-----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, V0qYtZZG5WPLBy+9s1abXYIUwzrOQZD0Kqi3HCfOeB5nQRCRYiQulDY/VUTz2XIS ouSriR+E12PfFJOlVtFkHQ== 0000950168-01-000694.txt : 20010409 0000950168-01-000694.hdr.sgml : 20010409 ACCESSION NUMBER: 0000950168-01-000694 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010402 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: 1590321 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-K 1 0001.txt FORM 10-K FOR FNB CORP. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------ FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 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) 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 this Form 10-K. [X] As of March 22, 2001, the Registrant had 5,065,942 shares of $2.50 par value common stock outstanding. 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 $56,730,000. Portions of the Proxy Statement of the Registrant for the Annual Meeting of Shareholders to be held on May 8, 2001 are incorporated by reference in Part III of this report.
CROSS REFERENCE INDEX Page ---- Part I Item 1 Business Item 2 Properties Item 3 Legal Proceedings Not applicable. Item 4 Submission of Matters to a Vote of Security Holders Not applicable. Part II Item 5 Market for the Registrant's Common Equity and Related Stockholder Matters Item 6 Selected Financial Data Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations Item 7A Quantitative and Qualitative Disclosures about Market Risk Item 8 Financial Statements and Supplementary Data Independent Auditors' Report Consolidated Balance Sheets at December 31, 2000 and 1999 Consolidated Statements of Income for each of the years in the three-year period ended December 31, 2000 Consolidated Statements of Shareholders' Equity and Comprehensive Income for each of the years in the three-year period ended December 31, 2000 Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 2000 Notes to Consolidated Financial Statements Quarterly Financial Data for 2000 and 1999 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable. Page ---- Part III Item 10 Directors and Executive Officers of the Registrant * Item 11 Executive Compensation * Item 12 Security Ownership of Certain Beneficial Owners and Management * Item 13 Certain Relationships and Related Transactions * Part IV Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a)(1) Financial Statements (See Item 8 for reference). (2) Financial Statement Schedules normally required on Form 10-K are omitted since they are not applicable. (3) Exhibits have been filed separately with the Commission and are available upon written request. (b) Reports on Form 8-K (None were filed during the last quarter of the period covered by this Form 10-K).
- ------------- * Information called for by Part III is incorporated herein by reference to portions of the Registrant's Proxy Statement for the 2001 Annual Meeting of Shareholders, as follows: Item 10 - See information that appears under the headings "Election of Directors" and "Executive Officers". Item 11 - See information that appears under the heading "Executive Compensation". Item 12 - See information that appears under the headings "Voting Securities Outstanding and Principal Shareholders" and "Security Ownership of Management". Item 13 - See information that appears under the heading "Indebtedness of Officers and Directors". BUSINESS General 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 Chatham, Montgomery, Moore, Randolph, Richmond and Scotland counties in North Carolina. Four offices, including the main office, are located in Asheboro. Additional community offices are located in Archdale (two offices), Biscoe, Ellerbe, Laurinburg, Ramseur, Randleman, Rockingham (two offices), Seagrove, Siler City, Southern Pines and Trinity. Some of the major banking services offered include regular checking accounts, interest checking 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, debit cards, credit cards and loans, both secured and unsecured, for business, agricultural and personal use. Other services offered include internet banking, cash management, investment and trust services. The Bank also has automated teller machines and is a member of Plus, a national teller machine network, and Star, a regional network. 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. In connection with the merger of the Bank with Richmond Savings, the Bank acquired a financial subsidiary, Richmond Investment Services, Inc., which changed its name after the acquisition to First National Investor Services, Inc. This financial subsidiary acts as an agent in the sale of annuities, Medicare and Medicaid supplements, and major medical and life insurance policies. It also provides investment brokerage services. 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. In the 2000 fourth quarter, management adopted a balance sheet restructuring project to reduce the level of lower yielding, 1-4 family residential mortgage loans by selling those loans and redeploying the funds in other types of assets, including specific purchases of bank owned life insurance and a more general redeployment to other loan programs and investment securities. 1-4 family residential mortgage loans totaling $20,938,000 were transferred to loans held for sale, and of that amount, $12,199,000 were sold in 2000 and the remainder were sold in the first quarter of 2001. In December 2000, single premium purchases of life insurance amounting to $10,000,000 were recorded as bank owned life insurance in other assets on the consolidated balance sheet. Income relating to the cash surrender value of the bank owned life insurance will be recorded as noninterest income, while the loans sold had generated interest income. The effective reduction of interest income will tend to lower the net yield on earning assets and net interest spread in future periods. Management believes that the income resulting from the bank owned life insurance, which is not subject to income tax, will produce a greater contribution to net income than did the income from the loans sold. Competition The commercial banking industry within the Bank's marketing area is extremely competitive. The Bank faces direct competition in Chatham, Montgomery, Moore, Randolph, Richmond and Scotland counties from approximately twenty-one 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. The principal methods of competing in the commercial banking industry are improving customer service through the quality and range of services provided, improving cost efficiencies and pricing services competitively. Supervision and Regulation The following discussion sets forth a summary of some of the material statutes and regulations applicable to FNB and its subsidiaries. Further information is provided under the heading "Capital Adequacy" in "Management's Discussion and Analysis of Financial Condition and Results of Operations" below. The summaries do not purport to be comprehensive. The regulatory framework is intended primarily for the protection of depositors and not for the protection of security holders. 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, direct or indirect ownership or control of more than five percent of the voting shares of any bank; acquiring all or substantially all of the assets of any bank; or merging or consolidating with any other bank holding company. In addition, the BHC Act prohibits a bank holding company that does not qualify as a financial holding company under the Gramm-Leach-Bliley Financial Services Modernization Act of 1999 ("GLB Act"), as more fully discussed below, from engaging in activities other than banking, managing, or controlling banks or other permissible subsidiaries; and acquiring or retaining direct or indirect control of any company engaged in any activities determined by the Federal Reserve Board to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. In determining whether a particular activity is permissible, the Federal Reserve Board considers whether the performance of such an activity reasonably can be expected to produce benefits to the public that outweigh possible adverse effects. Possible benefits the Federal Reserve Board considers include greater convenience, increased competition, or gains in efficiency. Possible adverse effects include undue concentration of resources, decreased or unfair competition, conflicts of interest, or unsound banking practices. Activities that the Federal Reserve Board has permitted for bank holding companies include: (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 GLB Act, signed into law in November 1999, establishes a comprehensive framework to permit affiliations among commercial banks, insurance companies, securities firms and other financial service providers. The GLB Act allows bank holding companies meeting management, capital and Community Reinvestment Act standards to engage in a substantially broader range of nonbanking activities than was permissible prior to enactment, including insurance underwriting and making merchant banking investments in commercial and financial companies; allows insurers and other financial services companies to acquire banks; removes various restrictions that applied to bank holding ownership of securities firms and mutual fund advisory companies; and establishes the overall regulatory structure applicable to bank holding companies that also engage in insurance and securities operations. The act also broadens the activities that may be conducted by national banks, banking subsidiaries of bank holding companies and their financial subsidiaries and provides an enhanced framework for protecting the privacy of consumer information. In addition and in a change from prior law, bank holding companies will be in a position to be owned, controlled or acquired by any company engaged in financially related activities. 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, 2000, the Parent Company had three officers, all of whom were also officers of the Bank. On that same date, the Bank had 187 full-time employees and 23 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 (401(k)) plan, group life, health and dental insurance, paid vacations, sick leave, and health care and life insurance benefits for retired employees. 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 (three offices), Archdale (two offices), Biscoe, Ellerbe, Laurinburg, Ramseur, Randleman, Rockingham (two offices), Seagrove, Siler City, Southern Pines and Trinity, 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 Laurinburg office is under a lease expiring February 28, 2002. 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. FNB CORP. AND SUBSIDIARY FIVE YEAR FINANCIAL HISTORY (1)
2000 1999 1998 1997 1996 -------- -------- -------- -------- -------- (dollars in thousands, except per share data) Summary of Operations Interest income $ 41,936 $ 35,822 $ 35,111 $ 32,242 $ 29,142 Interest expense 20,908 16,203 15,713 14,463 13,561 -------- -------- -------- -------- -------- Net interest income 21,028 19,619 19,398 17,779 15,581 Provision for loan losses 1,802 511 482 670 526 -------- -------- -------- -------- -------- Net interest income after provision for loan losses 19,226 19,108 18,916 17,109 15,055 Noninterest income 4,501 4,068 3,756 3,346 2,918 Noninterest expense 18,497 15,082 14,473 13,382 11,570 -------- -------- -------- -------- -------- Income before income taxes 5,230 8,094 8,199 7,073 6,403 Income taxes 1,714 2,504 2,568 2,220 1,975 -------- -------- -------- -------- -------- Net income $ 3,516 $ 5,590 $ 5,631 $ 4,853 $ 4,428 ======== ======== ======== ======== ======== Per Share Data (2,3) Net income: Basic $ .70 $ 1.11 $ 1.12 $ 1.08 $ 1.23 Diluted .69 1.09 1.09 1.07 1.22 Cash dividends declared (4) .51 .51 .45 .38 .33 Book value 10.89 10.13 9.76 11.24 10.35 Balance Sheet Information Total assets $565,639 $517,468 $472,188 $437,743 $401,909 Investment securities 132,384 119,786 121,471 112,278 107,412 Loans 395,737 360,840 314,839 296,525 264,020 Deposits 472,448 427,010 400,218 365,349 356,230 Shareholders' equity 55,122 52,068 50,390 57,349 37,408 Ratios (Averages) Return on assets .65% 1.15% 1.23% 1.16% 1.15% Return on shareholders' equity 6.59 10.85 9.55 9.78 12.34 Shareholders' equity to assets 9.86 10.57 12.88 11.86 9.34 Dividend payout ratio 76.05 40.88 36.71 29.86 26.87 Loans to deposits 84.79 80.63 80.36 77.71 75.93 Net yield on earning assets, taxable equivalent basis 4.28 4.48 4.71 4.72 4.52 - ----------------- (1) Financial data for all periods has been restated to reflect the merger with Carolina Fincorp, Inc., which became effective on April 10, 2000 and was accounted for as a pooling of interests. (2) All per share data has been retroactively adjusted to reflect the FNB Corp. two-for-one stock split effected in the form of a 100% stock dividend paid in the first quarter of 1998. (3) FNB Corp. historical shares were used for 1996 as Carolina Fincorp, Inc. had no shares outstanding. (4) Cash dividends declared represent FNB Corp. historical cash dividends declared.
