FORM 10-Q--QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT of 1934
For the quarterly period ended September 30, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 333-2524
FNB Corporation
(Exact name of registrant as specified in its charter)
Virginia 54-1791618
(State or other jurisdiction of incorporation or organization) (I.R.S.
Employer Identification No.)
50 North Franklin Street, Christiansburg, Virginia 24073
(Address of principal executive offices) (Zip Code)
(540) 382-4951
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last
report.)
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. x Yes No
1,661,900 shares outstanding as of September 30, 1996
<PAGE>
FNB CORPORATION AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item l. Financial Statements
As further discussed in Note 1 to the financial statements, First National
Bank is the predecessor to FNB Corporation (the Registrant). See Note 1 for
more information. The financial statements filed as a part of Item 1 of Part
I are as follows:
1. Consolidated Balance Sheets of FNB Corporation and subsidiaries as of
September 30, 1996 (unaudited) and First National Bank and subsidiaries as of
December 31, 1995;
2. Unaudited Consolidated Statements of Income of FNB Corporation and
subsidiaries for the quarter and nine-month periods ended September 30, 1996;
3. Unaudited Consolidated Statements of Income of First National Bank and
subsidiaries for the quarter and nine-month periods ended September 30, 1995;
4. Unaudited Consolidated Statements of Cash Flows for the nine-month
period ended September 30, 1996 for FNB Corporation and subsidiaries and for
the nine-month period ended September 30, 1995 for First National Bank and
subsidiaries; and
5. Unaudited Consolidated Statements of Changes in Stockholders' Equity for
the nine-month period ended September 30, 1996 for FNB Corporation and
subsidiaries and for the nine-month period ended September 30, 1995 for First
National Bank and subsidiaries.
<PAGE>
<TABLE>
CONSOLIDATED BALANCE SHEET
FNB Corporation and subsidiaries
September 30, 1996
In Thousands, Except Share and Per Share Data
(Unaudited)
<S> <C>
ASSETS
Cash and due from banks $ 12,513
Federal funds sold 7,800
Securities available-for-sale, at fair value 48,879
Securities held-to-maturity, at amortized cost
(market value $42,841) 42,538
Mortgage loans held for sale 420
Loans:
Commercial 49,582
Consumer 60,921
Real estate - commercial 50,336
Real estate - construction 7,660
Real estate - mortgage 90,759
Total loans 259,258
Less unearned income 80
Loans, net of unearned income 259,178
Less allowance for loan losses 4,148
Loans, net 255,030
Bank premises and equipment, net 8,057
Other real estate owned 199
Other assets 4,985
Total assets $ 380,421
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand deposits 28,388
Interest-bearing demand deposits 47,344
Savings deposits 46,933
Time deposits 164,479
Certificates of deposit of $100,000 and over 33,323
Total deposits 320,467
Federal funds purchased and securities sold under
agreements to repurchase 5,161
Other borrowed funds 14,814
Other liabilities 2,569
ESOP debt 1,290
Subordinated capital notes 857
Total liabilities 345,158
Stockholders' equity:
Common stock, $5.00 par value, Authorized 5,000,000
shares; issued and outstanding 1,661,900 shares 8,310
Surplus 10,782
Unearned ESOP shares (53,470 shares) (1,511)
Undivided profits 18,099
Net unrealized gains (losses) on securities
available-for-sale (417)
Total stockholders' equity 35,263
Total liabilities and stockholders' equity $ 380,421
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED BALANCE SHEET
First National Bank and subsidiaries
December 31, 1995
In Thousands, Except Share and Per Share Data
<S> <C>
ASSETS
Cash and due from banks $ 8,818
Federal funds sold 5,430
Securities available-for-sale, at fair value 47,851
Securities held-to-maturity, at amortized cost
(market value $41,001) 40,111
Mortgage loans held for sale 817
Loans:
Commercial 53,374
Consumer 61,888
Real estate - commercial 52,075
Real estate - construction 9,600
Real estate - mortgage 76,505
Total loans 252,442
Less unearned income 149
Loans, net of unearned income 252,293
Less allowance for loan losses 3,988
Loans, net 248,305
Bank premises and equipment, net 4,586
Other real estate owned 387
Other assets 4,228
Total assets $ 360,533
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand deposits 27,991
Interest-bearing demand deposits 44,247
Savings deposits 54,491
Time deposits 162,395
Certificates of deposit of $100,000 and over 26,653
Total deposits 315,777
Federal funds purchased and securities sold under
agreements to repurchase 3,942
Other borrowed funds 2,368
Other liabilities 3,392
ESOP debt 1,926
Subordinated capital notes 937
Total liabilities 328,342
Stockholders' equity:
Common stock, $5.00 par value. Authorized 2,500,000
shares; issued and outstanding 1,661,900 shares 8,310
Surplus 10,782
Unearned ESOP shares (74,858 shares) (2,115)
Undivided profits 15,006
Net unrealized gains (losses) on securities
available-for-sale 208
Total stockholders' equity 32,191
Total liabilities and stockholders' equity $ 360,533
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME
FNB Corporation and subsidiaries
Quarter and Nine Months Ended September 30, 1996
In Thousands, Except Share and Per Share Data
(Unaudited)
<CAPTION>
Quarter Ended Nine Months Ended
September 30, 1996 September 30, 1996
<S> <C> <C>
Interest income:
Interest and fees on loans $ 6,285 18,480
Interest on securities:
Taxable 721 2,150
Nontaxable 590 1,793
Interest on federal funds sold 73 126
Total interest income 7,669 22,549
Interest expense:
Interest on interest-bearing demand deposits 326 952
Interest on savings deposits 346 1,038
Interest on time deposits 2,364 7,132
Interest on certificates of deposit of
$100,000 and over 454 1,370
Interest on federal funds purchased and
securities sold under agreements
to repurchase 60 162
Interest on other borrowed funds 180 386
Interest on subordinated capital notes 24 67
