<PAGE> 1
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 March 31, 1997
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.)
105 Arbor Drive, 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 March 31, 1997
<PAGE> 2
FNB CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 22
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 26
Signatures 27
Index to Exhibits 28
<PAGE> 3
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
December 31, 1996 and March 31, 1997 (unaudited);
2. Unaudited Consolidated Statements of Income for the three-month period
ended March 31, 1997 for FNB Corporation and subsidiaries and for the three-
month period ended March 31, 1996, for First National Bank and subsidiaries;
3. Unaudited Consolidated Statements of Cash Flows for the three-month
period ended March 31, 1997 for FNB Corporation and subsidiaries and for the
three-month period ended March 31, 1996 for First National Bank and
subsidiaries; and
4. Unaudited Consolidated Statements of Changes in Stockholders' Equity
for the three-month period ended March 31, 1997 for FNB Corporation and
subsidiaries and for the three-month period ended March 31, 1996 for First
National Bank and subsidiaries.
<PAGE> 4
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET
FNB Corporation and subsidiaries
March 31, 1997
In Thousands, Except Share and Per Share Data
(Unaudited)
<S> <C>
ASSETS
Cash and due from banks $ 11,720
Securities available-for-sale, at fair value 53,726
Securities held-to-maturity, at amortized cost
(market value $43,864) 43,596
Mortgage loans held for sale 89
Loans:
Commercial 53,578
Consumer 61,069
Real estate - commercial 51,606
Real estate - construction 7,064
Real estate - mortgage 96,502
Total loans 269,819
Less unearned income 42
Loans, net of unearned income 269,777
Less allowance for loan losses 4,309
Loans, net 265,468
Bank premises and equipment, net 11,654
Other real estate owned 152
Other assets 4,877
Total assets $ 391,282
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand deposits 30,133
Interest-bearing demand deposits 47,583
Savings deposits 49,043
Time deposits 168,493
Certificates of deposit of $100,000 and over 32,275
Total deposits 327,527
Federal funds purchased and securities sold under
agreements to repurchase 7,226
Other borrowed funds 15,577
Other liabilities 2,996
ESOP debt 950
Total liabilities 354,276
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 (42,776 shares) (1,208)
Retained earnings 19,545
Net unrealized gains (losses) on securities
available-for-sale (423)
Total stockholders' equity 37,006
Total liabilities and stockholders' equity $ 391,282
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> 5
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET
FNB Corporation and subsidiaries
December 31, 1996
In Thousands, Except Share and Per Share Data
<S> <C>
ASSETS
Cash and due from banks $ 10,277
Federal funds sold 2,500
Securities available-for-sale, at fair value 54,886
Securities held-to-maturity, at amortized cost
(market value $43,632) 43,089
Mortgage loans held for sale 330
Loans:
Commercial 56,461
Consumer 62,906
Real estate - commercial 52,232
Real estate - construction 4,926
Real estate - mortgage 96,856
Total loans 273,381
Less unearned income 57
Loans, net of unearned income 273,324
Less allowance for loan losses 4,179
Loans, net 269,145
Bank premises and equipment, net 10,283
Other real estate owned 185
Other assets 4,629
Total assets $ 395,324
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand deposits 30,798
Interest-bearing demand deposits 47,603
Savings deposits 47,998
Time deposits 171,003
Certificates of deposit of $100,000 and over 38,000
Total deposits 335,402
Securities sold under agreements to repurchase 4,795
Other borrowed funds 14,404
Other liabilities 3,643
ESOP debt 1,252
Total liabilities 359,496
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)
Retained earnings 18,285
Net unrealized gains (losses) on securities
available-for-sale (38)
Total stockholders' equity 35,828
Total liabilities and stockholders' equity $ 395,324
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> 6
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF INCOME
FNB Corporation and subsidiaries
Three Months Ended March 31, 1997
In Thousands, Except Share and Per Share Data
(Unaudited)
<S> <C>
Interest income:
Interest and fees on loans $ 6,330
Interest on securities:
Taxable 829
Nontaxable 590
Interest on federal funds sold 26
Total interest income 7,775
Interest expense:
Interest on interest-bearing demand deposits 316
Interest on savings deposits 376
Interest on time deposits 2,417
Interest on certificates of deposit of
$100,000 and over 504
Interest on federal funds purchased and
securities sold under agreements
to repurchase 59
Interest on other borrowed funds 196
Interest on ESOP debt 22
Total interest expense 3,890
Net interest income 3,885
Provision for loan losses 175
Net interest income after provision for
loan losses 3,710
Noninterest income:
Service charges on deposit accounts 240
Loan origination fees 36
Other service charges and fees 103
Other income 255
Securities gains (losses), net (21)
Total noninterest income 613
Noninterest expense:
Salaries and employee benefits 1,548
Occupancy and equipment expense, net 385
Credit card expense 129
Supplies expense 86
FDIC assessment expense 10
Other expenses 554
Total noninterest expense 2,712
Income before income tax expense 1,611
Income tax expense 351
Net income $ 1,260
Net income per share $ .78
Dividends declared per share $ --
Average number of shares outstanding 1,618,089
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> 7
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF INCOME
First National Bank and subsidiaries
Three Months Ended March 31, 1996
In Thousands, Except Share and Per Share Data
(Unaudited)
<S> <C>
Interest income:
Interest and fees on loans $ 6,082
Interest on securities:
Taxable 687
Nontaxable 557
Interest on federal funds sold 23
Total interest income 7,349
Interest expense:
Interest on interest-bearing demand deposits 307
Interest on savings deposits 345
Interest on time deposits 2,403
Interest on certificates of deposit of
$100,000 and over 469
Interest on federal funds purchased and
securities sold under agreements
to repurchase 46
Interest on other borrowed funds 53
Interest on subordinated capital notes 22
Interest on ESOP debt 32
Total interest expense 3,677
Net interest income 3,672
Provision for loan losses 105
Net interest income after provision for
loan losses 3,567
Noninterest income:
Service charges on deposit accounts 235
Loan origination fees 68
Other service charges and fees 95
Other income 115
Securities gains (losses), net 25
Total noninterest income 538
Noninterest expense:
Salaries and employee benefits 1,375
Occupancy and equipment expense, net 308
Credit card expense 121
Supplies expense 77
FDIC assessment expense 1
Other expenses 460
Total noninterest expense 2,342
Income before income tax expense 1,763
Income tax expense 421
Net income $ 1,342
Net income per share $ 0.84
Dividends declared per share $ --
Average number of shares outstanding 1,596,701
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> 8
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CASH FLOWS
FNB Corporation and subsidiaries
Three Months Ended March 31, 1997
In Thousands
(Unaudited)
Three Months Ended
March 31, 1997
<S> <C>
Cash flows from operating activities:
Net income $ 1,260
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 175
Depreciation and amortization of bank
premises and equipment 184
ESOP compensation 302
Amortization of premiums and accretion
of discounts, net 8
Loss on sale of securities, net 21
Net loss on sale of fixed assets and
other real estate 1
Net decrease in mortgage
loans held for sale 241
Increase in other assets (238)
Decrease in other liabilities (647)
Net cash provided by operating
activities 1,307
Cash flows from investing activities:
Net decrease in federal funds sold 2,500
Proceeds from sales of securities
available-for-sale 3,559
Proceeds from calls and maturities of
securities available-for-sale 3,659
Proceeds from calls and maturities of
securities held-to-maturity 555
Purchase of securities available-for-sale (6,489)
Purchase of securities held-to-maturity (1,224)
Net decrease in loans 3,618
Proceeds from sale of other real estate owned 33
Recoveries on loans previously charged off 53
Bank premises and equipment expenditures (1,555)
Net cash (used in) investing activities 4,709
Cash flows from financing activities:
Net decrease in deposits (7,875)
Net increase in federal funds
purchased, securities sold under agreements
to repurchase and other borrowed funds 3,604
Principal payments on ESOP debt (302)
Net cash provided by financing activities (4,573)
Net increase in cash and due from banks 1,443
Cash and due from banks at beginning of period 10,277
Cash and due from banks at end of period $ 11,720
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> 9
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CASH FLOWS