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 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 $3,516,000 in 2000, a 37.1% decrease in net income from 1999. Basic earnings per share decreased from $1.11 in 1999 to $.70 in 2000 and diluted earnings per share decreased from $1.09 to $.69. Total assets were $565,639,000 at December 31, 2000, up 9.3% from year-end 1999. Loans amounted to $395,737,000 at December 31, 2000, up 9.7% from the prior year. Total deposits grew 10.6% to $472,448,000 in 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 2000 amounted to $5,854,000, a 4.7% increase over 1999, with basic and diluted earnings per share amounts of $1.16 and $1.15, respectively. 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 $264,000 in 2000, up 4.7% over 1999. Earnings were positively impacted in 2000 by increases of $1,409,000 or 7.2% in net interest income and $433,000 in noninterest income. These gains were significantly offset, however, by an increase of $619,000 in noninterest expense and by an increase of $841,000 in the provision for loan losses, excluding merger-related charges. Results for 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. The Corporation's net income decreased $41,000 in 1999, down 0.7% from 1998. Earnings were positively impacted in 1999 by increases of $221,000 or 1.1% in net interest income and $312,000 in noninterest income. These gains were more than offset, however, by an increase of $609,000 in noninterest expense and by an increase of $29,000 in the provision for loan losses. Special noninterest expense charges, relating to a major data processing conversion, significantly affected the 1998 fourth quarter operating results, such charges amounting to $302,000 during that period, and to a lesser extent affected the 1999 operating results, especially in the first quarter. Excluding the merger-related charges, return on average assets declined from 1.23% in 1998 to 1.15% in 1999 to 1.08% in 2000. Return on average shareholders' equity improved from 9.55% in 1988 to 10.85% in 1999 to 10.97% in 2000. Including the effect of the merger-related charges, return on average assets was .65% in 2000 and return on average shareholders' equity was 6.59%. 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 $21,028,000 in 2000 compared to $19,619,000 in 1999. The increase of $1,409,000 or 7.2% resulted primarily from a 11.7% 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 4.48% in 1999 to 4.28% in 2000. In 1999, there was a $221,000 or 1.1% increase in net interest income reflecting a 6.5% increase in average earning assets, the effect of which was largely offset by a decline in the net interest margin from 4.71% in 1998. On a taxable equivalent basis, the increases in net interest income in 2000 and 1999 were $1,377,000 and $271,000, 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. Table 1 Average Balances and Net Interest Income Analysis
2000 1999 -------------------------------------- -------------------------------------- Average Interest Average Rates Average Interest Average Rates Balance Income/Expense Earned/Paid Balance Income/Expense Earned/Paid ------- -------------- ----------- ------- -------------- ----------- (taxable equivalent basis, dollars in thousands) EARNING ASSETS Loans (1) (2) $385,299 $ 34,296 8.88% $328,450 $ 28,016 8.53% Investment securities (1): Taxable income 103,636 6,772 6.53 104,438 6,893 6.60 Non-taxable income 19,684 1,508 7.66 19,832 1,537 7.75 Other earning assets 6,296 383 6.06 8,446 431 5.10 ------- ------ ---- ------- ------ ---- Total earning assets 514,915 42,959 8.33 461,166 36,877 8.00 ------- ------ ---- ------- ------ ---- Cash and due from banks 13,955 14,371 Other assets, net 11,968 11,895 -------- -------- TOTAL ASSETS $540,838 $487,432 ======== ======== INTEREST-BEARING LIABILITIES Interest-bearing deposits: Demand deposits $ 57,332 907 1.58 $ 55,129 826 1.50 Savings deposits 35,844 827 2.30 37,571 849 2.26 Money market deposits 34,798 1,463 4.19 31,839 1,154 3.62 Certificates and other time deposits 279,586 16,304 5.82 239,289 12,354 5.16 Retail repurchase agreements 11,091 516 4.64 12,971 501 3.87 Federal Home Loan Bank advances 15,178 819 5.38 8,567 433 5.05 Other borrowed funds 1,112 72 6.47 1,616 86 5.30 ------- ------ ---- ------- ------ ---- Total interest-bearing liabilities 434,941 20,908 4.79 386,982 16,203 4.19 ------- ------ ---- ------- ------ ---- Noninterest-bearing demand deposits 46,859 43,546 Other liabilities 5,692 5,360 Shareholders' equity 53,346 51,544 -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $540,838 $487,432 ======== ======== NET INTEREST INCOME AND SPREAD $ 22,051 3.54% $ 20,674 3.81% ======== ==== ======== ==== NET YIELD ON EARNING ASSETS 4.28% 4.48% ==== ====
1998 ------------------------------------- Average Interest Average Rates Balance Income/Expense Earned/Paid ------- -------------- ----------- EARNING ASSETS Loans (1) (2) $307,613 $ 27,375 8.90% Investment securities (1): Taxable income 98,090 6,780 6.91 Non-taxable income 19,780 1,546 7.82 Other earning assets 7,381 415 5.62 ------- ------ ---- Total earning assets 432,864 36,116 8.34 ------- ------ ---- Cash and due from banks 13,200 Other assets, net 11,938 -------- TOTAL ASSETS $458,002 ======== INTEREST-BEARING LIABILITIES Interest-bearing deposits: Demand deposits $ 51,179 894 1.75 Savings deposits 38,595 944 2.44 Money market deposits 25,430 977 3.84 Certificates and other time deposits 226,914 12,411 5.47 Retail repurchase agreements 10,169 444 4.37 Federal Home Loan Bank advances -- -- -- Other borrowed funds 742 43 5.80 ------- ------ ---- Total interest-bearing liabilities 353,029 15,713 4.45 ------- ------ ---- Noninterest-bearing demand deposits 40,697 Other liabilities 5,304 Shareholders' equity 58,972 -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $458,002 ======== NET INTEREST INCOME AND SPREAD $ 20,403 3.89% ======== ==== NET YIELD ON EARNING ASSETS 4.71% ==== (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 average prime rate of interest has remained in a fairly narrow band in recent years, amounting to 9.21%, 7.99% and 8.37% in 2000, 1999 and 1998, respectively. This situation has tended to create a degree of stability in the interest rates both earned and paid by the Bank. Nonetheless, the actual level of the prime rate has changed with some frequency as the Federal Reserve has responded to various economic scenarios. After remaining unchanged in the first three quarters of 1998, a significant change occurred in the level of the prime rate during the last three months of that year when the Federal Reserve took action 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 yield on total 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 raised it from 7.75% to 8.50%, thereby effectively reversing the rate reductions that had 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 net interest spread. In 2000, the net interest spread declined by 27 basis points from 3.81% in 1999 to 3.54% 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 33 basis points from 8.00% in 1999 to 8.33% in 2000, while the cost of funds increased by 60 basis points in moving from 4.19% to 4.79%. In 1999, the 8 basis points decrease in net interest spread resulted from a 34 basis points decrease in the yield on earning assets as partially offset by a 26 basis points decrease in the cost of funds. The 2000 and 1999 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
2000 Versus 1999 1999 Versus 1998 ----------------------------- -------------------------------- Variance due to(1) Variance due to(1) ------------------ ------------------ Volume Rate Net Change Volume Rate Net Change ------- ------- ---------- ------- ------- ---------- (taxable equivalent basis, in thousands) Interest Income Loans (2) $ 5,077 $ 1,203 $ 6,280 $ 1,807 $(1,166) $ 641 Investment securities (2): Taxable income (51) (70) (121) 426 (313) 113 Non-taxable income (11) (18) (29) 4 (13) (9) Other earning assets (121) 73 (48) 57 (41) 16 ------- ------- ------- ------- ------- ------- Total interest income 4,894 1,188 6,082 2,294 (1,533) 761 ------- ------- ------- ------- ------- ------- Interest Expense Interest-bearing deposits: Demand deposits 35 46 81 66 (134) (68) Savings deposits (38) 16 (22) (25) (70) (95) Money market deposits 115 194 309 235 (58) 177 Certificates and other time deposits 2,245 1,705 3,950 662 (719) (57) Retail repurchase agreements (78) 93 15 112 (55) 57 Federal Home Loan Bank advances 356 30 386 433 -- 433 Other borrowed funds (30) 16 (14) 47 (4) 43 ------- ------- ------- ------- ------- ------- Total interest expense 2,605 2,100 4,705 1,530 (1,040) 490 ------- ------- ------- ------- ------- ------- Net Interest Income $ 2,289 $ (912) $ 1,377 $ 764 $ (493) $ 271 ======= ======= ======= ======= ======= ======= (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 probable losses inherent in the loan portfolio. 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. Earnings were negatively impacted in 2000 by a $1,802,000 provision for loan losses compared to a $511,000 provision in 1999. Of the total 2000 provision, $835,000 was recorded in the second quarter, which amount included approximately $450,000 that was merger related as discussed below, while the remainder resulted from additional loan writedowns and charge-offs taken in the same quarter. The additional increase in the provision for 2000 was due to continued loan growth, higher loan losses and uncertain economic conditions. The allowance for loan losses, as a percentage of loans outstanding and reflecting the restatement of historical information for the merger, amounted to 1.13% at December 31, 2000, .91% at December 31, 1999 and .95% at December 31, 1998. The increase in the allowance percentage from December 31, 1999 to December 31, 2000 resulted largely from the provision component of approximately $450,000 for the second quarter of 2000 to align the credit risk methodologies of FNB Corp. and Carolina Fincorp. Noninterest Income Noninterest income increased $433,000 or 10.6% in 2000 and $312,000 or 8.3% in 1999, reflecting in part the general increase in the volume of business. The increase in service charges on deposit accounts in 2000 was primarily due to improved fee collection efforts in 2000, but also reflected the implementation for a full year of the selected increases in service charge rates that became effective in the 1999 first quarter. The 1999 increase in service charges on deposit accounts primarily reflected the rate increases that became effective in the 1999 first quarter. The decrease in annuity and brokerage commissions in 2000 related to a general decrease in both sales of annuity products and the volume of brokerage services, while the opposite was true in 1999 when such commissions increased. Other income was impacted in 2000 by a $76,000 gain on the sale of an investment. Noninterest Expense Excluding merger-related expenses of $2,796,000 recorded in the second quarter of 2000, noninterest expense was $619,000 or 4.1% higher in 2000 due largely to increased personnel 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 continued for Richmond Savings 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. 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. 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. Noninterest expense was $609,000 or 4.2% higher in 1999 due largely to increased personnel expense, the effect of a major data processing conversion (as discussed above) 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, as noted above. Personnel expense was impacted by increased staffing requirements, especially as related to the data processing conversion and the opening of the new branch office, and by normal salary adjustments. Net occupancy expense was affected by increased maintenance charges. Furniture and equipment expense increased largely as a result of the data processing conversion, especially for depreciation charges. Merger-Related Expenses and Charges In connection with the merger acquisition of Carolina Fincorp, 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 restricted stock plan shares became fully vested, resulting in certain expenses considered merger-related. Other primary components of merger-related expenses were professional fees, investment banking fees, contract termination costs, data processing conversion fees and severance payments. 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. The primary components of merger-related expenses are summarized in Table 3. - -------------------------------------------------------------------------------- Table 3 Merger-Related Expenses 2000 ---- (in thousands) Professional fees $ 569 Investment banking fees 558 Contract termination costs 467 ESOP and restricted stock plan termination costs 385 Data processing conversion fees 209 Severance payments 161 Other merger expenses 447 ------ Total $2,796 ====== - -------------------------------------------------------------------------------- Income Taxes The effective income tax rate increased from 30.9% in 1999 to 32.8% in 2000 due principally to the nondeductibility of certain merger-related expenses. Reflecting a reduction in the state income tax rate, the effective income tax rate declined from 31.3% in 1998 to 30.9% in 1999. 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 $67,800,000 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 Sensitivity One of the primary objectives of asset/liability management is to maximize net interest margin while minimizing the earnings risk associated with changes in interest rates. One method used to manage interest rate sensitivity is to measure, over various time periods, the interest rate sensitivity positions, or gaps; however, this method addresses only the magnitude of timing differences and does not address earnings or market value. Therefore, management uses an earnings simulation model to prepare, on a regular basis, earnings projections based on a range of interest rate scenarios in order to more accurately measure interest rate risk. The Bank's balance sheet was liability-sensitive at December 31, 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. Included in interest-bearing liabilities subject to rate changes within 90 days is a portion of the interest-bearing demand, savings and money market deposits. These types of deposits historically have not repriced coincidentally with or in the same proportion as general market indicators. Table 4 presents information about the periods in which the interest-sensitive assets and liabilities at December 31, 2000 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 interest-bearing demand, savings and money market deposits are assumed to reprice immediately and 50% are assumed to reprice beyond one year. Table 4 Interest Rate Sensitivity Analysis
December 31, 2000 -------------------------------------------------------- Rate Maturity In Days ------------------------------ Beyond 1-90 91-180 181-365 One Year Total -------- -------- --------- --------- -------- (dollars in thousands) Earning Assets Loans $154,209 $ 16,352 $ 29,335 $195,841 $395,737 Investment securities 2,830 2,008 3,746 123,800 132,384 -------- -------- --------- -------- -------- Total earning assets 157,039 18,360 33,081 319,641 528,121 -------- -------- --------- -------- -------- Interest-Bearing Liabilities Interest-bearing deposits: Demand deposits 28,240 - - 28,241 56,481 Savings deposits 17,220 - - 17,221 34,441 Money market deposits 17,950 - - 17,951 35,901 Time deposits of $100,000 or more 43,060 18,884 26,760 12,880 101,584 Other time deposits 54,640 26,477 84,016 33,007 198,140 Retail repurchase agreements 11,201 - - - 11,201 Federal Home Loan Bank advances - - - 15,000 15,000 Federal funds purchased 4,750 - - - 4,750 -------- -------- --------- -------- -------- Total interest-bearing liabilities 177,061 45,361 110,776 124,300 457,498 -------- -------- --------- -------- -------- Interest Sensitivity Gap $(20,022) $(27,001) $ (77,695) $195,341 $ 70,623 ======== ======== ========= ======== ======== Cumulative gap $(20,022) $(47,023) $(124,718) $ 70,623 $ 70,623 Ratio of interest-sensitive assets to interest-sensitive liabilities 89% 40% 30% 257% 115%
