-----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, SO7FfrsD3YWAcmZDX+I52YWwH/pDvRqOtfYD55f6iHcXT2qLw9aawf+xN3KiwNFw YbR7mdaXNnZapmzzdEfkrA== 0000950168-97-000824.txt : 19970401 0000950168-97-000824.hdr.sgml : 19970401 ACCESSION NUMBER: 0000950168-97-000824 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FNB CORP/NC CENTRAL INDEX KEY: 0000764811 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 561456589 STATE OF INCORPORATION: NC FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-13823 FILM NUMBER: 97571741 BUSINESS ADDRESS: STREET 1: 101 SUNSET AVE STREET 2: P O BOX 1328 CITY: ASHEBORO STATE: NC ZIP: 27203 BUSINESS PHONE: 9106268300 MAIL ADDRESS: STREET 1: P.O. BOX 1328 CITY: ASHEBORO STATE: NC ZIP: 27203 10KSB 1 FNB CORP. 10-KSB UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-KSB |X| ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended December 31, 1996 OR |_| TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from ______________________ to ______________________ Commission File Number 0-13823 FNB CORP. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) North Carolina 56-1456589 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 101 Sunset Avenue, Asheboro, North Carolina 27203 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) Registrant's telephone number, including area code: (910) 626-8300 Securities registered under Section 12(b) of the Act: None Securities registered under 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-B 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-KSB or any amendment to the Form 10-KSB. [ ] The registrant's revenues for the year ended December 31, 1996 were $24,691,387. As of March 10, 1997, 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 $45,126,666. The registrant had 1,811,104 shares of $2.50 par value common stock outstanding at March 10, 1997. Transitional Small Business Disclosure Format (Check One): Yes No X DOCUMENTS INCORPORATED BY REFERENCE Portions of the Annual Report to Shareholders for the year ended December 31, 1996 are incorporated by reference into Part II. Portions of the definitive proxy statement for the Annual Meeting of Shareholders to be held on May 13, 1997 are incorporated by reference into Part III. PART I ITEM 1. DESCRIPTION OF BUSINESS FNB Corp. (the "Parent Company") is a bank holding company incorporated under the laws of the State of North Carolina in 1984. On July 2, 1985, through an exchange of stock, the Parent Company acquired its wholly-owned bank subsidiary, First National Bank and Trust Company (the "Bank"), a national banking association founded in 1907. The Parent Company and the Bank are collectively referred to as the "Corporation". The Bank, a full-service commercial bank, currently conducts all of its operations in Randolph, Montgomery and Chatham counties in North Carolina. Four offices, including the main office, are located in Asheboro. Additional community offices are located in Archdale (two offices), Biscoe, Ramseur, Randleman, Seagrove and Siler City. Some of the major services offered include checking accounts, NOW accounts (including package account versions that offer a variety of products and services), money market accounts, savings accounts, certificates of deposit, holiday club accounts, individual retirement accounts, credit cards and loans, both secured and unsecured, for business, agricultural and personal use. The Bank also has automated teller machines and is a member of two national teller machine networks, Cirrus and Plus, and one regional network, Honor. The Bank has a Trust and Investment Services Division that offers traditional trust and estate settlement services, investment management programs, brokerage services and tax-deferred annuities. In 1995, the Trust and Investment Services Division began offering investment products and services through "FNB Investors Services", a service provided by Liberty Securities. On December 30, 1993, the Corporation entered into definitive agreements to acquire two mutual savings banks, Home Savings Bank of Siler City, SSB of Siler City, North Carolina and Randleman Savings Bank, SSB of Randleman, North Carolina, in merger/conversion transactions, pursuant to which the savings banks would convert from mutual to stock form and the Corporation would simultaneously acquire the shares issued in the conversions. Regulatory applications for approval to consummate the proposed acquisitions were filed in April 1994. Substantial changes in regulatory policy occurring shortly after the applications were filed effectively resulted in a moratorium on federal approval of merger/conversions, and the Corporation subsequently withdrew the applications to the FDIC and the Federal Reserve and postponed the ultimate decision to proceed with the acquisition until it was clear what the regulatory obstacles might be. In 1995, the agreements expired without the acquisitions having been completed due to changes in federal and state regulatory policies which strictly limited the circumstances under which such transactions would be permitted. The Corporation incurred certain costs in connection with the proposed acquisitions. Those costs, which had been deferred, amounted to $186,350 and are included in other expense in the consolidated statement of income for the year ended December 31, 1995. During 1994, a new credit card operation was established in which the Bank carries its own credit card receivables as opposed to the former fee-based arrangement under which accounts were generated for and owned by a correspondent bank. As part of the new credit card strategy, extensive 1 marketing efforts were undertaken in 1995, primarily to Bank customers. Credit card receivables amounted to $2,257,204 and $1,524,718 at December 31, 1996 and 1995, respectively. Additionally, the merchant aspect of credit card operations has been shifted to an in-house basis from the prior correspondent arrangement. In a significant 1994 development, the Bank elected to outsource all of its data processing, item capture and statement rendering operations. The conversion to a service bureau arrangement was completed in the 1994 fourth quarter. The major items of data processing equipment that were no longer needed by the Bank were acquired by the new processor. While the Bank does not currently plan to resume any major data processing operations, the level of computer equipment was significantly increased in 1995 through expanded use of personal computer networks. The new networks allow for a more direct input of basic loan and deposit account information to the data files maintained by the service bureau. Capital expenditures in 1995, which totaled $1,302,230, related primarily to the increase in computer equipment. Since most of this equipment was not placed into service until late in 1995, the full effect on annual depreciation expense was not recognized until 1996. Approximately one-third of 1996 capital expenditures, which totaled $1,019,109, also related to personal computer networks. In 1995, management adopted a comprehensive restructuring project for the purpose of reengineering Bank operations to become more competitive and cost-effective in developing business and servicing customers and to improve long-term profitability. In connection with this project, certain positions within the Bank were either realigned or eliminated. Total restructuring charges, all of which were incurred and paid in 1995, amounted to $460,457, of which $301,116 related to personnel costs and $159,341 to professional fees. The Bank also decided in March 1995 to recognize losses of $414,596 from the sales of certain investment securities held in the available-for-sale portfolio in order to gain favorable tax treatment for the losses and to take advantage of reinvestment opportunities at higher coupon rates. While these actions had a significant adverse impact on 1995 earnings, management believes these decisions will enhance the long-term value of the Corporation and strengthen the competitive position of its community banking operations. Management decided in March 1996 that the Bank would discontinue the purchase of retail installment loan contracts from automobile and equipment dealers, due largely to the declining yields being experienced in this loan program. Contracts of this nature included in loans at December 31, 1996 and 1995 amounted to $20,355,367 and $33,525,143, respectively. While there will be no purchases of new contracts, current plans call for the collection of outstanding loans based on their contractual terms. It is expected that the funds previously invested in this loan program will be redeployed, as loan payments occur, to other loan programs or to the investment securities portfolio. COMPETITION The commercial banking industry within the Bank's marketing area is extremely competitive. The Bank faces direct competition in Randolph, Montgomery and Chatham counties from approximately nineteen different financial institutions, including commercial banks, savings institutions and credit unions. Although none of these entities is dominant, the Bank considers itself one of the major financial institutions in the area in terms of total assets and deposits. Further competition is provided by banks located in adjoining counties, as well as other types of financial institutions such as insurance companies, finance companies, pension funds and brokerage houses and other money funds. 2 SUPERVISION AND REGULATION The Parent Company is a bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended (the "BHC Act"), and is registered as such with the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"). A bank holding company is required to file with the Federal Reserve Board annual reports and other information regarding its business operations and those of its subsidiaries. It is also subject to examination by the Federal Reserve Board and is required to obtain Federal Reserve Board approval prior to acquiring, directly or indirectly, ownership or control of any voting shares of any bank if, after such acquisition, it would own or control, directly or indirectly, more than five percent of the voting stock of such bank, unless it already owns a majority of the voting stock of such bank. Furthermore, a bank holding company, with limited exceptions, is prohibited from acquiring direct or indirect ownership or control of more than five percent of the voting stock of any company which is not a bank or a bank holding company and must engage only in the business of banking or managing or controlling banks or furnishing services to or performing services for its subsidiary banks. One of the exceptions to this prohibition is the ownership of shares in a company the activities of which the Federal Reserve Board has determined to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. The Federal Reserve Board has determined that certain activities are closely related to banking, and that bank holding companies may apply to the Federal Reserve Board for permission to form, retain or acquire an interest in a company engaging or proposing to engage in these activities. The permitted nonbanking activities include, without limitation: (1) making, acquiring or servicing loans or other extensions of credit such as consumer finance, credit card, mortgage, commercial finance and factoring companies would make; (2) acting as an investment or financial advisor; (3) leasing real or personal property or acting as agent, broker, or advisor in leasing such property if the lease is to serve as the functional equivalent of an extension of credit to the lessee of the property and certain other conditions are met; (4) providing bookkeeping or data processing services under certain circumstances; (5) acting as an insurance agent or broker with respect to insurance that is directly related to the extension of credit with other financial services; (6) acting as an underwriter for credit life insurance and credit accident and health insurance directly related to extensions of credit by the holding company system; and (7) providing securities brokerage services and related securities credit activities. As a national banking association, the Bank is subject to regulatory supervision, of which regular bank examinations by the Comptroller of the Currency are a part. The Bank is a member of the Federal Deposit Insurance Corporation (the "FDIC") which currently insures the deposits of each member bank to a maximum of $100,000 per depositor. For this protection, each bank pays a quarterly statutory assessment and is subject to the rules and regulations of the FDIC. The Bank is also a member of the Federal Reserve System and is therefore subject to the applicable provisions of the Federal Reserve Act, which imposes restrictions on loans by subsidiary banks to a holding company and its other subsidiaries and on the use of stock or securities as collateral security for loans by subsidiary banks to any borrower. The ability of the Parent Company to pay dividends depends to a large extent upon the amount of dividends the Bank pays to the Parent Company. Approval of the Comptroller of the Currency, or his designate, will be required for any dividend to the Parent Company by the Bank if the total of all dividends, including any proposed dividend, declared by the Bank in any calendar year exceeds the total of its net profits for that year combined with its retained net profits for the preceding two years, less any required transfers to surplus or a fund for the retirement of any preferred stock. 3 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, 1996, the Parent Company had three officers, all of whom were also officers of the Bank. On that same date, the Bank had 121 full-time employees and 22 part-time employees. The Bank considers its relationship with its employees to be excellent. The Bank provides employee benefit programs, including a noncontributory defined benefit pension plan, matching retirement/savings plan, group life, health and dental insurance, paid vacations, sick leave, and health care and life insurance benefits for retired employees. ITEM 2. DESCRIPTION OF PROPERTY The main offices of the Bank and the principal executive offices of the Parent Company are located in an office building at 101 Sunset Avenue, Asheboro, North Carolina. The premises contain approximately 36,500 square feet of office space. The Bank also has other community offices in Asheboro, Archdale, Biscoe, Ramseur, Randleman, Seagrove and Siler City, North Carolina. Except as noted below, all premises are owned by the Bank in fee. The Randolph Mall office in Asheboro is under a lease expiring December 31, 1999. The Bush Hill office in Archdale is under a lease expiring January 31, 2002, with lease renewal options for up to an additional 20-year term. The land on which the Seagrove Office is situated is under a lease expiring June 30, 2016. At that time, the land is subject to a purchase option at a fixed price or lease renewal options for up to an additional 30-year term. ITEM 3. LEGAL PROCEEDINGS Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. 4 PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Information with respect to FNB Corp. common stock, appearing under the headings "Common Stock" and "Market Makers" of the section entitled "General Information" and under the heading "Table 10 - Quarterly Financial Data" of the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the 1996 Annual Report to Shareholders, is incorporated herein by reference. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION The sections entitled "Five Year Financial History" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the 1996 Annual Report to Shareholders are incorporated herein by reference. ITEM 7. FINANCIAL STATEMENTS The consolidated financial statements of FNB Corp. and subsidiary and the opinion of KPMG Peat Marwick LLP, independent certified public accountants, with respect thereto, are incorporated herein by reference, as identified below, from the 1996 Annual Report to Shareholders. Independent Auditors' Report Consolidated Balance Sheets, December 31, 1996 and 1995 Consolidated Statements of Income, years ended December 31, 1996, 1995 and 1994 Consolidated Statements of Shareholders' Equity, years ended December 31, 1996, 1995 and 1994 Consolidated Statements of Cash Flows, years ended December 31, 1996, 1995 and 1994 Notes to Consolidated Financial Statements ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable. 5 PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT Information with respect to directors, appearing under the heading "Election of Directors" in the Registrant's definitive proxy statement for the Annual Meeting of Shareholders to be held on May 13, 1997, is incorporated herein by reference. Information with respect to executive officers, appearing under the heading "Executive Officers" in the Registrant's definitive proxy statement for the Annual Meeting of Shareholders to be held on May 13, 1997, is incorporated herein by reference. Information with respect to compliance with Section 16(a) of the Exchange Act, appearing under the heading "Security Ownership of Management" in the Registrant's definitive proxy statement for the Annual Meeting of Shareholders to be held on May 13, 1997, is incorporated herein by reference. ITEM 10. EXECUTIVE COMPENSATION Information with respect to executive compensation, appearing under the heading "Executive Compensation" in the Registrant's definitive proxy statement for the Annual Meeting of Shareholders to be held on May 13, 1997, is incorporated herein by reference. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information with respect to security ownership of certain beneficial owners and management, appearing under the headings "Voting Securities Outstanding and Principal Shareholders" and "Security Ownership of Management" in the Registrant's definitive proxy statement for the Annual Meeting of Shareholders to be held on May 13, 1997, is incorporated herein by reference. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information with respect to certain relationships and related transactions, appearing under the heading "Indebtedness of Officers and Directors" in the Registrant's definitive proxy statement for the Annual Meeting of Shareholders to be held on May 13, 1997, is incorporated herein by reference. 6 PART IV ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits to this report are listed in the index to exhibits on pages 10 and 11 of this report. (b) Reports on Form 8-K. No reports on Form 8-K were filed during the last quarter of the period covered by this report. 7 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FNB Corp. (Registrant) Date: March 26, 1997 By: /s/ Michael C. Miller --------------------- Michael C. Miller President and Chief Executive Officer In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on March 26, 1997. Signature Title /s/ Michael C. Miller President, Chief Executive Michael C. Miller Officer and Director /s/ Jerry A. Little Treasurer and Secretary Jerry A. Little (Principal Financial and Accounting Officer) /s/ James M. Culberson, Jr. Chairman of the Board James M. Culberson, Jr. /s/ James M. Campbell, Jr. Director James M. Campbell, Jr. /s/ Wilbert L. Hancock Director Wilbert L. Hancock /s/ Thomas A. Jordan Director Thomas A. Jordan /s/ R. Reynolds Neely, Jr. Director R. Reynolds Neely, Jr. 8 Signature Title /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 9 FNB CORP. INDEX TO EXHIBITS Exhibit No. Description of Exhibit 3.10 Articles of Incorporation of the Registrant,incorporated herein by reference to Exhibit 3.1 to the Registrant's Form S-14 Registration Statement (No. 2-96498) filed March 16, 1985. 3.11 Articles of Amendment to Articles of Incorporation of the Registrant, adopted May 10, 1988, incorporated herein by reference to Exhibit 19.10 to the Registrant's Form 10-Q Quarterly Report for the quarter ended June 30, 1988. 3.20 Amended and Restated Bylaws of the Registrant, adopted May 9, 1995, incorporated herein by reference to Exhibit 3.20 to the Registrant's Form 10-QSB Quarterly Report for the quarter ended June 30, 1995. 4 Specimen of Registrant's Common Stock Certificate, incorporated herein by reference to Exhibit 4 to Amendment No. 1 to the Registrant's Form S-14 Registration Statement (No. 2-96498) filed April 19, 1985. 10.10 Form of Split Dollar Insurance Agreement dated as of November 1, 1987 between First National Bank and Trust Company and certain of its key employees and directors, incorporated herein by reference to Exhibit 19.20 to the Registrant's Form 10-Q Quarterly Report for the Quarter ended June 30, 1988. 10.11 Form of Amendment to Split Dollar Insurance Agreement dated as of November 1, 1994 between First National Bank and Trust Company and certain of its key employees and directors, incorporated herein by reference to Exhibit 10.11 to the Registrant's Form 10-KSB Annual Report for the fiscal year ended December 31, 1994. 10.20 Copy of Split Dollar Insurance Agreement dated as of May 28, 1989 between First National Bank and Trust Company and James M. Culberson, Jr., incorporated herein by reference to Exhibit 10.30 to the Registrant's Form 10-K Annual Report for the fiscal year ended December 31, 1989. 10.30 Copy of Stock Compensation Plan adopted May 11, 1993, incorporated herein by reference to Exhibit 10.40 to the Registrant's Form 10-QSB Quarterly Report for the quarter ended June 30, 1993. 10 Exhibit No. Description of Exhibit 10.31 Form of Incentive Stock Option Agreement between FNB Corp. and certain of its key employees, pursuant to the Registrant's Stock Compensation Plan, incorporated herein by reference to Exhibit 10.31 to the Registrant's Form 10-KSB Annual Report for the fiscal year ended December 31, 1994. 10.32 Form of Nonqualified Stock Option Agreement between FNB Corp. and certain of its directors, pursuant to the Registrant's Stock Compensation Plan, incorporated herein by reference to Exhibit 10.32 to the Registrant's Form 10-KSB Annual Report for the fiscal year ended December 31, 1994. 10.40 Copy of FNB Corp. Savings Institutions Management Stock Compensation Plan adopted May 10, 1994, incorporated herein by reference to Exhibit 10.40 to the Registrant's Form 10-QSB Quarterly Report for the quarter ended June 30, 1994. 10.50 Copy of Employment Agreement dated as of December 27, 1995 between First National Bank and Trust Company and Michael C. Miller. 13 Portions of the Registrant's 1996 Annual Report to Shareholders, which are incorporated into this report at the items so designated. 21 Subsidiaries of the Registrant. 23 Consent of Independent Auditors. 27 Financial Data Schedule. 11 EX-13 2 EXHIBIT 13 FIVE YEAR FINANCIAL HISTORY (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
1996 1995 1994 1993 1992 SUMMARY OF OPERATIONS Interest income............................................ $ 22,248 $ 20,606 $ 17,688 $ 17,507 $ 18,594 Interest expense........................................... 9,612 9,002 6,979 6,945 8,083 Net interest income........................................ 12,636 11,604 10,709 10,562 10,511 Provision for loan losses.................................. 490 515 220 370 575 Net interest income after provision for loan losses........ 12,146 11,089 10,489 10,192 9,936 Losses on sales of securities.............................. -- (415) -- -- -- Other operating income..................................... 2,444 2,241 2,075 1,810 1,609 Restructuring charges...................................... -- 460 -- -- -- Other operating expense.................................... 9,077 8,654 8,578 8,306 7,536 Income before income taxes................................. 5,513 3,801 3,986 3,696 4,009 Income taxes............................................... 1,676 1,101 1,159 1,006 1,100 Net income................................................. $ 3,837 $ 2,700 $ 2,827 $ 2,690 $ 2,909 PER SHARE DATA (1) Net income................................................. $ 2.13 $ 1.50 $ 1.57 $ 1.49 $ 1.62 Cash dividends declared.................................... .66 .52 .47 .45 .44 Book value................................................. 15.92 14.46 12.99 12.35 11.22 BALANCE SHEET INFORMATION Total assets............................................... $307,134 $283,678 $261,616 $249,698 $245,205 Investment securities...................................... 90,316 84,536 76,983 78,488 81,020 Loans...................................................... 195,273 179,923 168,328 157,302 147,032 Deposits................................................... 271,380 250,144 229,925 224,260 223,478 Shareholders' equity....................................... 28,767 25,995 23,379 22,223 20,204 RATIOS (AVERAGES) Return on assets........................................... 1.32% 1.00% 1.11% 1.09% 1.24% Return on shareholders' equity............................. 13.97 10.93 12.33 12.62 15.16 Shareholders' equity to assets............................. 9.41 9.17 8.98 8.65 8.19 Dividend payout ratio...................................... 31.02 34.62 29.71 30.34 27.23 Loans to deposits.......................................... 72.87 73.10 70.67 66.76 64.47 Net yield on earning assets, taxable equivalent basis...... 4.90 4.84 4.73 4.86 5.17
(1) All per share data in 1995 and prior years has been retroactively adjusted to reflect the three-for-two common stock split effected in the form of a 50% stock dividend paid in the second quarter of 1995. 4 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. The Corporation earned $3,837,304 in 1996, a 42.1% increase in net income from 1995. Earnings OVERVIEW per share, adjusted for the three-for-two common stock split in 1995, increased from $1.50 in 1995 to $2.13 in 1996. The 1995 results were impacted by restructuring charges and losses on sales of investment securities discussed in more detail in the "Earnings Review" and in "Business Development Matters". Total assets were $307,134,477 at December 31, 1996, up 8.3% from year-end 1995. Loans amounted to $195,272,683 at December 31, 1996, up 8.5% from the prior year. Total deposits grew 8.5% to $271,380,065 in 1996. On December 30, 1993, the Corporation entered into definitive agreements to acquire two mutual savings banks in merger/conversion transactions, pursuant to which the savings banks would convert from mutual to stock form and the Corporation would simultaneously acquire the shares issued in the conversions. In 1995, the agreements expired without the acquisitions having been completed due to changes in federal and state regulatory policies which strictly limited the circumstances under which such transactions would be permitted. The Corporation's net income increased $1,136,847 in 1996, up 42.1% over 1995. Earnings were EARNINGS REVIEW positively impacted in 1996 by an increase of $1,032,830 or 8.9% in net interest income. The comparison to 1995 results is affected by the fact that there were certain nonrecurring changes in 1995, including restructuring charges of $460,457 and losses on sales of investment securities of $414,596, which were charges taken for the strategic purposes discussed in "Business Development Matters". The 1995 results were further negatively affected by a $295,000 increase in the provision for loan losses. Additionally, certain costs, amounting to $186,350, that had been deferred in connection with the proposed acquisitions discussed in the "Overview" were charged to expense in 1995. In 1995, earnings declined $126,409 or 4.5% from 1994. The negative factors affecting net income in 1995, as noted above, more than offset the benefit of an increase of $894,160 or 8.3% in net interest income. Return on average assets, affected in 1995 by the negative factors noted above, increased from 1.00% in 1995 to 1.32% in 1996. Return on average assets declined in 1995 from 1.11% in 1994, again reflecting the effect of the negative factors in 1995. Similarly, return on average shareholders' equity, increased to 13.97% in 1996 after declining to 10.93% in 1995 from 12.33% in 1994. 5 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 $12,636,312 in 1996 compared to $11,603,482 in 1995. The increase of $1,032,830 or 8.9% resulted from an improvement in the net yield on earning assets, or net interest margin, from 4.84% in 1995 to 4.90% in 1996 coupled with a 8.3% increase in the level of average earning assets. In 1995, there was a $894,160 or 8.3% increase in net interest income reflecting both an improvement in the net interest margin from 4.73% in 1994 and a 5.5% increase in average earning assets. Following a period of generally lower interest rates, which had ultimately resulted in a reduction in the net interest margin, interest rates began to increase significantly in 1994, influenced by actions taken by the Federal Reserve to combat a possible resurgence in inflation. The interest rate increases in 1994 and early 1995, later offset to some extent by Federal Reserve action to reduce rates in the second half of 1995 and first quarter of 1996, have resulted in an improvement in the net interest margin. Additionally, there had been a continuing negative impact on the margin from certain variable-rate time deposits with rate floors above the current market rates. Such variable-rate time deposits were phased out over a two-year period that commenced in January 1994. On a taxable equivalent basis, the increases in net interest income in 1996 and 1995 were $1,183,000 and $918,000, 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. 6 TABLE 1 AVERAGE BALANCES AND NET INTEREST INCOME ANALYSIS (TAXABLE EQUIVALENT BASIS, DOLLARS IN THOUSANDS)
1996 1995 1994 Average Average Interest Rates Interest Rates Interest Average Income/ Earned/ Average Income/ Earned/ Average Income/ Balance Expense Paid Balance Expense Paid Balance Expense EARNING ASSETS Loans (1)(2)................................ $186,937 $16,777 8.96% $174,139 $15,698 9.01 % $161,121 $13,299 Investment securities (1): Taxable income............................ 71,297 4,985 6.99 65,397 4,418 6.76 66,679 3,911 Non-taxable income........................ 14,282 1,205 8.44 10,610 970 9.14 10,042 1,021 Federal funds sold.......................... 1,688 89 5.27 3,042 177 5.82 2,174 91 Total earning assets.................. 274,204 23,056 8.40 253,188 21,263 8.40 240,016 18,322 Cash and due from banks..................... 9,423 9,226 8,625 Other assets, net........................... 8,161 6,884 6,631 TOTAL ASSETS.......................... $291,788 $269,298 $255,272 INTEREST-BEARING LIABILITIES Interest-bearing deposits: NOW accounts.............................. $ 35,021 666 1.90 $ 32,442 695 2.14 $ 32,521 658 Savings deposits.......................... 30,147 756 2.50 29,945 845 2.82 31,820 830 Money market accounts..................... 16,067 444 2.76 16,659 508 3.05 21,261 543 Certificates and other time deposits...... 138,993 7,525 5.40 122,743 6,773 5.52 106,759 4,850 Retail repurchase agreements................ 4,118 178 4.32 3,358 167 4.97 2,101 84 Federal funds purchased..................... 764 43 5.63 239 14 5.77 307 14 Total interest-bearing liabilities.... 225,110 9,612 4.26 205,386 9,002 4.38 194,769 6,979 Noninterest-bearing demand deposits......... 36,296 36,444 35,614 Other liabilities........................... 2,921 2,765 1,964 Shareholders' equity........................ 27,461 24,703 22,925 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.............................. $291,788 $269,298 $255,272 NET INTEREST INCOME AND SPREAD.............. $13,444 4.14% $12,261 4.02 % $11,343 NET YIELD ON EARNING ASSETS................. 4.90% 4.84 % Average Rates Earned/ Paid EARNING ASSETS Loans (1)(2)................................ 8.25 % Investment securities (1): Taxable income............................ 5.87 Non-taxable income........................ 10.17 Federal funds sold.......................... 4.19 Total earning assets.................. 7.63 Cash and due from banks..................... Other assets, net........................... TOTAL ASSETS.......................... INTEREST-BEARING LIABILITIES Interest-bearing deposits: NOW accounts.............................. 2.02 Savings deposits.......................... 2.61 Money market accounts..................... 2.55 Certificates and other time deposits...... 4.54 Retail repurchase agreements................ 4.00 Federal funds purchased..................... 4.64 Total interest-bearing liabilities.... 3.58 Noninterest-bearing demand deposits......... Other liabilities........................... Shareholders' equity........................ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.............................. NET INTEREST INCOME AND SPREAD.............. 4.05 % NET YIELD ON EARNING ASSETS................. 4.73 %