First National Bank and subsidiaries
Three Months Ended March 31, 1996
In Thousands
(Unaudited)
Three Months Ended
March 31, 1996
<S> <C>
Cash flows from operating activities:
Net income $ 1,342
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 105
Depreciation and amortization of bank
premises and equipment 131
ESOP compensation 302
Amortization of premiums and accretion
of discounts, net 28
Gain on sale of securities, net (25)
Gain on sale of equipment (2)
Net increase in mortgage
loans held for sale (582)
Increase in other assets (435)
Decrease in other liabilities (696)
Net cash provided by operating activities 168
Cash flows from investing activities:
Net decrease in federal funds sold 830
Proceeds from calls and maturities of
securities available-for-sale 3,467
Proceeds from calls and maturities of
securities held-to-maturity 1,017
Purchase of securities available-for-sale (5,247)
Purchase of securities held-to-maturity (4,343)
Net increase in loans (265)
Recoveries on loans previously charged off 32
Bank premises and equipment expenditures (599)
Net cash (used in) investing activities (5,108)
Cash flows from financing activities:
Net decrease in deposits (3,144)
Net increase in federal funds
purchased, securities sold under agreements
to repurchase and other borrowed funds 6,995
Principal payments on ESOP debt (302)
Principal payments on subordinated capital notes (27)
Net cash provided by financing activities 3,522
Net decrease in cash and due from banks (1,418)
Cash and due from banks at beginning of period 8,818
Cash and due from banks at end of period $ 7,400
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> 10
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FNB Corporation and subsidiaries
Three Months Ended March 31, 1997
In Thousands
(Unaudited)
1997
<S> <C>
Balance, beginning of period $ 35,828
Net income for period 1,260
ESOP shares allocated upon loan repayment 302
Change in net unrealized gains (losses) on securities
available-for-sale, net of income taxes (384)
Balance, end of period $ 37,006
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> 11
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
First National Bank and subsidiaries
Three Months Ended March 31, 1996
In Thousands
(Unaudited)
1996
<S> <C>
Balance, beginning of period $ 32,191
Net income for period 1,342
ESOP shares allocated upon loan repayment 302
Change in net unrealized gains (losses) on securities
available-for-sale, net of income taxes (320)
Balance, end of period $ 33,515
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> 12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FNB Corporation and subsidiaries
March 31, 1997 and 1996
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. All adjustments were of a normal recurring nature.
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,
various regulatory agencies, as an integral part of their examination process,
<PAGE> 13
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 its
wholly-owned subsidiaries (collectively, the "Corporation"). 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 Corporation 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 Corporation had no trading securities at December 31, 1996, or
March 31, 1997. 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
estate mortgage loans is accrued based on the average loans
<PAGE> 14
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 is amortized as an adjustment of the
related loan's yield 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 in lieu 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.
(h) Net Income Per Share
Net income per share computations are based on the weighted
average number of shares outstanding during each year. The
<PAGE> 15
weighted average shares outstanding do not include unearned shares
held by the Employee Stock Ownership Plan (ESOP). The shares held
by the ESOP are not considered outstanding for net income per
share calculations until the shares are released.
(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 Corporation.
(2) Restrictions on Cash
Federal reserve regulations require the Bank to maintain certain average
balances as cash reserves. The reserve requirements approximated $3,435
and $3,328 at March 31, 1997 and December 31, 1996, respectively.
(3) Securities Available-for-Sale
The following sets forth the composition of securities available-for-sale,
which are reported at fair value, at March 31, 1997 and December 31, 1996:
<TABLE>
<CAPTION>
Gross Gross Approx.
