-----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, V5am2+Llv81WOhj86lzLgqxH2WW845nueGw2Z5e6Kz05fy6OuHRqLVibh97rnxrS FH9AyEP1dGOrZxHBhKeN3Q== 0001021408-01-505405.txt : 20010815 0001021408-01-505405.hdr.sgml : 20010815 ACCESSION NUMBER: 0001021408-01-505405 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FNB CORP/NC CENTRAL INDEX KEY: 0000764811 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 561456589 STATE OF INCORPORATION: NC FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-13823 FILM NUMBER: 1713878 BUSINESS ADDRESS: STREET 1: 101 SUNSET AVE STREET 2: P O BOX 1328 CITY: ASHEBORO STATE: NC ZIP: 27203 BUSINESS PHONE: 3366268300 MAIL ADDRESS: STREET 1: P.O. BOX 1328 CITY: ASHEBORO STATE: NC ZIP: 27203 10-Q 1 d10q.txt FNB CORP. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ____________ FORM 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended June 30, 2001 Commission File Number 0-13823 ____________ FNB CORP. (Exact name of Registrant as specified in its charter) North Carolina 56-1456589 (State of incorporation) (I.R.S. Employer Identification No.) 101 Sunset Avenue, Asheboro, North Carolina 27203 (Address of principal executive offices) (336) 626-8300 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No __ -- The registrant had 5,009,098 shares of $2.50 par value common stock outstanding at August 10, 2001. PART I. FINANCIAL INFORMATION Item 1. Financial Statements FNB Corp. and Subsidiary CONSOLIDATED BALANCE SHEETS
June 30, (unaudited) December 31, ------------------------------- 2001 2000 2000 ------------ ------------ ------------- (in thousands, except share data) ASSETS Cash and due from banks $ 14,189 $ 14,833 $ 14,108 Interest-bearing bank accounts - 650 - Federal funds sold 159 160 94 Investment securities: Available for sale, at estimated fair value (amortized cost of $165,619, $65,822 and $73,572) 167,009 62,695 73,023 Held to maturity (estimated fair value of $55,721 and $59,727) - 57,498 59,361 Loans: Loans held for sale 2,557 473 9,870 Loans held for investment 386,385 386,720 385,867 Less allowance for loan losses (4,353) (4,012) (4,352) ------------ ------------ ------------- Net loans 384,589 383,181 391,385 ------------ ------------ ------------- Premises and equipment, net 9,438 9,882 9,596 Other assets 18,663 9,395 18,072 ------------ ------------ ------------- Total Assets $ 594,047 $ 538,294 $ 565,639 ============ ============ ============= LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Noninterest-bearing demand deposits $ 46,823 $ 48,139 $ 45,901 Interest-bearing deposits: Demand, savings and money market deposits 131,366 123,604 126,823 Time deposits of $100,000 or more 102,102 90,267 101,584 Other time deposits 205,005 188,991 198,140 ------------ ------------ ------------- Total deposits 485,296 451,001 472,448 Retail repurchase agreements 13,635 10,283 11,201 Federal Home Loan Bank advances 25,000 15,000 15,000 Federal funds purchased 4,375 4,400 4,750 Other liabilities 7,486 5,967 7,118 ------------ ------------ ------------- Total Liabilities 535,792 486,651 510,517 ------------ ------------ ------------- Shareholders' equity: Preferred stock - $10.00 par value; authorized 200,000 shares, none issued - - - Common stock - $2.50 par value; authorized 10,000,000 shares, issued shares - 5,047,292, 5,046,386 and 5,059,641 12,618 12,616 12,649 Surplus 2,653 2,736 2,836 Retained earnings 42,066 38,355 40,000 Accumulated other comprehensive income (loss) 918 (2,064) (363) ------------ ------------ ------------- Total Shareholders' Equity 58,255 51,643 55,122 ------------ ------------ ------------- Total Liabilities and Shareholders' Equity $ 594,047 $ 538,294 $ 565,639 ============ ============ =============
See accompanying notes to consolidated financial statements. 1 FNB Corp. and Subsidiary CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Six Months Ended June 30, (unaudited) June 30, (unaudited) ------------------------------- ------------------------------- 2001 2000 2001 2000 ------------ ------------ ------------- ------------ (in thousands, except per share data) Interest Income Interest and fees on loans $ 8,053 $ 8,391 $ 16,604 $ 16,289 Interest and dividends on investment securities: Taxable income 2,171 1,570 3,969 3,131 Non-taxable income 238 244 481 493 Other interest income 57 125 142 231 ----------- ----------- ------------- ------------ Total interest income 10,519 10,330 21,196 20,144 ----------- ----------- ------------- ------------ Interest Expense Deposits 5,116 4,657 10,452 8,948 Retail repurchase agreements 119 127 243 240 Federal Home Loan Bank advances 320 202 601 405 Federal funds purchased 10 27 38 52 ----------- ----------- ------------- ------------ Total interest expense 5,565 5,013 11,334 9,645 ----------- ----------- ------------- ------------ Net Interest Income 4,954 5,317 9,862 10,499 Provision for loan losses 165 835 285 992 ----------- ----------- ------------- ------------ Net Interest Income After Provision for Loan Losses 4,789 4,482 9,577 9,507 ----------- ----------- ------------- ------------ Noninterest Income Service charges on deposit accounts 648 553 1,229 1,100 Annuity and brokerage commissions 53 141 114 253 Cardholder and merchant services income 157 133 295 242 Other service charges, commissions and fees 173 154 365 345 Bank owned life insurance 159 - 316 - Net gain on sales of loans 175 15 429 22 Other income 123 151 166 278 ----------- ----------- ------------- ------------ Total noninterest income 1,488 1,147 2,914 2,240 ----------- ----------- ------------- ------------ Noninterest Expense Personnel expense 2,300 2,247 4,489 4,355 Net occupancy expense 203 207 404 409 Furniture and equipment expense 345 462 701 916 Data processing services 174 277 341 505 Merger related expenses - 2,796 - 2,796 Other expense 1,049 893 1,975 1,849 ----------- ----------- ------------- ------------ Total noninterest expense 4,071 6,882 7,910 10,830 ----------- ----------- ------------- ------------ Income (Loss) Before Income Taxes 2,206 (1,253) 4,581 917 Income taxes (benefit) 608 (278) 1,301 411 ----------- ----------- ------------- ------------ Net Income (Loss) $ 1,598 $ (975) $ 3,280 $ 506 =========== =========== ============= ============ Net income (loss) per common share: Basic $ .32 $ (.19) $ .65 $ .10 Diluted .31 (.19) .64 .10 =========== =========== ============= ============ Weighted average number of shares outstanding: Basic 5,062,678 5,027,951 5,062,635 5,017,591 Diluted 5,133,881 5,027,951 5,137,616 5,075,268 =========== =========== ============= ============ Cash dividends declared per common share $ .12 $ .12 $ .24 $ .24 =========== =========== ============= ============
See accompanying notes to consolidated financial statements. 2 FNB Corp. and Subsidiary CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME Six Months Ended June 30, 2001 and June 30, 2000 (unaudited)
ESOP Common Stock and --------------------------- Retained Restricted Shares Amount Surplus Earnings Stock Plans ------------- ------------ ------------ ------------- ------------ (in thousands, except share data) Balance, December 31, 1999 5,139,520 $ 12,849 $ 4,131 $ 39,158 $ (2,092) Comprehensive income: Net income - - - 506 - Other comprehensive income: Unrealized securities losses, net of income tax benefit of $43 - - - - - Total comprehensive income - - - - - Cash dividends declared - - - (1,309) - Cash paid for fractional shares in merger (122) - (1) - - ESOP and restricted stock plan transactions: Termination of plans (93,113) (233) (1,342) - 1,9605 Other transactions - - (17) - 1325 Common stock issued through: Dividend reinvestment plan 4,701 12 39 - - Stock option plan 2,100 5 14 - - Common stock repurchased (6,700) (17) (88) - - ------------ ----------- ------------ ------------ ----------- Balance, June 30, 2000 5,046,386 $ 12,616 $ 2,736 $ 38,355 $ - ============ =========== ============ ============ =========== Balance, December 31, 2000 5,059,641 $ 12,649 $ 2,836 $ 40,000 $ - Comprehensive income: Net income - - - 3,280 - Other comprehensive income: Unrealized securities gains, net of income taxes of $659 - - - - - Total comprehensive income - - - - - Cash dividends declared - - - (1,214) - Common stock issued through: Stock option plan 9,551 24 72 - - Common stock repurchased (21,900) (55) (255) - - ------------- ------------ ------------ ----------- - ----------- Balance, June 30, 2001 5,047,292 $ 12,618 $ 2,653 $ 42,066 $ - ============ =========== ============ ============== =========== Accumulated Other Comprehensive Income (Loss) Total -------------- ----------- Balance, December 31, 1999 $ (1,978) $ 52,068 Comprehensive income: Net income - 506 Other comprehensive income: Unrealized securities losses, net of income tax benefit of $43 (86) (86) ----------- Total comprehensive income - 420 ----------- Cash dividends declared - (1,309) Cash paid for fractional shares in merger - (1) ESOP and restricted stock plan transactions: Termination of plans - 385 Other transactions - 115 Common stock issued through: Dividend reinvestment plan - 51 Stock option plan - 19 Common stock repurchased - (105) -------------- ----------- Balance, June 30, 2000 $ (2,064) $ 51,643 ============== ===========