(1) Interest income and yields related to certain investment securities and loans exempt from both federal and state income tax or from state income tax alone are stated on a fully taxable equivalent basis, assuming a 34% federal tax rate and applicable state tax rate, reduced by the nondeductible portion of interest expense. (2) Nonaccrual loans are included in the average loan balance. Loan fees and the incremental direct costs associated with making loans are deferred and subsequently recognized over the life of the loan as an adjustment of interest income. Changes in the net interest margin and net interest spread tend to correlate with movements in the prime rate of interest. There are variations, however, in the degree and timing of rate changes, compared to prime, for the different types of earning assets and interest-bearing liabilities. The prime rate, which had been 6.00% at December 31, 1993, moved up significantly in 1994 to close the year at 8.50% and, after certain changes during 1995, remained at that level at December 31, 1995. In 1996, after one reduction, the prime rate closed the year at 8.25%. The average prime for 1994, 1995 and 1996 amounted to 7.09%, 8.82% and 8.28%, respectively. The prime rate had declined significantly from 1991 to 1993, but began to increase in 1994 following steps taken by the Federal Reserve to combat a possible resurgence in inflation. The prime rate increased towards the end of the first quarter in 1994 and an additional four times during the remainder of that year. In the first quarter of 1995, it increased again to 9.00% and remained at that level until the second half of the year when, in response to actions taken by the Federal Reserve, it decreased twice, followed by one further reduction in the first quarter of 1996. In 1996, the net interest spread increased by 12 basis points from 4.02% in 1995 to 4.14% in 1996, reflecting a decrease in the average rate paid on interest-bearing liabilities, or cost of funds. In 7 1995, the net interest spread declined modestly by 3 basis points due to the fact that the average total yield on earning assets increased by slightly less than the cost of funds. The yield on earning assets increased by 77 basis points from 7.63% in 1994 to 8.40% in 1995, while the cost of funds increased by 80 basis points in moving from 3.58% to 4.38%. The 1996 and 1995 changes in net interest income on a taxable equivalent basis, as measured by volume and rate variances, are analyzed in Table 2. Volume refers to the average dollar level of earning assets and interest-bearing liabilities. TABLE 2 VOLUME AND RATE VARIANCE ANALYSIS (TAXABLE EQUIVALENT BASIS, IN THOUSANDS)
1996 Versus 1995 1995 Versus 1994 Variance Variance due to (1) due to (1) Volume Rate Net Change Volume Rate Net Change INTEREST INCOME Loans (2)................................................. $1,165 $ (86) $1,079 $1,121 $1,278 $2,399 Investment securities (2): Taxable income.......................................... 412 155 567 (76 ) 583 507 Non-taxable income...................................... 314 (79) 235 55 (106) (51) Federal funds sold........................................ (72 ) (16) (88) 44 42 86 Total interest income................................. 1,819 (26) 1,793 1,144 1,797 2,941 INTEREST EXPENSE Interest-bearing deposits: NOW accounts............................................ 53 (82) (29) (2 ) 39 37 Savings deposits........................................ 6 (95) (89) (50 ) 65 15 Money market accounts................................... (17 ) (47) (64) (130 ) 95 (35) Certificates and other time deposits.................... 899 (147) 752 788 1,135 1,923 Retail repurchase agreements.............................. 35 (24) 11 59 24 83 Federal funds purchased................................... 30 (1) 29 (3 ) 3 -- Total interest expense................................ 1,006 (396) 610 662 1,361 2,023 NET INTEREST INCOME......................................... $ 813 $ 370 $1,183 $ 482 $ 436 $ 918
(1) The mix variance, not separately stated, has been proportionally allocated to the volume and rate variances based on their absolute dollar amount. (2) Interest income related to certain investment securities and loans exempt from both federal and state income tax or from state income tax alone is stated on a fully taxable equivalent basis, assuming a 34% federal tax rate and applicable state tax rate, reduced by the nondeductible portion of interest expense. PROVISION FOR LOAN LOSSES This provision is the charge against earnings to provide an allowance or reserve for possible future losses on loans. The amount of each year's charge is affected by several considerations including management's evaluation of various risk factors in determining the adequacy of the allowance (see "Asset Quality"), actual loan loss experience and loan portfolio growth. In 1996, earnings were positively impacted by a decrease in the provision of $25,000, while in 1995 there was a negative impact from a $295,000 provision increase. OTHER OPERATING INCOME Total other operating income, or noninterest income, increased $617,351 or 33.8% in 1996 and decreased $248,712 or 12.0% in 1995 due principally to the effect on 1995 results from the recognition of losses on sales of investment securities in the 1995 first quarter of $414,596 (see 8 "Business Development Matters"). The 1996 increase reflected in part the general increase in the volume of business, a factor that also affected the 1995 results, exclusive of the losses on sales of securities. The 1996 gain in annuity and brokerage commissions reflected increased brokerage commissions. In 1995, there was a $136,218 decrease in annuity and brokerage commissions due to a reduction in the sales of tax deferred annuity products, a situation that reflected the competition from the higher interest rates available on deposit accounts in 1995 compared to 1994. The significant increase in credit card income in 1995 was due to the implementation in 1994 of the new credit card operation discussed in "Business Development Matters". The level of other service charges, commissions and fees was higher in 1996 due primarily to the implementation in the 1996 third quarter of a fee charged to noncustomers for usage of the Bank's automated teller machines. The increase in service charges on deposit accounts in 1996 resulted primarily from the implementation of daily charges on overdraft balances in the second quarter of 1995. The 1995 increase in service charges on deposit accounts was primarily due to a change in the 1994 fourth quarter in the method of collecting fees on returned checks and overdraft items and to the selected increases in service charge rates that became effective in the 1995 second quarter and included the initial implementation of daily charges on overdraft balances. Partially offsetting these earnings improvement factors in 1995 was the negative effect of higher interest rates on the calculation of the earnings credit that is used to offset service charges that would otherwise be assessed on commercial accounts. OTHER OPERATING EXPENSE Total other operating, or noninterest, expense decreased $36,552 or 0.4% in 1996 and increased $535,678 or 6.2% in 1995 due primarily to the effect on 1995 results of restructuring charges of $460,457 (see "Business Development Matters") and of certain costs charged to "other expense", amounting to $186,350, that had been deferred in connection with proposed acquisitions (see "Overview"). Additionally, the 1995 results, and those in 1996 also, were generally impacted by the continuing effects of inflation. Noninterest expense was favorably affected in 1995 by a $221,485 reduction in FDIC insurance expense, reflecting the effect of a rate reduction as discussed below. In 1996, noninterest expense was favorably affected by a further reduction in FDIC insurance expense, amounting to $180,273 despite a special one-time assessment of $74,845 related to new legislation enacted on September 30, 1996. This cost improvement factor was more than offset in 1996, however, by increases in personnel expense and data processing services and by a higher level of equipment costs related to the expanded use of personal computer networks. The components of other operating expense have been significantly changed by the Bank's decision in 1994 to outsource its data processing operations (see "Business Development Matters"). The conversion of data processing operations to a service bureau arrangement was completed in the 1994 fourth quarter. Consequently, the level of expense for data processing services, which includes trust and credit card processing costs in addition to basic data processing operations, increased significantly in 1995. Personnel and equipment costs were reduced, however, as a result of the outsourcing decision. A change in the credit card operation (see "Business Development Matters") has also contributed to a higher cost of data processing services. The levels of certain expenses are being favorably affected by the comprehensive project undertaken in 1995 for the reengineering of Bank operations (see "Business Development Matters"). Despite an increase in the volume of business, the average number of full-time equivalent employees in 1996 was approximately equal to that for 1995. As is the situation for other operating expenses, however, personnel expense is subject to the continuing effects of inflation through normal salary adjustments and higher costs of fringe benefits. Personnel expense was also impacted in 1996 by changes in the incentive compensation program. Furniture and equipment expense increased in 1996 due to a higher level of depreciation 9 charges associated primarily with equipment purchases in 1995 and 1996 related to personal computer networks (see "Business Development Matters"). Because of the Federal Deposit Insurance Corporation Improvement Act (FDICIA) enacted in 1989, FDIC insurance expense was increased substantially, with the Bank's expense amounting to $503,379 in the year ended December 31, 1994. The FDIC has two separate insurance funds, which are the Bank Insurance Fund (BIF) and the Savings Association Insurance Fund (SAIF). As provided by FDICIA, the insurance assessment rate could be lowered once a fund had reached a mandated 1.25 percent reserve ratio. While the SAIF fund did not reach the mandated reserve ratio, the BIF fund was found in the third quarter of 1995 to have reached this level by the end of May 1995. Accordingly, the BIF rate was reduced effective June 1, 1995, resulting in only a minimum annual charge of $2,000 for the majority of financial institutions with BIF-insured deposits. Since most of the Bank's deposits are insured through BIF, the Bank experienced a significant reduction in FDIC insurance expense commencing in the 1995 third quarter when the effect of the rate adjustment was initially recorded. Consequently, FDIC insurance expense for the entire 1995 year amounted to only $281,894, with total 1996 expense, including the one-time assessment of $74,845, amounting to $101,621. The Deposit Insurance Funds Act of 1996 (DIFA) was enacted on September 30, 1996 and has three main components. The first included a one-time assessment on SAIF deposits to capitalize the SAIF fund to the mandated 1.25 percent ratio. The second is a requirement that the repayment of the Financing Corporation (FICO) bonds be shared by both banks and thrifts. The third is the ultimate elimination of the BIF and SAIF funds by merging them into a new Deposit Insurance Fund. The one-time assessment on the Bank's SAIF deposits, which amounted to $74,845, was determined on the date of enactment and expensed at that time. Beginning January 1, 1997, FDIC insurance premiums will be assessed for FICO bond repayment purposes at an estimated rate of $.0648 per $100 for SAIF deposits and a rate equal to one-fifth of that, or $.01296 per $100, for BIF deposits. Additional premiums could be assessed in order to maintain the BIF and SAIF funds at the required 1.25 percent reserve ratio. Based on the Bank's deposits at December 31, 1996, the total annual assessment for FICO bond repayment purposes would amount to approximately $42,000 in 1997. INCOME TAXES The effective income tax rate increased from 29.0% in 1995 to 30.4% in 1996 due principally to an increase in the ratio of taxable to tax-exempt income. The effective income tax rate of 29.0% in 1995 did not significantly change from the 29.1% rate in 1994. Liquidity refers to the continuing ability of the Bank to meet deposit withdrawals, fund loan and LIQUIDITY capital expenditure commitments, maintain reserve requirements, pay operating expenses and provide funds to the Parent Company for payment of dividends, debt service and other operational requirements. Liquidity is immediately available from three major sources: (a) cash on hand and on deposit at other banks, (b) the outstanding balance of federal funds sold and (c) the available-for-sale securities portfolio. While additional liquidity is readily obtainable by purchasing federal funds from other banks, the Bank has not found it necessary to utilize this resource to any substantial extent in recent years. Further, while available-for-sale securities are intended to be a source of immediate liquidity, the entire investment securities portfolio is managed to provide both income and a ready source of liquidity. The average portfolio life of debt securities is approximately five years, resulting in a substantial level of maturities each year. All debt securities are of investment grade quality and, if the need arises, can be promptly liquidated on the open market or pledged as collateral for short-term borrowing. In line with its approach to liquidity, the Bank as a matter of policy does not solicit or accept brokered deposits for funding asset growth. Instead, loans and other assets are based on a core of local deposits and the Bank's capital position. To date, the steady increase in deposits, retail repurchase agreements and capital has been adequate to fund loan demand in the Bank's 10 market area, while maintaining the desired level of immediate liquidity and a substantial investment securities portfolio available for both immediate and secondary liquidity purposes. One of the primary objectives of asset/liability management is to maximize net interest margin ASSET/LIABILITY MANAGEMENT AND INTEREST RATE SENSITIVITY while minimizing the earnings risk associated with changes in interest rates. One method used to manage interest rate sensitivity is to measure, over various time periods, the interest rate sensitivity positions, or gaps; however, this method addresses only the magnitude of timing differences and does not address earnings or market value. Therefore, management uses an earnings simulation model to prepare, on a regular basis, earnings projections based on a range of interest rate scenarios in order to more accurately measure interest rate risk. The Bank's balance sheet is liability-sensitive, meaning that in a given period there will be more liabilities than assets subject to immediate repricing as market rates change. Because immediately rate sensitive interest-bearing liabilities exceed rate sensitive assets, the earnings position could improve in a declining rate environment and could deteriorate in a rising rate environment, depending on the correlation of rate changes in these two categories. Included in interest-bearing liabilities subject to rate changes within 90 days is a portion of the NOW, savings, and money market deposits. These types of deposits historically have not repriced coincidentally with or in the same proportion as general market indicators. As a specific asset/liability management tool and as further discussed in Note 13 to Consolidated Financial Statements, the Bank, at December 31, 1996, had entered into an interest rate floor agreement with a correspondent bank to protect certain variable-rate loans from the downward effects of their repricing in the event of a decreasing rate environment. The notional amount of the agreement is $10,000,000. The agreement requires the correspondent bank to pay to the Bank the difference between the floor rate of interest of 7.50% and the prime rate of interest in the event that the prime rate is less. Any payments received under the agreement, net of premium amortization, will be treated as an adjustment of interest income on loans. 11 Table 3 presents information about the periods in which the interest-sensitive assets and liabilities at December 31, 1996 will either mature or be subject to repricing in accordance with market rates, and the resulting interest-sensitivity gaps. This table shows the sensitivity of the balance sheet at one point in time and is not necessarily indicative of what the sensitivity will be on other dates. As a simplifying assumption concerning repricing behavior, 50% of the NOW, savings and money market deposits are assumed to reprice immediately and 50% are assumed to reprice beyond one year. TABLE 3 INTEREST RATE SENSITIVITY ANALYSIS (DOLLARS IN THOUSANDS)
