FORM 10-K-ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-K
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT of 1934.
For the fiscal year ended December 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 24068
(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.)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common stock, $5 par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES X NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
The aggregate market value of voting stock held by non-affiliates of the
registrant as of March 9, 1998, was $72,540,275.
3,384,015 shares outstanding as of March 9, 1998
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Corporation's Annual Report to Stockholders for the year ended
December 31, 1997, are incorporated into Parts I and II hereof. Portions of
the Corporation's Notice of Annual Meeting and Proxy Statement for the Annual
Meeting of May 12, 1998, are incorporated into Part III hereof.
<PAGE>
PART I
Item 1. Business
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
(collectively, the "Corporation")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.
First National Bank, which was organized in 1905, does a general banking
business, serving the commercial, agricultural, and personal banking needs of
its trade territory, commonly referred to as the New River Valley, which
consists of Montgomery County, Virginia and portions of adjacent counties.
The Bank engages in and offers a full range of banking services, including
trust services; demand, savings, and time deposits used to fund the loan
demand in our trade area; commercial, farm, consumer installment, mortgage,
credit card, FHA and SBA guaranteed loans.
Under national banking law, nontraditional activities of a bank must be
operated through a corporate subsidiary of the bank. During 1992, FNB formed
a wholly-owned subsidiary in order to expand its business operations. FNB
Financial Services, Inc. is a member of the Virginia Title Center, L.L.C. and
acts as an agent in the issuance of title insurance policies. Additionally,
this subsidiary has been licensed by the Commonwealth of Virginia to offer
annuity products through First National's Trust Department. Any reference in
this report to the operations of the Corporation shall include the activities
of FNB Financial Services, Inc.
The local economy is tied primarily to the area's three largest employers -
Virginia Polytechnic Institute and State University, with a student population
in excess of 23,000; Radford University, with a student population in excess
of 9,000; and the Radford Arsenal, a large munitions plant operated under
contract to the U.S. Army by the Hercules Corporation. Other industries
<PAGE>
include a wide variety of manufacturing concerns and agriculture-related
enterprises. The Bank's main office is located in Christiansburg, the County
Seat, with offices strategically located to take advantage of its trade area's
population mix. Of the Bank's ten full service offices, eight are located in
Montgomery County, one in the City of Radford and one in the Town of Dublin.
One paying and receiving office is located in Montgomery County.
Refer to the Corporation's 1997 Annual Report to Stockholders under the
heading "Selected Consolidated Financial Information" for a five year summary
of selected consolidated financial information which is incorporated by
reference into this Form 10-K.
Construction of a new corporate headquarters facility was completed during the
first quarter of 1997.
Competition. The Corporation is the largest bank in the area, with
approximately 65 percent of those deposits held by independent banks. It is
estimated that the Corporation holds 37 percent of total deposits in its trade
area including the offices of those state-wide and multi-state bank holding
companies located in our trade area. Competition in the trade area consists of
seven state-wide and multi-state bank holding companies, one independent bank,
two offices of a regional bank, and five credit unions.
Loan Commitments. The portfolio is not concentrated within any single industry
or group of related industries, nor is there any material risk other than that
which is expected in the normal course of business of a bank in this location.
Corporation policy establishes lending limits for each officer. Loan requests
for amounts exceeding loan officer lending authority are referred to the
officer loan committee which can approve loans up to 80% of the bank's legal
lending limit. Loan requests exceeding this limit are referred to the
Executive Committee of the Board of Directors. The following table relates
outstanding loans for the dates indicated (in thousands):
<TABLE>
<CAPTION>
December 31,
1997 1996
<S> <C> <C>
Commercial $ 64,247 56,461
Consumer 66,059 62,906
Real estate - commercial 56,404 52,232
Real estate - construction 8,657 4,926
Real estate - mortgage 95,703 96,856
Total loans $ 291,070 273,381
</TABLE>
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 in excess of 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 the event 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.
<PAGE>
Unless noted otherwise, the Corporation does not require collateral or other
security to support the following financial instruments with credit risk (in
thousands):
<TABLE>
<CAPTION>
December 31,
1997 1996
Contract Amounts
Financial instruments whose contract amounts
represent credit risk:
<S> <C> <C>
Commitments to extend credit $ 63,194 50,209
Standby letters of credit and
financial guarantees written 4,300 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 of the 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 by the Corporation 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 by the
Corporation 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 loans to customers.
Collateral held varies but may include securities, accounts receivable,
inventory, property, plant and equipment and income-producing commercial
properties.
Deposit Concentrations. The Corporation's deposits are obtained from a wide
range of depositors. There are no material concentrations of deposits from
any individual or organization.
Employees. The Corporation had 204 full-time equivalent employees as of
December 31, 1997, of which 63 were officers.
Securities Act Guide 3. Statistical Disclosure by Bank Holding Companies. The
following schedules are included:
Average Balance Sheets
Rate/Volume Variance
Securities Available-For-Sale at Fair Value
Securities Held-To-Maturity at Amortized Cost
Securities--Maturity/Yield Schedule
Types of Loans
Loan Maturities and Interest Sensitivity
Nonperforming Assets and Past Due Loans
Pro forma/Recorded Interest on Nonaccrual Loans
Analysis of Allowance for Loan Losses
Allocation of Allowance for Loan Losses
Deposit Maturities
Interest Sensitivity Analysis
<PAGE>
<TABLE>
<CAPTION>
AVERAGE BALANCE SHEET
1997
Average
Average Income/ Yield/
(thousands) Balance Expense Rate
<S> <C> <C> <C>
ASSETS
Loans (Net of unearned income) (1)(2) $278,824 26,959 9.67%
Securities:
Taxable 55,721 3,641 6.53
Nontaxable (2) 46,581 3,596 7.72
Total securities 102,302 7,237 7.07
Federal funds sold 6,376 344 5.40
Total interest-earning assets 387,502 34,540 8.91
Allowance for loan losses (4,316)
Cash and due from banks, noninterest-
bearing 11,061
Bank premises and equipment, net 11,965
Other real estate owned 77
Other assets 4,719
Total assets $411,008
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposit:
Demand $ 47,394 1,367 2.88%
Savings 49,091 1,456 2.97
Time 174,225 10,071 5.78
Certificates of deposit of
$100,000 and over 36,724 2,148 5.85
Total interest-bearing deposits 307,434 15,042 4.89
Federal funds purchased and securities
sold under agreements to repurchase 5,849 250 4.27
Other borrowed funds 24,469 1,385 5.66
ESOP debt 942 88 9.34
Subordinated capital notes 0 0 0.00
Total interest-bearing liabilities 338,694 16,765 4.95
Demand deposits, noninterest-bearing 31,358
Other liabilities 2,941
Stockholders' equity 38,015
Total liabilities and stockholders'
equity $411,008
Interest income and rate earned $34,540 8.91%
Interest expense and rate paid 16,765 4.95
Interest rate spread 3.96
NET INTEREST INCOME AND NET YIELD
ON AVERAGE EARNING ASSETS $17,775 4.59%
</TABLE>
(1) Interest on nonaccrual loans has been included only to the extent
reflected in the statements of income. Nonaccrual loans are included in
average balances for yield computations.
(2) Income and rates on non-taxable loans and securities are computed on a tax
equivalent basis using a federal tax rate of 34% for 1997.
<PAGE>
<TABLE>
<CAPTION>
AVERAGE BALANCE SHEET
1996
Average
Average Income/ Yield/
(thousands) Balance Expense Rate
<S> <C> <C> <C>
ASSETS
Loans (Net of unearned income) (1)(2) $ 257,571 25,227 9.79%
Securities:
Taxable 47,420 2,998 6.32
Nontaxable (2) 45,660 3,603 7.89
Total securities 93,080 6,601 7.09
Federal funds sold 3,496 188 5.38
Total interest-earning assets 354,147 32,016 9.04
Allowance for loan losses (4,116)
Cash and due from banks, noninterest-
bearing 8,524
Bank premises and equipment, net 6,772
Other real estate owned 277
Other assets 4,363
Total assets $ 369,967
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposits:
Demand $ 44,127 1,280 2.90%
Savings 47,253 1,395 2.95
Time 164,236 9,497 5.78
Certificates of deposit of
$100,000 and over 32,219 1,856 5.76
Total interest-bearing deposits 287,835 14,028 4.87
Federal funds purchased and securities
sold under agreements to repurchase 5,461 229 4.19
Other borrowed funds 9,846 574 5.83
ESOP debt 1,469 118 8.03
Subordinated capital notes 661 67 10.14
Total interest-bearing liabilities 305,272 15,016 4.92
Demand deposits, noninterest-bearing 27,862
Other liabilities 2,583
Stockholders' equity 34,250
Total liabilities and stockholders'
equity $369,967
Interest income and rate earned $32,016 9.04%
Interest expense and rate paid 15,016 4.92
Interest rate spread 4.12
NET INTEREST INCOME AND NET YIELD
ON AVERAGE EARNING ASSETS $17,000 4.80%
</TABLE>
(1) Interest on nonaccrual loans has been included only to the extent
reflected in the statements of income. Nonaccrual loans are included in
average balances for yield computations.
(2) Income and rates on non-taxable loans and securities are computed on a tax
equivalent basis using a federal tax rate of 34% for 1996.
<PAGE>
<TABLE>
<CAPTION>
AVERAGE BALANCE SHEET
1995
Average
Average Income/ Yield/
(thousands) Balance Expense Rate
<S> <C> <C> <C>
ASSETS
Loans (net of unearned income)(1)(2) $ 234,904 23,237 9.89%
Securities:
Taxable 50,178 3,109 6.20
Nontaxable(2) 37,294 2,974 7.97
Total securities 87,472 6,083 6.95
Federal funds sold 3,594 186 5.18
Total interest-earning assets 325,970 29,506 9.05
Allowance for loan losses (3,923)
Cash and due from banks, noninterest-
bearing 7,748
Bank premises and equipment, net 4,350
Other real estate owned 416
Other assets 4,717
Total assets $ 339,278
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposits:
Demand $ 42,715 1,410 3.30%
Savings 52,828 1,692 3.20
Time 149,923 8,740 5.83
Certificates of deposit of $100,000
and over 26,170 1,603 6.13
Total interest-bearing deposits 271,636 13,445 4.95
Federal funds purchased and securities
sold under agreements to repurchase 4,874 232 4.76
Other borrowed funds 2,722 144 5.29
ESOP debt 2,273 173 7.61
Subordinated capital notes 978 87 8.90
Total interest-bearing liabilities 282,483 14,081 4.98
Demand deposits, noninterest-bearing 24,501
Other liabilities 2,414
Stockholders' equity 29,880
Total liabilities and
stockholders' equity $339,278
Interest income and rate earned $29,506 9.05%
Interest expense and rate paid 14,081 4.98
Interest rate spread 4.07
NET INTEREST INCOME AND NET YIELD
ON AVERAGE EARNING ASSETS $15,425 4.73%
</TABLE>
(1) Interest on nonaccrual loans has been included only to the extent
reflected in the statements of income. Nonaccrual loans are included in
average balances for yield computations.
(2) Income and rates on non-taxable loans and securities are computed on a tax
equivalent basis using a federal tax rate of 34% for 1995.
<PAGE>
<TABLE>
<CAPTION>
RATE/VOLUME VARIANCE
1997 Compared to 1996 1996 Compared to 1995
Due to Due to Due to Due to
(thousands) Change Volume Rate Change Volume Rate
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
Loans $ 1,732 2,068 (336) 1,990 2,231 (241)
Securities:
Taxable 643 534 109 (111) (173) 62
Nontaxable (7) 72 (79) 629 664 (35)
Federal funds sold 156 155 1 2 (5) 7
Total 2,524 2,829 (305) 2,510 2,717 (207)
INTEREST EXPENSE
Demand 87 94 (7) (130) 44 (174)
Savings 61 54 7 (297) (172) (125)
Time 574 578 (4) 757 831 (74)
Certificates of deposit
of $100,0000 and over 292 262 30 253 359 (106)
Federal funds purchased
and securities sold
under agreements to
repurchase 21 16 5 (3) 26 (29)
Other borrowed funds 811 840 (29) 430 396 34
ESOP debt (30) (47) 17 (55) (63) 8
Subordinated capital notes (67) (33) (34) (20) (30) 10
Total 1,749 1,764 (15) 935 1,391 (456)
Net interest income $ 775 1,065 (290) 1,575 1,326 249
</TABLE>
Variances caused by changes in rate times the changes in volume are allocated
equally.
<PAGE>
<TABLE>
<CAPTION>
SECURITIES AVAILABLE-FOR-SALE AT FAIR VALUE
December 31,
(thousands) 1997 1996 1995
<S> <C> <C> <C>
U.S. Treasury $ 8,162 5,647 9,639
U.S. Government agencies and corporations 47,020 37,989 25,874
States and political subdivisions 3,070 4,047 2,388
Other securities 4,604 7,203 9,950
Totals $ 62,856 54,886 47,851
</TABLE>
<TABLE>
<CAPTION>
SECURITIES HELD-TO-MATURITY AT AMORTIZED COST
December 31,
(thousands) 1997 1996 1995
<S> <C> <C> <C>
U.S. Treasury $ -- -- --
U.S. Government agencies and corporations -- 500 500
States and political subdivisions 42,360 42,394 39,110
Other securities 60 195 501
Totals $ 42,420 43,089 40,111
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SECURITIES--MATURITY/YIELD SCHEDULE
As of December 31, 1997
Securities Available-for-Sale
Approximate Taxable
Amortized Fair Equivalent
(thousands) Costs Values Yield(1)
<S> <C> <C> <C>
U.S. Treasury:
Within 1 year $ 1,001 1,001 5.49%
1 through 5 years 5,011 5,055 6.17
6 through 10 years 2,097 2,106 6.02
Total 8,109 8,162 6.04
U.S. Government
agencies and corporations:
Within 1 year 7,048 7,012 5.26
1 through 5 years 7,033 7,032 6.34
6 through 10 years 32,643 32,835 6.87
Over 10 years 140 141 6.57
Total 46,864 47,020 6.54
State and political
subdivisions:
Within 1 year 200 201 6.88
1 through 5 years 500 504 10.52
6 through 10 years 2,049 2,150 7.85
Over 10 years 213 215 7.57
Total 2,962 3,070 8.22
Other securities:
Within 1 year 576 579 6.81
1 through 5 years 497 523 10.00
6 through 10 years 627 626 6.21
Over 10 years 2,876 2,876 7.00
Total 4,576 4,604 7.20
$ 62,511 62,856 6.61
</TABLE>
(1) Yields on non-taxable investment securities are computed on a tax
equivalent basis using a federal tax rate of 34%.