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 in "Asset/Liability Management and Interest Rate Sensitivity" above. Table 5 presents information about the contractual maturities, average interest rates and estimated fair values of financial instruments considered market risk sensitive at December 31, 2000. Table 5 Market Risk Analysis of Financial Instruments
Contractual Maturities at December 31, 2000 -------------------------------------------------------------------- Beyond Average Estimated Five Interest Fair 2001 2002 2003 2004 2005 Years Total Rate (1) Value -------- -------- -------- -------- -------- -------- -------- -------- --------- (dollars in thousands) Financial Assets Debt securities (2) $ 8,590 $ 2,131 $ 8,974 $ 7,723 $ 40,968 $ 61,578 $129,964 6.88% $129,752 Loans (3): Fixed rate 53,593 25,336 21,251 16,012 16,700 62,257 195,149 8.75 189,238 Variable rate 63,989 27,730 29,419 16,392 14,265 48,793 200,588 9.08 200,812 Federal funds sold - - - - - - 94 6.49 94 -------- -------- -------- -------- -------- -------- -------- -------- Total $126,172 $ 55,197 $ 59,644 $ 40,127 $ 71,933 $172,628 $525,795 8.41 $519,896 ======== ======== ======== ======== ======== ======== ======== ======== Financial Liabilities Interest-bearing demand deposits $ - $ - $ - $ - $ - $ - $ 56,481 1.43 $ 56,481 Savings deposits - - - - - - 34,441 1.99 34,441 Money market deposits - - - - - - 35,901 4.16 35,901 Time deposits: Fixed rate 241,264 35,179 7,749 1,155 1,815 - 287,162 6.34 289,370 Variable rate 7,644 3,884 945 85 4 - 12,562 5.83 12,562 Retail repurchase agreements - - - - - - 11,201 4.82 11,201 Federal Home Loan Bank advances - - - - - 15,000 15,000 5.44 15,219 Federal funds purchased - - - - - - 4,750 6.84 4,750 -------- -------- -------- -------- -------- -------- -------- -------- Total $248,908 $ 39,063 $ 8,694 $ 1,240 $ 1,819 $ 15,000 $457,498 5.16 $459,925 ======== ======== ======== ======== ======== ======== ======== ======== (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. Mortgage-backed securities which have monthly curtailments of principal are categorized by final maturity. (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 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 December 31, 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 December 31, 2000, FNB Corp. and the Bank had total capital ratios of 15.15% and 14.69%, respectively, and Tier 1 capital ratios of 14.05% and 13.58%. 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 December 31, 2000, FNB Corp. and the Bank had leverage capital ratios of 9.92% 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 1 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, 2000 and, accordingly, is well-capitalized under the regulatory framework for prompt corrective action. Balance Sheet Review Asset growth was slightly higher in 2000 than in 1999. Total assets increased $48,171,000 or 9.3% in 2000 compared to $45,280,000 or 9.6% in 1999. Deposits grew $45,438,000 or 10.6% and $26,792,000 or 6.7%, respectively, in the same periods. Retail repurchase agreements increased $534,000 in 2000 after declining $817,000 in 1999. A portion of the 1999 asset growth was funded by initial advances totaling $15,000,000 from the Federal Home Loan Bank, which was also the level of these advances at December 31, 2000. The average asset growth rates were 11.0% in 2000 and 6.4% in 1999. The corresponding average deposit growth rates were 11.5% and 6.4%. Certain balance sheet restructuring matters are discussed in "Business Development Matters". Investment Securities Investments are carried on the consolidated balance sheet at estimated fair value for available-for-sale securities and at amortized cost for held-to-maturity securities. Table 6 presents information, on the basis of selected maturities, about the composition of the investment securities portfolio for each of the last three years. A change in the classification of investment securities on January 1, 2001 is discussed in "Accounting Pronouncement Matters". Table 6 Investment Securities Portfolio Analysis
December 31 ------------------------------------------------------- 2000 1999 1998 ------------------------------------- ------ ------ Estimated Taxable Amortized Fair Equivalent Carrying Carrying Cost Value Yield (1) Value Value --------- -------- ---------- -------- -------- (dollars in thousands) Available for Sale U.S. Treasury: Within one year $ 749 $ 753 7.20% $ 758 $ 1,258 One to five years - - - 250 1,543 ------- ------- ------- ------- Total 749 753 7.20 1,008 2,801 ------- ------- ------- ------- U.S. Government agencies and corporations: Within one year 3,250 3,240 6.05 1,492 2,344 One to five years 26,221 25,975 6.44 13,131 8,465 Five to ten years 38,883 38,563 6.84 43,214 40,267 Over ten years 1,500 1,494 7.63 - - ------- ------- ------- ------- Total 69,854 69,272 6.68 57,837 51,076 ------- ------- ------- ------- Mortgage-backed securities - - - - 230 ------- ------- ------- ------- Total debt securities 70,603 70,025 6.68 58,845 54,107 Equity securities 2,969 2,998 2,220 1,881 ------- ------- ------- ------- Total available-for-sale securities $73,572 $73,023 $61,065 $55,988 ======= ======= ======= ======= Held to Maturity U.S. Treasury: Within one year $ - $ - - $ - $ 502 ------- ------- ------- ------- U.S. Government agencies and corporations: Within one year 3,499 3,491 6.11 1,001 1,700 One to five years 28,190 27,916 6.48 7,796 9,794 Five to ten years 4,400 4,352 6.55 28,292 31,039 ------- ------- ------- ------- Total 36,089 35,759 6.45 37,089 42,533 ------- ------- ------- ------- Mortgage-backed securities 483 488 7.13 594 1,168 ------- ------- ------- ------- State, county and municipal: Within one year 1,092 1,098 9.21 1,330 845 One to five years 4,483 4,561 8.13 4,495 5,261 Five to ten years 7,637 7,926 8.07 6,645 6,358 Over ten years 6,523 6,767 7.82 7,578 7,822 ------- ------- ------- ------- Total 19,735 20,352 8.07 20,048 20,286 ------- ------- ------- ------- Other debt securities: Within one year - - - - - One to five years 499 501 6.48 499 994 Five to ten years 492 488 6.66 491 - Over ten years 2,063 2,139 9.88 - - ------- ------- ------- ------- Total 3,054 3,128 8.81 990 994 ------- ------- ------- ------- Total held-to-maturity securities $59,361 $59,727 7.11 $58,721 $65,483 ======= ======= ======= ======= (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 total assets exceeded that for loans in 2000 and as investments were further impacted by the balance sheet restructuring matters discussed in "Business Development Matters", the level of investment securities was increased $12,598,000 or 10.5%. In 1999, when the growth in loans exceeded that for total assets, there was a net decrease of $1,685,000 or 1.4% in the level of investment securities. 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, 2000. Loans The Corporation's primary source of revenue and largest component of earning assets is the loan portfolio. Loans experienced growth of $34,897,000 or 9.7% in 2000 and $46,001,000 or 14.6% in 1999. Average loans increased $56,849,000 or 17.3% and $20,837,000 or 6.8%, respectively. The ratio of average loans to average deposits increased from 80.6% in 1999 to 84.8% in 2000. The ratio of loans to deposits at December 31, 2000 was 83.8%. Table 7 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, 2000 are presented in Table 8. Table 7 Loan Portfolio Composition
December 31 ------------------------------------------------------------------------------------ 2000 1999 1998 1997 1996 --------------- --------------- --------------- -------------- ------------ Amount % Amount % Amount % Amount % Amount % -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- (dollars in thousands) Commercial and agricultural $160,057 41.5 $125,331 34.7 $ 99,055 32.0 $ 84,221 28.6 $ 62,678 23.8 Real estate - construction 5,734 1.5 5,472 1.5 8,056 2.6 7,801 2.6 5,768 2.2 Real estate - mortgage: 1-4 family residential 165,057 42.8 170,577 47.3 151,552 49.0 146,588 49.7 129,738 49.1 Commercial and other 16,050 4.2 22,214 6.2 21,423 6.9 24,535 8.3 26,220 9.9 Consumer 25,290 6.5 30,340 8.4 29,477 9.5 31,772 10.8 39,616 15.0 Leases 13,679 3.5 6,832 1.9 - - - - - - ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- Loans held for investment 385,867 100.0 360,766 100.0 309,563 100.0 294,917 100.0 264,020 100.0 ===== ===== ===== ===== ===== Loans held for sale 9,870 74 5,276 1,608 - -------- -------- -------- -------- -------- Gross loans $395,737 $360,840 $314,839 $296,525 $264,020 ======== ======== ======== ======== ========
Table 8 Selected Loan Maturities December 31, 2000 -------------------------------------------- One Year One to Over or Less Five Years Five Years Total -------- ---------- ---------- -------- (in thousands) Commercial and agricultural $59,701 $67,192 $33,164 $160,057 Real estate - construction 3,267 1,747 720 5,734 -------- --------- ------- -------- Total selected loans $62,968 $68,939 $33,884 $165,791 ======== ========= ======= ======== Sensitivity to rate changes: Fixed interest rates $20,227 $39,100 $18,132 $ 77,459 Variable interest rates 42,741 29,839 15,752 88,332 -------- --------- ------- -------- Total $62,968 $68,939 $33,884 $165,791 ======== ========= ======= ======== The commercial and agricultural loan portfolio was primarily responsible for loan growth in 2000. An increase was also recorded for lease financing contracts, a new loan product added in 1999. Loan growth and the composition of the loan portfolio, especially for 1-4 family residential mortgage loans, are being affected by certain balance sheet restructuring matters as discussed in "Business Development Matters". Asset Quality Management considers the Bank's asset quality to be of primary importance. A formal loan review function, independent of loan origination, is used to identify and monitor problem loans. 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. 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. At December 31, 2000, the Bank had impaired loans which totaled $321,000 and were also on nonaccrual status. The related allowance for loan losses on these loans amounted to $73,000. At December 31, 1999 the Bank had impaired loans which totaled $1,420,000 and were also on nonaccrual status. The related allowance for loan losses on these loans amounted to $289,000. Table 9 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 10. Table 9 Allowance for Loan Losses and Nonperforming Assets
2000 1999 1998 1997 1996. ------ ------ ------ ------ ------ (dollars in thousands) Allowance for Loan Losses Balance at beginning of year $3,289 $2,954 $2,694 $2,375 $2,266 Charge-offs: Commercial and agricultural 603 49 9 66 24 Real estate - construction - - - - - Real estate - mortgage 21 2 - 2 12 Consumer 277 306 387 449 543 Leases 12 - - - - ------ ------ ------ ------ ------ Total charge-offs 913 357 396 517 579 ------ ------ ------ ------ ------ Recoveries: Commercial and agricultural 117 16 16 14 12 Real estate - construction - - - - - Real estate - mortgage 6 - - 11 3 Consumer 130 138 158 141 147 Leases - - - - - ------ ------ ------ ------ ------ Total recoveries 253 154 174 166 162 ------ ------ ------ ------ ------ Net loan charge-offs 660 203 222 351 417 Provision for loan losses (1) 1,802 511 482 670 526 Allowance adjustment for loans sold (79) - - - - Adjustment to conform fiscal periods - 27 - - - ------ ------ ------ ------ ------ Balance at end of year $4,352 $3,289 $2,954 $2,694 $2,375 ====== ====== ====== ====== ====== Nonperforming Assets, at end of year Nonaccrual loans $1,478 $1,602 $ 855 $ 257 $ 92 Accruing loans past due 90 days or more 367 298 263 167 231 ------ ------ ------ ------ ------ Total nonperforming loans 1,845 1,900 1,118 424 323 Foreclosed assets 33 3 - 23 38 Other real estate owned 163 423 20 27 29 ------ ------ ------ ------ ------ Total nonperforming assets $2,041 $2,326 $1,138 $ 474 $ 390 ====== ====== ====== ====== ====== Ratios Net loan charge-offs to average loans .17% .06% .07% .13% .16% Net loan charge-offs to allowance for loan losses 15.17 6.17 7.52 13.03 17.56 Allowance for loan losses to year-end loans excluding loans held for sale 1.13 .91 .95 .91 .90 Total nonperforming loans to year-end loans excluding loans held for sale .48 .53 .36 .14 .12 (1) Approximately $450,000 of the total provision for loan losses in 2000 was related to aligning the credit risk methodologies of FNB Corp. and Carolina Fincorp, Inc.
Table 10 Allocation of Allowance For Loan Losses
December 31 ---------------------------------------------- 2000 1999 1998 1997 1996 ------ ------ ------ ------ ------ (in thousands) Commercial and agricultural $1,714 $1,070 $ 821 $ 719 $ 650 Real estate - construction 21 14 31 23 16 Real estate - mortgage 982 735 643 633 538 Consumer 1,076 1,023 1,027 971 905 Leases 201 58 - - - Unallocated 358 389 432 348 266 ------ ------ ------ ------ ------ Total allowance for loan losses $4,352 $3,289 $2,954 $2,694 $2,375 ====== ====== ====== ====== ======
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, reflecting the effect of promotions for premium-rate certificates of deposits and the increase in time deposits obtained from governmental units, grew $43,867,000 in 2000 and $23,488,000 in 1999, accounting for the majority of total deposit growth in each year. The level of time deposits obtained from governmental units amounted to $46,800,000, $39,179,000 and $26,555,000 at December 31, 2000, 1999 and 1998, respectively. Money market deposits increased $1,974,000 in 2000 and $5,247,000 in 1999 due to a high-yield product that has had steady growth since its introduction in 1996. Table 11 shows the year-end and average deposit balances for the years 2000, 1999 and 1998 and the changes in 2000 and 1999. Table 11 Analysis of Deposits
2000 1999 1998 ----------------------- ------------------------ ------- Change from Change from Prior Year Prior Year ------------- -------------- Balance Amount % Balance Amount % Balance -------- ------ ----- -------- ------- ----- ------- (dollars in thousands) Year-End Balances Interest-bearing deposits: Demand deposits $ 56,481 $(1,532) (2.6) $ 58,013 $2,551 4.6 $ 55,462 Savings deposits 34,441 (1,438) (4.0) 35,879 (2,542) (6.6) 38,421 Money market deposits 35,901 1,974 5.8 33,927 5,247 18.3 28,680 -------- ------- -------- ------- -------- Total 126,823 (996) (.8) 127,819 5,256 4.3 122,563 Certificates and other time deposits 299,724 43,867 17.1 255,857 23,488 10.1 232,369 -------- ------- -------- ------- -------- Total interest-bearing deposits 426,547 42,871 11.2 383,676 28,744 8.1 354,932 Noninterest-bearing demand deposits 45,901 2,567 5.9 43,334 (1,952) (4.3) 45,286 -------- ------- -------- ------- -------- Total deposits $472,448 $45,438 10.6 $427,010 $26,792 6.7 $400,218 ======== ======= ======== ======= ======== Average Balances Interest-bearing deposits: Demand deposits $ 57,332 $ 2,203 4.0 $ 55,129 $ 3,950 7.7 $ 51,179 Savings deposits 35,844 (1,727) (4.6) 37,571 (1,024) (2.7) 38,595 Money market deposits 34,798 2,959 9.3 31,839 6,409 25.2 25,430 -------- ------- -------- ------- -------- Total 127,974 3,435 2.8 124,539 9,335 8.1 115,204 Certificates and other time deposits 279,586 40,297 16.8 239,289 12,375 5.5 226,914 -------- ------- -------- ------- -------- Total interest-bearing deposits 407,560 43,732 12.0 363,828 21,710 6.3 342,118 Noninterest-bearing demand deposits 46,859 3,313 7.6 43,546 2,849 7.0 40,697 -------- ------- -------- ------- -------- Total deposits $454,419 $47,045 11.5 $407,374 $24,559 6.4 $382,815 ======== ======= ======== ======= ========