Interest on ESOP debt 28 93
Total interest expense 3,782 11,200
Net interest income 3,887 11,349
Provision for loan losses 135 345
Net interest income after provision for
loan losses 3,752 11,004
Noninterest income:
Service charges on deposit accounts 242 708
Loan origination fees 50 184
Other service charges and fees 75 233
Other income 129 412
Securities gains (losses), net 7 1
Total noninterest income 503 1,538
Noninterest expense:
Salaries and employee benefits 1,427 4,275
Occupancy and equipment expense, net 332 941
Credit card expense 178 422
Supplies expense 111 264
FDIC assessment expense 1 2
Other expenses 591 1,594
Total noninterest expense 2,640 7,498
Income before income tax expense 1,615 5,044
Income tax expense 358 1,152
Net income $ 1,257 3,892
Net income per share $ 0.78 2.43
Dividends declared per share $ - 0.50
Average number of shares outstanding 1,607,395 1,600,611
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME
First National Bank and subsidiaries
Quarter and Nine Months Ended September 30, 1995
In Thousands, Except Share and Per Share Data
(Unaudited)
<CAPTION>
Quarter Ended Nine Months Ended
September 30, 1995 September 30, 1995
<S> <C> <C>
Interest income:
Interest and fees on loans $ 6,005 16,997
Interest on securities:
Taxable 646 2,390
Nontaxable 618 1,426
Interest on federal funds sold 104 141
Total interest income 7,373 20,954
Interest expense:
Interest on interest-bearing demand deposits 359 1,093
Interest on savings deposits 438 1,323
Interest on time deposits 2,422 6,295
Interest on certificates of deposit of
$100,000 and over 388 1,247
Interest on federal funds purchased and
securities sold under agreements
to repurchase 57 170
Interest on other borrowed funds 59 97
Interest on subordinated capital notes 22 64
Interest on ESOP debt 43 133
Total interest expense 3,788 10,422
Net interest income 3,585 10,532
Provision for loan losses 75 225
Net interest income after provision for
loan losses 3,510 10,307
Noninterest income:
Service charges on deposit accounts 237 691
Loan origination fees 54 129
Other service charges and fees 57 199
Other income 95 364
Securities gains (losses), net 0 0
Total noninterest income 443 1,383
Noninterest expense:
Salaries and employee benefits 1,365 3,834
Occupancy and equipment expense, net 323 926
Credit card expense 152 332
Supplies expense 89 279
FDIC assessment expense (15) 303
Other expenses 504 1,456
Total noninterest expense 2,418 7,130
Income before income tax expense 1,535 4,560
Income tax expense 360 1,098
Net income $ 1,175 3,462
Net income per share $ 0.74 2.19
Dividends declared per share $ - 0.45
Average number of shares outstanding 1,586,007 1,579,568
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENT OF CASH FLOWS
FNB Corporation and subsidiaries
Nine Months Ended September 30, 1996
In Thousands
(Unaudited)
<CAPTION>
Nine Months Ended
September 30, 1996
<S> <C>
Cash flows from operating activities:
Net income $ 3,892
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 345
Depreciation and amortization of bank
premises and equipment 402
ESOP compensation 604
Amortization of premiums and accretion
of discounts, net 64
Gain on sale of securities, net (1)
Gain on sale of fixed assets (39)
Gain on sale of other real estate (4)
Net decrease in mortgage
loans held for sale 397
Increase in other assets (1,007)
Decrease in other liabilities (823)
Net cash provided by operating
activities 3,830
Cash flows from investing activities:
Net increase in federal funds sod (2,370)
Proceeds from sales of securities
available-for-sale 5,386
Proceeds from calls and maturities of
securities available-for-sale 9,483
Proceeds from calls and maturities of
securities held-to-maturity 2,362
Purchase of securities available-for-sale (19,070)
Purchase of securities held-to-maturity (5,308)
Net increase in loans (4,115)
Proceeds from sale of other real estate owned 446
Recoveries on loans previously charged off 84
Bank premises and equipment expenditures (3,873)
Net cash (used in) investing activities (16,975)
Cash flows from financing activities:
Net increase in deposits 4,690
Net increase in federal funds
purchased, securities sold under agreements
to repurchase and other borrowed funds 13,665
Principal payments on ESOP debt (604)
Dividends on unallocated ESOP shares (32)
Principal payments on subordinated capital notes (80)
Dividends paid (799)
Net cash provided by financing activities 16,840
Net increase in cash and due from banks 3,695
Cash and due from banks at beginning of period 8,818
Cash and due from banks at end of period $ 12,513
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENT OF CASH FLOWS
First National Bank and subsidiaries
Nine Months Ended September 30, 1995
In Thousands
(Unaudited)
<CAPTION>
Nine Months Ended
September 30, 1995
<S> <C>
Cash flows from operating activities:
Net income $ 3,462
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 225
Depreciation and amortization of bank
premises and equipment 410
ESOP compensation 302
Amortization of premiums and accretion
of discounts, net (29)
Gain on sale of fixed assets (1)
Net increase in mortgage
loans held for sale (830)
Decrease in other assets 1,747
Decrease in other liabilities (153)
Net cash provided by operating activities 5,133
Cash flows from investing activities:
Net increase in federal funds sold (6,690)
Proceeds from calls and maturities of
securities available-for-sale 11,738
Proceeds from calls and maturities of
securities held-to-maturity 1,193
Purchase of securities available-for-sale (1,962)
Purchase of securities held-to-maturity (8,887)
Net increase in loans (25,562)
Proceeds from sale of other real estate owed 87
Recoveries on loans previously charged off 185
Bank premises and equipment expenditures (829)
Net cash (used in) investing activities (30,727)
Cash flows from financing activities:
Net increase in deposits 20,721
Net increase in federal funds
purchased, securities sold under agreements
to repurchase and other borrowed funds 4,170
Principal payments on ESOP debt (302)
Dividends on unallocated ESOP shares (38)