<PAGE>
<TABLE>
<CAPTION>
SECURITIES--MATURITY/YIELD SCHEDULE
As of December 31, 1997
Securities Held-To-Maturity
Approximate Taxable
Amortized Fair Equivalent
(thousands) Costs Values Yield(1)
<S> <C> <C> <C>
U.S. Treasury:
Within 1 year $ 0 0 0.00%
1 through 5 years 0 0 0.00
6 through 10 years 0 0 0.00
Total 0 0 0.00
U.S. Government
agencies and corporations:
Within 1 year 0 0 0.00
1 through 5 years 0 0 0.00
6 through 10 years 0 0 0.00
Over 10 years 0 0 0.00
Total 0 0 0.00
State and political subdivisions:
Within 1 year 2,519 2,529 7.59
1 through 5 years 19,528 19,973 7.64
6 through 10 years 19,665 20,207 7.50
Over 10 years 648 661 7.74
Total 42,360 43,370 7.57
Other securities:
Within 1 years 0 0 0.00
1 through 5 years 60 60 9.79
6 through 10 years 0 0 0.00
Over 10 years 0 0 0.00
Total 60 60 9.79
$ 42,420 43,430 7.57
</TABLE>
(1) Yields on non-taxable investment securities are computed on a tax
equivalent basis using a federal tax rate of 34%.
<PAGE>
<TABLE>
<CAPTION>
TYPES OF LOANS
December 31,
1997 1996 1995
% of % of % of
(thousands) Amount Total Amount Total Amount Total
<S> <C> <C> <C> <C> <C> <C>
Commercial $ 64,247 22.0 56,461 20.7 52,374 20.7
Consumer 66,059 22.7 62,906 23.0 61,888 24.5
Real estate - commercial 56,404 19.4 52,232 19.1 52,075 20.6
Real estate - construction 8,657 3.0 4,926 1.8 9,600 3.8
Real estate - mortgage 95,703 32.9 96,856 35.4 76,505 30.3
$ 291,070 100.0 273,381 100.0 252,442 100.0
</TABLE>
<TABLE>
<CAPTION>
TYPES OF LOANS
December 31,
1994 1993
% of % of
(thousands) Amount Total Amount Total
<S> <C> <C> <C> <C>
Commercial $ 42,237 19.4 37,163 18.1
Consumer 54,155 24.8 46,816 22.8
Real estate - commercial 49,858 22.9 47,940 23.4
Real estate - construction 7,936 3.6 5,107 2.5
Real estate - mortgage 63,831 29.3 68,142 33.2
$218,017 100.0 205,168 100.0
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LOAN MATURITIES AND INTEREST SENSITIVITY
As of December 31, 1997
One
Within Through Over
(thousands) One Year Five Years Five Years Total
<S> <C> <C> <C> <C>
Commercial:
Fixed interest rates $ 5,418 11,694 8,353 25,465
Floating interest rates 38,455 327 --- 38,782
Total 43,873 12,021 8,353 64,247
Real estate-commercial:
Fixed interest rates 650 3,832 8,110 12,592
Floating interest rates 39,847 3,965 --- 43,812
Total 40,497 7,797 8,110 56,404
Real estate-construction:
Fixed interest rates 166 572 5,126 5,864
Floating interest rates 2,793 --- --- 2,793
Total 2,959 572 5,126 8,657
$ 87,329 20,390 21,589 129,308
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NONPERFORMING ASSETS AND PAST DUE LOANS
December 31,
(thousands) 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $ 893 573 1,769 857 736
Restructured loans -- -- -- -- --
Other real estate owned 98 185 387 444 2,364
Total nonperforming assets 991 758 2,156 1,301 3,100
Accruing loans past due 90 days $ 196 595 43 365 534
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA/RECORDED INTEREST ON NONACCRUAL LOANS
(thousands) 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Pro forma interest-nonaccrual
loans $ 92 60 161 90 67
Recorded interest-nonaccrual
loans $ 3 3 1 1 3
</TABLE>
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. Pro forma interest represents
the amount of interest that would have been recorded if the loans had been
current in accordance with their original terms.
<PAGE>
<TABLE>
<CAPTION>
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
(thousands) 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
AVERAGE LOANS OUTSTANDING $278,824 257,571 234,904 209,668 202,059
ALLOWANCE FOR LOAN LOSSES $ 4,179 3,988 3,815 3,471 3,068
Balance, beginning of period 550 595 300 360 1,125
Provision for loan losses 4,729 4,583 4,115 3,831 4,193
Loans charged off:
Commercial 42 122 27 80 465
Consumer 402 402 326 317 286
Real estate - commercial 25 21 12 55 227
Real estate - construction -- -- -- -- --
Real estate - mortgage 159 15 -- 64 --
Total loans charged off 628 560 365 516 978
Recovery of loans previously
charged off:
Commercial 17 29 36 80 110
Consumer 134 125 142 155 132
Real estate - commercial 37 2 24 210 1
Real estate - construction 2 -- -- -- --
Real estate - mortgage -- -- 36 55 13
Total recoveries 190 156 238 500 256
Net loans charged off 438 404 127 16 722
Balance, end of period $ 4,291 4,179 3,988 3,815 3,471
Net charge-offs to average
loans outstanding 0.16% 0.16 0.05 0.01 0.36
</TABLE>
<TABLE>
<CAPTION>
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
December 31,
(thousands) 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Commercial $ 1,218 961 652 603 950
Consumer 792 487 391 208 450
Real estate - commercial 649 738 412 242 313
Real estate - construction 161 28 69 11 50
Real estate - mortgage 688 743 612 248 250
Unassigned portion of allowance 783 1,222 1,852 2,503 1,458
$ 4,291 4,179 3,988 3,815 3,471
</TABLE>
Management continually reviews the loan portfolio for signs of deterioration.
In making their evaluation of the portfolio, factors considered include the
individual strength of borrowers, the strength of the individual industries,
the value and marketability of collateral, specific market strengths and
weaknesses, and general economic conditions. Management believes that the
allowance for loan losses at December 31, 1997 is adequate to cover potential
loan losses inherent in the loan portfolio.
<PAGE>
<TABLE>
<CAPTION>
DEPOSIT MATURITIES
As of December 31, 1997
Mature Within
Over Six
Three Over Three Months
Months Months Through Over
or Through Twelve Twelve
(thousands) Less Six Months Months Months Total
<S> <C> <C> <C> <C> <C>
Certificates of
deposit and other
time deposits of
$100M and over $ 4,883 5,479 19,500 13,562 43,424
All other deposits 77,855 49,448 59,476 122,342 309,121
Total deposits $ 82,738 54,927 78,976 135,904 352,545
</TABLE>
<TABLE>
<CAPTION>
INTEREST SENSITIVITY ANALYSIS
As of December 31, 1997
Mature or Reprice Within
Over Three
Three Months Over One
Months Through Year To Over
or Twelve Five Five
(thousands) Less Months Years Years Total
<S> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS $ 110,351 96,982 65,864 18,139 291,336
Loans
Securities:
Available-for-sale,
at fair value 19,701 17,297 18,250 7,608 62,856
Held-to-maturity,
at amortized cost 1,140 4,640 24,300 12,340 42,420
Other interest-earning
assets 3,759 -- -- -- 3,759
Total interest-
earning assets $ 134,951 118,919 108,414 38,087 400,371
INTEREST-BEARING LIABILITIES
Certificates of deposit
and other time deposits
of $100M and over $ 5,475 25,014 12,935 -- 43,424
Time 26,537 83,294 64,238 50 174,119
All other deposits 53,030 20,012 26,681 -- 99,723
Securities sold under
agreements to
repurchase 5,460 -- -- -- 5,460
Other borrowed funds 24,337 90 476 1,190 26,093
ESOP debt 901 -- -- -- 901
Total interest-
bearing
liabilities $ 115,740 128,410 104,330 1,240 349,720
Interest sensitivity
gap per period $ 19,211 (9,491) 4,084 36,847 50,651
Cumulative interest
sensitivity gap 19,211 9,720 13,804 50,651 --
</TABLE>
Refer to the Bank's 1997 Annual Report to Stockholders under the heading
"Selected Consolidated Financial Information" for a five year summary of
financial information which includes return on equity, return on assets and
other ratios, which is incorporated by reference into this Form 10-K.
<PAGE>
Item 2. Properties
The Corporation has ten full service offices and one paying and receiving
office at the following locations:
Full Service
1. Christiansburg Office, 50 North Franklin Street, Christiansburg,
Virginia, containing 9,000 square feet;
2. Blacksburg Office, 601 North Main Street, Blacksburg, Virginia,
containing 8,750 square feet;
3. Riner Office, Route 8, Riner, Virginia, containing 1,600 square
feet;
4. Hills Office, l340 Roanoke Street, Christiansburg, Virginia,
containing 1,200 square feet;
5. Radford Office, 50 First Street, Radford, Virginia, containing
8,000 square feet;
6. New River Valley Mall Office, 646 New River Road, Christiansburg,
Virginia, containing 917 square feet.
7. Corporate Research Center Office, 1872 Pratt Drive, Suite 1125,
Blacksburg, Virginia, containing 360 square feet.
8. Shawsville Office, 250 Alleghany Spring Road, Shawsville,
Virginia, containing 2,712 square feet.
9. Dublin Office, 2 Town Center Drive, Dublin, Virginia, containing
2,640 square feet.
10. FNB Center, 105 Arbor Drive, Christiansburg, Virginia, containing
72,816 square feet.
Paying and Receiving
11. Foothills Office, 1580 North Franklin Street, Christiansburg,
Virginia, containing 652 square feet.
All of such space is used by the Corporation in its operations. The
Corporation owns properties 1, 2, 3, 5, 8, 9 and 10 and leases properties 4,
6, 7 and 11 from independent parties on terms which management believes are
satisfactory.
Other Real Estate.
Other Real Estate is composed of one residential property. There were no
covered transactions.
Item 3. Legal Proceedings
From time to time, the Corporation is a party to lawsuits arising in the
normal course of business in which claims for money damages are asserted.
Management, after consulting with legal counsel handling the respective
matters, is of the opinion that the ultimate outcome of such pending actions,
whether or not adverse to the Corporation, will not have a material effect
upon the Corporation's financial condition.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of 1997.
<PAGE>
PART II
Item 5. Market for the Corporation's Common Stock and Related Security Holder
Matters
The Corporation has only one (1) class of Common Stock with a Par Value of $5
per share. There were approximately 1,028 stockholders of record as of
December 31, 1997, holding 3,323,800 shares of the authorized 5,000,000
shares. The Corporation's stock is listed on the over-the-counter bulletin
board. Trading activity has been light. The recent market prices and other
related shareholder data is incorporated by reference into this Form 10-K from
the section entitled, "Market Price and Dividend Data," in the Corporation's
1997 Annual Report to Stockholders which is filed as Exhibit 13 to this Annual
Report on Form 10-K. The Corporation has consistently paid a semi-annual
dividend on its common stock. Beginning in the second quarter of 1997, the
dividend payment was changed to a quarterly basis, which is currently
anticipated to be the normal frequency for the foreseeable future. There are
no known restrictions on the retained earnings that would affect the ability
to pay further dividends other than those imposed by regulatory agencies. See
Note 13 of the notes to consolidated financial statements in the Corporation's
1997 Annual Report to Stockholders under the caption Dividend Restrictions and
Capital Requirements, which is filed as Exhibit 13 to this Form 10-K and is
incorporated herein by reference.
Item 6. Selected Financial Data
Selected financial data is located in the Corporation's 1997 Annual Report to
Stockholders, which is filed as Exhibit 13 to this Form 10-K, under the
caption "Selected Consolidated Financial Information," which is incorporated
herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Management's Discussion and Analysis of Financial Condition and Results of
Operations is located in the section of the Corporation's 1997 Annual Report
to Stockholders, which is filed as Exhibit 13 to this Form 10-K, under the
same heading, and is incorporated herein by reference.
Item 7(A) Quantitative and Qualitative Disclosures About Market Risk
Information regarding market risks is included in the section of the 1997
Annual Report to Stockholders entitled "Market Risks Related to Financial
Instruments," which is filed as Exhibit 13 to this Form 10-K and is
incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
The following independent auditors' report, consolidated financial statements,
and supplementary financial information included in the Corporation's 1997
Annual Report to Stockholders, which is filed as Exhibit 13 to this Form 10-K,
are incorporated herein by reference:
Independent Auditors' Report
Consolidated Balance Sheets - December 31, 1997 and 1996
Consolidated Statements of Income - Years ended December 31, 1997, 1996,
and 1995
Consolidated Statements of Cash Flows - Years ended December 31, 1997,
1996, and 1995
Consolidated Statements of Changes in Stockholders' Equity - Years ended
December 31, 1997, 1996, and 1995
Notes to Consolidated Financial Statements
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Corporation
Information on directors is incorporated by reference from the Corporation's
Proxy Statement for the 1998 Annual Meeting of Stockholders under the heading
"Election of Directors."
Information on executive officers is incorporated by reference from the
Corporation's Proxy Statement for the 1998 Annual Meeting of Stockholders
under the heading "Executive Officers of the Corporation."