See accompanying notes to consolidated financial statements. 3 FNB Corp. and Subsidiary CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, (unaudited) ------------------------------- 2001 2000 ------------ ------------- (in thousands) Operating Activities: Net income $ 3,280 $ 506 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of premises and equipment 569 763 Provision for loan losses 285 992 Deferred income taxes (benefit) 102 (208) Deferred loan fees and costs, net 7 (29) Premium amortization and discount accretion of investment securities, net (1) 28 ESOP and restricted stock plan expenses - 500 Amortization of intangibles 5 7 Net decrease (increase) in loans held for sale 7,312 (399) Increase in other assets (536) (565) Increase in other liabilities 417 984 ------------ ------------- Net Cash Provided by Operating Activities 11,440 2,579 ------------ ------------- Investing Activities: Available-for-sale securities: Proceeds from maturities and calls 50,277 - Purchases (82,950) (1,759) Held-to-maturity securities: Proceeds from maturities and calls - 1,852 Purchases - (655) Net increase in loans held for investment (1,407) (26,425) Purchases of premises and equipment (411) (705) Other, net (129) (151) ------------ ------------- Net Cash Used in Investing Activities (34,620) (27,843) ------------ ------------- Financing Activities: Net increase in deposits 12,848 23,991 Increase (decrease) in retail repurchase agreements 2,434 (384) Increase in Federal Home Loan Bank advances 10,000 - Decrease in federal funds purchased (375) (3,335) Common stock issued 96 70 Common stock repurchased (310) (105) Cash dividends paid (1,367) (1,253) ------------ ------------- Net Cash Provided by Financing Activities 23,326 18,984 ------------ ------------- Net Increase (Decrease) in Cash and Cash Equivalents 146 (6,280) Cash and cash equivalents at beginning of period 14,202 21,923 ------------ ------------- Cash and Cash Equivalents at End of Period $ 14,348 $ 15,643 ============ ============= Supplemental disclosure of cash flow information: Cash paid during the period for: Interest $ 10,923 $ 9,457 Income taxes 1,740 1,507 Noncash transactions: Transfer of held-to-maturity securities to available-for-sale securities 59,361 - Foreclosed loans transferred to other real estate 626 534 Unrealized securities gains (losses), net of income taxes 1,281 (86)
See accompanying notes to consolidated financial statements. 4 FNB Corp. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Basis of Presentation FNB Corp. is a one-bank holding company whose wholly-owned subsidiary is the First National Bank and Trust Company (the "Bank"). The Bank, which has one wholly-owned subsidiary, First National Investor Services, Inc., offers a complete line of financial services, including loan, deposit, cash management, investment and trust services, to individual and business customers primarily in the region of North Carolina that includes Chatham, Montgomery, Moore, Randolph, Richmond and Scotland counties. The accompanying consolidated financial statements, prepared without audit, include the accounts of FNB Corp. and the Bank (collectively the "Corporation"). All significant intercompany balances and transactions have been eliminated. The chief operating decision maker reviews the results of operations of the Corporation and its subsidiary as a single enterprise. The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. As discussed in Note 3 below, the Corporation in 2000 completed a merger for the acquisition of Carolina Fincorp, Inc. in a transaction accounted for as a pooling of interests. Historical financial information included in these consolidated financial statements has been restated to include the account balances and results of operations of Carolina Fincorp, Inc. 2. Cash and Cash equivalents For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, and federal funds sold. Generally, federal funds are purchased and sold for one-day periods. 3. Merger Information On April 10, 2000, the Corporation completed a merger for the acquisition of Carolina Fincorp, Inc. ("Carolina Fincorp"), holding company for Richmond Savings Bank, Inc., SSB ("Richmond Savings"), headquartered in Rockingham, North Carolina, in a transaction accounted for as a pooling of interests. Accordingly, all historical financial information included in these consolidated financial statements has been restated to include the account balances and results of operations of Carolina Fincorp. Pursuant to the terms of the merger, each share of Carolina Fincorp common stock was converted into .79 of a share of FNB Corp. common stock, for a total issuance of 1,478,398 FNB Corp. shares. On 5 June 26, 2000, Richmond Savings was merged into First National Bank and Trust Company. At March 31, 2000, Carolina Fincorp operated five offices through Richmond Savings and had approximately $125,943,000 in total assets, $108,848,000 in deposits and $16,332,000 in shareholders' equity. Merger-related expenses of $2,796,000 were recorded in the second quarter of 2000. Upon the change in control, the Carolina Fincorp ESOP plan terminated according to its terms and unvested MRP shares became fully vested. Included in merger-related expenses were $385,000 of expense related to the termination of these plans. Additionally, approximately $450,000 of the total provision for loan losses of $835,000 in the 2000 second quarter was related to aligning the credit risk methodologies of FNB Corp. and Carolina Fincorp. 4. Adoption of SFAS No. 133 On January 1, 2001, the Corporation adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities", as further amended by Statement of Financial Accounting Standards No. 138, "Accounting for Certain Derivative Financial Instruments and Certain Hedging Activities, an amendment of FASB Statement No. 138" (collectively referred to as "SFAS No. 133"). This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. As permitted by SFAS No. 133, on January 1, 2001, the Corporation transferred all of its securities from the held-to- maturity portfolio to the available-for-sale portfolio as follows:
Securities Transferred ----------------------------- Estimated Pretax Amortized Fair Gain Cost Value (Loss) --------- --------- ------- (in thousands) U.S. Government agencies and corporations $36,089 $35,759 $(330) Mortgage-backed securities 483 488 5 State, county and municipal 19,735 20,352 617 Other debt securities 3,054 3,128 74 ------- ------- ----- Total $59,361 $59,727 $ 366 ======= ======= =====
As of January 1, 2001, the transfer of the securities had a net of tax effect of $242,000 on other comprehensive income. On January 1, 2001, the Corporation had no embedded derivative instruments requiring separate accounting treatment and had identified fixed rate conforming loan commitments as its only freestanding derivative instruments. The fair value of these commitments was not material and therefore the adoption of SFAS No. 133 on January 1, 2001, did not have a material impact on the Corporation's consolidated financial statements. The fair value of these commitments at June 30, 2001 was not material to the Corporation's consolidated financial statements. The Corporation had no other derivative instruments requiring separate accounting treatment at June 30, 2001 6 5. Earnings Per Share (EPS) Basic net income per share, or basic earnings per share (EPS), is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if the Corporation's dilutive stock options were exercised. The numerator of the basic EPS computation is the same as the numerator of the diluted EPS computation for all periods presented. A reconciliation of the denominators of the basic and diluted EPS computations is as follows:
Three Months Ended Six Months Ended June 30, June 30, -------------------- -------------------- 2001 2000 2001 2000 --------- --------- --------- --------- Basic EPS denominator - Weighted average number of common shares outstanding 5,062,678 5,027,951 5,062,635 5,017,591 Dilutive share effect arising from assumed exercise of stock options and unvested MRP shares 71,203 - 74,981 57,677 --------- --------- --------- --------- Diluted EPS denominator 5,133,881 5,027,951 5,137,616 5,075,268 ========= ========= ========= =========
6. Loans Loans as presented are reduced by net deferred loan fees of $412,000, $397,000 and $405,000 at June 30, 2001, June 30, 2000 and December 31, 2000, respectively. 7. Allowance for Loan Losses Changes in the allowance for loan losses were as follows:
Three Months Ended Six Months Ended June 30, June 30, ------------------- ---------------- 2001 2000 2001 2000 ------- -------- -------- ------ (in thousands) Balance at beginning of period $4,351 $3,449 $4,352 $3,289 Charge-offs 194 342 315 383 Recoveries 31 70 74 113 ------ ------ ------ ------ Net loan charge-offs 163 272 241 269 Provision for loan losses 165 835 285 992 Allowance adjustment for loans sold - - (43) - ------ ------ ------ ------ Balance at end of period $4,353 $4,012 $4,353 $4,012 ====== ====== ====== ======
7 8. Supplementary Income Statement Significant components of other Information expense were as follows:
Three Months Ended Six Months Ended June 30, June 30, ------------------- ---------------- 2001 2000 2001 2000 ------- -------- -------- ------ (in thousands) Stationary, printing and supplies $122 $129 $259 $240 Advertising and marketing 94 134 170 269