Amortized Unrealized Unrealized Fair
March 31, 1997 Costs Gains Losses Values
<S> <C> <C> <C> <C>
U.S. Treasury $ 8,147 14 (85) 8,076
U.S. Government agencies
and corporations 38,634 38 (697) 37,975
States and political
subdivisions 3,980 59 (15) 4,024
Other securities 3,606 46 (1) 3,651
Totals $ 54,367 157 (798) 53,726
</TABLE>
<TABLE>
<CAPTION>
Gross Gross Approx.
Amortized Unrealized Unrealized Fair
December 31, 1996 Costs Gains Losses Values
<S> <C> <C> <C> <C>
U.S. Treasury $ 5,634 29 (16) 5,647
U.S. Government agencies
and corporations 38,165 130 (306) 37,989
States and political
subdivisions 3,981 79 (13) 4,047
Other securities 7,164 63 (24) 7,203
Totals $ 54,944 301 (359) 54,886
</TABLE>
<PAGE> 16
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
March 31, 1997 Costs Values
<S> <C> <C>
Due in one year or less $ 4,596 4,604
Due after one year through five years 19,072 18,881
Due after five years through ten years 26,412 25,953
Due after ten years 4,287 4,288
Totals $54,367 53,726
</TABLE>
Realized gains and losses on securities available-for-sale were not
material in the first quarter of 1997 and 1996.
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
$17,803 at March 31, 1997 and $17,650 at December 31, 1996.
(4) Securities Held-To-Maturity
The amortized costs, gross unrealized gains and losses, and approximate
fair values of securities held-to-maturity at March 31, 1997 and
December 31, 1996 are as follows:
<TABLE>
<CAPTION>
Gross Gross Approx.
Amortized Unrealized Unrealized Fair
March 31, 1997 Costs Gains Losses Values
<S> <C> <C> <C> <C>
States and political
subdivisions $43,401 630 (362) 43,669
Other Securities 195 - - 195
Totals $43,596 630 (362) 43,864
</TABLE>
<TABLE>
<CAPTION>
Gross Gross Approx.
Amortized Unrealized Unrealized Fair
December 31, 1996 Costs Gains Losses Values
<S> <C> <C> <C> <C>
U.S. Government agencies
and corporations $ 500 1 - 501
States and political
subdivisions 42,394 830 (288) 42,936
Other securities 195 - - 195
Totals $43,089 831 (288) 43,632
</TABLE>
<PAGE> 17
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
March 31, 1997 Costs Values
<S> <C> <C>
Due in one year or less $ 2,092 2,093
Due after one year through five years 14,863 15,006
Due after five years through ten years 25,443 25,571
Due after ten years 1,198 1,194
Totals $43,596 43,864
</TABLE>
Realized gains and losses on securities held-to-maturity were not
material in the first quarter of 1997 and 1996.
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
$14,692 at March 31, 1997 and $14,690 at December 31, 1996.
(5) Loans
At March 31, 1997 and December 31, 1996, there were direct loans to
executive officers and directors of $3,194 and $4,121, respectively. In
addition, there were loans of $8,234 and $7,184 at March 31, 1997 and
December 31, 1996, respectively, which directors endorsed or had been
made to companies in which directors had an equity interest.
At March 31, 1997 and December 31, 1996, the Corporation had sold
without recourse, participations in various loans to financial
institutions and other customers of the Corporation in the amount of
$29,226 and $29,200, respectively.