December 31, 1996 Rate Maturity In Days Beyond 1-90 91-180 181-365 One Year Total EARNING ASSETS Loans.......................................................... $ 86,677 $ 8,851 $ 11,762 $87,983 $195,273 Investment securities.......................................... 2,594 948 2,628 84,146 90,316 Federal funds sold............................................. -- -- -- -- -- Total earning assets......................................... 89,271 9,799 14,390 172,129 285,589 INTEREST-BEARING LIABILITIES NOW accounts................................................... 18,069 -- -- 18,070 36,139 Savings deposits............................................... 14,567 -- -- 14,567 29,134 Money market accounts.......................................... 8,652 -- -- 8,652 17,304 Time deposits of $100,000 or more.............................. 31,584 7,050 8,723 1,588 48,945 Other time deposits............................................ 25,782 21,594 40,807 12,870 101,053 Retail repurchase agreements................................... 3,725 -- -- -- 3,725 Federal funds purchased........................................ 575 -- -- -- 575 Total interest-bearing liabilities........................... 102,954 28,644 49,530 55,747 236,875 INTEREST SENSITIVITY GAP......................................... $(13,683) $(18,845) $ (35,140) $116,382 $ 48,714 Cumulative gap................................................... $(13,683) $(32,528) $ (67,668) $48,714 $ 48,714 Ratio of interest-sensitive assets to interest-sensitive liabilities.................................................... 87% 34% 29% 309 % 121%
Under guidelines established by the Board of Governors of the Federal Reserve System, capital CAPITAL ADEQUACY adequacy is currently measured for regulatory purposes by certain risk-based capital ratios, supplemented by a leverage capital ratio. The risk-based capital ratios are determined by expressing allowable capital amounts, defined in terms of Tier I and Tier II, as a percentage of risk-weighted assets, which are computed by measuring the relative credit risk of both the asset categories on the balance sheet and various off-balance sheet exposures. Tier I capital consists primarily of common shareholders' equity and qualifying perpetual preferred stock, net of goodwill and other disallowed intangible assets. Tier II capital, which is limited to the total of Tier I capital, includes allowable amounts of subordinated debt, mandatory convertible securities, preferred stock and the allowance for loan losses. Under current requirements, the minimum total capital ratio, consisting of both Tier I and Tier II capital, is 8.00% and the minimum Tier I ratio is 4.00%. At December 31, 1996, FNB Corp. and the Bank had total capital ratios of 14.79% and 14.46%, respectively, and Tier I capital ratios of 13.84% and 13.50%. The leverage capital ratio, which serves as a minimum capital standard, considers Tier I capital only and is expressed as a percentage of average total assets for the most recent quarter, after 12 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, 1996, FNB Corp. and the Bank had leverage capital ratios of 9.41% and 9.18%, respectively. The Bank is also required to comply with prompt corrective action provisions established by the Federal Deposit Insurance Corporation Improvement Act. To be categorized as well-capitalized, the Bank must have a minimum ratio for total capital of 10.00%, for Tier I capital of 6.00% and for leverage capital of 5.00%. As noted above, the Bank met all of those ratio requirements at December 31, 1996 and, accordingly, is well-capitalized under the regulatory framework for prompt corrective action. Asset and deposit growth was comparable in 1996 to 1995. Total assets increased $23,456,000 or BALANCE SHEET REVIEW 8.3% in 1996 compared to $22,062,000 or 8.4% in 1995. Deposits grew $21,236,000 or 8.5% and $20,219,000 or 8.8%, respectively, in the same periods. The average asset growth rates were 8.4% in 1996 and 5.5% in 1995. The corresponding average deposit growth rates were 7.7% and 4.5%. Investments are carried on the consolidated balance sheet at estimated fair value for available- INVESTMENT SECURITIES for-sale securities and at amortized cost for held-to-maturity securities. Table 4 presents information, on the basis of selected maturities, about the composition of the investment securities portfolio for each of the last three years. As discussed in Note 1 to Consolidated Financial Statements and permitted on a one-time basis by the Financial Accounting Standards Board in an implementation guide to Statement of Financial Accounting Standards No. 115, certain investment securities that had been included in the held-to-maturity category were transferred in December 1995 to the available-for sale category. 13 TABLE 4 INVESTMENT SECURITIES PORTFOLIO ANALYSIS (DOLLARS IN THOUSANDS)
December 31 1996 Estimated Taxable 1995 1994 Amortized Fair Equivalent Carrying Carrying Cost Value Yield (1) Value Value AVAILABLE FOR SALE U.S. Treasury: One to five years....................................... $ 2,577 $ 2,589 6.74% $ 5,038 $ 7,256 Five to ten years....................................... 2,108 2,114 6.43 4,526 509 Total................................................. 4,685 4,703 6.59 9,564 7,765 U.S. Government agencies and corporations: Within one year......................................... 500 500 6.57 2,060 -- One to five years....................................... 9,959 9,939 7.03 6,129 -- Five to ten years....................................... 8,825 8,844 7.50 452 -- Total................................................. 19,284 19,283 7.24 8,641 -- Mortgage-backed securities................................ 4,760 4,787 6.67 10,020 12,108 Total debt securities..................................... 28,729 28,773 7.04 28,225 19,873 Equity securities......................................... 147 156 150 4,696 Total available-for-sale securities................... $28,876 $28,929 $28,375 $24,569 HELD TO MATURITY U.S. Treasury: Within one year......................................... $ -- $ -- -- $ -- $ 4,954 One to five years....................................... -- -- -- -- 2,748 Total................................................. -- -- -- -- 7,702 U.S. Government agencies and corporations: Within one year......................................... 1,348 1,356 6.92 2,854 3,151 One to five years....................................... 24,480 24,380 6.70 23,800 26,294 Five to ten years....................................... 18,108 17,873 7.27 17,022 4,916 Over ten years.......................................... -- -- -- 300 -- Total................................................. 43,936 43,609 6.95 43,976 34,361 State, county and municipal: Within one year......................................... 325 327 11.67 1,203 2,081 One to five years....................................... 3,104 3,196 9.19 2,590 3,017 Five to ten years....................................... 5,930 6,038 7.80 4,959 4,909 Over ten years.......................................... 8,092 8,105 7.96 3,433 344 Total................................................. 17,451 17,666 8.20 12,185 10,351 Total held-to-maturity securities..................... $61,387 $61,275 $56,161 $52,414
(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. 14 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, the level of investment securities was increased $5,780,00 or 6.8% in 1996 and $7,553,000 or 9.8% in 1995. 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, 1996. The Corporation's primary source of revenue and largest component of earning assets is the LOANS loan portfolio. Loans experienced growth of $15,350,000 or 8.5% in 1996 and $11,595,000 or 6.9% in 1995. Average loans increased $12,798,000 or 7.3% and $13,018,000 or 8.1%, respectively. The ratio of average loans to average deposits decreased slightly from 73.1% in 1995 to 72.9% in 1996. The ratio of loans to deposits at December 31, 1996 was 72.0%. Table 5 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, 1996 are presented in Table 6. TABLE 5 LOAN PORTFOLIO COMPOSITION (DOLLARS IN THOUSANDS)
December 31 1996 1995 1994 1993 1992 Amount % Amount % Amount % Amount % Amount Commercial and agricultural............. $ 62,678 32.1 $ 47,317 26.3 41,777 24.8 40,858 26.0 34,630 Real estate -- construction............. 4,348 2.2 759 .4 1,331 .8 2,163 1.4 1,313 Real estate -- mortgage: 1-4 family residential................ 68,887 35.3 57,664 32.0 50,575 30.0 42,302 26.9 37,833 Commercial and other.................. 24,257 12.4 27,803 15.5 28,594 17.0 27,480 17.4 23,436 Consumer................................ 35,103 18.0 46,380 25.8 46,051 27.4 44,499 28.3 49,820 Total loans........................... $195,273 100.0 $179,923 100.0 $168,328 100.0 $157,302 100.0 $147,032 % Commercial and agricultural............. 23.5 Real estate -- construction............. .9 Real estate -- mortgage: 1-4 family residential................ 25.7 Commercial and other.................. 16.0 Consumer................................ 33.9 Total loans........................... 100.0
TABLE 6 SELECTED LOAN MATURITIES (IN THOUSANDS)
December 31, 1996 One Year One to Over or Less Five Years Five Years Total Commercial and agricultural............................................... $22,563 $ 36,436 $ 3,679 $62,678 Real estate -- construction............................................... 1,606 2,298 444 4,348 Total selected loans.................................................... $24,169 $ 38,734 $ 4,123 $67,026 Sensitivity to rate changes: Fixed interest rates.................................................... $ 4,742 $ 7,019 $ 4,123 $15,884 Variable interest rates................................................. 19,427 31,715 -- 51,142 Total................................................................... $24,169 $ 38,734 $ 4,123 $67,026
15 Loan growth and the composition of the loan portfolio are being affected by management's decision in March 1996 to discontinue the purchase of retail installment loan contracts from automobile and equipment dealers (see "Business Development Matters"). The outstanding balance of these loan contracts, which are primarily included in consumer loans, experienced a net 1996 decrease of $13,169,776. Consequently, total consumer loans declined significantly during that period. Other consumer loan elements, including credit cards and home equity lines of credit, have continued to grow. Changes in the credit card operation are discussed in "Business Development Matters". The commercial loan portfolio and the residential construction and mortgage loan portfolio each experienced strong gains during 1996. Management considers the Bank's asset quality to be of primary importance. A formal loan ASSET QUALITY review function, independent of loan origination, is used to identify and monitor problem loans. As part of the loan review function, a third party assessment group is employed to review the underwriting documentation and risk grading analysis. In determining the allowance for loan losses and any resulting provision to be charged against earnings, particular emphasis is placed on the results of the loan review process. Consideration is also given to historical loan loss experience, the value and adequacy of collateral, and economic conditions in the Bank's market area. This evaluation is inherently subjective as it requires material estimates, including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. Management's policy in regard to past due loans is conservative and normally requires a prompt charge-off to the allowance for loan losses following timely collection efforts and a thorough review. Further efforts are then pursued through various means available. Loans carried in a nonaccrual status are generally collateralized and the possibility of future losses is considered minimal. 16 Table 7 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 8. TABLE 7 ALLOWANCE FOR LOAN LOSSES AND NONPERFORMING ASSETS (DOLLARS IN THOUSANDS)
1996 1995 1994 1993 1992 ALLOWANCE FOR LOAN LOSSES Balance at beginning of year.............................................. $1,903 $1,720 $1,745 $1,766 $1,484 Charge-offs: Commercial and agricultural............................................. 24 84 16 57 159 Real estate -- construction............................................. -- -- -- -- -- Real estate -- mortgage................................................. 12 -- 1 24 34 Consumer................................................................ 532 393 419 486 228 Total charge-offs..................................................... 568 477 436 567 421 Recoveries: Commercial and agricultural............................................. 12 8 6 8 24 Real estate -- construction............................................. -- -- -- -- -- Real estate -- mortgage................................................. 3 3 5 7 1 Consumer................................................................ 146 134 180 161 103 Total recoveries...................................................... 161 145 191 176 128 Net loan charge-offs...................................................... 407 332 245 391 293 Provision for loan losses................................................. 490 515 220 370 575 Balance at end of year.................................................... $1,986 $1,903 $1,720 $1,745 $1,766 NONPERFORMING ASSETS, AT END OF YEAR Nonaccrual loans.......................................................... $ 65 $ 26 $ -- $ -- $ 68 Accruing loans past due 90 days or more................................... 231 317 118 136 388 Total nonperforming loans............................................. 296 343 118 136 456 Foreclosed assets......................................................... 38 64 78 134 159 Other real estate owned................................................... -- -- -- -- 52 Total nonperforming assets............................................ $ 334 $ 407 $ 196 $ 270 $ 667 RATIOS Net loan charge-offs to average loans..................................... .22% .19% .15% .26% .21% Net loan charge-offs to allowance for loan losses......................... 20.49 17.45 14.25 22.43 16.59 Allowance for loan losses to year-end loans............................... 1.02 1.06 1.02 1.11 1.20 Total nonperforming loans to year-end loans............................... .15 .19 .07 .09 .31
TABLE 8 ALLOCATION OF ALLOWANCE FOR LOAN LOSSES (IN THOUSANDS)
December 31 1996 1995 1994 1993 1992 Commercial and agricultural................................................. $ 650 $ 572 $ 490 $ 451 $ 418 Real estate -- construction................................................. 10 9 14 25 23 Real estate -- mortgage..................................................... 439 384 346 281 261 Consumer.................................................................... 727 695 651 569 343 Unallocated................................................................. 160 243 219 419 721 Total allowance for loan losses........................................... $1,986 $1,903 $1,720 $1,745 $1,766
17 The level and mix of deposits is affected by various factors, including general economic DEPOSITS conditions, the particular circumstances of local markets and the specific deposit strategies employed. In general, broad interest rate declines tend to encourage customers to consider alternative investments such as mutual funds and tax-deferred annuity products, while interest rate increases tend to have the opposite effect. The Bank's level and mix of deposits has been specifically affected by the following factors. A promotion that offered premium-rate certificates of deposit, based on selected maturities, has resulted in a significant portion of the $17,173,000 increase in time deposits during 1996. Certain variable-rate time deposits with minimum rates in excess of current market rates were phased out over a two-year period that commenced in January 1994. A retail repurchase agreements program, established in the second quarter of 1994, has tended to transfer funds away from deposits. The balance of retail repurchase agreements was $3,725,000 at December 31, 1996 and $4,642,000 at December 31, 1995. Further, the level of time deposits obtained from governmental units fluctuates, amounting to $21,602,000, $17,820,000 and $4,898,000 at December 31, 1996, 1995 and 1994, respectively. Table 9 shows the year-end and average deposit balances for the years 1996, 1995 and 1994 and the changes in 1996 and 1995. TABLE 9 ANAYLSIS OF DEPOSITS (DOLLARS IN THOUSANDS)