Election of Directors. A total of 1,463,123 shares of a possible 1,661,900
shares or 88.0 percent of eligible shares were voted at the May 13, 1997,
stockholders meeting. No class of voting stock withheld or cast against any
nominee for Director in aggregate five percent or more of total shares cast by
such class.
Item 11. Executive Compensation Information on executive compensation is
incorporated by reference from the Corporation's Proxy Statement for the 1998
Annual Meeting of Stockholders under the heading "Executive Compensation."
Employee Stock Ownership Plan. The Corporation instituted a qualified
employee stock ownership plan in 1983 which covers substantially all
employees. The Corporation makes periodic contributions to the plan that are
used to purchase the Corporation's common stock from available sources. The
shares are then allocated among plan participants based upon compensation and
years of service. Stock allocated to a particular participant (or its value)
is generally distributed upon retirement, death, disability, or (under certain
circumstances) attaining a specified age. The plan is administered by a
committee appointed by the Corporation's Board of Directors. Information on
the Corporation's leveraged ESOP is included in Note 11 of notes to
consolidated financial statements, and is incorporated by reference from the
Corporation's 1997 Annual Report to Stockholders which is included as Exhibit
13 to this Form 10-K.
Information on compensation of directors compensation committee and executive
compensation matters is incorporated by reference from the Corporation's Proxy
Statement for the 1998 Annual Meeting of Stockholders under the heading "Board
of Directors and Committees of the Board."
The Corporation's performance graph is incorporated by reference from the
Corporation's Proxy Statement under the heading "Performance Graph."
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
Principal Security Holders. The Corporation knows of no person or group that
beneficially owned more than five percent of the outstanding shares of Common
Stock as of March 5, 1998.
Executive Officers. The persons currently serving as executive officers of
the Corporation, their security ownership, and their length of service with
the Corporation and it's predecessor (the Bank), are as follows:
Percent of
Title and Length Number Shares Owned Outstanding
Name (Age) of Service as of 3/5/98(A)(B) Shares
Samuel H. President & Chief 137,873 4.15
Tollison (65) Executive Officer
since January, 1971
Julian D. Executive Vice 36,815 1.11
Hardy, Jr. (48) President since
November 19, 1984
Perry D. Chief Financial Officer 26,586 *
Taylor (51) since January 1, 1989
* Less than one percent.
(A) Includes shares that may be deemed beneficially owned due to sole or
joint ownership, voting power or investment power; including shares owned by
or held for the benefit of an executive officer's spouse or another immediate
family member residing in the household of the executive officer that may be
deemed beneficially owned.
(B) Includes estimated 1997 Employee Stock Ownership Plan allocation.
Directors. Information on security ownership of directors is incorporated by
reference from the Corporation's Proxy Statement for the 1998 Annual Meeting
of Stockholders under the heading "Election of Directors."
Item 13. Certain Relationships and Related Transactions
Directors and officers of the Corporation and persons with whom they are
associated have had and expect to have in the future, banking transactions
with the Corporation in the ordinary course of their businesses. In the
opinion of management of the Corporation, all such loans and commitments for
loans were made on substantially the same terms, including interest rates,
collateral and repayment terms as those prevailing at the same time for
comparable transactions with other persons, were made in the ordinary course
of business, and do not involve more than a normal risk of collectibility or
present other unfavorable features. The aggregate amount of direct loans to
any one director, officer or principal stockholder (and related persons), does
not exceed 10 percent of the Corporation's equity capital accounts (nor 20
percent of such accounts for all such persons as a group) and did not during
the previous two fiscal years.
Information on transactions with management is incorporated herein by
reference from the Corporation's Proxy Statement for the 1998 Annual Meeting
of Stockholders under the heading "Transactions with Management."
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
a(1). Consolidated Financial Statements. See index to Consolidated Financial
Statements.
a(2). Financial Statement Schedules. The financial statement schedules are
omitted as the required information is inapplicable or the information
is presented in the consolidated financial statements or related notes.
a(3). Exhibits.
See index to Exhibits
b. Reports on Form 8-K.
The Corporation did not file any reports on Form 8-K during the fourth
quarter of 1997.
c. Exhibits.
Included in item 14a(3) above
d. Financial Statement Schedules.
Included in item 14a(2) above
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
FNB Corporation
By: s/Samuel H. Tollison
Samuel H. Tollison
President & Chief Executive Officer
By: s/Perry D. Taylor
Perry D. Taylor
Chief Financial Officer
Date: March 25, 1998
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following directors on behalf of the
registrant and in that capacity and on the dates indicated.
Signature Date
s/Kendall O. Clay March 25, 1998
Kendall O. Clay
s/Daniel D. Hamrick March 25, 1998
Daniel D. Hamrick
s/Julian D. Hardy, Jr. March 25, 1998
Julian D. Hardy, Jr.
s/Joan H. Munford March 25, 1998
Joan H. Munford
s/Samuel H. Tollison March 25, 1998
Samuel H. Tollison
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
The following independent auditors' report and consolidated financial
statements of the Corporation are incorporated by reference from the
Corporation's 1997 Annual Report to Stockholders included within this document
as an Exhibit:
Independent Auditors' Report
Consolidated Balance Sheets --
December 31, 1997 and 1996
Consolidated Statements of Income -- Years
Ended December 31, 1997, 1996, and 1995
Consolidated Statements of Cash Flows --
Years Ended December 31, 1997, 1996,
and 1995
Consolidated Statements of Changes in
Stockholders' Equity -- Years Ended
December 31, 1997, 1996, and 1995
Notes to Consolidated Financial Statements
All schedules are omitted as the required information is inapplicable or the
information is presented in the consolidated financial statements or related
notes.
<PAGE>
INDEX TO EXHIBITS
Exhibit # Description
(2) Plan of Reorganization
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.
(3.1) 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.
(3.2) Registrant's Bylaws
(10) Material Contracts
(10)A The construction contract dated October 2, 1995,
with J. M. Turner & Co., Inc. filed as Exhibit 10.9
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.
(10)B Employment agreement dated September 11, 1997 between Samuel H.
Tollison, First National Bank, and Registrant, filed with the
Commission as Exhibit (10)A on Form 10-Q for the quarter ended
September 30, 1997, is incorporated herein by reference.
(10)C Employment agreement dated September 11, 1997 between Julian D.
Hardy, Jr., First National Bank, and Registrant, filed with the
Commission as Exhibit (10)B on Form 10-Q for the quarter ended
September 30, 1997, is incorporated herein by reference.
(10)D Change in control agreements with seven senior officers of First
National Bank. All agreements have identical terms and, as such,
only a sample copy of the agreements was filed with the Commission
as Exhibit (10)C on Form 10-Q for the quarter ended September 30,
1997, and is incorporated herein by reference. The officers
covered by the agreements are as follows:
(1) Darlene S. Lancaster, Senior Vice President, Manager,
Mortgage Loan Department, dated August 25, 1997
(2) R. Bruce Munro, Senior Vice President, Chief Credit
Administration Officer, dated August 25, 1997
(3) Woody B. Nester, Senior Vice President, Cashier, dated
August 25, 1997
<PAGE>
(4) Fred L. Newhouse, Jr., Senior Vice President, Branch
Administrator, dated August 25, 1997
(5) Peter A. Seitz, Senior Vice President, General Counsel,
dated August 25, 1997
(6) Perry D. Taylor, Senior Vice President, Chief Financial
Officer, dated August 25, 1997
(7) Litz H. Van Dyke, Senior Vice President, Manager, Commercial
Banking Department, dated August 25, 1997
(13) 1997 Annual Report to Stockholders
(21) Subsidiaries of the Registrant
(27) Financial Data Schedule
FNB CORPORATION
RESTATEMENT OF BYLAWS
(Approved June 12, 1997)
ARTICLE I
Meetings of Shareholders
Section 1.1. Annual Meeting. The regular annual meeting of the
shareholders for the election of Directors and the transaction of whatever
other business that may properly come before the meeting, shall be held at
such place as the Board may designate on the second Tuesday of May of each
year or at such other time as the Board designates. Notice of such meeting
shall be mailed, postage prepaid, at least ten days but not more than sixty
days prior to the date thereof, addressed to each shareholder at his address
appearing on the books of the holding company. If for any cause, an election
of Directors is not made on the said day, the Board of Directors shall order
the election to be held on some subsequent day, as soon thereafter as
practicable, according to the provision of law; and notice thereof shall be
given in the manner herein provided for the annual meeting.
Section 1.2. Special Meetings. Except as otherwise specifically
provided by statute, special meetings of the shareholders may be called for
any purpose at any time by the Board of Directors, the Chairman of the Board
or the President. Every such special meeting, unless otherwise provided by
law, shall be called by mailing, postage prepaid, not less than ten days nor
more than sixty days prior to the date fixed for such meeting, to each
shareholder at his address appearing on the books of the holding company, a
notice stating the purpose of the meeting.
Section 1.3. Nominations for Director. Nominations for election to the
Board of Directors may be made by the Board of Directors or by any stockholder
of any outstanding class of capital stock of the holding company entitled to
vote for the election of Directors. Nominations, other than those made by or
on behalf of the existing management of the bank, shall be made in writing and
shall be delivered or mailed to the President of the holding company, not less
than l4 days nor more than 50 days prior to any meeting of stockholders called
for the election of Directors; provided, however, if less than 21 days notice
of the meeting is given to shareholders, such nomination shall be mailed or
delivered to the President of the holding company not later than the close of
business on the seventh day following the day on which the notice of meeting
was mailed. Such notification shall contain the following information to the
extent known to the notifying shareholder: (a) the name and address of each
proposed nominee; (b) the principal occupation of each proposed nominee; (c)
<PAGE>
the total number of shares of capital stock of the holding company that will
be voted for each proposed nominee; (d) the name and address of the notifying
shareholder; and (e) the number of shares of capital stock of the holding
company owned by the notifying shareholder. Nominations not made in
accordance herewith shall not be considered at the meeting.
Section 1.4 Eligibility for Nomination to Board. No person shall be
eligible for nomination (and subsequent election) for Director if they have
attained or will attain age seventy (70) during the calendar year when they
are proposed to be nominated for election of Directors. In the event the
Corporation acquires voting control of more than one chartered bank, any
Director of this Corporation who shall serve as a director of such chartered
bank controlled by the Corporation shall not be eligible for renomination as a
director of this Corporation unless such director resigns as a director of the
chartered bank or serves as President of the chartered bank.
Section 1.5. Judges of Election. Every election of Directors shall be
managed by three judges, who shall be appointed from among the shareholders by
the Board of Directors. The judges of election shall hold and conduct the
election at which they are appointed to serve; and, after the election, they
shall file with the Secretary a certificate under their hands, certifying the
result thereof and the names of the Directors elected. The judges of
election, at the request of the Chairman of the meeting, shall act as tellers
of any other vote by ballot taken at such meeting, and shall certify the
result thereof.
Section 1.6. Proxies. Shareholders may vote at any meeting of the
shareholders by proxies duly authorized in writing. Proxies shall be valid
only for one meeting, to be specified therein, and any adjournments of such
meeting. Proxies shall be dated and shall be filed with the records of the
meeting.
Section 1.7. Quorum. A majority of the outstanding capital stock,
represented in person or by proxy, shall constitute a quorum at any meeting of
shareholders, unless otherwise provided by law; but less than a quorum may
adjourn any meeting, from time to time, and the meeting may be held, as
adjourned, without further notice. A majority of the votes cast shall decide
every question or matter submitted to the shareholders at any meeting, unless
otherwise provided by law or by the Articles of Incorporation.
ARTICLE II
Directors
Section 2.1. Board of Directors. The Board of Directors (hereinafter
referred to as the "Board"), shall have power to manage and administer the
business and affairs of the holding company. Except as expressly limited by
law, all corporate powers of the holding company shall be vested in and may be
exercised by said Board.
<PAGE>
Section 2.2. Number. The Board shall consist of not less than three
shareholders nor more than fifteen, the exact number to be fixed and
determined from time to time by resolution of a majority of the full Board or
by resolution of the shareholders at any meeting thereof.
Section 2.3 Class of Directors. Directors shall be divided into three
classes for the purpose of elections as set forth in the holding company's
Articles of Incorporation.
Section 2.4. Organization Meeting. The President or Executive Vice-
President, upon receiving the certificate of the judges, of the result of any
election, shall notify the directors-elect of their election and of the time
at which they are required to meet at the main office of the holding company
for the purpose of organizing the new Board and electing and appointing
officers of the holding company for the succeeding year. Such meeting shall
be appointed to be held on the day of the election or as soon thereafter as
practicable, and, in any event, within thirty days thereof, and if, at the
time fixed for such meeting, there shall not be a quorum present, the
Directors present may adjourn the meeting, from time to time, until a quorum
is obtained.
Section 2.5. Regular Meetings. The Regular Meetings of the Board of
Directors shall be held, without notice, on the second Thursday of each month
at 8:00 a.m. in the Board of Directors' room at First National Bank or at such
time, place and with such frequency as the Board may establish at a regular
meeting. When any regular meeting of the Board falls upon a holiday, the
meeting shall be held on the next banking business day, unless the Board shall
designate some other day.
Section 2.6. Special Meetings. Special Meetings of the Board of
Directors may be called by the President or Executive Vice President of the
holding company, or at the request of three (3) or more Directors. Each
member of the Board of Directors shall be given notice stating the time and
place, by facsimile, letter, or in person, of each such special meeting.
Section 2.7. Quorum. A majority of the Directors shall constitute a
quorum at any meeting, except when otherwise provided by law; but a less
number may adjourn any meeting, from time to time, and the meeting may be
held, as adjourned, without further notice. If a quorum is present, the Board
may take action through the vote of a majority of directors who are in
attendance.
Section 2.8. Vacancies. When any vacancy occurs among the Directors,
the remaining members of the Board, in accordance with the laws of the
Commonwealth of Virginia and the Articles of Incorporation of the Corporation,
may appoint a Director to fill such vacancy at any regular meeting of the
Board, or at a special meeting called for that purpose.