Principal payments on subordinated capital notes (80)
Dividends paid (710)
Net cash provided by financing activities 23,761
Net decrease in cash and due from banks (1,833)
Cash and due from banks at beginning of period 11,111
Cash and due from banks at end of period $ 9,278
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FNB Corporation and subsidiaries
Nine Months Ended September 30, 1996
In Thousands
(Unaudited)
<CAPTION>
1996
<S> <C>
Balance, beginning of period $ 32,191
Net income for period 3,892
Cash dividends (799)
ESOP shares allocated upon loan repayment 604
Change in net unrealized gains (losses) on securities
available-for-sale, net of income taxes (625)
Balance, end of period $ 35,263
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
First National Bank and subsidiaries
Nine Months Ended September 30, 1995
In Thousands
(Unaudited)
<CAPTION>
1995
<S> <C>
Balance, beginning of period $ 26,777
Net income for period 3,462
Cash dividends (710)
ESOP shares allocated upon loan repayment 302
Change in net unrealized gains (losses) on securities
available-for-sale, net of income taxes 1,743
Balance, end of period $ 31,574
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FNB Corporation and subsidiaries
September 30, 1996 and 1995
In Thousands, Except Share Data
(Unaudited)
(1) General
Subsequent to December 31, 1995, the Board of Directors of First National Bank
(the "Bank") approved a reorganization whereby a bank holding company (FNB
Corporation) was incorporated under the laws of the Commonwealth of Virginia.
On June 11, 1996, the shareholders of the Bank approved a plan for the holding
company to exchange one share of its stock for each share of stock of the
Bank. A registration statement was filed with the Securities and Exchange
Commission (SEC) to register the stock of the holding company, and such
registration statement was subsequently declared effective by the SEC. On
July 11, 1996, the Office of the Comptroller of the Currency (OCC) approved
the plan, and the exchange was subsequently consummated. As a result, the
Bank became a wholly owned subsidiary of the holding company during the third
quarter of 1996, and the holding company began filing periodic reports under
the Securities Exchange Act of 1934. Prior to the consummation of the
exchange, the Bank filed periodic reports with the OCC.
The financial statements included herein reflect the balances and activity of
the Bank and its subsidiaries for periods ending prior to the consummation of
the reorganization and of the holding company and its subsidiaries for periods
ending subsequent to the reorganization. The exchange of stock was accounted
for using the pooling of interests method. That is, the bases of the assets
and liabilities of the Bank prior to the reorganization were carried forward
without adjustment. Because of this, and because the holding company's
revenues, expenses and changes in financial position subsequent to the
reorganization have been minimal, the consolidated financial statements for
periods subsequent to the reorganization are comparable to those for periods
prior to the reorganization.
The financial statements are unaudited, however, in the opinion of management,
all adjustments necessary for a fair presentation of the financial statements
have been included.
Material estimates that are particularly susceptible to significant changes in
the near-term relate to the determination of the allowance for loan losses and
the valuation of other real estate owned acquired in connection with
foreclosures or in satisfaction of loans. In connection with the
determination of the allowance for loan losses and the valuation of other real
estate owned, management obtains independent appraisals for significant
properties.
Management believes that the allowance for loan losses and the valuation of
other real estate owned are adequate. While management uses available
information to recognize loan losses and write-downs of other real estate
owned, future additions to the allowance and write-downs to other real estate
owned may be necessary based on changes in economic conditions. In addition,
<PAGE>
various regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowance for loan losses and valuation of
other real estate owned. Such agencies may require the Bank to recognize
additions to the allowance for loan losses and additional write-downs of other
real estate owned based on their judgments of information available to them at
the time of their examination.
The following is a description of the more significant accounting and
reporting policies which conform to general practice within the banking
industry.
(a) Consolidation
The consolidated financial statements include the accounts of FNB
Corporation (the "Registrant" or the "holding company") and First
National Bank and its wholly-owned subsidiaries, FNB Financial
Services, Inc. and FNBO Co. Inc. ("the Bank"). All significant
intercompany balances and transactions have been eliminated.
(b) Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents
include those amounts in the balance sheet caption cash and due
from banks. Generally, cash and cash equivalents are considered
to have maturities of three months or less.
(c) Investment Securities
Debt securities that the Bank has the positive intent and ability
to hold to maturity are classified as held-to-maturity securities
and reported at amortized cost. Debt and equity securities that
are bought and held principally for the purpose of selling them in
the near term are classified as trading securities and reported at
fair value, with unrealized gains and losses included in earnings.
The bank had no trading securities at December 31, 1995, or
September 30, 1996. Debt and equity securities not classified as
either held-to-maturity securities or trading securities are
classified as available-for-sale securities and reported at fair
value, with unrealized gains and losses excluded from earnings and
reported as a separate component of stockholders' equity.
