------- ---------- Total interest income 10,734 8,978 30,878 26,494 ---------- ---------- ---------- ---------- Interest Expense: Deposits 5,088 3,773 14,036 11,200 Retail repurchase agreements 137 130 377 370 Federal Home Loan Bank advances 205 90 610 239 Federal funds purchased 15 40 67 69 ---------- ---------- ---------- ---------- Total interest expense 5,445 4,033 15,090 11,878 ---------- ---------- ---------- ---------- Net Interest Income 5,289 4,945 15,788 14,616 Provision for loan losses 160 84 1,152 302 ---------- ---------- ---------- ---------- Net Interest Income After Provision for Loan Losses 5,129 4,861 14,636 14,314 ---------- ---------- ---------- ---------- Noninterest Income: Service charges on deposit accounts 550 496 1,650 1,496 Annuity and brokerage commissions 87 100 340 375 Cardholder and merchant services income 131 120 373 322 Other service charges, commissions and fees 163 182 508 493 Other income 139 110 439 357 ---------- ---------- ---------- ---------- Total noninterest income 1,070 1,008 3,310 3,043 ---------- ---------- ---------- ---------- Noninterest Expense: Personnel expense 2,165 2,082 6,520 6,081 Net occupancy expense 230 199 639 592 Furniture and equipment expense 442 431 1,358 1,063 Data processing services 159 262 664 957 Merger related expenses - - 2,796 - Other expense 961 921 2,810 2,562 ---------- ---------- ---------- ---------- Total noninterest expense 3,957 3,895 14,787 11,255 ---------- ---------- ---------- ---------- Income Before Income Taxes 2,242 1,974 3,159 6,102 Income taxes 698 613 1,109 1,905 ---------- ---------- ---------- ---------- Net Income $ 1,544 $ 1,361 $ 2,050 $ 4,197 ========== ========== ========== ========== Net income per common share: Basic $ .31 $ .27 $ .41 $ .83 Diluted .30 .27 .40 .81 ========== ========== ========== ========== Weighted average number of shares outstanding: Basic 5,049,303 5,019,746 5,028,238 5,029,560 Diluted 5,069,131 5,133,498 5,073,207 5,159,100 ========== ========== ========== ========== Cash dividends declared per common share $ .12 $ .12 $ .36 $ .36 ========== ========== ========== ==========
See accompanying notes to consolidated financial statements. 2 FNB Corp. and Subsidiary CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME Nine Months Ended September 30, 2000 (unaudited) and September 30, 1999
ESOP Accumulated Common Stock and Other ----------------------- Retained MRP Comprehensive Shares Amount Surplus Earnings Plans Loss Total ---------- ---------- ---------- ---------- ---------- ---------- ---------- (in thousands, except share data) Balance, December 31, 1998 5,160,756 $ 12,902 $ 4,205 $ 35,763 $ (2,531) $ 51 $ 50,390 Comprehensive income: Net income - - - 4,197 - - 4,197 Other comprehensive income: Unrealized securities losses, net of income tax benefit of $654 - - - - - (1,267) (1,267) ---------- Total comprehensive income - - - - - - 2,930 ---------- Cash dividends declared - - - (1,631) - - (1,631) ESOP and MRP plan transactions - - (6) - 176 - 170 Common stock issued through: Stock option plan 5,250 13 49 - - - 62 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Balance, September 30, 1999 5,166,006 $ 12,915 $ 4,248 $ 38,329 $ (2,355) $ (1,216) $ 51,921 ========== ========== ========== ========== ========== ========== ========== Balance, December 31, 1999 5,139,520 $ 12,849 $ 4,131 $ 39,158 $ (2,092) $ (1,978) $ 52,068 Comprehensive income: Net income - - - 2,050 - - 2,050 Other comprehensive income: Unrealized securities gains, net of income taxes of $293 - - - - - 566 566 ---------- Total comprehensive income - - - - - - 2,616 ---------- Cash dividends declared - - - (1,916) - - (1,916) Cash paid for fractional shares in merger (122) - (1) - - - (1) ESOP and MRP plan transactions: Termination of plans (93,113) (233) (1,342) - 1,960 - 385 Other transactions - - (17) - 132 - 115 Common stock issued through: Dividend reinvestment plan 4,701 12 39 - - - 51 Stock option plan 9,243 23 64 - - - 87 Common stock repurchased (6,700) (17) (88) - - - (105) ---------- ---------- ---------- ---------- ---------- ---------- ---------- Balance, September 30, 2000 5,053,529 $ 12,634 $ 2,786 $ 39,292 $ - $ (1,412) $ 53,300 ========== ========== ========== ========== ========== ========== ==========
See accompanying notes to consolidated financial statements. 3 FNB Corp. and Subsidiary CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, (unaudited) ------------------------ 2000 1999 -------- -------- (in thousands) Operating Activities: Net income $ 2,050 $ 4,197 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of premises and equipment 1,145 999 Provision for loan losses 1,152 302 Deferred income taxes (281) (91) Deferred loan fees and costs, net 18 105 Premium amortization and discount accretion of investment securities, net 38 (21) ESOP and MRP plan expenses 500 170 Amortization of intangibles 11 14 Net decrease (increase) in loans held for sale (169) 5,206 Increase in other assets (1,170) (1,585) Increase in other liabilities 1,084 48 -------- -------- Net Cash Provided by Operating Activities 4,378 9,344 -------- -------- Investing Activities: Available-for-sale securities: Proceeds from sales 77 - Proceeds from maturities and calls - 12,958 Purchases (1,761) (24,458) Held-to-maturity securities: Proceeds from maturities and calls 2,418 12,415 Purchases (655) (6,502) Net increase in loans (39,079) (26,482) Proceeds from sales of premises and equipment - 2 Purchases of premises and equipment (622) (1,993) Other, net (129) 238 -------- -------- Net Cash Used in Investing Activities (39,751) (33,822) -------- -------- Financing Activities: Net increase in deposits 33,493 20,046 Increase (decrease) in retail repurchase agreements (602) 882 Increase in Federal Home Loan Bank advances - 15,000 Decrease in federal funds purchased (4,535) (4,745) Common stock issued 138 62 Common stock repurchased (105) - Cash dividends and fractional shares paid (1,860) (1,739) -------- -------- Net Cash Provided by Financing Activities 26,529 29,506 -------- -------- Net Increase (Decrease) in Cash and Cash Equivalents (8,844) 5,028 Cash and cash equivalents at beginning of period 21,923 23,253 -------- -------- Cash and Cash Equivalents at End of Period $ 13,079 $ 28,281 ======== ======== Supplemental disclosure of cash flow information: Cash paid during the period for: Interest $ 14,582 $ 12,025 Income taxes 1,448 2,254