<PAGE>
ARTICLE III
Committees of the Board
The Board of Directors has power over and is solely responsible for the
management, supervision and administration of the holding company. The Board
of Directors may delegate its power, but not any of its responsibilities, to
such persons or committees as the Board may determine, including committees of
the Corporation's wholly owned subsidiary, First National Bank. The chief
executive officers of the Corporation shall serve as ex officio members of all
committees of the Board with voting rights; however, membership on the Audit
Committee shall not include voting rights.
The Board of Directors must formally ratify written policies authorized by
committees of the Board before such policies become effective. Each committee
must have one or more member(s), who serve at the pleasure of the Board of
Directors. Provisions of the articles and bylaws governing quorum and voting
requirements of the Board of Directors, apply to committees and their members
as well. The creation of a committee and appointment of members to it must be
approved by the Board of Directors.
Section 3.1. Administrative Committee. There may be an Administrative
Committee composed of not less than two outside directors. The Board may
appoint new members or replace members whenever it so chooses. The
Administrative Committee shall have authority to exercise, when the Board is
not in session, all other powers of the Board that may lawfully be delegated.
The Administrative Committee shall keep minutes of its meetings, and such
minutes shall be submitted at the next regular meeting of the Board of
Directors at which a quorum is present, and any action taken by the Board with
respect thereto shall be entered in the minutes of the Board.
Section 3.2. Asset Liability Management Committee. There may be an
Asset Liability Management Committee composed of not less than two outside
directors and any designated officers of the bank subsidiaries, directors and
designated officers being appointed by the Board annually or more often. The
Asset Liability Management Committee shall have the authority thereto, and to
exercise, when the Board is not in session, all powers of the Board regarding
the oversight of the holding company's assets and liabilities that may be
lawfully delegated. The Asset Liability Management Committee shall keep
minutes of its meetings, and such minutes shall be submitted at the next
regular meeting of the Board of Directors at which a quorum is present, and
any action taken by the Board with respect thereto shall be entered in the
minutes of the Board.
Section 3.3. Audit Committee. There may be an Audit Committee composed
of not less than two outside directors, exclusive of any active officers of
the holding company or its bank subsidiaries, appointed by the Board annually
or more often. The duty of that committee shall be to examine at least once
during each calendar year and within l5 months of the last examination the
<PAGE>
affairs of the holding company or its affiliates or cause suitable
examinations to be made by auditors responsible only to the Board of Directors
and to report the result of such examination in writing to the Board at the
next regular meeting thereafter. Such report shall state whether the holding
company or its affiliates is in a sound condition, and whether adequate
internal controls and procedures are being maintained and shall recommend to
the Board such changes in the manner of conducting the affairs of the holding
company as shall be deemed advisable.
Section 3.4 Other Committees. The Board of Directors may appoint, from
time to time, from its own members, compensation, special litigation and other
committees of one or more persons, for such purposes and with such powers as
the Board may determine.
However, a committee may not:
(1) Authorize distributions of assets or dividends.
(2) Approve action required to be approved by shareholders.
(3) Fill vacancies on the Board of Directors or any of its
committees.
(4) Amend articles of incorporation.
(5) Adopt, amend or repeal bylaws.
(6) Authorize or approve issuance or sale or contract for sale of
shares, or determine the designation and relative rights,
preferences and limitations of a class or series of shares.
ARTICLE IV
Officers and Employees
Section 4.1. Chairman of the Board. The Board of Directors may appoint
one of its members to be Chairman of the Board to serve at the pleasure of the
Board. He shall preside at all meetings of the Board of Directors. The
Chairman of the Board shall supervise the carrying out of the policies adopted
or approved by the Board. He shall also have and may exercise such further
powers and duties as from time to time may be conferred upon, or assigned to
him by the Board of Directors.
Section 4.2. President. The Board of Directors shall appoint a
President of the holding company. The President shall have general executive
powers, and shall have and may exercise any and all other powers and duties
pertaining by law, regulation, or practice, to the office of President, or
imposed by these Bylaws. He shall also have and may exercise such further
powers and duties as from time to time may be conferred upon, or assigned to
him by the Board of Directors.
Section 4.3. Executive Vice President. The Board of Directors shall
appoint an Executive Vice President. The Executive Vice President shall have
<PAGE>
such powers and duties as may be assigned to him by the Board of Directors.
The Executive Vice President shall be designated by the Board of Directors, in
the absence of the President, to perform all the duties of the President.
Section 4.4. Secretary. The Board of Directors shall appoint a
Secretary of the Board and of the holding company, and shall keep accurate
minutes of all meetings. He shall give all notices required by these Bylaws.
He shall be custodian of the corporate seal, records, documents and papers of
the holding company. He shall provide for the keeping of proper records of
all transactions of the holding company. He shall have and may exercise any
and all other powers and duties pertaining by law, regulation or practice, or
imposed by these Bylaws. He shall also perform such other duties as may be
assigned to him, from time to time, by the Board of Directors.
Section 4.5. Other Officers. The Board of Directors may appoint one or
more Senior Vice Presidents, one or more Vice Presidents, one or more
Assistant Vice Presidents, one or more Assistant Secretaries, and such other
officers and Attorneys-in-fact as from time to time may appear to the Board of
Directors to be required or desirable to transact the business of the holding
company. Such officers shall respectively exercise such powers and perform
such duties as pertain to their several offices, or as may be conferred upon,
or assigned to them by the Board of Directors, the Chairman of the Board, the
President or Executive Vice President.
Section 4.6. Tenure of Office. Subject to any agreement to the
contrary, the President and Executive Vice President shall hold his office for
the current year for which the Board of which he shall be a member was
elected, unless he shall resign, become disqualified, or be removed, and any
vacancy occurring in the office of President and Executive Vice President
shall be filled promptly by the Board of Directors.
ARTICLE V
Stock and Stock Certificates
Section 5.l. Transfers. Shares of stock shall be transferable on the
books of the holding company or such other party as designated by the Board of
Directors, and a transfer book shall be kept in which all transfers of stock
shall be recorded. Every person becoming a shareholder by such transfer
shall, in proportion to his shares, succeed to all rights of the prior holder
of such shares. The Board of Directors may impose conditions upon the
transfer of the stock reasonably calculated to simplify the work of the
holding company with respect to stock transfers, voting at shareholder's
meetings, and related matters and to protect against fraudulent transfers.
<PAGE>
Section 5.2. Stock Certificates. Certificates of Stock shall bear the
signature of any holding company officer and attested by any other holding
company officer. Each certificate shall recite on its face that the stock
represented thereby is transferable only upon the books of the holding company
and properly endorsed.
Section 5.3. Authorized Capital. The amount of authorized capital stock
of this holding company shall be $25,000,000 divided into 5,000,000 shares of
common stock, the par value per share of $5, but the capital stock may be
increased or decreased from time to time, in accordance with the provisions of
the laws of the Commonwealth of Virginia. No shares shall possess preemptive
rights.
ARTICLE VI
Corporate Seal
The President, the Executive Vice President, the Secretary, the
Assistant Secretary or any other officer, shall have authority to affix the
corporate seal to any document requiring such seal, and to attest the same.
Such seal shall be substantially in the following form:
( )
( Impression )
( Of )
( Seal )
( )
ARTICLE VII
Miscellaneous Provisions
Section 7.l. Fiscal Year. The fiscal year of the holding company shall
be the calendar year.
Section 7.2. Execution of Instruments. All agreements, indentures,
mortgages, deeds, conveyances, transfers, certificates, declarations,
receipts, discharges, releases, satisfactions, settlements, petitions,
schedules, accounts, affidavits, bonds, undertakings, proxies and other
instruments or documents may be signed, executed, acknowledged, verified,
delivered or accepted on behalf of the bank by the President, the Executive
Vice President, any Vice President, the Secretary or Assistant Secretary or
any other holding company officer. The provisions of this Section 7.2 are
supplementary to any other provision of these Bylaws.
<PAGE>
Section 7.3. Records. The Articles of Incorporation, the Bylaws and the
proceedings of all meetings of the shareholders, the Board of Directors,
standing committees of the Board, shall be recorded in appropriate minute
books provided for the purpose. The minutes of each meeting shall be signed
by the Secretary or other officer appointed to act as Secretary of the
meeting. A shareholder shall be entitled to inspect the records of the
corporation provided (1) he has been a shareholder of record for at least six
months immediately preceding his demand or is the holder of record of at least
five percent of all outstanding shares and (2) he gives the holding company
written notice of his demand at least five business days before the
corporation wishes to inspect and copy, as permitted by Virginia law, from
time to time.
ARTICLE VIII
Bylaws
Section 8.l. Inspection. A copy of the Bylaws, with all amendments
thereto, shall at all times be kept in a convenient place within the holding
company offices, and shall be open for inspection to all shareholders, during
banking hours only, and according to the procedures outlined in Section 7.3.
Section 8.2. Amendments. The Bylaws may be amended, altered or
repealed, at any regular meeting of the Board of Directors, by a vote of a
majority of the whole number of the Directors. The Bylaws may also be
amended, altered or replaced by shareholders either by unanimous action
without a meeting or by a majority vote of the outstanding shares at a duly
called meeting.
FNB CORPORATION
ANNUAL REPORT TO STOCKHOLDERS
1997
<PAGE>
INDEX TO ANNUAL REPORT TO STOCKHOLDERS
Selected Consolidated Financial Information
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Market Price and Dividend Data
Market Risks Related to Financial Instruments
Independent Auditors' Report on Consolidated Financial Statements
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Cash Flows
Consolidated Statements of Changes in Stockholders' Equity
Notes to Consolidated Financial Statements
<PAGE>
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL INFORMATION Years Ended December 31,
1997 1996 1995 1994 1993
Selected income statement data
(in thousands):
<S> <C> <C> <C> <C> <C>
Interest income $ 33,114 30,526 28,330 24,089 23,200
Interest expense 16,764 15,016 14,081 11,022 11,339
Net interest income 16,350 15,510 14,249 13,067 11,861
Provision for loan losses 550 595 300 360 1,125
Noninterest income 2,291 2,034 1,869 1,704 2,435
Noninterest expense 11,602 10,254 9,695 9,010 8,757
Income tax expense 1,324 1,491 1,449 1,394 824
Income before cumulative
effects of changes in
accounting principles 5,165 5,204 4,674 4,007 3,590
Cumulative effect of
change in accounting
for postretirement
benefits other than
pensions - - - - (179)
Cumulative effect of change
in accounting for income
taxes - - - - 337
Net income $ 5,165 5,204 4,674 4,007 3,748
Per share data:
Net income $ 1.60 1.62 1.48 1.29 1.21
Cash dividends declared .42 .60 .55 .73 .37
Book value per share 12.42 11.14 10.14 8.50 8.49
Average shares outstanding 3,237,731 3,205,132 3,162,872 3,115,710 3,109,920
Selected balance sheet data at year end
(in thousands):
Total securities $105,276 97,975 87,962 86,013 85,276
Loans, net 286,767 269,145 248,305 213,899 201,381
Allowance for loan losses 4,291 4,179 3,988 3,815 3,471
Total assets 428,174 395,324 360,533 323,876 307,516
Deposits 352,545 335,402 315,777 286,130 271,406
Subordinated capital notes - - 937 1,044 1,152
Stockholders' equity 40,213 35,828 32,191 26,777 26,392
Selected ratios (in percentages):
Return on average assets 1.26 1.41 1.38 1.29 1.26
Return on average equity 13.59 15.20 15.64 14.93 15.23
Dividend pay-out ratio 26.08 36.99 37.27 56.25 30.17
Average equity to
average assets 9.31 9.26 8.82 8.68 8.30
</TABLE>
NOTES: (1) All share and per share data have been adjusted
retroactively to reflect the 2 for 1 stock split effected
in the form of a 100% stock dividend in 1997 and a 10% stock
dividend in 1994.
(2) See Note 1 to the consolidated financial statements for
information relating to a change in reporting entity
resulting from a reorganization involving the formation of a
bank holding company (the successor) and the exchange of one
share of the holding company's stock for each share of First
National Bank (the predecessor). For reasons discussed in
Note 1, the information in the table above for periods prior
to the reorganization are comparable to that for the periods
subsequent to the reorganization.
<PAGE>
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.
In 1996, 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,
the successor, to exchange one share of its stock for each share of stock of
the Bank, the predecessor. 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.
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 (July 11, 1996) and of the holding company and its
subsidiaries (collectively, the "Corporation") 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 accompanying consolidated statements of income, cash
flows and changes in stockholders' equity for 1996 include the combined
activity for the portion of 1996 prior to the consummation of the
reorganization as well as that occurring subsequent to the reorganization.
Net Income
Net income for 1997 was $5,165 compared to $5,204 for 1996 and $4,674 for
1995. This amounted to a decrease of .8% for 1997 compared to an increase of
11.3% for 1996. Earnings per share were $1.60 for 1997 compared to $1.62 for
1996 and $1.48 for 1995. The decrease in 1997 earnings resulted from higher
overhead expenses from the opening of two new branch offices during the second
half of 1996 and the new corporate office facility in early 1997. The
increase in earnings for 1996 was primarily the result of increases in net
interest income and declines in the Federal Deposit Insurance Corporation
insurance assessment.
The per share earnings for 1996 and 1995 have been restated to reflect the
effects of a two-for-one stock split effected in the form of a 100% stock
dividend declared in the second quarter of 1997.
<PAGE>
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 for
1997 was $16,350, up 5.4% from $15,510 for 1996, which was up 8.8% from
$14,249 for 1995. The increases in net interest income in both 1997 and 1996
were primarily the result of growth in average earning assets, partially
offset by growth in interest bearing liabilities. Average earning asset
growth totaled $30,842 or 8.71% for 1997 and $28,177 or 8.64% for 1996. The
largest component of the increase in earning assets was average loans,
reflecting increases of $18,741 or 7.28% for 1997 and $22,667 or 9.65% for
1996. Growth in the loan portfolio was concentrated primarily in commercial
and real estate loans, reflecting a combined increase of $14,536 for 1997.