(6) Allowance for Loan Losses and Impaired Loans
A loan is considered impaired when, based on management's judgment, the
Corporation 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 Corporation'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:
<PAGE> 18
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1997 1996
<S> <C> <C>
Balance at beginning of period $ 4,179 3,988
Provisions for loan losses 175 105
Loan recoveries 54 32
Loan charge-offs (99) (41)
Balance at end of period $ 4,309 4,084
</TABLE>
Nonperforming assets consist of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1997 l996
<S> <C> <C>
Nonaccrual loans $ 885 573
Other real estate owned 152 185
Total nonperforming assets $ 1,037 758
</TABLE>
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>
Three Months Ended
March 31,
1997 1996
<S> <C> <C>
Proforma interest - nonaccrual loans $ 24 38
Recorded interest - nonaccrual loans -- --
</TABLE>
There were no material commitments to lend additional funds to customers
whose loans were classified as nonperforming at March 31, 1997.
(7) Bank Premises and Equipment, Net
Bank premises and equipment are stated at cost less accumulated
depreciation and amortization as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
<S> <C> <C>
Land $ 1,962 1,174
Buildings 8,591 2,763
Furniture and equipment 5,595 4,936
Leasehold improvements 380 379
Construction in progress -- 5,736
16,528 14,988
Less accumulated depreciation
and amortization 4,874 4,705
Totals $ 11,654 10,283
</TABLE>
<PAGE> 19
(8) Other Borrowed Funds
Other borrowed funds include advances from the Federal Home Loan Bank of
Atlanta totaling $12,724 and $12,779 on March 31, 1997 and December 31,
1996, 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
whereby the Corporation 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
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
March 31, 1997, retained net profits which were free of such restriction
approximated $7,472.
(12) Supplemental Cash Flow Information
The Corporation paid $3,674 and $3,677 for interest and it paid $6 and
$0 for income taxes for the three month periods ended March 31, 1997 and
1996, respectively.
(13) Commitments and Contingencies
The Corporation 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.
<PAGE> 20
(14) Financial Instruments with Off-Balance-Sheet Risk
The Corporation 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 Corporation has in
particular classes of financial instruments.
The Corporation'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 of those instruments. The Corporation 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 $12,629 at March 31, 1997, and
$12,732 at December 31, 1996, the Corporation may not require collateral
or other security to support the following financial instruments with
credit risk:
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
Contract Amount
<S> <C> <C>
Financial instruments whose contract amounts
represent credit risk:
Commitments to extend credit $ 50,990 50,209
Standby letters of credit and
financial guarantees written 4,390 3,479
</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 Corporation 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.
<PAGE> 21
The Corporation sells portions of mortgage and commercial loans to other
investors in the normal course of business ("participations"). In
certain cases the Corporation has agreed to repurchase the loan from the
investor in the event the debtor defaults. The Corporation's total
exposure at March 31, 1997 under such agreements approximates $8,776.
(15) Concentrations of Credit Risk
The Corporation 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
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 $45
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> 22
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.
1997 Compared to 1996
Net Income
Net income of $1,260 for the first three months of 1997 represented a decrease
of $82 over earnings of $1,342 during the same period of 1996. Earnings per
share were $0.78 for the first quarter of 1997 and $0.84 for the comparable
1996 period. Decreased current year earnings were primarily the result of an
increase in noninterest expense associated with the opening of three new
branch offices during the previous nine months.
Net Interest Income
The principal source of earnings for the Corporation 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
$3,885 for the three months ended March 31, 1997, an increase of $213 from the
same period in 1996. The increase in net interest income was primarily the
result of growth in average earning assets, partially offset by growth in
interest bearing liabilities. Average earning asset growth totaled $32,841
(9.72%) for the first quarter of 1997 over the respective prior year period.
The largest component of the increase in earning assets was average loans,
reflecting an increase of $17,772 (7.04%) for the first quarter of 1997.
Growth in the loan portfolio was concentrated primarily in real estate loans
reflecting an increase of $14,125 for the first quarter of 1997. Average
securities increased $14,612 (17.50%) for the first quarter of 1997 and were
used as an alternative investment for funds in excess of loan demand.