See accompanying notes to consolidated financial statements. 4 FNB Corp. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Basis of Presentation 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 a complete line of financial services, including deposit, loan, investment and trust services, to individual and business customers primarily in the region of North Carolina that includes Chatham, Montgomery, Moore, Randolph, Richmond and Scotland counties. The accompanying consolidated financial statements, prepared without audit, include the accounts of FNB Corp. and the Bank (collectively, the "Corporation"). All significant intercompany balances and transactions have been eliminated. The results of operations of the Corporation and its subsidiary are reviewed as a single enterprise by the chief operating decision maker. All prior period financial information has been restated to include historical information for a company acquired in a transaction accounted for as a pooling of interests, as further discussed in Note 3 below. 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. In the opinion of management, the financial information furnished in this report includes all adjustments (consisting of normal recurring accruals) necessary to a fair statement of the results for the periods presented. 2. 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. 3. Merger Activity On April 10, 2000, the Corporation completed a merger for the acquisition of Carolina Fincorp, Inc. ("Carolina Fincorp"), holding company for Richmond Savings Bank, Inc., SSB ("Richmond Savings"), headquartered in Rockingham, North Carolina, in a transaction accounted for as a pooling of interests. Pursuant to the terms of the merger, each share of Carolina Fincorp common stock was converted into .79 of a share of FNB Corp. common stock, for a total issuance of 1,478,398 FNB Corp. shares. On June 26, 2000, Richmond Savings was merged into First National Bank and Trust Company. At March 31, 2000, Carolina Fincorp operated five offices through Richmond Savings and had approximately $125,943,000 in total assets, $108,848,000 in deposits and $16,332,000 in 5 shareholders' equity. Merger-related expenses of $2,796,000 were recorded in the second quarter of 2000. Upon the change in control, the Carolina Fincorp ESOP plan terminated according to its terms and unvested MRP shares became fully vested. Included in merger-related expenses were $385,000 of expense related to the termination of these plans. Additionally, approximately $450,000 of the total provision for loan losses of $835,000 in the second quarter was related to aligning the credit risk methodologies of FNB Corp. and Carolina Fincorp. Historical financial information included in these consolidated financial statements has been restated to include the account balances and results of operations of Carolina Fincorp. Separate financial information for the pooled entities for the year ended December 31, 1999 is as follows. Income statement information for Carolina Fincorp is for its fiscal year ended June 30, 1999. FNB Carolina Corp. Fincorp Combined ---------- --------- --------- (in thousands) Total assets $396,067 $121,401 $517,468 Total revenues 30,734 9,156 39,890 Net interest income 15,497 4,122 19,619 Net income 4,657 933 5,590 4. 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 reconciliation of the denominators of the basic and diluted EPS computations is as follows:
Three Months Ended Nine Months Ended September 30, September 30, ---------------------- --------------------- 2000 1999 2000 1999 ---------- --------- ---------- --------- Basic EPS denominator - Weighted average number of common shares outstanding 5,049,303 5,019,746 5,028,238 5,029,560 Dilutive share effect arising from assumed exercise of stock options and unvested MRP shares 19,828 113,752 44,969 129,540 --------- --------- --------- --------- Diluted EPS denominator 5,069,131 5,133,498 5,073,207 5,159,100 ========= ========= ========= =========
6 5. Loans Loans as presented are reduced by net deferred loan fees of $445,000, $485,000 and $426,000 at September 30, 2000, September 30, 1999 and December 31, 1999, respectively. 6. Allowance for Loan Losses Changes in the allowance for loan losses were as follows: Nine Months Ended September 30, -------------------------- 2000 1999 ------ ------- (in thousands) Balance at beginning of period $3,289 $2,954 Charge-offs 488 292 Recoveries 216 124 ------- ------ Net loan charge-offs 272 168 Provision for loan losses 1,152 302 ------- ------ Balance at end of period $4,169 $3,088 ====== ====== 7. Supplementary Income Statement Information Significant components of other expense were as follows: Three Months Ended Nine Months Ended September 30, September 30, --------------- ---------------- 2000 1999 2000 1999 ------ ------ ------ ------ (in thousands) Stationery, printing and supplies $145 $139 $385 $384 Advertising and marketing 66 121 335 287 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The purpose of this discussion and analysis is to assist in the understanding and evaluation of the financial condition, changes in financial condition and results of operations of FNB Corp. (the "Parent Company") and its wholly-owned subsidiary, First National Bank and Trust Company (the "Bank"), collectively referred to as the "Corporation". This discussion should be read in conjunction with the financial information appearing elsewhere in this report. Overview On April 10, 2000, the Corporation completed a merger for the acquisition of Carolina Fincorp, Inc. ("Carolina Fincorp"), holding company for Richmond Savings Bank, Inc., SSB ("Richmond Savings"), headquartered in Rockingham, North Carolina, in a transaction accounted for as a pooling of interests. Pursuant to the terms of the merger, each share of Carolina Fincorp common stock was converted into .79 of a share of FNB Corp. common stock, for a total issuance of 1,478,398 FNB Corp. shares. On June 26, 2000, Richmond Savings was merged into First National Bank and Trust Company. At March 31, 2000, Carolina Fincorp operated five offices through Richmond Savings and had approximately $125,943,000 in total assets, $108,848,000 in deposits and $16,332,000 in shareholders' equity. Merger-related expenses of $2,796,000 were recorded in the second quarter of 2000. Upon the change in control, the Carolina Fincorp ESOP plan terminated according to its terms and unvested MRP shares became fully vested. Included in merger-related expenses were $385,000 of expense related to the termination of these plans. Additionally, approximately $450,000 of the total provision for loan losses of $835,000 in the second quarter was related to aligning the credit risk methodologies of FNB Corp. and Carolina Fincorp. Historical financial information included in the consolidated financial statements has been restated to include the account