Loan growth for 1996 was concentrated primarily in real estate loans with an
average increase of $15,410. Average securities increased $9,192 or 9.91% for
1997 and $5,608 or 6.41% for 1996 and were used as an alternative investment
for funds in excess of loan demand.
Average interest-bearing liabilities increased $32,278 or 10.62% for 1997 and
$22,789 or 8.07% for 1996. The largest component of the increase in interest-
bearing liabilities was average deposits, reflecting an increase of $19,790
for 1997 and $16,199 for 1996. Growth in the deposit portfolio was
concentrated in time deposits with an average increase of $9,969 for 1997 and
$14,313 for 1996 and in certificates of deposit of $100 and over with an
increase of $4,505 for 1997 and $6,049 for 1996. Successful deposit
promotions and more aggressive bidding for deposits accounted for the
increases. Average other borrowed funds increased $12,100 for 1997 and $7,124
for 1996. 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 4.59% for 1997 from 4.80% for 1996 and 4.73%
for 1995. The yield on average earning assets decreased 13 basis points for
1997 and was essentially unchanged in 1996 from 1995. The cost of interest-
bearing liabilities increased 3 basis points for 1997 compared to a 6 basis
point decrease in 1996. Overall, 137.4% and 84.2% of the net interest income
increases in 1997 and 1996, respectively, were attributable to changes in the
volume of net interest-earning assets and interest-bearing liabilities. The
remainder of the changes in both years was due to changes in average rates.
Management attempts to match, where possible, the maturities and repricing
intervals of its interest earning assets and interest bearing liabilities.
The largest cumulative interest sensitivity gap for periods up to five years
is $19,200, which represents 4.8% and 5.5% of total interest earning assets
and interest bearing liabilities at December 31, 1997, respectively. The
sensitivity gap for the period beyond five years is $36,800. Management
considers the interest rate exposure represented by these gaps to be
acceptable.
Provision for Loan Losses
The provision for loan losses was $550 for 1997, $595 for 1996 and $300 for
1995. Net charge-offs amounted to $438, $404 and $127 for 1997, 1996 and
1995, respectively. The increase in net charge-offs for both years was due to
a drop in recoveries of loans previously charged off. The allowance for loan
losses was $4,291, 1.47% of outstanding loans, at December 31, 1997 and
<PAGE>
$4,179, 1.53% of outstanding loans, at December 31, 1996. Although the
provision for loan losses decreased and net charge-offs increased for 1997 in
comparison to 1996, the allowance for loan losses increased as the result of
the fact that the 1997 provision exceeded net charge-offs. Management
believes the allowance for loan losses as a percentage of outstanding loans
remains at a prudent level.
Noninterest Income
Noninterest income, which includes service charges on deposit accounts, loan
origination fees, other service charges, other income and net securities gains
(losses), was $2,291, $2,034 and $1,869 for 1997, 1996 and 1995, respectively.
The increase in noninterest income for 1997 was due primarily to increases in
service charges on deposit accounts, automated teller machine usage fees,
trust fees and net gains on sales of loans. The 1996 increase in noninterest
income resulted primarily from an increase in fees on Small Business
Administration and real estate loans sold, trust fees, title insurance income
and gain on disposal of fixed assets. Increases for both 1997 and 1996 were
partially offset by reductions in other areas.
Noninterest Expense
Noninterest expense, consisting of salaries and employee benefits, occupancy
costs, credit cards, supplies, FDIC assessment and other expenses was $11,602
for 1997, $10,254 for 1996 and $9,695 for 1995. The 1997 net increase
resulted from increases in personnel costs, occupancy and equipment expense,
telephone, supplies, education, marketing and donations, the bulk of which was
attributable to the operation of new branch facilities and the new corporate
office building which opened in February, 1997. The 1996 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 two new branches.
The increases for both 1997 and 1996 were partially offset by reductions in
other areas.
Income Taxes
Income tax expense as a percentage of pre-tax income was 20.4%, 22.3% and
23.7% in 1997, 1996 and 1995, respectively. The most significant component of
the rate decrease in 1997 was anticipated income tax refunds related to
amendments of prior years tax returns. The decline in the rate for 1996 was
due to the continuing shift from taxable to nontaxable investment securities.
Balance Sheet
Total assets of the Corporation at December 31, 1997, were $428,174, compared
to $395,324 at December 31, 1996. Total loans were $291,070 at December 31,
1997, an increase of $17,689 from December 31, 1996. Loan growth was
concentrated in the commercial and real estate-commercial portfolios and
amounted to $11,958. All other loan portfolios experienced increases of
varying amounts, except the real estate-mortgage portfolio which decreased
$1,153. The increase in bank premises and equipment of $2,235 resulted
primarily from the construction of the new corporate headquarters building.
On an amortized cost basis, securities increased $6,898 from $98,033 at
December 31, 1996. The increase in securities represented funds in excess of
loan demand.
<PAGE>
Total deposits at December 31, 1997, were $352,545, an increase of $17,143
from December 31, 1996. Certificates of deposit of $100 and over increased
$5,424, time deposits increased $3,116, interest-bearing demand deposits
increased $4,452 and noninterest-bearing demand deposits increased $4,481
since year end 1996. 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 December 31, 1997, were $26,093, an increase of
$11,689 from December 31, 1996. The primary reason for the change was an
increase in advances from the Federal Home Loan Bank of Atlanta from $12,779
at December 31, 1996, to $22,601 at December 31, 1997, to provide partial
funding for earning asset growth.
Stockholders' Equity
Stockholders' equity was $40,213 at December 31, 1997, compared to $35,828 at
December 31, 1996. This increase of $4,385 was the net result of earnings
retention, an improvement of $265 in net unrealized gain or loss (net of tax)
on securities available-for-sale, a decrease of $303 in unearned ESOP shares
resulting from principal repayments on ESOP debt, and dividends paid to
shareholders. In the second quarter of 1997, the Corporation declared and
paid a two-for-one stock split effected in the form of a 100% stock dividend.
This resulted in a transfer of $8,309 from retained earnings to the capital
stock account. There was no effect on total stockholders' equity.
All financial institutions are required to maintain minimum levels of
regulatory capital. The Federal Reserve and the Office of the 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. Tier 1 and total capital to risk-weighted assets ratios as
of December 31, 1997 were 13.2% and 14.5%, respectively, exceeding the
minimums required.
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. The leverage ratio
of the Corporation as of December 31, 1997 was 9.6% as compared to a minimum
requirement of 4.0%.
<PAGE>
As of December 31, 1997, the most recent notification from the OCC categorized
the Bank as "well capitalized" under the regulatory framework for prompt
corrective action, established by Section 38 of the Federal Deposit Insurance
Act. To be categorized as well capitalized, minimum total risk-based capital,
Tier 1 risk-based capital, and Tier 1 leverage ratios of 10.0%, 6.0% and 5.0%,
respectively, must be maintained. As noted above, the Bank exceeded all three
of these minimums as of December 31, 1997. There are no conditions or events
that management believes have changed the institution's category.
Past Due Loans and Nonperforming Assets
Loans past due 90 days and over at December 31, 1997 totaled $196 compared to
$595 at December 31, 1996. In addition, nonaccrual loans and other real
estate owned totaled $991 at December 31, 1997, compared to $758 at December
31, 1996. In spite of the increase in nonaccrual loans and other real estate
owned, the New River Valley economy continues to improve, and such improvement
has been reflected in a declining trend of nonperforming assets in recent
years. There were no major concentrations in nonaccrual loans at December 31,
1997 or 1996.
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 $10,000 of the Corporation's
borrowing capacity under an existing agreement with the FHLB remains unused as
of December 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 $34,000 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 1998 dividends (unless prior regulatory
approval is obtained) to $7,096 plus year-to-date 1998 net profits as of the
declaration date. This limitation had no effect on the liquidity of the
holding company in 1997, and it is not expected to have any material impact in
1998. During 1997, the bank paid $1,911 in dividends to the holding company.
Effects of Inflation
The income statement generally reflects the effects of inflation. Since
interest rates, loan activities and deposit levels are related to inflation,
the resulting changes are included in net income. The most significant item
that does not reflect the effects of inflation is depreciation expense because
historically presented dollar values used to determine this expense do not
reflect the effects of inflation on the market value of depreciable assets.
<PAGE>
Recent Accounting Developments
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards (SFAS) 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
was first effective for the fourth quarter of 1997, but it did not have an
impact on earnings per share for 1997 or prior periods. Based on the current
capital structure of the Corporation, management does not expect SFAS No. 128
to materially impact earnings per share in the future because there are
currently no potentially dilutive securities.
The FASB has also issued SFAS No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities." This 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. 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. A portion
of SFAS 125 was adopted in 1997 and resulted in the classification of certain
participations sold with recourse as secured borrowings. Previously these
types of transactions were recorded as sales of loans. The new standard
resulted in a similar change in the classification of the related interest on
the portion of the loan sold. There was no impact on net income. The
adoption of the Statement does not involve the restatement of any previously
issued financial statements. The remaining portions of SFAS 125 are required
to be adopted in 1998. Management does not expect SFAS No.125 to have a
significant impact on financial position or results of operations in the
future based on current operations.
The FASB has also issued SFAS No. 130, "Reporting Comprehensive Income." The
Statement requires enterprises to display "comprehensive income" and its
components in a financial statement that is displayed with the same prominence
as other financial statements in a full set of financial statements.
"Comprehensive income" reflects net income as reported under current
accounting standards as well as certain items and events that are currently
reflected only in stockholders' equity without impacting the Statement of
Income. The new standard requires such information to be presented as an
additional financial statement, but the primary financial statements as
currently reported will not be affected. SFAS No. 130 is effective starting
in the first quarter of 1998.
Other Matters
The "Year 2000 Issue" results from the inability of most computers to process
year-date data accurately beyond the year 1999 unless programmed to do so.
The Corporation has undertaken substantial measures to identify hardware and
software in its own systems that are not year-2000 compliant, and some
replacements have been effected. Some systems, however, are still not year-
2000 compliant, and management intends and expects to continue its efforts to
<PAGE>
achieve full year-2000 compliance in all of its significant systems to avoid
any systems failures or malfunctions. Because a large portion of the
Corporation's software and hardware has been purchased relatively recently,
and because the software for most of the Corporation's major systems is
maintained and updated periodically by outside vendors, management does not
anticipate the year-2000 compliance process to require expenditures that would
be material to the financial statements. These costs are being expensed as
incurred in accordance with generally accepted accounting principles.
<PAGE>
Market Price and Dividend Data
The following information reflects per share data for the periods indicated
relative to Common Stock trading values and dividends. FNB Corporation Common
Stock began appearing on the OTC Bulletin Board under the symbol FNBP on
November 15, 1996. Shares are occasionally bought and sold by private
individuals, firms or corporations, and in many instances FNB Corporation does
not have knowledge of the purchase price or the terms of the purchase. The
information below relating to the trading values for the stock is based upon
information furnished to FNB Corporation by one or more parties involved in
certain purchases and sales of the stock. No attempt was made to verify or
determine the accuracy of the representations made. Both the trading values
and per share dividends in the tables below have been adjusted to
retroactively reflect the effects of a two-for-one stock split effected in the
form of a 100% stock dividend in June 1997 as though the split had occurred at
the beginning of 1996. As of December 31, 1997, there were 1,028 holders of
record of FNB Corporation Common Stock.
The information below relating to periods prior to the effective date of the
reorganization discussed under Management's Discussion and Analysis relate to
the Common Stock of First National Bank, the predecessor entity. The stock of
First National Bank was not reported on any quotation system or traded on any
organized exchange. See Note 1 to the consolidated financial statements
included herein.
<TABLE>
<CAPTION>
Trading Value Dividends
1997 High Low Per Share
<S> <C> <C> <C>
First Quarter $ 22.25 20.00 --
Second Quarter 21.00 19.75 0.10
Third Quarter 23.00 20.00 0.15
Fourth Quarter 23.75 21.50 0.17
</TABLE>
<TABLE>
<CAPTION>
Trading Value Dividends
1996 High Low Per Share
<S> <C> <C> <C>
First Quarter $ 21.87 21.25 --
Second Quarter 21.87 21.00 0.25
Third Quarter 22.00 21.75 --
Fourth Quarter 22.25 21.75 0.35
</TABLE>
<PAGE>
Market Risks Related to Financial Instruments
The Corporation is a party to a variety of financial instruments in the
ordinary course of business, including loans, investment securities and
deposits. Most financial instruments by their nature carry associated market
risks. The only substantial market risk associated with the Corporation's
financial instruments is interest rate risk; that is, the risk that the fair
values or future cash flows from an instrument could change as a result of
changes in market interest rates. For example, a decline in market interest
rates will generally have the effect of reducing the expected future interest
to be received on a loan with a variable contractual interest rate. However,
such a decline will normally have the effect of increasing the fair value of a
fixed contractual rate investment security. Management does not expect
significant changes in its market risk exposure positions in the near term
future.
The Corporation is not a party to any material amounts of derivative financial
instruments such as futures, forward interest rate agreements, swaps or option
contracts. Commitments to lend are entered into in the ordinary course of
business as discussed more fully in the notes to the financial statements, but
the majority of these commitments reflect interest rates that vary with
certain indexes, such as the prime rate. As a result, those commitments
normally do not expose the Corporation to market interest rate risks prior to
funding the loan.
In general, the Corporation does not enter into financial instruments for
trading purposes. That is, obtaining short-term profits by buying and selling
instruments is not an objective pursued by management. The turnover
frequency associated with financial instruments is, in general, greater when
trading is a short-term objective, and market risks can be enhanced or reduced
by such trading.
The Corporation seeks to manage its interest rate risk by establishing
asset/liability management policies and by continually monitoring the
characteristics of its asset and liability portfolios that bear on interest
rate risk. Interest rate management is conducted in coordination with
management of liquidity and capital adequacy. The monitoring of interest rate
risk is supervised by an Asset Liability Management Committee comprised of
certain senior officers and certain members of the board of directors.