Average interest-bearing liabilities increased $26,478 (9.01%) for the first
quarter of 1997 over the respective prior year period. The largest component
of interest-bearing liabilities was average deposits, reflecting an increase
of $16,737 for the first quarter of 1997. Growth in the deposit portfolio was
concentrated in certificates of deposit of $100 and over with an increase of
<PAGE> 23
$2,760 and in time deposits with an increase of $6,285 and in demand deposits
with an increase of $4,402 for the first quarter of 1997. Successful deposit
promotions and more aggressive bidding for deposits accounted for the
increase. Other borrowed funds increased $10,021 for the first quarter of
1997. The primary reason for the change was an increase in advances from the
Federal Home Loan Bank of Atlanta, as the Corporation increasingly utilized
this source of funds.
Net interest yield decreased to 4.58% for the first quarter of 1997 from 4.74%
for the respective prior year period. The yield on average earning assets
decreased 32 basis points, from 9.10% to 8.78% for the first quarter of 1997.
The cost of interest-bearing liabilities decreased 14 basis points, from 5.00%
to 4.86% for the first quarter of 1997. Overall, 153.2%, of the net interest
income increase for the first quarter of 1997 was attributable to changes in
the volume of net interest-earning assets and interest-bearing liabilities.
The difference, a decrease of 53.2% was due to a change in average rates.
Provision for Loan Losses
The provision for loan losses was $175 and $105, respectively, for the first
quarter ended March 31, 1997 and 1996. Net charge-offs amounted to $46 and $9,
respectively, for the first quarter ended March 31, 1997 and 1996. The
allowance for loan losses was $4,309, 1.60% of outstanding loans, at March 31,
1997, and $4,179, 1.53% of outstanding loans, at December 31, 1996. 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 $613 for the quarter ended March 31, 1997, and $538 for the
quarter ended March 31, 1996. The increase in noninterest income resulted
primarily from an increase in fees on loans sold and trust fees. These
increases were partially offset by reductions in other areas, most notably in
realized losses on the sale of securities.
Noninterest Expense
Noninterest expense, consisting of salaries and employee benefits, occupancy
costs, credit cards, supplies, FDIC assessment and other expenses was $2,712
for the quarter ended March 31, 1997, and $2,342 for the quarter ended March
31, 1996. The net increase in noninterest expense resulted from increases in
several categories, primarily personnel costs, occupancy and equipment expense
and other expenses. Personnel costs increased primarily as the result of
merit increases, and additional personnel to staff three new branches. The
increases in occupancy and equipment expense and other expense were directly
related to the new branches and the new corporate office building which opened
in February, 1997. These increases were partially offset by reductions in
other areas.
<PAGE> 24
Income Taxes
Income tax expense as a percentage of pre-tax income was 21.8% for the
quarter ended March 31, 1997 and 23.9% for the quarter ended March 31, 1996.
The decline in the rate was primarily due to the continuing shift from taxable
to nontaxable investment securities and an increase in nontaxable industrial
development authority loan interest.
Balance Sheet
Total assets of the Corporation at March 31, 1997, were $391,282, compared to
$395,324 at December 31, 1996. Total loans were $269,819 at March 31, 1997, a
decrease of $3,562 from December 31, 1996. Loan growth was experienced in the
real estate-construction portfolio and amounted to $2,138. All other loan
portfolios experienced declines of varying amounts. The increase in bank
premises and equipment of $1,371 represented advances for the construction of
the new corporate headquarters building. Cash and due from banks increased
$1,443 while Federal Funds sold decreased $2,500 reflecting a small decrease
in liquidity.
Total deposits at March 31, 1997, were $327,527, a decrease of $7,875 from
December 31, 1996. Certificates of deposit of $100 and over decreased $5,725
and time deposits decreased $2,510 since year end. These decreases were
partially offset by an increase of $1,045 in savings deposits since year end.
Depositors continue to shift funds among the various types of deposit
instruments seeking the most advantageous return while maintaining an
acceptable level of liquidity. Competition for deposits among local financial
institutions continues to be strong.