balances and results of operations of Carolina Fincorp. The Corporation earned $2,050,000 in the first nine months of 2000, a 51.2% decrease from the same period in 1999. Basic earnings per share decreased from $.83 to $.41 in comparing these nine-month periods and diluted earnings per share decreased from $.81 to $.40. For the 2000 third quarter, earnings amounted to $1,544,000, which represents a 13.4% increase from the 1999 third quarter and a gain in basic earnings per share from $.27 to $.31 and in diluted earnings per share from $.27 to $.30. Total assets were $548,135,000 at September 30, 2000, up 8.6% from September 30, 1999 and 5.9% from December 31, 1999. Loans amounted to $400,066,000 at September 30, 2000, increasing 19.1% from September 30, 1999 and 10.9% from December 31, 1999. Total deposits grew 9.6% from September 30, 1999 and 7.8% from December 31, 1999 to $460,503,000 at September 30, 2000. Excluding $2,338,000 in after-tax charges associated with the merger, which includes the $450,000 provision for loan losses discussed above, net income for the nine months ended September 30, 2000 amounted to $4,388,000, a 4.6% increase over the same period in 1999, with basic and diluted earnings per share amounts of $.87 and $.86, respectively. The third quarter of 2000 was not impacted by the merger-related charges. Earnings Review After exclusion of after-tax, merger-related charges of $2,338,000 recorded in the second quarter of 2000 and associated with the merger with Carolina Fincorp as discussed in the "Overview", the Corporation's net income increased $191,000 or 4.6% in the first nine months of 2000 compared to the same period of 1999 8 and increased $183,000 or 13.4% in comparing third quarter periods. Earnings were positively impacted in the first nine months of 2000 by increases of $1,172,000 or 8.0% in net interest income and $267,000 in noninterest income. These gains were significantly offset, however, by an increase of $736,000 in noninterest expense and by an increase of $400,000 in the provision for loan losses. The positive impact on 2000 third quarter earnings from increases of $344,000 or 7.0% in net interest income and $62,000 in noninterest income was partially offset by the effect of a $62,000 increase in noninterest expense and a $76,000 increase in the provision for loan losses. Results for the first nine months of 2000 were negatively affected by a special group medical insurance assessment of $176,000 recorded in the second quarter, the effect of which was only partially offset by a $76,000 gain on the sale of an investment recorded in the same quarter. On an annualized basis and excluding the charges associated with the merger, return on average assets decreased from 1.16% in the first nine months of 1999 to 1.09% in the first nine months of 2000. Return on average shareholders' equity increased from 10.89% to 11.04% in comparing the same periods. In comparing third quarter periods, return on average assets increased from 1.11% to 1.14% and return on average shareholders' equity increased from 10.54% to 11.71%. 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 $15,788,000 in the first nine months of 2000 compared to $14,616,000 in the same period of 1999. This increase of $1,172,000 or 8.0% resulted primarily from a 12.1% increase in the level of average earning assets, the effect of which was partially offset by a decline in the net yield on earning assets, or net interest margin, from 4.52% in the first nine months of 1999 to 4.34% in the same period of 2000. In comparing third quarter periods, net interest income increased $344,000 or 7.0% reflecting a 11.3% increase in average earning assets and a decline in the net interest margin from 4.49% to 4.29%. On a taxable equivalent basis, the increases in net interest income in the first nine months and third quarter of 2000 were $1,151,000 and $336,000, respectively, reflecting changes in the relative mix of taxable and non-taxable earning assets. Table 1 on page 18 and Table 2 on page 19 set forth for the periods indicated information with respect to the Corporation's average balances of assets and liabilities, as well as the total dollar amounts of interest income (taxable equivalent basis) from earning assets and interest expense on interest-bearing liabilities, resultant rates earned or paid, net interest income, net interest spread and net yield on earning assets. Net interest spread refers to the difference between the average yield on earning assets and the average rate paid on interest-bearing liabilities. Net yield on earning assets, or net interest margin, refers to net interest income divided by average earning assets and is influenced by the level and relative mix of earning assets and interest-bearing liabilities. Changes in net interest income on a taxable equivalent basis, as measured by volume and rate variances, are also analyzed in Tables 1 and 2. Volume refers to the average dollar level of earning assets and interest-bearing liabilities. Changes in the net interest margin and net interest spread tend to correlate with movements in the prime rate of interest. There are variations, however, in the degree and timing of rate changes, compared to prime, for the different types of earning assets and interest-bearing liabilities. 9 The prime rate of interest has been relatively stable in recent years, averaging 7.99%, 8.37% and 8.44% in 1999, 1998 and 1997, respectively. This general stability has tended to apply to the interest rates both earned and paid by the Bank. During the last three months of 1998, however, a significant change occurred in the prime rate when the Federal Reserve took action on the level of interest rates in response to the downturn of the economies of certain Asian and Latin American countries and the effects or potential effects of those downturns on the U.S. economy. In rapid succession, three 25 basis point cuts were recorded in the prime rate, lowering it from 8.50% to 7.75%. This decrease in the prime rate, through the effect on the average total yield on earning assets, tended to negatively impact the Corporation's net interest margin and net interest spread. Due to subsequent concern about inflationary pressures that appeared to be building in the U.S. economy, the Federal Reserve elected to raise the level of interest rates in the third and fourth quarters of 1999, resulting in three 25 basis point increases in the prime rate that increased it from 7.75% to 8.50%, thereby effectively reversing the rate reductions that occurred in 1998. Continued concerns about possible inflationary pressures caused the Federal Reserve to further raise