1996 1995 Change from Change from Prior Year Prior Year 1994 Balance Amount % Balance Amount % Balance YEAR-END BALANCES Interest-bearing deposits: NOW accounts...................................... $ 36,139 $3,732 11.5 $ 32,407 $ 505 1.6 $ 31,902 Savings deposits.................................. 29,134 (958 ) (3.2) 30,092 (828 ) (2.7) 30,920 Money market accounts............................. 17,304 1,075 6.6 16,229 (3,350 ) (17.1) 19,579 Total........................................... 82,577 3,849 4.9 78,728 (3,673 ) (4.5) 82,401 Certificates and other time deposits.............. 149,998 17,173 12.9 132,825 22,583 20.5 110,242 Total interest-bearing deposits................. 232,575 21,022 9.9 211,553 18,910 9.8 192,643 Noninterest-bearing demand deposits................. 38,805 214 .6 38,591 1,309 3.5 37,282 Total deposits.................................. $271,380 $21,236 8.5 $250,144 $20,219 8.8 $229,925 AVERAGE BALANCES Interest-bearing deposits: NOW accounts...................................... $ 35,021 $2,579 7.9 $ 32,442 $ (79 ) (.2) $ 32,521 Savings deposits.................................. 30,147 202 .7 29,945 (1,875 ) (5.9) 31,820 Money market accounts............................. 16,067 (592 ) (3.6) 16,659 (4,602 ) (21.6) 21,261 Total........................................... 81,235 2,189 2.8 79,046 (6,556 ) (7.7) 85,602 Certificates and other time deposits.............. 138,993 16,250 13.2 122,743 15,984 15.0 106,759 Total interest-bearing deposits................. 220,228 18,439 9.1 201,789 9,428 4.9 192,361 Noninterest-bearing demand deposits................. 36,296 (148 ) (.4) 36,444 830 2.3 35,614 Total deposits.................................. $256,524 $18,291 7.7 $238,233 $10,258 4.5 $227,975
18 As discussed in the "Overview" and in Note 16 to Consolidated Financial Statements, the BUSINESS DEVELOPMENT Corporation had entered into definitive agreements to MATTERS acquire two mutual savings banks. In 1995, the agreements expired without the acquisitions having been completed due to changes in federal and state regulatory policies which strictly limited the circumstances under which such transactions would be permitted. During 1994, a new credit card operation was established in which the Bank carries its own credit card receivables as opposed to the former fee-based arrangement under which accounts were generated for and owned by a correspondent bank. As part of the new credit card strategy, extensive marketing efforts were undertaken in 1995, primarily to Bank customers. Credit card receivables amounted to $2,257,204 and $1,524,718 at December 31, 1996 and 1995, respectively. Additionally, the merchant aspect of credit card operations has been shifted to an in-house basis from the prior correspondent arrangement. In a significant 1994 development, the Bank elected to outsource all of its data processing, item capture and statement rendering operations. The conversion to a service bureau arrangement was completed in the 1994 fourth quarter. The major items of data processing equipment that were no longer needed by the Bank were acquired by the new processor. While the Bank does not currently plan to resume any major data processing operations, the level of computer equipment was significantly increased in 1995 through expanded use of personal computer networks. The new networks allow for a more direct input of basic loan and deposit account information to the data files maintained by the service bureau. Capital expenditures in 1995, which totaled $1,302,230, related primarily to the increase in computer equipment. Since most of this equipment was not placed into service until late in 1995, the full effect on annual depreciation expense was not recognized until 1996. Approximately one-third of 1996 capital expenditures, which totaled $1,019,109, also related to personal computer networks. In 1995, as discussed in Note 15 to Consolidated Financial Statements, management adopted a comprehensive restructuring project for the purpose of reengineering Bank operations to become more competitive and cost-effective in developing business and servicing customers and to improve long-term profitability. In connection with this project, certain positions within the Bank were either realigned or eliminated. Total restructuring charges, all of which were incurred and paid in 1995, amounted to $460,457, of which $301,116 related to personnel costs and $159,341 to professional fees. The Bank also decided in March 1995 to recognize losses of $414,596 from the sales of certain investment securities held in the available-for-sale portfolio in order to gain favorable tax treatment for the losses and to take advantage of reinvestment opportunities at higher coupon rates. While these actions had a significant adverse impact on 1995 earnings, management believes these decisions will enhance the long-term value of the Corporation and strengthen the competitive position of its community banking operations. Management decided in March 1996 that the Bank would discontinue the purchase of retail installment loan contracts from automobile and equipment dealers, due largely to the declining yields being experienced in this loan program. Contracts of this nature included in loans at December 31, 1996 and 1995 amounted to $20,355,367 and $33,525,143, respectively. While there will be no purchases of new contracts, current plans call for the collection of outstanding loans based on their contractual terms. It is expected that the funds previously invested in this loan program will be redeployed, as loan payments occur, to other loan programs or to the investment securities portfolio. In March 1995, the Financial Accounting Standards Board (the "FASB") issued Statement of ACCOUNTING PRONOUNCEMENT Financial Accounting Standards (SFAS) No. 121, "Accounting MATTERS for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", which establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill related to those assets to be held and used and for those to be disposed of. This statement requires that long-lived assets and certain intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. SFAS No. 121 19 is effective for fiscal years beginning after December 15, 1995. The Corporation adopted the provisions of SFAS No. 121 in 1996 without any effect on the consolidated financial statements. In May 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage Servicing Rights, an amendment of FASB Statement No. 65". SFAS No. 122 amends FASB Statement No. 65 to require that the rights to service mortgage loans for others, however those servicing rights are acquired, be recognized as separate assets, eliminating the previously existing accounting distinction between servicing rights acquired through purchase transactions and those acquired through loan originations. SFAS No. 122 is required to be adopted and applied prospectively for fiscal years beginning after December 15, 1995 to transactions involving the sale or securitization of mortgage loans with servicing rights retained. The Corporation adopted the provisions of SFAS No. 122 without any significant effect on the consolidated financial statements. In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation". SFAS No. 123 defines a fair value based method of accounting for an employee stock option or similar equity instrument. However, it also allows an entity to continue to measure compensation cost for those plans using the intrinsic value based method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees". Entities electing to remain with the accounting in APB Opinion No. 25 must make pro forma disclosures of net income and, if presented, earnings per share, as if the fair value based method of accounting defined in SFAS No. 123 had been applied. The accounting requirements of SFAS No. 123 are effective for transactions entered into in fiscal years that begin after December 15, 1995, though they may be adopted on issuance. The Corporation adopted the provisions of SFAS No. 123 in 1996, resulting in the disclosures presented in Note 12 to the consolidated financial statements. In June 1996, the FASB issued SFAS No. 125 "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities". SFAS No. 125 provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities using a financial-components approach that focuses on control of the asset or liability. It requires that an entity recognize only assets it controls and liabilities it has incurred and should derecognize assets only when control has been surrendered and derecognize liabilities only when they have been extinguished. SFAS No. 125 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996 and is to be applied prospectively. The Corporation adopted the provisions of SFAS No. 125 on January 1, 1997 without any effect on the consolidated financial statements. The operations of the Bank and therefore of the Corporation are subject to the effects of EFFECTS OF INFLATION 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. 20 TABLE 10 QUARTERLY FINANCIAL DATA (IN THOUSANDS EXCEPT PER SHARE DATA)
First Second Third Fourth 1996 Interest income.................................................................... $5,436 $5,443 $5,538 $5,831 Interest expense................................................................... 2,380 2,346 2,357 2,529 Net interest income................................................................ 3,056 3,097 3,181 3,302 Provision for loan losses.......................................................... 100 95 110 185 Net interest income after provision for loan losses................................ 2,956 3,002 3,071 3,117 Other operating income............................................................. 586 589 592 677 Other operating expense............................................................ 2,186 2,222 2,305 2,364 Income before income taxes......................................................... 1,356 1,369 1,358 1,430 Income taxes....................................................................... 411 417 419 429 Net income......................................................................... $ 945 $ 952 $ 939 $1,001 Per share data: Net income....................................................................... $ .53 $ .53 $ .52 $ .56 Cash dividends declared.......................................................... .15 .15 .15 .21 Common stock price (1): High........................................................................... 26.50 26.50 26.00 30.00 Low............................................................................ 22.50 22.63 23.50 25.50 1995 Interest income.................................................................... $4,870 $5,062 $5,230 $5,444 Interest expense................................................................... 2,079 2,193 2,317 2,413 Net interest income................................................................ 2,791 2,869 2,913 3,031 Provision for loan losses.......................................................... 95 125 130 165 Net interest income after provision for loan losses................................ 2,696 2,744 2,783 2,866 Losses on sales of securities...................................................... (415) -- -- -- Other operating income............................................................. 531 552 561 597 Restructuring charges.............................................................. 460 -- -- -- Other operating expense............................................................ 2,227 2,128 2,083 2,216 Income before income taxes......................................................... 125 1,168 1,261 1,247 Income taxes (benefit)............................................................. (8) 368 375 366 Net income......................................................................... $ 133 $ 800 $ 886 $ 881 Per share data (2): Net income....................................................................... $ .07 $ .44 $ .49 $ .49 Cash dividends declared.......................................................... .12 .12 .13 .15 Common stock price (1): High........................................................................... 16.67 18.00 21.00 24.00 Low............................................................................ 15.33 15.33 16.50 18.50
(1) FNB Corp. common stock is traded on the NASDAQ National Market System under the symbol FNBN. (2) All per share data in 1995 has been retroactively adjusted to reflect the three-for-two common stock split effected in the form of a 50% stock dividend paid in the second quarter of 1995. 21 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, 1996 and 1995, and the related consolidated statements of income, shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1996. These consolidated financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of FNB Corp. and subsidiary as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. KPMG PEAT MARWICK LLP Greensboro, North Carolina March 7, 1997 22 FNB CORP. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
December 31 ASSETS 1996 1995 Cash and due from banks............................................................. $ 13,052,150 $ 8,764,539 Federal funds sold.................................................................. -- 2,600,000 Investment securities: Available for sale, at estimated fair value (amortized cost of $28,875,531 in 1996 and $28,183,155 in 1995)........................................................ 28,928,543 28,375,645 Held to maturity (estimated fair value of $61,274,858 in 1996 and $57,008,236 in 1995)........................................................................... 61,387,196 56,160,814 Loans............................................................................... 195,272,683 179,922,737 Less: Allowance for loan losses................................................... (1,985,581) (1,902,640) Net loans....................................................................... 193,287,102 178,020,097 Premises and equipment.............................................................. 6,290,471 6,029,541 Other assets........................................................................ 4,189,015 3,727,476 TOTAL ASSETS.................................................................... $307,134,477 $283,678,112 LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Noninterest-bearing demand deposits............................................... $ 38,805,364 $ 38,590,985 Interest-bearing deposits: NOW, savings and money market deposits.......................................... 82,576,792 78,728,366 Time deposits of $100,000 or more............................................... 48,944,981 36,427,161 Other time deposits............................................................. 101,052,928 96,397,964 Total deposits................................................................ 271,380,065 250,144,476 Retail repurchase agreements........................................................ 3,724,929 4,641,527 Federal funds purchased............................................................. 575,000 -- Other liabilities................................................................... 2,687,241 2,897,038 Total Liabilities............................................................. 278,367,235 257,683,041 Shareholders' Equity: Preferred stock, $10.00 par value; authorized 200,000 shares, none issued......... -- -- Common stock, $2.50 par value; authorized 5,000,000 shares, issued 1,806,994 shares in 1996 and 1,797,995 shares in 1995..................................... 4,517,485 4,494,988 Surplus........................................................................... 213,510 18,705 Retained earnings................................................................. 24,001,259 21,354,335 Net unrealized securities gains................................................... 34,988 127,043 Total Shareholders' Equity.................................................... 28,767,242 25,995,071 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................................... $307,134,477 $283,678,112 Commitments (Note 13)