8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The purpose of this discussion and analysis is to assist in the understanding and evaluation of the financial condition, changes in financial condition and results of operations of FNB Corp. (the "Parent Company") and its wholly-owned subsidiary, First National Bank and Trust Company (the "Bank"), collectively referred to as the "Corporation". This discussion should be read in conjunction with the financial information appearing elsewhere in this report. Overview On April 10, 2000, the Corporation completed a merger for the acquisition of Carolina Fincorp, Inc. ("Carolina Fincorp"), holding company for Richmond Savings Bank, Inc., SSB ("Richmond Savings"), headquartered in Rockingham, North Carolina, in a transaction accounted for as a pooling of interests. Pursuant to the terms of the merger, each share of Carolina Fincorp common stock was converted into .79 of a share of FNB Corp. common stock, for a total issuance of 1,478,398 FNB Corp. shares. On June 26, 2000, Richmond Savings was merged into First National Bank and Trust Company. At March 31, 2000, Carolina Fincorp operated five offices through Richmond Savings and had approximately $125,943,000 in total assets, $108,848,000 in deposits and $16,332,000 in shareholders' equity. Merger-related expenses of $2,796,000 were recorded in the second quarter of 2000. Upon the change in control, the Carolina Fincorp ESOP plan terminated according to its terms and unvested MRP shares became fully vested. Included in merger-related expenses were $385,000 of expense related to the termination of these plans. Additionally, approximately $450,000 of the total provision for loan losses of $835,000 in the 2000 second quarter was related to aligning the credit risk methodologies of FNB Corp. and Carolina Fincorp. Historical financial information included in the consolidated financial statements has been restated to include the account balances and results of operations of Carolina Fincorp. In the 2000 fourth quarter, management adopted a balance sheet restructuring project to reduce the level of lower yielding, 1-4 family residential mortgage loans by selling those loans and redeploying the funds in other types of assets, including specific purchases of bank owned life insurance and a more general redeployment to other loan programs and investment securities. 1-4 family residential mortgage loans totaling $20,938,000 were transferred to loans held for sale, and of that amount, $12,199,000 were sold in 2000 and the remainder were sold in the first quarter of 2001. In December 2000, single premium purchases of life insurance amounting to $10,000,000 were recorded as bank owned life insurance in other assets on the consolidated balance sheet. Income relating to the bank owned life insurance is being recorded as noninterest income, while the loans sold had generated interest income. The effective reduction of interest income will tend to lower the net yield on earning assets and net interest spread in future periods. Management believes that the income resulting from the bank owned life insurance, which is not subject to income tax, will produce a greater contribution to net income than did the income from the loans sold. The Corporation earned $3,280,000 in the first six months of 2001, a 548.2% increase over the same period in 2000. Basic earnings per share increased from $.10 to $.65 in comparing these six-month periods and diluted earnings per share increased from $.10 to $.64. For the 2001 second quarter, there was net income of $1,598,000 compared to a net loss of $975,000 in the 2000 second quarter with basic and diluted earnings per share amounts in 2001 of $.32 and $.31, respectively, compared to basic and diluted loss per share amounts of $.19 each in 2000. Total assets were $594,047,000 at June 30, 2001, up 10.4% from June 30, 2000 and 5.0% from December 31, 2000. Loans, affected by the balance sheet restructuring project, 9 amounted to $388,942,000 at June 30, 2001, increasing 0.5% from June 30, 2000 and decreasing 1.7% from December 31, 2000. Total deposits grew 7.6% from June 30, 2000 and 2.7% from December 31, 2000 to $485,296,000 at June 30, 2001. Largely reflecting the utilization of proceeds from loan sales related to the restructuring project and advances totaling $10,000,000 obtained from the Federal Home Loan Bank in the first quarter of 2001, investment securities, which amounted to $167,009,000 at June 30, 2001, increased $46,816,000 or 39.0% in the twelve-month period ended June 30, 2001 and $34,625,000 or 26.2% in the first six months of 2001. Earnings Review After exclusion of after-tax, merger-related charges of $2,338,000 recorded in the second quarter of 2000 and associated with the merger with Carolina Fincorp as discussed in the "Overview", the Corporation's net income increased $436,000 or 15.3% in the first six months of 2001 compared to the same period of 2000 and increased $235,000 or 17.2% in comparing second quarter periods. Earnings were positively impacted in the first six months of 2001 by an increase of $674,000 in noninterest income and by decreases of $124,000 in noninterest expense and $257,000 in the provision for loan losses. These gains were partially offset, however, by a $637,000 or 6.1% decrease in net interest income, which reflected the effects of interest rate declines during the first six months of 2001 and the balance sheet restructuring project discussed in the "Overview". The interest rate declines, resulting from actions taken by the Federal Reserve, caused a greater reduction in the average yield on earning assets than in the average rate paid on interest-bearing liabilities. As noted in the discussion of the restructuring project, non-taxable income related to bank owned life insurance, which replaced a portion of certain loans sold, is recorded as noninterest income, while income on loans sold was recorded as interest income. Income on bank owned life insurance amounted to $316,000 in the first six months of 2001. The net gain on loans sold, which amounted to $429,000 in the first six months of 2001 compared to $22,000 in the same period of 2000, included a $151,000 net gain in the 2001 first quarter related to loans sold in connection with the restructuring project. In comparing the results for second quarter periods, excluding the merger- related charges in similar fashion to the year-to-date comparisons above, the positive impact on 2001 second quarter earnings from an increase of $341,000 in noninterest income and by decreases of $15,000 in noninterest expense and $220,000 in the provision for loan losses was partially offset by a $363,000 or 6.8% decrease in net interest income. Income on bank owned life insurance amounted to $159,000 in the 2001 second quarter, and the net gain on loans sold was $175,000 in the 2001 second quarter compared to $15,000 in the same period of 2000. On an annualized basis and excluding the merger-related charges, return on average assets increased from 1.07% in the first six months of 2000 to 1.14% in the first six months of 2001. Return on average shareholders' equity increased from 10.71% to 11.42% in comparing the same periods. In comparing second quarter periods, return on average assets increased from 1.01% to 1.09% and return on average shareholders' equity increased from 10.18% to 10.97%. 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. 10 Net interest income was $9,862,000 in the first six months of 2001 compared to $10,499,000 in the same period of 2000. This decrease of $637,000 or 6.1% resulted primarily from a decline in the net yield on earning assets, or net interest margin, from 4.36% in the first six months of 2000 to 3.86% in the same period of 2001, the effect of which more than offset the benefit of a 7.2% increase in the level of average earning assets. As noted in the "Overview", the level of earning assets was reduced in December 2000 through reinvestment of $10,000,000 of the proceeds from the sale of certain loans in bank owned life insurance, which is included in other assets on the consolidated balance sheet and, accordingly, generates noninterest income rather than interest income. In comparing second quarter periods, net interest income decreased $363,000 or 6.8% reflecting a decline in the net interest margin from 4.34% to 3.84% and a 6.8% increase in average earning assets. On a taxable equivalent basis, the decrease in net interest income in the first six months and second quarter of 2001 were $567,000 and $307,000, respectively, reflecting changes in the relative mix of taxable and non-taxable earning assets in each period. Table 1 on page 20 and Table 2 on page 21 set forth for the periods indicated information with respect to the Corporation's average balances of assets and liabilities, as well as the total dollar amounts of interest income (taxable equivalent basis) from earning assets and interest expense on interest- bearing liabilities, resultant rates earned or paid, net interest income, net interest spread and net yield on earning assets. Net interest spread refers to the difference between the average yield on earning assets and the average rate paid on interest-bearing liabilities. Net yield on earning assets, or net interest margin, refers to net interest income divided by average earning assets and is influenced by