Business Development Matters As discussed in the "Overview" and in Note 2 to Consolidated Financial Statements, the Corporation completed a merger on April 10, 2000 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. 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. In the 2000 fourth quarter, management adopted a balance sheet restructuring project to reduce the level of lower yielding, 1-4 family residential mortgage loans by selling those loans and redeploying the funds in other types of assets, including specific purchases of bank owned life insurance and a more general redeployment to other loan programs and investment securities. 1-4 family residential mortgage loans totaling $20,938,000 were transferred to loans held for sale, and of that amount, $12,199,000 were sold in 2000 and the remainder were sold in the first quarter of 2001. In December 2000, single premium purchases of life insurance amounting to $10,000,000 were recorded as bank owned life insurance in other assets on the consolidated balance sheet. Income relating to the cash surrender value of the bank owned life insurance will be recorded as noninterest income, while the loans sold had generated interest income. The effective reduction of interest income will tend to lower the net yield on earning assets and net interest spread in future periods. Management believes that the income resulting from the bank owned life insurance, which is not subject to income tax, will produce a greater contribution to net income than did the income from the loans sold. Accounting Pronouncement Matters On January 1, 2001, the Corporation adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities", as further amended by Statement of Financial Accounting Standards No. 138, "Accounting for Certain Derivative Financial Instruments and Certain Hedging Activities, an amendment of FASB Statement No. 138" (collectively referred to as "SFAS No. 133"). This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. As permitted by SFAS No. 133, on January 1, 2001, the Corporation transferred all of its securities from the held-to-maturity portfolio to the available-for-sale portfolio as follows: Securities Transferred ------------------------------ Estimated Pretax Amorized Fair Gain Cost Value (Loss) ------- ------- ------ (in thousands) U.S. Government agencies and corporations $36,089 $35,759 $(330) Mortgage-backed securities 483 488 5 State, county and municipal 19,735 20,352 617 Other debt securities 3,054 3,128 74 ------- ------- ----- Total $59,361 $59,727 $ 366 ======= ======= ===== As of January 1, 2001, the transfer of the securities had a net of tax effect of $242,000 on other comprehensive income. On January 1, 2001, the Company had no embedded derivative instruments requiring separate accounting treatment and had identified fixed rate conforming loan commitments as its only freestanding derivative instruments. The fair value of these commitments was mot material and therefore the adoption of SFAS No. 133 on January 1, 2001, is not expected to have a material impact on the Corporation's consolidated financial statements. The FASB has issued Statement of Financial Accounting Standards No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS 140"). This statement replaces SFAS No. 125 ("Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities") and 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 the provisions of SFAS No. 125 without consideration. SFAS No. 140 provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities, based on application of a financial components approach that focuses on control. SFAS No. 140 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 2001. Adoption of SFAS No. 140 is not expected to have a material impact on the Corporation's consolidated financial statements. 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. Cautionary Statement for Purpose of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995 The statements contained in this Annual Report on Form 10-K 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", "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) competitive pressure in the banking industry or in the Corporation's markets may increase significantly, (ii) changes in the interest rate environment may reduce margins, (iii) general economic conditions, either nationally or regionally, may be less favorable than expected, resulting in, among other things, credit quality deterioration, (iv) changes may occur in banking legislation and in the environment, (v) changes may occur in general business conditions and inflation and (vi) changes may occur in the securities markets. Table 12 Quarterly Financial Data First Second Third Fourth ------- ------- ------- ------- (in thousands, except per share data) 2000 Interest income $ 9,814 $10,330 $10,734 $11,058 Interest expense 4,632 5,013 5,445 5,818 ------- ------- ------- ------- Net interest income 5,182 5,317 5,289 5,240 Provision for loan losses 157 835 160 650 ------- ------- ------- ------- Net interest income after provision for loan losses 5,025 4,482 5,129 4,590 Noninterest income 1,093 1,147 1,070 1,191 Merger related expenses - 2,796 - - Noninterest expense 3,948 4,086 3,957 3,710 ------- ------- ------- ------- Income (loss)before income taxes 2,170 (1,253) 2,242 2,071 Income taxes (benefit) 689 (278) 698 605 ------- -------- ------- ------- Net income (loss) $ 1,481 $ (975) $ 1,544 $ 1,466 ======= ======= ======= ======= Per share data: Net income (loss): Basic $ .30 $ (.19) $ .31 $ .29 Diluted .29 (.19) .30 .29 Cash dividends declared .12 .12 .12 .15 Common stock price (1): High 17.00 12.50 12.00 12.13 Low 10.50 6.00 9.50 11.19 1999 Interest income $ 8,721 $ 8,795 $ 8,978 $ 9,328 Interest expense 3,901 3,944 4,033 4,325 ------- ------- ------- ------- Net interest income 4,820 4,851 4,945 5,003 Provision for loan losses 99 119 84 209 ------- ------- ------- ------- Net interest income after provision for loan losses 4,721 4,732 4,861 4,794 Noninterest income 1,008 1,027 1,008 1,025 Noninterest expense 3,659 3,701 3,895 3,827 ------- ------- ------- ------- Income before income taxes 2,070 2,058 1,974 1,992 Income taxes 646 646 613 599 ------- ------- ------- ------- Net income $ 1,424 $ 1,412 $ 1,361 $ 1,393 ======= ======= ======= ======= Per share data: Net income: Basic $ .28 $ .28 $ .27 $ .28 Diluted .27 .27 .27 .27 Cash dividends declared .12 .12 .12 .15 Common stock price (1): High 29.00 27.00 24.25 22.00 Low 20.00 20.00 19.00 13.25 (1) FNB Corp. common stock is traded on the NASDAQ National Market System under the symbol FNBN. At December 31, 2000, there were 1,697 shareholders of record. 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, 2000 and 1999, and the related consolidated statements of income, shareholders' equity and comprehensive income and cash flows for each of the years in the three-year period ended December 31, 2000. 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 auditing standards generally accepted in the United States of America. 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, 2000 and 1999, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. KPMG LLP Greenville, South Carolina March 16, 2001 FNB CORP. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
December 31 2000 1999 ---- ---- (in thousands, except share data) Assets Cash and due from banks $ 14,108 $ 18,808 Interest-bearing bank accounts - 3,115 Federal funds sold 94 - Investment securities: Available for sale, at estimated fair value (amortized cost of $73,572 in 2000 and $64,063 in 1999) 73,023 61,065 Held to maturity (estimated fair value of $59,727 in 2000 and $56,953 in 1999) 59,361 58,721 Loans: Loans held for sale 9,870 74 Loans held for investment 385,867 360,766 Less allowance for loan losses (4,352) (3,289) -------- -------- Net loans 391,385 357,551 -------- -------- Premises and equipment, net 9,596 10,330 Other assets 18,072 7,878 -------- -------- Total Assets $565,639 $517,468 ======== ======== Liabilities and Shareholders' Equity Deposits: Noninterest-bearing demand deposits $ 45,901 $ 43,334 Interest-bearing deposits: Demand, savings and money market deposits 126,823 127,819 Time deposits of $100,000 or more 101,584 86,818 Other time deposits 198,140 169,039 -------- -------- Total deposits 472,448 427,010 Retail repurchase agreements 11,201 10,667 Federal Home Loan Bank advances 15,000 15,000 Federal funds purchased 4,750 7,735 Other liabilities 7,118 4,988 -------- -------- Total Liabilities 510,517 465,400 -------- -------- 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 5,059,641 shares in 2000 and 5,139,520 shares in 1999 12,649 12,849 Surplus 2,836 4,131 Retained earnings 40,000 39,158 ESOP and restricted stock plans - (2,092) Accumulated other comprehensive loss (363) (1,978) -------- -------- Total Shareholders' Equity 55,122 52,068 -------- -------- Total Liabilities and Shareholders' Equity $565,639 $517,468 ======== ======== Commitments (Note 17)
See accompanying notes to consolidated financial statements. FNB CORP. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31 ------------------------------------- 2000 1999 1998 (in thousands, except per share data) Interest Income Interest and fees on loans $ 34,241 $ 27,970 $ 27,343 Interest and dividends on investment securities: Taxable income 6,331 6,430 6,359 Non-taxable income 981 991 994 Other interest income 383 431 415 --------- --------- --------- Total interest income 41,936 35,822 35,111 --------- --------- --------- Interest Expense Deposits 19,501 15,183 15,226 Retail repurchase agreements 516 501 444 Federal Home Loan Bank advances 819 433 - Other borrowed funds 72 86 43 --------- --------- --------- Total interest expense 20,908 16,203 15,713 --------- --------- --------- Net Interest Income 21,028 19,619 19,398 Provision for loan losses 1,802 511 482 --------- --------- --------- Net Interest Income After Provision for Loan Losses 19,226 19,108 18,916 --------- --------- --------- Noninterest Income Service charges on deposit accounts 2,236 2,058 1,986 Annuity and brokerage commissions 414 482 294 Cardholder and merchant services income 524 450 368 Other service charges, commissions and fees 674 583 496 Other income 653 495 612 --------- --------- --------- Total noninterest income 4,501 4,068 3,756 Noninterest Expense Personnel expense 8,534 7,792 7,136 Occupancy expense 835 788 664 Furniture and equipment expense 1,709 1,472 1,046 Data processing services 831 1,188 1,819 Merger related expenses 2,796 - - Other expense 3,792 3,842 3,808 --------- --------- --------- Total noninterest expense 18,497 15,082 14,473 --------- --------- --------- Income Before Income Taxes 5,230 8,094 8,199 Income taxes 1,714 2,504 2,568 --------- --------- --------- Net Income $ 3,516 $ 5,590 $ 5,631 ========= ========= ========= Net income per common share: Basic $ .70 $ 1.11 $ 1.12 Diluted $ .69 $ 1.09 $ 1.09 Weighted average number of shares outstanding: Basic 5,035,529 5,022,403 5,043,181 Diluted 5,077,937 5,138,365 5,188,129
See accompanying notes to consolidated financial statements. FNB CORP. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
ESOP and Accumulated Common Stock Restricted Other ----------------------- Retained Stock Comprehensive Shares Amount Surplus Earnings Plans Income (loss) Total ---------- ---------- ---------- ---------- ---------- ---------- ---------- (in thousands, except share data) Balance, December 31, 1997 3,282,510 $ 8,206 $ 14,457 $ 36,136 $ (1,491) $ 41 $ 57,349 Comprehensive income: Net income -- -- -- 5,631 -- -- 5,631 Other comprehensive income: Unrealized securities gains, net of income taxes of $6 -- -- -- -- -- 10 10 ---------- Total comprehensive income 5,641 ---------- Cash dividends declared, $.45 per share -- -- -- (2,067) -- -- (2,067) Return of capital dividend -- -- (10,761) -- (661) -- (11,422) ESOP and restricted stock plan transactions 42,695 108 919 -- (379) -- 648 Two-for-one stock split effected in the form of a 100% stock dividend 1,825,343 4,563 (626) (3,937) -- -- -- Common stock issued through: Dividend reinvestment plan 1,015 2 24 -- -- -- 26 Stock option plan 9,193 23 192 -- -- -- 215 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Balance, December 31, 1998 5,160,756 12,902 4,205 35,763 $ (2,531) 51 50,390 Comprehensive income: Net income -- -- -- 5,590 -- -- 5,590 Other comprehensive income: Unrealized securities losses, net of income tax benefit of $1,037 -- -- -- -- -- (2,009) (2,009) ---------- Total comprehensive income 3,581 ---------- Cash dividends declared, $.51 per share -- -- -- (2,285) -- -- (2,285) ESOP and restricted stock plan transactions -- -- (64) -- 295 -- 231 Common stock issued through: Dividend reinvestment plan -- -- -- -- -- -- -- Stock option plan 7,224 19 77 -- -- -- 96 Common stock repurchased (28,460) (72) (71) (184) -- -- (327) Equity adjustment to conform fiscal periods -- -- (16) 274 144 (20) 382 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Balance, December 31, 1999 5,139,520 12,849 4,131 39,158 $ (2,092) (1,978) 52,068 Comprehensive income: Net income -- -- -- 3,516 -- -- 3,516 Other comprehensive income: Unrealized securities gains, net of income taxes of $834 -- -- -- -- -- 1,615 1,615 ---------- Total comprehensive income 5,131 ---------- Cash dividends declared, $.51 per share -- -- -- (2,674) -- -- (2,674) Cash paid for fractional shares in merger (122) -- (1) -- -- -- (1) ESOP and restricted stock 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 15,355 38 114 -- -- -- 152 Common stock repurchased (6,700) (17) (88) -- -- -- (105) ---------- ---------- ---------- ---------- ---------- ---------- ---------- Balance, December 31, 2000 5,059,641 $ 12,649 $ 2,836 $ 40,000 $ -- $ (363) $ 55,122 ========== ========== ========== ========== ========== ========== ==========
See accompanying notes to consolidated financial statements. FNB CORP. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31 ------------------------------------ 2000 1999 1998 -------- -------- -------- (in thousands) Operating Activities Net income $ 3,516 $ 5,590 $ 5,631 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of premises and equipment 1,465 1,359 987 Provision for loan losses 1,802 511 482 Deferred income taxes (398) (191) (205) Deferred loan fees and costs, net (22) 115 180 Premium amortization and discount accretion of investment securities, net 47 (1) (147) ESOP and restricted stock plan expenses 500 231 648 Amortization of intangibles 14 19 24 Net decrease (increase) in loans held for sale 11,142 5,096 (4,717) Decrease (increase) in other assets 631 436 (144) Increase (decrease) in other liabilities 2,057 (354) 590 -------- -------- -------- Net Cash Provided by Operating Activities 20,754 12,811 3,329 -------- -------- -------- Investing Activities Available-for-sale securities: Proceeds from sales 77 500 1,990 Proceeds from maturities and calls 2,250 17,965 76,383 Purchases (11,761) (30,039) (80,566) Held-to-maturity securities: Proceeds from maturities and calls 2,434 13,039 31,015 Purchases (3,117) (6,941) (37,801) Net increase in loans held for investment (47,948) (46,246) (14,070) Purchases of premises and equipment (922) (2,341) (1,918) Purchases of life insurance contracts (10,000) -- -- Other, net (108) 340 62 -------- -------- -------- Net Cash Used in Investing Activities (69,095) (53,723) (24,905) -------- -------- -------- Financing Activities Net increase in deposits 45,438 26,645 34,869 Increase (decrease) in retail repurchase agreements 534 (817) 4,047 Increase in Federal Home Loan Bank advances -- 15,000 -- Increase (decrease) in other borrowed funds (2,985) 2,990 1,845 Common stock issued 203 96 241 Common stock repurchased (105) (327) -- Cash dividends and fractional shares paid (2,465) (2,284) (1,902) Return of capital dividend -- -- (11,422) -------- -------- -------- Net Cash Provided by Financing Activities 40,620 41,303 27,678 -------- -------- -------- Net Increase (Decrease) in Cash and Cash Equivalents (7,721) 391 6,102 Cash and cash equivalents at beginning of year 21,923 23,253 17,151 Adjustment to conform fiscal periods -- (1,721) -- -------- -------- -------- Cash and Cash Equivalents at End of Year $ 14,202 $ 21,923 $ 23,253 ======== ======== ======== Supplemental disclosure of cash flow information: Cash paid during the year for: Interest $ 19,333 $ 16,128 $ 15,456 Income taxes 1,879 3,025 2,611 Noncash transactions: Loans held for investment transferred to loans held for sale 20,938 -- -- Foreclosed loans transferred to other real estate 1,173 549 -- Unrealized securities gains (losses), net of income taxes 1,615 (2,009) 10