See notes to consolidated financial statements. 23 FNB CORP. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31 1996 1995 1994 INTEREST INCOME Interest and fees on loans............................................. $16,727,702 $15,638,486 $13,228,841 Interest and dividends on investment securities: Taxable income....................................................... 4,661,250 4,170,724 3,722,957 Non-taxable income................................................... 770,119 619,480 645,224 Federal funds sold..................................................... 88,799 177,071 91,034 Total interest income.............................................. 22,247,870 20,605,761 17,688,056 INTEREST EXPENSE Deposits............................................................... 9,390,717 8,821,404 6,880,389 Retail repurchase agreements........................................... 178,113 167,076 84,094 Federal funds purchased................................................ 42,728 13,799 14,251 Total interest expense............................................. 9,611,558 9,002,279 6,978,734 NET INTEREST INCOME...................................................... 12,636,312 11,603,482 10,709,322 Provision for loan losses.............................................. 490,000 515,000 220,000 Net Interest Income After Provision for Loan Losses...................... 12,146,312 11,088,482 10,489,322 OTHER OPERATING INCOME Service charges on deposit accounts.................................... 1,415,038 1,356,083 1,218,066 Annuity and brokerage commissions...................................... 217,766 182,091 318,309 Credit card income..................................................... 315,641 263,678 100,816 Other service charges, commissions and fees............................ 314,097 284,994 270,280 Losses on sales of investment securities............................... -- (414,596) -- Other income........................................................... 180,975 153,916 167,407 Total other operating income....................................... 2,443,517 1,826,166 2,074,878 OTHER OPERATING EXPENSE Personnel expense...................................................... 4,733,429 4,479,773 4,902,442 Net occupancy expense.................................................. 485,357 461,992 447,645 Furniture and equipment expense........................................ 661,504 452,094 503,296 Data processing services............................................... 1,006,405 881,757 297,670 Restructuring charges.................................................. -- 460,457 -- Other expense.......................................................... 2,190,379 2,377,553 2,426,895 Total other operating expense...................................... 9,077,074 9,113,626 8,577,948 Income Before Income Taxes............................................... 5,512,755 3,801,022 3,986,252 Income taxes............................................................. 1,675,451 1,100,565 1,159,386 NET INCOME............................................................... $ 3,837,304 $ 2,700,457 $ 2,826,866 Net income per share..................................................... $ 2.13 $ 1.50 $ 1.57 Weighted average number of shares outstanding............................ 1,801,933 1,798,717 1,800,000
See notes to consolidated financial statements. 24 FNB CORP. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Years Ended December 31, 1996, 1995 and 1994
NET UNREALIZED COMMON STOCK RETAINED SECURITIES SHARES AMOUNT SURPLUS EARNINGS GAINS (LOSSES) BALANCE, DECEMBER 31, 1993....................... 1,200,000 $3,000,000 $900,000 $18,247,517 $ 75,916 Net income, 1994................................. -- -- -- 2,826,866 -- Cash dividends declared, $.467 per share......... -- -- -- (840,000) -- Change in net unrealized gains (losses) on available-for-sale securities.................. -- -- -- -- (831,169) BALANCE, DECEMBER 31, 1994....................... 1,200,000 3,000,000 900,000 20,234,383 (755,253) Net income, 1995................................. -- -- -- 2,700,457 -- Cash dividends declared, $.52 per share.......... -- -- -- (935,017) -- Three-for-two stock split effected in the form of a 50% stock dividend........................... 599,968 1,499,920 (900,000) (599,920) -- Cash paid for fractional shares.................. -- -- -- (768) -- Common stock issued through dividend reinvestment plan........................................... 1,227 3,068 18,705 -- -- Common stock repurchased......................... (3,200) (8,000) -- (44,800) -- Change in net unrealized gains (losses) on available-for-sale securities.................. -- -- -- -- 882,296 BALANCE, DECEMBER 31, 1995....................... 1,797,995 4,494,988 18,705 21,354,335 127,043 Net income, 1996................................. -- -- -- 3,837,304 -- Cash dividends declared, $.66 per share.......... -- -- -- (1,190,380) -- Common stock issued through: Dividend reinvestment plan..................... 6,574 16,435 150,356 -- -- Stock option plan.............................. 2,425 6,062 44,449 -- -- Change in net unrealized gains (losses) on available-for-sale securities.................. -- -- -- -- (92,055) BALANCE, DECEMBER 31, 1996....................... 1,806,994 $4,517,485 $213,510 $24,001,259 $ 34,988
See notes to consolidated financial statements. 25 FNB CORP. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31 1996 1995 1994 OPERATING ACTIVITIES Net income........................................................... $ 3,837,304 $ 2,700,457 $ 2,826,866 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of premises and equipment............ 634,116 397,979 408,730 Provision for loan losses.......................................... 490,000 515,000 220,000 Deferred income taxes (benefit).................................... (65,999) 36,206 295,558 Deferred loan fees and costs, net.................................. 395,050 (130,477) (504,202) Premium amortization and discount accretion of investment securities, net.................................................. 39,357 157,127 417,395 Losses on sales of investment securities........................... -- 414,596 -- Amortization of intangibles........................................ 43,876 59,115 78,107 Net decrease (increase) in loans held for sale..................... 405,503 (405,503) 1,089,594 Increase in other assets........................................... (439,441) (557,531) (273,155) Increase (decrease) in other liabilities........................... (160,153) 732,884 320,447 Net Cash Provided By Operating Activities........................ 5,179,613 3,919,853 4,879,340 INVESTING ACTIVITIES Available-for-sale securities: Proceeds from sales................................................ -- 5,896,328 -- Proceeds from maturities........................................... 20,000,719 2,659,634 6,690,357 Purchases.......................................................... (20,765,272) (249,405) (3,400,725) Held-to-maturity securities: Proceeds from maturities........................................... 15,368,717 21,184,527 18,249,914 Purchases.......................................................... (20,558,380) (36,279,578) (21,708,597) Net increase in loans................................................ (16,531,348) (11,376,742) (11,743,814) Proceeds from sales of premises and equipment........................ 15,485 2,718 183,292 Purchases of premises and equipment.................................. (1,019,109) (1,302,230) (239,939) Other, net........................................................... (33,497) (26,031) (213,423) Net Cash Used In Investing Activities............................ (23,522,685) (19,490,779) (12,182,935) FINANCING ACTIVITIES Net increase in deposits............................................. 21,235,589 20,219,164 5,665,256 Increase (decrease) in retail repurchase agreements.................. (916,598) 1,115,301 3,526,226 Increase (decrease) in federal funds purchased....................... 575,000 (3,050,000) 1,250,000 Common stock issued.................................................. 217,302 21,773 -- Common stock repurchased............................................. -- (52,800) -- Cash dividends and fractional shares paid............................ (1,080,610) (666,086) (840,000) Net Cash Provided By Financing Activities........................ 20,030,683 17,587,352 9,601,482 NET INCREASE IN CASH AND CASH EQUIVALENTS.............................. 1,687,611 2,016,426 2,297,887 Cash and cash equivalents at beginning of year......................... 11,364,539 9,348,113 7,050,226 CASH AND CASH EQUIVALENTS AT END OF YEAR............................... $ 13,052,150 $ 11,364,539 $ 9,348,113 Supplemental disclosure of cash flow information: Cash paid during the year for: Interest........................................................... $ 9,746,990 $ 8,233,042 $ 6,911,446 Income taxes....................................................... 1,911,293 1,075,350 749,993 Noncash investing and financing activity -- Transfer of investment securities to available-for-sale category............................ -- 11,353,710 --
See notes to consolidated financial statements. 26 FNB CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS/CONSOLIDATION FNB Corp. is a one-bank holding company whose wholly-owned subsidiary is the First National Bank and Trust Company (the "Bank"). The Bank is an independent community bank that offers full banking and trust services to consumer and business customers primarily in the region of North Carolina that includes Randolph, Montgomery and Chatham counties. The consolidated financial statements include the accounts of FNB Corp. and the Bank (collectively the "Corporation"). All significant intercompany balances and transactions have been eliminated. The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, and federal funds sold. Generally, federal funds are purchased and sold for one-day periods. INVESTMENT SECURITIES Under Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities" , investment securities are to be categorized and accounted for as follows: (Bullet) Held-to-maturity securities -- Debt securities that the Corporation has the positive intent and ability to hold to maturity. Reported at amortized cost. (Bullet) Trading securities -- Debt and equity securities bought and held principally for the purpose of being sold in the near future. Reported at fair value, with unrealized gains and losses included in earnings. (Bullet) Available-for-sale securities -- Debt and equity securities not classified as either held-to-maturity securities or trading securities. Reported at fair value, with unrealized gains and losses, net of related tax effect, excluded from earnings and reported as a separate component of shareholders' equity. The Corporation intends to hold its securities classified as available-for-sale securities for an indefinite period of time but may sell them prior to maturity. All other securities, which the Corporation has the positive intent and ability to hold to maturity, are classified as held-to-maturity securities. In November 1995, the Financial Accounting Standards Board (the "FASB") issued an implementation guide for SFAS No. 115. The FASB stated that the transition provisions included in the guide permit a one-time opportunity for companies to reconsider their ability and intent to hold the securities accounted for under SFAS No. 115 to maturity and allow entities to transfer securities from the held-to-maturity category without tainting their remaining held-to-maturity securities. The FASB emphasized that this would be a one-time event and that any transfers from the held-to-maturity category to the available-for-sale category under this provision must be made by December 31, 1995. The Corporation transferred $11,353,710 in investment securities from the held-to-maturity category to the available-for-sale category as allowed under the provisions of the implementation guide. On the date of the transfer, the held-to-maturity securities were recorded as available-for-sale securities at their current fair value, which resulted in the recognition of an unrealized gain of $54,908 being recorded, net of the related tax effect, as an addition to shareholders' equity. Interest income on debt securities is adjusted using the level yield method for the amortization of premiums and accretion of discounts. The adjusted cost of the specific security is used to compute gains or losses on the disposition of securities. LOANS Effective January 1, 1995, the Corporation adopted Statement of Financial Accounting Standards (SFAS) No. 114, "Accounting by Creditors for Impairment of a Loan" and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan -- Income Recognition and Disclosures". Commencing in 1995 under the provisions of SFAS No. 114, the allowance for loan losses relating to loans that are determined to be impaired is based on discounted cash flows using the loan's initial effective interest rate or the fair value of the collateral for certain collateral dependent loans. The Corporation previously measured loan impairment in a method generally comparable to the methods prescribed in SFAS No. 114. Accordingly, no additional provisions for loan losses were required as a result of the adoption of SFAS No. 114. 27 FNB CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Unearned income on certain installment loans is recognized as income over the life of the loans by the sum-of-the-months'-digits method which is not materially different from the interest method. Interest on all other loans is calculated by using the constant yield method based on the daily outstanding balance. The recognition of interest revenue, including interest income on impaired loans, is discontinued when, in management's opinion, the collection of all or a portion of interest becomes doubtful. Loan fees and the incremental direct costs associated with making loans are deferred and subsequently recognized over the life of the loan as an adjustment of interest income. Residential mortgage loans held for sale are valued at the lower of cost or market as determined by outstanding commitments from investors or current investor yield requirements, calculated on the aggregate loan basis. ALLOWANCE FOR LOAN LOSSES The allowance for loan losses represents an amount considered adequate to absorb loan losses inherent in the portfolio. Management's evaluation of the adequacy of the allowance is based on a review of individual loans, historical loan loss experience, the value and adequacy of collateral, and economic conditions in the Bank's market area. Losses are charged and recoveries are credited to the allowance for loan losses. This evaluation is inherently subjective as it requires material estimates, including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan losses. Such agencies may require the Bank to recognize changes to the allowance based on their judgments about information available to them at the time of their examination. PREMISES AND EQUIPMENT Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed using both straight-line and accelerated methods based on the estimated useful lives of the assets as follows: buildings and components, 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 $99,703 and $143,579 at December 31, 1996 and 1995, 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. 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. 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. RESTATEMENTS Share and per share information in the consolidated financial statements and related notes thereto have been restated, where appropriate, to reflect the three-for-two common stock split effected in the form of a 50% stock dividend paid to shareholders on May 26, 1995. 28 FNB CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. INVESTMENT SECURITIES Summaries of the amortized cost and estimated fair value of investment securities and the related gross unrealized gains and losses are presented below:
Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value AVAILABLE FOR SALE DECEMBER 31, 1996 U.S. Treasury....................................... $ 4,685,376 $ 33,154 $ 15,432 $ 4,703,098 U.S. Government agencies and corporations........... 19,283,516 63,259 63,882 19,282,893 Mortgage-backed securities.......................... 4,759,750 43,187 15,799 4,787,138 Equity securities................................... 146,889 8,525 -- 155,414 Total............................................. $28,875,531 $148,125 $ 95,113 $28,928,543 DECEMBER 31, 1995 U.S. Treasury....................................... $ 9,439,250 $134,291 $ 8,658 $ 9,564,883 U.S. Government agencies and corporations........... 8,604,302 49,133 12,213 8,641,222 Mortgage-backed securities.......................... 9,995,875 51,692 27,617 10,019,950 Equity securities................................... 143,728 5,862 -- 149,590 Total............................................. $28,183,155 $240,978 $ 48,488 $28,375,645 HELD TO MATURITY DECEMBER 31, 1996 U.S. Government agencies and corporations........... $43,935,800 $114,573 $ 441,497 $43,608,876 State, county and municipal......................... 17,451,396 301,006 86,420 17,665,982 Total............................................. $61,387,196 $415,579 $ 527,917 $61,274,858 DECEMBER 31, 1995 U.S. Government agencies and corporations........... $43,975,874 $466,103 $ 54,515 $44,387,462 State, county and municipal......................... 12,184,940 447,387 11,553 12,620,774 Total............................................. $56,160,814 $913,490 $ 66,068 $57,008,236
The amortized cost and estimated fair value of investment securities at December 31, 1996, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because issuers may have the right to prepay obligations with or without prepayment penalties.