the level and relative mix of earning assets and interest- bearing liabilities. Changes in net interest income on a taxable equivalent basis, as measured by volume and rate variances, are also analyzed in Tables 1 and 2. Volume refers to the average dollar level of earning assets and interest-bearing liabilities. Changes in the net interest margin and net interest spread tend to correlate with movements in the prime rate of interest. There are variations, however, in the degree and timing of rate changes, compared to prime, for the different types of earning assets and interest-bearing liabilities. The prime rate of interest has remained in a fairly narrow band in recent years, averaging 9.21%, 7.99% and 8.37% in 2000, 1999 and 1998, respectively. This situation has tended to create a degree of stability in the interest rates both earned and paid by the Bank. Nonetheless, the actual level of the prime rate has changed with some frequency as the Federal Reserve has responded to various economic scenarios. Due to concern about inflationary pressures that appeared to be building in the economy, the Federal Reserve elected to raise the level of interest rates in the third and fourth quarters of 1999, resulting in three 25 basis point increases in the prime rate that increased it from 7.75% to 8.50%, thereby effectively reversing similar rate reductions that had occurred in 1998. Continued concerns about possible inflationary pressures caused the Federal Reserve to further raise the level of interest rates in the first six months of 2000, resulting in two additional 25 basis point increases and one 50 basis point increase in the prime rate that raised it to the 9.50% level. While the Corporation tended to see some improvement in the average total yield on earning assets due to the prime rate increases, the average rate paid on interest-bearing liabilities increased by a greater amount, negatively impacting the net interest margin and net interest spread. Due to a general slowdown in the economy that began to be perceived in the 2000 fourth quarter, the Federal Reserve acted to provide a stimulus through a series of interest rate reductions commencing in the 2001 first quarter, resulting in five 50 basis point reductions and one 25 basis point reduction in the prime rate that lowered it to the 6.75% level at June 30, 2001. This decrease in the prime rate, through the reduction of 11 the average yield on earning assets without a commensurate reduction in the average rate paid on interest bearing liabilities, has tended to negatively impact the net interest margin and net interest spread. Following the increases in 1999 and 2000, the prime rate averaged 8.94% in the first six months of 2000. The subsequent prime rate reductions in 2001 resulted in an average prime rate of 8.09% in the first six months of 2001. The prime rate averaged 7.43% in the second quarter of 2001 compared to 9.21% in the 2000 second quarter. The net interest spread, in comparing six-month periods, declined by 46 basis points from 3.65% in 2000 to 3.19% in 2001, reflecting the effect of a decrease in the average total yield on earning assets coupled with an increase in the average rate paid on interest-bearing liabilities, or cost of funds. The yield on earning assets decreased by 11 basis points from 8.19% in 2000 to 8.08% in 2001, while the cost of funds increased by 35 basis points from 4.54% to 4.89%. In comparing second quarter periods, the net interest spread declined by 42 basis points from 3.61% to 3.19%, as the yield on earning assets decreased by 35 basis points while the cost of funds increased by 7 basis points. Provision for Loan Losses This provision is the charge against earnings to provide an allowance or reserve for probable losses inherent in the loan portfolio. The amount of each period's charge is affected by several considerations including management's evaluation of various risk factors in determining the adequacy of the allowance (see "Asset Quality"), actual loan loss experience and loan portfolio growth. Earnings were negatively impacted in 2000 by provisions of $992,000 for the first six months and $835,000 for the second quarter compared to 2001 provisions of $285,000 and $165,000, respectively. Approximately $450,000 of the provision for the second quarter of 2000 was merger related as a result of aligning the credit risk metholodogies of FNB Corp. and Carolina Fincorp, while the remainder resulted from additional loan writedowns and charge-offs taken in the same quarter. The allowance for loan losses, as a percentage of loans outstanding, amounted to 1.13% at June 30, 2001, 1.04% at June 30, 2000 and 1.13% at December 31, 2000. Noninterest Income Noninterest income for the first six months and second quarter of 2001 increased $674,000 or 30.1% and $341,000 or 29.7%, respectively, compared to the same periods in 2000, reflecting in part the general increase in the volume of business. The increase, in comparing six-month periods, was primarily due to a $407,000 increase in the net gain on sales of loans and to $316,000 of income on bank owned life insurance. Similarly, in comparing second quarter periods, there was a $160,000 increase in the net gain on sales of loans and $159,000 of income on bank owned life insurance As discussed in the "Overview", a balance sheet restructuring project resulted in single premium purchases of life insurance amounting to $10,000,000 in December 2000. Income resulting from the bank owned life insurance is not subject to income tax. The net gain on sales of loans of $254,000 in the first quarter of 2001 included a $151,000 net gain related to loans sold in connection with the restructuring project. The increase in service charges on deposit accounts was primarily due to the improved fee collection efforts that became effective in 2000 subsequent to the first quarter. The decrease in annuity and brokerage commissions was largely related to a decrease in the volume of sales of annuity products. Other income was lower in 2001 due mainly to net losses on sales of other real estate compared to net gains in 2000. 12 Noninterest Expense Excluding merger-related expenses of $2,796,000 recorded in the second quarter of 2000, noninterest expense was $124,000 or 1.5% lower in the first six months of 2001 compared to the same period in 2000 and for the second quarter was $15,000 or 0.4% lower, due in part to the successful implementation of synergies following the merger with Carolina Fincorp on April 10, 2000 as discussed in the "Overview". The decrease in furniture and equipment expense was due mainly to the reduction in depreciation expense related to computer networks that became fully depreciated in the third and fourth quarters of 2000. The cost of data processing services was higher in 2000 than in 2001 because of the outside data processing services employed by Richmond Savings until its merger into First National Bank and Trust Company on June 26, 2000. While benefiting from a reduction in advertising and marketing expense, other expense was negatively impacted in 2001 from increased expenses related to nonperforming assets. Income Taxes The effective income tax rate decreased from 44.8% in the first six months of 2000 to 28.4% in the same period of 2001 due principally to the nondeductibility of certain merger-related expenses in 2000. Liquidity Liquidity refers to the continuing ability of the Bank to meet deposit withdrawals, fund loan and capital expenditure commitments, maintain reserve requirements, pay operating expenses and provide funds to the Parent Company for payment of dividends, debt service and other operational requirements. Liquidity is immediately available from five major sources: (a) cash on hand and on deposit at other banks, (b) the outstanding balance of federal funds sold, (c) lines for the purchase of federal funds from other banks, (d) the $71,200,000 line of credit established at the Federal Home Loan Bank, less existing advances against that line, and (e) the investment securities portfolio, all of which is categorized as available-for-sale securities. All debt securities are of investment grade quality and, if the need arises, can be promptly liquidated on the open market or pledged as collateral for short-term borrowing. Consistent with its approach to liquidity, the Bank as a matter of policy does not solicit or accept brokered deposits for funding asset growth. Instead, loans and other assets are based primarily on a core of local deposits and the Bank's capital position. To date, the steady increase in deposits, retail repurchase agreements and capital, supplemented by Federal Home Loan Bank advances, has been adequate to fund loan demand in the Bank's market area, while maintaining the desired level of immediate liquidity and a substantial investment securities portfolio available for both immediate and secondary liquidity purposes. Asset/Liability Management and Interest Rate Senstivity One of the primary objectives of asset/liability management is to maximize the net interest margin while minimizing the earnings risk associated with changes in interest rates. One method used to manage interest rate sensitivity is to measure, over various time periods, the interest rate sensitivity positions, or gaps; however, this method addresses only the magnitude of timing