See accompanying notes to consolidated financial statements. FNB CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 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, which has one wholly-owned subsidiary, First National Investor Services, Inc., offers a complete line of financial services, including loan, deposit, cash management, 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 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 chief operating decision maker reviews the results of operations of the Corporation and its subsidiary as a single enterprise. 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. As discussed in Note 2 below, the Corporation in 2000 completed a merger for the acquisition of Carolina Fincorp, Inc. in a transaction accounted for as a pooling of interests. Historical financial information included in these consolidated financial statements has been restated to include the account balances and results of operations of Carolina Fincorp, Inc. 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 Investment securities are 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, included as an item of other comprehensive income 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. 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 Interest income on loans is generally calculated by using the constant yield method based on the daily outstanding balance. The recognition of interest income 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. 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. 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. Other Real Estate Other real estate, which is included in other assets on the consolidated balance sheet, represents properties acquired through foreclosure or deed in lieu thereof and is carried at the lower of cost or fair value based on recent appraisals, less estimated costs to sell. Declines in the fair value of properties included in other real estate below carrying value are recognized by a charge to income. Mortgage Servicing Rights (MSRs) The rights to service mortgage loans for others are included in other assets on the consolidated balance sheet. MSRs are capitalized based on the allocated cost which is determined when the underlying loans are sold. MSRs are amortized over the life of the underlying loan as an adjustment of servicing income. Impairment reviews of MSRs are performed on a quarterly basis. 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 $10,000 and $24,000 at December 31, 2000 and 1999, 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 (EPS) As required for entities with complex capital structures, a dual presentation of basic and diluted EPS is included on the face of the income statement, and a reconciliation is provided in a footnote of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Comprehensive Income Comprehensive income is defined as the change in equity of an enterprise during a period from transactions and other events and circumstances from nonowner sources and, accordingly, includes both net income and amounts referred to as other comprehensive income. The items of other comprehensive income are included in the consolidated statement of shareholders's equity and comprehensive income. The accumulated balance of other comprehensive income is included in the shareholders' equity section of the consolidated balance sheet. 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. In 2000, the Corporation adopted a noncontributory, nonqualified supplemental executive retirement plan (the "SERP") covering certain executive employees. Annual benefits payable under the SERP are based on factors similar to those for the pension plan, with offsets related to amounts payable under the pension plan and social security benefits. SERP costs, which are actuarially determined using the projected unit credit method and recorded on an unfunded basis, are charged to current operations and credited to a liability account on the consolidated balance sheet. 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 The Corporation accounts for awards under employee stock-based compensation plans in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees" and, acordingly, no compensation cost has been recognized for such awards in the consolidated financial statements. As required by Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation", the Corporation discloses in a footnote the pro forma effect on net income and earnings per share that would result from the use of the fair value based method to measure compensation costs related to awards granted after December 15, 1994. Derivative Financial Instruments The Corporation may use off-balance sheet derivative contracts for interest rate risk management purposes. The existing contracts, all of which expired in 1999, were accounted for on the accrual basis and the net interest differential, including premiums paid, if any, were 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 two-for-one common stock split effected in the form of a 100% stock dividend paid to shareholders on March 18, 1998. Note 2 - Merger Information 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. Accordingly, all historical financial information included in these consolidated financial statements has been restated to include the account balances and results of operations of Carolina Fincorp. 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 restricted stock plan shares became fully vested, resulting in certain expenses considered merger-related. Other primary components of merger-related expenses were professional fees, investment banking fees, contract termination costs, data processing conversion fees and severance payments. 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. The primary components of merger-related expenses, including the amounts incurred through December 31, 2000 and the amounts remaining as accrued expenses at December 31, 2000, are as follows:
Incurred Remaining Total Through Accrual at Merger-Related December 31, December 31, Expenses 2000 2000 ---------- --------- --------- (in thousands) Professional fees $ 569 $ 554 $ 15 Investment banking fees 558 558 -- Contract termination costs 467 467 -- ESOP and restricted stock plan termination costs 385 385 -- Data processing conversion fees 209 209 -- Severance payments 161 124 37 Other merger expenses 447 447 -- ------ ------ ------ Total $2,796 $2,744 $ 52 ====== ====== ======
For purposes of preparing the 1999 consolidated balance sheet, the year-end for Carolina Fincorp was conformed from a June 30 year-end to the December 31 year-end of the Corporation. In preparing other consolidated financial statements for 1999 and prior years and for the consolidated balance sheets before December 31, 1999, the results of operations for Carolina Fincorp are included based on the June 30 year-end. The net results of operations for Carolina Fincorp for the six months ended December 31, 1999 are included as a conforming adjustment in preparing the consolidated statement of shareholders' equity and comprehensive income and consolidated statement of cash flows for the year ended December 31, 1999. The equity adjustment to conform fiscal periods for the consolidated statement of shareholders' equity and comprehensive income consisted of the following for the operations of Carolina Fincorp for the six months ended December 31, 1999 (in thousands): Net income $ 476 Cash dividends declared (202) ESOP and restricted stock plan transactions 128 Unrealized securities losses, net of income taxes (20) ------ Equity adjustment to conform fiscal periods $ 382 ======
Separate financial information for the pooled entities for the years ended December 31, 1999 and 1998 is as follows:
FNB Carolina Corp. Fincorp Combined ---------- --------- --------- (in thousands) 1999 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 Net income per common share: Basic 1.27 .54 1.11 Diluted 1.23 .54 1.09 1998 Total assets $356,623 $115,565 $472,188 Total revenues 29,615 9,252 38,867 Net interest income 14,820 4,578 19,398 Net income 4,562 1,069 5,631 Net income per common share: Basic 1.25 .61 1.12 Diluted 1.20 .61 1.09
Note 3 - 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 --------- ---------- ---------- ---------- (in thousands) Available For Sale December 31, 2000 U.S. Treasury $ 749 $ 4 $ -- $ 753 U.S. Government agencies and corporations 69,854 67 649 69,272 Equity securities 2,969 29 -- 2,998 ------- ------- ------- ------- Total $73,572 $ 100 $ 649 $73,023 ======= ======= ======= ======= December 31, 1999 U.S. Treasury $ 1,000 $ 8 $ -- $ 1,008 U.S. Government agencies and corporations 60,855 -- 3,018 57,837 Equity securities 2,208 12 -- 2,220 ------- ------- ------- ------- Total $64,063 $ 20 $ 3,018 $61,065 ======= ======= ======= ======= Held To Maturity December 31, 2000 U.S. Government agencies and corporations $36,089 $ -- $ 330 $35,759 Mortgage-backed securities 483 5 -- 488 State, county and municipal 19,735 622 5 20,352 Other debt securities 3,054 78 4 3,128 ------- ------- ------- ------- Total $59,361 $ 705 $ 339 $59,727 ======= ======= ======= ======= December 31, 1999 U.S. Government agencies and corporations $37,089 $ -- $ 1,656 $35,433 Mortgage-backed securities 594 4 3 595 State, county and municipal 20,048 156 239 19,965 Other debt securities 990 -- 30 960 ------- ------- ------- ------- Total $58,721 $ 160 $ 1,928 $56,953 ======= ======= ======= =======
The amortized cost and estimated fair value of investment securities at December 31, 2000, 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 ------------------------ -------------------------- Estimated Estimated Amortized Fair Amortized Fair Cost Value Cost Value ----------- ----------- ----------- ----------- (in thousands) Due in one year or less $ 3,999 $ 3,993 $ 4,591 $ 4,589 Due after one year through five years 26,221 25,975 33,172 32,978 Due after five years through ten years 38,883 38,563 12,529 12,766 Due after ten years 1,500 1,494 8,586 8,906 ------- ------- ------- ------- Total 70,603 70,025 58,878 59,239 Mortgage-backed securities -- -- 483 488 Equity securities 2,969 2,998 -- -- ------- ------- ------- ------- Total investment securities $73,572 $73,023 $59,361 $59,727 ======= ======= ======= =======
Debt securities with an estimated fair value of $68,433,000 were pledged to secure public funds and trust funds on deposit at December 31, 2000. Debt securities with an estimated fair value of $18,800,000 were pledged to secure retail repurchase agreements at December 31, 2000. Proceeds from the sales of investment securities classified as available-for-sale amounted to $77,000 in 2000, $500,000 in 1999 and $1,990,000 in 1998. Gross gains realized on these sales were $76,000 in 2000 and $2,000 in 1998. Gross losses realized on these sales were $1,000 in 1998. The Bank, as a member of the Federal Home Loan Bank (the "FHLB") of Atlanta, is required to own capital stock in the FHLB of Atlanta based generally upon the balances of residential mortgage loans and FHLB advances. FHLB capital stock is pledged to secure FHLB advances. No ready market exists for this stock, and it has no quoted market value. However, redemption of this stock has historically been at par value. At December 31, 2000 and 1999, the Bank owned a total of $2,557,000 and $2,055,000, respectively, of FHLB stock. Note 4 - Loans Major classifications of loans are as follows:
December 31 2000 1999 -------- -------- (in thousands) Commercial and agricultural $160,057 $125,331 Real estate - construction 5,734 5,472 Real estate - mortgage: 1-4 family residential 165,057 170,577 Commercial and other 16,050 22,214 Consumer 25,290 30,340 Leases 13,679 6,832 -------- -------- Loans held for investment 385,867 360,766 Loans held for sale 9,870 74 -------- -------- Gross loans $395,737 $360,840 ======== ========
Loans as presented are reduced by net deferred loan fees of $405,000 and $427,000 at December 31, 2000 and 1999, respectively. Nonaccrual loans amounted to $1,478,000 at December 31, 2000 and $1,602,000 at December 31, 1999. Interest income that would have been recorded on nonaccrual loans for the years ended December 31, 2000, 1999 and 1998 had they performed in accordance with their original terms, amounted to approximately $137,000, $153,000 and $63,000, respectively. Interest income on all such loans included in the results of operations amounted to approximately $98,000 in 2000, $90,000 in 1999 and $30,000 in 1998. At December 31, 2000, the Bank had impaired loans which totaled $321,000 and were also on nonaccrual status. The related allowance for loan losses on these loans amounted to $73,000. At December 31, 1999 the Bank had impaired loans which totaled $1,420,000 and were also on nonaccrual status. The related allowance for loan losses on these loans amounted to $289,000. The average carrying value of impaired loans was $330,000 in 2000, $1,508,000 in 1999 and $467,000 in 1998. Interest income on impaired loans amounted to approximately $17,000 in 2000, $87,000 in 1999 and was not material in 1998. Loans with outstanding balances of $1,173,000 in 2000 and $549,000 in 1999 were transferred from loans to other real estate acquired through foreclosure. Such loans transferred in 1998 were not material. Other real estate acquired through loan foreclosures amounted to $163,000 at December 31, 2000 and $423,000 at December 31, 1999 and is included in other assets on the consolidated balance sheet. Loans are primarily made in the region of North Carolina that includes Chatham, Montgomery, Moore, Randolph, Richmond and Scotland counties. The real estate loan portfolio can be affected by the condition of the local real estate markets. 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 2000 with respect to related party loans is as follows (in thousands):
Balance, December 31, 1999 $ 9,096 New loans during 2000 16,760 Repayments during 2000 (17,836) -------- Balance, December 31, 2000 $ 8,020 ========
Note 5 - Allowance for Loan Losses Changes in the allowance for loan losses were as follows:
Years Ended December 31 ----------------------------------- 2000 1999 1998 ------- -------- -------- (in thousands) Balance at beginning of year $ 3,289 $ 2,954 $ 2,694 Provision for losses charged to operations 1,802 511 482 Loans charged off (913) (357) (396) Recoveries on loans previously charged off 253 154 174 Allowance adjustment for loans sold (79) -- -- Adjustment to conform fiscal periods -- 27 -- ------- ------- ------- Balance at end of year $ 4,352 $ 3,289 $ 2,954 ======= ======= =======
Note 6 - Premises and Equipment Premises and equipment are summarized as follows:
December 31 ---------------------- 2000 1999 ------- ------- (in thousands) Land $ 2,342 $ 2,342 Buildings and improvements 6,672 6,599 Furniture and equipment 9,207 8,933 Leasehold improvements 434 415 ------- ------- Total 18,655 18,289 Less accumulated depreciation and amortization 9,059 7,959 ------- ------- Premises and equipment, net $ 9,596 $10,330 ======= =======
Note 7 - Income Taxes Income taxes as reported in the consolidated income statement included the following expense (benefit) components:
2000 1999 1998 ------- ------- ------- (in thousands) Current: Federal $ 2,106 $ 2,633 $ 2,663 State 6 62 110 ------- ------- ------- Total 2,112 2,695 2,773 ------- ------- ------- Deferred - Federal (398) (191) (205) ------- ------- ------- Total income taxes $ 1,714 $ 2,504 $ 2,568 ======= ======= =======
A reconciliation of income tax expense computed at the statutory Federal income tax rate to actual income tax expense is presented below:
2000 1999 1998 ------- ------- ------- (in thousands) Amount of tax computed using Federal statutory tax rate of 34% $ 1,778 $ 2,752 $ 2,788 Increases (decreases) resulting from effects of: Non-taxable income (329) (316) (308) Non-deductible merger-related expenses 331 -- -- Other (66) 68 88 ------- ------- ------- Total $ 1,714 $ 2,504 $ 2,568 ======= ======= =======
The components of deferred tax assets and liabilities and the tax effect of each are as follows:
December 31 -------------------- 2000 1999 ------ ------ (in thousands) Deferred tax assets: Allowance for loan losses $1,161 $ 798 Net unrealized securities losses 186 1,020 Compensation and benefit plans 924 794 Other 80 72 ------ ------ Total 2,351 2,684 ------ ------ Deferred tax liabilities: Depreciable basis of premises and equipment 337 312 Prepaid pension cost 297 288 Net deferred loan fees and costs 225 175 Other 212 193 ------ ------ Total 1,071 968 ------ ------ Net deferred tax asset $1,280 $1,716 ====== ======
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. The Corporation is permitted under the Internal Revenue Code to deduct an annual addition to a reserve for bad debts in determining taxable income, subject to certain limitations. This addition differs significantly from the provisions for losses for financial reporting purposes. Under generally accepted accounting principles, the Corporation is not required to provide a deferred tax liability for the tax effect of additions to the tax bad debt reserve through 1987, the base year. Retained earnings at December 31, 2000, includes approximately $1,400,000 for which no provision for federal income tax has been made. These amounts represent allocations of income to bad debt deductions for tax purposes only. Reductions of such amounts for purposes other than bad debt losses could create income for tax purposes in certain remote instances, which would then be subject to the then current corporate income tax rate. Note 8 - Time Deposits The scheduled maturities of time deposits at December 31, 2000 are as follows (in thousands):
Years ending December 31 ------------------------- 2001 $248,908 2002 39,063 2003 8,694 2004 1,240 2005 1,819 -------- Total time deposits $299,724 ========
Note 9 - Short-Term 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:
2000 1999 -------------------------- ----------------------------- Retail Federal Retail Federal Repurchase Funds Repurchase Funds Agreements Purchased Agreements Purchased ------------ ----------- ----------- ----------- (dollars in thousands) Balance at December 31 $11,201 $ 4,750 $10,667 $ 7,735 Average balance during the year 11,091 1,112 12,971 1,590 Maximum month-end balance 12,580 5,000 14,230 8,200 Weighted average interest rate: At December 31 4.82% 6.84% 3.97% 5.18% During the year 4.64 6.47 3.87 5.38
Note 10 - Federal Home Loan Bank (FHLB) Advances The Bank has a $67,800,000 line of credit with the FHLB, secured by a blanket collateral agreement on qualifying 1-4 family residential mortgage loans. At December 31, 2000, FHLB advances under this line amounted to $15,000,000 and were at interest rates ranging from 4.92% to 5.92%. At December 31, 1999, FHLB advances amounted to $15,000,000 and were at interest rates ranging from 4.92% to 5.36%. The scheduled maturities of FHLB advances at December 31, 2000 are as follows (in thousands):
Years ending December 31 ------------------------- 2009 $ 7,000 2010 8,000 ------- Total FHLB Advances $15,000 =======
Note 11 - 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 status of the plan is as follows:
2000 1999 ------- ------- (dollars in thousands) Change in Benefit Obligation: Benefit obligation at beginning of year $ 5,742 $ 6,137 Service cost 255 225 Interest cost 428 392 Net actuarial loss (gain) 139 (648) Benefits paid (336) (364) ------- ------- Benefit obligation at end of year $ 6,228 $ 5,742 ======= ======= Change in Plan Assets: Fair value of plan assets at beginning of year $ 7,832 $ 7,231 Actual return (loss) on plan assets (192) 965 Employer contributions 56 -- Benefits paid (336) (364) Other 88 -- ------- ------- Fair value of plan assets at end of year $ 7,448 $ 7,832 ======= ======= Prepaid Pension Cost Components: Funded status of plan $ 1,220 $ 2,090 Unrecognized net actuarial gain (932) (1,957) Unrecognized prior service cost 566 673 Unrecognized transition obligation 21 43 ------- ------- Prepaid pension cost at end of year $ 875 $ 849 ======= ======= Weighted-Average Plan Assumptions at End of Year: Discount rate 7.5% 7.5% Expected long-term rate of return on plan assets 9.0 9.0 Rate of increase in compensation levels 5.5 5.5
Net periodic pension cost included the following components:
2000 1999 1998 ------ ------ ------- (in thousands) Service cost $ 255 $ 225 $ 177 Interest cost 428 392 379 Expected return on plan assets (697) (634) (477) Amortization of prior service cost 107 107 107 Amortization of transition obligation 21 21 21 Recognized net actuarial gain (84) (16) (1) ----- ----- ----- Net periodic pension cost $ 30 $ 95 $ 206 ===== ===== =====
Supplemental Executive Retirement Plan In 2000, the Corporation adopted a noncontributory, nonqualified supplemental executive retirement plan (the "SERP") covering certain executive employees. Annual benefits payable under the SERP are based on factors similar to those for the pension plan, with offsets related to amounts payable under the pension plan and social security benefits. Information concerning the status of the plan is as follows:
2000 ----- (dollars in thousands) Change in Benefit Obligation: Benefit obligation at beginning of year $-- Service cost 20 Interest cost 21 Amendments 288 ----- Benefit obligation at end of year $ 329 ===== Change in Plan Assets: Fair value of plan assets at beginning of year $-- Actual return on plan assets -- Employer contributions -- Benefits paid -- ----- Fair value of plan assets at end of year $-- ===== Accrued SERP Cost Components: Funded status (liability) of plan $(329) Unrecognized net actuarial gain -- Unrecognized prior service cost 256 Unrecognized transition obligation -- ----- Accrued SERP cost at end of year $ (73) ===== Weighted-Average Plan Assumptions at End of Year: Discount rate 7.5% Expected long-term rate of return on plan assets 7.5
Net periodic SERP cost included the following components: 2000 ----- (in thousands) Service cost $20 Interest cost 21 Expected return on plan assets -- Amortization of prior service cost 32 Amortization of transition obligation -- Recognized net actuarial gain -- ----- Net periodic pension cost $73 ===== 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. Information concerning the plans, which are unfunded, is as follows:
2000 1999 ----- ----- (dollars in thousands) Change in Benefit Obligation: Benefit obligation at beginning of year $ 729 $ 763 Service cost 29 22 Interest cost 52 48 Net actuarial gain (13) (46) Benefits paid (46) (58) ----- ----- Benefit obligation at end of year $ 751 $ 729 ===== ===== Accrued Postretirement Benefit Cost Components: Unrecognized net actuarial gain $(687) $(652) Unrecognized prior service cost 49 59 Unrecognized transition obligation 243 263 ----- ----- Accrued postretirement benefit cost at end of year $(395) $(330) ===== ===== Weighted-Average Plan Assumptions at End of Year: Discount rate 7.5% 7.5% Annual rate of increase in the cost of medical benefits: Current year 10.0 11.0 Final constant amount 6.0 5.0 Annual decrease 1.0 1.0
Increasing or decreasing the assumed medical cost trend rate by one percentage point would not have a significant effect on either the postretirement benefit obligation at December 31, 2000 or the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year ended December 31, 2000. Net periodic postretirement benefit cost included the following components:
2000 1999 1998 ---- ---- ---- (in thousands) Service cost $ 29 $ 22 $ 19 Interest Cost 52 48 47 Amortization of prior service cost 10 10 10 Amortization of transition obligation 20 20 20 Recognized net actuarial loss -- 4 3 ---- ---- ---- Net periodic postretirement benefit cost $111 $104 $ 99 ==== ==== ====
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 $117,000 in 2000, $107,000 in 1999 and $96,000 in 1998. Carolina Fincorp maintained a 401(k) retirement plan. Upon completion of the merger with Carolina Fincorp in 2000, the plan was rolled into the Corporation's matching retirement/savings plan. The matching contributions for the Carolina Fincorp 401(k) retirement plan amounted to $24,000 in 1999 and $21,000 in 1998. ESOP and Restricted Stock Plans Carolina Fincorp had established an ESOP, or employee stock ownership plan, for the benefit of all qualified employees. Under the terms of the ESOP, shares of Carolina Fincorp common stock, for future allocation to plan participants, were purchased with proceeds from a loan by the parent company with repayments to be made by the subsidiary bank. Under a restricted stock plan for directors, officers and employees, newly issued shares of Carolina Fincorp common stock were awarded to plan participants on a deferred vesting schedule. Compensation expense related to the ESOP and restricted stock plans amonunted to $115,000 in 2000, $231,000 in 1999 and $648,000 in 1998. Upon the change in contol when the merger occurred in 2000, the ESOP plan terminated according to its terms and unvested restricted stock plan shares became fully vested, resulting in $385,000 of merger-related expenses. Note 12 - Leases Future obligations at December 31, 2000 for minimum rentals under noncancellable operating lease commitments, primarily relating to premises, are as follows (in thousands):
Years ending December 31 ------------------------- 2001 $ 79 2002 17 2003 8 2004 3 2005 3 2006 and later years 39 ---- Total minimum lease payments $149 ====
Net rental expense for all operating leases amounted to $87,000 in 2000, $81,000 in 1999 and $73,000 in 1998. One operating lease for real property contains a purchase option considered to approximate fair market value. Note 13 - Supplementary Income Statement Information Significant components of other expense were as follows:
2000 1999 1998 ---- ---- ---- (in thousands) Stationery, printing and supplies $521 $493 $391 Advertising and marketing 392 460 411
Note 14 - 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, 2000 and 1999, and the related condensed statements of income and cash flows for each of the years in the three-year period ended December 31, 2000 are as follows: Condensed Balance Sheets
December 31 ------------------- 2000 1999 ------- ------- (in thousands) Assets: Cash $ 1,718 $ 1,258 Investment in wholly-owned bank subsidiary 53,278 50,129 Other assets 885 1,244 ------- ------- Total assets $55,881 $52,631 ======= ======= Liabilities and Shareholders' Equity: Accrued liabilities $ 759 $ 563 Shareholders' equity 55,122 52,068 ------- ------- Total liabilities and shareholders' equity $55,881 $52,631 ======= =======
Condensed Statements of Income
Years Ended December 31 ---------------------------------- 2000 1999 1998 ------ ------ ----------- (in thousands) Income: Dividends from bank subsidiary $2,403 $6,554 $1,835 Other income 139 130 588 ------ ------ ------ Total income 2,542 6,684 2,423 ------ ------ ------ Expenses: Operating 89 170 162 Merger related 146 - - ------ ------ ------ Total expenses 235 170 162 ------ ------ ------ Income before income taxes and equity in undistributed net income of bank subsidiary 2,307 6,514 2,261 Income taxes (benefit) 28 (4) 153 ------ ------ ------ Income before equity in undistributed net income of bank subsidiary 2,279 6,518 2,108 Equity in undistributed (excess of dividends over) net income of bank subsidiary 1,237 (928) 3,523 ------ ------- ------ Net income $3,516 $5,590 $5,631 ====== ====== ======
Condensed Statements of Cash Flows
Years Ended December 31 ------------------------------------------ 2000 1999 1998 -------- -------- -------- (in thousands) Operating activities: Net income $ 3,516 $ 5,590 $ 5,631 Adjustments to reconcile net income to net cash provided by operating activities: Excess of dividends over (equity) in undistributed) net income of bank subsidiary (1,237) 928 (3,523) Other, net 407 (582) 6 -------- -------- -------- Net cash provided by operating activities 2,686 5,936 2,114 -------- -------- -------- Investing activities: Proceeds from sales and maturities of available-for-securities 77 -- 7,754 Other, net 64 29 (140) -------- -------- -------- Net cash provided by investing activities 141 29 7,614 -------- -------- -------- Financing activities: Increase (decrease) in borrowed funds -- (3,200) 3,200 Common stock issued 203 96 241 Common stock repurchased (105) (327) -- Cash dividends and fractional shares paid (2,465) (2,284) (1,902) Return of capital dividend -- -- (11,422) -------- -------- -------- Net cash used in financing activities (2,367) (5,715) (9,883) -------- -------- -------- Net increase (decrease) in cash 460 250 (155) Cash at beginning of year 1,258 1,366 1,521 Adjustment to conform fiscal periods -- (358) -- -------- -------- -------- Cash at end of year $ 1,718 $ 1,258 $ 1,366 ======== ======== ========
Note 15 - 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 2001, the maximum amount of dividends the Bank can pay to FNB Corp., without the approval of the Comptroller of the Currency, is $3,546,000 plus an additional amount equal to the retained net income in 2001 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, 2000, the average daily reserve requirement was $5,540,000. 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 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 December 31, 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. 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 1 risk-based and Tier 1 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 2000 1999 2000 1999 Purposes Action Provisions ------- ------- ------ ------ -------- ----------------- (dollars in thousands) As of December 31 Total capital (to risk-weighted assets): FNB Corp. $59,833 $57,334 15.15% 16.77% 8.00% N/A Bank 57,982 55,377 14.69 16.20 8.00 10.00% Tier 1 capital (to risk-weighted assets): FNB Corp. 55,468 54,040 14.05 15.80 4.00 N/A Bank 53,617 52,083 13.58 15.24 4.00 6.00% Tier 1 capital (to average assets): FNB Corp. 55,468 54,040 9.92 10.53 4.00 N/A Bank 53,617 52,083 9.58 10.15 4.00 5.00%
Note 16 - 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 reconciliation of the denominators of the basic and diluted EPS computations is as follows:
2000 1999 1998 --------- --------- --------- Basic EPS denominator - Weighted average number of common shares outstanding 5,035,529 5,022,403 5,043,181 Dilutive share effect arising from assumed exercise of stock options 42,408 115,962 144,948 --------- --------- --------- Diluted EPS denominator 5,077,937 5,138,365 5,188,129 ========= ========= =========
For the years 2000 and 1999, there were 323,601 and 96,364 stock options, respectively, that were antidilutive since the exercise price exceeded the average market price. These common stock equivalents were omitted from the calculations of diluted EPS for their respective years. There were no antidilutive stock options in 1998. Stock Options 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 720,000 shares of common stock has been reserved for issuance under the stock compensation plan. At December 31, 2000, there were 42,850 shares available under the plan for the granting of additional options. The Corporation assumed a stock compensation plan in its merger acquistion of Carolina Fincorp in 2000. One grant of incentive and nonqualified stock options was made under the plan in 1999 to key employees and directors at a price equal to fair market value on the date of grant. No additional grants will be made under the plan. The total stock options assumed on April 10, 2000, the date of completion of the merger, amounted to 109,300 shares after adjustment for the exchange ratio in converting from Carolina Fincorp shares to FNB Corp. shares. All unvested options of Carolina Fincorp that were outstanding on April 10, 2000 became immediately vested as a result of a change-in-control provision in the plan that was triggered by the merger. Based on the stock options outstanding at December 31, 2000, a maximum of 102,348 shares of common stock has been reserved for issuance under the stock compensation plan. The Corporation applies APB Opinion No. 25 in accounting for stock compensation plans 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 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 measure compensation costs related to stock option grants in 1995 and subsequent years.