the level of interest rates in the first six months of 2000, resulting in two additional 25 basis point increases and one 50 basis point increase in the prime rate that raised it to the 9.50% level. While the Corporation has tended to see some improvement in the average total yield on earning assets due to the prime rate increases, the average rate paid on interest-bearing liabilities has increased by a greater amount, which has further negatively impacted the net interest margin and interest spread. Following the reductions in late 1998 and two subsequent increases in the third quarter of 1999, the prime rate averaged 7.87% in the first nine months of 1999. Those third quarter increases coupled with increases subsequent thereto resulted in an average prime rate of 9.12% in the first nine months of 2000. The prime rate averaged 9.50% in the third quarter of 2000 compared to 8.07% in the 1999 third quarter. The net interest spread, in comparing nine-month periods, declined by 23 basis points from 3.84% in 1999 to 3.61% in 2000, reflecting the effect of an increase in the average total yield on earning assets that was more than offset by an increase in the average rate paid on interest-bearing liabilities, or cost of funds. The yield on earning assets increased by 27 basis points from 8.02% in 1999 to 8.29% in 2000, while the cost of funds increased by 50 basis points from 4.18% to 4.68%. In comparing third quarter periods, the net interest spread declined by 30 basis points from 3.83% to 3.53%, as the yield on earning assets increased by 54 basis points while the cost of funds increased by 84 basis points. Provision for Loan Losses This provision is the charge against earnings to provide an allowance or reserve for probable losses inherent in the loan portfolio. The amount of each period's charge is affected by several considerations including management's evaluation of various risk factors in determining the adequacy of the allowance (see "Asset Quality"), actual loan loss experience and loan portfolio growth. Earnings were negatively impacted in 2000 by provisions of $1,152,000 for the first nine months, $835,000 for the second quarter and $160,000 for the third quarter compared to 1999 provisions of $302,000, $119,000 and $84,000, respectively. Approximately $450,000 of the provision for the second quarter of 2000 was merger related as discussed below, while the remainder resulted from additional loan writedowns and charge-offs taken in the same quarter as completion of the merger transaction. The allowance for loan losses, as a percentage of loans outstanding and reflecting the restatement of historical information for the merger, amounted to 1.04% at September 30, 2000, 0.92% at September 30, 1999 and 0.91% at December 31, 1999. On a pre-merger basis, the allowance percentage was 1.04% at 10 September 30, 1999 and 1.04% at December 31, 1999. The increase in the allowance percentage on the restated basis at September 30, 2000 resulted primarily from the provision component of approximately $450,000 for the second quarter of 2000 to align the credit risk metholodogies of FNB Corp. and Carolina Fincorp. Noninterest Income Noninterest income for the first nine months and third quarter of 2000 increased $267,000 or 8.8% and $62,000 or 6.2%, respectively, compared to the same periods in 1999, reflecting in part the general increase in the volume of business. The increase in service charges on deposit accounts in comparing nine-month periods was primarily due to the selected increases in service charge rates that became effective in the 1999 first quarter and to improved fee collection efforts, the latter factor significantly relating to the increase in comparing third quarter periods. Other income was higher in the first nine months of 2000 due largely to a $76,000 gain on the sale of an investment recorded in the second quarter. Reflecting reduced mortgage loan activity in 2000, gains on loan sales, included in other income, were lower than in 1999. Noninterest Expense Excluding merger-related expenses of $2,796,000 recorded in the second quarter of 2000, noninterest expense was $736,000 or 6.5% higher in the first nine months of 2000 compared to the same period in 1999 and for the third quarter was $62,000 or 1.6% higher, due largely to increased personnel expense, a higher level of advertising and marketing expense and the continuing effects of inflation. The level of noninterest expense was further affected by the opening of a new branch office in August 1999 (see "Business Development Matters"). The components of noninterest expense were affected by the major data processing conversion completed in the first quarter of 1999, which conversion ultimately resulted in a major reduction in the cost of data processing services provided by outside processors. The cost of outside data processing services for Richmond Savings continued until its merger into First National Bank and Trust Company on June 26, 2000. Personnel expense was impacted by increased staffing requirements, especially as related to the data processing conversion and to the opening of the new branch office, and by normal salary adjustments. Personnel expense was further negatively affected in 2000 by a special group medical insurance assessment of $176,000 in the second quarter. Additionally, group medical insurance rates were increased approximately 39% in the 2000 second quarter. Furniture and equipment expense increased largely as a result of the data processing conversion, especially for depreciation and maintenance charges. Advertising and marketing expense, included in other expense, increased $48,000 in the first nine months of 2000 due primarily to an increased level of expenditures related to the major marketing plan centered around the "YES YOU CAN, YES WE CAN(R)" program, although such expense did decline $55,000 in the 2000 third quarter compared to the same period in 1999. The major data processing conversion from a service bureau arrangement to an in-house basis, completed on March 26, 1999 and discussed in "Business Development Matters", significantly affected operating results for the 1999 first quarter. The cost of data processing services in the 1999 first quarter was impacted by the higher rate charged by the service bureau on a month-to-month basis, subsequent to the termination of the prior long-term agreement in late 1998. Also, personnel expense was negatively affected by the staffing and training requirements that were preliminary to the implementation of the new system. 