Amortization of premiums and accretion of discounts are computed
on the level yield method. Gains and losses on sales of
investment securities are computed on the basis of specific
identification of the adjusted cost of each security upon
disposition.
(d) Loans
Loans are stated at the amount of funds disbursed plus the
applicable amount, if any, of unearned interest and deferred fees
and costs less payments received. Interest on commercial and real
<PAGE>
estate mortgage loans is accrued based on the average loans
outstanding times the applicable interest rates. Interest on
installment loans is recognized on methods which approximate the
level yield method.
Loan origination and commitment fees and certain costs are being
deferred, and the net amount amortized as an adjustment of the
related loan's yield. The Bank is amortizing these amounts over
the contractual life of the related loans.
Interest related to nonaccrual loans is recognized on the cash
basis. Loans are generally placed on nonaccrual status when the
collection of principal or interest is 90 days or more past due,
unless the obligation is both well secured and in the process of
collection.
(e) Bank Premises and Equipment, Net
Bank premises and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation and amortization are
charged to expense over the estimated useful lives of the assets,
principally on the straight-line method. Costs of maintenance and
repairs are charged to expense as incurred and improvements are
capitalized.
(f) Other Real Estate Owned
Other real estate owned represents properties acquired through
foreclosure or deed taken instead of foreclosure. At the time of
acquisition, these properties are recorded at the lower of the
recorded investment in the loan or fair value minus estimated
costs to sell with any write-down being charged to the allowance
for loan losses. Expenses incurred in connection with operating
these properties and subsequent write-downs, if any, are charged
to expense. Gains and losses on the sales of these properties are
credited or charged to income in the year of the sale.
(g) Income Taxes
Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be
recovered 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.
<PAGE>
(h) Net Income Per Share
Net income per share computations are based on the weighted
average number of shares outstanding during each year.
(I) Trust Assets
Assets held by the Bank's trust department in a fiduciary or
agency capacity are not included in the consolidated financial
statements as they are not assets of the Bank.
(2) Restrictions on Cash
Federal reserve regulations require the Bank to maintain certain average
balances as cash reserves. The reserve requirements approximated $2,987
and $2,712 at September 30, 1996 and December 31, 1995, respectively.
(3) Securities Available-for-Sale
The following sets forth the composition of securities available-for-sale,
which are reported at fair value, at September 30, 1996 and
December 31, 1995:
<TABLE>
<CAPTION>
Gross Gross Approx.
Amortized Unrealized Unrealized Fair
September 30, 1996 Costs Gains Losses Values
<S> <C> <C> <C> <C>
U.S. Treasury $ 8,127 22 (72) 8,077
U.S. Government agencies
and corporations 29,538 44 (656) 28,926
States and political
subdivisions 3,981 61 (21) 4,021
Other securities 7,865 59 (69) 7,855
Totals $ 49,511 186 (818) 48,879
</TABLE>
<TABLE>
<CAPTION>
Gross Gross Approx.
Amortized Unrealized Unrealized Fair
December 31, 1995 Costs Gains Losses Values
<S> <C> <C> <C> <C>
U.S. Treasury $ 9,513 128 (2) 9,639
U.S. Government agencies
and corporations 25,840 132 (98) 25,874
States and political
subdivisions 2,304 84 - 2,388
Other securities 9,878 161 (89) 9,950
Totals $ 47,535 505 (189) 47,851
</TABLE>
<PAGE>
The amortized costs and approximate fair values of securities available-
for-sale by contractual maturity are shown below. Expected maturities
may differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
Approx.
Amortized Fair
September 30, 1996 Costs Values
<S> <C> <C>
Due in one year or less $ 7,131 7,080
Due after one year through five years 16,442 16,259
Due after five years through ten years 19,715 19,336
Due after ten years 6,223 6,204
Totals $ 49,511 48,879
</TABLE>
Proceeds from sales, calls and maturities of securities available-for-sale
for the nine months ended September 30, 1996 and 12 months ended
December 31, 1995 were $14,869 and $14,987, respectively. Gross gains
of $48 and gross losses of $47 were realized on those sales and calls
through September 30, 1996, and gains and losses were not material in
1995.
The carrying value of securities available-for-sale pledged to secure
public and trust deposits and securities sold under agreements to
repurchase, and for other purposes as required or permitted by law, was
$16,786 at September 30, 1996 and $15,158 at December 31, 1995.
(4) Securities Held-To-Maturity
The amortized costs, gross unrealized gains and losses, and approximate
fair values of securities held-to-maturity at September 30, 1996 and
December 31, 1995 are as follows:
<TABLE>
<CAPTION>
Gross Gross Approx.
Amortized Unrealized Unrealized Fair
September 30, 1996 Costs Gains Losses Values
<S> <C> <C> <C> <C>
U.S. Government agencies
and corporations $ 500 - (7) 493
States and political
subdivisions 42,038 711 (401) 42,348
Totals $42,538 711 (408) 42,841
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Gross Gross Approx.
Amortized Unrealized Unrealized Fair
December 31, 1995 Costs Gains Losses Values
<S> <C> <C> <C> <C>
U.S. Government agencies
and corporations $ 500 6 - 506
States and political
subdivisions 39,110 1,032 (149) 39,993
Other securities 501 1 - 502
Totals $ 40,111 1,039 (149) 41,001
</TABLE>
The amortized costs and approximate fair values of securities held-to-
maturity, by contractual maturity, are shown below. Expected maturities
may differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
Approx.