Other borrowed funds at March 31, 1997, were $15,577, an increase of $1,173
from December 31, 1996. Other borrowed funds is composed primarily of
advances from the Federal Home Loan Bank of Atlanta.
Stockholders' Equity
Stockholders' equity was $37,006 at March 31, 1997, compared to $35,828 at
December 31, 1996. This increase of $1,178 was the net result of earnings
retention, an increase of $385 in net unrealized loss (net of tax) on
securities available-for-sale, and a decrease of $302 in unearned ESOP shares
resulting from principal repayments on ESOP debt.
All financial institutions are required to maintain minimum levels of
regulatory capital. The Federal Reserve and the Office of Comptroller of the
Currency (OCC) have established substantially similar risk-based and leveraged
capital standards for financial institutions they regulate. Under the risk-
based capital requirements of these regulatory agencies, the Corporation is
required to maintain a minimum ratio of total capital to risk-weighted assets
of at least 8%. At least half of the total capital is required to be "Tier 1
capital", which consists principally of common and certain qualifying
preferred shareholders' equity, less certain intangibles and other
adjustments. The remainder, "Tier 2 capital", consists of a limited amount of
subordinated and other qualifying debt and a limited amount of the general
loan loss reserve.
<PAGE> 25
In addition, the federal regulatory agencies have established a minimum
leveraged capital ratio (Tier 1 capital to tangible assets). These guidelines
provide for a minimum leveraged capital ratio of 3% for banks and their
respective holding companies that meet certain specified criteria, including
that they have the highest regulatory examination rating and are not
contemplating significant growth or expansion. All other institutions are
expected to maintain a leverage ratio of at least 100 to 200 basis points
above that minimum. The guidelines also provide that banking organizations
experiencing internal growth or making acquisitions will be expected to
maintain strong capital positions substantially above the minimum supervisory
levels, without significant reliance on intangible assets.
At March 31, 1997, 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 March 31, 1997, totaled $43 compared to
$595 at December 31, 1996. In addition, nonaccrual loans and other real
estate owned totaled $1,037 at March 31, 1997, compared to $758 at December
31, 1996. The New River Valley economy continues to improve, and such
improvement has been reflected in a declining trend of nonperforming assets in
recent years.
Liquidity
Liquidity is the ability to provide sufficient cash flow to meet financial
commitments and to fund additional loan demand or withdrawal of existing
deposits. Liquidity remains sufficient, as assets are maintained on a short-
term basis to meet the liquidity demands anticipated by management. Funding
sources primarily include customer-based core deposits and cash generated by
operations. Another source of liquidity is additional borrowings from the
Federal Home Loan Bank of Atlanta; in excess of $15 million of the
Corporation's borrowing capacity under an existing agreement with the FHLB
remains unused as of March 31, 1997, based on the level of qualifying
portfolio mortgage loans available for securitization. Secondary sources of
liquidity are available should the need arise, including approximately $28,000
in unused Federal Funds lines of credit and the ability to liquidate assets
held for sale, especially investment securities.
The only significant source of cash for the holding company is transfers from
its bank subsidiary in the form of dividends, loans, or advances. The most
restrictive regulatory limitation placed on the amount of funds that may be
transferred from the Bank to the holding company is that placed on dividends.
Specifically, the maximum amount of dividends that may be paid by the Bank in
any calendar year without prior regulatory approval is the net profits of that
year, as defined, combined with the retained net profits for the two preceding
years. In effect, this limits 1997 dividends (unless prior regulatory
approval is obtained) to $6,212 plus year-to-date 1997 net profits as of the
declaration date. This limitation is not expected to have any material impact
on the liquidity of the holding company in 1997.
Recent Developments
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards (SFAS) No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." This
<PAGE> 26
Statement provides standards for distinguishing between transfers of financial
assets that should be accounted for as sales and those that should be
accounted for as collateralized borrowings. In essence, transactions in which
the transferor has surrendered control of the financial asset must be recorded
as sales, and those in which control has not been surrendered should be
recorded as borrowings. The Statement specifies various circumstances that
would indicate whether control has been effectively surrendered or not.