11 Subsequent to the 1999 first quarter, the total cost related to data processing operations on an in-house basis compares favorably to the cost that was being experienced under the service bureau arrangement prior to the start of the conversion process in the 1998 fourth quarter. Noninterest expense components are being significantly affected, however, as there is a major decrease in the direct cost of data processing services, but increases in the levels of personnel expense and furniture and equipment expense. Income Taxes The effective income tax rate increased from 31.2% in the first nine months of 1999 to 35.1% in the same period of 2000 due principally to the expected nondeductibility of certain merger-related expenses. 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 $65,700,000 line of credit established at the Federal Home Loan Bank, less existing advances against that line, 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. 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 primarily on a core of local deposits and the Bank's capital position. To date, the steady increase in deposits, retail repurchase agreements and capital, supplemented by Federal Home Loan Bank advances, has been adequate to fund loan demand in the Bank's market area, while maintaining the desired level of immediate liquidity and a substantial investment securities portfolio available for both immediate and secondary liquidity purposes. Asset/Liability Management and Interest Rate Senstivity One of the primary objectives of asset/liability management is to maximize net interest margin while minimizing the earnings risk associated with changes in interest rates. One method used to manage interest rate sensitivity is to measure, over various time periods, the interest rate sensitivity positions, or gaps; however, this method addresses only the magnitude of timing differences and does not address earnings or market value. Therefore, management uses an earnings simulation model to prepare, on a regular basis, earnings projections based on a range of interest rate scenarios in order to more accurately measure interest rate risk. The Bank's balance sheet was liability-sensitive at September 30, 2000. A liability-sensitive position means that in gap measurement periods of one year or less there are more liabilities than assets subject to immediate repricing as market rates change. Because immediately rate sensitive interest-bearing liabilities exceed rate sensitive assets, the earnings position could improve in a declining rate environment and could deteriorate in a rising rate environment, depending on the correlation of rate changes in these two categories. 12 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. 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 1, Tier 2 and Tier 3, 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 1 capital consists primarily of common shareholders' equity and qualifying perpetual preferred stock, net of goodwill and other disallowed intangible assets. Tier 2 capital, which is limited to the total of Tier 1 capital, includes allowable amounts of subordinated debt, mandatory convertible debt, preferred stock and the allowance for loan losses. Tier 3 capital, applicable only to financial institutions subject to certain market risk capital guidelines, is capital allocated to support the market risk related to a financial institution's ongoing trading activities. At September 30, 2000, FNB Corp. and the Bank were not subject to the market risk capital guidelines and, accordingly, had no Tier 3 capital allocation. Total capital, for risk-based purposes, consists of the sum of Tier 1, Tier 2 and Tier 3 capital. Under current requirements, the minimum total capital ratio is 8.00% and the minimum Tier 1 capital ratio is 4.00%. At September 30, 2000, FNB Corp. and the Bank had total capital ratios of 15.51% and 15.04%, respectively, and Tier 1 capital ratios of 14.41% and 13.94%. The leverage capital ratio, which serves as a minimum capital standard, considers Tier 1 capital only and is expressed as a percentage of average total assets for the most recent quarter, after reduction of those assets for goodwill and other disallowed intangible assets at the measurement date. As currently required, the minimum leverage capital ratio is 4.00%. At September 30, 2000, FNB Corp. and the Bank had leverage capital ratios of 10.06% and 9.73%, 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 1 capital of 6.00% and for leverage capital of 5.00%. As noted above, the Bank met all of those ratio requirements at September 30, 2000 and, accordingly, is well-capitalized under the regulatory framework for prompt corrective action. Balance Sheet Review Restated to reflect the merger with Carolina Fincorp as discussed in the "Overview", total assets at September 30, 2000 were higher than at September 30, 1999 and December 31, 1999 by $43,272,000 or 8.6% and $30,667,000 or 5.9%, respectively; deposits were ahead by $40,239,000 or 9.6% and $33,493,000 or 7.8%. The level of funds provided by retail repurchase agreements at September 30, 2000 had decreased by $2,301,000 or 18.6% from September 30, 1999 and by $602,000 or 5.6% from December 31, 1999. Average assets increased 11.1% in the first nine months of 2000 compared to the same period in 1999, while average deposits increased 11.2%, the third quarter increases being 10.2% and 11.0%, respectively. 13 Investment Securities Additions to the investment securities portfolio depend to a large extent on the availability of investable funds that are not otherwise needed to satisfy loan demand. During the twelve-month period ended September 30, 2000, when the growth in loans exceeded that for total assets, the level of investment securities was reduced $4,559,000 or 3.6%, with a net increase of $820,000 or 0.7% occurring in the first nine months of 2000. 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 September 30, 2000. Loans The Corporation's primary source of revenue and largest component of earning assets is the loan portfolio. Loans increased $64,116,000 or 19.1% during the twelve-month period ended September 30, 2000. The net loan increase during the first nine months of 2000 was $39,226,000 or 10.9%. Average loans were $56,546,000 or 17.5% higher in the first nine months of 2000 than in the same period of 1999. The ratio of average loans to average deposits, in comparing nine-month periods increased from 80.1% in 1999 to 84.7% in 2000. The ratio of loans to deposits at September 30, 2000 was 86.9%. The commercial and agricultural loan portfolio has experienced strong gains during both the twelve-month period ended September 30, 2000 and the first nine months of 2000. The 1-4 family residential mortgage loan portfolio has also gained significantly during these periods. Lease financing contracts, a new loan product in 1999, have further added to the balance of the total loan portfolio. Loan growth and the composition of the loan portfolio are being affected by management's decision in March 1996 to discontinue the purchase of retail installment loan contracts from automobile and equipment dealers (see "Business Development Matters"). The outstanding balance of these loan contracts, which are primarily included in consumer loans, experienced a net decrease of $784,000 during the twelve-month period ended September 30, 2000. Total consumer loans declined during that period. 