Management seeks to minimize the risks to earnings and equity associated with
movements in market interest rates. To achieve this objective management
monitors such factors as:
Relative volumes of fixed rate vs. variable rate loans and deposits
Average interest rate spreads between interest bearing assets and
liabilities
Maturity and repricing schedules of loans, investment securities and
deposits, including the extent to which expected maturities of interest
sensitive assets align with that of interest sensitive liabilities
("sensitivity gap")
Techniques used by management to adjust exposure to interest rate risk include
but are not limited to selling certain types of loans (especially fixed rate
loans), periodically changing stated interest rates charged on loans and
offered on deposits in conjunction with market trends, redirecting funds upon
maturities of investment securities and loan repayments, and careful selection
among choices of sources of borrowed funds other than deposits. The
Corporation has not entered into derivative financial instruments such as
futures, forward interest rate agreements, swaps or option contracts in order
to manage interest rate risk.
<PAGE>
A key analytical technique used by management in its efforts to manage
interest rate risk is interest rate shock simulation. This method seeks to
estimate the impact on earnings or on the fair values of interest bearing
assets and liabilities if market interest rates fluctuate by a predetermined
amount by using present value techniques (discounting). The table below
provides information about the Corporation's financial instruments that are
sensitive to changes in interest rates, including those with fixed contractual
rates and those with variable rates. The information is presented as of
December 31, 1997. The expected increases or decreases in the fair values of
financial instruments assuming an increase and a decrease of 200 basis points
in market interest rates are as follows:
<TABLE>
<CAPTION>
Percentage Increase (Decrease) in Fair Value
200 Basis Point Increase 200 Basis Point Decrease
<S> <C> <C>
Total Securities (5.74)% 3.67%
Total Loans (2.20)% 2.49%
Total Deposits (2.26)% 2.37%
Repurchase Agreements and
Other Borrowed Funds (0.76)% 0.88%
</TABLE>
Excluded from the above table are financial instruments that carry no market
interest rate risk because of their terms, including cash, non-interest
bearing deposits at other financial institutions, accounts payable and similar
liabilities, and accrued interest receivable and payable. Also excluded are
instruments which carry only an insignificant degree of market risk because
the principal amount of the instrument is not material as a whole, including
federal funds purchased and sold and the loan related to the employee stock
ownership plan. The table reflects annual loan prepayment assumptions of 5%
for commercial loans and installment loans and 18% for mortgage loans. These
prepayment assumptions represent estimates derived by management. Investment
securities are assumed to remain in the Corporation's portfolio until maturity
unless called by the issuer. No early withdrawals are assumed for deposits
with defined contractual maturity terms. For other deposits, 30% of the
balance is assumed to mature in three months and another 30% in the next three
months. The remaining 40% is assumed to mature between two and three years
from the date of the table.
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
FNB Corporation
We have audited the accompanying consolidated balance sheets of FNB
Corporation and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for the years then ended. We have also audited the accompanying
consolidated statements of income, changes in stockholders' equity and cash
flows of First National Bank and subsidiaries for the year ended December 31,
1995. These consolidated financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of FNB
Corporation and subsidiaries as of December 31, 1997 and 1996, and the results
of their operations and their cash flows for the years then ended, and the
results of operations and cash flows for First National Bank and subsidiaries
for the year ended December 31, 1995, in conformity with generally accepted
accounting principles.
As discussed in Note 1 to the consolidated financial statements, FNB
Corporation was formed in 1996 and acquired 100% of the outstanding common
stock of First National Bank, the predecessor reporting entity.
MCLEOD & COMPANY
Roanoke, Virginia
February 27, 1998
<PAGE>
<TABLE>
<CAPTION>
December 31, 1997 and 1996
CONSOLIDATED BALANCE SHEETS in thousands, except share and per share data)
FNB Corporation and Subsidiaries
1997 1996
<S> <C> <C>
ASSETS
Cash and due from banks $ 14,406 10,277
Federal funds sold 3,500 2,500
Securities available-for-sale, at fair value 62,856 54,886
Securities held-to-maturity, at amortized cost 42,420 43,089
Mortgage loans held for sale 1,159 330
Loans:
Commercial 64,247 56,461
Consumer 66,059 62,906
Real estate- commercial 56,404 52,232
Real estate - construction 8,657 4,926
Real estate - mortgage 95,703 96,856
Total loans 291,070 273,381
Less unearned income 12 57
Loans, net of unearned income 291,058 273,324
Less allowance for loan losses 4,291 4,179
Loans, net 286,767 269,145
Bank premises and equipment, net 12,518 10,283
Other real estate owned 98 185
Other assets 4,450 4,629
Total assets $ 428,174 395,324
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest-bearing demand deposits $ 35,279 30,798
Interest-bearing demand deposits 52,055 47,603
Savings deposits 47,668 47,998
Time deposits 174,119 171,003
Certificates of deposit of $100,000
and over 43,424 38,000
Total deposits 352,545 335,402
Securities sold under agreements to
repurchase 5,460 4,795
Other borrowed funds 26,093 14,404
Other liabilities 2,962 3,643
ESOP debt 901 1,252
Total liabilities 387,961 359,496
Stockholders' equity:
Common stock, $5.00 par value.
Authorized 5,000,000 shares;
issued and outstanding 3,323,800
shares in 1997 and 1,661,900 in 1996 16,619 8,310
Surplus 10,782 10,782
Unearned ESOP shares (77,811 and 50,662
shares in 1997 and 1996, respectively) (1,208) (1,511)
Retained earnings 13,793 18,285
Net unrealized gains (losses) on securities
available-for-sale 227 (38)
Total stockholders' equity 40,213 35,828
Total liabilities and stockholders'
equity $ 428,174 395,324
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,1997, 1996 and 1995
CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share data)
FNB Corporation First National Bank
and Subsidiaries and Subsidiaries
1997 1996 1995
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $ 26,754 24,962 23,072
Interest on securities:
Taxable 3,642 2,998 3,109
Nontaxable 2,374 2,378 1,963
Interest on federal funds sold 344 188 186
Total interest income 33,114 30,526 28,330
Interest expense:
Interest on interest-bearing
demand deposits 1,367 1,280 1,410
Interest on savings deposits 1,456 1,395 1,692
Interest on time deposits 10,070 9,497 8,740
Interest on certificates of
deposit of $100,000
and over 2,148 1,856 1,603
Interest on securities sold
under agreements to
repurchase 250 229 232
Interest on other borrowed funds 1,385 574 144
Interest on subordinated capital
notes - 67 87
Interest on ESOP debt 88 118 173
Total interest expense 16,764 15,016 14,081
Net interest income 16,350 15,510 14,249
Provision for loan losses 550 595 300
Net interest income
after provision for
loan losses 15,800 14,915 13,949
Noninterest income:
Service charges on deposit
accounts 990 957 910
Loan origination fees 205 223 199
Other service charges and fees 375 332 279
Other income 740 517 477
Securities gains (losses), net (19) 5 4
Total noninterest income 2,291 2,034 1,869
Noninterest expense:
Salaries and employee benefits 6,193 5,745 5,170
Occupancy and equipment expense,
net 1,786 1,285 1,267
Credit card expense 560 572 464
Supplies expense 456 371 384
FDIC assessment expense 41 2 333
Other expenses 2,566 2,279 2,077
Total noninterest expense 11,602 10,254 9,695
Income before income tax expense 6,489 6,695 6,123
Income tax expense 1,324 1,491 1,449
Net income $ 5,165 5,204 4,674
Net income per share $ 1.60 1.62 1.48
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
FNB Corporation First National Bank
and Subsidiaries and Subsidiaries
1997 1996 1995
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 5,165 5,204 4,674
Adjustments to reconcile net
income to net cash provided
by operating activities:
Provision for loan losses 550 595 300
Depreciation and amortization
of bank premises and
equipment 902 549 538
ESOP compensation 302 604 302
Provision for deferred
income taxes 130 64 (90)
Loss (gain) on sales of
securities available-for
-sale, net 20 (5) -
Amortization of premiums and
accretion of discounts, net 71 73 20
Gain on sales of securities
held-to-maturity, net (1) - (4)
Decrease in valuation allowance
for securities - - (209)
Loss (gain) on sale of other
real estate and equipment (32) (47) 12
Proceeds from sales of mortgage
loans held for sale 13,751 11,843 14,125
Origination of mortgage loans
held for sale (14,580) (11,356) (14,487)
Decrease (increase) in other
assets 179 (401) 1,169
(Decrease) increase in other
liabilities (681) 251 385
Net cash provided by
operating activities 5,776 7,374 6,735
Cash flows from investing activities:
Net decrease (increase) in federal
funds sold (1,000) 2,930 (3,000)
Proceeds from sales of securities
available-for-sale 6,060 9,462 -
Proceeds from calls and maturities
of securities available-for-sale 13,269 10,895 15,009
Proceeds from calls and maturities
of securities held to maturity 2,640 3,037 2,626
Purchases of securities available-
for-sale (26,963) (27,834) (4,456)
Purchase of securities held-to-
maturity (1,994) (6,047) (11,783)
Net increase in loans (18,673) (21,739) (35,989)
Proceeds from sale of other real
estate owned 155 449 197
Recoveries on loans previously
charged off 190 156 238
Bank premises and equipment
expenditures (3,130) (6,203) (985)
Net cash used in
investing activities (29,446) (34,894) (38,143)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31, 1997, 1996 and 1995
(in thousands)
FNB Corporation First National Bank
and Subsidiaries and Subsidiaries
1997 1996 1995
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase (decrease) in
demand deposits $ 8,603 (330) 3,799
Net increase in time deposits
and certificates of deposit 8,540 19,955 25,848
Net increase in securities
sold under agreements
to repurchase 665 853 838
Net increase in other borrowed
funds 11,689 12,036 868
Principal payments on ESOP debt (302) (604) (302)
Principal payments on subordinated
capital notes - (937) (107)
Dividends paid (1,347) (1,924) (1,742)
Dividends on unallocated ESOP
shares (49) (70) (87)
Net cash provided by
financing activities 27,799 28,979 29,115
Net increase (decrease) in cash and due
from banks 4,129 1,459 (2,293)
Cash and due from banks at beginning of
year 10,277 8,818 11,111
Cash and due from banks at end of year $ 14,406 10,277 8,818
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF Years Ended December 31,1997, 1996 and 1995
CHANGES IN STOCKHOLDERS' EQUITY (in thousands, except share and per
share data)
Net
Unrealized
Gains
(Losses) on
Unearned Securities
Common ESOP Retained Available-
Stock Surplus Shares Earnings for-Sale Total
First National Bank
and Subsidiaries
<S> <C> <C> <C> <C> <C> <C>
Balances at
December 31,
1994 $ 8,310 10,782 (2,417) 12,074 (1,972) 26,777
Net income - - - 4,674 - 4,674
Cash dividends,
$1.10 per share - - - (1,742) - (1,742)
ESOP shares
allocated upon
loan repayment - - 302 - - 302
Change in net
unrealized gains
(losses) on
securities
available for sale,
net of income tax
effect of $1,123 - - - - 2,180 2,180
Balances at
December 31,
1995 8,310 10,782 (2,115) 15,006 208 32,191 1995
FNB Corporation and
Subsidiaries
Net income - - - 5,204 - 5,204
Cash dividends,
$1.20 per share - - - (1,925) - (1,925)
ESOP shares
allocated upon
loan repayment - - 604 - - 604
Change in net
unrealized gains
(losses) on
securities
available
for sale, net
of tax effect
of $127 - - - - (246) (246)
Balances at
December 31,
1996 8,310 10,782 (1,511) 18,285 (38) 35,828
Net income 5,165 5,165
Cash dividends,
$0.42 per share (1,348) (1,348)
ESOP shares
allocated upon
loan repayment 303 303
Two for one stock
split effected
in form of 100%
stock dividend 8,309 - - (8,309) - -
Change in net
unrealized gains
(losses) on
securities
available for
sale, net of
tax effect of
$136 265 265
Balances at
December 31,
1997 $16,619 10,782 (1,208) 13,793 227 40,213
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997
(in thousands, except share data)
(1) Change in Reporting Entity
In 1996, 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, the successor, to exchange one share of
its stock for each share of stock of the Bank, the predecessor. 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 par value per share and the total number of shares outstanding
of the holding company immediately after the reorganization was the same
as that of the Bank immediately prior to the reorganization.
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 (July 11, 1996) 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 accompanying consolidated
statements of income, cash flows and changes in stockholders' equity for
1996 include the combined activity for the portion of 1996 prior to the
consummation of the reorganization as well as that occurring subsequent
to the reorganization.
(2) Summary of Significant Accounting Policies
The accounting and reporting policies of FNB Corporation and its wholly-
owned subsidiaries (collectively, the "Corporation") conform to
generally accepted accounting principles and general practices within
the banking industry. In preparing the financial statements, management
is required to make estimates and assumptions that affect the reported
amounts of assets and liabilities as of the date of the balance sheet
and revenues and expenses for the year. Actual results could differ
significantly from those estimates.
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 of
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, periodically review the 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.
<PAGE>
The following is a summary of the more significant accounting policies.
(a) Consolidation
The consolidated financial statements include the accounts of FNB
Corporation, a bank holding company, and its wholly-owned
subsidiaries. For periods prior to the reorganization discussed
above, the consolidated financial statements include the accounts
of First National Bank and its wholly-owned subsidiaries. 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. The Bank maintains
amounts due from banks which, at times, may exceed federally
insured limits. No losses have been experienced in such
accounts.
(c) Securities
The Corporation follows the provisions of Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments
in Debt and Equity Securities." Under Statement 115,
investments in debt and equity securities are required to be
classified in three categories and accounted for as follows:
Debt securities which the Corporation has the positive
intent and ability to hold to maturity are classified as
held-to-maturity securities and reported at amortized cost,
computed by the level yield method.
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 income.
The Corporation has no trading securities.