2000 1999 1998. ------ ------ ------ (in thousands, except per share data) Net Income: As reported $3,516 $5,590 $5,631 Pro forma 3,199 5,346 5,490 Net Income Per Share: Basic: As reported .70 1.11 1.12 Pro forma .64 1.06 1.09 Diluted: As reported .69 1.09 1.09 Pro forma .63 1.04 1.06
The weighted-average fair value per share of options granted in 2000, 1999 and 1998 amounted to $4.16, $4.21 and $11.17, respectively. Fair values were estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:
2000 1999 1998 -------- -------- -------- Risk-free interest rate 5.00% 6.23% 4.70% Dividend yield 3.50 3.20 1.80 Volatility 44.00 41.00 44.00 Expected life 6 years 6 years 6 years
The following is a summary of stock option activity. For comparison purposes, Carolina Fincorp and the Corporation were consolidated using conforming fiscal years.
Years Ended December 31 --------------------------------------------------------------------- 2000 1999 1998 ----------------------- --------------------- --------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ------ ----- ------ ----- ------ ----- Outstanding at beginning of year 567,315 $14.25 396,089 $15.53 340,800 $12.93 Granted 222,500 11.74 185,070 11.58 71,000 27.00 Exercised (15,355) 9.24 (7,619) 11.29 (14,711) 10.47 Forfeited (46,315) 16.69 (6,225) 19.22 (1,000) 17.50 ------- ------- ------- Outstanding at end of year 728,145 13.44 567,315 14.25 396,089 15.53 ======= ======= ======= Options exercisable at end of year 371,645 12.69 289,359 12.10 151,639 11.37 ======= ======= =======
At December 31, 2000, 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 77,250 3.96 77,250 12.00 58,700 4.96 58,700 14.00 72,450 5.96 57,650 16.00 2,000 6.75 1,200 17.50 75,600 6.96 45,600 27.00 59,875 7.96 24,175 9.82 93,895 8.13 93,895 14.13 65,875 8.96 13 175 10.00 1,000 9.58 - 11.63 1,000 9.79 - 11.75 220,500 9.96 - ------- ------- 728,145 7.71 371,645 ======= =======
Note 17 - Commitments In the normal course of business, various commitments are outstanding that are not reflected in the consolidated financial statements. At December 31, 2000, a summary of significant commitments is as follows: Commitments to extend credit $82,959,000 Standby letters of credit 782,000 In management's opinion, these commitments will be funded from normal operations with not more than the normal risk of loss. Note 18 - 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. The fair value of Federal Home Loan Bank advances is estimated using the rates currently offered for advances of similar remaining maturities. 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 17. The estimated fair values of financial instruments are as follows:
December 31, 2000 December 31, 1999 ---------------------- ---------------------- Estimated Estimated Carrying Fair Carrying Fair Value Value Value Value -------- -------- -------- -------- (in thousands) Financial Assets Cash and cash equivalents $ 14,202 $ 14,202 $ 21,923 $ 21,923 Investment securities: Available for sale 73,023 73,023 61,065 61,065 Held to maturity 59,361 59,727 58,721 56,953 Net loans 391,385 385,698 357,551 349,823 Financial Liabilities Deposits 472,448 474,656 427,010 428,231 Retail repurchase agreements 11,201 11,201 10,667 10,667 Federal Home Loan Bank advances 15,000 15,219 15,000 13,994 Federal funds purchased 4,750 4,750 7,735 7,735
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. 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, as of March 23, 2001. FNB Corp. (Registrant) By: /s/ Michael C. Miller ------------------------------ Michael C. Miller Chairman and President 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, as of March 23, 2001.
Signature Title --------- ----- /s/ Michael C. Miller Chairman and President - ------------------------------------ Michael C. Miller /s/ Jerry A. Little Treasurer and Secretary - ------------------------------------ (Principal Financial and Jerry A. Little Accounting Officer) /s/ James M. Campbell, Jr. Director - --------------------------- James M. Campbell, Jr. /s/ R. Larry Campbell Director - --------------------------- R. Larry Campbell /s/ Darrell L. Frye Director - ------------------------------------ Darrell L. Frye /s/ Wilbert L. Hancock Director - ------------------------------------ Wilbert L. Hancock /s/ Thomas A. Jordan Director - ------------------------------------ Thomas A. Jordan
/s/ Cooper M. McLaurin Director - --------------------------- Cooper M. McLaurin /s/ R. Reynolds Neely, Jr. Director - --------------------------- R. Reynolds Neely, Jr. /s/ Richard K. Pugh Director - ------------------------------------ Richard K. Pugh /s/ J. M. Ramsay III 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
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. 3.12 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. 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 to 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* 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. 10.31* Carolina Fincorp, Inc. Stock Option Plan (assumed by the Registrant on April 10, 2000), incorporated herein by reference to Exhibit 99.1 to the Registrant's Registration Statement on Form S-8 (File No. 333-54702). 10.32* Employment Agreement dated as of April 10, 2000 between First National Bank and Trust Company and R. Larry Campbell. 21 Subsidiaries of the Registrant. 23 Consent of Independent Auditors. - ----------------
*Management contract, or compensatory plan or arrangement. EX-10.32 2 0002.txt CONTRACT LARRY CAMPBELL Exhibit 10.32 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (this "Agreement") made and entered into as of the 10th day of April, 2000, by and between FIRST NATIONAL BANK AND TRUST COMPANY, a national banking corporation with its principal office and place of business located in Asheboro, North Carolina (the "Bank") and R. LARRY CAMPBELL (the "Employee"). W I T N E S S E T H: - - - - - - - - - - WHEREAS, the Bank desires to employ the Employee, the Employee desires to accept employment with the Bank, and each desires to enter into an agreement embodying the terms of such employment; NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and in consideration of the mutual covenants and obligations herein contained, the parties hereto agree as follows: 1. Employment. The Bank hereby employs the Employee, and the Employee hereby accepts employment with the Bank, for the term set forth in Section 2 below, in the position and with the duties and responsibilities set forth in Section 3 below, and upon the other terms and conditions hereinafter stated. 2. Term. The term of this Agreement shall commence as of the date hereof and, unless otherwise terminated as hereinafter provided, shall continue for an initial term of three years and shall automatically be extended on each anniversary date of this Agreement for an additional one year period so that the term shall again be three years unless either party notifies the other of its decision not to continue such annual renewal by written notice given not less than 90 days prior to such anniversary date. Notwithstanding the foregoing, there shall be no automatic extension of the term of this Agreement after the sixth anniversary date of this Agreement, but absent written notice from either party in accordance with the previous sentence, this Agreement will be automatically extended on the sixth anniversary date so that the term will again be three years from such date. 3. Position and Responsibilities. The Employee shall serve as a Senior Vice President and Regional Manager of the Bank for Richmond County, North Carolina and for such other counties in North Carolina as the Bank may designate, or in such other appropriate position and with such duties as the Bank may in the future designate. In such capacity, the Employee shall at all times report to, and his activities shall at all times be subject to the direction and control of, the principal executive officer of the Bank or his designee. The Employee shall devote substantially all of his business time, attention and services to discharge faithfully and diligently his duties and responsibilities under this Agreement and to use his best efforts for both the successful operation of the Bank's business and the successful implementation of the policies established by the Bank or its parent, FNB Corp. ("FNB"). 1 4. Compensation and Benefits. During the term of this Agreement, the Bank shall provide to the Employee the following compensation and benefits: (a) Salary. In consideration of the services to be rendered by the Employee to the Bank and the Employee's covenants hereunder, the Bank shall pay to the Employee a base salary at the rate of $100,000 per annum (such salary as it may be increased from time to time being hereinafter referred to as the "Base Salary"). The Employee shall receive from the Bank a formal review of Employee's performance at least as frequently as annually, and Employee may be considered for merit increases to his Base Salary in accordance with the Bank's policies and practices for employee compensation as established or modified from time to time. Except as may otherwise be agreed, the Base Salary shall be payable in accordance with the Bank's policies and practices for employee compensation as established or modified from time to time; provided that the Base Salary shall be payable not less frequently than monthly. Salary payments shall be subject to all applicable federal and state withholding, payroll and other taxes. (b) Group Benefit Plans and Programs. The Employee will be entitled to participate, in accordance with the provisions thereof, in any group health, disability and life insurance, and any bonus, pension, retirement and other employee benefit plans and programs made available by the Bank or FNB to their employees generally. (c) Supplemental Plans. The Bank shall assume the obligations of Richmond Savings Bank, Inc., SSB (the "Savings Bank") with respect to that Executive Income Plan Deferred Compensation Agreement and Split Dollar Agreement each dated January 1, 1987 and subsequently amended January 1, 1992 (collectively, the "Supplemental Plans") and shall continue the Supplemental Retirement Plans in effect in accordance with the terms thereof; provided, however, that nothing herein shall prohibit the Bank from terminating either or both Supplemental Retirement Plans upon the Employee's voluntary termination of employment or upon a termination for Cause (as defined below). (d) Club Dues. The Bank shall pay or reimburse the Employee for the monthly dues and assessments necessary for Employee to maintain the status of an active member of the Richmond Pines Country Club. (e) Vacation. The Employee shall be entitled to such vacation and other leave as may be provided by the Bank or FNB to their employees in similar positions generally; provided, however, that, to the extent that the amount of vacation and other leave to which the Employee is entitled is related to the Employee's years of service to the Bank or FNB, the Employee shall be given credit for each year of service as an employee of the Savings Bank. (f) Automobile. The Bank shall provide the Employee with a suitable vehicle for his exclusive use in the discharge of his duties hereunder and shall pay all operating and service expenses, including automobile insurance, related to such vehicle. Any personal use of such 2 vehicle by the Employee will be appropriately accounted for and reported as additional compensation. (g) Business Expenses. The Bank shall reimburse the Employee for any reasonable out-of-pocket business and travel expenses incurred by the Employee in the ordinary course of performing his duties for the Bank upon presentation by the Employee, from time to time, of appropriate documentation therefor and in accordance with the Bank's policies and practices as established or modified from time to time. (h) Convention Attendance. The Bank shall pay all registration, travel, accommodation and meal expenses for the Employee and his spouse to attend the annual convention of the North Carolina Bankers Association each year. 5. Termination. The Employee's term of employment under this Agreement may be terminated before the end of the initial term or any extension thereof as follows: (a) Death. In the event of the death of the Employee during his employment under this Agreement, this Agreement shall be terminated as of the date of death. In such event, the Bank shall pay the Employee's Base Salary, at the rate in effect at the time of his death and through the last day of the calendar month in which such death occurs, to the Employee's designated beneficiary, or, in the absence of such designation, to the estate or other legal representative of the Employee. Any rights and benefits the Employee's estate or any other person may have under employee benefit plans and programs of the Bank or any benefit plans or agreements of Richmond Savings Bank, Inc., SSB ("Richmond Savings") or Carolina Fincorp, Inc. ("Carolina") that are assumed by the Bank or FNB in the event of the Employee's death shall be determined in accordance with the terms of such plans and programs. (b) Long-Term Disability. If the Employee suffers any disability while employed under this Agreement that prevents him from performing his duties under this Agreement for a period of 90 consecutive days, then, unless otherwise then agreed in writing by the parties hereto, the employment of the Employee under this Agreement shall, at the election of the Bank, be terminated effective as of the ninetieth day of such period. Upon termination of the Employee's employment by reason of disability under this Section 5(b), the Employee shall be entitled to receive his Base Salary, at the rate in effect on the date of such termination, less any disability insurance payments paid to the Employee on a policy maintained for the benefit of the Employee by the Bank or FNB, through the end of the then current term of this Agreement. Any rights and benefits the Employee may have under employee benefit plans and programs of the Bank or any benefit plans or agreements of Richmond Savings or Carolina that are assumed by the Bank or FNB in the event of the Employee's disability shall be determined in accordance with the terms of such plans and programs. For purposes of this Agreement, "disability" shall mean the inability, by reason of bodily injury or physical or mental disease, or any combination thereof, of the Employee to perform his customary or other comparable duties with the Bank. In the event that the Employee and the Bank are unable to agree as to whether the Employee is suffering a disability, the Employee and 3 the Bank shall each select a physician and the two physicians so chosen shall make the determination or, if they are unable to agree, they shall select a third physician, and the determination as to whether the Employee is suffering a disability shall be based upon the determination of a majority of the three physicians. The Bank shall pay the reasonable fees and expenses of all physicians selected pursuant to this Section 5(b). (c) Termination for Cause. Nothing herein shall prevent the Bank from terminating the Employee's employment at any time for Cause (as hereinafter defined). Upon termination for Cause, the Employee shall receive his Base Salary only through the date that such termination becomes effective. Neither the Employee nor any other person shall be entitled to any further payments from the Bank, for salary or any other amounts. Notwithstanding the foregoing, any rights and benefits the Employee may have under employee benefit plans and programs of the Bank or any benefit plans or agreements of Richmond Savings or Carolina that are assumed by the Bank or FNB following a termination of the Employee's employment for Cause shall be determined in accordance with the terms of such plans, agreements and programs. For purposes of this Agreement, termination for Cause shall mean termination by the Bank of the Employee's employment as a result of (i) an intentional, willful and continued failure by the Employee to perform his duties in the capacities indicated above (other than due to disability); (ii) an intentional, willful and material breach by the Employee of his fiduciary duties of loyalty and care to the Bank; (iii) an intentional, willful and knowing violation by the Employee of any provision of this Agreement; (iv) a conviction of, or the entering of a plea of nolo contendere by the Employee for any felony or any crime involving fraud or dishonesty, or (v) a willful and knowing violation of any material federal or state banking law or regulation applicable to the Bank or the occurrence of any event described in Section 19 of the Federal Deposit Insurance Act or any other act or event as a result of which the Employee becomes unacceptable to, or is removed, suspended or prohibited from participating in the conduct of the Bank's affairs by any regulatory authority having jurisdiction over the Bank or FNB. (d) Termination Other Than For Cause. The Bank may terminate the Employee's employment under this Agreement at any time upon 90 days written notice to the Employee for whatever reason it deems appropriate, or for no reason. In the event such termination by the Bank occurs and is not due to death as provided in Section 5(a) above or for Cause as provided in Section 5(c) above, the Bank shall continue the Employee's Base Salary, at the rate in effect at the time of such termination through the end of the then current term of this Agreement. Such salary continuation shall be subject to all applicable federal and state withholding taxes. Any rights and benefits the Employee may have under employee benefit plans and programs of the Bank or FNB or under any benefit plans or agreements of Richmond Savings or FNB that are assumed by the Bank or FNB following a termination of the Employee's employment pursuant to this Section 5(d) shall be determined in accordance with the terms of such plans, agreements and programs. In addition to and notwithstanding the foregoing, in the event of a termination pursuant to this Section 5(d), the Bank shall continue to provide to the Employee either the benefits to which the Employee is entitled under this Agreement or the economic equivalent thereof for the remainder of the term of this Agreement. 