Amortized Fair
September 30, 1996 Costs Values
<S> <C> <C>
Due in one year or less $ 1,639 1,638
Due after one year through five years 13,188 13,340
Due after five years through ten years 24,315 24,481
Due after ten years 3,396 3,382
Totals $ 42,538 42,841
</TABLE>
Proceeds from sales, calls and maturities of securities held-to-maturity
for the nine months ended September 30, 1996 and for the 12 months ended
December 31, 1995 were $2,362 and $2,626, respectively. Gross gains and
gross losses realized on those sales, calls and maturities were not
material.
The carrying value of securities held-to-maturity pledged to secure
public and trust deposits and securities sold under agreements to
repurchase, and for other purposes as required or permitted by law, was
$14,689 at September 30, 1996 and $16,815 at December 31, 1995.
(5) Loans
At September 30, 1996 and December 31, 1995, there were direct loans to
executive officers and directors of $3,252 and $3,084, respectively. In
addition, there were loans of $8,449 and $6,861 at September 30, 1996
and December 31, 1995, respectively, which directors endorsed or had
been made to companies in which directors had an equity interest.
At September 30, 1996 and December 31, 1995, the Bank had sold
participations in various loans to customers of the Bank in the amount
of $37,716 and $32,000, respectively.
<PAGE>
(6) Allowance for Loan Losses and Impaired Loans
As of January 1, 1995, the Bank adopted Statement of Financial
Accounting Standards No. 114, "Accounting by Creditors for Impairment of
a Loan," and Statement No. 118, "Accounting by Creditors for Impairment
of a Loan - Income Recognition and Disclosures." These new standards
require that impaired loans be measured based on the present value of
expected future cash flows discounted at the loan's effective interest
rate or, as a practical expedient, at the loan's observable market price
or the fair value of the collateral if the loan is collateral dependent.
They also require creditors to evaluate the collectibility of both
contractual interest and contractual principal of all receivables when
assessing the need for a loss accrual. Creditors may continue to use
existing methods of recognizing interest income on an impaired loan.
These statements were adopted on a prospective basis and had no material
impact on the financial statements.
A loan is considered impaired when, based on management's judgment, the
Bank will probably not be able to collect all amounts due according to
the contractual terms of the loan. In making such assessment,
management considers the individual strength of borrowers, the strength
of particular industries, the payment history of individual loans, the
value and marketability of collateral and general economic conditions.
The Bank's methodology for evaluating the collectibility of a loan after
it is deemed to be impaired does not differ from the methodology used
for nonimpaired loans.
A summary of the changes in the allowance for loan losses (including
allowances for impaired loans) follows:
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Balance at beginning of period $ 4,128 3,951 3,988 3,815
Provisions for loan losses 135 75 345 225
Loan recoveries 29 71 84 185
Loan charge-offs (144) (98) (269) (226)
Balance at end of period $ 4,148 3,999 4,148 3,999
</TABLE>
Nonperforming assets consist of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
<S> <C> <C>
Nonaccrual loans $ 1,521 1,769
Other real estate owned 199 387
Total nonperforming assets $ 1,720 2,156
</TABLE>
<PAGE>
The following tables show the pro forma interest that would have been
earned on nonaccrual loans if they had been current in accordance with
their original terms and the recorded interest included in income on
these investments:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1996 1995
<S> <C> <C>
Proforma interest - nonaccrual loans $ 100 128
Recorded interest - nonaccrual loans -- 2
</TABLE>
There were no material commitments to lend additional funds to customers
whose loans were classified as nonperforming at September 30, 1996.
(7) Bank Premises and Equipment, Net
Bank premises and equipment are stated at cost less accumulated
depreciation and amortization as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
<S> <C> <C>
Land $ 1,882 1,869
Buildings 5,898 2,787
Furniture and equipment 4,477 3,821
Leasehold improvements 363 309
12,620 8,786
Less accumulated depreciation
and amortization 4,563 4,200
Totals $ 8,057 4,586
</TABLE>
(8) Other Borrowed Funds
Other borrowed funds include advances from the Federal Home Loan Bank of
Atlanta totaling $12,803 and $1,967 on September 30, 1996 and December
31, 1995, respectively. The interest rates on the advances range from
5.38 to 7.15 percent and have maturity dates through June 5, 2010. The
advances are collateralized under a blanket floating lien agreement
dated September 24, 1994, by which the Bank gives a blanket pledge of
residential first mortgage loans for 1-4 units.
(9) Employee Benefit Plans
The Employee Stock Ownership Plan (ESOP) invests primarily in the
Registrant's stock. The ESOP covers substantially all employees. In
May 1994, the Bank sold 106,940 shares of Bank stock to the ESOP for
$28.25 per share. In 1996, the ESOP tendered the stock in exchange for
the stock issued by the Registrant pursuant to the reorganization
discussed in Note 1. The ESOP borrowed $3,021 to purchase the shares.
The ESOP's obligation to repay this borrowing is guaranteed by the Bank;
therefore, the unpaid balance of the borrowing has been reflected in the
accompanying balance sheet as a liability and the amount representing
<PAGE>
unearned employee benefits has been recorded as a reduction in
stockholders' equity. These amounts will be reduced as the ESOP debt is
curtailed. The ESOP is repaying the loan (plus interest) using employer
contributions and dividends received on the shares of common stock held
by the ESOP.
(10) Income Taxes
The primary reason for the difference between the effective tax rates
and the statutory tax rate is a substantial amount of tax-exempt
interest income.