Debt and equity securities not classified as either held-to-
maturity or trading securities are classified as available-
for-sale securities and reported at fair value, with
unrealized gains and losses excluded from income and
reported as a separate component of stockholders' equity,
net of the related income tax effect.
Gains and losses on sales of securities are based on the net
proceeds and adjusted carrying amount of the security sold using
the specific identification method. Declines in fair values of
individual securities below their cost that are other than
temporary are charged to income resulting in a new cost basis for
the security.
(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
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 deferred, and the net amount is amortized over
the contractual life of the related loans as an adjustment of the
yield.
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.
Mortgage loans held for sale are carried at the lower of aggregate
cost or market value. Loans sold are removed from the accounts
and any realized gain or loss is recorded.
<PAGE>
(e) Bank Premises and Equipment, Net
Bank premises and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation and amortization is
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. 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 (3,237,731,
3,205,132, and 3,162,872 in 1997, 1996 and 1995, respectively, as
restated). The weighted average shares outstanding do not include
average unearned shares held by the Employee Stock Ownership Plan
(ESOP) totaling 86,069, 118,668 and 160,928 shares for 1997, 1996
and 1995, respectively. The shares held by the ESOP are not
considered outstanding for net income per share calculations until
the shares are released.
During the second quarter of 1997, the Corporation declared a two
for one stock split effected in the form of a 100% stock dividend.
The split occurred in June 1997. As a result, the total number of
shares outstanding doubled. Par value per share did not change.
Earnings per share, dividends per share and weighted average
shares for periods prior to the split have been restated to
reflect the change in shares outstanding as though the split had
occurred at the beginning of the earliest period presented. In
order to provide comparable earnings per share amounts, the
reported per share earnings and dividends for periods prior to the
formation of the holding company have also been restated. The par
value per share and the total number of shares outstanding were
not affected by the reorganization discussed in Note 1.
(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.
(j) Reclassifications
Certain reclassifications have been made to prior year amounts to
conform to the 1997 presentation.
(3) Restrictions on cash
Federal reserve regulations require the Bank to maintain certain
average balances as cash reserves. The reserve requirements
approximated $4,285 and $3,328 at December 31, 1997 and 1996,
respectively.
<PAGE>
(4) Securities available-for-sale
The following sets forth the composition of securities available-for-
sale, which are reported at fair value, at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
December 31, 1997 Costs Gains Losses Values
<S> <C> <C> <C> <C>
U.S. Treasury $ 8,109 53 - 8,162
U.S. Government
agencies and
corporations 46,864 272 (116) 47,020
States and
political
subdivisions 2,962 108 - 3,070
Other securities 4,576 28 - 4,604
Totals $62,511 461 (116) 62,856
</TABLE>
<TABLE>
<CAPTION>
Gross Gross Approximate
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>
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>
Approximate
Amortized Fair
December 31, 1997 Costs Values
<S> <C> <C>
Due in one year or less $ 8,826 8,794
Due after one year through
five years 13,041 13,113
Due after five years
through ten years 37,415 37,717
Due after ten years 3,229 3,232
Totals $ 62,511 62,856
</TABLE>
Realized gains and losses on securities available-for-sale were not
material in 1997, 1996 or 1995.
<PAGE>
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
$16,371 at December 31, 1997 and $17,650 at December 31, 1996.
(5) Securities held-to-maturity
The amortized costs, gross unrealized gains and losses, and approximate
fair values of securities held-to-maturity at December 31, 1997 and 1996
are as follows:
<TABLE>
<CAPTION>
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
December 31, 1997 Costs Gains Losses Values
<S> <C> <C> <C> <C>
States and political
subdivisions $ 42,360 1,029 (19) 43,370
Other securities 60 - - 60
Totals $ 42,420 1,029 (19) 43,430
</TABLE>
<TABLE>
<CAPTION>
Gross Gross Approximate
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>
The amortized costs and approximate fair values of securities held-to-
maturity at December 31, 1997 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>
Approximate
Amortized Fair
December 31, 1997 Costs Values
<S> <C> <C>
Due in one year or less $ 2, 519 2,529
Due after one year through
five years 19,588 20,034
Due after five years
through ten years 19,665 20,205
Due after ten years 648 662
Totals $ 42,420 43,430
<PAGE>
Realized gains and losses on sales, calls and maturities on securities
held-to-maturity were not material in 1997, 1996 and 1995, respectively.
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
$16,381 and $14,690 at December 31, 1997 and 1996, respectively.
(6) Loans
At December 31, 1997 and 1996, there were direct loans to officers and
directors of $5,595 and $4,121, respectively. During 1997, new direct
loans to officers and directors amounted to $2,134 and repayments
amounted to $660. In addition, there were loans of $5,957 and $7,184 at
December 31, 1997 and 1996, respectively, which were endorsed by
directors or had been made to companies in which directors had an equity
interest.
At December 31, 1997 and 1996, the Corporation had sold without recourse
to financial institutions and other customers of the Corporation
participations in various loans in the amount of approximately $30,000
and $29,200, respectively.
(7) Allowance for Loan Losses and Impaired Loans
Impaired loans are 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. A
loan is considered impaired when, based on management's judgment, it is
probable that the Corporation will not be able to collect on 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. Management'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.
As of December 31, 1997 and 1996, the investment in impaired loans
approximated $1,256 and $1,963, respectively. The December 31, 1997 and
1996 allowances for loan losses includes allowances of $183 and $335,
respectively, for these loans. Impaired loans averaged $1,694, $2,933
and $2,166 during 1997, 1996 and 1995, respectively. Interest on
impaired loans is recognized in the same manner as loans that are not
considered impaired; that is, interest is generally recognized on the
cash basis once the collection of principal or interest is 90 days or
more past due.
A summary of the changes in the allowance for loan losses (including
allowances for impaired loans) follows:
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31, 1997 1996 1995
<S> <C> <C> <C>
Balance at beginning of year $ 4,179 3,988 3,815
Provisions for loan losses 550 595 300
Loan recoveries 190 156 238
Loan charge-offs (628) (560) (365)
Balance at end of year $ 4,291 4,179 3,988
</TABLE>
<PAGE>
Nonperforming assets consist of the following:
<TABLE>
<CAPTION>
December 31, 1997 1996 1995
<S> <C> <C> <C>
Nonaccrual loans $ 893 573 1,769
Other real estate owned 98 185 387
Total nonperforming assets $ 991 758 2,156
</TABLE>
There were no material commitments to lend additional funds to customers
whose loans were classified as nonperforming at December 31, 1997.
The following table shows the pro forma interest that would have been
earned on impaired loans if interest had been recorded using the cash
basis and the recorded interest that was included in income on these
loans:
<TABLE>
<CAPTION>
Years Ended December 31, 1997 1996 1995
<S> <C> <C> <C>
Cash basis interest -
impaired loans $ 64 122 81
Recorded interest -
impaired loans $ 7 131 51
</TABLE>
(8) Bank Premises and Equipment, Net
Bank premises and equipment are stated at cost less accumulated
depreciation and amortization as follows:
<TABLE>
<CAPTION>
December 31, 1997 1996
<S> <C> <C>
Land $ 1,359 1,174
Buildings 9,820 2,763
Furniture and equipment 6,461 4,936
Leasehold improvements 383 379
Construction in progress - 5,736
18,023 14,988
Less accumulated depreciation and
amortization 5,505 4,705
Totals $ 12,518 10,283
</TABLE>
In 1997 and 1996, a total of $22 and $132 of interest was capitalized,
respectively, related to the construction of a new headquarters
facility.
<PAGE>
(9) Deposits
At December 31, 1997 and 1996, there were deposits from officers and
directors of $2,066 and $1,366, respectively. Time deposits and
certificates of deposit of $100,000 and over as of December 31, 1997
mature as follows:
<TABLE>
<S> <C>
1998 $128,255
1999 43,542
2000 33,963
2001 4,786
2002 6,593
Thereafter 404
$217,543
</TABLE>
(10) Securities Sold Under Agreements to Repurchase and Other Borrowed Funds
Advances from the Federal Home Loan Bank of Atlanta were $22.6 million
and $12.8 million on December 31, 1997 and 1996, respectively. The
fixed interest rates on the advances as of December 31, 1997 range from
5.38 to 7.15 percent. 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. Of the total balance
at December 31, 1997, $1,000 matures in 1998, $10,000 matures in 2000,
and $10,000 matures in 2001. The remainder matures after 2001.
Securities sold under agreements to repurchase (repurchase agreements)
at December 31, 1997 were collateralized by investment securities
controlled by the Corporation with a book value of approximately $8.9
million. The maximum amount of repurchase agreements outstanding during
1997 was $6.6 million, and the average amount outstanding during 1997
was $5.4 million.
(11) Employee Benefit Plans
The Corporation sponsors a leveraged Employee Stock Ownership Plan
(ESOP) which covers all employees following the completion of one year
of service and attainment of age 21. The ESOP invests substantially in
stock of the Corporation. Employer contributions and dividends received
by the ESOP are used to pay debt service.
In May 1994, the Bank sold 106,940 shares of its stock to the ESOP for a
price of $28.25 per share as determined by an independent third-party
valuation. The acquisition cost of $3,021 was financed by a loan from
another financial institution, collateralized by the shares purchased,
and guaranteed by the Bank. In 1996, the ESOP tendered the stock of the
Bank in exchange for the stock issued by the holding company pursuant to
the reorganization discussed in Note 1. As debt is repaid, shares are
released from collateral and allocated to active participants as of the
end of the plan's year based on the participants' pro rata interest in
the plan. The ESOP debt is reported as debt and the corresponding
shares pledged as collateral are reported as unearned ESOP shares in the
accompanying consolidated balance sheet. As shares are released from
collateral, compensation expense is recorded, and the released shares
are included in income per share computations. Dividends on allocated
ESOP shares are recorded as a reduction of retained earnings while
dividends on unallocated ESOP shares are recorded as a reduction of ESOP
debt and related accrued interest. ESOP compensation expense of $302,
$604 and $302 and related ESOP interest expense of $88, $118 and $173
were recorded for 1997, 1996 and 1995, respectively.
<PAGE>
As of December 31, 1997, ESOP debt of $901, consisting of actual debt of
$1,209 and dividends on unallocated shares available for future debt
reduction of $308, was outstanding. ESOP shares as of December 31, 1997
consisted of 558,777 shares allocated prior to January 1, 1994, 132,336
released for allocation subsequent to January 1, 1994 and 77,811
unreleased and unearned shares (as restated for the 1997 100% stock
dividend). Based on quoted trading prices, the fair value of the
unreleased and unearned shares as of December 31, 1997 was $22.50 per
share.
In 1997 the Corporation instituted a 401(k) plan that covers
substantially all employees who work at least 1,000 hours per year.
Participants have the option to have up to 12% of their salary withheld
on a pre-tax basis to be contributed to the plan. The Corporation
matches 100% of the first 3% of the participants' contributions.
Participants may choose among several investment options comprised
primarily of mutual funds, but there is no stock of the Corporation in
the plan. Matching contributions totaled $26 for 1997.
(12) Income Taxes
Total income tax taxes are allocated as follows:
<TABLE>
<CAPTION>
Years Ended December 31, 1997 1996 1995
<S> <C> <C> <C>
Income $ 1,324 1,491 1,449
Stockholders' equity, for net
unrealized gains and losses
on securities available-for-sale
recognized for financial
reporting purposes 136 (127) 1,123
Totals $ 1,460 1,364 2,572
</TABLE>
The components of federal income tax expense are as follows:
<TABLE>
<CAPTION>
Years Ended December 31, 1997 1996 1995
<S> <C> <C> <C>
Current $ 1,194 1,427 1,539
Deferred 30 64 (90)
Totals $ 1,324 1,491 1,449
<PAGE>
The reconciliation of expected income tax expense at the statutory
federal rate with the reported tax expense at the effective rate is as
follows:
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
Percent Percent Percent
of of of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
<S> <C> <C> <C> <C> <C> <C>
Expected tax expense
at statutory rate $ 2,206 34.0% 2,276 34.0% 2,082 34.0%
Increase (decrease) in
taxes resulting from:
Tax-exempt interest (970) (15.0) (1,007) (15.0) (746) (12.1)
Nondeductible
interest expense 142 2.2 140 2.1 113 1.8
Other, net (54) (0.8) 82 1.2 - -
Reported tax expense at
effective rate $ 1,324 20.4% 1,491 22.3% 1,449 23.7%
</TABLE>
The tax effects of temporary differences that give rise to
significant portions of deferred tax assets and deferred tax liabilities
are as follows:
<TABLE>
<CAPTION>
December 31, 1997 1996
<S> <C> <C>
Deferred tax assets:
Loans, principally due to allowance for loan
losses and unearned fees $ 1,145 1,078
Securities, principally due to valuation
allowance established for financial
reporting purposes - 20
Accrued post-retirement benefits due to
accrual for financial reporting purposes
in excess of actual contributions 150 139
Bank premises and equipment, due to
differences in depreciation - 76
Other 22 29
Total gross deferred tax assets 1,317 1,342
Less valuation allowance - -
Net deferred tax assets 1,317 1,342
Deferred tax liabilities:
Bank premises and equipment, due to
differences in depreciation 72 -
Securities, due principally to valuation
allowance 116 -
Investment securities, due to differences
in discount accretion 106 73
Other 69 48
Total gross deferred tax liabilities 363 121
Net deferred tax asset, included in
other assets $ 954 1,221
</TABLE>
<PAGE>
The Corporation has determined that a valuation allowance for gross
deferred tax assets is not necessary at December 31, 1997 or 1996 since
deferred tax assets can be recognized during the carryback period
available under current tax laws.
(13) Dividend restrictions and capital requirements
The holding company's principal asset is its investment in the Bank, a
wholly-owned consolidated subsidiary. The only significant source of
income for the holding company is dividends from the Bank. Regulatory
agencies limit the amount of funds that may be transferred from the Bank
to the holding company in the form of dividends, loans, or advances.