4 (e) At the Employee's Option. The Employee may terminate his employment at any time upon at least 60 days advance written notice to the Bank; provided, however, that the Bank, in its discretion, may cause such termination to be effective at any time during such notice period. In the event of such a voluntary termination of employment, the Employee will be entitled to receive only any earned but unpaid Base Salary and the other benefits of this Agreement through the date on which the Employee's termination becomes effective. Notwithstanding the foregoing, any rights and benefits the Employee may have under employee benefit plans and programs of the Bank or any benefit plans or agreements of Richmond Savings or Carolina that are assumed by the Bank or FNB following a voluntary termination of the Employee's employment pursuant to this Section 5(e) shall be determined in accordance with the terms of such plans, agreements and programs. 6. No Solicitation of Change in Control. The Employee will not solicit, counsel or encourage any acquisition, merger or other change in control of FNB or the Bank without the prior written approval of the Board of Directors of the Bank or FNB. A violation of this Section 6 shall be deemed to constitute a forfeiture by the Employee of all of his rights under Section 5(d) hereof. 7. Noncompetition Covenant; Nonsolicitation. For purposes of this Section 7 and the following Sections 8 through 12, "Bank" shall mean the Bank, FNB and/or any of its subsidiaries. (a) For a period commencing on the date hereof and continuing until (i) one (1) year after the date of expiration of the term hereof or the date that any termination of the Employee's employment under this Agreement becomes effective or (ii) the last day of the period after the date that any termination of the Employee's employment under this Agreement becomes effective in which the Employee is entitled to receive any Base Salary pursuant to Section 5 hereof, whichever is later, the Employee will not, directly or indirectly: (i) own any interest in, manage, operate, control, be employed by, render consulting or advisory services to, or participate in or be connected with the management or control of any business that is then engaged in the operation of a bank, savings bank, credit union, mortgage company, savings and loan association or similar financial institution that conducts any of its operations within 60 miles of Rockingham, North Carolina; provided, however, that the Employee may, without violating this Agreement, own as a passive investment not in excess of two percent (2%) of the outstanding capital stock of any such business whose stock is publicly traded or quoted on the NASDAQ over-the-counter market, the New York Stock Exchange, the American Stock Exchange, the National Daily Quotation System "Pink Sheets" or the OTC Bulletin Board; (ii) influence or attempt to influence any customer of the Bank to discontinue its use of the Bank's services or to divert such business to any other person, firm or corporation; 5 (iii) interfere with, disrupt or attempt to disrupt the relationship, contractual or otherwise, between the Bank and any of its respective customers, suppliers, principals, distributors, lessors or licensors; and (iv) solicit any officer or employee of the Bank, whose base annual salary at the time of the Employee's termination was $20,000 or more, to work for any other person, firm or corporation. (b) It is expressly agreed that the provisions and covenants in this Section 7 shall not apply and shall be of no force or effect in the event that the Bank fails to honor its obligations hereunder. (c) The Employee and the Bank intend that Section 7 of this Agreement be enforced as written. However, if one or more of the provisions contained in Section 7 shall for any reason be held to be unenforceable because of the duration or scope of such provision or the area covered thereby, the Employee and the Bank agree that the court making such determination shall have the power to reform the duration, scope and/or area of such provision and in its reformed form such provision shall then be enforceable and shall be binding on the parties. 8. Confidentiality. The Employee hereby acknowledges and agrees that (i) in the course of his service as an employee of the Bank, he will gain substantial knowledge of and familiarity with the Bank's customers and its dealings with them, and other information concerning the business of the Bank, all of which constitute valuable assets and privileged information that is particularly sensitive due to the fiduciary responsibilities inherent in the banking business; and (ii) to protect the interest in and to assure the benefit of the business of the Bank, it is reasonable and necessary to place certain restrictions on the Employee's ability to disclose information about the business and customers of the Bank. For that purpose, and in consideration of the agreements contained herein, the Employee covenants and agrees that any and all data, figures, projections, estimates, lists, files, records, documents, manuals or other such materials or information (financial or otherwise) relating to the Bank and its business, regulatory examinations, financial results and condition, lending and deposit operations, customers (including lists of the customers and information regarding their accounts and business dealings with the Bank), policies and procedures, computer systems and software, shareholders, employees, officers and directors (herein referred to as "Confidential Information") are proprietary to the Bank and are valuable, special and unique assets of the business to which the Employee will have access during his employment hereunder. The Employee shall consider, treat and maintain all Confidential Information as the confidential, private and privileged records and information of the Bank. Further, at all times during the term of his employment and following the termination of his employment under this Agreement for any reason, and except as shall be required in the course of the performance by the Employee of his duties on behalf of the Bank or otherwise pursuant to the direct, written authorization of the Bank, the Employee will not divulge any Confidential Information to any other person, firm, corporation, bank, 6 savings and loan association or similar financial institution, remove any such Confidential Information in written or other recorded form from the Bank's premises, or make any use of the Confidential Information for his own purposes or for the benefit of any person, firm, corporation, bank, savings and loan association or similar financial institution other than the Bank. However, following the termination of the Employee's employment with the Bank, this Section 8 shall not apply to any Confidential Information which then is in the public domain (provided that the Employee was not responsible, directly or indirectly, for permitting such Confidential Information to enter the public domain without the Bank's consent), or which is obtained by the Employee from a third party which or who is not obligated under an agreement of confidentiality with respect to such information. 9. Remedies Upon Breach. Each party agrees that any breach of this Agreement by either party could cause irreparable damage to the other party and that in the event of such breach the other party shall have, in addition to any and all remedies of law, the right to an injunction, specific performance or other equitable relief to prevent the violation of the obligations of the breaching party hereunder, without the necessity of posting a bond, plus the recovery of any and all costs and expenses incurred by the enforcing party, including reasonable attorneys' fees in connection with the enforcement of this Agreement, provided that the enforcing party shall have been successful on the merits or otherwise in any proceeding related to the enforcement thereof. 10. Acknowledgments. The Employee hereby acknowledges that the enforcement of Sections 7 and 8 of this Agreement is necessary to ensure the preservation, protection and continuity of the business, trade secrets and goodwill of the Bank, and that the restrictions set forth in Sections 7 and 8 of this Agreement are reasonable as to time, scope and territory and in all other respects. 11. Tolling Period. In the event the Employee breaches any of the provisions contained herein and the Bank seeks compliance with such provisions by judicial proceedings, the time period during which the Employee is restricted by such provisions shall be extended by the time during which the Employee has actually competed with the Bank or been in violation of any such provision and any period of litigation required to enforce the Employee's obligations under this Agreement. 12. Termination of Previous Employment Agreement. The Employee specifically agrees that the Employment Agreement dated November 22, 1996, as the same may have been amended, by and between the Employee and the Savings Bank hereby is terminated and shall be of no further force or effect, and the Employee hereby waives any and all of his rights, and releases the Bank and the Savings Bank from any and all obligations, under such agreement. 13. Severability. In case any one or more of the provisions contained in this Agreement for any reason shall be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision of this Agreement but this Agreement shall be construed as if such invalid, illegal or unenforceable provisions had never been contained herein. 14. Consent and Waiver by Third Parties. The Employee hereby represents and warrants that his employment with the Bank on the terms and conditions set forth herein and his execution 7 and performance of this Agreement do not constitute a breach or violation of any other agreement, obligation or understanding with any third party. The Employee represents that he is not bound by any agreement or any other existing or previous business relationship which conflicts with, or may conflict with, the performance of his obligations hereunder or prevents the full performance of his duties and obligations hereunder. 15. Waivers and Modifications. This Agreement may be modified, and the rights and remedies of any provision hereof may be waived, only in accordance with this Section 15. No waiver by either party of any breach by the other or any provision hereof shall be deemed to be a waiver of any later or other breach thereof or as a waiver of any other provision of this Agreement. This Agreement sets forth all of the terms of the understandings between the parties with reference to the subject matter set forth herein and may not be waived, changed, discharged or terminated orally or by any course of dealing between the parties, but only by an instrument in writing signed by the party against whom any waiver, change, discharge or termination is sought. 16. Assignment. The Employee acknowledges that the services to be rendered by him are unique and personal. Accordingly, the Employee may not assign any of his rights or delegate any of his duties or obligations under this Agreement. The Bank shall have the right to assign this Agreement to FNB or any of its subsidiaries or to its successors under law, and the rights and obligations of the Bank under this Agreement shall inure to the benefit of, and shall be binding upon, the successors and permitted assigns of the Bank. 17. Notices. All notices hereunder shall be (i) delivered by hand, (ii) sent by first-class certified mail, postage prepaid, return receipt requested, (iii) delivered by overnight commercial courier, or (iv) transmitted by telecopy or facsimile machine, to the following address of the party to whom such notice is to be made, or to such other address as such party may designate in the same manner provided herein: If to the Bank: FNB Corp. Attention: Mr. Michael C. Miller, President 101 Sunset Avenue Asheboro, North Carolina 27203 With copy to: Schell Bray Aycock Abel & Livingston P.L.L.C. Attention: Dan T. Barker, Jr. 230 North Elm Street 1500 Renaissance Plaza Greensboro, North Carolina 27420 8 If to the Employee, to his last address as shown on the personnel records of the Bank. With copy to: Brooks, Pierce, McLendon, Humphrey & Leonard, L.L.P Attention: Edward C. Winslow III 2000 Renaissance Plaza 230 North Elm Street Greensboro, North Carolina 27401 18. Survival of Obligations. The Employee's obligations under Sections 7 through 12 of this Agreement shall survive the termination of his employment with the Bank regardless of the manner of such termination and shall be binding upon his heirs, executors and administrators. The existence of any claim or cause of action by Employee against the Bank or FNB shall not constitute and shall not be asserted as a defense to the enforcement by the Bank of this Agreement. 19. Governing Law. This Agreement shall be governed by and construed in accordance with the internal laws of the State of North Carolina. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. FIRST NATIONAL BANK AND TRUST COMPANY By: /s/ Michael C. Miller -------------------------- Title: Chairman and President /s/ R. Larry Campbell (SEAL) ------------------------------ R. Larry Campbell 9 EX-21 3 0003.txt SUBSIDIARIES 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 0004.txt CONSENT OF ACCOUNTANTS EXHIBIT 23 Consent of Independent Auditors The Board of Directors FNB Corp. We consent to incorporation by reference in the registration statements (Nos. 33-72686 and 333-54702) on Form S-8 of FNB Corp. of our report dated March 16, 2001, relating to the consolidated balance sheets of FNB Corp. and subsidiary as of December 31, 2000 and 1999, and the related consolidated statements of income, shareholders' equity and comprehensive income and cash flows for each of the years in the three-year period ended December 31, 2000, included in the December 31, 2000 annual report on Form 10-K of FNB Corp. KPMG LLP April 2, 2001 Greenville, South Carolina -----END PRIVACY-ENHANCED MESSAGE-----