Available For Sale Held To Maturity Amortized Estimated Amortized Estimated Cost Fair Value Cost Fair Value Due in one year or less............................ $ 3,077,658 $ 3,089,571 $ 1,673,383 $ 1,682,583 Due after one year through five years.............. 12,066,711 12,052,628 27,583,959 27,575,662 Due after five years through ten years............. 8,824,523 8,843,792 24,037,534 23,911,622 Due after ten years................................ -- -- 8,092,320 8,104,991 Total........................................ 23,968,892 23,985,991 61,387,196 61,274,858 Mortgage-backed securities......................... 4,759,750 4,787,138 -- -- Equity securities.................................. 146,889 155,414 -- -- Total investment securities.................. $28,875,531 $28,928,543 $61,387,196 $61,274,858
Debt securities with an estimated fair value of $50,856,716 were pledged to secure public funds and trust funds on deposit and retail repurchase agreements at December 31, 1996. Proceeds from the sale of investment securities classified as available-for-sale amounted to $5,896,328 in 1995. Gross losses of $414,596 were realized on these sales. There were no securities sales in 1996 and 1994. 29 FNB CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3. LOANS Major classifications of loans are as follows:
December 31 1996 1995 Commercial and agricultural................................................... $ 62,677,847 $ 47,317,352 Real estate -- construction................................................... 4,347,673 759,263 Real estate -- mortgage: 1-4 family residential...................................................... 68,886,704 57,663,783 Commercial and other........................................................ 24,256,938 27,802,936 Consumer...................................................................... 35,103,521 46,379,403 Total loans............................................................... $195,272,683 $179,922,737
Loans as presented are increased by net deferred expense of $37,998 and $133,400 at December 31, 1996 and 1995, respectively. Residential mortgage loans held for sale at December 31, 1995 amounted to $405,503, with no such loans being held for sale at December 31, 1996. Nonaccrual loans amounted to $65,230 at December 31, 1996 and $25,576 at December 31, 1995. Lost interest income on nonaccrual loans was not material. Under the criteria of SFAS No. 114, as discussed in Note 1, there were no loans considered to be impaired at December 31, 1996 or 1995. Loans are primarily made in the region of North Carolina that includes Randolph, Montgomery and Chatham counties. The real estate loan portfolio can be affected by the condition of the local real estate markets. Included in loans at December 31, 1996 and 1995 are $20,355,367 and $33,525,143, respectively, of retail installment loan contracts purchased primarily from automobile dealers. In March 1996, the Bank discontinued the purchase of retail installment loan contracts from automobile and equipment dealers. Loans have been made by the Bank to directors and executive officers of the Corporation and to the associates of such persons, as defined by the Securities and Exchange Commission. Such loans were made in the ordinary course of business on substantially the same terms, including rate and collateral, as those prevailing at the time in comparable transactions with other borrowers and do not involve more than normal risk of collectibility. A summary of the activity during 1996 with respect to related party loans is as follows: Balance, December 31, 1995.................................................. $ 8,596,170 New loans during 1996....................................................... 10,244,476 Repayments during 1996...................................................... (8,637,755) Balance, December 31, 1996.................................................. $ 10,202,891
30 FNB CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4. ALLOWANCE FOR LOAN LOSSES Changes in the allowance for loan losses were as follows:
Years Ended December 31 1996 1995 1994 Balance at beginning of year.......................................... $1,902,640 $1,719,717 $1,744,820 Provision for losses charged to operations............................ 490,000 515,000 220,000 Loans charged off..................................................... (568,499) (476,977) (436,157) Recoveries on loans previously charged off............................ 161,440 144,900 191,054 Balance at end of year................................................ $1,985,581 $1,902,640 $1,719,717
5. PREMISES AND EQUIPMENT Premises and equipment are summarized as follows:
December 31 1996 1995 Land.............................................................................. $ 1,003,619 $1,003,619 Buildings and improvements........................................................ 4,275,866 4,045,155 Furniture and equipment........................................................... 4,953,489 4,572,809 Leasehold improvements............................................................ 394,390 394,390 Total....................................................................... 10,627,364 10,015,973 Less accumulated depreciation and amortization.................................... 4,336,893 3,986,432 Premises and equipment, net....................................................... $ 6,290,471 $6,029,541
6. INCOME TAXES Income taxes as reported in the consolidated income statement included the following expense (benefit) components:
1996 1995 1994 Current: Federal............................................................. $1,674,945 $1,045,564 $ 818,773 State............................................................... 66,505 18,795 45,055 Total............................................................. 1,741,450 1,064,359 863,828 Deferred -- Federal................................................... (65,999) 36,206 295,558 Total income taxes................................................ $1,675,451 $1,100,565 $1,159,386
A reconciliation of income tax expense computed at the statutory Federal income tax rate to actual income tax expense is presented below:
1996 1995 1994 Amount of tax computed using Federal statutory tax rate of 34%........ $1,874,337 $1,292,348 $1,355,326 Increases (decreases) resulting from: Effect of tax-exempt loan and investment securities income.......... (251,508) (213,390) (233,114) Other............................................................... 52,622 21,607 37,174 Total........................................................... $1,675,451 $1,100,565 $1,159,386
31 FNB CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The sources of deferred tax assets and liabilities and the tax effect of each are as follows:
December 31 1996 1995 Deferred tax assets: Allowance for loan losses......................................................... $501,571 $ 473,370 Accrued expenses, not currently deductible........................................ 324,210 326,010 Other............................................................................. 76,663 73,001 Total........................................................................... 902,444 872,381 Deferred tax liabilities: Depreciable basis of premises and equipment....................................... 309,869 236,963 Taxable basis of investment securities............................................ 53,499 47,066 Prepaid pension cost.............................................................. 224,827 250,717 Net deferred loan fees and costs.................................................. 219,625 309,318 Other............................................................................. 27,472 74,587 Total........................................................................... 835,292 918,651 Net deferred tax assets (liabilities)............................................... $ 67,152 $ (46,270)
There is no valuation allowance for deferred tax assets as it is management's contention that realization of the deferred tax assets is more likely than not based upon the Corporation's history of taxable income and estimates of future taxable income. 7. EMPLOYEE BENEFIT PLANS PENSION PLAN The Corporation has a noncontributory defined benefit pension plan covering substantially all full-time employees who qualify as to age and length of service. Benefits are based on the employee's compensation, years of service and age at retirement. The Corporation's funding policy is to contribute annually to the plan an amount which is not less than the minimum amount required by the Employee Retirement Income Security Act of 1974 and not more than the maximum amount deductible for income tax purposes. Information concerning the funded status of the plan is as follows:
December 31 1996 1995 Actuarial present value of benefit obligation: Vested benefit obligation...................................................... $ 4,368,884 $ 4,059,993 Non-vested benefit obligation.................................................. 48,293 40,180 Total accumulated benefit obligation......................................... $ 4,417,177 $ 4,100,173 Projected benefit obligation for service rendered................................ $(5,325,298) $(4,706,895) Plan assets at fair value, primarily marketable securities....................... 4,828,175 4,428,752 Projected benefit obligation in excess of plan assets............................ (497,123) (278,143) Unrecognized net transition liability............................................ 107,369 128,844 Unrecognized prior service cost.................................................. 995,011 720,672 Unrecognized net loss............................................................ 56,000 166,029 Prepaid pension cost included on the consolidated balance sheet.............. $ 661,257 $ 737,402
32 FNB CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Net periodic pension cost included the following components:
1996 1995 1994 Service cost -- benefits earned during the period........................ $ 108,379 $ 71,275 $ 82,674 Interest cost on projected benefit obligation............................ 327,835 311,432 280,736 Actual return on plan assets............................................. (517,299) (458,088) 101,768 Net amortization and deferral............................................ 266,453 290,002 (279,824) Net periodic pension cost............................................ $ 185,368 $ 214,621 $ 185,354
The rates used in determining the actuarial present value of the projected benefit obligation were as follows:
1996 1995 1994 Discount rate........................................................................... 7.0% 7.0% 8.0% Rate of increase in compensation levels................................................. 6.0 6.0 6.0 Expected long-term rate of return on plan assets........................................ 8.0 8.0 8.0
OTHER POSTRETIREMENT DEFINED BENEFIT PLANS The Corporation has postretirement medical and life insurance plans covering substantially all full-time employees who qualify as to age and length of service. The medical plan is contributory, with retiree contributions adjusted whenever medical insurance rates change. The life insurance plan is noncontributory. Information reconciling the plans, which are unfunded, with the amount included on the consolidated balance sheet is as follows:
December 31 1996 1995 Accumulated postretirement benefit obligation: Retirees........................................................................... $(322,587) $(330,919) Fully eligible active participants................................................. (26,174) (25,500) Other active plan participants..................................................... (201,338) (173,295) Total accumulated postretirement benefit obligation.............................. (550,099) (529,714) Unrecognized net transition liability................................................ 323,502 343,720 Unrecognized prior service cost...................................................... 87,906 97,673 Unrecognized net gain................................................................ (13,926) (18,285) Accrued postretirement benefit cost included on the consolidated balance sheet... $(152,617) $(106,606)
Net periodic postretirement benefit cost included the following components:
1996 1995 1994 Service cost -- benefits earned during the period............................. $17,049 $12,523 $ 6,880 Interest cost on accumulated postretirement benefit obligation................ 35,931 35,998 34,468 Net amortization and deferral................................................. 29,985 28,239 20,218 Net periodic postretirement benefit cost.................................. $82,965 $76,760 $61,566
For measurement purposes, the annual rate of increase assumed in 1996 for the cost of medical benefits was 14%, decreasing gradually to 6% in 2004 and assumed to remain at that level thereafter. In 1995, the annual rate of increase assumed for the cost of medical benefits was 15%, decreasing gradually to 6% in 2004 and assumed to remain at that level thereafter. Increasing the assumed medical cost trend rate by one percentage point in each year would not have a significant effect on either the accumulated postretirement benefit obligation at December 31, 1996 or the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year ended December 31, 1996. The discount rate used in determining the accumulated postretirement benefit obligation was 7.0% in 1996, 7.0% in 1995 and 8.0% in 1994. 33 FNB CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 $78,247 in 1996, $77,835 in 1995 and $71,484 in 1994. 8. LEASES Future obligations for minimum rentals under noncancellable operating lease commitments, all relating to premises, are as follows:
Years ending December 31 1997.............................................................................................. $ 45,109 1998.............................................................................................. 45,109 1999.............................................................................................. 45,109 2000.............................................................................................. 15,100 2001.............................................................................................. 15,100 2002 and later years.............................................................................. 51,840 Total minimum lease payments.................................................................. $217,367
Net rental expense for all operating leases amounted to $57,891 in 1996, $55,122 in 1995 and $50,908 in 1994. One operating lease for real property contains a purchase option considered to approximate fair market value. 9. SUPPLEMENTARY INCOME STATEMENT INFORMATION Significant components of other expense were as follows:
1996 1995 1994 FDIC insurance............................................................. $101,621 $281,894 $503,379 Stationery, printing and supplies.......................................... 301,703 280,665 304,997
34 FNB CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 10. 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, 1996 and 1995, and the related condensed statements of income and cash flows for each of the years in the three-year period ended December 31, 1996 are as follows: CONDENSED BALANCE SHEETS
December 31 1996 1995 Assets: Cash........................................................................... $ 611,884 $ 220,312 Investment in wholly-owned bank subsidiary..................................... 28,129,278 25,758,036 Other assets................................................................... 405,549 286,422 Total assets................................................................. $29,146,711 $26,264,770 Liabilities and Shareholders' Equity: Accrued liabilities............................................................ $ 379,469 $ 269,699 Shareholders' equity........................................................... 28,767,242 25,995,071 Total liabilities and shareholders' equity................................... $29,146,711 $26,264,770
CONDENSED STATEMENTS OF INCOME
Years Ended December 31 1996 1995 1994 Income: Dividends from bank subsidiary...................................... $1,383,000 $ 936,000 $1,146,000 Other income (expense).............................................. 3,899 (315) 1,345 Total income...................................................... 1,386,899 935,685 1,147,345 Operating expenses.................................................... 15,707 201,916 21,017 Income before income tax benefit and equity in undistributed net income of bank subsidiary........................................... 1,371,192 733,769 1,126,328 Income tax benefit.................................................... 2,815 68,957 6,738 Income before equity in undistributed net income of bank subsidiary... 1,374,007 802,726 1,133,066 Equity in undistributed net income of bank subsidiary................. 2,463,297 1,897,731 1,693,800 Net income........................................................ $3,837,304 $2,700,457 $2,826,866
35 FNB CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONDENSED STATEMENTS OF CASH FLOWS
Years Ended December 31 1996 1995 1994 Operating activities: Net income........................................................ $ 3,837,304 $2,700,457.. $ 2,826,866 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed net income of bank subsidiary........... (2,463,297) (1,897,731) (1,693,800) Other, net...................................................... (111,900) (82,601) (2,245) Net cash provided by operating activities..................... 1,262,107 720,125 1,130,821 Investing activities: Increase in other assets.......................................... (7,227) (4,444) (180,112) Financing activities: Common stock issued............................................... 217,302 21,773 -- Common stock repurchased.......................................... -- (52,800) -- Cash dividends and fractional shares paid......................... (1,080,610) (666,086) (840,000) Net cash used in financing activities......................... (863,308) (697,113) (840,000) Net increase in cash................................................ 391,572 18,568 110,709 Cash at beginning of year........................................... 220,312 201,744 91,035 Cash at end of year................................................. $ 611,884 $ 220,312 $ 201,744
11. REGULATORY MATTERS 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 1997, the maximum amount of dividends the Bank can pay to FNB Corp., without the approval of the Comptroller of the Currency, is $4,361,057 plus an additional amount equal to the retained net income in 1997 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, 1996, the average daily reserve requirement was $3,253,000. FNB Corp. and the Bank are required to comply with capital adequacy standards established by the Board of Governors of the Federal Reserve System. In addition, the Bank is required to comply with prompt corrective action provisions established by the Federal Deposit Insurance Corporation Improvement Act. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, there are minimum ratios of capital to risk-weighted assets. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Failure to meet minimum capital requirements can initiate certain mandatory and possibly discretionary actions by regulators that, if undertaken, could have a material effect on the consolidated financial statements. Regulatory capital amounts and ratios are set forth in the table below. The risk-based capital ratios are determined by expressing allowable capital amounts, defined in terms of Tier I and Tier II, as a percentage of risk-weighted assets, which are computed by measuring the relative credit risk of both the asset categories on the balance sheet and various off-balance sheet exposures. Tier I capital consists primarily of common shareholders' equity and qualifying perpetual preferred stock, net of goodwill and other disallowed intangible assets. Tier II capital, which is limited to the total of Tier I capital, includes allowable amounts of subordinated debt, mandatory convertible securities, preferred stock and the allowance for loan losses. Total capital, for risk-based purposes, consists of both Tier I and Tier II capital. 36 FNB CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Bank is well-capitalized under the regulatory framework for prompt corrective action. To be categorized as well-capitalized, the Bank must meet minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the table below.