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. The
total dividends that may be declared in 1998 without the approval of the
Comptroller totals $7,096 plus year-to-date 1998 net profits as of the
declaration date.
The Corporation is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory--and possibly
additional discretionary--actions by regulators that, if undertaken,
could have a direct material effect on the Corporation's financial
statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, established by Section 38 of the
Federal Deposit Insurance Act (FDI Act), the Corporation must meet
specific capital guidelines that involve quantitative measures of
assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Corporation's capital
amounts and classification are also subject to qualitative judgments by
the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Corporation to maintain minimum amounts and ratios
(set forth in the table below) of total and Tier 1 capital (as defined
in the regulations) to risk-weighted assets (as defined), and of Tier 1
capital to average assets (as defined). Management believes, as of
December 31, 1997, that the Corporation meets all capital adequacy
requirements to which it is subject.
As of December 31, 1997, the most recent notification from the Office of
the Comptroller of the Currency categorized the Bank as well capitalized
under the regulatory framework for prompt corrective action (Section 38
of the FDI Act). To be categorized as well capitalized, minimum total
risk-based capital, Tier 1 risk-based capital, and Tier 1 leverage
ratios as set forth in the table below must be maintained. There are no
conditions or events since that notification that management believes
have changed the institution's category.
<PAGE>
<TABLE>
<CAPTION>
As of December 31, 1997: Minimum Requirements
Section 38 of
For Capital Federal Deposit
Actual Adequacy Insurance Act
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
Total Capital
(to Risk Weighted
Assets) $44,195 14.5% 24,418 8.0% 30,523 10.0%
Tier 1 Capital
(to Risk Weighted
Assets) 40,374 13.2% 12,209 4.0% 18,313 6.0%
Tier 1 Capital
(to Average
Assets) 40,374 9.6% 16,843 4.0% 21,054 5.0%
</TABLE>
<TABLE>
<CAPTION>
As of December 31, 1996:
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
Total Capital
(to Risk Weighted
Assets) $40,646 14.3% 22,668 8.0% 28,335 10.0%
Tier 1 Capital
(to Risk Weighted
Assets) 37,096 13.1% 11,334 4.0% 17,001 6.0%
Tier 1 Capital
(to Average
Assets) 37,096 9.7% 15,244 4.0% 19,055 5.0%
</TABLE>
(14) Supplemental Cash Flow Information
The Corporation paid $16,325, $14,899 and $13,901 for interest and
$1,057, $1,413, and $1,710 for income taxes in 1997, 1996 and 1995,
respectively. Noncash investing activities included $98, $343, and $61
of loans transferred to other real estate owned in 1997, 1996 and 1995,
respectively.
(15) 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 have a material
effect on the Corporation's consolidated results of operations or
financial position.
(16) 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. The financial instruments include commitments to
extend credit and standby letters of credit. Those instruments involve,
to varying degrees, elements of credit risk in excess of the amount
recognized in the balance sheets. The contract amounts of those
instruments reflect the extent of involvement the Corporation has in
particular classes of financial instruments. Exposure to credit loss in
the event 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 these 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 $14,526 at December 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:
<PAGE>
<TABLE>
<CAPTION>
Contract Amounts
December 31, 1997 1996
<S> <C> <C>
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit $ 63,194 50,209
Standby letters of credit 4,300 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 of the
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
creditworthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Corporation 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 by the
Corporation 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 loans to
customers. Collateral held varies but may include securities, accounts
receivable, inventory, property, plant and equipment, and income-
producing properties.
Commitments to extend credit, standby letters of credit and financial
guarantees written are not reflected in the financial statements except
to the extent of fees collected, which are generally reflected in
income. The fulfillment of these commitments would normally result in
the recording of a loan at the time the funds are disbursed.
The Corporation originates mortgage loans for sale to secondary market
investors subject to contractually specified and limited recourse
provisions. In 1997, the Corporation originated $14,580 and sold
$13,751 to investors, compared to $11,356 originated and $11,843 sold in
1996. Every contract with each investor contains certain recourse
language. In general, the Corporation may be required to repurchase a
previously sold mortgage loan if there is major noncompliance with
defined loan origination or documentation standards, including fraud,
negligence or material misstatement in the loan documents. Repurchase
may also be required if necessary governmental loan guarantees are
canceled or never issued, or if an investor is forced to buy back a loan
after it has been resold as a part of a loan pool. In addition, the
Corporation may have an obligation to repurchase a loan if the mortgagor
has defaulted early in the loan term. This potential default period
ranges from six to twelve months after sale of a loan to the investor.
Historically, repurchases under these recourse provisions have been
minimal.
(17) 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
<PAGE>
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 included approximately $55
million and $52 million of loans to individuals for household, family
and other personal expenditures at December 31, 1997 and 1996,
respectively. The real estate mortgage portfolio consists primarily of
loans secured by 1-4 family residential properties.
(18) Disclosures About Fair Values of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments," requires the Corporation to
disclose estimated fair values of its financial instruments. The
following methods and assumptions were used to estimate the approximate
fair value of each class of financial instrument for which it is
practicable to estimate that value:
(a) Cash and Due from Banks and Federal Funds Sold
The carrying amounts in the consolidated balance sheets are
reasonable estimates of fair values.
(b) Securities
The fair value of securities, except certain state and municipal
securities, is estimated based on bid prices published in financial
newspapers or bid quotations received from securities dealers.
The fair value of certain state and municipal securities is not
readily available through market sources other than dealer
quotations, so fair value estimates are based on quoted market
prices of similar instruments, adjusted for differences between
the quoted instruments and the instruments being valued.
(c) Loans
Fair values are estimated for portfolios of loans with similar
financial characteristics. Loans are segregated by type
(commercial, mortgage, consumer, etc.), by interest rate terms
(fixed and adjustable rate) and by performing and nonperforming
categories. The fair value of performing loans is calculated by
discounting scheduled cash flows through the estimated maturity
using estimated market discount rates that reflect the credit and
interest rate risk inherent in the loan as well as estimates for
operating expenses and prepayments. The estimate of maturity is
based on the Corporation's historical experience with repayments
for each loan classification, modified, as required, by an
estimate of the effect of current economic and lending conditions.
Fair value for significant nonperforming loans is based on
estimated cash flows which are discounted using a rate
commensurate with the risk associated with the estimated cash
flows. Assumptions regarding credit risk, cash flows and discount
rates are judgmentally determined using available market
information and specific borrower information.
(d) Deposits
The fair value of demand and savings deposits is the amount
payable on demand. The fair value of fixed maturity time deposits
and certificates of deposit is estimated using the rates currently
offered for deposits of similar remaining maturities.
(e) Securities Sold Under Agreements to Repurchase and Other Borrowed
Funds
Rates currently available for debt with similar terms and
remaining maturities are used to estimate fair value of existing
debt.
(f) ESOP Debt
Rates currently available for debt with similar terms and
remaining maturities are used to estimate fair value of existing
debt.
<PAGE>
(g) Commitments to Extend Credit and Standby Letters of Credit
The only amounts recorded for commitments to extend credit and
standby letters of credit are the deferred fees arising from these
unrecognized financial instruments. These deferred fees are not
deemed significant at December 31, 1997 and 1996, and as such, the
related fair values have not been estimated.
The carrying amounts and approximate fair values of the Corporation's
financial instruments are as follows:
<TABLE>
<CAPTION>
December 31, 1997 1996
Approximate Approximate
Carrying Fair Carrying Fair
Amounts Values Amounts Values
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks $ 14,406 14,406 10,277 10,277
Federal funds sold 3,500 3,500 2,500 2,500
Securities available-for-
sale 62,856 62,856 54,886 54,886
Securities held-to-
maturity 42,420 43,430 43,089 43,632
Loans, net 286,767 289,832 269,145 268,814
Total financial
assets $409,949 414,024 379,897 380,109
Financial liabilities:
Deposits $352,545 353,418 335,402 336,262
Securities sold under
agreements to
repurchase and
other borrowed funds 31,553 31,559 19,199 19,143
ESOP debt 901 901 1,252 1,252
Total financial
liabilities $384,999 385,878 355,853 356,657
</TABLE>
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial
instrument. These estimates do not reflect any premium or discount that
could result from offering for sale at one time the Corporation's entire
holdings of a particular financial instrument. Because no market exists
for a significant portion of the Corporation's financial instruments,
fair value estimates are based on judgments regarding future expected
loss experience, current economic conditions, risk characteristics of
various financial instruments and other factors. These estimates are
subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on and off-balance sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities that
are not considered financial instruments. In addition, the tax
ramifications related to the realization of the unrealized gains and
losses can have a significant effect on fair value estimates and have
not been considered in the estimates.
<PAGE>
(19) Parent Company Financial Information
Condensed financial information of FNB Corporation (the parent or
holding company) is presented below:
<TABLE>
<CAPTION>
Condensed Balance Sheets
December 31, 1997 December 31, 1996
<S> <C> <C>
Assets
Investment in bank subsidiary $39,699 35,829
Receivable from bank subsidiary 514 1,162
Total Assets $40,213 36,991
Liabilities
Dividends payable $ - 1,163
Total Liabilities - 1,163
Stockholders' Equity
Common stock and surplus 27,401 19,092
Retained earnings 13,793 18,285
Other (981) (1,549)
Total Stockholders' Equity 40,213 35,828
Total Liabilities and
Stockholders' Equity $40,213 36,991
</TABLE>
<TABLE>
<CAPTION>
Condensed Statements of Income
January 1, 1997 to July 6, 1996 to
December 31, 1997 December 31, 1996
<S> <C> <C>
Equity in earnings of bank
subsidiary $ 5,165 2,570
Other expenses - 1
Income before income taxes 5,165 2,569
Income tax expense - -
Net income $ 5,165 2,569
</TABLE>
NOTES:
(1) July 6, 1996 represents the inception of operations of the
holding company. See Note 1 to the consolidated financial
statements. The equity in earnings of bank subsidiary represents
the net income of its wholly-owned bank subsidiary.
(2) Cash flows for the parent company during 1997 and 1996 were not
significant, other than dividends from the Bank. Total dividends
declared by the Bank payable to the parent company were $1,911 and
$1,163 in 1997 and 1996, respectively.
<PAGE>
(20) Interim Financial Information (Unaudited)
Consolidated quarterly results of operations were as follows:
<TABLE>
<CAPTION>
1997
Three Months Ended
March 31 June 30 September 30 December 31
<S> <C> <C> <C> <C>
Interest income $7,775 8,172 8,618 8,549
Interest expense 3,890 4,126 4,385 4,363
Provision for loan losses 175 100 125 150
Noninterest income 613 553 565 560
Noninterest expense 2,712 2,722 2,997 3,171
Income before income
tax expense 1,611 1,777 1,676 1,425
Income tax expense 351 390 304 279
Net income $1,260 1,387 1,372 1,146
Net income per share
(as restated) $ 0.39 0.43 0.42 0.36
</TABLE>
<TABLE>
<CAPTION>
1996
Three Months Ended
March 31 June 30 September 30 December 31
<S> <C> <C> <C> <C>
Interest income $7,349 7,531 7,669 7,977
Interest expense 3,677 3,741 3,782 3,816
Provision for loan losses 105 105 135 250
Noninterest income 538 497 503 496
Noninterest expense 2,342 2,516 2,640 2,756
Income before income
tax expense 1,763 1,666 1,615 1,651
Income tax expense 421 373 358 339
Net income $1,342 1,293 1,257 1,312
Net income per share
(as restated) $ 0.42 0.40 0.39 0.41
</TABLE>
The quarterly data above reflects the results of operations of the Bank
and its subsidiaries for periods prior to July 11, 1996 (the date of the
consummation of the reorganization discussed in Note 1), and of the
holding company and its subsidiaries for periods subsequent to that
date. Because the reorganization did not result in the adjustment of
the carrying values of assets and liabilities, and because revenues and
expenses related to the holding company have been minimal, management
considers the pre-organization and post-reorganization amounts in the
above tables to be comparable. See Note (1).
Net income per share in the above tables for periods prior to the second
quarter of 1997 have been restated to reflect retroactively a two-for-
one stock split effected in the form of a 100% stock dividend.
<PAGE>
(21) Recent Accounting 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 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. However, the FASB has since issued SFAS No. 127, which deferred
the adoption date for certain portions of SFAS No. 125 for one year.
The portion of the SFAS 125 which was adopted in 1997 resulted in the
classification of certain participations sold with recourse as secured
borrowings. Previously these types of transactions were recorded as
sales of loans. The new standard resulted in a similar change in the
classification of the related interest on the portion of the loan sold.
There was no impact on net income. The adoption of the Statement does
not involve the restatement of any previously issued financial
statements. Management does not expect SFAS No. 125 to have a
significant impact on financial position or results of operations.
The Financial Accounting Standards Board 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 was first
effective for the fourth quarter of 1997, but it did not have an impact
on earnings per share for 1997 or prior periods. Based on the current
capital structure, management does not expect SFAS No. 128 to materially
impact earnings per share in the future because there are currently no
potentially dilutive securities.
Exhibit #(21)
SUBSIDIARIES OF THE REGISTRANT
Name of Subsidiary State of Incorporation
First National Bank Virginia
FNB Financial Services, Inc. Virginia
FNCO Co., Inc. Virginia
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 14,406
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 3,500
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 62,856
<INVESTMENTS-CARRYING> 42,420
<INVESTMENTS-MARKET> 43,430
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<DEPOSITS> 352,545
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<LONG-TERM> 22,502
0
0
<COMMON> 16,619
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<INTEREST-TOTAL> 33,114
<INTEREST-DEPOSIT> 15,041
<INTEREST-EXPENSE> 16,764
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<LOAN-LOSSES> 550
<SECURITIES-GAINS> (19)
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<INCOME-PRETAX> 6,489
<INCOME-PRE-EXTRAORDINARY> 6,489
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<EPS-PRIMARY> 1.60
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<YIELD-ACTUAL> 4.59
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<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 783
</TABLE>