(11) Restrictions on Payment of Dividends
Under applicable federal laws, the Comptroller of the Currency
restricts, without prior approval, the total dividend payments of the
Bank in any calendar year to the net profits of that year, as defined,
combined with the retained net profits for the two preceding years. At
September 30, 1996, retained net profits which were free of such
restriction approximated $3,254.
(12) Supplemental Cash Flow Information
The Bank paid $11,100 and $10,256 for interest and it paid $1,013 and
$1,165 for income taxes for the nine month periods ended September 30,
1996 and 1995, respectively. Noncash investing activities included $258
and $58 of loans transferred to other real estate and $269 and $226 of
loans charged against the allowance for loan losses for the nine month
periods ended September 30, 1996 and 1995, respectively.
(13) Commitments and Contingencies
The Bank is involved from time to time in litigation arising in the
normal course of business. Management believes that any resulting
settlements and disposition of these matters will not materially affect
consolidated results of operations or financial position.
(14) Financial Instruments with Off-Balance-Sheet Risk
The Bank is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend
credit and standby letters of credit. Those instruments involve, to
varying degrees, elements of credit risk more than the amount recognized
in the balance sheet. The contract amounts of those instruments reflect
the extent of involvement the Bank has in particular classes of
financial instruments.
The Bank's exposure to credit loss in case of nonperformance by the
other party to the financial instrument for commitments to extend credit
and standby letters of credit is represented by the contractual amount
<PAGE>
of those instruments. The Bank uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments.
Except for home equity lines totaling $12,711 at September 30, 1996, and
$12,722 at December 31, 1995, the Bank may not require collateral or
other security to support the following financial instruments with
credit risk:
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
Contract Amount
<S> <C> <C>
Financial instruments whose contract amounts
represent credit risk:
Commitments to extend credit $ 48,054 47,551
Standby letters of credit and
financial guarantees written 3,261 2,769
</TABLE>
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash
requirements. The Bank evaluates each customer's credit worthiness on a
case-by-case basis. The amount of collateral obtained, if deemed
necessary upon extension of credit, is based on management's credit
evaluation of the customer. Collateral held varies but may include
securities, accounts receivable, inventory, property, plant and
equipment, and income-producing commercial properties.
Standby letters of credit are conditional commitments issued to
guarantee the performance of a customer to a third party. Those
guarantees are primarily issued to support public and private borrowing
arrangements, including commercial paper, bond financing, and similar
transactions. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to
customers. Collateral held varies but may include securities, accounts
receivable, inventory, property, plant and equipment and income-producing
commercial properties.
The Bank sells portions of mortgage and commercial loans to other
investors in the normal course of business ("participations"). In
certain cases the Bank has agreed to repurchase the loan from the
investor in the event the debtor defaults. The Bank's total exposure at
September 30, 1996 under such agreements approximates $9,512.
(15) Concentrations of Credit Risk
The Bank does a general banking business, serving the commercial,
agricultural and personal banking needs of its customers in its trade
territory, commonly referred to as the New River Valley, which consists
of Montgomery County, Virginia and portions of adjacent counties.
Operating results are closely correlated with the economic trends within
<PAGE>
this area which are, in turn, influenced by the area's three largest
employers--Virginia Polytechnic Institute and State University, Radford
University and the Radford Arsenal. Other industries include a wide
variety of manufacturing concerns and agriculture-related enterprises.
The ultimate collectibility of the loan portfolios and the recovery of
the carrying amounts of repossessed property are susceptible to changes
in the market conditions of this area. The commercial portfolio is
diversified with no significant concentrations of credit within a single
industry. The consumer loan portfolio includes approximately $46
million of the loans to individuals for household, family and other
personal expenditures. The real estate-mortgage portfolio consists
primarily of loans secured by l-4 family residential properties.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a discussion of factors that significantly affected the
financial condition and results of operations of FNB Corporation and
subsidiaries. This discussion should be read in connection with the
consolidated financial statements, statistical disclosures and other financial
information presented herein. All amounts presented are denoted in thousands
except per share and percentage data.
See Note 1 to the consolidated financial statements for a discussion of a
reorganization in 1996 resulting in the creation of FNB Corporation (the
"Registrant" or the "Holding Company"). As a result, First National Bank (the
"Bank") is a wholly-owned subsidiary of the Registrant. Because of factors
discussed in Note 1, the consolidated financial statements for periods
subsequent to the reorganization are comparable to those for periods prior to
the reorganization.
1996 Compared to 1995
Net Income
Net income of $3,892 for the first nine months of 1996 represented an increase
of $430 over earnings of $3,462 during the same period of 1995. Net income
was $1,257 for the third quarter of 1996 as compared to $1,175 for the same
period in 1995. Earnings per share were $0.78 for the third quarter and $2.43
for the first nine months of 1996 versus $0.74 and $2.19, respectively, for
the comparable 1995 periods. Increased current year earnings were primarily
the result of an increase in net interest income and a decrease in the Federal
Deposit Insurance Corporation insurance assessment.