differences and does not address earnings or market value. Therefore, management uses an earnings simulation model to prepare, on a regular basis, earnings projections based on a range of interest rate scenarios in order to more accurately measure interest rate risk. 13 The Bank's balance sheet was liability-sensitive at June 30, 2001. A liability-sensitive position means that in gap measurement periods of one year or less there are more liabilities than assets subject to immediate repricing as market rates change. Because immediately rate sensitive interest-bearing liabilities exceed rate sensitive assets, the earnings position could improve in a declining rate environment and could deteriorate in a rising rate environment, depending on the correlation of rate changes in these two categories. Included in interest-bearing liabilities subject to rate changes within 90 days is a portion of the interest-bearing demand, savings and money market deposits. These types of deposits historically have not repriced coincidentally with or in the same proportion as general market indicators. Capital Adequacy Under guidelines established by the Board of Governors of the Federal Reserve System, capital adequacy is currently measured for regulatory purposes by certain risk-based capital ratios, supplemented by a leverage capital ratio. The risk-based capital ratios are determined by expressing allowable capital amounts, defined in terms of Tier 1, Tier 2 and Tier 3, as a percentage of risk- weighted assets, which are computed by measuring the relative credit risk of both the asset categories on the balance sheet and various off-balance sheet exposures. Tier 1 capital consists primarily of common shareholders' equity and qualifying perpetual preferred stock, net of goodwill and other disallowed intangible assets. Tier 2 capital, which is limited to the total of Tier 1 capital, includes allowable amounts of subordinated debt, mandatory convertible debt, preferred stock and the allowance for loan losses. Tier 3 capital, applicable only to financial institutions subject to certain market risk capital guidelines, is capital allocated to support the market risk related to a financial institution's ongoing trading activities. At June 30, 2001, FNB Corp. and the Bank were not subject to the market risk capital guidelines and, accordingly, had no Tier 3 capital allocation. Total capital, for risk-based purposes, consists of the sum of Tier 1, Tier 2 and Tier 3 capital. Under current requirements, the minimum total capital ratio is 8.00% and the minimum Tier 1 capital ratio is 4.00%. At June 30, 2001, FNB Corp. and the Bank had total capital ratios of 15.22% and 14.64%, respectively, and Tier 1 capital ratios of 14.15% and 13.56%, respectively. The leverage capital ratio, which serves as a minimum capital standard, considers Tier 1 capital only and is expressed as a percentage of average total assets for the most recent quarter, after reduction of those assets for goodwill and other disallowed intangible assets at the measurement date. As currently required, the minimum leverage capital ratio is 4.00%. At June 30, 2001, FNB Corp. and the Bank had leverage capital ratios of 9.82% and 9.41%, respectively. The Bank is also required to comply with prompt corrective action provisions established by the Federal Deposit Insurance Corporation Improvement Act. To be categorized as well-capitalized, the Bank must have a minimum ratio for total capital of 10.00%, for Tier 1 capital of 6.00% and for leverage capital of 5.00%. As noted above, the Bank met all of those ratio requirements at June 30, 2001 and, accordingly, is well-capitalized under the regulatory framework for prompt corrective action. Balance Sheet Review Total assets at June 30, 2001 were higher than at June 30, 2000 and December 31, 2000 by $55,753,000 or 10.4% and $28,408,000 or 5.0%, respectively; deposits were ahead by $34,295,000 or 7.6% and $12,848,000 or 2.7%. A portion of the asset growth was funded by advances from the Federal Home Loan Bank which at June 30, 2001 had increased by $10,000,000 or 66.7% compared to both June 30, 2000 and December 31, 2000. The level of funds provided by retail repurchase agreements at June 30, 2001 had 14 increased by $3,352,000 or 32.6% from June 30, 2000 and by $2,434,000 or 21.7% from December 31, 2000. Average assets increased 8.6% in the first six months of 2001 compared to the same period in 2000, while average deposits increased 6.9%, the second quarter increases being 8.2% and 5.9%, respectively. Investment Securities Additions to the investment securities portfolio depend to a large extent on the availability of investable funds that are not otherwise needed to satisfy loan demand. In general, because the growth in total assets exceeded that for loans during the twelve-month period ended June 30, 2001, the level of investment securities was increased $46,816,000 or 39.0%, with a net increase of $34,625,000 or 26.2% occurring in the first six months of 2001. This growth in investment securities also relates to certain balance sheet strategies, including a restructuring project that commenced in the 2000 fourth quarter (see "Overview") whereby certain loans were sold with the reinvestment of such funds planned for other asset categories including investment securities. Additionally, the funds obtained from advances totaling $10,000,000 from the Federal Home Loan Bank in the first quarter of 2001 were primarily utilized for the purchase of investment securities. Investable funds not otherwise utilized are temporarily invested on an overnight basis as federal funds sold, the level of which is affected by such considerations as near-term loan demand and liquidity needs. Based on funds requirements, the Bank was a net purchaser of funds at June 30, 2001. Loans The Corporation's primary source of revenue and largest component of earning assets is the loan portfolio. Loans increased $1,749,000 or 0.5% during the twelve-month period ended June 30, 2001, with a net loan decrease of $6,795,000 or 1.7% occurring in the first six months of 2001. Average loans were $16,107,000 or 4.3% higher in the first six months of 2001 than in the same period of 2000. The ratio of average loans to average deposits, in comparing six-month periods, decreased from 84.0% in 2000 to 82.0% in 2001. The ratio of loans to deposits at June 30, 2001 was 80.1%. The commercial and agricultural loan portfolio experienced strong gains during both the twelve-month period ended June 30, 2001 and the first six months of 2001. Otherwise, the level of the loan portfolio has been affected by the balance sheet restructuring project adopted in the 2000 fourth quarter and discussed in the "Overview". The specific aim of the restructuring project was to reduce the level of lower yielding, 1-4 family residential mortgage loans by selling those loans and redeploying the funds in other types of assets, including specific purchases of bank owned life insurance and a more general redeployment to other loan programs and investment securities. 1-4 family residential mortgage loans totaling $20,938,000 were transferred to loans held for sale, and of that amount, $12,199,000 were sold in 2000 and the remainder were sold in the first quarter of 2001. Funds obtained from these sales were primarily redeployed to single premium purchases of life insurance amounting to $10,000,000 in December 2000 and to purchases of investment securities. Asset Quality Management considers the Bank's asset quality to be of primary importance. A formal loan review function, independent of loan origination, is used to identify and monitor problem loans. As part of the loan review function, a third party assessment group is employed to review the underwriting documentation and risk grading analysis. In determining the allowance for loan losses and any resulting provision to be charged against earnings, particular emphasis is placed on the results of the loan review process. Consideration is also 15 given to historical loan loss experience, the value and adequacy of collateral, and economic conditions in the Bank's market area. For loans determined to be impaired, the allowance is based on discounted cash flows using the loan's initial effective interest rate or the fair value of the collateral for certain collateral dependent loans. This evaluation is inherently subjective as it requires material estimates, including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. The unallocated portion of the allowance for loan losses represents management's estimate of the appropriate level of reserve to provide for probable losses inherent in the loan portfolio. Considerations in determining the unallocated portion of the allowance for loan losses include general economic and lending trends and other factors. Management's policy in regard to past due loans is conservative and normally requires a prompt charge-off to the allowance for loan losses following timely collection efforts and a thorough review. Further efforts are then pursued through various means available. Loans carried in a nonaccrual status are generally collateralized and the possibility of future losses is considered in the determination of the allowance for loan losses. The following table presents an analysis of the changes in the allowance for loan losses.