Minimum Ratios For To Be Well Capital Capitalized Under Capital Amount Ratio Adequacy Prompt Corrective 1996 1995 1996 1995 Purposes Action Provisions (thousands) AS OF DECEMBER 31 Total capital (to risk-weighted assets): FNB Corp................................. $30,695 $27,740 14.79% 14.78% 8.00% N/A Bank..................................... 29,980 27,390 14.46 14.61 8.00 10.00% Tier I capital (to risk-weighted assets): FNB Corp................................. 28,709 25,837 13.84 13.77 4.00 N/A Bank..................................... 27,994 25,487 13.50 13.59 4.00 6.00% Tier I capital (to average assets): FNB Corp................................. 28,709 25,837 9.41 9.16 4.00 N/A Bank..................................... 27,994 25,487 9.18 9.04 4.00 5.00%
12. STOCK OPTIONS The Corporation adopted a stock compensation plan in 1994 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 180,000 shares of common stock has been reserved for issuance under the stock compensation plan. At December 31, 1996, there were 39,525 shares available under the plan for the granting of additional options. The Corporation applies APB Opinion No. 25 in accounting for the stock compensation plan and, accordingly, no compensation cost has been recognized for stock option grants in the consolidated financial statements. As required by Statement of Financial Accounting Standards (SFAS) No. 123, disclosures are presented below for the effect on net income and net income per share that would result from the use of the fair value based method to measure compensation costs related to stock option grants in 1995 and subsequent years. The effect on pro forma net income for 1996 and 1995 for options granted prior to 1995 has not been determined. Consequently, the effects of applying SFAS No. 123 pro forma disclosures during the initial phase-in period may not be representative of the effects on reported net income in future years.
1996 1995 NET INCOME As reported....................................................................... $3,837,304 $2,700,457 Pro forma......................................................................... $3,803,186 $2,699,117 NET INCOME PER SHARE As reported....................................................................... 2.13 1.50 Pro forma......................................................................... 2.11 1.50
37 FNB CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The weighted-average fair value per share of options granted in 1996 and 1995 amounted to $8.87 and $7.21, respectively. Fair values were estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:
1996 1995 Risk-free interest rate.................................................................. 6.25% 5.38% Dividend yield........................................................................... 2.50 2.50 Volatility............................................................................... 30.00 30.00 Expected life............................................................................ 6 years 6 years
A summary of stock option activity, adjusted to reflect the 1995 stock split disclosed in Note 1, is as follows:
Years Ended December 31 1996 1995 1994 Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price Outstanding at beginning of year............... 97,375 $19.45 66,000 $16.27 -- $ -- Granted........................................ 47,750 28.00 40,000 24.00 66,000 16.27 Exercised...................................... (2,425) 17.55 -- -- -- -- Forfeited...................................... (4,650) 20.01 (8,625) 16.27 -- -- Outstanding at end of year..................... 138,050 22.42 97,375 19.45 66,000 16.27 Options exercisable at end of year............. 27,250 18.30 11,475 16.27 -- --
At December 31, 1996, stock options outstanding had exercise prices ranging from $16.27 to $28.00 and a weighted-average remaining contractual life of 8.9 years. 13. COMMITMENTS In the normal course of business, various commitments are outstanding that are not reflected in the consolidated financial statements. At December 31, 1996, a summary of significant commitments is as follows: Commitments to extend credit................................................. $45,576,000 Standby letters of credit.................................................... 8,438,000
In management's opinion, these commitments will be funded from normal operations with not more than the normal risk of loss. The Bank has entered into an interest rate floor agreement with a correspondent bank to protect certain variable-rate loans from the downward effects of their repricing in the event of a decreasing rate environment. The notional amount of the agreement is $10,000,000. The agreement requires the correspondent bank to pay to the Bank the difference between the floor rate of interest of 7.50% and the prime rate of interest in the event that the prime rate is less. Any payments received under the agreement, net of premium amortization, will be treated as an adjustment of interest income on loans. The Bank's exposure to credit risk is limited to the ability of the counterparty to make payments to the Bank that are required pursuant to the agreement. The Bank's exposure to market risk of loss is limited to the amount of the unamortized premium. At December 31, 1996, the unamortized premium related to the interest rate floor agreement amounted to $42,000 and had an estimated fair value of $15,000. The Bank received no payments under the agreement in 1996. 38 FNB CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 14. 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. OTHER INTEREST-BEARING LIABILITIES. The carrying value of retail repurchase agreements and federal funds purchased is considered to be a reasonable estimate of fair value. COMMITMENTS. The fair value of commitments to extend credit is considered to approximate carrying value, since the large majority of these commitments would result in loans that have variable rates and/or relatively short terms to maturity. For other commitments, generally of a short-term nature, the carrying value is considered to be a reasonable estimate of fair value. The various commitment items are disclosed in Note 13. The estimated fair values of financial instruments are as follows (in thousands):
December 31, 1996 December 31, 1995 Estimated Estimated Carrying Fair Carrying Fair Value Value Value Value FINANCIAL ASSETS Cash and cash equivalents.................................... $ 13,052 $ 13,052 $ 11,365 $ 11,365 Investment securities: Available for sale......................................... 28,929 28,929 28,375 28,375 Held to maturity........................................... 61,387 61,275 56,161 57,008 Net loans.................................................... 193,287 191,296 178,020 179,173 FINANCIAL LIABILITIES Deposits..................................................... 271,380 272,047 250,144 250,795 Retail repurchase agreements................................. 3,725 3,725 4,642 4,642 Federal funds purchased...................................... 575 575 -- --
The fair value estimates are made at a specific point in time based on relevant market and other information about the financial instruments. 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. 39 FNB CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 15. RESTRUCTURING CHARGES In 1995, management adopted a comprehensive restructuring project for the purpose of reengineering Bank operations to become more competitive and cost-effective in developing business and servicing customers and to improve long-term profitability. In connection with this project, certain positions within the Bank were either realigned or eliminated. All significant project costs were incurred and paid in 1995. A summary of the restructuring charges is as follows: Retirement benefits............................................................................... $256,266 Other personnel costs............................................................................. 44,850 Total personnel costs......................................................................... 301,116 Professional fees related to restructuring project................................................ 159,341 Total restructuring charges................................................................... $460,457
16. ACQUISITIONS On December 30, 1993, the Corporation entered into definitive agreements to acquire two mutual savings banks, Home Savings Bank of Siler City, SSB of Siler City, North Carolina and Randleman Savings Bank, SSB of Randleman, North Carolina, in merger/conversion transactions, pursuant to which the savings banks would convert from mutual to stock form and the Corporation would simultaneously acquire the shares issued in the conversions. Regulatory applications for approval to consummate the proposed acquisitions were filed in April 1994. Substantial changes in regulatory policy occurring shortly after the applications were filed effectively resulted in a moratorium on federal approval of merger/conversions, and the Corporation subsequently withdrew the applications to the FDIC and the Federal Reserve and postponed the ultimate decision to proceed with the acquisitions until it was clear what the regulatory obstacles might be. In 1995, the agreements expired without the acquisitions having been completed due to changes in federal and state regulatory policies which strictly limited the circumstances under which such transactions would be permitted. The Corporation incurred certain costs in connection with the proposed acquisitions. Those costs, which had been deferred, amounted to $186,350 and are included in other expense in the consolidated statement of income for the year ended December 31, 1995. 40 GENERAL INFORMATION CORPORATE HEADQUARTERS FNB Corp. 101 Sunset Avenue Post Office Box 1328 Asheboro, North Carolina 27204 COMMON STOCK FNB Corp. Common stock is traded on the NASDAQ National Market System under the symbol FNBN. At December 31, 1996, there were 1,062 shareholders of record. MARKET MAKERS Interstate/Johnson Lane Corporation J. C. Bradford & Co., Incorporated ANNUAL MEETING The annual Meeting of Shareholders of FNB Corp. will be held at the AVS Banquet Centre, 2045 North Fayetteville Street, Asheboro, North Carolina, on Tuesday, May 13, 1997 at 1:00 p.m., preceded by a buffet luncheon beginning at 12:15 p.m. FORM 10-KSB Copies of the FNB Corp. Annual Report to the Securities and Exchange Commission on Form 10-KSB may be obtained by any shareholder upon written request to Jerry A. Little, Treasurer. EQUAL OPPORTUNITY EMPLOYER FNB Corp. and First National Bank and Trust Company are equal opportunity employers. All matters regarding recruiting, hiring, training, compensation, benefits, promotions, transfers and all other personnel policies will continue to be free from all discriminatory practices. STOCK TRANSFER AGENT AND REGISTRAR DIVIDEND REINVESTMENT SERVICES First National Bank and Trust Company Post Office Box 1328 Asheboro, North Carolina 27204 Attention: Mrs. Susan G. Brown, Assistant Secretary (910) 626-8300 INDEPENDENT AUDITORS KPMG Peat Marwick LLP Greensboro, North Carolina EX-21 3 EXHIBIT 21 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 EXHIBIT 23 EXHIBIT 23 Consent of Independent Auditors The Board of Directors FNB Corp. We consent to incorporation by reference in the registration statement (No. 33-72686) on Form S-8 of FNB Corp. of our report dated March 7, 1997, relating to the consolidated balance sheets of FNB Corp. and subsidiary as of December 31, 1996 and 1995, and the related consolidated statements of income, shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1996, which report appears in the December 31, 1996 annual report on Form 10-KSB of FNB Corp. KPMG PEAT MARWICK LLP Greensboro, North Carolina March 31, 1997 EX-27 5 EXHBIT 27
9 This Schedule contains summary financial information extracted from Form 10-KSB for the fiscal year ended December 31, 1995 and is qualified in its entirety by reference to such financial statements. Year Dec-31-1996 Dec-31-1996 13,052,150 0 0 0 28,928,543 61,387,196 0 195,272,683 1,985,581 307,134,477 271,380,065 4,299,929 2,687,241 0 0 0 4,517,485 24,249,757 307,134,477 16,727,702 5,431,369 88,799 22,247,870 9,390,717 9,611,558 12,636,312 490,000 0 9,077,074 5,512,755 5,512,755 0 0 3,837,304 2.13 2.13 4.60 65,000 231,000 0 0 1,903,000 568,000 161,000 1,986,000 1,826,000 0 160,000
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