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. For loans determined to be impaired, the allowance 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 loans. 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. The unallocated portion of the allowance for loan losses represents management's estimate of the appropriate level of reserve to provide for probable losses inherent in the loan portfolio. Considerations in determining the unallocated portion of the allowance for loan losses include general economic and lending trends and other factors. 14 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. The following table presents an analysis of the changes in the allowance for loan losses. Nine Months Ended September 30, ------------------- 2000 1999 ------ ------ (in thousands) Balance at beginning of period $3,289 $2,954 Charge-offs 488 292 Recoveries 216 124 ------ ------ Net loan charge-offs 272 168 Provision for loan losses 1,152 302 ------ ------ Balance at end of period $4,169 $3,088 ====== ====== At September 30, 2000, the Bank had impaired loans with two borrowers which totaled $315,000 and were also on nonaccrual status. At September 30, 2000, nonperforming loans were $2,068,000 in total, nonaccrual loans and accruing loans past due 90 days or more amounting to $791,000 and $1,277,000, respectively. At September 30, 1999, nonperforming loans were $1,332,000 in total, nonaccrual loans and accruing loans past due 90 days or more amounting to $939,000 and $393,000, respectively 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. Time deposits, largely reflecting the effect of promotions for premium-rate certificates of deposit, accounted for $37,758,000 of total deposit growth of $40,239,000 during the twelve-month period ended September 30, 2000 and, due to a net increase of $34,746,000, exceeded total deposit growth of $33,493,000 during the first nine months of 2000. Further, the level of time deposits obtained from governmental units fluctuates, amounting to $44,506,000, $32,512,000 and $38,529,000 at September 30, 2000, September 30, 1999 and December 31, 1999, respectively. Business Development Matters As discussed in the "Overview" and in Note 3 to Consolidated Financial Statements, the Corporation completed a merger in the second quarter of 2000 for the acquisition of Carolina Fincorp, holding company for Richmond Savings, headquartered in Rockingham, North Carolina. 15 Prior to March 26, 1999, the Bank's data processing, item capture and statement rendering operations were outsourced under a service bureau arrangement. Commencing in the 1998 fourth quarter, the Bank began the process of converting these operations to an in-house basis. Conversion to the replacement systems occurred on March 26, 1999. Richmond Savings, however, was on a service bureau arrangement until its merger into the Bank on June 26, 2000. The total capital expenditure outlay for hardware and software amounted to approximately $1,700,000, of which approximately one-half was recorded in 1998 and the remainder in 1999. In addition to capital expenditures for the new system, the Bank incurred certain expenses in 1998, totaling approximately $302,000, related to deconversion from the prior arrangement. In the 1998 fourth quarter, the Bank received regulatory approval for establishment of a new branch office in Trinity, North Carolina. Construction of the permanent Trinity facility is expected to be complete in 2001, resulting in a total capital outlay of approximately $1,000,000, of which approximately one-third was recorded in 1998 related to the purchase of land. Prior to completion of the permanent facility, a temporary mobile office, which opened in August 1999, is being operated at this site. 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 September 30, 2000, September 30, 1999 and December 31, 1999 amounted to $571,000, $1,355,000 and $963,000, 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. Accounting Pronouncement Issues In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133 establishes accounting and reporting standards for derivative instruments and for hedging activities. This statement, as amended by SFAS No. 137 and No. 138, is effective for the Corporation beginning October 1, 2000, without any significant impact expected on the consolidated financial statements as the Corporation does not have any significant derivative financial instruments and is not involved in any hedging activities. The FASB has also issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, a replacement of FASB Statement No. 125". SFAS No. 140 revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures, but it carries over most of SFAS No. 125's provisions without reconsideration. This statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. This Statement is not expected to materially impact the Corporation. Cautionary Statement for Purpose of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995 The statements contained in this Quarterly Report on Form 10-Q that are not historical facts are forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995), which can be identified by the use of forward-looking terminology such as "believes", "expects", "plans", 16 "projects", "goals", "estimates", "may", "could", "should", or "anticipates" or the negative thereof or other variations thereon of comparable terminology, or by discussions of strategy that involve risks and uncertainties. In addition, from time to time, the Corporation or its representatives have made or may make forward-looking statements, orally or in writing. Such forward-looking statements may be included in, but are not limited to, various filings made by the Corporation with the Securities and Exchange Commission, or press releases or oral statements made by or with the approval of an authorized executive officer of the Corporation. Forward-looking statements are based on management's current views and assumptions and involve risks and