Three Months Ended Six Months Ended June 30, June 30, ------------------ ----------------- 2001 2000 2001 2000 ------- ---------- -------- -------- (in thousands) Balance at beginning of period $4,351 $3,449 $4,352 $3,289 Charge-offs 194 342 315 382 Recoveries 31 70 74 113 ------ ------ ------ ------ Net loan charge-offs 163 272 241 269 Provision for loan losses 165 835 285 992 Allowance adjustment for loans sold - - (43) - ------ ------ ------ ------ Balance at end of period $4,353 $4,012 $4,353 $4,012 ====== ====== ====== ======
At June 30, 2001, the Bank had impaired loans that totaled $659,000, of which $621,000 were also on nonaccrual status. The related allowance for loan losses on these loans amounted to $167,000. At June 30, 2001, nonperforming loans were $4,990,000 in total, nonaccrual loans and accruing loans past due 90 days or more amounting to $2,980,000 and $2,010,000, respectively. At June 30, 2000, nonperforming loans were $1,587,000 in total, nonaccrual loans and accruing loans past due 90 days or more amounting to $516,000 and $1,071,000, respectively. The increase in nonperforming loans was primarily due to one large credit well secured by real estate and general economic conditions. Deposits The level and mix of deposits is affected by various factors, including general economic conditions, the particular circumstances of local markets and the specific deposit strategies employed. In general, broad interest rate declines tend to encourage customers to consider alternative investments such as mutual funds and tax-deferred annuity products, while interest rate increases tend to have the opposite effect. 16 The Bank's level and mix of deposits has been specifically affected by the following factors. Time deposits, reflecting the effect of promotions for premium-rate certificates of deposit, grew $27,849,000 during the twelve-month period ended June 30, 2001 and $7,383,000 during the first six months of 2001. Money market deposits also gained, increasing $9,411,000 during the twelve-month period ended June 30, 2001 and $6,673,000 during the first six months of 2001. Further, the level of time deposits obtained from governmental units fluctuates, amounting to $47,694,000, $38,306,000 and $46,800,000 at June 30, 2001, June 30, 2000 and December 31, 2000, respectively. Business Development Matters As discussed in the "Overview" and in Note 3 to Consolidated Financial Statements, the Corporation completed a merger on April 10, 2000 for the acquisition of Carolina Fincorp, Inc. ("Carolina Fincorp"), holding company for Richmond Savings Bank, Inc., SSB ("Richmond Savings"), headquartered in Rockingham, North Carolina, in a transaction accounted for as a pooling of interests. As discussed in the "Overview", management adopted a balance sheet restructuring project in the 2000 fourth quarter that has affected loans and other balance sheet categories in both the 2000 fourth quarter and the 2001 first quarter. In the 1998 fourth quarter, the Bank received regulatory approval for establishment of a new branch office in Trinity, North Carolina. Construction of the permanent Trinity facility is expected to be complete in 2001, resulting in a total capital outlay of approximately $1,000,000, of which approximately one-third was recorded in 1998 related to the purchase of land. Prior to completion of the permanent facility, a temporary mobile office, which opened in August 1999, is being operated at this site. Accounting Pronouncement Matters On January 1, 2001, the Corporation adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities", as further amended by Statement of Financial Accounting Standards No. 138, "Accounting for Certain Derivative Financial Instruments and Certain Hedging Activities, an amendment of FASB Statement No. 138" (collectively referred to as "SFAS No. 133"). This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. The accounting for changes in the fair value of a derivative depends on the intended 17 use of the derivative and the resulting designation. As permitted by SFAS No. 133, on January 1, 2001, the Corporation transferred all of its securities from the held-to-maturity portfolio to the available-for-sale portfolio as follows:
Securities Transferred ---------------------------- Estimated Pretax Amorized Fair Gain Cost Value (Loss) -------- --------- ------- (in thousands) U.S. Government agencies and corporations $36,089 $35,759 $(330) Mortgage-backed securities 483 488 5 State, county and municipal 19,735 20,352 617 Other debt securities 3,054 3,128 74 ------- ------- ----- Total $59,361 $59,727 $ 366 ======= ======= =====
As of January 1, 2001, the transfer of the securities had a net of tax effect of $242,000 on other comprehensive income. On January 1, 2001, the Corporation had no embedded derivative instruments requiring separate accounting treatment and had identified fixed rate conforming loan commitments as its only freestanding derivative instruments. The fair value of these commitments was not material and therefore the adoption of SFAS No. 133 on January 1, 2001, did not have a material impact on the Corporation's consolidated financial statements. The fair value of these commitments at June 30, 2001 was not material to the Corporation's consolidated financial statements. The Corporation had no other derivative instruments requiring separate accounting treatment at June 30, 2001. The FASB has issued Statement of Financial Accounting Standards No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS No. 140"). This statement replaces SFAS No. 125 ("Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities") and revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures, but it carries over most of the provisions of SFAS No. 125 without consideration. SFAS No. 140 provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities, based on application of a financial components approach that focuses on control. SFAS No. 140 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 2001. The Corporation adopted SFAS No. 140 on April 1, 2001 with no material impact on the Corporation's consolidated financial statements. In July 2001, the FASB isssued Statement of Financial Accounting Standards No. 141, "Business Combinations" ("SFAS No. 141"), and Statement No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"). SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS No. 141 also specifies criteria that intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill, noting that any purchase price allocable to an assembled workforce may not be accounted for separately. Effective January 1, 2002, SFAS No. 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amotized, but instead be tested for impairment at least annually in 18 accordance with the provisions of SFAS No. 142. Also, SFAS No. 142 will require that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and be reviewed for impairment in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". The adoption of SFAS Nos. 141 and 142 is not expected to have a material impact on the Corporation's consolidated financial statements. Cautionary Satement for Purpose of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995 The statements contained in this Quarterly Report on Form 10-Q that are not historical facts are forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995), which can be identified by the use of forward-looking terminology such as "believes", "expects", "plans", "projects", "goals", "estimates", "may", "could", "should", or "anticipates" or the negative thereof or other variations thereon of comparable terminology, or by discussions of strategy that involve risks and uncertainties. In addition, from time to time, the Corporation or its representatives have made or may make forward-looking statements, orally or in writing. Such