Net Interest Income
The principal source of earnings for the Bank is net interest income. Net
interest income is the net amount of interest earned on interest bearing
assets, less the amount of interest paid on deposits and other interest-bearing
liabilities. Net interest income before provision for loan losses was
$11,349 for the nine months ended September 30, 1996, an increase of $817 from
the same period in 1995. Net interest income before provision for loan losses
was $3,887 for the quarter ended September 30, 1996, an increase of $302 from
the same period in 1995. The increases in net interest income in both the
third quarter and first nine months were primarily the result of growth in
average earning assets, partially offset by growth in interest bearing
liabilities. Average earning asset growth totaled $21,490 (6.42%) and $27,998
(8.69%), respectively, for the third quarter and first nine months of 1996
over the respective prior year periods. The largest component of the increase
in earning assets was average loans, reflecting increases of $18,180 (7.59%)
and $24,553 (10.65%), respectively, for the third quarter and first nine
months of 1996. Growth in the loan portfolio was concentrated primarily in
real estate loans reflecting increases of $13,762 and $15,784, respectively,
for the third quarter and first nine months of 1996. Average securities
increased $4,973 (5.71%) and $4,033 (4.61%), respectively, for the third
<PAGE>
quarter and first nine months of 1996 and were used as an alternative
investment for funds in excess of loan demand.
Average interest-bearing liabilities increased $16,904 (5.90%)and $23,942
(8.70%), respectively, for the third quarter and first nine months of 1996
over the respective prior year periods. The largest component of
interest-bearing
liabilities was average deposits, reflecting an increase of $7,264 and
$17,100, respectively for the third quarter and first nine months of 1996.
Growth in the deposit portfolio was concentrated in certificates of deposit of
$100 and over with an increase of $7,207 and $4,536 for the third quarter and
first nine months of 1996 and in time deposits with an increase of $4,722 and
$17,981 for the third quarter and first nine months of 1996. Successful
deposit promotions and more aggressive bidding for deposits accounted for the
increase. Other borrowed funds increased $8,749 and $6,376, respectively, for
the third quarter and first nine months of 1996. The primary reason for the
change was an increase in advances from the Federal Home Loan Bank of Atlanta.
Net interest yield increased to 4.77% from 4.71% for the third quarter and to
4.74% from 4.72% for the first nine months of 1996. The yield on average
earning assets decreased 22 basis points, to 9.03% from 9.25% for the third
quarter and 4 basis points, to 9.00% from 9.04% for the first nine months of
1996. The cost of interest-bearing liabilities decreased 29 basis points, to
4.95% from 5.24% for the third quarter and 4 basis points, to 4.95% from 4.99%
for the first nine months of 1996, contributing to the improvement in the net
interest yield. The wider earnings spread reflected the Bank's management of
its interest rate position which benefited from a decreasing interest rate
environment.
Provision for Loan Losses
The provision for loan losses was $135 and $345, respectively, for the quarter
and nine months ended September 30, 1996, and $75 and $225, respectively, for
the quarter and nine months ended September 30, 1995. Net charge-offs
amounted to $115 and $185, respectively, for the quarter and nine months ended
September 30, 1996, and $27 and $41, respectively, for the quarter and nine
months ended September 30, 1995. The increase in net charge offs was due to a
drop in recoveries of loans previously charged off. The allowance for loan
losses was $4,148, 1.60% of outstanding loans, at September 30, 1996, and
$3,988, 1.58% of outstanding loans, at December 31, 1995. With the increase
in net charge-offs, the provision for loan losses was also increased and the
allowance for loan losses reflected a corresponding increase. Management
believes the allowance for loan losses as a percentage of outstanding loans
remains at a prudent level.
Noninterest Income
Noninterest income, including service charges on deposit accounts, loan
origination fees, other service charges, other income and net securities gains
(losses), was $503 and $1,538, respectively, for the quarter and nine months
ended September 30, 1996, and $443 and $1,383, respectively, for the quarter
and nine months ended September 30, 1995. The increase in noninterest income
resulted primarily from an increase in fees on Small Business Administration
<PAGE>
and real estate loans sold, trust fees, title insurance income and gain on
disposal of fixed assets. These increases were partially offset by reductions
in other areas.
Noninterest Expense
Noninterest expense, consisting of salaries and employee benefits, occupancy
costs, credit card, supplies, FDIC assessment and other expenses was $2,640
and $7,498, respectively, for the quarter and nine months ended September 30,
1996, and $2,418 and $7,130, respectively, for the quarter and nine months
ended September 30, 1995. The net increase in noninterest expense resulted
from increases in several categories, primarily personnel costs and credit
cards. Personnel costs increased primarily as the result of merit increases,
and additional personnel to staff a new branch. These increases were
partially offset by reductions in other areas, most notably in Federal Deposit
Insurance Corporation assessment expense.
Income Taxes
Income tax expense as a percentage of pre-tax income was 22.2% and 22.8%,
respectively, for the quarter and nine months ended September 30, 1996 and
23.5% and 24.1%, respectively, for the quarter and nine months ended September
30, 1995. The decline in the rate was due to the continuing shift from
taxable to nontaxable investment securities.
Balance Sheet
Total assets of the Corporation at September 30, 1996, were $380,421, compared
to $360,533 at December 31, 1995. Total loans were $259,258 at September 30,
1996, an increase of $6,816 from December 31, 1995. Loan growth was
concentrated in the real estate-mortgage portfolio and amounted to $14,254.
All other loan portfolios experienced declines of varying amounts. The
increase in bank premises and equipment of $3,471 represented advances for the
construction of the new corporate headquarters building. Cash and due from
banks increased $3,695 and Federal Funds sold increased $2,370 reflecting an
increase in liquidity.
Total deposits at September 30, 1996, were $320,467, an increase of $4,690
from December 31, 1995. Certificates of deposit of $100 and over increased
$6,670 and interest-bearing demand deposits increased $3,097 since year end.
These increases were partially offset by a decrease of $7,558 in savings
deposits since year end 1995. Depositors continue to shift funds among the
various types of deposit instruments seeking the most advantageous return
while maintaining an acceptable level of liquidity.