uncertainties that could significantly affect expected results. The Corporation wishes to caution the reader that factors, such as those listed below, in some cases have affected and could affect the Corporation's actual results, causing actual results to differ materially from those in any forward-looking statement. These factors include: (i) expected cost savings from the merger completed with Carolina Fincorp in the second quarter of 2000 may not materialize, (ii) the Corporation may experience greater than expected deposit attrition, customer loss, or revenue loss in connection with the merger, (iii) competitive pressure in the banking industry or in the Corporation's markets may increase significantly, (iv) changes in the interest rate environment may reduce margins, (v) general economic conditions, either nationally or regionally, may be less favorable than expected, resulting in, among other things, credit quality deterioration, (vi) changes may occur in banking legislation and in the environment, (vii) changes may occur in general business conditions and inflation and (viii) changes may occur in the securities markets. Readers should also consider information on risks and uncertainties contained in the discussions of competition, supervision and regulation, and effect of governmental policies contained in the Corporation's most recent Annual Report on Form 10-K. 17 Table 1 Average Balances and Net Interest Income Analysis
NINE MONTHS ENDED SEPTEMBER 30 2000 1999 ---------------------------------- -------------------------------- Average Average Interest Rates Interest Rates Average Income/ Earned/ Average Income/ Earned/ Balance Expense Paid Balance Expense Paid ------- ------ ---- ------- ------- ---- (Taxable Equivalent Basis, Dollars in Thousands) Earning Assets Loans (2) (3) $380,240 $ 25,211 8.83% $323,694 $ 20,720 8.55% Investment securities (2): Taxable income 103,208 5,042 6.51 102,646 5,119 6.65 Non-taxable income 19,667 1,132 7.67 19,866 1,158 7.77 Other earning assets 5,871 259 5.87 7,884 284 4.82 ------- ------ ---- ------- ------ ---- Total earning assets 508,986 31,644 8.29 454,090 27,281 8.02 ------- ------ ---- ------- ------ ---- Cash and due from banks 14,225 14,605 Other assets, net 11,909 12,931 -------- -------- Total Assets $535,120 $481,626 ======== ======== Interest-Bearing Liabilities Interest-bearing deposits: NOW accounts $ 57,325 692 1.61 $ 54,719 622 1.52 Savings deposits 36,247 652 2.39 37,816 647 2.29 Money market accounts 34,550 1,070 4.13 31,203 839 3.60 Certificates and other time deposits 274,169 11,622 5.65 235,223 9,092 5.17 Retail repurchase agreements 10,997 377 4.57 12,935 370 3.83 Federal Home Loan Bank advances 15,237 610 5.33 6,399 239 4.99 Federal funds purchased 1,373 67 6.44 1,752 69 5.24 ------- ------ ---- ------- ------ ---- Total interest-bearing liabilities 429,898 15,090 4.68 380,047 11,878 4.18 ------- ------ ---- ------- ------ ---- Noninterest-bearing demand deposits 46,850 44,974 Other liabilities 5,365 5,236 Shareholders' equity 53,007 51,369 -------- -------- Total Liabilities and Shareholders' Equity $535,120 $481,626 ======== ======== Net Interest Income and Spread $ 16,554 3.61% $ 15,403 3.84% ======== ==== ======== ==== Net Yield on Earning Assets 4.34% 4.52% ==== ==== NINE MONTHS ENDED SEPTEMBER 30 2000 Versus 1999 -------------------------------- Interest Variance due to (1) ------------------- Net Volume Rate Change ------- ----- ------ (Taxable Equivalent Basis, Dollars in Thousands) Earning Assets Loans (2) (3) $ 3,781 $ 710 $ 4,491 Investment securities (2): Taxable income 29 (106) (77) Non-taxable income (11) (15) (26) Other earning assets (80) 55 (25) ----- ----- ----- Total earning assets 3,719 644 4,363 ----- ----- ----- Cash and due from banks Other assets, net Total Assets Interest-Bearing Liabilities Interest-bearing deposits: NOW accounts 31 39 70 Savings deposits (25) 30 5 Money market accounts 97 134 231 Certificates and other time deposits 1,620 910 2,530 Retail repurchase agreements (59) 66 7 Federal Home Loan Bank advances 354 17 371 Federal funds purchased (16) 14 (2) ----- ----- ----- Total interest-bearing liabilities 2,002 1,210 3,212 ----- ----- ----- Noninterest-bearing demand deposits Other liabilities Shareholders' equity Total Liabilities and Shareholders' Equity Net Interest Income and Spread $ 1,717 $ (566) $ 1,151 ======= ======== ======== Net Yield on Earning Assets (1) The mix variance, not separately stated, has been proportionally allocated to the rate and volume variances based on their absolute dollar amount. (2) Interest income and yields related to certain investment securities and loans exempt from both federal and state income tax or from state income tax alone are stated on a fully taxable equivalent basis, assuming a 34% federal tax rate and applicable state tax rate, reduced by the nondeductible portion of interest expense. (3) Nonaccrual loans are included in the average loan balance. Loan fees and the incremental direct costs associated with making loans are deferred and subsequently recognized over the life of the loan as an adjustment of interest income.
18 Table 2 Average Balances and Net Interest Income Analysis
THREE MONTHS ENDED SEPTEMBER 30 2000 1999 ---------------------------------- -------------------------------- Average Average Interest Rates Interest Rates Average Income/ Earned/ Average Income/ Earned/ Balance Expense Paid Balance Expense Paid ------- ------ ---- ------- ------- ---- (Taxable Equivalent Basis, Dollars in Thousands) Earning Assets Loans (2) (3) $391,876 $ 8,897 9.03% $329,924 $ 7,042 8.49% Investment securities (2): Taxable income 103,473 1,690 6.54 105,482 1,718 6.52 Non-taxable income 19,374 373 7.68 19,634 378 7.70 Other earning assets 1,681 28 6.55 8,915 102 4.54 ------- ----- ---- ------- ----- ---- Total earning assets 516,404 10,988 8.47 463,955 9,240 7.93 ------- ----- ---- ------- ----- ---- Cash and due from banks 12,981 14,340 Other assets, net 11,763 12,586 -------- -------- Total Assets $541,148 $490,881 ======== ======== Interest-Bearing Liabilities Interest-bearing deposits: NOW accounts $ 55,902 227 1.61 $ 55,216 200 1.44 Savings deposits 35,446 193 2.16 37,419 206 2.18 Money market accounts 34,690 382 4.37 32,423 298 3.65 Certificates and other time deposits 283,702 4,286 5.99 241,620 3,069 5.04 Retail repurchase agreements 11,205 137 4.85 13,370 130 3.88 Federal Home Loan Bank advances 15,000 205 5.42 7,119 90 4.99 Federal funds purchased 789 15 6.98 2,875 40 5.51 ------- ----- ---- ------- ----- ---- Total interest-bearing liabilities 436,734 5,445 4.94 390,042 4,033 4.10 ------- ----- ---- ------- ----- ---- Noninterest-bearing demand deposits 46,204 44,140 Other liabilities 5,454 5,059 Shareholders' equity 52,756 51,640 -------- -------- Total Liabilities and Shareholders' Equity $541,148 $490,881 ======== ======== Net Interest Income and Spread $ 5,543 3.53% $ 5,207 3.83% ======== ==== ======== ==== Net Yield on Earning Assets 4.29% 4.49% ==== ==== THREE MONTHS ENDED SEPTEMBER 30 2000 Versus 1999 -------------------------------- Interest Variance due to (1) ------------------- Net Volume Rate Change ------- ----- ------ (Taxable Equivalent Basis, Dollars in Thousands) Earning Assets Loans (2) (3) $1,385 $ 470 $ 1,855 Investment securities (2): Taxable income (33) 5 (28) Non-taxable income (4) (1) (5) Other earning assets (106) 32 (74) --- --- ----- Total earning assets 1,242 506 1,748 --- --- ----- Cash and due from banks Other assets, net Total Assets Interest-Bearing Liabilities Interest-bearing deposits: NOW accounts 3 24 27 Savings deposits (11) (2) (13) Money market accounts 22 62 84 Certificates and other time deposits 584 633 1,217 Retail repurchase agreements (23) 30 7 Federal Home Loan Bank advances 107 8 115 Federal funds purchased (34) 9 (25) --- --- ----- Total interest-bearing liabilities 648 764 1,412 --- --- ----- Noninterest-bearing demand deposits Other liabilities Shareholders' equity Total Liabilities and Shareholders' Equity Net Interest Income and Spread $ 594 $ (258) $ 336 ====== ======== ======== Net Yield on Earning Assets
(1) The mix variance, not separately stated, has been proportionally allocated to the rate and volume variances based on their absolute dollar amount. (2) Interest income and yields related to certain investment securities and loans exempt from both federal and state income tax or from state income tax alone are stated on a fully taxable equivalent basis, assuming a 34% federal tax rate and applicable state tax rate, reduced by the nondeductible portion of interest expense. (3) Nonaccrual loans are included in the average loan balance. Loan fees and the incremental direct costs associated with making loans are deferred and subsequently recognized over the life of the loan as an adjustment of interest income. 19 Item 3. Quantitative and Qualitative Disclosures about Market Risk Market risk reflects the risk of economic loss resulting from adverse changes in market 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 above in Item 2 "Management's Discussion and Analysis of Financial Condition and Results of Operations" under the heading "Asset/Liability Management and Interest Rate Sensitivity". Management does not believe there has been any significant change in the overall analysis of financial instruments considered market risk sensitive, as measured by the factors of contractual maturities, average interest rates and estimated fair values, since the analysis prepared and presented in conjunction with the Form 10-K Annual Report for the fiscal year ended December 31, 1999. A merger acquisition in the second quarter of 2000, discussed in Note 3 to Consolidated Financial Statements in Item 1 above, is not considered to have materially impacted the Bank's market risk. 20 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits. Exhibits to this report are listed in the index to exhibits on pages 22 and 23 of this report. (b) Reports on Form 8-K. No reports on Form 8-K were filed during the quarter ended September 30, 2000 ----------------------------------------------- SIGNATURES In accordance with the requirements of the Securities Exchange Act of 1934, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FNB Corp. (Registrant) Date: November 13, 2000 By: /s/ Jerry A. Little ----------------------------- Jerry A. Little Treasurer and Secretary (Principal Financial and Accounting Officer) 21 INDEX TO EXHIBITS Exhibit No. Description of Exhibit - ----------- ---------------------- 2.10 Amended and Restated Agreement and Plan of Merger by and between FNB Corp. and Carolina Fincorp, Inc., dated as of December 28, 1999, incorporated herein by reference to Exhibit 2.10 to the Registrant's Form S-4 Registration Statement (No. 333-93869) filed December 30, 1999. 2.11 Stock Option Agreement issued by Carolina Fincorp, Inc. to FNB Corp., dated as of October 16, 1999, incorporated herein by reference to Exhibit 2.11 to the Registrant's Form S-4 Registration Statement (No, 333-93869) filed December 30, 1999. 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 June 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. 3.12 Articles of Amendment to Articles of Incorporation of the Registrant, adopted May 12, 1998, incorporated herein by reference to Exhibit 3.12 to the Registrant's Form 10-Q Quarterly Report for the quarter ended June 30, 1998. 3.20 Amended and Restated Bylaws of the Registrant, adopted May 21, 1998, incorporated herein by reference to Exhibit 3.20 to the Registrant's Form 10-Q Quarterly Report for the quarter ended June 30, 1998. 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. 22 Exhibit No. Description of Exhibit - ----------- ---------------------- 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 Stock Compensation Plan, as amended, effective May 12, 1998, incorporated herein by reference to Exhibit 10.30 the Registrant's Form 10-Q Quarterly Report for the quarter ended June 30, 1998. 10.21 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. 10.22 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. 10.30 Copy of Employment Agreement dated as of December 27, 1995 between First National Bank and Trust Company and Michael C. Miller, incorporated herein by reference to Exhibit 10.50 to the Registrant's Form 10-KSB Annual Report for the fiscal year ended December 31, 1995. 27.10 Financial Data Schedule for the nine months ended September 30, 2000. 27.20 Restated Financial Data Schedule for the nine months ended September 30, 1999. 23 EX-27.1 2 0002.txt FINANCIAL DATA SCHEDULE
9 THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-2000 SEP-30-2000 12,926 71 82 0 63,683 56,923 0 400,066 4,169 548,135 460,503 13,265 6,067 15,000 0 0 12,634 40,666 548,135 25,174 5,445 259 30,878 14,036 15,090 15,788 1,152 76 14,787 3,159 3,159 0 0 2,050 .41 .40 4.14 791 1,277 0 0 3,289 488 216 4,169 3,734 0 435
EX-27.2 3 0003.txt FINANCIAL DATA CORPORATION
9 THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1999 SEP-30-1999 12,039 9,242 7,000 0 65,631 59,534 0 335,950 3,088 504,863 420,264 12,366 5,312 15,000 0 0 12,915 39,006 504,863 20,688 5,522 284 26,494 11,200 11,878 14,616 302 0 11,255 6,102 6,102 0 0 4,197 .83 .81 4.29 939 393 0 0 2,954 292 124 3,088 2,792 0 296
-----END PRIVACY-ENHANCED MESSAGE-----