forward-looking statements may be included in, but are not limited to, various filings made by the Corporation with the Securities and Exchange Commission, or press releases or oral statements made by or with the approval of an authorized executive officer of the Corporation. Forward-looking statements are based on management's current views and assumptions and involve risks and uncertainties that could significantly affect expected results. The Corporation wishes to caution the reader that factors, such as those listed below, in some cases have affected and could affect the Corporation's actual results, causing actual results to differ materially from those in any forward-looking statement. These factors include: (i) competitive pressure in the banking industry or in the Corporation's markets may increase significantly, (ii) changes in the interest rate environment may reduce margins, (iii) general economic conditions, either nationally or regionally, may be less favorable than expected, resulting in, among other things, credit quality deterioration, (iv) changes may occur in banking legislation and in the environment, (v) changes may occur in general business conditions and inflation and (vi) changes may occur in the securities markets. Readers should also consider information on risks and uncertainties contained in the discussions of competition, supervision and regulation, and effect of governmental policies contained in the Corporation's most recent Annual Report on Form 10-K. 19 Table 1 Average Balances and Net Interest Income Analysis
SIX MONTHS ENDED JUNE 30 2001 -------------------------------------------- Average Interest Rates Average Income/ Earned/ Balance Expense Paid ------------ ------------ ------------ Earning Assets Loans (2) (3) $ 390,465 $ 16,654 8.58 % Investment securities (2): Taxable income 125,832 4,243 6.74 Non-taxable income 19,369 739 7.63 Other earning assets 5,798 142 4.94 ------------ ------------ ------------ Total earning assets 541,464 21,778 8.08 ------------ ------------ ------------ Cash and due from banks 12,323 Other assets, net 23,846 ------------ Total Assets $ 577,633 ============ Interest-Bearing Liabilities Interest-bearing deposits: Demand deposits $ 54,703 257 0.95 Savings deposits 34,385 300 1.76 Money market deposits 39,962 772 3.89 Certificates and other time deposits 301,763 9,123 6.10 Retail repurchase agreements 11,973 243 4.09 Federal Home Loan Bank advances 23,265 601 5.22 Federal funds purchased 1,308 38 5.84 ------------ ------------ ------------ Total interest-bearing liabilities 467,359 11,334 4.89 ------------ ------------ ------------ Noninterest-bearing demand deposits 45,520 Other liabilities 7,335 Shareholders' equity 57,419 ------------ Total Liabilities and Shareholders' Equity $ 577,633 ============ Net Interest Income and Spread $ 10,444 3.19 % ============ ============ Net Yield on Earning Assets 3.86 % ============ SIX MONTHS ENDED JUNE 30 2000 ------------------------------------------- Average Interest Rates Average Income/ Earned/ Balance Expense Paid ------------ ------------- ------------ (Taxable Equivalent Basis, Dollars in Thousands) Earning Assets Loans (2) (3) $ 374,358 $ 16,314 8.73 % Investment securities (2): Taxable income 103,074 3,352 6.50 Non-taxable income 19,815 759 7.67 Other earning assets 7,989 231 5.80 ------------ ------------- ------------ Total earning assets 505,236 20,656 8.19 ------------ ------------- ------------ Cash and due from banks 14,854 Other assets, net 11,983 ------------ Total Assets $ 532,073 ============ Interest-Bearing Liabilities Interest-bearing deposits: Demand deposits $ 58,061 465 1.60 Savings deposits 36,652 459 2.51 Money market deposits 34,479 688 4.00 Certificates and other time deposits 269,350 7,336 5.46 Retail repurchase agreements 10,892 240 4.42 Federal Home Loan Bank advances 15,357 405 5.29 Federal funds purchased 1,668 52 6.31 ------------ ------------- ------------ Total interest-bearing liabilities 426,459 9,645 4.54 ------------ ------------- ------------ Noninterest-bearing demand deposits 47,160 Other liabilities 5,320 Shareholders' equity 53,134 ------------ Total Liabilities and Shareholders' Equity $ 532,073 ============ Net Interest Income and Spread $ 11,011 3.65 % ============= ============ Net Yield on Earning Assets 4.36 % ============ SIX MONTHS ENDED JUNE 30 2001 Versus 2000 -------------------------------------------- Interest Variance due to (1) Net ---------------------------- Volume Rate Change ------------ ------------ ------------ Earning Assets Loans (2) (3) $ 641 $ (301) $ 340 Investment securities (2): Taxable income 763 128 891 Non-taxable income (16) (4) (20) Other earning assets (58) (31) (89) ------------ ------------ ------------ Total earning assets 1,330 (208) 1,122 ------------ ------------ ------------ Cash and due from banks Other assets, net Total Assets Interest-Bearing Liabilities Interest-bearing deposits: Demand deposits (26) (182) (208) Savings deposits (27) (132) (159) Money market deposits 104 (20) 84 Certificates and other time deposits 905 882 1,787 Retail repurchase agreements 22 (19) 3 Federal Home Loan Bank advances 201 (5) 196 Federal funds purchased (10) (4) (14) ------------ ------------ ------------ Total interest-bearing liabilities 1,169 520 1,689 ------------ ------------ ------------ Noninterest-bearing demand deposits Other liabilities Shareholders' equity Total Liabilities and Shareholders' Equity Net Interest Income and Spread $ 161 $ (728) $ (567) ============ ============ ============ Net Yield on Earning Assets
(1) The mix variance, not separately stated, has been proportionally allocated to the rate and volume variances based on their absolute dollar amount. (2) Interest income and yields related to certain investment securities and loans exempt from both federal and state income tax or from state income tax alone are stated on a fully taxable equivalent basis, assuming a 34% federal tax rate and applicable state tax rate, reduced by the nondeductible portion of interest expense. (3) Nonaccrual loans are included in the average loan balance. Loan fees and the incremental direct costs associated with making loans are deferred and subsequently recognized over the life of the loan as an adjustment of interest income. 20 Table 2 Average Balances and Net Interest Income Analysis
THREE MONTHS ENDED JUNE 30 2001 2000 ------------------------------------- --------------------------------------- Average Average Interest Rates Interest Rates Average Income/ Earned/ Average Income/ Earned/ Balance Expense Paid Balance Expense Paid ----------- ------------ ------------ ------------ ------------- ------------ (Taxable Equivalent Basis, Dollars in Thousands) Earning Assets Loans (2) (3) $ 387,221 $ 8,082 8.37 % $ 382,175 $ 8,403 8.81 % Investment securities (2): Taxable income 136,594 2,322 6.80 103,371 1,680 6.50 Non-taxable income 19,257 367 7.62 19,667 375 7.63 Other earning assets 5,236 57 4.36 8,219 125 6.09 ----------- ------------ ------------ ------------ ------------- ------------ Total earning assets 548,308 10,828 7.91 513,432 10,583 8.26 ----------- ------------ ------------ ------------ ------------- ------------ Cash and due from banks 12,034 14,856 Other assets, net 24,206 12,093 ----------- ------------ Total Assets $ 584,548 $ 540,381 =========== ============ Interest-Bearing Liabilities Interest-bearing deposits: Demand deposits $ 54,708 111 0.82 $ 58,587 236 1.61 Savings deposits 34,415 130 1.51 36,776 262 2.85 Money market deposits 41,786 370 3.55 34,618 359 4.17 Certificates and other time deposits 303,469 4,505 5.95 275,163 3,800 5.54 Retail repurchase agreements 12,795 119 3.71 10,842 127 4.70 Federal Home Loan Bank advances 25,000 320 5.15 15,000 202 5.42 Federal funds purchased 829 10 4.74 1,632 27 6.81 ----------- ------------ ------------ ------------ ------------- ------------ Total interest-bearing liabilities 473,002 5,565 4.72 432,618 5,013 4.65 ----------- ------------ ------------ ------------ ------------- ------------ Noninterest-bearing demand deposits 45,947 48,541 Other liabilities 7,356 5,677 Shareholders' equity 58,243 53,545 ----------- ------------ Total Liabilities and Shareholders' Equity $ 584,548 $ 540,381 =========== ============ Net Interest Income and Spread $ 5,263 3.19 % $ 5,570 3.61 % ============ ============ ============= ============ Net Yield on Earning Assets 3.84 % 4.34 % ============ ============ THREE MONTHS ENDED JUNE 30 2001 Versus 2000 -------------------------------------------- Interest Variance due to (1) Net ---------------------------- Volume Rate Change ------------ ------------ ------------ Earning Assets Loans (2) (3) $ 108 $ (429) $ (321) Investment securities (2): Taxable income 562 80 642 Non-taxable income (8) - (8) Other earning assets (38) (30) (68) ------------ ------------ ------------ Total earning assets 624 (379) 245 ------------ ------------ ------------ Cash and due from banks Other assets, net Total Assets Interest-Bearing Liabilities Interest-bearing deposits: Demand deposits (15) (110) (125) Savings deposits (16) (116) (132) Money market deposits 69 (58) 11 Certificates and other time deposits 410 295 705 Retail repurchase agreements 21 (29) (8) Federal Home Loan Bank advances 129 (11) 118 Federal funds purchased (11) (6) (17) ------------ ------------ ------------ Total interest-bearing liabilities 587 (35) 552 ------------ ------------ ------------ Noninterest-bearing demand deposits Other liabilities Shareholders' equity Total Liabilities and Shareholders' Equity Net Interest Income and Spread $ 37 $ (344) $ (307) ============ ============ ============ Net Yield on Earning Assets
(1) The mix variance, not separately stated, has been proportionally allocated to the rate and volume variances based on their absolute dollar amount. (2) Interest income and yields related to certain investment securities and loans exempt from both federal and state income tax or from state income tax alone are stated on a fully taxable equivalent basis, assuming a 34% federal tax rate and applicable state tax rate, reduced by the nondeductible portion of interest expense. (3) Nonaccrual loans are included in the average loan balance. Loan fees and the incremental direct costs associated with making loans are deferred and subsequently recognized over the life of the loan as an adjustment of interest income. 21 Item 3. Quantitative and Qualitative Disclosures about Market Risk Market risk reflects the risk of economic loss resulting from adverse changes in market price and interest rates. This risk of loss can be reflected in diminished current market values and/or reduced potential net interest income in future periods. The Bank's market risk arises primarily from interest rate risk inherent in its lending and deposit-taking activities. The structure of the Bank's loan and deposit portfolios is such that a significant decline in interest rates may adversely impact net market values and net interest income. The Bank does not maintain a trading account nor is the Bank subject to currency exchange risk or commodity price risk. Interest rate risk is monitored as part of the Bank's asset/liability management function, which is discussed above in Item 2 "Management's Discussion and Analysis of Financial Condition and Results of Operations" under the heading "Asset/Liability Management and Interest Rate Sensitivity". Management does not believe there has been any significant change in the overall analysis of financial instruments considered market risk sensitive, as measured by the factors of contractual maturities, average interest rates and estimated fair values, since the analysis prepared and presented in conjunction with the Form 10-K Annual Report for the fiscal year ended December 31, 2000. 22 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits. Exhibits to this report are listed in the index to exhibits on pages 24 and 25 of this report. (b) Reports on Form 8-K. No reports on Form 8-K were filed during the quarter ended June 30, 2001. ------------------------------ SIGNATURES In accordance with the requirements of the Securities Exchange Act of 1934, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FNB Corp. (Registrant) Date: August 14, 2001 By: /s/ Jerry A. Little ------------------- Jerry A. Little Treasurer and Secretary (Principal Financial and Accounting Officer) 23 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 June 16, 1985. 3.11 Articles of Amendment to Articles of Incorporation of the Registrant, adopted May 10, 1988, incorporated herein by reference to Exhibit 19.10 to the Registrant's Form 10-Q Quarterly Report for the quarter ended June 30, 1988. 3.12 Articles of Amendment to Articles of Incorporation of the Registrant, adopted May 12, 1998, incorporated herein by reference to Exhibit 3.12 to the Registrant's Form 10-Q Quarterly Report for the quarter ended June 30, 1998. 3.20 Amended and Restated Bylaws of the Registrant, adopted May 21, 1998, incorporated herein by reference to Exhibit 3.20 to the Registrant's Form 10-Q Quarterly Report for the quarter ended June 30, 1998. 4 Specimen of Registrant's Common Stock Certificate, incorporated herein by reference to Exhibit 4 to Amendment No. 1 to the Registrant's Form S-14 Registration Statement (No. 2-96498) filed April 19, 1985. 10.10* Form of Split Dollar Insurance Agreement dated as of November 1, 1987 between First National Bank and Trust Company and certain of its key employees and directors, incorporated herein by reference to Exhibit 19.20 to the Registrant's Form 10-Q Quarterly Report for the Quarter ended June 30, 1988. 10.11* Form of Amendment to Split Dollar Insurance Agreement dated as of November 1, 1994 between First National Bank and Trust Company and certain of its key employees and directors, incorporated herein by reference to Exhibit 10.11 to the Registrant's Form 10- KSB Annual Report for the fiscal year ended December 31, 1994. 10.20* Stock Compensation Plan as amended effective May 12, 1998, incorporated herein by reference to Exhibit 10.30 the Registrant's Form 10-Q Quarterly Report for the quarter ended June 30, 1998. 10.21* Form of Incentive Stock Option Agreement between FNB Corp. and certain of its key employees, pursuant to the Registrant's Stock Compensation Plan, incorporated herein by reference to Exhibit 10.31 to the Registrant's Form 10-KSB Annual Report for the fiscal year ended December 31, 1994. 24 Exhibit No. Description of Exhibit - ----------- ---------------------- 10.22* Form of Nonqualified Stock Option Agreement between FNB Corp. and certain of its directors, pursuant to the Registrant's Stock Compensation Plan, incorporated herein by reference to Exhibit 10.32 to the Registrant's Form 10-KSB Annual Report for the fiscal year ended December 31, 1994. 10.30* Employment Agreement dated as of December 27, 1995 between First National Bank and Trust Company and Michael C. Miller, incorporated herein by reference to Exhibit 10.50 to the Registrant's Form 10-KSB Annual Report for the fiscal year ended December 31, 1995. 10.31* Carolina Fincorp, Inc. Stock Option Plan (assumed by the Registrant on April 10, 2000), incorporated herein by reference to Exhibit 99.1 to the Registrant's Registration Statement on Form S-8 (File No. 333-54702). 10.32* Employment Agreement dated as of April 10, 2000 between First National Bank and Trust Company and R. Larry Campbell, incorporated herein by reference to Exhibit 10.32 to the Registrant's Form 10-K Annual Report for the fiscal year ended December 31, 2000. ______________ * Management contract, or compensatory plan or arrangement. 25 -----END PRIVACY-ENHANCED MESSAGE-----