Transactions engaged in by the Corporation which are covered by the Statement
include sales of loans with retainage of servicing rights, securities sold
under agreement to repurchase (repurchase agreements), participations sold or
purchased, and borrowings secured by loans. The Statement as issued was
required to be adopted prospectively to transfers and servicing of financial
assets and extinguishment of liabilities occurring after December 31, 1996.
No restatement of previously issued financial statements is permitted.
However, the FASB has since issued SFAS No. 127, which defers the adoption
date for certain portions of SFAS No. 125 for one year. The primary types of
transactions engaged in by the Corporation for which the delay is applicable
are collateralized borrowings and repurchase agreements. Management does not
expect SFAS No. 125 to have a significant impact on financial position or
results of operations.
The FASB has also issued Statement of Financial Accounting Standards
No. 128, "Earnings per Share", which supersedes existing standards for
calculating and disclosing earnings per share (EPS). The new standard
requires the disclosure of Basic EPS and, where potential dilution
exists, Diluted EPS. Basic EPS is calculated using only the actual
weighted average number of common shares outstanding and the income available
to common stockholders. Diluted EPS adjusts the income and number of shares
to reflect the potential effects of stock options, warrants, convertible debt,
and other potentially dilutive securities. The Statement is effective for
financial statements issued for periods ending after December 15, 1997,
including interim periods; earlier application is not permitted. However,
once adopted, the Statement requires restatement of all prior-period EPS data
presented. Based on the current capital structure of the Corporation,
management does not expect SFAS No. 128 to materially impact earnings per
share.
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> 27
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 May 9, 1997 By: s/Samuel H. Tollison
Samuel H. Tollison
President
Date May 9, 1997 By: s/Perry D. Taylor
Perry D. Taylor
Chief Financial Officer
<PAGE> 28
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.
(3)(i) Articles of Incorporation
Registrant's Articles of Incorporation, filed with the
Commission as exhibit 3.1 to the Annual Report on Form 10-K
for the year ended December 31, 1996, is incorporated herein
by reference.
(3)(ii) Bylaws
Registrant's Bylaws, filed with the Commission as exhibit
3.2 to the Annual Report on Form 10-K for the year ended
December 31, 1996, is incorporated herein by reference.
(27) Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 11,720
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 53,726
<INVESTMENTS-CARRYING> 43,596
<INVESTMENTS-MARKET> 43,864
<LOANS> 269,819
<ALLOWANCE> 4,309
<TOTAL-ASSETS> 391,282
<DEPOSITS> 327,527
<SHORT-TERM> 11,079
<LIABILITIES-OTHER> 2,996
<LONG-TERM> 12,674
0
0
<COMMON> 8,310
<OTHER-SE> 28,696
<TOTAL-LIABILITIES-AND-EQUITY> 391,282
<INTEREST-LOAN> 6,330
<INTEREST-INVEST> 1,419
<INTEREST-OTHER> 26
<INTEREST-TOTAL> 7,775
<INTEREST-DEPOSIT> 3,613
<INTEREST-EXPENSE> 3,890
<INTEREST-INCOME-NET> 3,885
<LOAN-LOSSES> 175
<SECURITIES-GAINS> (21)
<EXPENSE-OTHER> 2,712
<INCOME-PRETAX> 1,611
<INCOME-PRE-EXTRAORDINARY> 1,611
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,260
<EPS-PRIMARY> .78
<EPS-DILUTED> .78
<YIELD-ACTUAL> 4.58
<LOANS-NON> 885
<LOANS-PAST> 43
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 4,179
<CHARGE-OFFS> 99
<RECOVERIES> 53
<ALLOWANCE-CLOSE> 4,308
<ALLOWANCE-DOMESTIC> 3,088
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,221
</TABLE>