Other borrowed funds at September 30, 1996, were $14,814, an increase of
$12,446 from December 31, 1995. The primary reason for the change was an
increase in advances from the Federal Home Loan Bank of Atlanta from $1,967 at
December 31, 1995, to $12,803 at September 30, 1996, to provide partial
funding for earning asset growth.
<PAGE>
Stockholders' Equity
Stockholders' equity was $35,263 at September 30, 1996, compared to $32,191 at
December 31, 1995. This increase of $3,072 was the net result of earnings
retention, an increase of $625 in net unrealized loss (net of tax) on
securities available-for-sale, a decrease of $604 in unearned ESOP shares
resulting from principal repayments on ESOP debt, and dividends paid to
shareholders.
The Bank is required to maintain minimum amounts of capital to total "risk
weighted" assets, as defined by the banking regulators. At September 30,
1996, the Bank's Tier 1 ratio, total capital ratio, and leverage ratio,
exceeded the minimum ratios required by the regulations.
Past Due Loans and Nonperforming Assets
Loans past due 90 days and over at September 30, 1996, totaled $802 compared
to $43 at December 31, 1995. In addition, nonaccrual loans and other real
estate owned totaled $1,720 at September 30, 1996, compared to $2,156 at
December 31, 1995. In spite of the small overall increase, the New River
Valley economy continues to improve, and such improvement has been reflected
in a declining trend of nonperforming assets in recent years.
As of January 1, 1995, FNB adopted Statement of Financial Accounting Standards
No. 114, "Accounting by Creditors for Impairment of a Loan," and Statement No.
118, "Accounting by Creditors for Impairment of a Loan--Income Recognition and
Disclosure." These statements were adopted on a prospective basis and had no
material impact on the financial statements. See Note 6 to the consolidated
financial statements for additional information on loan impairment.
Liquidity
Liquidity is the ability of the Bank to meet present and future obligations
through the acquisition of additional liabilities or the sale of existing
assets. Liquidity remains sufficient, as assets are maintained on a short-term
basis to meet the liquidity demands anticipated by management.
Additionally, the Bank has secondary sources of liquidity should the need
arise, including approximately $32,000 in unused Federal Funds lines of
credit.
The Bank has begun construction on a new corporate headquarters facility, the
cost of which is expected to approximate $4,700. It is expected to be
completed in January 1997.
Recent Developments
The Financial Accounting Standards Board has issued several pronouncements
that are required to be adopted in 1996. Statement of Financial Accounts
Standards (SFAS) No. 121 governs accounting for the impairment of long-lived
assets (including those to be disposed of), SFAS No. 122 governs the
accounting for mortgage servicing rights, and SFAS No. 123 governs the
accounting for certain stock-based compensation arrangements. These
statements will apply to the Registrant only in case of certain transactions
or circumstances. In any case, it is not anticipated that any of these
<PAGE>
pronouncements will have a material impact on consolidated financial position
or results of operations.
Additionally, the FASB has issued SFAS No. 125, which governs the accounting
for transfers and servicing of financial assets and extinguishment of
liabilities. The Statement is effective for periods after December 31, 1996
and must be applied prospectively. Management has not determined the likely
impact of the adoption of the Statement.
Part II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits:
See index to exhibits
(B) Reports on Form 8-K:
None
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FNB Corporation
Date November 7, 1996 By: s/Samuel H. Tollison
Samuel H. Tollison
President
Date November 7, 1996 By: s/Perry D. Taylor
Perry D. Taylor
Chief Financial Officer
<PAGE>
INDEX TO EXHIBITS
Exhibit #
(2) Plan of Reorganization
(A) Agreement and Plan of Reorganization dated as of February 1, 1996,
between the Registrant, First National Bank, and FNB Bank, filed
as Exhibit 2 to the Registration Statement on Form S-4 filed by
FNB Corporation with the Securities and Exchange Commission May 3,
1996, (Registration number 333-2524) is incorporated herein by
reference.
(27) Financial Data Schedule
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 12,513
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 7,800
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 48,879
<INVESTMENTS-CARRYING> 42,538
<INVESTMENTS-MARKET> 42,841
<LOANS> 259,258
<ALLOWANCE> 4,148
<TOTAL-ASSETS> 380,421
<DEPOSITS> 320,467
<SHORT-TERM> 7,172
<LIABILITIES-OTHER> 2,569
<LONG-TERM> 14,950
0
0
<COMMON> 8,310
<OTHER-SE> 26,954
<TOTAL-LIABILITIES-AND-EQUITY> 380,421
<INTEREST-LOAN> 18,480
<INTEREST-INVEST> 3,943
<INTEREST-OTHER> 126
<INTEREST-TOTAL> 22,549
<INTEREST-DEPOSIT> 10,492
<INTEREST-EXPENSE> 11,200
<INTEREST-INCOME-NET> 11,349
<LOAN-LOSSES> 345
<SECURITIES-GAINS> 1
<EXPENSE-OTHER> 7,498
<INCOME-PRETAX> 5,044
<INCOME-PRE-EXTRAORDINARY> 5,044
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,892
<EPS-PRIMARY> 2.43
<EPS-DILUTED> 2.43
<YIELD-ACTUAL> 4.74
<LOANS-NON> 1,521
<LOANS-PAST> 802
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,988
<CHARGE-OFFS> 269
<RECOVERIES> 84
<ALLOWANCE-CLOSE> 4,148
<ALLOWANCE-DOMESTIC> 2,574
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,574
</TABLE>
